OUTER HOUSE, COURT OF SESSION

P1177/01

 

 

 

 

 

 

 

 

 

 

OPINION OF LORD REED

in Petition of

(FIRST) MOHAMED ABDEL MONEIM AL FAYED, (SECOND) HARRODS LIMITED, (THIRD) HARRODS (UK) LIMITED, (FOURTH) HARRODS HOLDINGS LIMITED, (FIFTH) THE RITZ HOTEL LIMITED, (SIXTH) LIBERTY PUBLISHING & MEDIA LIMITED, (SEVENTH) THE LIBERTY BROADCASTING COMPANY LIMITED, (EIGHTH) PUNCH LIMITED, (NINTH) BROMPTON PRESS LIMITED, (TENTH) F L PROPERTY MANAGEMENT LIMITED, (ELEVENTH) FULHAM FOOTBALL CLUB (1987) LIMITED, (TWELFTH) FULHAM FOOTBALL CLUB LIMITED, (THIRTEENTH) FULHAM FOOTBALL LEISURE LIMITED and (FOURTEENTH) FULHAM STADIUM LIMITED

Petitioners;

against

THE ADVOCATE GENERAL FOR SCOTLAND, for and on behalf of THE COMMISSIONERS OF INLAND REVENUE

Respondents:

for

 

 

 

 

Judicial Review of a decision by the Commissioners of Inland Revenue to carry out an in-depth review of the Harrods Group of companies and of the Fayed family tax position and that of any individual, companies or organisations connected with them

________________

 

 

Petitioners: Keen, Q.C., D.E.L. Johnston; Maclay Murray & Spens

Respondents: Hodge, Q.C., Paterson; Solicitor (Scotland), Inland Revenue

 

11 May 2004

CONTENTS

[1] In view of the length of this Opinion, it may be helpful if I list at the outset the paragraphs in which different topics are covered:

   

Paragraph

1

INTRODUCTION AND PROCEDURAL BACKGROUND

2

2

THE FACTS

14

 

(1) Events leading to the 1985 forward tax agreement

15

 

(2) Events leading to the 1990 forward tax agreement

38

 

(3) Events leading to the 1997 forward tax agreement

64

 

(4) Events between the 1997 agreement and August 1999

120

 

(5) Events from August 1999 to the issue of the letters of 31 May and 2 June 2000

136

 

August 1999

136

 

October 1999

162

 

November 1999

176

 

December 1999

187

 

January 2000

190

 

February 2000

204

 

March 2000

250

 

April 2000

319

 

May 2000

335

 

June 2000

400

 

(6) Subsequent events

423

 

June 2000

424

 

July 2000

451

 

SCO's actions after 13 July 2000

468

 

LBO's actions after 13 July 2000

472

3

REVENUE LAW AND PRACTICE

530

 

(1) Statutory provisions

531

 

Collection and assessment in general

532

 

Assessment prior to self-assessment

540

 

Self-assessment

549

 

Collection without assessment

559

 

PAYE

561

 

Information powers

562

 

(2) Revenue Publications

580

 

Code of Practice 8

581

 

The Investigation Handbook

607

 

The Large Corporates Forum

625

 

(3) The concept of an investigation

630

4

THE SUBMISSIONS

642

 

(1) The petitioners' submissions

643

 

Competency

643

 

Unfairness, unreasonableness and improper purpose

645

 

(a) general principles

645

 

(b) the statutory context

649

 

(c) the SCO investigation

651

 

(d) the LBO review

675

 

Breach of legitimate expectations

681

 

(a) general principles

681

 

(b) the SCO investigation

683

 

(c) the LBO review

686

 

Remedy

687

 

(2) The Revenue's submissions

688

 

Competency

688

 

Unfairness, unreasonableness and improper purpose

690

 

(a) general principles

690

 

(b) the statutory context

692

 

(c) the SCO investigation

694

 

(d) the LBO review

719

 

Breach of legitimate expectations

722

 

(a) general principles

722

 

(b) the SCO investigation

723

 

(c) the LBO review

724

 

Remedy

725

5

DISCUSSION

726

 

(1) General considerations

727

 

(2) Competency

731

 

(3) The grounds of judicial review

745

 

(4) The SCO investigation

752

 

The decision to investigate

756

 

The review

771

 

The scope of the investigation

785

 

Conclusion

792

 

(5) The LBO review

793

 

(6) Conclusion

796

 

1 INTRODUCTION AND PROCEDURAL BACKGROUND

[2] On 31 May 2000 a letter signed by Mr James Williams, a Principal Inspector of Taxes at the Inland Revenue's Large Business Office (LBO) in Glasgow, was sent to Mr David Hadden, the Group Taxation Accountant of the Harrods group of companies. The letter was marked "Urgent", and was in the following terms:

"HARRODS GROUP

As you are aware, the accounts of the group companies are open for the two years to 31 January 1999.

This letter is to inform you that I propose to carry out an in depth review of the group's tax affairs for those years. The review will be carried out on Combined Casework (CCW) lines and will involve other Inland Revenue agencies including the Special Compliance Office. The review will also extent [sic: mistakes in subsequent quotations can be assumed to be reproduced from the original] to related matters such as Cylena SA.

I would like to meet with you before initiating enquiries to discuss the implications and scope of the review. Will you please give me a ring to make the necessary arrangements. I would also be happy to meet with any other senior executives who need to be involved and with the group's professional advisors and you may care to inform all such parties of the content of this letter as a matter of urgency."

[3] On 2 June 2000 a letter signed by Mr Alan Carmichael, an Inspector of Taxes at the Inland Revenue's Special Compliance Office (SCO) in Edinburgh, was handed to Mr Thomas Murray of KPMG, who acted as tax advisers to Mr Mohamed Al Fayed and his brothers Ali Fayed and Salah Fayed. The letter was in the following terms:

"THE AL FAYED FAMILY

I refer to our meeting on 02 June 2000.

I am advised that the letter of agreement dated 28 April 2000 is not enforceable because it is ultra vires. The agreement takes no account of the possibility of there being a false factual basis for the contract. Also it does not allow for any changes in the facts or circumstances for any unexpired years or for changes in future legislation. I should also make it plain the agreement is ultra vires because it does not reflect as it should the performance by the Revenue of its statutory duties and care and management powers to assess and collect tax. Accordingly, the letter dated 7 March 2000 can be disregarded in respect of its reference to the suspension of the agreement. The agreement is not and never has been binding in law.

In view of the history of the arrangements the Inland Revenue do not believe that it would be appropriate to re-open the back years in respect of liability to income tax and capital gains tax on foreign source income and capital gains prior to 5 April 2000. Accordingly, in this connection I would be grateful if you could arrange for your client to forward to me a cheque for 240,000 made payable to Inland Revenue in respect of the year to 5 April 2000.

For the years from 6 April 2000 onwards Tax Returns will have to be completed in accordance with the family's statutory responsibilities, and without reference to the agreement.

The Revenue will also be looking to verify the position as set out in the KPMG benefits report of 1996. This will entail a detailed examination of the mechanism by which all benefits are identified, quantified and recharged. To do this I propose to review in depth the 1999 Tax Returns and appropriate notices of enquiry will be sent by separate letter.

Furthermore, in the light of matters raised in the recent Hamilton libel case, the Revenue does not consider it has a sufficiently full picture of the Fayed Family circumstances and does not consider it would be discharging its duties appropriately unless it sought to satisfy itself concerning any other liabilities. Accordingly there will be a need to review the Fayed Family position and that of any individual, companies or organisations connected with them. To do this I shall need a comprehensive list of Family members including their respective names, addresses and ages and a list of all the companies, charities and trusts associated to them.

This enquiry work will be undertaken by Special Compliance Office under Code of Practice 8, a copy of which is enclosed and should be brought to your clients attention. I also enclose Inland Revenue Leaflet IR 120."

Another letter in similar terms, signed by Mr James McGuigan of SCO Edinburgh, was sent on the same date to Messrs D.J. Freeman, the solicitors acting for the Fayed brothers.

[4] In order to understand these letters, it is necessary to know the circumstances in which they came to be written, and in particular the history of dealings between the Revenue and the Fayed brothers and the companies, including the Harrods group, in which they have an interest. These matters are explained in detail below. In summary, however, it can be seen that the second paragraph of the letter to KPMG dated 2 June 2000 (after the introductory first paragraph) asserts that a certain agreement is ultra vires and therefore not binding. This refers to a "forward tax agreement" dated 28 April 1997 (not 2000, as stated in the letter), entered into between Mohamed Al Fayed, his son Emad (otherwise known as Dodi) Al Fayed (who died in August 1997), Ali Fayed and Salah Fayed, on the one hand, and the Revenue on the other hand, under which it was agreed that the liability of those four individuals to UK income tax and capital gains tax in respect of remittances to the UK from overseas over the following six tax years would be 240,000 per annum. The fifth paragraph of the letter (beginning "The Revenue") gives notice that SCO proposes to examine benefits in kind, in the context of tax returns for 1998/99. The final two paragraphs of the letter give notice that SCO is undertaking a "review", or "enquiry work", under Code of Practice 8, in respect of "the Fayed Family position and that of any individual, companies or organisations connected with them", and request certain information. As explained below, the issue of the letter dated 31 May 2000 was closely related to that of the letters dated 2 June 2000. The former similarly gave notice of a "review", concerning the tax affairs of the Harrods group and extending to related matters, to be carried out by Glasgow LBO on combined casework lines, and involving other Revenue agencies, including SCO.

[5] After these letters had been issued, the three Fayed brothers began proceedings in which they sought judicial review of the Revenue's decision not to abide by the terms of the 1997 agreement, and to require them to complete tax returns for the years of assessment from 6 April 2000 to 5 April 2003 without reference to the agreement, as intimated in the two letters dated 2 June 2000. A first order was granted in those proceedings on 11 July 2000. After substantial preliminary procedure, a first hearing was held during June and August 2001. Evidence was presented to the court in the form of affidavits. On 26 August 2001 the Lord Ordinary made avizandum. On 31 May 2002 the petition was refused. That decision is the subject of a reclaiming motion which has not yet been determined.

[6] On 16 October 2001 the present petition was lodged, seeking judicial review of the decision to carry out an in-depth review of the Harrods group of companies and of the Fayed family tax position and that of any individual, companies or organisations connected with them, as intimated in the letter of 31 May 2000 and the two letters of 2 June 2000. It is to be noted that the present petitioners, with the exception of Mr Al Fayed, are different from those in the first judicial review. The subject-matter is also different, although closely related to that of the first judicial review. Most of the documents on which the present petition is based were produced by the Revenue in the first judicial review.

[7] On 17 October 2001 a first order was granted, which allowed a first hearing. The parties thereafter arranged for a diet of seven weeks to be fixed for the first hearing, during 2003, on the assumption that a proof was appropriate. Only limited other steps were taken in these proceedings until after the first judicial review had been determined, in view of the impact which its outcome might have upon these proceedings: as matters were explained to me, both the petitioners and the Revenue thought it appropriate to await the outcome of the first judicial review before taking these proceedings forward. Following the refusal of the first petition, the present proceedings came before me in connection with applications by the petitioners for the recovery of documents. It appeared to me that the answers lodged by the Revenue failed to provide a clear statement of their position or an explanation of the Revenue documents and decisions which formed the basis of the petitioners' complaints. I therefore ordered the Revenue to lodge affidavits given by the officials principally involved, explaining the decision-making process leading to the decisions challenged, and when and why those decisions were taken, and dealing with the principal issues raised by the petitioners. I also ordered the lodging of affidavits by any witnesses whom the petitioners would intend to lead at any proof. In addition, I ordered an exchange of lists of questions arising from the affidavits. That resulted in the lodging of supplementary affidavits by the Revenue officials in response to the questions posed by the petitioners. These orders were made with the agreement of the parties. At the last of the procedural hearings I granted the parties' joint motion that a proof should be allowed in relation to all the matters raised in the petition and answers. I was persuaded that this was an exceptional case in which the court would be required, in the context of judicial review, to exercise a first instance fact-finding jurisdiction, and that there were issues of fact which could only be resolved by oral evidence. In the event, the proof occupied the diet which had been arranged, and additional days later in 2003.

[8] At the proof, oral evidence was led from several Revenue officials and from Mr Murray of KPMG. The affidavits which had been prepared for the purposes of these proceedings had also been lodged as productions and therefore formed part of the evidence, by virtue of section 2(1)(b) of the Civil Evidence (Scotland) Act 1988 and Rule of Court 36.8. Copies of affidavits which had been prepared for use in the first judicial review were also lodged as productions: it was a matter of agreement that they also should be treated as forming part of the evidence, in the same way as the principal affidavits which had been lodged. It was also agreed that productions which had not been introduced into evidence, but which could be identified as documents whose terms were a matter of admission in the pleadings, should also be treated as forming part of the evidence.

[9] In the event, the oral evidence was concerned almost entirely with the actions of SCO and its predecessors, and the Revenue officials who were called to give evidence were all from SCO. The evidence relating to the actions of LBO was given principally in the form of affidavits.

[10] A variety of submissions were made as to the approach which should be taken to the assessment of the evidence: for example, that oral evidence should be preferred to affidavit evidence, since the former could be tested and assessed in a manner in which the latter could not be tested or assessed; or that the affidavits of the witnesses who gave oral evidence should be treated as the primary source of the witnesses' evidence; or that, where a witness had been comprehensively examined at the proof, his earlier affidavit should be regarded as little more than a check upon the reliability or credibility of his oral evidence; or that, where a witness was not led in evidence, his affidavit should be regarded as unchallenged; or that, on the contrary, little if any weight should be attached to the affidavit of a witness who had not been led in evidence, after the court had allowed parties a proof of their respective averments.

[11] My general approach to the evidence has been to treat the oral evidence, the affidavit evidence and the documents introduced into evidence as forming a body of evidence which requires to be considered as a whole. The examination of witnesses at the proof has been of particular importance to my assessment of their evidence, as it enabled their evidence to be tested by direct questioning and their demeanour to be observed. Where I have been able to conclude that the evidence of such a witness was credible and reliable, that has provided an important foothold in assessing the remainder of the evidence. I have not however disregarded the affidavits of such witnesses, or treated them merely as a basis for checking the consistency of their oral evidence: the affidavits provide, on occasions, a more considered statement of the witness's position than he may have given in the cut-and-thrust of oral examination. In the case of witnesses whose evidence was given solely in affidavit form, their evidence has had to be assessed on the basis of a comparison with other evidence: I have treated their evidence neither as incontrovertible, nor as necessarily bearing little weight.

[12] Generally, I have treated the contemporaneous documents as an important source of evidence and as an important basis for assessing the credibility and reliability of the evidence of witnesses (whether given orally or on affidavit). In some instances I have had to conclude that such documents are an unreliable source of evidence, because they are inconsistent with other evidence which I accept; but in most instances I have been able to form a judgment, considering the documents together with the evidence of witnesses, as to whether apparently reliable documents fit with the apparently reliable evidence of a witness so as to enable a convincing picture of events to be formed, or whether there are such difficulties in reconciling the documents with the evidence of the witness that his evidence cannot be regarded as a reliable account. I use the phrase "difficulties in reconciling", rather than referring to inconsistencies, because the witnesses in the present case were generally able to interpret the documents in a manner which fitted with their evidence, even if the interpretation placed some strain on the words used. Together with the demeanour of witnesses, their ability or inability to accept the natural interpretation of contemporaneous documents has been an important basis for assessing their credibility and reliability.

[13] As will be apparent from some of the passages quoted from documents below, many of the documents were produced in an incomplete form. It may be helpful to say a word about that. In the first judicial review, a commission and diligence were granted to the petitioners for the recovery of documents. The Revenue then produced a large quantity of documentation, much of it in a redacted form: that is to say, passages had been blanked out, generally for the purpose of protecting the confidentiality of taxpayers other than the petitioners in those proceedings. Many of these documents were also produced by the petitioners in the present proceedings. In some cases, the Revenue also produced the same document in a form which was redacted to a lesser extent, or in its complete form. The Revenue also produced a number of documents during the course of the proof in the present proceedings. In some instances, I allowed passages to be blanked out in order to protect the confidentiality of legal advice.

2 THE FACTS

[14] The grounds upon which judicial review is sought require the factual background to the letters of 31 May and 2 June 2000 to be considered in detail. In order to understand that background, it is necessary to examine the dealings between the Revenue and the Fayed brothers and the Harrods group from 1984 onwards. The earlier dealings have to be examined in some detail, partly because the grounds of review include a complaint that the Revenue failed to review the information already in its possession; and it is therefore necessary to consider what information it had in its possession. The petition's primary focus, however, is the Revenue's treatment of Mr Al Fayed's tax affairs between about August 1999 and June 2000; and a close examination of the Revenue's actings during that period is necessary in order to address the petitioners' complaints. These matters will be discussed under the following broad headings:

(1) Events leading to the 1985 forward tax agreement.

(2) Events leading to the 1990 forward tax agreement.

(3) Events leading to the 1997 forward tax agreement.

(4) Events between the 1997 agreement and August 1999.

(5) Events from August 1999 to the issue of the letters of 31 May and 2 June 2000.

(6) Subsequent events.

(1) Events leading to the 1985 forward tax agreement

[15] The Revenue appears first to have taken a sustained interest in Mr Al Fayed in 1984, in consequence of the Fayeds' acquisition of Lonrho's shareholding in House of Fraser. In November of that year Mr Peter Stribblehill, an official of the Revenue's Special Office at Solihull, made a general inquiry of Peat Marwick Mitchell & Co (PMM). The Revenue had had previous contact with that firm in relation to the affairs of two companies connected to Mr Al Fayed, namely Bocardo SA and Balnagown Castle Properties Ltd. The Special Office was an investigation branch of the Revenue, which had been established in 1976 to deal with matters which were not appropriate to existing Revenue investigative agencies but which were too complex for investigation in district offices (i.e. local tax offices). It handled a variety of matters, including tax avoidance schemes, centralised investigations of tax evasion within an industry (e.g. by casual workers in the printing industry in Fleet Street), and the identification of wealthy individuals for whom there was previously no tax file. As explained below, it was one of the parts of the Revenue which subsequently merged to form SCO. Mr Stribblehill explained to PMM that he understood that Mr Al Fayed had been visiting the United Kingdom for a number of years and had held a number of UK directorships, but did not appear to have made any tax returns. Mr Stribblehill wished to establish whether any UK taxation consequences arose from Mr Al Fayed's visits and directorships.

[16] On 28 November 1984 PMM replied on behalf of Mr Al Fayed. They stated that, according to the information provided to them by Mr Al Fayed, he had not filed UK tax returns because no income arose to him in the UK. He was not resident in the UK but in Dubai. He was not a director or employee of any company resident in the UK, nor did he receive any income from any UK source. He had held two UK directorships, but did not receive any emoluments. It was suggested that that information would be sufficient, failing which a meeting could be arranged.

[17] A meeting was held on 11 December 1984 between Mr Stribblehill and representatives of PMM, at which Mr Stribblehill explained that he wished to clarify the position not only of Mr Al Fayed but also of his brothers Ali and Salah Fayed and his son Emad. At that meeting, PMM said that the Fayeds were international businessmen with operations in many parts of the world. Mr Al Fayed's business interests were said to include the Ritz Hotel in Paris, where he spent much of his time; the Trade Centre in Dubai, which was managed by a Fayed company; oil interests in Abu Dhabi; property in New York; a bank in Houston, Texas; and shipping interests in Italy and Greece. PMM acted for some, but not all, of the companies with which the Fayeds were connected. Mention was made of some of those companies, including Bocardo SA, a company incorporated in Liechtenstein, which was thought to own property at 60 Park Lane, London, and of whose ownership and ultimate control PMM were unaware; Genavco Air Ltd, which was said to be a UK company which operated and maintained the aircraft used by the Fayeds on behalf of Fayair (Jersey) Company Ltd, and also performed similar services in respect of aircraft used by third parties; and Alfayed Investment & Trust Ltd, the company which owned the House of Fraser shares acquired from Lonrho, and of whose ownership PMM were unaware. Asked by Mr Stribblehill about Mr Al Fayed's domicile, PMM said that he was domiciled in Egypt. Asked about Mr Al Fayed's visits to the UK, PMM said that no details were available, but that the Fayeds were aware of UK tax residence requirements, including the "90 day rule", and that Mr Al Fayed's maximum total annual stay in the UK had been two months in any one year. Asked where Mr Al Fayed stayed when he visited the UK, PMM said that for reasons of security he usually stayed in apartments at 60 Park Lane, leased by companies with which he had connections. He occasionally visited Balnagown Castle in Easter Ross. Asked whether Mr Al Fayed ran his businesses from the UK, PMM said that that was not the case.

[18] It may be helpful at this point to give a brief explanation of the legal context of Mr Stribblehill's enquiries about Mr Al Fayed. Some of the enquiries were directed towards the question whether Mr Al Fayed was resident in the UK for tax purposes. The relevance of that was that, in principle, an individual who is resident in the UK is subject to income tax on income arising worldwide: Income and Corporation Taxes Act 1988 (the 1988 Act), sections 18(1) and 19(1). Similarly, he is in principle subject to capital gains tax on the disposal of assets anywhere in the world: Taxation of Chargeable Gains Act 1992 (the 1992 Act), section 2(1). If, however, a UK resident is domiciled outside the UK, then (putting the matter very broadly) he is subject to income tax on foreign income only insofar as that income is brought into the UK: section 65 of the 1988 Act. This "remittance basis" of taxation is explained in greater detail below (at para.23). Similarly, such an individual is outside the charge to capital gains tax on the disposal of an asset located outside the UK, unless he brings the proceeds of the disposal into the UK: section 12(1) of the 1992 Act. Chapter II of Part III of the 1992 Act applies the same principle to gains otherwise assessable on individuals under the provisions concerned with settlements, where the gain arises on the disposal of an asset located outside the UK.

[19] There is no statutory definition of residence: it is a question of fact. Among the factors considered relevant are the frequency, regularity and duration of visits to the UK, and whether or not a place of abode is maintained in the UK. In Revenue practice, a visitor is normally regarded as resident in the UK if he visits the UK regularly, i.e. his visits after four years average 91 days or more in the tax year: such a visitor is treated as resident as from the fifth year. At one time the Revenue also took the view that if a person had accommodation available to him in the UK, any visit to the UK would suffice to make that person a UK resident for the fiscal year in which the visit took place. The "available accommodation" rule appears to have been departed from after 1993 (having been abolished, for some purposes at least, by the Finance Act 1993, section 208).

[20] Mr Stribblehill's enquiries about visits were thus directed to the issue of residence (and the "90 day rule"); and his enquiries about 60 Park Lane and Balnagown Castle were directed in part to the same issue, in light of the "available accommodation" rule applied at that time. His enquiries about 60 Park Lane and Balnagown Castle were also relevant to the question whether Mr Al Fayed might be liable to be taxed on a benefit (namely the provision of living accommodation) under Schedule E. As Mr Stribblehill remarked at the meeting, Mr Al Fayed could be liable to be taxed on such a benefit even if he was not resident in the UK, under Case II of Schedule E (which covers "any emoluments, in respect of duties performed in the United Kingdom, for any year of assessment in which the person holding the office or employment is not resident (or, if resident, not ordinarily resident) in the United Kingdom": section 19(1) of the 1988 Act, as amended). Mr Stribblehill's enquiries about whether Mr Al Fayed ran his businesses from the UK could be relevant not only to his own residence status, but also to the residence status of the companies in question, since a company incorporated abroad is generally treated as resident where its central management and control are to be found (De Beers Consolidated Mines Ltd v Howe [1906] AC 455 at page 458 per Lord Loreburn LC). Mr Stribblehill's enquiries about domicile were directed to the issue whether foreign income and capital gains were taxable only on the remittance basis.

[21] Following the meeting, Mr Stribblehill wrote to PMM in January 1985 requesting information bearing on the residence status of the members of the Fayed family mentioned at the meeting: in particular, details of visits to the UK, information about the use made of 60 Park Lane and Balnagown Castle, and information about responsibility for expenditure on the properties. PMM responded that there were no records of visits to the UK, or of the occupation of the apartments at 60 Park Lane. Information was however provided about the companies having an interest in the apartments and in Balnagown Castle and other properties in Scotland. It was said that there were 51 apartments at 60 Park Lane. Bocardo SA had a long lease of the whole property and had entered into sub-leases of most of the flats. Bocardo SA also owned Balnagown Castle and other properties in the vicinity of the castle. Other properties in Scotland were owned by Ross Estates Ltd. Farms were either let or managed on a commercial basis by Balnagown Castle Properties Ltd. An account was given of the uses made of the Scottish properties, and of how expenditure on the castle was met. Mr Stribblehill then requested, in a letter of 12 March 1985, detailed personal information bearing on the domicile and residence of each individual, together with further information about the use made by them of the apartments in Park Lane.

[22] PMM then requested a further meeting with Mr Stribblehill, which was held on 16 May 1985. At the meeting, PMM said that the Fayeds wanted to get the enquiry settled. It was accepted that they were spending more time in the UK and that their involvement in the UK would be greater in the future than it had been in the past, due to the House of Fraser takeover. They had now acquired sufficient shares to acquire all the minority shares, and thus own all the shares in the company. PMM asked whether it was possible to reach some form of settlement based on an acceptance that Mr Al Fayed and Ali Fayed were resident in the UK from April 1985: Salah Fayed lived in Switzerland, and Emad Al Fayed in the USA. In suggesting this, PMM made it clear that, even if the Fayeds were resident in the UK, it would be possible for them to plan their affairs so that they brought only capital into the UK.

[23] It may be helpful to interrupt the narrative at this point in order to explain further the remittance basis of taxation. In broad terms, if income arising from a foreign source is taxed on a remittance basis it is taxed not as it arises, but only as it is received by the taxpayer in the UK. The remittance basis only applies to certain types of person and to certain types of income (and, as mentioned earlier, to capital gains from the disposal of assets overseas). In particular, it applies to income within Schedule D, Case IV ("income arising from securities out of the United Kingdom": section 18(3) of the 1988 Act) and Case V ("income arising from possessions out of the United Kingdom not being income consisting of emoluments of any office or employment": ibid.) only if the taxpayer satisfies the Revenue that he is not domiciled in the UK (or satisfies other requirements which are not material to the present case): section 65(4) of the 1988 Act. The remittance basis also applies to foreign emoluments falling within Schedule E: section 19(1) of the 1988 Act, read with section 192. In the case of an individual who is resident in the UK but not domiciled in the UK, this covers emoluments from foreign employers for duties performed outside the UK. Such emoluments fall within Case III of Schedule E if they are received in the UK. Where the remittance basis applies, the sum received must have the character of income according to UK tax law when it is remitted to the UK, and it must be received by the taxpayer in the UK, if it is to fall within the ambit of UK income tax. If the taxpayer has both capital and income abroad, and remits only capital to the UK, it follows that there will be no charge to income tax: Kreen v Martin [1935] 1 KB 499. It was apparent from the evidence that, in practice, it may be difficult for the Revenue to establish that remittances have the character of income, since it may be difficult for it to obtain information from sources (such as banks) which are outside UK jurisdiction.

[24] Returning to the meeting held on 16 May 1985, PMM explained that the Fayeds had very substantial amounts of capital available, principally in Switzerland, and could make arrangements to ensure that there was no liability to UK taxation in future years even if they were resident in the UK. Against this, they appreciated that they perhaps had some obligation to the UK authorities, and in addition they did not want the trouble of having to arrange their affairs precisely. They therefore wondered if it would be possible for a round sum figure of tax to be paid for future years' liabilities, taking into account both inflation and the level of their UK involvement from time to time. This, it was said, would mean that the Fayeds were accepting that they were remitting to the UK a mixture of capital and income, and that the income element of the remittances was equivalent to the grossed-up amount of the tax which they agreed to pay. In other words, what was suggested was that the individuals in question would be treated as resident but non-domiciled, and therefore liable to UK taxation on foreign income only (broadly speaking) to the extent that it was remitted to the UK; and they would pay a sum to the Revenue on the basis that they (and the Revenue) accepted that the income element in the sums which they remitted to the UK was equal to the grossed-up amount of the sum paid to the Revenue. They would thus pay to the Revenue a pre-determined sum without a computation of the actual tax liability of the individuals in question. If such an arrangement were made, the Revenue would not have to make complex enquiries as to the source of remittances; nor would the Fayeds have to arrange their affairs so as to ensure that only capital was remitted to the UK. Mr Stribblehill responded to this suggestion at the meeting by stating that his enquiries were concerned with past years as well as with ensuring that some proper scheme was arranged to deal with future liabilities. He was prepared to consider some form of arrangement for future years, but would require time to make a response.

[25] In relation to the earlier years, Mr Stribblehill returned at the meeting to the question of available accommodation. He expressed concern that, having asked about addresses used by the Fayeds when in the UK, he had not been told about Barrow Green Court in Surrey, which he had learned about from a local newspaper. It appeared that this house had been owned by Bocardo SA for more than 10 years. He therefore had reason to believe that members of the Fayed family had been resident in the UK for more than 10 years. Any offer in settlement of those years' tax liabilities should be based on whatever factual evidence was available. He had no idea of the level of spending by the Fayeds in the UK. PMM expressed doubt as to the relevance of this for future periods, since the Fayeds were capable of avoiding any liability by remitting only capital to the UK. Mr Stribblehill however expected financial records to be available for past years to establish the amount of remittances and the elements claimed to be capital. It was agreed that an attempt should be made to quantify money coming into the UK.

[26] Arrangements for future years of the kind suggested by PMM - forward tax agreements, as they have been described in the present proceedings - were not altogether exceptional in the 1980s. Such agreements generally had their genesis in enquiries made by Special Office into the affairs of individuals who were on the borderline of being resident or non-resident in the UK, and were usually non-domiciled. In such circumstances, settlements might be negotiated between the Revenue and the taxpayers, relating to what were often disputed issues of residence and to the taxation of remittances from overseas for back years, with arrangements put in place to cover future years. The number of agreements of this kind which the Revenue entered into appears to have been in the order of tens rather than hundreds.

[27] Following the meeting, Mr Stribblehill wrote to PMM on 3 June 1985 indicating that it might be possible to reach a broadly based agreement if certain information was provided. Mr Stribblehill wanted to establish the level of expenditure in the UK, as a means of establishing the total amount of remittances; and PMM could then make proposals as to the proportions of capital and income. He suggested that the two years to 5 April 1985 be examined, and that the conclusions reached in respect of that period might be extended to earlier and later periods. In reply, PMM stated that it had always been the Fayeds' intention that any personal sums transferred to the UK should come from capital sources, and that they had given appropriate instructions in order to achieve this. Their bank in Switzerland confirmed that the funds transferred to the UK had come from capital sources. The brothers recognised however that in the past their administrative arrangements might not have been sufficiently tightly drawn to enable them to be certain that no income had been received in the UK. On that basis, and to avoid a time-consuming exercise in tracing the source of all funds received in the UK over a period of years, they proposed to make a round sum payment. PMM suggested that the annual tax payment proposed for future years should be taken into account in evaluating the settlement for past years, since "the brothers could so organise their affairs as to be absolutely certain that no funds received in the UK represent income".

[28] A further meeting was held on 13 August 1985, when PMM said that they had a letter from the Swiss bank, Compagnie de Gestion et de Banque Gonet SA of Geneva, confirming that all remittances were capital. The remittances had been made to an account held with the Midland Bank. PMM were under the impression that this was the sole vehicle through which money was remitted to the UK for the use of the Fayeds in a personal rather than a corporate capacity. The Midland Bank had provided a certified list of funds remitted to the UK during the 6 years to 5 April 1985. They rose over the period from 800,000 in the year to 5 April 1980 to 1.7m in the year to 5 April 1985. The remittances were used for day-to-day expenses, including the reimbursement of UK companies for any personal expenses. All substantial capital assets in the UK were owned by companies rather than by the Fayeds as individuals. PMM also provided information concerning the Ritz hotel in Paris. It was explained that the hotel was the only trading asset of a company incorporated in the UK which made its tax returns to the French Revenue. The company had been bought in 1979.

[29] In response to this information, Mr Stribblehill said that he remained concerned about the period of about 6 years prior to 1979-80, in view of the ownership of the three properties (the Park Lane apartments, Barrow Green Court and Balnagown Castle) by Fayed companies during that period. In addition, before any settlement could be reached, he would need to satisfy the Inland Revenue Claims Branch as to the residence, ordinary residence and domicile status of each of the individuals under discussion. This would necessitate some acceptance of UK residence. A final agreement would be subject to certain points being satisfied:

(1) The information requested in Mr Stribblehill's letter of 12 March 1985 would have to be provided, to establish non-UK domicile status.

(2) A copy should be provided of the Banque Gonet statement that all remittances had been of capital.

(3) The details provided by the Midland Bank should be forwarded.

(4) A signed statement should be obtained from the Fayeds to the effect that the Midland Bank had been the only substantial vehicle for remission of funds to the UK.

(5) A certified statement should be provided of the UK assets owned by the Fayed family.

Mr Stribblehill said that when the amounts of remittances for the 3 years to 5 April 1985 were established, PMM should put forward proposals as to the amounts to be taken as remittances for the earlier years. All four individuals must accept UK residence. The only point open for negotiation was the proportion of the remittances which should be taken to be income rather than capital. Mr Stribblehill suggested that the normal Revenue position, where there was no firm evidence that remittances were capital, was to treat 100 per cent as income, but in order to reach a settlement he would accept that 50 per cent represented taxable income. PMM suggested that there was no real basis for this figure, particularly since the statement by Banque Gonet was evidence that the remittances referred to were capital. PMM had looked at the question by assessing the relative proportions of capital and income available, and had formed the view that in the case of such an immensely rich family the capital would far outweigh the income. They suggested that 10 per cent income would be a reasonable return, and doubled that to 20 per cent in order to make an offer which would be accepted as a realistic settlement. Mr Stribblehill responded that the opening offer having been at 20 per cent, negotiations would have to be at a higher level. After discussion, Mr Stribblehill said that he would recommend to the Board of Inland Revenue acceptance of an offer based on one-third of remittances being treated as income, divided equally between the four individuals over a twelve year period. PMM agreed to take instructions.

[30] After taking instructions, PMM wrote to the Revenue on 10 September 1985 agreeing to settle the back duty on the basis that one-third of remittances should be treated as income, and agreeing to provide information along the lines requested by Mr Stribblehill at the meeting on 13 August. In relation to the fourth item on Mr Stribblehill's list (a signed statement that the Midland Bank had been the only substantial vehicle for remission of funds), PMM agreed to provide "confirmation that substantial personal remittances have been channelled solely through the Midland Bank account" (emphasis added). This qualification, which subsequently proved to be significant, reflected what had been said by PMM at the meeting: that they were under the impression that this was the sole vehicle through which money was remitted for the use of the Fayeds in a personal rather than a corporate capacity. PMM enclosed calculations of tax and interest for the twelve years to 5 April 1985, bringing out a total sum payable of 2.4m. PMM said that, in addition, their clients would agree to declare annual incomes in future years sufficient to give rise to annual tax payments of 150,000 in total. PMM said that these proposals were put forward in full and final settlement of any personal tax liabilities which might have arisen up to 5 April 1985, including potential liabilities arising from corporate investments in the UK.

[31] On 13 September 1985 Mr Stribblehill wrote to PMM, confirming that, subject to the supply of the information requested, and a formal domicile ruling from Claims Branch, the offer of 2.4m would be submitted for consideration by the Board. He confirmed that, if the offer were accepted, it followed that no further enquiries would be made into the issue of remittances via corporate investment in the UK. Mr Stribblehill also suggested that the first payment of 150,000 should be forwarded along with the 2.4m, bringing out a total payment of 2.55m.

[32] Mr Stribblehill stated then, and subsequently, that the offer would be submitted to the Board of Inland Revenue. It appears from the evidence that the offer may, but need not necessarily, have been considered by Board members personally. Officers of the Revenue have authority to take certain decisions in the name of the Board (in much the same way as, in other departments, a civil servant may take a decision in the name of the Minister). A decision on the offer would have been taken at the level within the Revenue at which, under the current practice, authority to take such a decision rested.

[33] On 20 September 1985 PMM sent Mr Stribblehill detailed biographical information bearing on the domicile of Mohamed, Ali, Salah and Emad Al Fayed, covering the matters raised in Mr Stribblehill's letter of 12 March 1985. The information implied that the four individuals each had an Egyptian domicile of origin and had not acquired a domicile of choice within the UK. The information also covered visits to the UK, and implied that they were not such as to give rise to UK residence, in the absence of the "available accommodation" rule. PMM also provided a copy of a letter from Banque Gonet addressed to Mr Mohamed Al Fayed, certifying:

"that the funds transferred during the years 1980 to 1984 by our bank to your account with Midland Bank plc, 72 Park Lane, London W1 originated from your capital account 'Fayed Bros', ref. FBS 4454 in our books".

PMM also provided a statement in the following terms:

"MOHAMMED, ALI, SALAH AND EMAD AL-FAYED

REMITTANCE OF FUNDS TO THE U.K.

PERSONAL ASSETS HELD IN THE U.K.

Attached are copies of statements prepared by Midland Bank plc showing details of payments received from abroad into an account held in the name of Mohamed Fayed during the six years ended 5th April, 1985....

The Al-Fayed's confirm that substantial personal remittances of the funds from abroad to the U.K. have been channelled solely through the account with Midland Bank plc in the name of Mohamed Fayed.

The Al-Fayeds also confirm that the only personal assets owned by them in the U.K. are personal chattels such as furnishings, clothes, jewellery and motor cars."

The Midland Bank statements were attached, and supported PMM's calculations bringing out the amount payable of 2.4m.

[34] Mr Stribblehill responded by letter dated 26 September 1985, requesting that the statement confirming that the Midland Bank account was the only substantial vehicle used for personal remittances, and the extent of UK assets owned personally, be signed by at least one of the Fayeds. Mr Stribblehill also confirmed that Claims Branch accepted that the Fayeds were of non-UK domicile. PMM thereafter forwarded a copy of the statement which had been attached to their letter of 20 September 1985 signed by Ali Fayed, for and on behalf of Mohamed, Ali, Salah and Emad Al Fayed.

[35] On 7 November 1985 PMM submitted to the Revenue formal offers, in terms which had previously been agreed with the Revenue, on behalf of each of Mohamed, Ali, Salah and Emad Al Fayed. That submitted on behalf of Mohamed Al Fayed was in the following terms:

"In consideration of your agreeing to accept the same from Mohamed Al Fayed of 60 Park Lane, London W1 in respect of the duties set out in the statement below which are alleged by the Inland Revenue to be unpaid by reason wholly or in part of his default or in respect of the penalties and interest to which he may thereby have become liable under the Taxes Acts we are authorised on his behalf hereby to offer in respect of the said duties, penalties and interest the sum of 637,500 for which a cheque is attached."

The statement then detailed the figures previously calculated by PMM as being due for the 12 years to 5 April 1985, together with 37,500 (i.e. one-quarter of 150,000) for 1985-86. The total of 637,500 was one-quarter of the 2.55m previously agreed. The other offers were in similar terms.

[36] The offers were accepted by the Revenue by letters dated 8 November 1985, which were handed to PMM at a meeting that day. At the meeting, the mechanics of implementing the arrangement for future years were discussed. Mr Stribblehill proposed to arrange for four files to be set up (i.e. one for each individual). Returns would be issued from the year ending 5 April 1987 onwards. He suggested that they need only show the total income received in the UK as a grossed-up amount leading to a total tax liability of 150,000 per year, increased in line with inflation. Mr Stribblehill suggested that the files be dealt with by London Provincial 8, the tax office which dealt with PAYE in relation to companies associated with the Fayeds. Mr Stribblehill's note states:

"This would therefore confine the awareness of the Al Fayed family to within one district. He intended to provide barely essential details to LP8 who would not be aware of all the facts surrounding the deal covering the earlier years."

This is the first example of the tendency of the investigative branches of the Revenue (successively Special Office, Enquiry Branch and SCO) not to disclose information about their agreements with the Fayeds to other Revenue agencies with an involvement or interest in the Fayeds' tax affairs.

[37] There was thus no formal agreement in respect of future years, the exchange of letters covering only the back duty settlement and the 150,000 due in respect of the current tax year. Both parties however proceeded on the basis that an agreement had been entered into covering remittances for the period up to 5 April 1991. So far as the 1985 agreement dealt with back duty, it was based upon treating one-third of total remittances as income. The proportion of one-third appears to have been the outcome of negotiation between Mr Stribblehill and PMM. That negotiation reflected the information available, but also required a broad judgment to be made insofar as information was not available. So far as the agreement dealt with future years, the figure of 150,000 appears similarly to have emerged as the result of negotiation. The contemporary documents do not reveal Mr Stribblehill's thinking, beyond his earlier rejection of a figure of 50,000 as being unrealistically low, and his suggestion that the level of income to be remitted in future years might be estimated by extrapolating from the figures for the most recent two or three years.

(2) Events leading to the 1990 forward tax agreement

[38] In about September 1988 the Revenue was provided by the Department of Trade and Industry with a copy of the DTI inspectors' report on the Fayeds' acquisition of House of Fraser. The report had not yet been published. Mr Roy Worsley, an Inspector at the London Enquiry Branch, was given the report to review. His brief was to identify potential UK tax liabilities. He and his group leader, Mr Geoffrey Monk, were instructed by the Director of Enquiry Branch, Mr David Hugo, to decide whether or not an investigation into Mr Al Fayed was warranted and, if so, to consider whether the Revenue might wish to prosecute or whether a civil settlement should be considered. Enquiry Branch was another investigation branch of the Revenue, which had been formed in 1920 to deal with the larger and more complex cases of suspected tax fraud. It dealt principally with cases in which a negotiated settlement was anticipated, but also with cases in which criminal proceedings were envisaged. Along with Special Office, it was the predecessor of SCO.

[39] Mr Worsley did not give evidence, but a copy of an affidavit which he prepared for the earlier judicial review formed part of the evidence in the present proceedings. Insofar as its contents can be compared with contemporary documents lodged as productions, the affidavit appears to be broadly reliable.

[40] Mr Worsley formed the view that the size of the 1985 back duty settlement was inconsistent with the Fayeds' evidence to the DTI inspectors. That evidence concerned, first, business activities which Mr Worsley considered might give rise to UK tax liabilities and, secondly, deposits in Royal Bank of Scotland (RBS) accounts which had been used to finance the House of Fraser share purchase, funded by remittances from overseas. It was thought that the Fayeds, as individuals, might have the legal and beneficial interest in those accounts. Although the DTI inspectors had rejected the Fayeds' evidence as to the source of the remittances used to acquire House of Fraser, Mr Worsley's approach was based upon treating their evidence as true.

[41] An initial meeting between Enquiry Branch and PMM took place on 25 November 1988. At the meeting, Mr Hugo and Mr Monk stated that they wished to set aside the 1985 settlement as having been reached on an incorrect factual basis, and requested mandates to enable the Revenue to obtain documents and information from RBS and the Midland Bank.

[42] Writing in response on 5 December 1988, PMM said that the overriding concern of their clients (the three Fayed brothers) was that the strictest confidentiality should be maintained. With that in mind, they suggested that the relevant documents should be obtained from the banks by themselves. They stated that their clients had long used the RBS in connection with their corporate investments, although the accounts might have been designated in the name of one or more individuals. The Midland Bank account had always been used in connection with personal expenses and personal remittances. PMM maintained that the remittances to the RBS for the acquisition of House of Fraser shares had in any event been referred to by Mr Stribblehill in a letter dated 30 August 1985, and that the matter was covered by the exchange of letters on 10 and 13 September 1985 (see paras. 30 and 31).

[43] A further meeting took place on 26 May 1989, at which the Fayed brothers were represented by counsel and solicitors as well as representatives of PMM. Counsel reported that information had been sought from RBS and the Midland Bank. It had been discovered that the information previously given to Special Office about the quantum of remittances transacted via the Midland Bank had been inaccurate. When dealing with Mr Stribblehill in 1985, PMM had relied upon summaries prepared by the Midland Bank. Following the meeting on 25 November 1988 it had been discovered that those summaries had been substantially inaccurate. It was acknowledged that the Special Office investigation had been settled on the basis of incorrect information. An interim report had been prepared by PMM and was provided to the Revenue. This included copies of all correspondence generated by the Special Office investigation in 1984-1985, copies of all Midland Bank account statements for accounts operated personally by the Fayeds for the period from March 1979 to June 1985, and schedules summarising all personal remittances made to the Midland Bank accounts for the period from April 1979 to April 1985. These schedules revealed larger remittances than had been disclosed at the time of the 1985 settlement: for example, the remittances during 1984/85 were 2.5 million rather than 1.7 million. Enquiries to date suggested that no personal remittances had been transacted in the RBS accounts. The Revenue officials responded that their principal concern was that substantial personal remittances of income might have been transferred to the UK via the RBS accounts. That concern arose from the evidence given by the Fayeds to the DTI inspectors, which suggested that the funds used to purchase the House of Fraser shares represented inter alia income arising from the Fayeds' overseas business activities. Information provided by RBS indicated that accounts had been operated in the name of Al Fayed/Fayed Brothers during 1984 and 1985.

[44] Thereafter PMM prepared a report on the RBS remittances. They maintained that the Fayeds did not have a beneficial interest either in the sums held in the RBS accounts or in the overseas sources from which those sums had been remitted. The Fayeds were therefore not liable to tax either on the sums remitted or on the interest earned on the accounts.

[45] Mr Worsley then carried out a more detailed analysis of the DTI report, and identified a number of potential tax liabilities, which he set out in a spreadsheet. This was provided to the Fayeds' advisers at a meeting held on 5 April 1990, following the publication of the DTI report on 7 March 1990. The first potential liability concerned the profits of an oil syndicate, said to amount to US $400m, arising principally between 1982 and 1984. Mr Worsley suggested that tax might be payable on these profits if the syndicate had been controlled and managed from the UK, or if the profits had been remitted to the UK as income. The second potential liability concerned interest on deposits with Banque Gonet in Geneva, said to amount to US $300m, arising between 1978 and 1984. Mr Worsley again suggested that the remittance basis would apply to the extent that any interest had been remitted to the UK as income. This interest, and the profits of the oil syndicate, were thought to be the principal source of remittances of 325m during 1984 from accounts at Citicorp Bank, Zurich, to the RBS. Other remittances had been made to the RBS during 1984 and 1985 totalling US $95m. The third potential liability concerned payments of commission for assisting with Middle Eastern construction projects awarded to British companies, estimated at 25.5m. Mr Worsley suggested that a liability to taxation might arise if the commission had been earned in the UK or remitted to the UK. The fourth potential liability concerned payments of commission for introducing clients to Morgan Grenfell, estimated at 1m. If the commission had been paid in the UK, it might be assessable. The fifth potential liability concerned a capital gain on the sale of Lonrho shares, the amount of which (if any) was not known. The sixth potential liability concerned interest of 12m earned on the RBS deposits during 1984-85. Mr Worsley suggested that, since the accounts in question were in the names of the Fayed brothers, the interest arising on those accounts should be regarded as accruing to them personally, even if the sums deposited in the accounts represented corporate funds. On the basis of Mr Worsley's spreadsheet, the Fayeds' advisers were provided with a rough calculation bringing out a potential tax liability of 227m.

[46] In the light of the concerns subsequently expressed by Revenue officials over Mr Al Fayed's access during the 1980s to substantial amounts of cash withdrawn from the Park Lane branch of the Midland Bank, the information provided to the Revenue by Mr Al Fayed's advisers up to this point is of some significance. Special Office had been told in 1985 that remittances from overseas for personal spending were paid into the Midland Bank's Park Lane branch, and had amounted to 1.7m during 1984/85. Enquiry Branch were told in 1989 that the correct figure had actually been 2.5m. That figure was vouched.

[47] At the meeting on 5 April 1990, the importance of confidentiality was emphasised by the Fayeds' solicitors, Herbert Smith. Mr Monk said that the settlement would be considered at "the highest level (i.e. D.W. Hugo/Board members)." The importance of confidentiality was reiterated by Herbert Smith in a letter dated 16 May 1990, in the light of "leaks" reported in the Press. In his reply, dated 17 May 1990, Mr Hugo wrote:

"I can give a clear assurance that access to information relating to negotiations and any settlement that may be reached will be restricted to a very limited number of individuals within the Inland Revenue".

He added that arrangements would be made for the collection of payments in a way which would protect anonymity.

[48] At a further meeting on 24 May 1990, Mr Monk told the Fayeds' advisers that "for our own reasons as well as yours we want to keep the matter confidential". The only people involved would be the officials dealing with the case in Mr Hugo's division and Board members.

[49] At the meeting, the Fayeds' advisers responded to Mr Worsley's spreadsheet. They maintained that residence could only be established after accommodation became available, i.e. in the early 1970s. The oil syndicate was a partnership outside the UK, mainly in the Middle East, with some accounting done in Switzerland. It ceased trading early in 1984. Since the partnership had ceased trading by the date of the remittances, those remittances constituted capital rather than income (i.e. there being no longer a source of income, the sums remitted could not have the character of income). In relation to the interest arising on deposits with Banque Gonet, the sums remitted from Switzerland had been capital rather than income. Any possibility of corporate remittances being treated as personal remittances had in any event been foreclosed by the correspondence between Mr Stribblehill and PMM in 1985. The payments of commission in respect of construction contracts and Morgan Grenfell had been made by one overseas company to another and did not constitute income earned or arising in the UK. The Lonrho shares had been held by an overseas company. The interest on the RBS accounts was accepted as being taxable insofar as it had been used for personal purposes, but not insofar as it had been used for corporate purposes. It was agreed between the Revenue officials and those representing the Fayeds that tax should also be paid (as in 1985) on one-third of the previously undisclosed remittances to the Midland Bank. It was recognised that the tax due was at least 10m. With a view to bridging the gap between the parties' positions, the Revenue officials suggested that documentation be produced to support what was being said on behalf of the Fayeds, particularly in relation to the RBS accounts. In the event, no such documentation was produced.

[50] The next meeting was held on 11 June 1990. The Revenue's note of that meeting is headed "The Shop Ltd". This appears to have been a code-name adopted by Enquiry Branch for the case of the Fayed brothers, intended to protect the confidentiality of the discussions. At the meeting, it was agreed that any settlement should also cover separate matters being inquired into by Glasgow 1 and Special Office in Solihull. The former was the tax office which dealt with the tax affairs of the House of Fraser group. It was contending that part of the legal fees incurred in connection with actions against Lonrho and in connection with the DTI investigation, which had been charged as expenses in the accounts of House of Fraser Holdings plc, represented benefits in kind assessable on the Fayeds under Schedule E. The latter was contending that certain overseas Fayed companies, including Bocardo SA and Ross Estates Ltd, were resident in the UK and therefore liable to corporation tax.

[51] At the next meeting, on 20 June 1990, Herbert Smith proposed that the settlement should include future annual instalments of 200,000 to cover any future UK tax liabilities arising from remittances from overseas. The Revenue thereafter proposed that future remittances be dealt with separately from the back duty settlement, and that 200,000 per annum should be paid for the next five years, with a review at the end of that period. The "marginal issues" (i.e. the matter previously dealt with by Special Office in Solihull, and the matters being dealt with by Glasgow 1) would be "swept up" in the agreement. At about this time, the investigation into overseas companies being carried out by Special Office in Solihull was transferred to London Enquiry Branch.

[52] At the next meeting, on 16 July 1990, it was agreed that the settlement should be structured in the form of four letters, covering the settlement of back duty, future tax liabilities on personal remittances for the tax years ended 5 April 1992 to 5 April 1997, residence and domicile, and the matters raised by Special Office in Solihull, Glasgow 1 and London Provincial 8. The latter had dealt with the personal taxation of the Fayeds since the 1985 agreement, and it was enquiring into possible benefits in kind arising to Ali and Salah Fayed from the provision of office accommodation and secretarial staff. At about this time Enquiry Branch informed Glasgow 1 that it was carrying out an investigation of the Fayeds, and asked that the settlement should include the matters which had been raised by Glasgow 1.

[53] Following further negotiations, the outstanding points were discussed at a meeting on 17 September 1990. One of these points concerned the level at which disposals of overseas assets would be disregarded for the purposes of capital gains tax as being de minimis. The appropriate level was agreed to be 15m. A second point concerned benefits in kind. Mr Hugo observed that KPMG (as PMM had become) would in future have to complete annual tax returns which would involve reviewing whether, and to what extent, the Fayed brothers were liable under Schedule E in respect of benefits in kind. KPMG however said that the Fayeds wished benefits to be covered by the settlement as part of the "package". They said that the Fayeds were not seeking a tax advantage, but merely wished to reduce the amount of detailed consideration of their positions that was required, so as to avoid "hassle". KPMG understood that the cost of all benefits had been reimbursed, and that no tax liabilities would in any event arise in respect of benefits. It was agreed that a "benefits review" would be required by the Revenue, examining any services and supplies provided by the various companies concerned and establishing whether they had been paid for at the market rate. A third point concerned potential duties arising from the taxation of living accommodation under sections 145 and 146 of the 1988 Act (which are discussed below, at para.59). An appeal was pending against an assessment under those sections which the Revenue had made; and it was agreed that no further action would be taken by the Revenue until a decision had been reached by the Appeal Commissioners in some other case involving similar circumstances.

[54] The agreement was then formally constituted by an exchange of letters on 28 September 1990. As discussed at the meeting on 16 July 1990, there were four elements:

(1) A back duty settlement, in terms of which 31m was offered and accepted in full and final settlement of all the personal liabilities of Mohamed, Ali, Salah and Emad Al Fayed for the fiscal years up to 5 April 1990, and in respect of liabilities of various companies in respect of accounting periods ended on or before 31 December 1989. The companies in question were Bocardo SA, Star Picture Co NV, Ross Estates Ltd, Tane Fount SA, Prestige Properties SA, Makart Establishment, International Marine Services SA and Alfayed Investment and Trust SA. All of these appear to have been overseas companies. The 31m included the sums already paid or to be paid under the 1985 agreement. So far as not already paid, it was to be paid in instalments of 3.4m per annum over a period of six years.

(2) An agreement covering future remittances, described in the following paragraph.

(3) A letter from the Revenue in relation to the residence and domicile status of Mohamed, Ali, Salah and Emad Al Fayed, accepting

(i) that if the existence of any dwelling house available for their use in the United Kingdom had been disregarded, they would not have been regarded as resident in the United Kingdom for any fiscal year up to 5 April 1984, and

(ii) that they were not, and never had been, domiciled in the UK.

(4) An agreement that legal fees incurred by the House of Fraser group in connection with specified proceedings would be deductible as expenses for corporation tax purposes in the accounts of the company concerned, and that no benefit would be regarded as arising to any employee or director. Glasgow 1 was to be informed of this agreement.

[55] The agreement covering future remittances was constituted by a letter of offer by KPMG, on behalf of Mohamed, Ali, Salah and Emad Al Fayed, and a letter of acceptance by the Revenue, signed by Mr Hugo on behalf of the Commissioners of Inland Revenue. Clause 1 stated that only Mohamed Al Fayed and Ali Fayed were currently regarded as resident and ordinarily resident in the UK. Clause 2 provided inter alia:

"2. Following recent discussions between representatives of our clients and officers of the Inland Revenue, we are authorised to offer that payment of the sum of 200,000 will be made in respect of each of the fiscal years ended 5th April 1992 to 1997 inclusive in full and final settlement of income tax or capital gains tax to which they become liable by reason of remittances, or of constructive remittances, to the United Kingdom of funds from outside the United Kingdom which may be assessable on them personally either singularly or jointly:

a. Under Case IV or V of Schedule D....

b. Under Case III of Schedule E....

c. Under Sections 1 and 14 CGTA 1979, in respect of any chargeable gain arising on the disposal, or part disposal, of any asset... situated outside the United Kingdom, but only where the proceeds... do not exceed 15 million."

This clause thus quantified the liabilities to income tax and capital gains tax (subject to the 15m ceiling) arising under the remittance basis at a pre-determined figure of 200,000 per annum.

[56] Clause 3 dealt with benefits in kind, and provided:

"3. The payment in paragraph 2 above will also cover any assessment to tax in respect of emoluments chargeable to income tax under Schedule E by virtue of Section 154 ICTA 1988 where it can be shown that the provision of services or supplies etc. was habitually provided to our clients prior to 6th April 1990. This is on the understanding that the cost of services or supplies etc. was then reimbursed to the company providing the particular services or supplies, if that was the practice prior to 6th April 1990, and continues to be reimbursed."

[57] Section 154 requires that there be treated as the income of a director or employee the cash equivalent of certain benefits provided for him, or for members of his family or household, by reason of his employment. For the purposes of this provision, a person's family or household is defined by section 168(4) as meaning "his spouse, his sons and daughters and their spouses, his parents and his servants, dependants and guests." The cash equivalent of the benefit is its cost, less so much (if any) of it as is made good by the employee to those at whose cost the benefit is provided. Certain benefits are excluded from the scope of section 154. These include living accommodation.

[58] Clause 4 of the offer dealt with accommodation, and provided inter alia:

"4. It is agreed that no assessment to tax in respect of emoluments which might be regarded as chargeable to income tax by virtue of sections 145 and 146 ICTA 1988 will be raised in respect of fiscal years ended prior to 6th April 1991. Thereafter the Inland Revenue may not pursue an appeal before the Commissioners against an assessment of emoluments under sections 145 and 146 against our clients unless and until a decision is reached by the Appeal Commissioners.... in favour of the Inland Revenue in another case involving similar circumstances....".

[59] Under section 145, where living accommodation is provided for a person or for his family or household (as defined by section 168(4)) by reason of his employment, he is to be treated as being in receipt of income equal to the value of the accommodation, less any sum made good by him to those at whose cost the accommodation is provided. There are a number of exceptions, including the case where, there being a special threat to the employee's security, special security arrangements are in force and he resides in the accommodation as part of those arrangements. Section 146 provides for an additional charge in respect of living accommodation which cost more than 75,000 to provide. The intention of clause 4 of the offer appears to have been that no assessment would be made under sections 145 and 146 unless and until an appeal in some similar case had been decided in the Revenue's favour.

[60] Clause 9 dealt with income tax returns, and provided:

"9. Our clients will complete income tax returns for the fiscal years ended 5th April 1992 to 1997 inclusive. The sections requiring details of income/gains assessable under the legislation referred to in paragraphs 2, 3 and 4 above will be completed 'as per agreement dated 28 September 1990'. All other sections will be completed as required and any such income and capital gains will be assessable in the normal way."

[61] Clause 10 provided that in the event of the death of either Mohamed Al Fayed or Ali Fayed, or the departure of either of them from the UK, the amount payable under clause 2 would be reduced by one half.

[62] Clause 11 provided:

"11. It is understood that during the year ended 5th April 1997 discussions will be held with an officer of the Inland Revenue for the purpose of negotiating a continuation for a further six years on such terms as are then appropriate in respect of remittances for fiscal years ending after 5th April 1997. Such revised terms shall take account of the provisions of this letter, and any subsequent changes to existing taxation legislation enacted by future Finance Acts."

[63] As in the case of the 1985 future tax agreement, so also in the case of the 1990 future tax agreement the amount payable was the outcome of a negotiation which was concerned primarily with back duty. The Revenue's position in 1990 differed from its position in 1985, however, in that on the later occasion it had no up-to-date information about the amount being remitted or the character of such remittances: the most recent information it had about personal remittances dated from 1985. The Revenue had been told at the meeting on 11 June 1990, for example, that the trading position of the House of Fraser group was currently being supported by overseas remittances of at least 30m per annum; but it did not know the form of those remittances, or whether the remittances were personal or corporate, or whether they were relevant to personal taxation.

(3) Events leading to the 1997 forward tax agreement

[64] On 25 October 1990 Mr Worsley wrote to Glasgow 1 giving brief particulars of those aspects of the agreements which concerned the expenses of management of the companies dealt with by Glasgow 1. London Provincial 8 was notified that with effect from 1991/92 the Fayeds' tax affairs would be handled by Enquiry Branch. For an investigative branch of the Revenue to deal with a taxpayer's tax affairs on a long term basis was exceptional. The purpose appears to have been to protect the confidentiality of the Fayeds' agreement with the Revenue, as Mr Hugo had indicated during the negotiations (see para.47).

[65] KPMG subsequently prepared a review of benefits, dated October 1991, the purpose of which was stated as being "to identify the assets and facilities enjoyed by Messrs Mohamed, Ali and Salah Fayed ... in the UK and to detail the method by which the costs of these are met both directly and indirectly". The review set out the position prior to 6 April 1990 as a basis for confirmation that there had been no subsequent changes (as envisaged in clause 3 of the 1990 agreement). The review's general conclusion was "that any services or supplies enjoyed in a personal capacity by the brothers are fully reimbursed by them ... and, accordingly, that none of the brothers has received any reportable benefits from any UK company in the [House of Fraser] Group." The review dealt in detail with various categories of potential benefit, such as domestic accommodation, security staff, aircraft, yachts, legal expenses and Harrods accounts. Where potential benefits were received, the costs were generally said to be reimbursed using personal funds from the Midland Bank account or from Geneva or from elsewhere outside the UK. KPMG stated that they had checked sample documentation in order to verify the position.

[66] London Enquiry Branch continued to be responsible for dealing with the tax affairs of the Fayeds. The Inspector responsible from March 1993 until 1996 was Mr Philip Keeping. Mr Monk remained the group leader. A copy of an affidavit prepared by Mr Keeping for the earlier judicial review formed part of the evidence in the present proceedings. It does not address all of the matters involving Mr Keeping which are relevant to the present proceedings: in particular, it does not discuss his dealings with Glasgow 1 or Glasgow Cavendish. So far as it goes, however, it reflects the relevant contemporary documents and I accept it as reliable evidence.

[67] During the period when he was responsible for the case, Mr Keeping attended to the administrative arrangements for payments under the 1990 agreement. At a meeting between himself, Mr Monk and KPMG on 10 September 1993, KPMG provided the benefits review which had been prepared in 1991. KPMG agreed to check whether there had been any material changes. In the course of the meeting, Mr Monk said that he and Mr Keeping were concerned about the forward contract in respect of remittances, and that he felt it right to give KPMG advance notice that no assurance could be given that such an agreement could be entered into again on the expiry of the current agreement.

[68] In the meantime, Glasgow 1 was attempting to pursue enquiries into the question whether certain items claimed as deductible expenses in the accounts of Harrods Investments plc (formerly House of Fraser Holdings plc) were properly deductible or should be assessed as benefits provided to members of the Fayed family. These enquiries related in particular to legal fees and security staff. Legal fees had been the subject of one of the agreements concluded by London Enquiry Branch in September 1990 (see para.54). The issue of benefits had been addressed more generally in clauses 3 and 4 of the remittances agreement (see paras.56-59), and taken forward by the benefits review provided to London Enquiry Branch.

[69] During 1994 Glasgow 1 learned that the 1990 agreement on legal fees covered some of the fees which it had been considering. It also learned about the benefits review. Mr Walker, the District Inspector at Glasgow 1, expressed his concerns to Mr Monk (now of London SCO, Enquiry Branch and Special Office having been merged to form Special Compliance Office) in a letter dated 29 August 1994:

"I have no wish to enter into a sterile debate with your office about the enquiry which was conducted in 1990. It is, however, essential that Glasgow 1 is kept fully informed of any matters being pursued by you which may have a bearing on the liabilities of any companies dealt with by Glasgow 1...

There are 2 aspects of the settlement about which I am concerned.

1. ... I am firmly of the opinion that these legal expenses [viz. certain of the legal expenses covered by the 1990 agreement] should have been challenged as being disallowable as expenses of management and I would have done so but for the terms of the settlement concluded by Enquiry Branch. ...

    1. It is totally unsatisfactory that Glasgow 1 was not informed about the ongoing reviews being carried out by you ... I was therefore unaware of the reviews being carried out by you when I raised enquiries on the 1993 accounts of Harrods Investments plc. These included an enquiry on air fares which resulted in my obtaining information about 'security staff'... It would seem also on the evidence I hold a number of the security staff are merely the domestic staff of the Al Fayeds.

The questions to be answered are therefore:

- Are these amounts chargeable as benefits on the Al Fayeds?

In his memo of 21 July Mr Keeping said 'I regret I am unable to provide any detailed information from my papers concerning matters disclosed during the enquiry carried out by this office.' While I recognise that you will hold sensitive information, I would emphasise that I do expect that I will be provided with any information which is relevant to my enquiries.

I would therefore ask that you let me have your comments on these matters. As you will no doubt appreciate I am dissatisfied that Glasgow 1 was not (apparently) kept informed of matters which had a bearing on the liabilities of one of its companies. There has been considerable debate recently about the desirability of whole or co-ordinated case-working. It would seem that this is an example of the problems which can arise when such a course is not followed."

[70] Following a reorganisation of the working of large groups of companies in the Glasgow offices of the Inland Revenue, responsibility for the Harrods group passed to Glasgow Cavendish office. The issue which had been raised by Mr Walker was then taken up by the District Inspector there, Mr Gavin McGregor. On 30 January 1995 he wrote to Mr Monk as follows:

"The tenor of your replies to Mr Walker's enquiries lays emphasis on the highly sensitive nature of your contacts with the Al-Fayeds or their representatives and the fact that the information obtained by you was highly confidential. It is quite clear that you are most reluctant to allow the information obtained to be passed on to the district responsible for the examination of the taxation affairs of the companies employing the Al-Fayeds. Indeed it would appear that you may well have given a guarantee that this information would not be passed on. Is this in fact the case? If it is, then I share Mr Walker's puzzlement on this point since the District Inspector of the district dealing with these companies will obviously have signed a declaration of secrecy and therefore there is no possibility of any information obtained by him which relates to the affairs of the principal directors of the companies being dealt with being passed on to any outside source. It might be helpful therefore if you were to explain more fully the reason for Enquiry Branch providing the taxpayers and/or their agents with this guarantee of confidentiality."

[71] Mr McGregor also expressed disquiet over the treatment of legal fees under the 1990 agreement, and requested information about the treatment of expenses incurred in connection with security staff. In relation to the latter point, Mr McGregor said that he had no difficulty with Mr Monk's statement that all directors' benefits were a matter for SCO London; but he wanted to know to what extent the expenses in question had been treated by SCO London as assessable benefits, and whether any guarantee had been given that the expenses would be deducted in calculating the profits of the company which paid them. SCO London responded that two thirds of the security costs were not being treated as a personal benefit, and that no guarantee had been given as to the deductibility of the expenditure not being met by the Fayeds.

[72] Mr McGregor wrote again to Mr Monk on 11 August 1995, following a meeting with KPMG and the Group Tax Accountant of the Harrods group, Mr Hadden, at which he had been informed that the Fayeds met the accommodation expenses arising in connection with Park Lane, Barrow Green Court and Balnagown Castle; that they met the costs incurred by Fayair (Jersey) Company Ltd in operating the aircraft used by them; and that the yacht which they used was owned by an overseas company, which he assumed was also funded by the Fayeds. This information was consistent with the 1991 benefits review prepared by KPMG. Mr McGregor noted that SCO London had also accepted that the Fayeds made a substantial contribution to the cost of security staff, which could be taken as covering any benefit otherwise assessable on them. Mr McGregor continued:

"All of the above suggests very substantial amounts of money being available to the Fayeds on an ongoing basis. This information also points to the need for a detailed examination of their personal financial capacity to fund these expenses. Can you give me a specific assurance that Special Compliance Office has fully investigated the Fayeds' capacity to fund all such expenditure and additionally all other expenditure which they could be expected to meet?

On the basis that your ongoing supervision of the Fayeds' benefits goes beyond mere supervision of the benefits and is concerned with their financial ability to fund their private expenditure ... may I take it that you accept full responsibility for ensuring that any deficiencies in the Fayeds' personal income tax position are dealt with?"

[73] In response, Mr Keeping telephoned Mr McGregor on 11 September 1995. Mr McGregor's note of the conversation states:

"During the conversation McGregor made it clear to Keating [sic] that he was not particularly happy with the arrangement which had been entered into whereby the district was not being supplied with full details of the settlement. He accepted that if on the Revenue side a commitment had been given that certain expenditure would be allowed, then the district was fettered from breaching that agreement but he was unhappy that full information was not being supplied in relation to the terms of the agreement entered into.

For his part Keating emphasised that at the time that the agreement was made the whole question of the Al-Fayeds' personal position was very high profile and indeed less than ten people including members of the Special Compliance Office and the Solicitors Office had had access to the detailed discussions. These discussions had been attended at the final meeting by the Controller of the Special Compliance Office.

McGregor said his immediate concern was to ensure that someone was accepting full responsibility for the compliance of the Al-Fayeds in relation to their personal taxation position. Keating confirmed that Special Compliance Office accepted this responsibility."

It was agreed that Glasgow Cavendish could pursue its enquiries into the deductibility of the security costs which were not being treated as a personal benefit, without interference from SCO. Mr McGregor thereafter completed his enquiries and concluded that the expenditure in question was deductible.

[74] As explained below (at para.149), these exchanges between the Glasgow offices dealing with the Harrods group and SCO London form part of the background to the interest taken by Glasgow LBO in Mr Al Fayed's affairs from August 1999 onwards. Most of the central features of Glasgow LBO's dealings with SCO are foreshadowed in these exchanges: the Glasgow office's perception that there was such a close connection between the tax affairs of the Harrods group and those of the directors that it was necessary for it to have access to information about the directors' personal tax affairs; the appeal by the Glasgow office to the concept of co-ordinated case-working; the expression of concern by the Glasgow office as to whether the personal tax affairs of the Fayeds were being dealt with properly, bearing in mind the level of expenditure which they were financing; and the reluctance of SCO to share information with the Glasgow office.

[75] On 5 December 1995 a meeting took place between the Fayeds' advisers and officials of SCO: the Controller, Mr Frank Brannigan; the Deputy Controller, Mr Denis Parrett; Mr Monk; and Mr Keeping. One matter raised by KPMG was that Ali Fayed was to become resident in the USA, resulting in a one-half reduction in the amounts payable under the 1990 remittances agreement (by virtue of clause 10: see para.61). The other matter raised by KPMG was the possibility of negotiating a further agreement on remittances as envisaged in clause 11 of the 1990 agreement. Mr Monk said that SCO had given indications that arrangements might not be renewed: with the introduction of self-assessment, in April 1997, it was difficult to justify an agreement of this sort. He also said that there had been difficulties with Glasgow 1 and Glasgow Cavendish over enquiries they had wanted to make, which had been precluded by the 1990 agreement. Mr Brannigan said that such agreements were a product of a different age: the Revenue now had a more open policy under the Taxpayer's Charter, and with the onset of self-assessment. It was agreed that the Revenue had to consider the issue of principle.

[76] It is apparent from the discussion at this meeting, and from the subsequent internal discussion of the issue by the Revenue's senior officials, that the misgivings which were felt in relation to forward tax agreements at this time were not confined to the Fayeds and did not arise from any factor which was specific to the Fayeds. As mentioned earlier (at para.26), the agreement concluded with the Fayeds was not the only example of a forward tax agreement; and a policy decision was required early in 1996 in respect of other agreements besides the Fayeds'.

[77] In a minute dated 14 March 1996 Mr Brannigan sought guidance on this issue from Mr Steve Matheson, the Deputy Chairman of the Board of Inland Revenue. He wrote:

"I mentioned to you yesterday that there have been over the years a number of cases in SCO where settlements have been arrived at which include arrangements for future years. The taxpayers involved are normally wealthy, often prominent or sensitive foreigners, who are resident but not domiciled in this country. They are thus, in addition to their UK sources of income, liable to tax on remittances of income or chargeable gains from abroad - but not remittances of capital.

To avoid annual examination by the Revenue of their world-wide financial affairs, to avoid distortion of their already complicated financial arrangements and to save expensive professional fees they have been willing to enter into agreements to pay large round sum annual amounts (100K-200K) as an approximation of their annual liability on any remitted income (without the need to precisely quantify that, if any).

In at least one case the Board was closely involved in setting up these arrangements and the Letter of Acceptance of the offer was signed by John Isaac [a member of the Board at the time]. The advantage to the Revenue was that under these arrangements the Exchequer was getting large amounts of money whereas in their absence

a. we would have very great practical difficulties in actually trying to establish what the reality was and

b. in any case the individuals in question are so wealthy that they could organise their affairs so that all remittances are non taxable capital.

The arrangements have generally worked without problems but some are now coming up for renewal (some have built in the prospect of a 5 year review, others are to run indefinitely 'except for a significant change in our clients' circumstances').

The question which arises is are there arrangements still deemed acceptable in the age of Self Assessment, Taxpayers Charter, Codes of Practice and the Adjudicator? It is a difficult question to answer and my first response which I put to Roger White (KPMG) and Peter Whiteman (Counsel) in one case [that of the Fayeds] was that they were not.

However having seen 2 more cases and recognising the difficulties of

I am now inclined to the view that

a. we should renegotiate these existing agreements coming up for renewal on a basis which most realistically reflects the underlying current circumstances, but within the spirit of the original and

b. we desist from entering into such agreements in any new cases.

I should be grateful for your views on this question and enclose some papers which will give a flavour of the cases I have referred to."

[78] Mr Matheson responded in a minute dated 27 March 1996:

"On reflection, I think I am a little more relaxed than you are although I understand your concern. The basic position is clear, I think. Certain taxpayers resident but not domiciled in the UK have such significant capital abroad that, with careful advice, they could and would so arrange their affairs that only capital was omitted [sic: "remitted" must be meant] to the UK to sustain them and their dependants in the life-style they are accustomed to. We could audit that process, at a cost, but with very uncertain chances (if any) of successful challenge. To minimise cost and inconvenience all round arrangements have been made for the equivalent of annual voluntary settlements in lieu of specifically unquantified but estimated liability.

I, myself, see no difficulty in that, now or under self-assessment. Under SA [self-assessment] I assume that these people would not get a return anyway. If they did we would presumably work on the basis that we had predetermined their annual taxable 'income' for a period of years and that would feature in the return.

The difficulty I have is that not all the forward contracts seem to be on the same basis (indefinite, five years reviewable, change of circumstances trigger etc).

Unless Mr Cleave [the Solicitor to the Board of Inland Revenue] sees any problems I have overlooked, my inclination is that we should not seek to overturn existing agreements although we should be prepared to review and re-negotiate as appropriate. For new cases in the future, if there are any, I think we should probe the circumstances to establish resident but not domiciled status, continue to probe and make some judgement on, as you do, the level of risk we are looking at and the prospects for successful challenge and then negotiate a settlement as appropriate. I do not think any new agreements should be open-ended but should be subject to review in the light of a change of circumstances or of the law and, in any event, at regular intervals. Five years seems to be the norm established and I would not dissent from that."

[79] On 22 April 1996 Mr Parratt wrote to Mr Keeping:

"THE SHOPKEEPERS

Generally you can go ahead and negotiate another 5 year contract provided that it is not open ended and it fulfils what the Revenue thinks is reasonable in all the circumstances.

You are entitled to review any particular matters you believe should be reviewed before the contract is signed up."

The expression "The Shopkeepers" referred to Mohamed, Ali, Salah and Emad Al-Fayed. Mr Parrett's memorandum did not mention Mr Matheson's advice that any agreement should be subject to review in the light of a change of circumstances or of the law. Nor did it expressly state that the amount payable under such an agreement should be what Mr Matheson had described as an "estimated liability", and Mr Brannigan had described as "an approximation of their annual liability on any remitted income... [negotiated] on a basis which most realistically reflects the underlying current circumstances".

[80] Mr Keeping's thoughts about how to proceed, in the light of Mr Parrett's memorandum, are recorded in a file note:

"The main problem is going to be identifying any potential current areas of concern without involving the local district. The CT [corporation tax] district [i.e. Glasgow Cavendish] has been very concerned at the lack of information that has been passed to them and any approach now is likely to stir up all the old issues.

I propose writing to KPMG asking for a further report to be prepared of the current position on all potential liabilities that would be covered by an offer, with the report supported by documentation evidencing what is being said. Once that is received we can then decide whether to look at the CT file or invite comment on areas of concern."

[81] Mr Keeping then wrote to KPMG on 14 May 1996, stating that it might be possible to negotiate a further contract, but that before any serious consideration could be given to that matter he required a full report on the current position regarding all potential liabilities referred to in the 1990 agreement, with supporting documentary evidence. KPMG replied on 3 June 1996, stating their understanding that Mr Keeping required an updated report on benefits in kind, with evidence to support any allocation of costs between corporate costs and the costs of benefits.

[82] In September 1996 Mr Keeping ceased to be involved in the tax affairs of the Fayeds. Responsibility passed to Mr Martin Whitehead, who was group leader of the Hansard Group within SCO London. Mr Whitehead gave oral evidence in the present proceedings over the course of four days. He impressed me as a witness of integrity. He did not seek to evade responsibility or to place a self-justifying gloss upon what he was recorded as having written or said in contemporary documents. He was careful and thoughtful. I conclude that his evidence was generally credible and reliable. There are however some matters on which I prefer the evidence of other witnesses, for reasons explained below. Mr Whitehead had also provided two affidavits for the previous judicial review which formed part of the evidence in the present case; and he provided two affidavits for the present proceedings. The contents of the affidavits are generally consonant with his oral evidence and with contemporary documents, and I accept them (in general) as credible and reliable evidence.

[83] It may be helpful to interrupt the narrative at this point to explain the structure of SCO, and of the Revenue more generally, and the place of SCO within the Revenue. The Commissioners of Inland Revenue are appointed by Her Majesty and are directly responsible under statute for the proper administration of direct taxation: Taxes Management Act 1970 (the 1970 Act), section 1(1). They form the Board of Inland Revenue. One of the Commissioners is the Chairman of the Board, and one or more of the remaining Commissioners may be designated as a Deputy Chairman. The Commissioners are not to be confused with the General Commissioners or the Special Commissioners, who determine appeals under the Taxes Acts. The Commissioners are answerable to Parliament, to which they submit an annual report. The Chairman is the accounting officer (i.e. the person who can be called before the Public Accounts Committee), and also appears before Parliamentary Select Committees to answer for the Revenue's performance. The Deputy Chairman and the remaining members of the Board are responsible internally for particular areas of the Revenue's work. In the performance of their duties the Commissioners are subject to the authority, direction and control of the Treasury: Inland Revenue Regulation Act 1890 (the 1890 Act), section 2. Treasury Ministers are not however involved in the day-to-day operations of the Revenue and are therefore not involved in individual cases. Decisions are made by or in the name of the Commissioners. It appears from the evidence that the Revenue is divided (in broad terms) into a network of district offices, under regional management control, and a number of head office departments. One of the head office departments is SCO. This organisational structure is not based on legislation, but is a matter of internal administration.

[84] The remit of SCO, as explained by the SCO officials who gave evidence, is (in general terms) to review and, where appropriate, investigate the circumstances of individuals, companies and other entities whose taxation affairs appear to deserve close scrutiny, particularly in cases of suspected avoidance or evasion where there is a risk of substantial loss of tax. In practice, SCO's activities are focused principally on cases of suspected tax avoidance or tax fraud, where the tax at risk is at least 100,000 and the complexity of the case is such that it is unsuitable to be dealt with by the local tax office. By "tax at risk" is meant the potential tax liability of the taxpayer under enquiry. SCO is headed by a Director (in 1996, as already mentioned, the title was "Controller"). The Director of SCO reports to a member of the Board: in 1996, and until his retirement during 2000, the relevant Board member was Mr Matheson, who was the Deputy Chairman. SCO has several offices, including one in London (where the Director is also based), one in Solihull and one in Edinburgh. In 1996, the Director was Mr Brannigan; and he was succeeded on 1 October 1999 by Mr John Middleton. Below the Director there are five Deputy Directors (formerly known as Deputy Controllers), one of whom is in SCO London. In 1996, that position was held by Mr Parrett; and he was succeeded by Mr Stuart Hartlib. Another Deputy Director was based in SCO Solihull; and he was responsible both for that office and for SCO Edinburgh. Each Deputy Director reports to the Director. There are also a number of Assistant Directors, who are concerned with such matters as training and quality monitoring, and have no line management responsibility for the offices.

[85] Each SCO office has a number of investigation groups dealing with different types of work. In most offices (including SCO London and SCO Edinburgh) there are three groups. One is Hansard Group, which is responsible for carrying out enquiries where serious tax fraud is suspected but where the Revenue considers that the case can be dealt with on a civil rather than criminal basis. It is known as Hansard Group because such an enquiry is conducted under the practice set out in a reply to a Parliamentary Question given by the Chancellor of the Exchequer. Where the Hansard procedure is followed, there is (in broad terms) an understanding that if the taxpayer makes a full confession of tax fraud, he will not be prosecuted, and the matter will be dealt with by a monetary settlement (see R v Gill [2003] EWCA Crim 2256, [2004] 1 WLR 469). Hansard Group is also known as Code 9 Group, as investigations under the Hansard arrangements are carried out under a published code of practice known as Code of Practice 9. It is the successor of the former Enquiry Branch, insofar as Enquiry Branch dealt with matters other than criminal investigations. A second group is Criminal Investigations Group (also known as Prosecutions Group), which deals with cases of serious tax fraud where criminal proceedings are anticipated. When SCO was first set up, one group dealt with all cases of suspected serious fraud (like the former Enquiry Branch): it was when it split into Hansard Group and Criminal Investigations Group, and Mr Keeping was assigned to the latter, that the case of the Fayeds was passed to Mr Whitehead as group leader of Hansard Group. A third group is Avoidance Group, which deals principally with cases of suspected tax avoidance on a substantial scale. Tax avoidance is lawful but is nevertheless enquired into, to challenge avoidance schemes where appropriate, and to check whether any tax liability has in fact arisen (e.g. through a failure to follow all the steps, sometimes of an elaborate nature, which may be involved in such a scheme). Avoidance Group is also known as Code 8 Group, as investigations into cases of that kind are carried out under a published code of practice known as Code of Practice 8. Code 8 applies in all SCO investigations other than those involving suspected serious fraud. Avoidance Group is the successor of the former Special Office.

[86] Within each office, each group comprises a number of Inspectors, known in SCO as "investigators", who report to the group leader. The group leader is also an Inspector. Each group leader in turn reports to the Deputy Director responsible for that office.

[87] A decision to investigate is ordinarily made by a group leader, or exceptionally by a Deputy Director. Exceptionally, in a particularly sensitive case, the Director and Board members would expect to be advised of a proposal to undertake an investigation. Even in such a case, the decision as to whether there were grounds for an investigation would be taken by the group leader. The Board do not instruct SCO to carry out investigations.

[88] The purpose of SCO's civil investigations is to collect tax, and its resources have to be deployed efficiently with that aim in mind. Some idea of the demands on resources in SCO can be gained from the fact that the Hansard Group of SCO London, which carries out all non-criminal investigations of cases of suspected serious tax fraud in London and the south-east of England, had 14 investigators in 2000. It appeared from the evidence that there was great pressure on resources in that group during 2000, and that the Avoidance Group in SCO Edinburgh was also busy.

[89] As I have mentioned, SCO will not ordinarily undertake an investigation unless there is considered to be tax of at least 100,000 at risk; and the degree of risk is also material. A "review" is therefore undertaken by an investigator, prior to an investigation, in order to assess whether there is a tax risk and, if so, whether that risk is at a sufficiently high level to warrant an SCO investigation. One of the group leaders who gave evidence, Mr James McGuigan, explained:

"We are in the business, after all, of collecting tax. So if an investigator was consistently producing settlements which produced no additional liability, then we might start to question whether that investigator's judgment in selecting a case was well-founded. It may also reflect on the group leader, because the group leader would have to sign it off."

Another important consideration is the resources involved in the investigation. Mr McGuigan said:

"The question of resources is something a Group Leader has to consider when approving every registration. He not only has to consider the resources available from the individual investigator but also the wider impact on the whole Group."

In the event that the investigator concludes that an investigation is warranted, he will then submit a registration report to his group leader for approval. The report should not be delayed, under SCO practice, once it is clear to the investigator that the case is suitable for investigation. The registration report explains what has been found during the review, the scope of the investigation proposed and the code of practice under which it is proposed that the investigation should be conducted. If the group leader approves the report, that authorises the investigator to conduct the investigation. The purpose of the investigation (if approval is given) is to pursue the tax loss which has been identified in the registration report. In the majority of cases, the review does not lead to an investigation. In SCO parlance, the expression "risk assessment" is used sometimes to refer to the process of assessment of the tax at risk, and sometimes to refer to the conclusion concerning tax at risk which is stated in the registration report. The expression has a slightly different meaning in LBO parlance, which is explained below (at para.122).

[90] A review is not of a superficial character, but involves a thorough consideration of the taxpayer's tax affairs on the basis of the available material. The practice was described in evidence by Mr McGuigan as follows:

"When SCO put someone's case on [sc. on SCO's computer system] as a review, it is with the intention of developing that review into an investigation. That does not mean that SCO, by putting the case on as a review, is committed come hell or high water to an investigation. An investigation can only proceed on a proper evaluation of the risks after having done proper research and thoroughly considered all the papers that we have.

...

In SCO we will pick up bits and pieces of information from a variety of sources, which in themselves are not conclusive evidence of avoidance or evasion, but as soon as that piece of information is received, if the investigator considers that it may develop into an investigation, then he is obliged to put the case on as a review. He will then continue to enquire, research, to do third party work, to build up the picture, so as to arrive at a properly evaluated assessment of the risk. If the investigator considers the risk is of a sufficiently high standard to warrant the involvement of SCO, he will prepare a registration report and ask me to approve it. If I approve it, that then is converted into an investigation."

Mr Whitehead accepted in his evidence that no rational decision could be made to investigate the tax affairs of the Fayeds without examining the files and records of the Revenue relating to those taxpayers, and that an investigation would not be conducted without having identified a risk of tax loss.

[91] As will be apparent from the foregoing account, a taxpayer's affairs are not normally dealt with on a continuing basis by SCO. For SCO to be in contact with a taxpayer about his affairs ("first party contact", in the jargon) is an exceptional event. The Fayeds' personal tax affairs had however been dealt with continuously by London Enquiry Branch, and thereafter by SCO London, since the 1990 agreement was concluded. The instalments due to be paid under the back duty settlement were received by SCO each September, the final instalment being due in September 1996; and the annual payments of 200,000 due under the forward tax agreement were received by SCO each January, the final agreed payment being due in January 1997. Tax returns were submitted each year by Mr Al Fayed to London Enquiry Branch and, following the Revenue reorganisation, to SCO London.

[92] When Mr Whitehead took over responsibility for the Fayeds' case, he was passed the files relating to their tax affairs which had been kept by London Enquiry Branch and SCO London. The files were then kept in a filing cabinet in his room. They were the only files kept there, apart from those temporarily in his room for the purpose of reviews or investigations by his team of investigators. Mr Whitehead did not review the files, and in his evidence had no clear recollection of what they comprised. According to Mr Alan Carmichael of SCO Edinburgh, to whom the files were subsequently forwarded, they included a copy of the Special Office papers relating to Mr Stribblehill's enquiries, the DTI report, the files relating to Mr Worsley's enquiries, the subsequent work done by Mr Keeping, and documents produced by Lonrho as part of the campaign referred to below (at para.112).

[93] During September 1996 Mr Whitehead received from KPMG an updated review of benefits in kind, dated 10 September 1996. Its purpose, like that of the earlier review, was "to identify the assets and facilities enjoyed by Messrs Mohamed, Ali and Salah Fayed .... in the United Kingdom and to detail the method by which the costs of these are met both directly and indirectly". It was based on information obtained in either June 1995 or June 1996 (the evidence as to the date being inconclusive). The general conclusion remained "that any services or supplies enjoyed in a personal capacity by the brothers are fully reimbursed by them .... and, accordingly, that none of the brothers has received any reportable benefits from any United Kingdom company in the [Harrods] group." The review dealt in detail with the same categories of potential benefit as the 1991 review. Where potential benefits were received, the costs were generally said to be reimbursed using personal funds from the Midland Bank or from Geneva or from elsewhere outside the UK. KPMG stated that they had reviewed sample documentation in order to verify the position. No documentary evidence was provided to the Revenue.

[94] Following a meeting on 9 January 1997, KPMG sent Mr Whitehead on 14 January a draft of a forward tax agreement to replace the 1990 forward tax agreement. They invited Mr Whitehead to telephone if he had any comments on the draft. Mr Whitehead checked the terms of the draft against the terms of the 1990 agreement, and checked that a benefits review had been done. He read the review and checked that it contained nothing objectionable. He considered whether the increase offered in the annual payments (from 200,000 to 240,000) was appropriate. He checked that the increase was in line with inflation. He did not make any other enquiries: when asked about this, he explained that he was under time pressures at that time. On 10 February 1997 Mr Whitehead informed KPMG that the draft letter of offer was acceptable. It was agreed that KPMG would send Mr Whitehead a signed copy of the letter of offer. They did so the following day.

[95] Mr Whitehead was the only Revenue official involved in the process of agreeing the 1997 agreement, after the point at which he took over responsibility for the Fayeds' case. He proceeded on the basis that he was authorised to enter into a further agreement by Mr Parrett's minute to Mr Keeping dated 22 April 1996 (see para.79). He was not aware of the minutes exchanged between Mr Brannigan and Mr Matheson (see paras.77-78).

[96] On 22 April 1997 KPMG sent Mr Whitehead a further signed copy of the letter of offer, dated 22 April 1997 and addressed to the Commissioners of Inland Revenue. On 28 April 1997 Mr Whitehead signed an endorsement at the end of the letter, stating: "I am duly authorised by the Commissioners and accept this offer on behalf of the said Commissioners".

[97] The 1997 agreement was modelled on the 1990 agreement and was in broadly similar terms, with some changes. The agreement was headed "Re: Mohamed Al-Fayed, Ali, Salah and Emad Fayed", and began by stating that KPMG acted for those four individuals. Clause 1 provided:

"1. Mohamed Al-Fayed, Ali, Salah and Emad Fayed will be treated by the Inland Revenue as not domiciled for all Years of Assessment covered by this Agreement. Only Mohamed Al-Fayed of our clients is currently regarded by the Inland Revenue as resident and ordinarily resident in the United Kingdom for tax purposes, but this letter covers the position for each of them over the period referred to below."

This provision went further than the 1990 agreement, in that it covered domicile in respect of future years of assessment. It was not the subject of any discussion between KPMG and the Revenue.

[98] Clause 2 provided inter alia:

"2. Following recent discussions between representatives of our clients and Officers of the Inland Revenue, we are authorised to offer the payment of the sum of 240,000 in respect of each of the Years of Assessment ended 5th April, 1998 to 2003 inclusive in full and final settlement of income tax or capital gains tax (and interest and penalties thereon) to which they become liable by reason of the receipt of foreign source income or capital gains including remittances, or constructive remittances, to the United Kingdom of funds or other assets from outside the United Kingdom which are assessable or may be assessable on them personally either singularly or jointly and in particular but without prejudice to the generality of the foregoing which are assessable or may be assessable:

a. under Case IV, V or VI of Schedule D ....

b. under Case III of Schedule E ....

c. under Sections 1 and 12 and Chapter II of Part III TCGA 1992 in respect of any chargeable gains arising on the disposal, or part disposal, of any asset situated outside the United Kingdom by our clients, but only where the proceeds do not exceed 15 million."

This provision was in substantially the same terms as the corresponding provision of the 1990 agreement, subject to the increase in the sum payable from 200,000 to 240,000, and the addition of Case VI of Schedule D. Mr Whitehead did not regard that alteration as significant, on the basis that Cases IV and V were more important (Case VI being a residual category which covers "tax in respect of any annual profits or gains not falling under any other Case of Schedule D and not charged by virtue of Schedule A or E": section 18(3) of the 1988 Act, as amended).

[99] Clause 3 provided:

"3 The payment in paragraph 2 above will also cover any assessment to tax in respect of emoluments chargeable to income tax under Schedule E by virtue of Section 154 ICTA 1988 where it can be shown that the provision of services or supplies etc, was habitually provided to our clients prior to 6th April, 1990. This is on the understanding that the cost of services or supplies etc., was then reimbursed to the company providing the particular services or supplies, if that was the practice prior to 6th April, 1990, and continues to be reimbursed."

This provision was in identical terms to the corresponding provision of the 1990 agreement.

[100] Clause 4 provided:

"4. It is agreed that the Inland Revenue may not pursue an appeal before the Commissioners against an assessment of emoluments under Sections 145 and 146 ICTA 1988 against our clients unless and until a decision is reached by the Appeal Commissioners in favour of the Inland Revenue in another case involving similar circumstances...".

This provision was in identical terms to the corresponding provision of the 1990 agreement.

[101] Clause 8 applied in the event of a default in payment, and provided that in that event:

".... the Commissioners of Inland Revenue shall be at liberty to treat this Agreement as repudiated by our clients, in which event such assessments may be made on them and such other proceedings brought against them as may be necessary to recover duties, interest and penalties thought to be outstanding. Save as aforesaid this Agreement shall be irrevocable."

This provision was in identical terms to the corresponding provision of the 1990 agreement.

[102] Clause 9 provided:

"9. Our clients will complete Tax Returns for the Years of Assessment ended 5th April, 1998 to 2003 inclusive as follows. The sections of the Tax Returns requiring details of foreign source income and capital gains, including the legislation referred to in paragraph 2 above, will be completed 'as per the Agreement dated 28 April 1997'. All other sections of such Tax Returns referring to income and capital gains not covered by this Agreement will be completed as required and any such income and capital gains not covered by this Agreement will be assessable in the normal way."

This provision was identical, mutatis mutandis, to the corresponding provision of the 1990 agreement.

[103] Clause 10 provided:

"10. By accepting the terms of this Agreement, the Commissioners of Inland Revenue accept for all Years of Assessment referred to in paragraph 2 above that Mohamed Al-Fayed shall be treated as resident but not domiciled for all United Kingdom taxation purposes, including all Double Taxation Agreements to which the United Kingdom is a signatory and inheritance tax. The same treatment will apply to any other of our clients who is resident in the United Kingdom in any Year of Assessment. Subject to paragraphs 7 and 8 above [which dealt with default in payment of tax], the only other circumstances which would arise to vary or terminate this Agreement would be the death of either Mohamed Al-Fayed or Ali Fayed or the departure of Mohamed Al-Fayed from the United Kingdom so that he thereafter ceased to be resident in the United Kingdom. Mohamed Al-Fayed accepts that until he gives notice of departure under this Agreement, he is considered to be resident and ordinarily resident in the United Kingdom."

This provision was new insofar as it dealt with domicile (and insofar as express mention was made of double taxation agreements and inheritance tax). Mr Whitehead regarded clauses 1 and 10 as being in the spirit of the agreement. That appeared to be on the basis that he regarded the provisions in clauses 1 and 10 as to domicile as making explicit something which was implicit in the 1985 and 1990 agreements.

[104] Clause 12 provided:

"12. It is understood that during the year ended 5th April, 2003 discussions will be held with an Officer of the Inland Revenue for the purpose of negotiating a continuation of this Agreement for a further six years on such terms as are then appropriate in respect of foreign source income and capital gains including remittances for Years of Assessment ending after 5th April, 2003. Such revised terms shall take account of the provisions of this Agreement and any subsequent changes to existing taxation legislation enacted by future Finance Acts."

This provision was in substantially the same terms as the corresponding provision of the 1990 agreement.

[105] Like the 1990 forward tax agreement, the 1997 agreement was primarily concerned to quantify the tax liability arising in respect of remittances from overseas. As clause 9 acknowledged, income not covered by the agreement was assessable in the normal way. This would include, in particular, any income arising within the UK.

[106] Whereas in 1985 the Revenue had information about personal remittances during the preceding years, and on that basis might have been able to make some estimate of the amount of remittances of income which could be anticipated during the years to be covered by the agreement, the Revenue could not do that either in 1990 or in 1997. As in 1990, so also in 1997 the Revenue had no information about remittances which was more recent than the Midland Bank statements for 1985 (which Mr Whitehead had not read); and the agreed figure represented an uplift of the previously agreed figure, broadly in line with inflation.

[107] It is necessary at this point to go back in time for a moment. On 20 October 1994 the Guardian newspaper published a front page report alleging that Mr Al Fayed had paid Mr Neil Hamilton, M.P. and Mr Tim Smith, M.P. thousands of pounds through Ian Greer Associates (IGA), a firm of Parliamentary lobbyists, in return for their asking questions in Parliament on behalf of House of Fraser. The article also alleged that Mr Hamilton and his wife had spent six nights at the Ritz in Paris at Mr Al Fayed's expense. On the same day Mr Hamilton, Mr Greer and IGA issued libel proceedings against the Guardian. Mr Smith admitted receiving fees from Mr Al Fayed and resigned from the Government.

[108] On 25 October 1994 a report into the allegations, by the Cabinet Secretary, was published as a written answer to a Parliamentary Question. It recorded that Mr Smith had admitted receiving money from Mr Al Fayed, but that Mr Hamilton denied the allegation of cash payments. Later the same day Mr Hamilton resigned from the Government at the request of the Prime Minister.

[109] In the light of these events the Prime Minister announced the setting up of the Standing Committee on Standards in Public Life, chaired by Lord Nolan. In May 1995 the Nolan Committee recommended the appointment of a Parliamentary Commissioner for Standards. Sir Gordon Downey was subsequently appointed.

[110] On 30 September 1996, shortly before the trial of the Guardian action was due to start, Mr Hamilton, Mr Greer and IGA withdrew their action. The allegations then received a great deal of publicity. On 14 October 1996 the Speaker of the House of Commons referred to serious allegations which had been made about Members of Parliament while the House was adjourned, which allegations called into question the reputation of the House as a whole. She expressed the hope that the Select Committee on Standards and Privileges ("the Committee") would find it possible to make an early special report. On 28 October 1996 the Committee asked Sir Gordon to investigate the allegations as a matter of urgency.

[111] Sir Gordon conducted a detailed enquiry involving the taking of evidence from over 60 witnesses, the holding of 13 oral hearings and the consideration of some 14,000 pages of documents. The enquiry was held in private. Extracts from the transcripts of oral evidence given to the enquiry were however leaked and published during March 1997. Sir Gordon's report was published on 2 July 1997. Most of the evidence (including the evidence mentioned below) was also published in the form of appendices to the report.

[112] Sir Gordon reported that the takeover in 1984 of House of Fraser by the Fayed brothers had produced a hostile response from Lonrho, the company whose own ambition to acquire the store group they had frustrated, and in particular from its chief executive, Mr Tiny Rowland. He had launched a campaign of opposition to the decision by the Secretary of State for Trade and Industry to allow the takeover to proceed. The purpose of the campaign, which exploited Lonrho's media interests such as the Observer, was to question the validity of the decision to approve the takeover and to seek to have it reversed, or at least to have some form of official enquiry established into the circumstances surrounding it. The concern of the Fayeds' tax advisers over the confidentiality of the discussions leading to the 1990 agreement has to be seen against the background of this campaign: the leak to which they had referred in May 1990 (see para.47), for example, had been published in the Observer. In 1987 the DTI appointed inspectors to investigate the circumstances of the takeover. As explained above (at para.38), the inspectors' report precipitated the Enquiry Branch investigation in 1988.

[113] Sir Gordon reported that Mr Al Fayed had responded to this campaign by seeking to improve the effectiveness with which his own case was presented to Ministers and to Parliament. IGA were engaged in October 1985 to act as political advisers to Alfayed Investment & Trust Ltd. An operation of Parliamentary lobbying was then instituted, involving Mr Smith, Mr Hamilton and others. Mr Smith had been rewarded by payments of cash over the period between May 1987 and early 1989. Mr Hamilton was also alleged to have been rewarded by payments of cash, together with Harrods vouchers and a stay at the Ritz, over a period of about eighteen months to two years beginning in May or June 1987. Estimates of the value of the payments allegedly made to Mr Hamilton varied: one figure put forward by Mr Al Fayed was a total of 28,000 in cash or vouchers, but in his oral evidence Mr Al Fayed suggested a figure of 40,000 to 60,000. The cost of the stay at the Ritz was alleged to be about 5,000. Mr Greer was also alleged to have received payments in cash, although the amounts and the period involved were unclear.

[114] Sir Gordon concluded that there was a strong probability that cash payments were made to Mr Greer, probably over a period of about eighteen months. He also concluded that Mr Smith had accepted cash payments from Mr Al Fayed of between 18,000 and 25,000 in return for lobbying services. He concluded that Mr Hamilton had also received cash payments from Mr Al Fayed in return for lobbying services. The amount received by him was unknown but was unlikely to have been less than the total amount received by Mr Smith. There was insufficient evidence to show that Mr Hamilton had received vouchers. Sir Gordon further concluded that the stay at the Ritz had been part of Mr Hamilton's reward for lobbying services.

[115] The evidence before Sir Gordon included a witness statement by Mr Al Fayed originally prepared for the purposes of the libel action. It stated:

"Between 1987 and 1989 I made a number of payments in cash or in Harrods gift vouchers directly to Mr Hamilton when he visited me either at Harrods or at my London residence at 60 Park Lane. I should first explain that for many years I have always had readily available fairly substantial sums of cash. I have always preferred cash as a method of settling bills rather than cheques or credit cards. From time to time, I arrange for one of my staff to go to the Midland Bank in Park Lane where my personal accounts are held to draw cash against a personal cheque from me. This cash is always presented by the Bank in bundles of 50 notes. Prior to the new 50 note coming into circulation, the bundles were of 2,500 each. Once the new smaller 50 note came into circulation recently, the bundles increased to 5,000 each.

I therefore had easy access to cash during 1987, 1988 and 1989 without my needing to arrange for it to be specially drawn."

[116] Mr Al Fayed's oral evidence to the enquiry was to the same effect. He explained that he found it convenient to have large amounts of cash to hand, particularly because he often had to travel overseas at short notice. Mr Al Fayed's personal assistant, Ms Alison Bozek, gave evidence that Mr Al Fayed kept a substantial amount of cash in his desk, and that the money was withdrawn, usually 25,000 at a time, by cheques drawn on his personal account with the Midland Bank in Park Lane. Mr Al Fayed's personal secretary, Ms Iris Bond, gave evidence confirming that large amounts of cash were withdrawn from Mr Al Fayed's personal account at the Midland Bank in Park Lane. She understood that that account was financed by inputs of cash from Switzerland.

[117] Ms Bond's evidence also contained a passage which might be considered relevant to other issues. The KPMG benefits reports had stated that office accommodation and secretarial staff were available for the use of the Fayed brothers in connection with UK corporate interests, and that no recharges were made by the companies bearing the costs of the office accommodation and the related support. Ms Bond's evidence however raised a possibility that such facilities might also be used in connection with wider interests:

"I am part of Mr Al Fayed's team which works from 60 Park Lane and I think you may appreciate that because of the nature of Mr Al Fayed being an international businessman, we would have a shift system because a lot of his work was being done in other parts of the world, so it was not a normal office inasmuch one could work from nine until ten in the evening, so there would be a shift system, although I would tend to work during the day and there would be another secretary who would work in the evening."

[118] Mr Al Fayed's evidence to the enquiry also contained passages which might be regarded as relevant to the question whether he had acquired a domicile of choice in the UK. He said, for example:

"It [i.e. the UK] is my country now.... I say this is my country, I have lived here for 30 years, I have four British kids. I sacrificed 30 years of my life for this country in the business of construction before having the House of Fraser."

[119] Sir Gordon's report was referred to the Revenue. Mr Whitehead did not read it. He had been aware of the Press coverage which the allegations, and the evidence to the enquiry, had received during the months preceding the conclusion of the 1997 agreement. He did not apply his mind to those matters when concluding the 1997 agreement.

(4) Events between the 1997 agreement and August 1999

[120] Mr Whitehead received and processed the agreed payments of 240,000 in January 1998 and January 1999. On the occasion of each payment, he had to go through the formality of registering an SCO investigation of Mr Al Fayed on SCO's computerised case management system, in order to enable the payment to be processed. No investigation was actually conducted, but an investigation had to be registered on the system in order to comply with the Revenue's internal system of audit and management (under which an SCO investigator could not properly receive a payment from a taxpayer otherwise than in the context of a registered investigation). He received tax returns for Mr Al Fayed for 1997/98 and 1998/99. The returns were completed in the manner envisaged in clause 9 of the 1997 agreement. They disclosed no sources of income subject to UK tax apart from the sources covered by the agreement. It was confirmed that the benefits position remained as stated in the KPMG report of 1996. Mr Whitehead was also involved, together with the Financial Intermediaries and Claims Office (FICO: a head office department of the Revenue which dealt at that time with charities, non-resident trusts and offshore funds), in dealing with Mr Ali Fayed's claims for the repayment of tax credits in respect of UK dividends (including dividends totalling 10m paid by Harrods Holdings plc during 1997 and 1998) under a double taxation agreement with the USA.

[121] In December 1997 Mr Whitehead was contacted by Mr Sarson, a Principal Inspector at Glasgow LBO. It may be helpful at this point to explain the nature and structure of LBO. That is a less straightforward task than it might have been. In their pleadings, the petitioners make averments about these matters, but the Revenue denies those averments and offers no explanation of LBO's function or organisation. Nor is any account of these matters contained in the affidavits lodged by the Revenue. I was however provided by counsel for the Revenue, in the course of their submissions, with a passage from Simon's Direct Tax Service (at para.A3.1608) which contains a description of LBO. Although that was not an appropriate means of placing evidence before the court, the description is broadly consistent with the petitioners' averments and, to that extent, did not appear to be in dispute. It appears that LBO is responsible for the tax affairs of the largest UK corporate taxpayers, partnerships, banks, building societies, insurance companies and Lloyd's underwriters. There are a number of Large Business Offices (Corporation Tax) in locations throughout the United Kingdom. One, in Glasgow, is known as Glasgow LBO.

[122] LBO is headed by a Director, based in London. There is also a Deputy Director. Each office has a number of Principal Inspectors, who are case directors. Each Principal Inspector has reporting to him a number of Inspectors, who are case managers. The role of the case manager is to make an initial review of annual accounts, to submit the outcome of the review to the case director, to discuss and determine with the case director the areas in which there is considered to be a risk of loss of tax, and then to issue and take forward the resulting correspondence. The process of identifying areas where there is a risk of loss of tax is known as "risk assessment". Unlike SCO, LBO deals with the tax affairs of the taxpayers in question on a long-term basis, reviewing their accounts and tax computations annually. Unlike SCO, it does not traditionally exercise the power to recover documents and information conferred on the Revenue by section 20 of the 1970 Act (discussed below), or make enquiries of third parties (such as banks) about a taxpayer's affairs. Whereas it is an exceptional event for a taxpayer to receive enquiries about his affairs from SCO, a company whose affairs are handled by LBO will expect to receive enquiries from the case manager every year.

[123] Mr Sarson was case director for the Harrods group of companies: he was in effect the successor of Mr Walker and Mr McGregor. In his letter to Mr Whitehead dated 8 December 1997, Mr Sarson wrote:

"In 1994/95 there was some correspondence between my predecessor and Mr Monk concerning a settlement reached by your office with the Fayed family [see paras.69-73]. We were never given any details of the terms of this and in consequence it was difficult to challenge or enquire into the basis on which personal expenses on security etc of the Fayeds was claimed as management expenses by the Harrods Holdings Company (now called Harrods Holdings plc). In his memo of 13 February 1995 Mr Monk said that the personal affairs of the directors would continue to be the responsibility of your office until 5 April 1997.

This is an area that I would potentially wish to research. The profit and loss to January 1996 included 1.8m on salaries and 0.2m on travel and accommodation, much of which I suspect relates to personal security. However I do need to be clear as to where we stand in terms of your own involvement and any agreement reached after your previous enquiries. I should be grateful therefore if you would let me know where we stand particularly as regards the January 1997 computations expected shortly. If for example you are to propose to follow up on your earlier enquiries then ideally I would like some involvement and co-ordination with this office. If on the other hand you have no objection to this office tackling the issue from a certain date then that would be helpful.

Please feel free to discuss over the phone."

Mr Whitehead telephoned Mr Sarson in response and informed him that there was an agreement still in place.

[124] On 7 December 1997 (or, according to the Revenue's minute, 7 December 1998) Mr Whitehead, together with Mr Nigel Wood, an investigator in Mr Whitehead's Hansard Group, attended a meeting with Mr Mark Collins, the managing director of Harrods Estates Ltd. Mr Collins's evidence about this matter is contained in an affidavit, the contents of which are generally consistent with the evidence of Mr Whitehead. One difference concerns the date of the meeting. On that matter, I think it likely that Mr Collins is correct in his recollection that the meeting took place in 1997, within a few months of the events with which it was concerned, rather than more than a year after those events. It cannot be taken for granted that the date recorded on the Revenue's minute of the meeting is correct: other documents produced by the Revenue contain errors as to dates. The date of the meeting is not in any event of particular importance.

[125] Earlier in 1997 Mr Al Fayed had had dealings with a third party in relation to a personal matter which I need not detail. Mr Al Fayed had had to pay the third party 35,000 at short notice. The payment was made by a banker's draft drawn on Harrods Bank Ltd. Mr Al Fayed decided that the conduct of the third party should be reported to the Revenue, and it was notified in writing in November 1997. The Revenue decided to carry out a review of the affairs of the third party, and the meeting with Mr Collins was held in the course of that review. The review was being undertaken by Mr Wood, and Mr Whitehead attended as the group leader with responsibility for the review.

[126] At the meeting, Mr Collins explained the events which I have summarised. In particular, he explained that the third party had initially asked to be paid in cash, but had then agreed to payment by banker's draft. He explained that the payment had been made in circumstances of urgency.

[127] Prior to the meeting, the Revenue had been provided with a copy of the banker's draft by those acting on behalf of Mr Al Fayed. Mr Al Fayed repaid Harrods Bank Ltd by a cheque drawn the following day on an account held by him with the Park Lane branch of the Midland Bank.

[128] The focus of Mr Whitehead's concerns at the meeting was not Mr Al Fayed; and the Revenue's minute of the meeting did not form part of the Revenue's file on Mr Al Fayed. Mr Whitehead however inferred from the information provided at the meeting that Mr Al Fayed had a banking relationship with Harrods Bank Ltd. He considered that such a relationship was a possible source of concern in relation to Mr Al Fayed's affairs. He did not pursue the matter, as he was busy with other work.

[129] In 1998 Mr Alan Carmichael joined SCO Edinburgh as an investigator, having previously worked in Glasgow 1 and thereafter in Glasgow LBO. Mr Carmichael worked in the Avoidance Group at SCO Edinburgh, his group leader being Mr McGuigan.

[130] Mr Carmichael provided two affidavits in the present proceedings and also gave oral evidence over the course of two days. Part of a transcript of evidence which he had given before a commissioner, in connection with the recovery of documents in the course of the earlier judicial review, also formed part of the evidence in the present case. Before going further, it is necessary to say something about my assessment of Mr Carmichael's evidence.

[131] At the request of counsel for the Revenue, Mr Carmichael was in court during the evidence of Mr Whitehead and Mr McGuigan, so as to be able to give instructions to counsel. In consequence, he gave his evidence after hearing the evidence of his group leader and line manager, Mr McGuigan. Mr Carmichael appeared to me at times to have difficulty giving a clear and direct answer to questions. For reasons explained below, I have concluded that in relation to certain matters Mr Carmichael's evidence was not reliable. These are generally matters in relation to which I have reached the same conclusion in respect of Mr McGuigan's evidence.

[132] Mr McGuigan also gave oral evidence, over the course of four days; and he provided two affidavits, in addition to an affidavit which had been prepared for the first judicial review. It is convenient at this point to say something about my assessment of his evidence. Mr McGuigan appeared to me to give his evidence in a defensive manner, conveying at times an impression of anxiety to place before the court a prepared account and to avoid making concessions. His defensiveness was reflected on occasions in his failing to give direct answers to questions, and on other occasions in his giving answers which conveyed less than the whole truth. For example, when asked whether he had been through the Harrods accounts, his initial response was "I have not memorised them, no." When counsel explained that he wished to test Mr McGuigan's knowledge, Mr McGuigan responded "Or memory". Eventually Mr McGuigan said that he had not read the accounts. As explained below (at paras.168-170, 215, 217-218, 250, 271 and 408), it was apparent from a number of documents that Mr McGuigan's statements to other Revenue officials (and third parties) could not be relied on to be accurate. It also appeared to me that he had a tendency in his evidence to rationalise his actions ex post facto, producing an explanation which (up to a point, at least) could be fitted to the facts, but which did not appear likely to be an entirely accurate or complete explanation of why, at the time, he had acted as he had done. This tendency was reflected in his putting a strained construction on the language used in certain Revenue documents, when the natural meaning of the words used was less consistent with his account (see e.g. paras.230, 235 and 308). In these circumstances, I have treated Mr McGuigan's evidence with care, and have concluded in relation to certain matters that it was not reliable.

[133] One of Mr Carmichael's functions was to offer advice and assistance to district offices for which he had liaison responsibility, and to review any work which they might submit to SCO. In 1999 Mr Carmichael had liaison responsibilities for Wick District. He visited that district between 1 and 3 February 1999. The purpose of the visit was to review the cases of share fishermen living in Shetland.

[134] During his visit to Wick District, Mr Carmichael discussed with the officials there a project, under the title "Who Owns Scotland", which they were undertaking with the objective of identifying landowners in Northern Scotland who were not on the Revenue's computer systems. It was envisaged that the largest cases would be referred to SCO Edinburgh.

[135] This project was taken forward by Mr William Lockyer, the District Inspector in Wick. On 2 July 1999 he sent Mr Carmichael information about a number of offshore companies which had been identified.

(5) Events from August 1999 to the issue of the letters of 31 May and 2 June 2000

August 1999

[136] In the meantime, there had been further activity at Glasgow LBO. In January 1999 Mr James Williams had become a Principal Inspector there. He assumed responsibility as case director for the Harrods group. Mr Williams provided an affidavit in the previous judicial review, and a further affidavit in the present proceedings. Since he did not give oral evidence, I can only assess the credibility and reliability of his evidence on the basis of the affidavits, and a comparison of their contents with other evidence in the case. I have come to the conclusion that his account of events is in general (and subject to certain qualifications, which I mention below) consistent with the contemporary documents and the other evidence which I accept, and can therefore be accepted.

[137] The case manager for the Harrods group was Mr Henry Murrin. He had been the case manager since about April 1997. Mr Murrin provided an affidavit in the present proceedings. It appears to be a candid and careful account, and is generally consistent with the contemporary documents. I accept it as a reliable account of events.

[138] It may be helpful to say something at this point about the Harrods group and other companies related to it. The principal company in the Harrods group is Harrods Holdings Ltd, the fourth petitioner. Under its previous names (Harrods Holdings plc, Harrods Investments plc and House of Fraser Holdings plc), it has been mentioned above (at paras.50, 68, 69 and 123). It is a close company (an expression which is defined below, at para.140), and is incorporated in the UK. Its accounts for the year ending 30 January 1999 record that its directors include Mr Al Fayed and Ali Fayed. They also record:

"The ultimate parent undertaking is Alfayed Investment and Trust PVT LP, a partnership based in Bermuda. All interests in the Partnership continue to be under the control and held for the benefit of the Fayed family, the ultimate controlling party."

It was mentioned above (at para.120) that Ali Fayed had claimed (and been granted) repayment of tax credits in respect of dividends paid by Harrods Holdings plc during the period covered by these accounts, under a double taxation agreement with the USA. That was presumably on the basis that he was the beneficial owner of part of the company's share capital. Harrods Holdings Ltd directly or indirectly owns 100 per cent of the share capital of the other companies in the group, which are also incorporated in the UK. They include Harrods Ltd, the second petitioner, and Harrods (UK) Ltd (formerly Harrods (UK) plc), the third petitioner. Mr Al Fayed and Ali Fayed are stated in the 1999 accounts to be directors of both companies.

[139] Until 4 September 1998, Harrods (UK) plc also owned 100 per cent of the share capital of Liberty Publishing & Media Ltd, the sixth petitioner. That company and its subsidiaries were therefore members of the Harrods group until that date. Liberty Publishing & Media Ltd is a close company incorporated in the UK. It is itself the parent company of a group of companies. In particular, it owns 100 per cent of the share capital of Liberty Radio Ltd, The Liberty Broadcasting Company Ltd (the seventh petitioner), Punch Ltd (the eighth petitioner) and Brompton Press Ltd (the ninth petitioner). Its accounts for the year ending 31 August 1999 record:

"At 31 August 1999 the ultimate parent undertaking of Liberty Publishing and Media Limited was Liberty Holdings Limited, a company incorporated in Jersey, which is owned and controlled by M. Al Fayed, the ultimate controlling party."

[140] The expression "close company" is defined by section 414 of the 1988 Act as meaning one which is under the control of five or fewer participators, or of any number of participators who are directors; or one in respect of which five or fewer participators, or participators who are directors, would receive more than half of the company's assets on a winding up. The expression "participator" is defined by section 417 as meaning a person having a share or interest in the capital or income of the company. A person is treated as a participator in a company if he is a participator in another company which controls that company. The expression "director" is defined by the same section as including any person occupying the position of director (by whatever name called), any person in accordance with whose directions or instructions the directors are accustomed to act, and any person who is a manager of the company or otherwise concerned in the management of the company's trade or business and who on his own or with associates is the beneficial owner or directly or indirectly controls not less than 20 per cent of the company's ordinary share capital. Under section 414, certain companies cannot be close companies: these include companies not resident in the United Kingdom. There is no dispute that certain of the UK companies in which Mr Al Fayed has an interest, including the Harrods group of companies, are close companies. Whether any or all of the offshore companies in which he has an interest are also close companies depends in the first place on whether the company in question is resident in the UK, which in turn normally depends (as explained above, at para.20) on the location of its central management and control.

[141] Whether a company is a close company is significant in relation to distributions and loans. In general, a distribution by a company is taxable on the recipient, and is disallowed in computing the profits of the paying company (section 337A(1)(a) of the 1988 Act). A distribution includes a dividend. In relation to close companies, the meaning of the term "distribution" is extended by section 418 to cover any expense incurred by the company in providing for any participator (including an associate of a participator) living or other accommodation, entertainment, domestic or other services, or other benefits or facilities of whatever nature, to the extent that the expense is not reimbursed by the participator. The latter provision does not however apply in relation to living accommodation or other benefits falling within the scope of sections 145 and 154 of the 1988 Act (discussed above at paras.57 and 59). Under section 419, a charge is imposed on a company which makes a loan or advance to a participator (or an associate of a participator). The expression "associate" is defined by section 417 as including "any relative or partner of the participator"; and "relative" means "husband and wife, parent or remoter forebear, child or remoter issue, or brother or sister".

[142] In August 1999 Mr Murrin reviewed the accounts of the Harrods group for the accounting period ended 31 January 1998. He was aware, from the correspondence between previous case directors and SCO, that an agreement was in place concerning Mr Al Fayed's personal taxation. Mr Murrin therefore focused in his review on issues other than those which he regarded as impinging on Mr Al Fayed's personal affairs.

[143] In his report to Mr Williams on the 1998 accounts of Harrods Holdings plc, dated 4 August 1999, Mr Murrin said that the only questionable figure in the corporation tax computation was in respect of "Legal fees incurred re DTI/Lonrho Activities". It will be recalled that the issue of legal fees had been pursued by Glasgow 1 prior to the 1990 agreement (see para.50), then dealt with in the 1990 agreement (see para.54), and that Glasgow 1 and Glasgow Cavendish had expressed concern about that aspect of the agreement (see paras.68-69 and 71). Mr Murrin said:

"How divisible the activities of the Company are from those of M Al Fayed is of course a central point to the consideration of the Group's affairs. If we bothered to challenge this charge, we will be faced with the argument that the expenditure was a valid management expense of the Company as the Group or Group Companies was the focus of any challenge, investigation etc., that M Al Fayed was not involved or, if he was involved, then as he is so inextricably involved with 'Harrods' that it is valid for the Group to protect itself from any possible detriment arising from any investigating authority's findings.

Unless we are to open the personal side in a Group context, we should either ask for details of what underlies the charge or simply accept it without enquiry."

[144] Mr Murrin also remarked that the group had met some personal expenditure on behalf of Mr Al Fayed, although the sums seemed modest. There was a director's loan as at the year end, falling within section 419 of the 1988 Act (see para.141); but the loan had been repaid. Mr Murrin also noted that two 1 special shares had been issued in March 1997, but that the issue would seem to have no immediate impact on corporation tax liability. Mr Murrin also noted that the accounts reflected the purchase of shares in Alpha Airports Group plc ("Alpha") from Cylena SA, discussed below (at para.146).

[145] Mr Murrin concluded:

"If we take M Al Fayed out of the equation, these accounts and computations should be accepted with little or no enquiry. We are at the stage where we have to decide whether to attempt to enquire into M Al Fayed's personal affairs. As far as these 1998 accounts are concerned, the P/L [profit and loss account] entries offering any scope for any 'personal' charges are those in relation to salaries and legal costs but we would really need to obtain the information held by SCO before making - or even deciding whether to make - any (Group-wide) enquiries in this field. As far as the SCO involvement is concerned, I refer you to the correspondence in the 1993 and 1994 accounts pads of the Company (when it was called Harrods Investments plc). It is entirely possible that the type of expenditure charged - and the Group companies in which (any) such expenditure is charged - has changed over the years. I think it would be rather foolish of us to make any enquiries of the Tax Manager before at least contacting SCO and if the attitude of SCO towards District involvement in this aspect of the affairs of the Group/the Fayeds has not altered since the time of the correspondence in the 1993 and 1994 papers, progressing the matter on our own would prove difficult."

[146] Cylena SA was a company incorporated in Liechtenstein. Glasgow LBO's understanding was that, at the time of the transactions described below, Mr Al Fayed was the beneficial owner of the company's share capital. It appeared from the information available to Glasgow LBO that Cylena SA acquired 25 per cent of the share capital of Alpha in November 1996 at a cost of 52m. Between November 1996 and 26 February 1997 it increased its shareholding to 28 per cent. The purchase was apparently financed by interest-free loans from Mr Al Fayed and Fayed family trusts. Cylena SA's share capital was then sold to Harrods Ltd for 1, on 27 February 1997. The Alpha shares were then transferred by Cylena SA to Harrods Ltd, and an interest-free loan was advanced by Harrods Ltd to Cylena SA. The loans made by Mr Al Fayed and the family trusts were then repaid. Information provided by Mr Hadden (the Group Taxation Accountant of the Harrods group) suggested that this series of transactions was motivated by tax planning, the intention being to avoid the stamp duty which would have been due if Harrods Ltd had acquired the Alpha shares directly. Mr Murrin had also been in correspondence with Mr Hadden in respect of a claim that Cylena SA had become tax resident in the UK upon its acquisition by Harrods Ltd, by virtue of becoming centrally managed and controlled in the UK.

[147] In his report on the 1998 accounts of Harrods (UK) plc, also dated 4 August 1999, Mr Murrin said that the situation was similar to that of Harrods Holdings plc in relation to the position of Mr Al Fayed. The only other enquiry concerned the sale of the former Harrods Depository in Barnes to a developer for the construction of the Harrods Village housing development. Part of the consideration included one of the flats to be constructed, a 999 year lease of which was granted to a company in which Mr Al Fayed had a beneficial interest (Prestige Properties SA: one of the offshore companies covered by the 1990 agreement: see para.54). A valuation of the lease was required, together with information about any continuing benefit arising from the development (given the use of the Harrods name).

[148] In his report of the same date on the 1998 accounts of Harrods Ltd, Mr Murrin said:

"Looking firstly at the M Al Fayed personal aspect, the analyses of the P/L entries indicate that the areas in which we would most likely find any personal expenditure charged (and I am assuming that the bulk of such expenditure would be in the areas of staff wages and accommodation costs) would be under 'Salaries And Wages' ..... and 'Occupancy Expenses' .... I must emphasise however that I think it unlikely that there will be any deliberate mis-claims for deductions. The agreement with SCO may still be in place - albeit that it was to cover the period, as I understand it, to 5 April 1997 - and, as I mention in my note on Harrods Holdings plc, may be based on the premise that all/any relevant personal expenditure is to be found in that Company. This all comes back to the necessity of us obtaining details of whether the agreement with SCO is still in place and what it covers."

The only other matters arising were of a more routine nature.

[149] Mr Williams received Mr Murrin's reports together with the relevant files. This was the first time Mr Williams had examined the files. He noted that a number of his predecessors had raised issues concerning Mr Al Fayed with SCO but, in Mr Williams's view, "without success". The exchanges between Mr Walker and SCO in 1994 (described above at para.69) had been "from Glasgow's point of view unsatisfactory". He considered that Mr Walker had been "unable to obtain a satisfactory response to his memos." He considered that Mr McGregor had "made no progress" in his dealings with SCO during 1995 and 1996 (described at paras.70-73). Mr Sarson had "likewise made no progress" when he took the matter up in 1997 (see para.123). Mr Williams was concerned at the approach that had been taken by SCO. He considered that three developments - risk assessment, the concept of the case director, and the concept of "combined case-working" - gave him greater authority than his predecessors "to challenge the secretive line that had previously been taken by SCO and to ensure that the whole of the Fayed economic entity was considered in the round".

[150] By "risk assessment", Mr Williams meant the annual process described earlier (at para.122) whereby the case director and the case manager would determine, on the basis of an examination of the accounts, areas in which there was considered to be a risk of loss of tax. Mr Williams understood the concept of the case director to be part of an approach which envisaged that LBO would take over responsibility for the tax affairs of related companies. It was also related to the concept of combined case-working, as explained in the next paragraph.

[151] The concept of combined case-working is of some importance in the present case, but is not clearly explained in Mr Willams's affidavit (or elsewhere in the evidence). In his affidavit, Mr Williams states:

"The Case Director approach envisaged that the relevant LBO would call in and take over responsibility for the tax affairs of related companies. Co-ordinated (or Combined) Case-working (CCW) had also come more fully into being and was continuing to evolve. A lot of work had gone into establishing the role of the Case Director which was to include acting as 'ring master' to ensure that all areas of risk were properly addressed regardless of which Revenue agency was responsible for actually dealing with them...

As Case Director my consideration of risk would have extended to the whole of the economic entity including any associated individuals or concerns. I would not have handled any matters outwith the LBO myself but would have acted as ringmaster to ensure that the risks were properly addressed by the appropriate agencies under what is called Combined (or Co-ordinated) Case Working (CCW)."

It appears from this explanation that, although the function of LBO was (as explained above at para.121) to handle the tax affairs of the UK's largest corporate taxpayers, the role of the case director in LBO was not confined to the tax affairs of such taxpayers. First, LBO might take over responsibility for the tax affairs of related companies. Secondly, when carrying out his risk assessment, the case director was entitled to consider the whole of the economic entity of which the taxpayer in question (and any related companies which LBO had "called in") might form only a part: other parts might, for example, consist of associated individuals or other entities. Risks which fell within the area of responsibility of LBO would be addressed by LBO. Risks which were appropriately dealt with by another Revenue agency would not be addressed by LBO, but the case director would ensure that the other agency then addressed the risk, under combined case-working.

[152] Mr Williams set down his thoughts in a memorandum to Mr Murrin dated 6 August 1999. He began:

"I am firmly of the view that to carry out a proper and meaningful risk assessment of a group such as this we must include a comprehensive review of the interaction with the individual directly controlling it. Al Fayed is a mysterious and controversial character with significant tax haven interests who seems unable or unwilling to distinguish between his corporate and personal dealings. From both previous and current evidence the group appears to meet personal expenditure and the accounts show continuing s.416 issues. There would also seem to be various business transfers (both ways) between the group and other Al Fayed entities in circumstances that are not obviously commercial."

By "section 416 issues" Mr Williams meant issues relating to close companies. The "transfers" which Mr Williams had in mind included Cylena SA and the Liberty group.

[153] In his memorandum, Mr Williams continued:

"It is therefore important that we review Al Fayed's personal file together with those of any other parts of his UK empire not currently held in Glasgow. Until we can satisfy ourselves that everything is in order on the personal side the biggest risk is that Al Fayed might not be paying UK tax on the 'income' that he spends in the UK, most of which one must assume comes directly or indirectly from the Harrods Group. Given his lifestyle the funds available to him must be considerable and the fact that you can find no TI [Taxpayers Index: a computerised register of all taxpayers in the UK kept by the Revenue] entry for him must suggest that the risk is high.

The explanation is hopefully that his personal affairs are still being worked by SCO who reached some sort of settlement with him some years ago which was intended to look forward and to cover all years up to 1997. Although they refused to tell us anything about it at the time they did say the file would be returned to the district (wherever that is) to deal with years after 1997. I am a little concerned, however, that SCO would have no ready machinery for controlling a case themselves from year to year and the fact that despite the interaction with the group they have never approached us with any sort of query can only suggest that whatever sort of review has been made of his returns each year cannot have been very thorough.

I hope that I am wrong but I cannot help but feel that the secrecy and total lack of meaningful communication between SCO and the LBO in this case could have been seriously prejudicial to the proper and efficient working of both the group and Al Fayed's personal affairs and must itself constitute a risk that should now be addressed.

So how do we move forward? Given the present position in the group's accounting cycle, the fact that the 1999 accounts have started to arrive and the concern that we cannot do a proper job of risk assessment without access to the personal papers, I agree that we should dispose of the remaining 1998 accounts with as little fuss as possible.... In the meantime we should prepare ourselves for a full-fledged risk assessment programme on the 1999 accounts, hopefully some time around the end of the year.... The preparation will entail tracking down and obtaining the personal papers (I am drafting a note to SCO) and those of any other known UK entity, for example that owning the Scottish estate. It will also be interesting to see what comes out of the enquiries on Cylena. The transfer of various businesses out of the group to the Jersey entity in the 99 a/p [accounting period] gives further reason to look at the accounts for that period in depth."

[154] It appears from these observations that Mr Williams was concerned that Mr Al Fayed's tax affairs, and those of the Harrods group, might not have been dealt with properly, partly as a consequence of the lack of communication or co-operation between SCO and LBO, and the consequent inability of either department to consider all relevant matters. In relation to close companies, such as those in the Harrods group, it would be natural for an LBO risk assessment to include a consideration of the position of the participators, so as to address such potential risks as the charging of private expenditure to the company or the making of loans to participators. Matters of that kind would be relevant to the corporation tax liability of the company in question, as explained above (at para.141). It is therefore unsurprising that Mr Murrin's review of the 1998 accounts of the Harrods group had raised a number of issues which concerned Mr Al Fayed and might affect the companies' corporation tax liabilities. Mr Williams also wished to obtain the Revenue papers relating to Mr Al Fayed's personal tax affairs and to review them, with the intention of ensuring that Mr Al Fayed's personal tax liabilities were being correctly assessed. That matter would appear to have gone beyond the scope of LBO's responsibility for assessing the corporation tax liabilities of large corporations. Mr Williams appears however to have based his approach upon his understanding that the role of case director, in the context of combined case-working, would enable him (as he states in his affidavit) "to ensure that all areas of risk were properly addressed regardless of which Revenue agency was responsible for actually dealing with them".

[155] Mr Williams was content with Mr Murrin's proposed enquiries. In relation to Harrods Holdings plc, he wrote

"....I am content for you to ask about the legal fees re DTI/Lonrho. The point will probably not be finally resolved before we carry out the 99 risk assessment but any initial response may be helpful in indicating what we are up against and any suggestion that any of it was for Al Fayed's personal benefit will help to demonstrate the need to keep in touch with those dealing with his personal affairs.

.... [In relation to the director's loan] I note the S.416 question even though the advance has now been repaid.

.... I would prefer that you do not finally settle any relevant period for any company that was party to the purchase of Alpha shares from Cylena.

.... Please ask about the two 1 Special Shares and feed the answer into the 1999 risk assessment."

[156] In these circumstances, Mr Murrin made only limited enquiries into matters arising from the 1998 Harrods accounts, and left the accounts "open", i.e. no assessment was issued.

[157] Glasgow LBO also received the accounts of the Liberty group of companies for the period ending 31 August 1998 during August 1999. Mr Murrin delayed enquiries on the accounts until details of the sale of the Liberty companies by Harrods (UK) plc to Liberty Holdings Ltd (see para.139) had been ascertained.

[158] On 9 August 1999 Mr Williams wrote to Mr Whitehead, introducing himself as the case director for the Harrods group. He continued:

"In accordance with current LBO and Departmental practice this involves my reviewing the group and any associated parties to establish whether and to what extent tax may be at risk. Under Combined Case Working (CCW) it will also entail my co-ordinating the work of the LBO and any other Departmental agencies to secure that tax.

Preparatory work is about to start on the risk assessment of the accounts to 30 January 1999 and that assessment has to involve consideration of the relationship between the group and the person or persons controlling it.

In this case this aspect of the review is particularly important, not only because it would seem that the group is ultimately controlled by one individual, namely Mr Al Fayed, but also because:-

I assume that the lack of a TI reference may have something to do with the fact that SCO negotiated some form of settlement with Mr Al Fayed around 1994 which involved looking forward in some way to 1997. Correspondence between my predecessors and Geoff Monk around that time indicated, however, that the file would be returning to a District in 1997.

Can you please let me know if the file has been returned and if so, where, when and under what reference. If SCO is continuing to issue Returns and work the case then can you please let me see the file and let me have details of the nature of your continuing interest?

If there are any remaining sensitivities or complications then I would be happy to meet to discuss how they can be respected while any work is co-ordinated with the rest of my review. It goes without saying, of course, that I would wish to discuss the case with SCO anyway if that review were to suggest any possibility of wrong doing."

[159] It appears from the first paragraph quoted that Mr Williams was asserting his entitlement as case director, under combined case-working, to review not only the affairs of the Harrods group but also those of "any associated parties", so as to establish whether and to what extent tax might be at risk, and to co-ordinate the work of LBO and any other Revenue agencies so as to secure that tax. The letter was written in diplomatic language. Nevertheless, as counsel for the Revenue said in their submissions, Mr Williams was putting his foot down: when LBO had made enquiries of SCO in the past it had (in counsel's words) been told to go away; but Mr Williams was making it clear that he would not go away and that SCO were going to have to co-operate with him.

[160] In relation to the last sentence quoted, Mr Williams explains in his affidavit that wrongdoing is a matter considered appropriate for reference to SCO. He does not explain what he means by "wrongdoing", but the ordinary meaning of the word would cover tax fraud (i.e. matters falling within the remit of Hansard Group or Criminal Investigation Group) rather than tax avoidance (falling within the remit of Avoidance Group). Mr Williams and Mr Whitehead subsequently spoke on the telephone and arranged to meet.

[161] In the meantime, Mr Carmichael had made some enquiries into the companies mentioned in Mr Lockyer's memorandum of 2 July 1999 (see para.135), and had ascertained that one of the companies had links with the Fayeds. He knew from his time in Glasgow that there had been a settlement between the Fayeds and the Revenue, and that the Glasgow office had been unable to gain access to the file. On 27 August Mr Carmichael wrote to Mr Lockyer informing him that both Edinburgh and Solihull SCO had previously looked at the offshore company in question, which Mr Carmichael described as "part of the Al Fayed empire".

October 1999

[162] In early October 1999 Mr Lockyer telephoned Mr Carmichael to say that he could not trace the taxpayer file for Mr Al Fayed or the PAYE scheme for Harrods. Mr Carmichael then asked a colleague, Mr Sims, to telephone Mr Murrin at Glasgow LBO. Mr Carmichael states in his affidavit that he did so in order to find out where Mr Al Fayed's file was.  An additional reason appears, from Mr Murrin's affidavit, to have been that Mr Carmichael wanted to borrow Glasgow LBO's file on Harrods. Mr Murrin was unwilling to lend files, and he suggested to Mr Sims that Mr Carmichael (whom he knew as a former colleague at Glasgow LBO) should call him. Mr Carmichael did so on 7 October, and learned that Mr Al Fayed's personal file was still held by SCO London and that Mr Whitehead was the officer responsible for it. He was also told that the parent entity of the Harrods group was a Bermudan trust of which Fayed family members were the beneficiaries. Mr Murrin regarded the conversation as a routine matter.

[163] Later in October 1999 Wick District received a visit from Mr Geoffrey Bush, the member of the Board of Inland Revenue with responsibility for district offices. Mr Bush was about to retire, and, in accordance with the customary practice, he made what might be described as a farewell tour of district offices prior to his retirement. On his return to London, Mr Bush sent an e-mail on 18 October to Mr Middleton, who had recently succeeded Mr Brannigan as the Director of SCO:

"Last Friday I visited Wick District - Officer in Charge Bill Lockyer.

2. He and his compliance inspectors are running an interesting intelligence project called: 'Who owns Scotland?' It is based on Sutherland and Caithness, the area covered by Wick District.

3. The work to date shows that there is a very high number of combinations of large estates/individuals/trusts/non-resident companies. But the reason for this particular note is that Bill Lockyer has been trying, so far without success, to track down a GCD-type file for Mohamed al Fayed, whose name has surfaced in the 'Who Owns Scotland?' exercise. (Indeed, I understand Mohamed al Fayed also owns more property south of Caithness (? In Ross and Cromarty).

4. Bill Lockyer has been trying, so far unsuccessfully, to track down any GCD-type file for Mohamed al Fayed. I should imagine that Mohamed al Fayed receives the very best tax advice but, even so, given his reported attempts to secure British citizenship and what is reported about his assets in the UK, and what we know about them otherwise, I would be surprised if he does not have to file some sort of return here.

5. Given that Mohamed al Fayed must be a very high-net-worth individual indeed, I should be grateful if SCO can give Wick some help in establishing the position."

As already mentioned, a "GCD" was a General Claims District: the district office to which a taxpayer would ordinarily make his return. Mr Al Fayed did not have a GCD reference because his tax affairs were dealt with by SCO. In consequence he could not be traced through the Taxpayers Index.

[164] Mr Middleton replied by e-mail the same day.

"Happy for SCO to assist Wick - I'm copying this to SCO Edinburgh. It would strike me as odd if SCO hadn't at some stage had a look over Mr Al Fayed's tax affairs, so it's possible there might be something on our database already."

It appears from this e-mail that Mr Middleton was not aware of SCO's prior involvement in Mr Al Fayed's tax affairs.

[165] Mr Middleton e-mailed Mr McGuigan the same day:

"Please see attached note from Geoff Bush following his visit to Wick. I'd be a bit surprised if SCO hadn't at some stage run the slide rule over Mr Al Fayed's tax affairs. Could you arrange for someone to check whether we've reviewed or investigated him and which District is his GCD. I've told Geoff that we'll assist Wick in tracing him, so if you find anything will you please have a word with the DI [District Inspector, i.e. Mr Lockyer]. Were you aware of the 'Who Owns Scotland?' project? Anything in it for us at the top end of the cases they're likely to turn up?"

Mr McGuigan was approached because his office was responsible for SCO liaison with Wick District. This was Mr McGuigan's first involvement with Mr Al Fayed's tax affairs.

[166] Shortly after e-mailing Mr McGuigan, Mr Middleton mentioned the matter to the Deputy Director of SCO London, Mr Stuart Hartlib, who told him that Mr Whitehead was "acquainted" with Mr Al Fayed. Mr Middleton then e-mailed Mr Whitehead and asked him and Mr McGuigan to agree about who would speak to Mr Lockyer.

[167] Mr McGuigan replied to Mr Middleton's e-mail less than an hour after receiving it:

"Thanks John - Yes we know all about it. The project 'Who Owns Scotland' was inspired by an SCO Edinburgh Liaison visit in February 1999. The SCO inspectors fully briefed Bill Lockyer (ex SCO London) and his team as to how SCO would go about such an exercise. Since then Bill regularly liaises with us on the results of his enquiries. I am surprised that Bill given his previous SCO connections didn't mention to Geoff the support he has so far received.

Our involvement continues in fact our next visit is planned for 2 weeks time.

As to the specifics Al Fayed was brought to SCO Edinburgh's attention at the beginning of October 99. Central was checked and 3 hits found 1 of which was sensitive. You might want to check with Martin Whitehead about his 'SHOP' case.

Harrods Ltd is an LBO Glasgow case and discussions took place on 07 October with the case officer in Glasgow. The aim was to bring the LBO on board in a joint review of Al Fayed and Harrods. This is of course dependant on Martin confirming London's interest has been concluded."

By "Central", Mr  McGuigan meant SCO's computerised case management system, which was subsequently replaced by another system known as SCOLS. By "hits", Mr McGuigan meant entries on the system. The designation "sensitive" meant that access to the computer file was restricted. Mr McGuigan surmised that the "sensitive" case was the SCO London case under the control of Mr Whitehead. Mr McGuigan had been group leader of the Avoidance Group in SCO London between 1995 and 1997, and had heard of Mr Whitehead's case from informal conversations. He had however very little information about it.

[168] There are two other points arising from Mr McGuigan's e-mail. First, the statement that the "Who Owns Scotland" project was "inspired by an SCO Edinburgh liaison visit in February 1999" can be contrasted with Mr Carmichael's evidence on affidavit about that visit:

"I....gave them advice on their project 'Who Owns Scotland'. They had the idea."

[169] Secondly, Mr McGuigan's statement that the aim of contacting Glasgow LBO on 7 October was to bring it on board in a joint review of Mr Al Fayed and Harrods is unsupported by the affidavit of Mr Carmichael, which suggests that the aim was to trace information so as to advise Wick District. In his oral evidence, Mr McGuigan said that either he or Mr Carmichael had decided by that point to bring LBO on board in a joint review. He said:

"We had some information about an estate in Scotland. We had some concerns being expressed by the LBO in Glasgow who dealt with Harrods. I concluded that, on the basis of the information about the Scottish estate, and the need for discussion with Glasgow LBO, that that was the route we should go down."

[170] When Mr Carmichael was asked about this matter in evidence (after having heard Mr McGuigan's evidence), he appeared to be reluctant to give a direct answer to the question whether he had spoken to Mr Murrin with the aim of bringing LBO on board in a joint review of Mr Al Fayed and Harrods. The question had to be asked four times before Mr Carmichael answered that "probably at that time it was a long-term wish rather than aim". Mr Carmichael's affidavit states that he has no recollection of discussing Mr Al Fayed's tax affairs with Mr McGuigan prior to 18 October 1999, and that it was in the light of Press coverage of the Hamilton trial (which began in November 1999) that he expressed an interest to Mr McGuigan in reviewing Mr Al Fayed's tax affairs. In addition, such a review could be carried out only if SCO London's case were concluded or transferred to Edinburgh: hence Mr McGuigan's statement that the proposed review was dependent on Mr Whitehead's "confirming" that London's interest was concluded. It appears however that SCO Edinburgh had not discussed such a course of action with Mr Whitehead. Further, according to the evidence of Mr Williams, a plan to institute a joint review could not have been formed without his knowledge, as the case director responsible for the Harrods group; and he denies that any such plan had been formed. I also bear in mind Mr Murrin's evidence that his conversation with Mr Carmichael on 7 October was a routine matter (see para.162). In the circumstances, I do not accept Mr McGuigan's evidence about this matter; and I conclude that his statement in the e-mail, that the aim of the discussions on 7 October had been a joint review, was incorrect.

[171] Senior counsel for the Revenue described Mr McGuigan's statement in the e-mail, that his office had had discussions with LBO with the aim of bringing LBO on board in a joint review of Mr Al Fayed and Harrods, as Mr McGuigan "blowing the trumpet of SCO Edinburgh" and "making a pitch".

[172] Mr Whitehead responded to Mr Middleton's e-mail by contacting Mr Lockyer and suggesting that they discuss the matter on the telephone. That discussion took place on 27 October 1999. Mr Whitehead made the telephone call from home, as he was about to go on holiday. He did not have access to the papers. It is not surprising in the circumstances that the information which he gave to Mr Lockyer was inaccurate. What he said is nevertheless of some significance. Referring to the 1990 agreement (which he mistakenly said was still in force and was to expire in January 2000), Mr Whitehead said that "the persons looking at Mohamed Al Fayed did not look at him in the way that the current Special Compliance Office would have done": he apparently overlooked the fact that the agreement which was in force (the 1997 agreement) had been entered into by himself, following a decision at Board level that forward tax agreements were in principle acceptable.

[173] When Mr Whitehead spoke to Mr Lockyer, he also made a number of observations about the issue of benefits in kind. First, he said that "the family owned, through various companies, penthouse suites in London where no benefits in kind were declared as the liability would be covered by the agreement entered into." The 1996 benefits review by KPMG had stated that the buildings at 55 and 60 Park Lane were owned by an overseas company, Prestige Properties SA, and rented to a company incorporated in the UK, Hyde Park Residence Ltd. The latter company managed the properties and paid for repairs and maintenance. It sublet the flats and charged rent. The rent due in respect of the flats made available to the Fayed brothers was paid in the first instance by another overseas company, Etablissement Wallon, which was then reimbursed by the Fayed brothers. Rent due in respect of other flats made available to guests of the Fayed brothers was invoiced by Hyde Park Residence Ltd and met by the brothers from personal funds. KPMG stated that sample invoices and statements had been provided and reviewed. Mr Whitehead had accepted the Fayeds' tax returns, which were prepared on the basis of that account.

[174] Mr Whitehead also told Mr Lockyer:

"In addition, when Dodi Fayed had been travelling around with Princess Diana, they had travelled on Harrods jets, a yacht in the Mediterranean etc and all costs had been met from Harrods, again with no benefits being declared."

In relation to aircraft, the KPMG review had reported that the aircraft used by the brothers and their families were owned by a company incorporated in the Channel Islands, Fayair (Jersey) Company Ltd. All costs of travel were said to be met initially by Hyde Park Residence Ltd and subsequently reimbursed by Fayair (Jersey) Company Ltd. Hyde Park Residence Ltd was said to receive a fee of 25,000 per annum. The costs of maintaining and insuring the aircraft were said to be met directly by Fayair (Jersey) Company Limited with personal funds from outside the UK. In relation to yachts, the review had reported that the yachts used by the brothers were owned by overseas companies; that all costs were met from personal funds; and that the yachts never entered UK waters. Again, Mr Whitehead had accepted tax returns prepared on the basis of that account.

[175] Mr Whitehead also gave Mr Lockyer an account of the circumstances, described above (at paras.125-128), in which Mr Al Fayed had made a payment by means of a banker's draft drawn by Harrods Bank Ltd. In that regard, Mr Whitehead is recorded as saying:

"This sum of 60,000 had again been paid by Harrods - Mr Whitehead had a copy of the banker's draft in the papers he held."

Mr Whitehead was unaware (not having enquired into the matter) that the banker's draft (which was in fact for 35,000) had been repaid by Mr Al Fayed from his personal account the following day.

November 1999

[176] On 12 November 1999 a meeting took place between Mr Whitehead and Mr Williams. The discussion is recorded in Mr Williams's note:

"I visited Whitehead to discuss my memo of 9 August and repeated the background to my concerns.

Whitehead set out the brief history to the agreement and confirmed that this had been renewed for a further five years from 1997. He promised to let me have a copy. He advised me that there was a growing concern as to the basis on which the agreement had been reached arising in particular from the evidence that had been given in the Hamilton trial. They would like to withdraw from the agreement and the idea was then that the papers would be transferred to Edinburgh SCO to register, particularly given an interest that they have expressed in the Scottish estate.

Whitehead showed me the extent of the papers they held - a four draw press - and promised that once they had decided exactly what was happening they would be happy to liaise fully with GLBO's risk assessment. He would keep in touch."

This note is not a reliable record. The Hamilton trial - i.e. the trial of the defamation action brought by Neil Hamilton against Mr Al Fayed - had not begun by the date of the meeting. The evidence given at the trial cannot therefore have been discussed at the meeting. Mr Williams states in his affidavit that the note is unlikely to have been prepared before Christmas 2000. I am not convinced that all the remarks attributed to Mr Whitehead in the note were made by him on 12 November. Mr Lockyer's note of his conversation with Mr Whitehead on 27 October (see paras.172-175) suggests that Mr Whitehead felt some unease about Mr Al Fayed's tax affairs, and about the 1997 agreement in particular, but not that any definite plans had been formulated. I accept Mr Whitehead's evidence that he made no remarks at the meeting to the effect that SCO would like to withdraw from the agreement.

[177] Mr Williams, in his affidavit, describes the meeting as "far from satisfactory" and "less than productive". Although he repeated the concerns set out in his memorandum of 9 August (see para.158), he did not succeed in obtaining access to the SCO files on Mr Al Fayed's personal tax affairs; nor was he given sight of the 1997 agreement. Mr Williams repeats in his affidavit that Mr Whitehead indicated that SCO would like to withdraw from the agreement and transfer the case to Edinburgh SCO. For the reasons explained above, I am not satisfied that Mr Whitehead expressed himself in those terms at that stage, although I do not doubt that he expressed misgivings about the 1997 agreement. Mr Williams states in his affidavit that he took no further steps for several weeks thereafter, "given the lack of any meaningful progress towards the disclosure of information from SCO about Mr Al Fayed."

[178] On 15 November the Hamilton trial began. This was the trial of an action brought by Mr Hamilton against Mr Al Fayed based on remarks which Mr Al Fayed had made during a televised interview, broadcast on 16 January 1997. During the interview, Mr Al Fayed had repeated his allegation that, during the late 1980s, Mr Hamilton had received money, vouchers and the stay at the Ritz as rewards for lobbying on behalf of House of Fraser. The Revenue officials with an interest in Mr Al Fayed followed the reporting of the trial in the newspapers. Mr Whitehead in particular followed the reporting of the trial in The Times.

[179] In his affidavit, Mr Whitehead draws particular attention to a report published in The Times on 26 November 1999. It stated:

"Mr Al Fayed, on his fifth day in the witness box, was accused by Desmond Browne, QC [counsel for Mr Hamilton] of using up to 120,000 in petty cash each week to 'lubricate' business dealings and to pay employees as a tax dodge.

Mr Browne told the court that up to 75,000 at a time was withdrawn from Mr Al Fayed's personal Midland Bank account in Park Lane up to three times a week.

Mr Browne: 'I suggest you use these enormous sums to lubricate your way through business... to ease your way with other people...'.

Mr Al Fayed: 'You talk absolute rubbish... I have big commitments, I have a big family, homes everywhere.'

Mr Browne: 'You have four children - 120,000 a week is a fairly handsome family budget.'

Mr Al Fayed: 'It is none of your bloody business, it is my business... get on with your cross-examination and don't waste the time of everybody.'"

In relation to the last exchange quoted, Mr Whitehead observes in his affidavit:

"The apparent absence of direct denial on oath at least raised the possibility that sums of around or in excess of 6m might be in use. At first sight expenditure of that magnitude might indicate taxable receipts of a similar magnitude. In very rough terms that might equate to tax liabilities of over 2m. Whether the figure put to Mr Al Fayed was right or wrong was unclear but I was aware that the annual payment was 240,000. The possible discrepancy raised a serious question in my mind which I did not believe I could ignore."

[180] Unsurprisingly, counsel for the petitioners were critical of Mr Whitehead's reasoning in this passage. His starting point is a figure put by counsel in cross-examination. It is treated as possibly correct because Mr Al Fayed's response (as reported) did not expressly deny it. The figure put by counsel as a maximum ("up to 120,000") is then treated by Mr Whitehead as if it were a weekly average, so as to produce an annual figure "around or in excess of 6m." The proposition that "expenditure of that magnitude might indicate taxable receipts of a similar magnitude" then depends on the possibility that the expenditure was financed entirely from taxable income or taxable capital gains. In addition, Mr Whitehead had been made aware, from his involvement in finalising the 1997 agreement, that Mr Al Fayed received remittances from overseas. The report in The Times identified the source of the cash as withdrawals from Mr Al Fayed's personal account with the Midland Bank in Park Lane. The Revenue had known for many years about Mr Al Fayed's having personal accounts with the Midland Bank. It had known that remittances to his account there in the mid 1980s had been very substantial (2.5m in 1984/85, for example: see para.46). It had known that the remittances had been certified to be of capital (see para.33). The Revenue had therefore been aware at that time that Mr Al Fayed had substantial sums available to him in the UK by virtue of those remittances. The relevant records appear to have been kept in Mr Whitehead's room.

[181] Even if Mr Whitehead had read those records, however, it is unlikely that his concern over a possible discrepancy between the 240,000 paid under the agreement and the amount of tax payable in the absence of the agreement would have been allayed. Mr Matheson's minute dated 27 March 1996 had envisaged that the sum payable under a forward tax agreement should be "in lieu of specifically unquantified but estimated liability" (see para.78); and Mr Brannigan's minute of 14 March 1996 had similarly envisaged "an approximation of.... annual liability on any remitted income" (see para.77). Mr Matheson's advice that any agreement should be subject to review in the light of a change of circumstances implicitly assumed that the Revenue would have an understanding of the circumstances existing at the time when the agreement was concluded. The Revenue had not however sought any vouching of the amount or character of remittances after 1985. The 240,000 could not therefore be regarded as a genuine estimate of liability. Even if the effect of the agreement was that the amount and character of remittances were no longer relevant to Mr Al Fayed's tax liabilities (as Mr Whitehead accepted in his evidence), and that cash withdrawals, however large, therefore had no bearing on those liabilities (provided they were financed by remittances from overseas), it might be thought that an Inspector of Taxes could scarcely view without concern a situation in which a taxpayer was apparently entitled by contract to remit unlimited amounts of income without requiring to pay the tax due under the Taxes Acts. Mr Whitehead does not however appear to have considered matters in that way. Without analysing the matter, he had a concern that the amount of tax being paid by Mr Al Fayed under the agreement did not appear to be appropriate in the light of reports of the trial proceedings which suggested that Mr Al Fayed had large amounts of cash readily available to him.

[182] Mr Whitehead also draws attention in his affidavit to the report in The Times on 30 November of the evidence of Ms Bozek. It will be recalled that she was Mr Al Fayed's personal assistant, and that she had given evidence to the Downey Enquiry (see para.116). According to the newspaper report, Ms Bozek gave evidence to the effect that Mr Al Fayed kept cash in a drawer in his office. She had on two occasions taken 2,000 or 3,000 from the drawer, and put it into an envelope for Mr Hamilton. The report stated:

"Miss Bozek added that no record was kept of these cash payments because they were made out of Mr Al Fayed's own personal petty cash, not out of office funds."

This was consistent with the evidence given by Ms Bozek to the Downey Enquiry, when she had said that the cash had been withdrawn from Mr Al Fayed's personal account with the Midland Bank in Park Lane.

[183] Other concerns arose from the evidence of cash payments. First, Mr Whitehead had noted the allegation put to Mr Al Fayed by counsel that he had used cash to pay employees as a tax dodge. An allegation of that nature, if it appeared to be of substance, would plainly be of interest to the Revenue. Moreover, as Mr Whitehead put it, "a large-scale use of cash is inherently a source of concern to inspectors of taxes": since cash payments are liable to be unrecorded (as the report of Ms Bozek's evidence indicated), it may be difficult to check that the proper amount of tax has been paid.

[184] The trial ended on 21 December 1999 with Mr Hamilton's claim being dismissed. Mr Whitehead concluded from the newspaper reports "that Mr Al Fayed had access to large amounts of cash the source of which was not known." Arising from Mr Al Fayed's access to cash, "one concern was that he might be able to extract funds from UK based companies, thus avoiding UK taxes." As I have mentioned, Mr Whitehead was not aware of the documents in the Revenue's possession vouching the level of remittances from overseas into Mr Al Fayed's personal account at the Midland Bank up to 1985. He was, in addition, under the mistaken impression that the 1997 agreement prevented him from making enquiries into the source of the cash. He had not re-read the agreement.

[185] Mr Whitehead also bore in mind an observation about the trial which was made in passing by Mr Middleton, who wondered aloud how Mr Al Fayed paid his legal fees. Mr Middleton in turn accepted in his evidence that it was possible that comments might have been made to him by Board members about the Press reports of the trial, although he had no clear recollection that that had happened.

[186] At SCO Edinburgh, Mr Carmichael was also following the reports of the trial. In his own words, "the revelations... influenced my views on Mr Al Fayed and the resources available to him... The stories were of Mr Al Fayed making substantial cash payments along with revealing insights into his personal lifestyle."

December 1999

[187] In late November or December 1999 Mr Carmichael expressed an interest to Mr McGuigan in carrying out a review of Mr Al Fayed's tax affairs. This appears to have been prompted by the Hamilton trial. Around the same time, Mr Whitehead decided to transfer the Fayeds' case to SCO Edinburgh, partly in view of Glasgow LBO's interest. As SCO Edinburgh had responsibility for liaison with Glasgow LBO, SCO Edinburgh was the appropriate office to handle the case. Mr Whitehead informed Mr McGuigan, and Mr McGuigan in turn informed Mr Carmichael that, as the officer with liaison responsibility for Glasgow LBO, he would be dealing with the case.

[188] I note that in an affidavit provided for the first judicial review, and also forming part of the evidence in the present proceedings, Mr McGuigan states:

"Following concerns about the tax affairs of Mr Mohamed Al Fayed which were raised by one of my investigators, it was decided that we should review his affairs. Our records indicated that there was a file relating to his affairs at SCO in London. We asked for the file to be sent to my office."

This summary appears to me to give a misleading impression of the extent to which Mr McGuigan's group was responsible for decisions at this stage. The decision that the Fayeds' case should be transferred from SCO London to SCO Edinburgh appears to have been taken by Mr Whitehead. The concerns which had been expressed by then in respect of Mr Al Fayed's tax affairs had been raised primarily by Mr Whitehead himself and by Mr Williams at Glasgow LBO. The case was transferred to SCO Edinburgh primarily because that office had liaison responsibility for Glasgow LBO. SCO Edinburgh did not request the London papers until after that decision had been taken. When Mr McGuigan was asked whether this passage in his affidavit referred to the case being transferred to SCO Edinburgh by Mr Whitehead, Mr McGuigan maintained that it did. Asked twice where that matter was referred to, Mr McGuigan said that it was referred to in the final sentence quoted. Asked the same question a third time, Mr McGuigan replied "Nowhere" .

[189] In late December, following the conclusion of the Hamilton trial, Mr Peter Whiteman, Q.C. was instructed on behalf of Mr Al Fayed to review the evidence with a view to identifying any matters bearing on Mr Al Fayed's tax affairs.

January 2000

[190] On 10 January 2000 Mr Williams sent Mr Whitehead an e-mail, headed "Subject: OUR FRIEND", which was intended "to chase him up":

"We are ready to start on the H [Harrods] risk assessment. Are you now able please to let me have the papers you promised me at our meeting."

[191] On 11 January Mr Whitehead telephoned Mr Carmichael. The conversation was noted by Mr Carmichael as follows (as redacted by the Revenue):

"Whitehead telephoned to confirm my interest in the case. He said that he was e-mailing Jim Williams of Glasgow LBO and he would copy this E mail to me to keep me abreast of developments. As I should know this case was an ongoing settlement which was nearing the end of the agreement. The intention was to withdraw from the agreement enabling the whole tax liability of Al Fayed and Harrods to be reviewed with a fresh mind.

Whitehead was attempting to get a transcript of the trial which would contain considerable information of relevance to a fresh investigation.

The old settlement was based along SO [Special Office] lines and was contracted at the time the Al Fayeds were purchasing Harrods. It was now outdated and a joint exercise by LBO, SCO Codes 8 and 9 Group was necessary to bring the case up to date.

Harrods itself has financial problems in terms of its bank and has failed to live up to its expectations and financial plans. This is a feature which we should bear in mind.

Whitehead referred to two blocks of flats in Maidavale and their ownership. He thought this was an area that we should pay particular attention to.

Whitehead's intention is to tell the agents (KPMG) that 'all bets are off'. They will then see what reaction this creates. Al Fayed currently submits Tax Returns to SCO London.

Apparently Jim Williams has identified technical aspects which require LBO input which added to the estate work identified by Bill Lockyer make this case a prime candidate for being dealt with in SCO Edinburgh.

[ ]

Whitehead said that the personal issues involved in this case made it imperative that it was dealt with in SCO.

He mentioned that enormous dividends are paid offshore and that Mohammed Al Fayed is the only brother remaining R/OR [resident and ordinarily resident] in the United Kingdom. Whitehead suggested an early meeting with Jim Williams, SCO and possibly Bill Lockyer to discuss the case in its generality and as a first step towards handing responsibility over. He will therefore write to the agents, see what that brings out having first cleared this through the Deputy Director.

Whitehead mentioned [ ]. This is dealt with at [ ] and will certainly require some review.

Whitehead finished by saying that because of internal pressures it was unlikely a meeting could take place before April."

[192] A number of points arise from this note. First, it contains certain errors of fact. In the first paragraph, it was incorrect to say that the settlement was "nearing the end of the agreement": the 1997 agreement had run less than half its course, and was not due to expire until 5 April 2003. In the third paragraph, it was incorrect to say that the settlement was "contracted at the time the Al Fayeds were purchasing Harrods": the 1997 agreement had been contracted long after the House of Fraser takeover. In the fifth paragraph, the flats were in Mayfair, not Maida Vale.

[193] Secondly, the note mentions two matters which were considered to merit enquiry. The fourth paragraph refers to Harrods Bank Ltd. In his affidavit, Mr Whitehead states what was in his mind:

"I also referred to enormous dividends ...... There was also the question whether the dividend went straight into Harrods Bank. If there was possibly an irregular relationship between Mr Al Fayed and the Bank then that could not be ruled out. I had no specific information on the point but it was not something I could rule out at a preliminary stage ... My reference to Harrods Bank was a link to my concerns about the banker's draft."

It appears that Mr Whitehead postulated, on the basis of Mr Al Fayed's having obtained a banker's draft from Harrods Bank on the occasion described above (at paras.125-128), that dividend income from the Harrods group might be paid into an account held by Mr Al Fayed with Harrods Bank and then drawn on by Mr Al Fayed. In that eventuality, the dividend income would be UK arising income and would therefore give rise to a liability to income tax. Mr Whitehead accepted in his evidence that any person who could satisfy a bank as to his creditworthiness would have access to a banker's draft, and that Harrods Bank might simply have been the closest facility for providing Mr Al Fayed with a banker's draft which was required urgently. He accepted that, if he had concerns about the source of funds for the banker's draft, he could have addressed a question regarding that matter to KPMG.

[194] The other matter mentioned as meriting enquiry (in the fifth paragraph) was the accommodation in Mayfair. In his affidavit, Mr Whitehead states:

"The question was simply whether the properties were used by the family and others. I believed them to be owned by an offshore entity. There might be a question of whether there was a Schedule E liability by virtue of receipt of benefits."

This issue had been looked at previously by the Revenue, and had most recently been addressed in the 1996 review produced by KPMG (see para.93). Mr Whitehead accepted in his evidence that, if he wanted further particulars of a matter, it would be normal practice to ask the taxpayer's advisers to provide them. He had not asked KPMG for any additional information or supporting documentation. In his affidavit, he accepts that he "had not addressed the question of whether the [1997] agreement and [1996] Benefits Report dealt with the matter fully".

[195] The note indicates that Mr Whitehead had by this time a course of action in mind: "The intention was to withdraw from the agreement". That would be done by writing to KPMG, who would be told that "all bets are off". The letter would be sent once it had been approved by the Deputy Director of SCO London, Mr Hartlib. There would then be "a joint exercise" by LBO and SCO Edinburgh. Mr Whitehead envisaged handing over responsibility for the case to SCO Edinburgh. As to the nature of the exercise which was envisaged, the first paragraph of the note refers to the tax liability of Mr Al Fayed and Harrods being "reviewed", while the second paragraph refers to "a fresh investigation". As explained earlier (at paras.89 and 90), a "review", in SCO parlance, is preliminary to a potential "investigation". I accept Mr Whitehead's evidence that his intention at this stage was that there should be a review.

[196] Shortly after his conversation with Mr Carmichael, Mr Whitehead e-mailed Mr Williams (with a copy to Mr Carmichael):

"Sorry for delay. I am awaiting a transcript of the civil action which was recently concluded in our friend's favour. His statements under oath about his petty(!) cash expenditure will allow me to rescind the agreement that has been in place for far too long. I suspect that the reaction will be to offer an increase in the amounts paid but this will be refused in favour of a more scientific approach. It would be appropriate for SCO Edinburgh to be involved as they have responsibility for liaison with your office. My DD [Deputy Director] has verbally agreed to my proposed course of action and I will copy my letter bringing the agreement to an end to you. I feel the response to that letter will dictate our next step. It may be that the other side are already considering our friend's position as they presumably followed the case in the press. Stranger things have happened."

It is plain from this e-mail that it was Mr Whitehead's intention at this time to rescind the agreement. In his evidence, Mr Whitehead accepted that the evidence at the trial would not have entitled the Revenue to rescind the agreement. In suggesting that "the other side" might be considering Mr Al Fayed's position (as was indeed the case: see para.189), Mr Whitehead had in mind the allegations that cash payments had been made to employees. Such payments might give rise to a PAYE liability upon the employer; and a question might also arise whether Mr Al Fayed, as an individual, should be regarded as the de facto employer.

[197] The e-mail of 11 January stated that Mr Hartlib had agreed to Mr Whitehead's proposed course of action; and Mr Whitehead maintained that position in his evidence. Mr Hartlib also gave evidence, and denied that he had agreed to the rescission of the agreement. Mr Hartlib appeared to be credible and reliable in his account of events, and impressed me as someone who was careful and cautious. It seems to me to be unlikely that he would have agreed to the rescission of the agreement merely on the basis of newspaper reports of the trial. It is more likely that he would have wished, as he said, to obtain a transcript so as to see whether there was reason to review Mr Al Fayed's affairs further. Indeed, it appears from the evidence of Mr Middleton that a decision by the Revenue to terminate what was understood to be a valid contract with a taxpayer would not be taken below the level of the Board (or, possibly, the Director of SCO). In the event, as explained below, Mr Whitehead's intention to rescind the agreement appears to have altered, following a discussion with Mr Hartlib, to an intention to suspend it; and that is consistent with my impression that Mr Hartlib's instinct would have been to proceed cautiously, rather than taking an irrevocable step, when little hard information was available. I conclude that Mr Hartlib's evidence about this matter is correct. I do not however question Mr Whitehead's good faith in stating that he had Mr Hartlib's approval: their discussions were informal and unrecorded, and Mr Whitehead may have formed a mistaken impression.

[198] I note that the Revenue's pleadings contain the averment:

"Explained and averred that, by 11th January 2000, the respondents wish to terminate the 1997 forward tax agreement."

Some weight was attached to that averment by counsel for the petitioners in their submissions. Mr Middleton reacted with some surprise when the averment was put to him. He said that he was not aware of any proposal by Mr Whitehead to rescind the agreement, and that such a decision would be made at the level of the Board or the Director of SCO. I accept that evidence. As explained above, the only official who had by 11 January expressed a desire to terminate the agreement was Mr Whitehead; and he did not possess the authority to take that step without the approval of more senior officials, which he had not obtained.

[199] On 14 January Mr Williams sent Mr Whitehead a further e-mail, responding to the e-mail of 11 January and again attempting to obtain information about the 1997 agreement:

"Thank you. I am still concerned about the extent to which the existing agreement may impinge on matters that could arise on our risk assessment of the accounts to January 99. For example on benefits and entertaining as well as on the fundamental question of whether the profits of H [Harrods] do indeed belong offshore or whether they find their way more directly into the control of our friend (what does he claim to live on by the way?). Can you please therefore let me have a copy of the agreement so that I can see the scope of it. Can you please also give me an opportunity to comment on the draft of any letter withdrawing from the agreement before it is issued just in case there are any implications for our wider interest. We will also need to be clear, along with SCO Edinburgh, about the proposals for any further work and who will be responsible for it. The more scientific approach you want to move to will need to take account of the corporate environment in which he operates as well as developments in the department's approach to tax risk and the working of wealthy individuals. Perhaps the interested parties should meet to determine where we go next. In the meantime, and so that we can make a start on the research, can you please let me have a copy of the large volume you showed me on my visit."

The "large volume" was the set of documents prepared by Lonrho in the 1980s and sent to a variety of Government departments as part of Mr Rowland's campaign against Mr Al Fayed. In the event (and despite sending a reminder on 3 February), Mr Williams was not shown a draft of the letter to be issued by Mr Whitehead; nor was he provided by Mr Whitehead with any of the documents he had requested.

[200] On 18 January Mr Murray of KPMG attended a conference with Mr Whiteman Q.C. at which Mr Whiteman advised on the interim conclusions he had reached after reviewing the evidence at the trial. One of his conclusions was that there might be tax implications for individuals, in particular members of Mr Al Fayed's immediate staff, such as secretaries and security guards, who had received cash gifts on occasions such as Christmas, Easter, or when going on holiday. The amounts were thought individually to be relatively small, but they had been given to staff over a long period. It was thought unlikely that all the employees could argue that all their receipts were outside the scope of income tax under Schedule E. It was also thought possible that the companies which employed the persons in question, including Harrods, should have applied PAYE. The matter was discussed with Mr Al Fayed at the end of January. Mr Al Fayed was advised by counsel that he had no personal tax liability arising from the payments. Mr Al Fayed however decided that he did not want the individuals or their employers to have difficulties or embarrassment, and that he would therefore accept responsibility himself for any liabilities of the individuals or of the companies which employed them. KPMG and Mr Whiteman were instructed to look into this matter with a view to discussing it with the Revenue and resolving any issues.

[201] On 26 January Mr Carmichael opened a file on Mr Al Fayed in SCO's computerised case management system (SCOLS). The file was a "review" file. Mr Carmichael opened the file so as to be able to record the time he was spending on the case, and to enable other SCO officers to know that he had an interest in Mr Al Fayed's tax affairs. He was not able to undertake any work on the review, pending receipt of the papers held by Mr Whitehead.

[202] On 27 January KPMG sent Mr Whitehead a cheque for 240,000, being the payment of tax due under the 1997 agreement for the tax year 1999/2000.

[203] Late in January 2000 Glasgow LBO received the Harrods group's accounts for the period to 31 January 1999. No action was taken on them at that time, pending a decision as to how the wider picture was to be taken into account. So far as Mr Williams and Mr Murrin were concerned, there had been no progress on the question of how any liaison with SCO was to proceed.

February 2000

[204] On a date at about this time, which appears likely to have been 7 February 2000, Mr Whitehead discussed the case of the Fayeds with Mr Hartlib. According to Mr Whitehead's evidence, he proposed that the agreement should be suspended; and that proposal was approved by Mr Hartlib. The purpose of suspending the agreement was "to bring the other side to the table". No legal advice was obtained. Mr Hartlib's evidence was broadly consistent with this account. He had been concerned that presenting the cheque for 240,000 might compromise the Revenue's ability to carry out a review based on the evidence given at the trial. He wanted to leave the Revenue's options open pending a consideration of the transcript, and concluded that that objective could be achieved by returning the cheque with a letter explaining that the agreement had been suspended in the light of the evidence given at the trial. It appears from the evidence that neither Mr Whitehead nor Mr Hartlib had any clear idea of what was meant by "suspending" the agreement.

[205] On 8 February Mr Whitehead drafted a letter to KPMG. No copy of that letter now exists, and it is impossible to be certain whether it was intended to intimate the rescission or the suspension of the 1997 agreement. Since the letter was drafted following a discussion with Mr Hartlib, and it is clear that Mr Hartlib wished the agreement to be suspended rather than rescinded (and, according to his evidence, had a discussion with Mr Whitehead on that subject in late January or early February 2000), I conclude that the letter is likely to have stated that the 1997 agreement was suspended. Mr Whitehead did not however send the letter at that time, as he wished to speak to KPMG before the letter was issued, as a matter of courtesy. Mr Whitehead also drafted a memorandum to Mr Hartlib, dated 8 February  2000, stating that he had now issued a letter (i.e. the letter drafted the same day) in accordance with their discussion the previous day. In the event, the memorandum was not sent.

[206] It appears, therefore, that whereas Mr Whitehead had originally had the idea of rescinding the 1997 agreement, a decision had been taken to "suspend" the agreement following a discussion between himself and Mr Hartlib. Mr Whitehead said in evidence that he had not been instructed by anyone to rescind or suspend the agreement in order to enable the Revenue to investigate Mr Al Fayed. What he was envisaging was a review of Mr Al Fayed's tax affairs involving combined case-working by SCO and LBO. I accept that evidence.

[207] In a subsequent e-mail dated 29 March 2000, which was copied to Mr Middleton and Mr Hartlib, Mr Whitehead wrote that the decision to suspend the agreement was made "with the full knowledge and encouragement of the Director and my DD." In evidence, MrWhitehead said that he had discussed the case with Mr Middleton on a couple of occasions. It appears that these were informal conversations. Mr Whitehead said that he had not been pressed by Mr Middleton to take action. He had the encouragement of Mr Hartlib, with whom he had discussed the decision to suspend the agreement; and he inferred from his discussions with Mr Middleton that he also had Mr Middleton's support, since Mr Middleton did not say otherwise.

[208] Mr Middleton gave evidence about this matter and other aspects of the case. He had also provided an affidavit in the first judicial review, a copy of which formed part of the evidence in the present proceedings. He was able to give authoritative evidence of a general nature about the internal organisation of the Revenue, and of SCO in particular, but his recollection of the Al Fayed case was imprecise (as he himself readily acknowledged). In relation to the question whether the decision to suspend the agreement had been made with his knowledge and encouragement, Mr Middleton accepted that Mr Whitehead had spoken to him informally about the case from time to time, and that Mr Whitehead might have mentioned to him that he was going to suspend the agreement. Mr Middleton regarded that as an operational matter, in which he had no particular interest. He did not regard himself as having encouraged Mr Whitehead.

[209] Although a decision had been taken by 8 February that the agreement should be "suspended", about a month passed before the "suspension letter" was issued on 7 March. That delay was caused partly by Mr Whitehead's absence from work between 18 and 29 February, partly by the pressure of work upon him, and partly by his wish to speak to KPMG before issuing the letter.

[210] On 8 February Mr Whitehead telephoned Mr McGuigan. He agreed to send some papers to SCO Edinburgh that day, and to give other papers to Mr McGuigan on 15 February, when Mr McGuigan was expected to be in London.

[211] On 9 February Mr Carmichael telephoned Mr Williams. Mr Carmichael's note of the conversation states:

"I telephoned Williams to say that information from London was expected shortly. We agreed that a meeting would be to our mutual benefit.

Williams briefly gave me an overview of the LBO approach to risk assessment.

In this case they deal with the main corporate files and also other divested interests such as media cases.

Their task is to look at the overall picture and identify potential areas of loss of tax. In this case the central issue is the vast amount of dividends which go offshore to the parent company only to be routed back to the director. We need to establish precisely how this happens and whether there is any tax risk. Clearly to do this properly we need to see the London agreement.

Williams' main task is to ensure that all risk areas are covered by the appropriate agency. He is not interested whether this is LBO, SCO or A N Other.

We agreed to meet on Friday 11 February at 10.00am - J McGuigan to attend."

During the conversation, Mr Williams told Mr Carmichael that he would assume the role of case director or ringmaster, and that he intended to involve other parts of the Revenue, such as the Large Employer Compliance Office (LECO: a Revenue agency, apparently forming part of the Large Business Office, which is responsible for audits of the compliance of the largest UK employers with their responsibilities for PAYE and National Insurance) and FICO (see para.120).

[212] On 10 February Mr Carmichael received the papers which Mr Whitehead had sent. They were the Lonrho papers produced and distributed during the 1980s by Mr Rowland. These documents had been in wide circulation within the Revenue.

[213] Summarising the position from August 1999 until this point, it appears that a number of Revenue agencies had independently become interested in Mr Al Fayed's affairs. Glasgow LBO's review of the Harrods group accounts for 1998 had identified the interaction between the companies and Mr Al Fayed as an area of risk which had not been fully considered in the past because of a lack of co-operation by SCO. LBO wanted to obtain such co-operation in order to address that area fully when it came to review the 1999 accounts. Mr Williams also wanted to assume responsibility, as case director, for ensuring that the tax affairs of the "whole of the economic entity", including Mr Al Fayed's personal tax affairs, were dealt with properly. SCO Edinburgh had also become interested in reviewing Mr Al Fayed's affairs, primarily because of newspaper reports of the Hamilton trial. Wick District had made enquiries concerning Mr Al Fayed, as part of its examination of land ownership in the Highlands. At SCO London, Mr Whitehead had become increasingly uneasy about the 1997 agreement, primarily because of his reading of newspaper reports of the Hamilton trial; but he appears to have had a muddled understanding of some of the relevant facts (e.g. as to the date and duration of the agreement itself and the position in relation to benefits: see paras.172-174 and 192); he had not considered the relevant documents in the Revenue's possession (see paras.184 and 194); and he had not taken legal advice (see para.204). In fairness to Mr Whitehead, he appears to have been under great pressure of work at the time. Mr Whitehead initially considered that KPMG should be told that the agreement was being rescinded, and that the case should then be transferred to SCO Edinburgh, which could liaise with Glasgow LBO and Wick District. Mr Whitehead envisaged that SCO Edinburgh and Glasgow LBO would then carry out a joint exercise under combined case-working, which (so far as the SCO involvement was concerned) would take the form of a review. In the meantime, Mr Williams received no meaningful assistance from Mr Whitehead. After discussion with Mr Hartlib, it was decided that the agreement should be "suspended" (whatever that might mean) rather than rescinded. The Revenue had not identified at that stage any proper basis for failing to adhere to the agreement.

[214] On 11 February 2000 the meeting between SCO Edinburgh and Glasgow LBO took place. It was attended by Mr Williams, Mr Murrin, Mr McGuigan and Mr Carmichael. It is necessary to consider the minute of this meeting, which was taken by Mr Carmichael, in some detail.

[215] So far as material, the minute begins:

"2. McGuigan gave a brief reprise of where SCO were coming from in this case. Al Fayed had made a deal to pay to the Inland Revenue 5m each year for 5 years. That agreement would now be withdrawn in view of disclosures made at the recent Court case. It was understood the final payment had actually been made.

3. The deal in its original form had been structured in such a way to help meet Al Fayed's cash flow problem."

What was said by Mr McGuigan was incorrect. Under the 1997 agreement, Mr Al Fayed had agreed to pay 240,000 each year, not 5m; the payments were to be made for six years, not five; the final payment was not due to be made for another three years; the agreement had nothing to do with any cash flow problem; and the intention was to "suspend" the agreement rather than to "withdraw" it. It is clear from what Mr McGuigan said that he knew very little about Mr Al Fayed's tax affairs (as he acknowledged in evidence). That is not surprising, since he had had no prior involvement with them of any materiality. He had not yet received, let alone read, the relevant papers, and he had not discussed the case in any detail with Mr Whitehead. In his evidence on affidavit, Mr McGuigan states that his contributions to the meeting had their source in various snippets of conversation with Mr Whitehead while Mr McGuigan was working in SCO London between 1995 and 1997, and in a few short conversations with Mr Whitehead between October 1999 and February 2000. It is however apparent that Mr McGuigan had no real knowledge of the Fayeds' tax affairs, as he acknowledged.

[216] In relation to the statement in paragraph 2 that the agreement was to be withdrawn, Mr McGuigan stated in evidence that his understanding had been that there was an intention not to renew the agreement upon its expiry (which he understood to be imminent), and in that sense to withdraw from an underlying "arrangement" which had been reflected in a series of consecutive forward tax agreements. That evidence does not sit altogether easily with some of the contemporary documents. Nevertheless, I accept Mr McGuigan's evidence on this matter. Mr Whitehead had erroneously told Mr Carmichael that the agreement was nearing its end (see para.191), and Mr Carmichael had reported that conversation to Mr McGuigan. Mr McGuigan's statements during the later part of the meeting (which, as explained below, envisaged that an investigation would be opened in early course), and his dismay when he subsequently discovered that the agreement still had several years to run, support his evidence that he mistakenly believed that the agreement was about to expire.

[217] The minute continues:

"4. Martin Whitehead, SCO London, had written to the agents intimating withdrawal of the agreement and also to flag up the potential to re-open enquiries."

This statement by Mr McGuigan was incorrect. Mr Whitehead had not written to KPMG. In his evidence, Mr McGuigan maintained that the source of the information contained in paragraph 4 was Mr Whitehead. I am not satisfied that that evidence is correct. It is unlikely that Mr Whitehead would have told Mr McGuigan that he had sent a letter when he had not done so, or that he would have told Mr McGuigan that he had written intimating "withdrawal" of the agreement, when by this time the intention appears to have been that the agreement should be suspended.

[218] The minute continues:

"5. The Board of Inland Revenue were very interested in this case particularly Matheson and Bush who have articulated concerns. McGuigan wants to achieve a focused approach. He will pick up more papers on the case from Whitehead on 15 February."

The statement by Mr McGuigan recorded in the first sentence was untrue. Mr Matheson had not had any involvement in Mr Al Fayed's tax affairs, beyond taking the general policy decision on forward contracts in March 1996 (see para.78). Mr Bush's only involvement had been to assist  Mr Lockyer by asking Mr Middleton if SCO could help Wick District to trace Mr Al Fayed's file (see para.163). Mr Middleton said in evidence that if the Board had been very interested in the case, or if Mr Matheson or Mr Bush had articulated concerns, he would have expected any such interest or concern to have been expressed to himself. He did not recall any particular concerns. Mr Whitehead said in evidence that no information to the effect that the Board were interested in the case, or that members of the Board had articulated concerns, had been conveyed to Mr McGuigan or Mr Carmichael by himself. He was not aware of any interest on the part of the Board. Nor had any instructions come through his hands that there was to be an all-out investigation exercise of Mr Al Fayed's affairs. He was not aware of any decision by the Board, or any official in SCO, to investigate Mr Al Fayed, prior to the end of March 2000. Mr McGuigan said in his evidence that no-one had told him that the Board were very interested in the case. No instructions had come to him from London as to what he was to do. He was not aware of any remit being set by senior management in relation to SCO Edinburgh's review of Mr Al Fayed's affairs, or of any constraints being imposed, or of any policy within the Revenue to set aside the 1997 agreement and thereby create a tax risk so as to justify an investigation of Mr Al Fayed. I accept the evidence of Mr Middleton, Mr Whitehead and Mr McGuigan about these matters. In relation to the statements which he made at the meeting, that the Board were "very interested in this case" and that Mr Matheson and Mr Bush had "articulated concerns", Mr McGuigan states in his affidavit:

"The reference to Mr Bush stems directly from his e-mail to Mr Middleton of 18 October 1999 when he was attempting to assist Wick District trace the personal tax file for Mr Al Fayed. That is the Bush interest to which I was referring. In Mr Matheson's case, he was at the time the Board member charged with responsibility for SCO. In my view the concerns expressed by Mr Bush in his e-mail would have been relayed to Mr Matheson in view of his responsibility for SCO, and, while I continue to believe that that would have been the case, I have, in fact, no direct evidence to that effect".

Mr McGuigan elaborated upon this explanation in his oral evidence. He continued to maintain that the Board were not merely interested in the case, but "very" interested. No one had told him that, but he had drawn that inference from Mr Bush's memorandum to Mr Middleton. The fact that Mr Bush had written to Mr Middleton to ask for SCO's assistance in tracking down a tax file for Mr Al Fayed was in itself a declaration of interest in the case, from which Mr McGuigan inferred that Mr Bush must be very interested in ensuring that Mr Al Fayed was fully complying with his obligations. It is apparent from the evidence of Mr Middleton and Mr Whitehead that no such inference had been drawn by them. On the evidence, the inference would not appear to me to have been a reasonable conclusion to draw; nor, in any event, would it have warranted the statement recorded in the first sentence of paragraph 5 of the minute. Mr Bush's e-mail did not articulate any concerns. The relaying of Mr Bush's concerns to Mr Matheson would not in any event mean that Mr Matheson had "articulated concerns". In his oral evidence, Mr McGuigan said:

"I may have embellished what I knew about the position at an internal meeting... to make sure that the LBO were aware that this was a case in which some members of the Board may take an interest."

He accepted that he had no knowledge of whether Mr Matheson was even aware of Mr Al Fayed's case in February 2000.

[219] The minute continues:

"6. Carmichael said that the papers already received were the old LONHRO papers, a copy of which he was sure was in Glasgow already. Williams and Mirren [Murrin] confirmed they had seen these papers.

7. Williams expressed doubt that merely ingathering third party information or newspaper articles is going to be helpful in this case. He believed the starting point must be the trial transcript and the agreement struck with the Inland Revenue.

8. The possibility of obtaining a trial transcript was discussed. The expense of obtaining such a document was flagged up as being of possible concern.

9. McGuigan said we must be under no disillusion that this case is a 'hot potato' both politically and otherwise."

[220] In relation to paragraph 6, the handwritten note which Mr Carmichael made during the meeting records the attitude of those present towards the Lonrho papers, which were described as "old hat". In relation to paragraph 9, Mr McGuigan states in his affidavit:

"I am recorded as using the words 'both politically and otherwise'. Read on its own this could be taken to mean that politicians had been or were involved in the case or that there had been political intervention at some point. This is not the case. To my knowledge there has been no intervention or involvement of anyone outwith the Department of Inland Revenue".

 There is no evidence in the present proceedings (besides the minute of this meeting) to suggest any political involvement in the tax affairs of Mr Al Fayed (or any of the other petitioners). Mr McGuigan's evidence that there had been no political intervention is supported by the evidence of other witnesses (e.g. Mr Carmichael), and I accept it.

[221] The minute continues:

"10. Williams and Mirren [Murrin] put forward the LBO point of view. The Inland Revenue deal was done sometime ago and things had moved on since then. For instance in the early 1990s Fayed had concern over his personal safety, there had been an IRA bombing at Harrods. This had been used to justify a large retinue of personal retainers, attendants and bodyguards. The situation no longer obtained and so was less relevant. The current problems of the Fayed security were discussed vis-à-vis the death of his son Dodi.

11. Williams said we needed to determine the risks. LBO would undertake a risk assessment as they would for any other case. The main area of concern was the close control exercised by Fayed over the Harrods Group. It was felt this gave scope for things going wrong.

12. The Harrods Group appear to be relatively complaint,. He had a long-term in-house tax manager who was pretty well on top of things. The normal enquiries were raised and some adjustments gained each year. The risks which had been identified were small and minor.

13. There was however another corporate side. This was the company sometimes in and sometimes out of the Group such as Liberty Radio, Punch Magazine, Fulham FC. The precise status of these companies with regard to the Group at any given time was not always known.

14. An example was quoted of Fayed purchasing 30% of Alpha Airport Foods. Not enough to gain control but sufficient to be a material interest."

[222] In relation to paragraphs 11 and 12, it is apparent that there was a good working relationship between Glasgow LBO and the Harrods group tax department, headed by Mr Hadden. The computations submitted with the accounts were comprehensive. Enquiries had been responded to with seemingly open and complete replies, and correspondence and negotiations over points of difference or difficulty had been resolved without the need for any appeal process. Mr Williams's acknowledgement of that good relationship did not however imply that he was departing from his contention that there were potential risks, going beyond mainstream corporation tax matters, and concerning the interaction between the companies and those controlling them, which might need to be addressed. Those risks concerned, in particular, the possible flow of the dividends generated by the Harrods group to personal use, and the related issues of benefits and deductible expenses, so far as the latter issues had previously been treated by Glasgow LBO as out of bounds by reason of the 1997 agreement.

[223] In relation to paragraphs 13 and 14, the acquisition of Alpha by Cylena SA was discussed above (at para.146). Liberty Radio Ltd was at the time a wholly-owned subsidiary of Liberty Publishing & Media Ltd, discussed above (at para.139). Punch Ltd was another such subsidiary. Mr Al Fayed had an interest in several companies concerned with Fulham Football Club, as explained below.

[224] The minute continues:

"15. It was agreed that the Home Office papers for Fayed needed to be reviewed."

In their evidence, Mr McGuigan and Mr Carmichael said that they did not see the Home Office papers until 11 August 2000. It appears therefore that the content of the Home Office papers played no part in the decisions complained of in the present proceedings. Mr McGuigan knew however from Press reports that Mr Al Fayed had applied for British nationality. Such an application was liable to contain information of relevance to a tax investigation: for example, information about family members, bank accounts, wealth and business interests.

[225] The minute continues:

"16. From first principles we had to establish Fayed's residence and domicile if this had not already been done. There was some talk that Fayed may well have publicly express UK domicile by choice.

17. Any enquiry would then have to establish precisely the flow of money. Dividends from Harrods went off shore to a Trust before coming back on shore again. What was the precise route and what were the tax implications arising.

18. The Revenue's discovery position needed to be ratified."

[226] In relation to paragraph 18, the concept of "discovery" should be explained. This matter is discussed in greater detail below (at paras.543, 545 and 555-556). Put briefly, section 29 of the 1970 Act empowers the Revenue to make an assessment in respect of previous years where a loss of tax is discovered, subject to certain conditions being satisfied. Paragraph 18 of the minute is thus concerned with the extent to which it was open to the Revenue to make a "discovery" assessment and, therefore, open to the Revenue to enquire into earlier years. Mr McGuigan considered that the scope for any SCO investigation of earlier years was likely to be restricted as a consequence of the forward tax agreement.

[227] The minute continues:

"19. Consideration should also be given to other members of the Fayed family, namely brothers Ali and Sabah [sic]. There may be other family members also worthy of inspection."

In his evidence, Mr McGuigan explained that he was suggesting in this part of the discussion that the affairs of Mr Al Fayed's brothers should be reviewed with a view to deciding whether they should be the subject of an investigation. Asked specifically about Salah Fayed, Mr McGuigan said that he had no information about Salah Fayed at the time. He did not know of any business connections between Salah Fayed and Mr Al Fayed.

[228] The minute continues:

"20. The current Group structure needed be established. It was agreed that a year would be picked i.e. (the current year) and all agencies would run with that year to piece together the whole picture. Where are the cash payments from and to, where is big spending. How does the cost of the Scottish and English estates fit in this picture. Both corporate and personal sides need to be looked at. Williams said as a cautionary note there is a limit to what can be coped with."

It appears from paragraph 20 that a joint exercise by LBO and SCO was envisaged. A single tax year was to be selected, and "all agencies would run with that year to piece together the whole picture", looking at "both corporate and personal sides".

[229] The minute continues:

"21. McGuigan said in the question of resources that he would arrange for whatever resources are necessary for the case. If necessary he would drop other work to further this case. He considered Inland Revenue exposure both politically and financially to be so important that the resources will be given if necessary. McGuigan will also authorise the use of Section 20 powers and third party work will be done as necessary."

[230] A number of points arise in relation to paragraph 21. First, Mr McGuigan's statement that he would arrange for whatever resources were necessary, dropping other work if necessary, was made at a time when neither he nor Mr Carmichael had begun to look at the case. In his evidence, Mr McGuigan said that what he meant was that he would provide whatever recourses were needed from within his group. As mentioned above (at para.88), SCO does not appear to have had resources to spare; and Mr Carmichael in particular had a full workload (probably an excessive workload, according to Mr McGuigan) at that time. The "other work" dealt with by Avoidance Group would itself consist of cases of suspected tax avoidance on a substantial scale. In his affidavit, Mr McGuigan states, in relation to this remark:

"I was confirming to my LBO colleagues that SCO Edinburgh would match the resources which SCO London appeared to have devoted to the case to see it satisfactorily resolved."

I do not find this gloss convincing: what Mr McGuigan said made no reference to SCO London or to resources previously allocated to the case. Mr McGuigan also states in his affidavit, in relation to this remark:

"The question of resources is something a Group Leader has to consider when approving every registration [sc. of an investigation: the registration of a review does not require approval]. He not only has to consider the resources available from the individual investigator but also the wider impact on the whole Group."

This explanation appears to suggest that, at the meeting, Mr McGuigan was already envisaging that there would be an investigation (as distinct from a review), and was undertaking to commit to it whatever resources were necessary, without knowing what tax might be at risk, what resources might be required or what the wider impact on the group might be.

[231] A second point arising from paragraph 21 concerns Mr McGuigan's reference to "Inland Revenue exposure both politically and financially [being] so important that the resources will be given if necessary". This remark reiterates the concern about a "political" dimension to the case which had been recorded in paragraph 9 (see para.219). In his evidence on affidavit, Mr McGuigan states that he does not recall using that phrase or making comments generally of that nature, but adds:

"It is possible that I may have made reference to political matters at this point during the meeting ... Mr Al Fayed had been known to operate at a political level and we might need to be in a position to explain what we were doing and why we were doing it."

The most important questions arising from the remark recorded at paragraph 21, as also from the similar remark in paragraph 9 about the case being politically a "hot potato", are whether there was any political intervention in the case, and whether decisions in the case were influenced by political considerations. I have already considered the former question (at para.220). In relation to the latter question, Mr McGuigan states in his evidence on affidavit:

"For the avoidance of doubt, I have not acted for political reasons."

Mr Williams's evidence is to the same effect:

"I was certainly not influenced in any way by any expression of Board interest. Nor was I or have I ever been influenced by any perceived political importance."

I accept that evidence. Whatever criticisms may be made of the Revenue in relation to the petitioners' affairs, I am satisfied that there is no reason to question the good faith of the officials involved.

[232] The final point arising from paragraph 21 of the minute concerns the last sentence:

"McGuigan will also authorise the use of Section 20 powers and third party work will be done as necessary."

The expression "third party work" means enquiries made of persons other than the taxpayer who is the subject of the enquiry. Section 20 of the 1970 Act is discussed in detail below. In short, it confers a power upon the Revenue to require taxpayers and others to produce documents and information. Such a power would only be exercised by SCO in the course of an investigation (as distinct from a review). Mr McGuigan's remark would therefore appear to have carried the implication that there would be an investigation (and not merely a review) of Mr Al Fayed's affairs. That also appeared to be the implication of Mr McGuigan's evidence:

"As far as the use of section 20 powers are concerned, I was simply advising the LBO that, if necessary - if necessary - we would use section 20... sometimes it is sufficient just to ask. Well, we would have asked KPMG for the information that we needed and they may well have provided it. But if they did not provide it, then we would have used section 20. Section 20 is a power which - an information - gathering power which is used extensively within SCO but in very few other places within the Department and certainly not within the LBO."

As explained below, it may not in practice be necessary to use section 20 powers in the course of an investigation, since documents and information may be produced without such powers having to be invoked. There would however be no question of section 20 being invoked by SCO other than in the course of an investigation.

[233] The minute continues:

"22. It was agreed that the LBO will look at the corporate side. SCO will bring together personal interests both on and off shore. A must was the early reading of papers from Special Compliance Office, London.

23. An investigation plan will then be prepared attacking weak spots, identifying risks, prioritising, programming and consideration of resources."

Paragraph 22 describes the allocation of responsibilities for the joint exercise which had been described in paragraph 20. In relation to paragraph 23, in SCO practice an investigation plan (otherwise known as an enquiry plan) sets out what it is hoped will be achieved in an investigation, and how it is proposed to reach the end result. It often forms part of the registration report, or it may be prepared after the registration report has been approved. In either event, it would not appear to make sense for an investigation plan to be prepared unless the case was considered, at least by the investigator preparing the plan, to be appropriate for investigation. The intention to have "an" investigation plan prepared, following work by LBO on the corporate side and work by SCO on the personal interests, is a further indication of the joint nature of the exercise envisaged.

[234] The minute continues:

"24. Harrods 1998 accounts are open with correspondence extant. The 1999 accounts are in but have not been examined. There is therefore some time available to us.

25. McGuigan said that if the deal was off then the tax agents (KPMG) they may want early movement. The preferred option of a long lead in may not be open to us. If there is an approach then we must indicate that this is an all-out investigation exercise indeed a comprehensive review of Fayed's affairs."

[235] In relation to paragraph 25, Mr McGuigan states in his affidavit:

"My understanding was that Mr Al Fayed had a 5 year Forward Tax Agreement which was about to come to an end. I expected that Mr Al Fayed's agents would seek to replace an old agreement with a new one increasing the amount to be paid to reflect inflation over the period. My comments were meant to indicate that an inflationary exercise would not be sanctioned and that any new deal, if a deal were to be entered into at all, would have to be founded on a full and complete understanding of Mr Al Fayed and his family's business activities."

[236] That does not appear to me adequately to explain what Mr McGuigan said at the meeting. The term "investigation", in SCO parlance, signifies a particular form of enquiry carried out by SCO (as explained above at paras.89-90), involving enquiry of the taxpayer and requiring the authorisation of a group leader (although an investigation may be registered on SCO's computer system without there being any intention at that point to make enquiries, where that is necessary in order to comply with the Revenue's internal accountability procedures: see e.g. para.120). It is generally used in contradistinction to the term "review", which signifies the preliminary enquiry carried out by an SCO investigator (without contact with the taxpayer) prior to deciding whether to seek authority to conduct an investigation (although the word "review" is sometimes used more loosely, as a synonym of "investigation", as for example in the letters of 2 June 2000 (see para.3), and in the last sentence of paragraph 25, where "an all-out investigation exercise" is also described as "a comprehensive review"). The second sentence refers to "the preferred option of a long lead-in". If one asks, "a lead-in to what?", the answer, according to Mr McGuigan's evidence, is "a lead-in to an investigation". What Mr McGuigan appears to have meant was that his preference was for there to be a relatively long period of time before an investigation was opened, but that if there was "an approach" by KPMG, then that course of action would no longer be open. In that event, the Revenue would have to "indicate that this [was] an all-out investigation exercise, indeed a comprehensive review".

[237] Paragraph 25 thus suggests that Mr McGuigan envisaged that an investigation was going to be opened: the only uncertainty mentioned was as to the timing, which would have to be brought forward if there was an "approach" by KPMG. In relation to that matter, Mr McGuigan explained in his evidence that it would be contrary to good practice in SCO for an investigator to be in contact with a taxpayer or his advisers (in SCO parlance, "first party contact") when SCO knew that the taxpayer was to be the subject of an investigation, or was considering him for investigation, without an investigation being registered and notified to the taxpayer.

[238] The minute continues:

"26. Whether or not we could expect a disclosure was discussed in view of the trial. Williams believes that withdrawal of the agreement may lead to an early disclosure. McGuigan said if this happens this will restrict what we can and cannot do in terms of investigation."

The discussion recorded in this paragraph was prompted by Mr Whitehead's e-mail of 11 January 2000 (see para.196), the reference to "Williams" in the minute being an error. It was anticipated that Mr Al Fayed's advisers might conclude that a voluntary disclosure to the Revenue of under-payment of tax (in respect of payments to employees) was appropriate. If such a disclosure were to be made, then the usual procedure would be for the advisers to prepare a disclosure report for submission to the Revenue, along lines which would have been previously agreed with the Revenue. If the Revenue was satisfied that the disclosure report dealt with the matter fully, then there would be no need for it to carry out any investigation of that matter itself. An investigation would be formally registered on SCO's computer system as soon as the disclosure was made (if the tax at risk was such that the matter was more appropriately dealt with by SCO than by a local tax office), in order to enable first party contact to take place and any back duty settlement to be negotiated in compliance with the Revenue's internal system of audit and management, but no enquiries would be made by SCO if the disclosure report appeared to be satisfactory.

[239] The minute continues:

"27. The handling of any potential informers was discussed. McGuigan believes that the London papers may have further information with regard to this.

28. The central management and control of off shore entities was discussed.

29. It was an odd feature of the corporate structure that loss making companies would be moved out of the Group. It was thought this might be a reflection of the true beneficial ownership - other partners in Harrods not funding losses of Fayed's other ventures.

30. There was some discussion as to the probability of Fayed leaving the country. It was agreed that speed was of the essence in this respect.

31. Fayed was apparently born on the 29  January 1929 therefore he is 71 years old this year. It was agreed his age was a factor in the need for an early and fast investigation. There was some dispute as to whether or not there was a surviving heir to the Harrods shares. Indeed the close family relationship was not known.

32. There was some discussion as to Harrods Bank. This is a small bank mainly dealing in 4X and current accounts. It is administered by a Law Society representative and has a strange control structure. A time scale was set. The papers from Martin Whitehead are to be ingathered by McGuigan on Tuesday 15 February. There will then be a meeting in Special Compliance Office in the week commencing 21 February 2000. All research is to be carried out in the following month allowing a month for preparing an investigation plan. It was anticipated the investigation can be formally opened about 21/2 months time."

[240] In relation to paragraph 31, the reference to "the need for an early and fast investigation" is a further indication that, before SCO Edinburgh had seen the papers, it was envisaged that an investigation would take place. In relation to the last sentence of paragraph 32, Mr Whitehead said that an investigation would normally be "opened" by the registration of the case on the computer system as an investigation and the issue to the taxpayer of the code of practice under which the investigation was going to be conducted. The statement that "it was anticipated the investigation can be formally opened [in] about 21/2 months' time" would appear to imply that there was to be an investigation. The formal step of opening the investigation was not to be taken until an investigation plan had been prepared (unless there was an approach by KPMG, in which event the opening of the investigation would have to be brought forward); but it appears to have been envisaged that an "all-out" investigation was to be carried out.

[241] A number of remarks which Mr McGuigan is noted as having made at this meeting thus suggest, to varying degrees, an assumption that a comprehensive investigation was appropriate and an intention to undertake such an investigation at some point in the future: that he would arrange for whatever resources were necessary; that he would authorise the use of section 20 powers; that an investigation plan would be prepared; that, in the event of an approach by KPMG, SCO must indicate that this was an all-out investigation exercise; that there was a need for an early and fast investigation; and that it was anticipated that the investigation could be formally opened in about 21/2 months' time. It is particularly striking that a timescale had been set for the opening of the investigation before SCO Edinburgh had looked at the files relating to Mr Al Fayed's tax affairs. When asked about this, Mr Middleton agreed that SCO Edinburgh was in no position to determine, prior to looking at the files, that any investigation of Mr Al Fayed's tax affairs would be required.

[242] In his evidence, Mr McGuigan denied that he had determined at this stage that there was to be an investigation. It is clear that, as at 11 February, Mr McGuigan had not gone through the procedure which he would require to follow, under Revenue practice, in order for an investigation to be authorised. That procedure would require an investigator such as Mr Carmichael to submit a registration report to his group leader, Mr McGuigan; and he would ordinarily do that only if he concluded, after carrying out a review of the case, that an investigation was appropriate (see paras.89-90) The report would explain what had been found during the review and identify the areas of interest proposed for investigation. The procedure would then require the group leader to approve the report; and he would do that only if he concluded, after considering the registration report, that the proposed investigation was appropriate. The procedure would then require the case to be converted on SCO's computer system from a review into an investigation, with the areas of interest identified in the registration report being registered. As at 11 February, Mr McGuigan had not received a registration report. It was therefore impossible, on that date, for him to have taken the steps necessary to authorise an investigation.

[243] I have listed above (at para.241) the remarks made by Mr McGuigan which suggest an assumption that an investigation was appropriate. When those remarks are considered as a whole, and it is borne in mind that Mr McGuigan was explaining to an official of another Revenue agency (and, apparently, one of more senior rank, Mr Williams being a Principal Inspector, whereas Mr McGuigan was an Inspector), in the context of a joint exercise, how SCO intended to deal with the case, they appear to me to justify the conclusion that Mr McGuigan had already formed the view that a comprehensive investigation of Mr Al Fayed's tax affairs was appropriate, and had formed an intention to undertake such an investigation at a later stage (a conclusion which is strengthened by another document, mentioned below: see para.250). Mr McGuigan had not committed himself irrevocably on 11 February to opening an investigation. I accept that any intention formed at that stage was provisional (in Mr McGuigan's words, he was not "committed come hell or high water to an investigation"). He had however made his attitude clear to the LBO officials, and "a time scale was set" for the opening of the investigation.

[244] For Mr McGuigan to have formed the view by the date of that meeting that a comprehensive investigation was appropriate appears to me to have been premature. Given his lack of knowledge of Mr Al Fayed's tax affairs, he was, as Mr Middleton and Mr Whitehead appeared to accept, in no position to determine at that time that an investigation would be required, or the scope of any investigation.

[245] Mr McGuigan's statements at the meeting raise a number of questions. Despite knowing very little about the case, he gave Mr Williams an account of SCO's dealings with the case to date: that account was inaccurate. He told Mr Williams that the Board were very interested in the case and that particular members of the Board had articulated concerns: that account was incorrect. Mr McGuigan himself acknowledged that he had embellished what he knew or had inferred. He told Mr Williams more than once that the case was politically sensitive: the appropriateness of those remarks appears to be questionable, given that there had been no political involvement in the case. Whereas Mr Williams had expressed caution as to the amount of work which could be undertaken, Mr McGuigan had said that he would arrange for whatever resources were necessary, dropping other work if necessary, in view of the political importance of the case. Even leaving to one side the remarks which suggest a premature assumption that there should be a comprehensive investigation, one might wonder why an experienced inspector such as Mr McGuigan would have made the statements which he made at this meeting. An explanation was suggested by senior counsel for the Revenue in his submissions: that (in counsel's words) Mr Williams was taking a slightly imperialist view of his role in relation to SCO, and Mr McGuigan was responding by telling him to get his tanks off SCO's lawn. What I understood counsel to mean was that Mr McGuigan's language was designed to impress upon Mr Williams that for LBO to direct an investigation of Mr Al Fayed's affairs would involve risks and that SCO in any event required no direction from LBO in order to undertake a thorough investigation, and thus to deflect Mr Williams from his intention to adopt a "ringmaster" role in relation to SCO Edinburgh. Mr McGuigan did not himself produce such an explanation of what he said, but it is consistent with the history of relations between SCO and LBO in relation to Mr Al Fayed's affairs (see e.g. paras.69-74, 80, 123, 149, 153, 158-159, 177, 199, 316, 343, 345, 372 and 410), and with other indications that Mr McGuigan wished SCO Edinburgh to be given the credit for progress in the Al Fayed case (see paras.168-171 and 188). It might also be regarded as consistent with Mr McGuigan's repeated insistence in his evidence that what he had said was said at an internal meeting. Nevertheless, insofar as Mr McGuigan's statements at the meeting suggest an assumption that an investigation was appropriate, I have taken those statements at face value, in the absence of any suggestion by Mr McGuigan that they were merely designed to influence LBO.

[246] Although the word "investigation" is used in the minute, it has to be borne in mind, in relation to the work to be carried out by LBO, that the minute was prepared by SCO and was not issued to LBO. From their affidavits, it appears that what was envisaged by Mr Williams and Mr Murrin at this time was that LBO would undertake a risk assessment of UK corporate issues. That is consistent with what Mr Williams said at the meeting:

"LBO would undertake a risk assessment as they would for any other case."

[247] As explained above (at para.228) it appears to have been envisaged that the SCO investigation would form part of a joint exercise being conducted by SCO and LBO. The subject-matter of the joint exercise, as then envisaged, appears to have been wide-ranging: the personal tax affairs of Mr Al Fayed; his brothers Ali and Salah; possibly other members of his family; the Harrods group; the Liberty group; Fulham FC; the Scottish and English estates; and the tax residence of offshore companies (see paras.221, 227, 228, 234 and 239).

[248] The meeting which had been arranged between Mr Whitehead and Mr McGuigan for 15 February (see para.210), at which the London papers were to be handed over, did not take place.

[249] Mr Carmichael had requested Wick District's papers concerning Mr Al Fayed and any associated papers, and on 17 February he received from Mr Lockyer a bundle of material which had been downloaded from the internet, apparently from the alfayed.com website.

March 2000

[250] On 6 March 2000 Mr McGuigan e-mailed Mr Whitehead, informing him that Mr Carmichael was to be in London on 8 March, and asking:

"Would you be happy to let him have a look at the papers for the Shop so he can make a start on a registration report (he needs the stock!!)."

A registration report is, as explained above, a document prepared by an investigator seeking approval from his group leader for the registration of an investigation. A registration report would ordinarily be prepared by an investigator only if, having carried out a review of the taxpayer's affairs, he concluded that it was appropriate to seek approval for the opening of an investigation. Mr McGuigan initially accepted in his evidence that he sent the e-mail to Mr Whitehead because, as at 6 March, he wanted Mr Carmichael to make a start on a registration report. Mr McGuigan also accepted that, at that stage, his knowledge of the Fayeds' tax affairs was much the same as it had been at the meeting on 11 February 2000: in other words, he knew very little about them. The papers had not yet been received, and no review had been carried out. Later in his evidence Mr McGuigan denied that he had wanted Mr Carmichael at this stage to make a start on a registration report: he maintained that he had merely wanted to secure the files from SCO London so that the process of review could commence. What he had said in the e-mail was, he said, a way of putting pressure on Mr Whitehead, as a means of securing the release of the London papers. What Mr McGuigan said in the e-mail, with its implicit assumption that an investigation was appropriate, is however consistent with the remarks which Mr McGuigan had made at the meeting on 11 February.

[251] In mentioning "stock", Mr McGuigan was referring to targets which investigators are expected to meet, measured in terms of the number of cases being worked. According to Mr Whitehead's evidence, the stock was measured at the end of the financial year, i.e. 31 March: he explained that it was because targets (including the financial return on investigations) were measured at the end of the tax year that he was under such pressure of work in the early months of 1997 and 2000. Mr McGuigan, on the other hand, denied that the stock as at 31 March was of significance. In the event, as explained below, an investigation in the case of Mr Al Fayed was registered in the SCOLS system on 31 March, Mr Carmichael's report having been submitted, and approved by Mr McGuigan, the previous day. Mr McGuigan maintained that this was coincidence. I accept Mr McGuigan's evidence on this point. As the exclamation marks indicate, the remark about "stock" was intended to be jocular. The registration of an investigation on 31 March appears to me to have been prompted by events earlier in March, including a meeting between Mr McGuigan and Mr Pegler on 27 March, as explained below. I do not believe that it was motivated by a desire to meet performance targets.

[252] On the same date (6 March) Mr Murray attended a conference with counsel to discuss further the disclosure to the Revenue of Mr Al Fayed's cash payments to staff.

[253] On the same date Mr Sargent of KPMG telephoned Mr Whitehead to find out why the cheque for 240,000 had not been presented. Mr Whitehead said that the Revenue had been following Press reports of the Hamilton trial and considering its impact on the agreement. The matter had been passed to Mr McGuigan and Mr Carmichael in SCO Edinburgh. In the meantime the Revenue regarded the agreement as suspended. Mr Whitehead said that he would be writing to KPMG accordingly.

[254] On 7 March 2000 Mr Whitehead sent a letter ("the suspension letter") to Mr Sargent at KPMG, in the following terms:

"As discussed in our telephone conversation today [sic] I have been concerned that the agreement dated 28 April 1997 requires review, inter alia, in the light of your client's recent civil action which was well reported in the press and highlighted his ready access to extremely large sums of cash. For that reason the agreement is suspended.

As I explained the case is appropriate to my colleagues in SCO Edinburgh as they have responsibility for the Glasgow Large Business Office which deals with the majority of the UK companies that your client has an interest in.

My colleague at Edinburgh Alan Carmichael will be in touch with you in the near future. I have advised him that Tom Murray is also a contact at your office.

In the meantime I return the cheque for 240,000 which accompanied your letter."

[255] On the same date Mr Whitehead sent a memorandum to Mr Hartlib, with a copy to Mr Middleton, in the following terms:

"As discussed I attach a copy of my letter sent yesterday [sic] to KPMG.

Alan Carmichael from SCO Edinburgh is calling tomorrow to pick up further papers and he intends getting in touch with Al-Fayed's agents in the near future.

Alan is aware of the 5 main areas of concern beneficial occupation of the Surrey and Highland Estates, ready access to large sums of cash, ready access to Harrods Bankers Drafts, legal fees and the use of flats at Hyde Park Residence.

I am copying this to the Director as he asked sometime ago that I update him on what was happening in this case."

[256] In the memorandum, Mr Whitehead identified five areas of concern. Two of these concerned possible benefits arising from the use of residential accommodation. As already mentioned (at para.194), Mr Whitehead accepted in his evidence that he had not addressed that issue fully. A second issue concerned legal fees. Mr Whitehead accepted in his evidence that, if he had wanted to make any enquiry into legal expenses, it would have been a simple matter to go to KPMG and raise a query with them. Mr Whitehead's evidence that he could have sought information from the taxpayer's advisers, and that to do so would be in accordance with the Revenue's general practice, was supported by the evidence of Mr Murray. It contrasted however to some extent with Mr McGuigan's evidence, the tenor of which was that contact between SCO and a taxpayer's advisers ("first party contact") would be exceptional, prior to the registration of an investigation, where the taxpayer's affairs were being considered with a view to a possible investigation. Insofar as there may have been a difference between their evidence, the explanation may lie (as counsel for the Revenue suggested) in the fact that Mr Whitehead was not dealing with the affairs of the Fayeds in the usual SCO context of a review or investigation involving the possibility of a tax settlement; or it may (as Mr Murray's evidence tended to suggest) reflect differences in practice within SCO. A third issue concerned "ready access to Harrods bankers' drafts". As explained above (at para.193) Mr Whitehead had made no enquiry into that matter, and in consequence was unaware that the draft had been repaid by Mr Al Fayed by a cheque drawn the following day on his personal account at the Midland Bank. The final issue was ready access to large sums of cash. As explained above (at para.184), the significance of access to large sums of cash was unclear at that stage, particularly since the 1997 agreement had been concluded without the Revenue's making any enquiry into the amount or character of remittances from overseas.

[257] It appears, therefore, that the sending of the suspension letter reflected a concern at a senior level in SCO London that not enough was known about Mr Al Fayed's affairs, so far as bearing on his UK tax liabilities. The Revenue could at that stage have enquired into areas of Mr Al Fayed's affairs which were not foreclosed by the 1997 agreement (such as income arising in the UK, or the reimbursement of benefits) by serving a notice of enquiry into his tax return, under section 9A of the 1970 Act (discussed below); but that was not the course of action which was decided upon. Instead, a decision was taken that the agreement should be "suspended". It is a matter of admission, in the Revenue's pleadings, that it had "no factual basis for suspending the agreement". Nor had the Revenue identified at that stage any legal basis for declining to adhere to the agreement. Legal advice had not been sought.

[258] On 7 March Mr Whitehead sent Mr Carmichael and Mr McGuigan a copy of the suspension letter and of his memorandum to Mr Hartlib. Mr Carmichael and Mr McGuigan had not previously known that the agreement was to be "suspended".

[259] On 8 March Mr Carmichael met Mr Whitehead in London. Mr Carmichael was given a copy of the 1997 agreement and a file containing papers, most of which appear to have concerned the 1990 agreement. He immediately telephoned Mr McGuigan and expressed concern that the suspension letter was incompatible with the terms of the 1997 agreement, and in particular with Clause 8 (which provided that the agreement was irrevocable except in the event of a default in payment: see para.101). Mr McGuigan and Mr Carmichael agreed to discuss the matter further on Mr Carmichael's return to Edinburgh.

[260] On 9 March Mr Murray of KPMG wrote to Mr Whitehead acknowledging receipt of the suspension letter and stating that an urgent meeting would be sought with Mr Carmichael. Mr Murray telephoned Mr Carmichael on 13 March and arranged to meet Mr Carmichael and Mr McGuigan on 20 March.

[261] Mr Murray was the partner in KPMG responsible for all investigation cases. He was himself a former Inspector of Taxes, and had spent his last eight years with the Revenue as an investigator in London Enquiry Branch. He had headed KPMG's tax investigation practice since 1989. He provided an affidavit in the present proceedings and also gave oral evidence. It was apparent from his evidence that he was aware of the system of authorisation of investigations on the basis of a registration report, but, as he acknowledged, he did not have a detailed knowledge of SCO's current internal procedures. Despite the criticisms of his evidence which were made by counsel for the Revenue, I formed the impression that his evidence (especially his oral evidence) was given in a careful and objective manner and was generally consistent with the contemporaneous documents. I accept his account of events as generally credible and reliable. I do not however accept all of his expressions of opinion, for the reasons explained below.

[262] On 13 March Mr Carmichael returned to Edinburgh and discussed matters with Mr McGuigan. Mr McGuigan noted that the agreement which Mr Whitehead had purported to "suspend" still had some years to run. He had previously assumed that, by the time the case was transferred to SCO Edinburgh, the agreement would have come to an end. He did not understand what the suspension letter meant. He noted that the agreement differed from other forward tax agreements he had seen, in that it did not contain a provision permitting a review in the event of a change in circumstances. In addition to the concern arising from clause 8 (a matter which had also been raised by Mr Murray during his telephone conversation with Mr Carmichael that day), Mr McGuigan was also concerned about clause 12 of the agreement (see para.104), which appeared to him to commit the Revenue to entering into successive forward tax agreements with the Fayeds ad infinitum. He "just wondered what [he] had taken on." Mr McGuigan and Mr Carmichael were unclear as to their legal rights, and as to whether the suspension letter had any standing. They agreed that legal advice should be sought from the Inland Revenue Solicitor's Office.

[263] On 13 and 14 March Mr Carmichael telephoned Ms Diane McKenzie-Boyle of the Solicitor's Office. She identified a number of issues, and said that she would seek advice from counsel. She advised that it was imperative in the meantime that a transcript of the trial proceedings be obtained. She also advised that, pending counsel's advice, SCO should intimate that it was considering matters further, and would require an opportunity to consider the transcript, which might raise issues requiring consideration. Mr Carmichael's note of the conversation concludes:

"She then talked about mistake. She said if the agreement was founded in a report which had a basic mistake then it would be unlikely the Revenue could be bound to it. This should be the line we take."

Later on 14 March Mr Carmichael received the remainder of Mr Whitehead's papers.

[264] In preparation for the meeting with Mr Murray, Mr Carmichael undertook what he described as a superficial examination of the papers which he had received. On 16 March he prepared notes summarising what he had found.

[265] The first note concerned the material downloaded from the internet, which Mr Carmichael had received from Mr Lockyer (see para.249). Much of this material was concerned with the deaths of Diana, Princess of Wales and Emad Al Fayed, and was of no apparent relevance to taxation. Other material concerned the refusal in 1999 of Mr Al Fayed's application for British nationality, and was again of no apparent relevance. In relation to pages concerned with Balnagown Castle, Mr Carmichael noted that Mr Al Fayed was said to have bought the castle in 1974 and that extensive restoration work was said to have been carried out. In relation to pages concerned with the Windsor Villa (the former home of the Duke and Duchess of Windsor, in the Bois de Boulogne), Mr Carmichael noted that the house was said to have been acquired by Mr Al Fayed in 1986, and that the contents had been auctioned in 1998 with the proceeds going to children's charities. In relation to pages concerned with the New School at West Heath, in Kent, Mr Carmichael noted that Mr Al Fayed was said to have bought the premises of the former West Heath Girls' School (where Diana, Princess of Wales, was educated) as premises for a school for children with special needs, which opened in 1998. According to the information, the school was "run as a charity (West Heath 2000 Ltd) by a Board of Trustees". In relation to pages concerned with Fulham FC, Mr Carmichael noted that Mr Al Fayed was said to have bought the club in May 1997 and to have invested 40m over the following two years. In relation to pages concerned with Liberty Radio, Mr Carmichael noted that Mr Al Fayed was said to have bought the radio station in November 1997. In relation to pages concerned with Punch, Mr Carmichael noted that Mr Al Fayed was said to have acquired the magazine in 1996.

[266] A second note summarised in a few lines the nature of the 1985 back duty settlement and forward tax agreement, the 1990 back duty settlement and forward tax agreement, and the 1997 agreement. A third note recorded the presence in the files of various tax returns, and noted the offices which had dealt with the Fayeds' personal tax affairs. A fourth note summarised the contents of the file relating to Mr Stribblehill's investigation. The same note also contains a few notes on a file relating to the initiation of the investigation arising from the DTI report. A fifth note summarised the contents of the file relating to the investigation carried out by Mr Worsley and Mr Monk, leading to the 1990 agreement.

[267] Mr Carmichael also requested the district file of Hyde Park Residence Ltd (HPR), a company which featured in the KPMG benefits reviews in relation to domestic accommodation, security costs and aircraft. What was said about HPR's involvement in the provision of domestic accommodation and aircraft was summarised above (at paras.173-174). In relation to security costs, KPMG had reported that HPR met one-third of the costs of close protection staff and security staff at Barrow Green Court and Balnagown Castle, the balance being met by Harrods Holdings plc. The costs met by HPR were said to be reimbursed by the individuals when invoiced, using personal funds from Geneva. HPR also met the costs of security staff at 55 and 60 Park Lane and 14 South Street, as the leaseholder and manager of the property. One quarter of those costs was re-charged to Harrods Holdings plc, since it had staff located in 55 Park Lane and 14 South Street.

[268] Mr Carmichael also obtained a copy of a book entitled The Bodyguard's Story, by Trevor Rees-Jones, a bodyguard who was the sole survivor of the accident in which Diana, Princess of Wales and Emad Al Fayed died.

[269] On 20 March 2000 the meeting took place between Mr McGuigan, Mr Carmichael and Mr Murray (who was accompanied by another representative of KPMG, Mr Craig Thomson, who had formerly worked as an investigator in SCO). Notes of the meeting were subsequently prepared by Mr Carmichael and Mr Thomson. Mr Thomson's note is more clearly structured; it was prepared sooner after the meeting, and agreed at that time with Mr Murray; and it records more of what was said by the SCO officials. The accuracy of parts of Mr Carmichael's note was disputed by Mr Murray, whom I regard as a careful and generally reliable witness as to events.

[270] After initial introductions, Mr Murray explained that KPMG were attending the meeting as personal tax advisers to the Fayed brothers. He summarised the nature and history of the 1985, 1990 and 1997 agreements, and said that the Fayed brothers had acted in reliance upon them. Mr Thomson's note continues:

"5. Having set out the background, TM [Mr Murray] asked whether SCO could now clarify two aspects:

5.1. What Mr Whitehead had meant in his letter of 7 March where he stated that 'the agreement is suspended'. In what sense could the IR [Inland Revenue] legitimately 'suspend' the agreement?

5.2. What were the IR's intentions for taking this forward?

6. JM [Mr McGuigan] explained that the IR had concerns that the 1997 agreement was called into question by certain matters which had come in to the public domain during the recent litigation with Mr Neil Hamilton. He had in mind references to very large withdrawals of cash from a bank account which appeared inconsistent with information provided to the Inland Revenue. SCO had taken the view that these matters might affect not only the 1997 agreement but also the basis of all agreements and Mr Whitehead had written to notify this. JM commented generally on Inland Revenue concerns about the desirability of forward agreements. In his view they were incompatible with self assessment, and it was unlikely that any existing agreements would be renewed.

7. TM observed that as the 1997 agreement was restricted to specified aspects of his clients affairs. It was always open to the IR to undertake such enquiries into the other aspects of their returns as they thought necessary. If so the IR would no doubt issue a Code of Practice or give a section 9A notice in the normal way.

8. That being so, it remained unclear how any matters brought out by recent litigation could give the IR the right to 'suspend' the 1997 agreement. Further, it was not clear what basis the IR had for effectively rejecting a self assessment and returning tax rendered. Could SCO comment as to this?

9. SCO acknowledged that this was an area which they were reviewing and may take further legal advice upon. SCO wished further time to review the papers.

10. KPMG acknowledged that as SCO Edinburgh had only recently taken over responsibility they would require time for review. TM pointed to 2 aspects:

10.1. The 1990 forward agreement, covering 1991/92 to 1996/97, had been entered into by the IR on the basis of an offer by KPMG dated 28/9/90. On the same day an offer had been made by Herbert Smith in respect of earlier years.

10.1.1. The Herbert Smith offer made plain that the agreement was entered into entirely without regard to previous representations. The forward agreement was stated to be irrevocable except in the event of failure to pay.

10.1.2. In so far as the liabilities covered by the agreements were concerned, it did not appear that it was open to the Revenue to argue that they had been induced to agree liabilities by reason of some failure in disclosure. The 1990 agreement specifically stated that prior representations be disregarded and there did not appear to have been subsequent representations regarding remittances.

10.2 Whilst SCO would now review its position, the clients would also have to consider taking legal advice. Were the IR entitled to unilaterally revoke a valuable agreement in this manner? There were also time limits to consider if it became necessary to institute proceedings to protect their rights."

[271] In relation to paragraph 6 of the note, it is not clear that Mr McGuigan had any basis for suggesting that references at the trial to large withdrawals of cash appeared inconsistent with information provided to the Revenue. In relation to paragraph 7 of the note, a "section 9A notice" is a notice of enquiry issued under section 9A of the 1970 Act. That provision is discussed below (at para.551). In summary, section 9A empowers an inspector to enquire into an individual's self-assessment return if he gives notice of his intention to do so. In relation to paragraphs 7 and 8, it appears that Mr Murray was questioning the compatibility of the Revenue's actions, in returning the cheque for 240,000 and thus declining to accept the self-assessment based upon Mr Al Fayed's tax return, with the statutory regime of self-assessment. In relation to paragraph 10.2, the final sentence refers to "time limits" for instituting proceedings. It appears that both KPMG and the Revenue had in mind the three month time limit imposed by RSC Order 53 rule 4: proceedings in England for judicial review of the suspension letter would have to be brought by 7 June 2000.

[272] Mr Thomson's note of the meeting continues:

"11. TM asked, in view of the above, that SCO should complete their review and return to KPMG as a matter of some urgency.

12. This was agreed by JM. JM undertook that SCO would return to KPMG with clarifications as to their view of the current status of the 1997 agreement by the week commencing 17 April...

13. SCO would also at the next meeting clarify whether they had any other enquiries and, if so, make their nature clear.

14. It was acknowledged by the IR that they may have to consider whether any S9A notices were necessary as it was not at all clear how the IR's letter of 7 March sat with the Department's obligations under Self Assessment legislation.

15. TM indicated that should such enquiries extend beyond KPMG's remit, for example relating to the corporate tax position of Harrods Group as suggested by Mr Whitehead's letter, then the IR should respect confidentiality as between his clients and those responsible for corporate tax. On no account should any personal tax enquiries relating to the individuals be disclosed by the IR to the corporate advisers. JM accepted this. AC [Mr Carmichael] indicated that there would be further discussions between SCO and the Inspector at the Large Business Office responsible for Harrods (Mr Williams): these discussions would be conducted on a discreet basis.

16. In more general conversation it was pointed out by KPMG that the 1997 agreement was entered into by the IR following meetings with Messrs Brannigan, Parret & Monk of IR SCO. These officers were then the most senior at SCO, and appeared to have sufficient authority to conclude such negotiations. The 1997 agreement had, in the end, been signed by Mr Whitehead on behalf of the Revenue.

17. It was acknowledged by both the IR and KPMG that while such 'advance agreements' were uncommon, they were not unique to the Al Fayed family and there had been other instances where the Revenue had agreed to settle liabilities in this way. Typically this was where the remittance basis was in point and wealthy individuals could avoid paying any tax, albeit at significant administrative cost to themselves and the Revenue.

18. CT [Mr Thomson] pointed out that one would normally expect that when the IR wished to re-visit an agreement, they would first establish the facts, then decide whether any new facts discovered actually bore upon the agreement, then take any advice as to whether the agreement could be re-visited in consequence of the discoveries. It was not clear whether all such steps had been taken here. JM acknowledged that a full review of all the background papers was still in progress."

[273] Paragraph 14 suggests that Mr McGuigan and Mr Carmichael were also concerned as to whether the suspension letter was compatible with the Revenue's obligations under self-assessment. It appears from paragraph 17 that the SCO representatives were aware that KPMG knew of other forward tax agreements.

[274] The allegations made in the Hamilton trial concerning cash payments were then discussed:

"20. TM said that he was informed that some of the comments concerning cash that had been reported as 'fact' were no more than the assertions of opposing Counsel. In particular, TM understood that the amounts of cash drawn weekly were nowhere near as great as had been alleged in the proceedings. SCO said out that the press comment had included allegations of cash drawings in excess of 100,000 a week. TM observed that the actual weekly sums involved were nowhere near this. A petty cash system has in effect been operated by MAF's [Mr Al Fayed's] private office.

21. TM indicated his understanding that cash withdrawals were from the one Midland bank account into which remittances had been made. SCO asked whether this account had a cheque facility. KPMG advised their understanding that it did, and that cheques had been drawn. This account had been in existence for many years. Its existence and analyses of movements had been disclosed to the IR during the earlier negotiations."

[275] This discussion led into Mr Murray's making a statement about the cash payments to staff which had been considered at the conferences with Mr Whiteman, Q.C. on 18 January and 6 March (see paras.200 and 252):

"22. TM said that there was an issue arising from cash payments which he has instructed to draw to the Revenue's attention. This would make it clear that there was no intention on his clients' part to do other than deal responsibly with tax issues.

22.1. TM indicated that he had been authorised by his clients to deal with any PAYE or Sch E consequences that may have resulted from the payments by MAF to employees. MAF had instructed KPMG in relation to this prior to Mr Whitehead's letter of 7 March.

22.2. The individuals were currently employees of the Harrods Group. MAF wished to deal constructively and co-operatively with the IR in order to settle, himself, any duties which may arise in consequence of his payments and he had authorised KPMG to take this forward on his behalf.

22.3 TM advised that no detailed review had as yet been undertaken by KPMG but initial indications were that relevant payments were in the region of approximately 30,000 to 40,000 a year.

22.4 AC acknowledged that there appeared to be a PAYE issue and asked whether the payments included those to security staff. AC also raised the issue of 'golden handshakes' to trusted staff.

22.5 TM acknowledged AC's comments but made clear that it was impossible to speak in detail at this stage. KPMG indicated that whilst their clients wished to take this forward they were inhibited by the uncertainty over the Revenue's attitude to the agreements on remittances. PAYE issues were subject to a review. However, given the absence of records, it was likely that reporting to IR, could only be on a very 'broad brush' basis.

22.6 AC asked whether KPMG knew whether any of the cash payments had been recharged to any of the Harrods Group of companies. TMM said that he understood that cash payments had not been recharged to Harrods companies."

[276] In his evidence on affidavit, Mr McGuigan states that he asked Mr Murray to confirm that the case was within SCO limits (i.e. that the tax at risk was at least 100,000: see para.89) and that Mr Murray confirmed that the sums mentioned made the case sufficiently large to warrant the involvement of SCO. Similar statements are made in two documents prepared by Mr Carmichael on about 30 March 2000 (see paras.293 and 303). Such an exchange is not however recorded in either Mr Carmichael's note of the meeting or Mr Thomson's (which Mr McGuigan accepted as accurate, although his attention was not directed to this particular point). Nor is it mentioned in the account of the meeting in Mr Carmichael's affidavit. If such an exchange had occurred, it would have been of sufficient significance for it to be likely that it would have been noted by both Mr Carmichael and Mr Thomson, or at least by one or other of them. In his evidence, Mr Murray denied that he had made such a statement:

"We did not know at that time what the tax at risk was. We knew that there had been gifts to a number of employees, over a number of years. We had not formed any conclusions as to the extent to which that would give rise to taxation for anyone and, if so, what the amount would be".

There are other matters, mentioned below (at para.459), which also tend to undermine the suggestion that such an exchange had taken place. On balance, I am not satisfied that such an exchange took place.

[277] The final matter of substance discussed was noted by Mr Thomson:

"23. TM asked whether the IR presently envisaged the raising of any specific issues?

23.1 JM repeated that they were still reviewing the papers. In the most general of terms however, JM indicated that the IR may well wish to review the ultimate funding of any overseas assets upon which MAF had drawn in recent years. In general terms such enquiries might be summarised as: 'if capital ultimately stems from Geneva, what is funding Geneva?'

23.2 KPMG acknowledged this general 'wish' but pointed out that should the IR now wish to engage in a review of the income/capital trail in relation to remitted funds they would be requesting the production of detail that the 1995/1990 [sic: 1985/1990 is meant] and 1997 agreements deemed unnecessary and indeed, irrelevant to the tax outcome.

24. JM noted these observations and indicated that they would be taken on board when all aspects were being reviewed over the weeks ahead.

....

26. TM indicated that the Al-Fayed family had over the years more than demonstrated their willingness to be constructive in discussion with the IR. They intended to continue to take this sensible and pragmatic approach but required early clarification of what the Revenue actually meant by the letter of 7 March. Should this be forthcoming then KPMG would be able to take matters forward on behalf on their clients so as to address relevant tax issues arising from the recent litigation.

27. However, should the IR continue to seek to alter the earlier agreements without adequate justification then the IR should be in no doubt that the clients would consider whatever action was open to them to preserve their rights under the agreements.

28. JM & AC noted KPMG's comments and undertook to review the matter fully and return with proposals for taking the position forward. As agreed, this response would be no later than the week commencing 17 April."

The implication of paragraphs 27 and 28 was, as Mr Carmichael says in his affidavit, that "the Revenue had 8 weeks to make up its mind what it was doing".

[278] Mr McGuigan was concerned about the implications of the agreement and of the suspension letter, and about the threat of judicial review. His priority was to establish the legal position as far as the agreement and the suspension letter were concerned. On 21 March  Mr Carmichael telephoned Ms McKenzie-Boyle to inform her of what had been said at the meeting. She advised that the Revenue was entitled to re-open matters if a taxpayer had deliberately misled it.

[279] On 27 March Mr McGuigan and Mr Carmichael had a meeting with Mr Roderick Pegler, who was the Deputy Director of SCO Solihull, responsible also for SCO Edinburgh, and Mr McGuigan's line manager. Mr Pegler did not give oral evidence, but he provided an affidavit, which appears to give a reliable account of his involvement in the relevant events. At the meeting the case was discussed. It was agreed that the 1997 agreement gave SCO "real problems" and that the suspension letter "did not help". Mr Pegler expressed surprise that the suspension letter had been issued. It was agreed that there was a need to "build the case for re-opening" and that a transcript of the evidence given at the Hamilton trial was required for that purpose. Mr Pegler advised that if necessary, to prevent a judicial review of the decision to suspend the agreement, the agreement should be reinstated. The note of the meeting contains no reference to the PAYE issue. Following the meeting, Mr Middleton authorised the purchase of the trial transcript, and Mr Carmichael subsequently arranged for it to be obtained.

[280] On 28 March Mr Murray wrote two letters to Mr McGuigan, confirming in writing the points he had raised at the meeting on 20 March. The first letter concerned the suspension of the 1997 agreement and related issues. In relation to the suspension letter, Mr Murray asked:

"- As the agreement itself nowhere provided that it can be 'suspended' and indeed never uses the word suspension, what did Mr Whitehead intend to convey by stating 'the agreement is suspended'?

- If, on the other hand, Mr Whitehead was unilaterally purporting either to vary or terminate the agreement, what is the legal basis for any such action in light of the clear terms of the 1997 agreement which state that it is both binding and irrevocable."

Mr Murray addressed the argument based on the evidence about cash withdrawals, and possible misrepresentation:

"The reason given in Mr Whitehead's letter of 7 March for the purported suspension of the 1997 agreement is press reporting which 'highlighted his (Mr Mohamed Al Fayed's) ready access to extremely large sums of cash'. In the course of our meeting you referred to withdrawals of cash from a bank account which may be inconsistent with information provided to the Inland Revenue. Here there are two distinct points. Firstly, generally, we fail to understand what relevance 'withdrawals of cash' can have to a binding agreement which substitutes the payment of fixed annual amounts to the Inland Revenue in lieu of the normal tax charge based on remittances. Your explanation of why the Inland Revenue believes there is such a connection would be much appreciated. Secondly, as we discussed, I find it difficult to identify that the Inland Revenue either sought or were provided with representations concerning remittances prior to the 1997 agreement.

...

Our question in relation to this matter is:

- What are the prior representations on which the Revenue rely in support of any attempt to vary the terms of the 1997 agreement prior to its expiry in 2003?"

Mr Murray noted that Mr McGuigan had undertaken to respond to these questions by the week beginning 17 April. Mr Murray also noted:

"You undertook to consider the Inland Revenue's response on the following matters:

[281] In his second letter, Mr Murray addressed the issue of cash payments to staff:

"I feel that it is also appropriate for me to record another matter which I raised at the meeting.

I have been authorised by my clients to deal with any PAYE or Schedule E consequences that may have resulted from payments made by Mr Mohamed Al Fayed to employees. As I told you at the meeting, KPMG was instructed in relation to this matter prior to Mr Whitehead's letter of 7 March. In due course I would hope to be able to discuss with you how we may satisfactorily resolve this issue."

[282] On 29 March Mr McGuigan telephoned  Mr Murray, in response to the letters of 28 March, and agreed to respond to his questions on or before 19 April.

[283] In the meantime, Mr Carmichael had read The Bodyguard's Story. In a note dated 30 March 2000 he recorded passages which he regarded as significant. In his evidence, he founded upon some of these passages as identifying a number of tax risks. It is unnecessary to quote the passages in full. The excerpts quoted below convey their flavour.

[284] The passages regarded by Mr Carmichael as important included, first, a number of passages referring to "bungs" or "tips". Some of these references were in quotations attributed to a person named "Kez". One passage stated:

"No-one was actually sacked, Trevor had observed. They are just asked to resign, then given a pay-out after signing another confidentiality agreement."

Mr Carmichael considered that these passages identified a tax risk, namely irregular payments to staff, possibly linked to agreements.

[285] A second group of passages was noted as being significant. One passage referred to "the family's cliffside estate at St Tropez..., a paradise compound of pools, terraces and gardens where F maintained more than a dozen security personnel and snarling guard dogs." Another passage, referring to the security staff at Park Lane, wrote of "a cracking bunch of blokes, roughly 40 in all and all ex-military." Another passage, several aspects of which Mr Carmichael considered significant, described Barrow Green Court:

"F had created an English country dream... gorgeous green landscapes of fields with grazing horses and flowering gardens surrounded by a massive Elizabeth mansion. F had spent millions of pounds to restore its panelled rooms, to build a huge swimming pool, instal horses, develop acres of exquisite gardens and to create what has been described as a children's dream world, for his 4 young children, with toys scooped up from the shop.

F ran his empire in all except the most bitter weather from a white plastic tent set out on the lawn and carpeted in astro turf like green carpeting. It seemed a British version of the Sheikh's desert tent but its purpose was less romantic - its isolation prevented bugging... all his other Estates were variations on the Oxted theme including the tent... through a bodyguard's eyes a different side of Oxted is revealed: a compound of 500 acres patrolled by guards. With an array of security and surveillance equipment the Estate was watertight."

Mr Carmichael considered that these passages identified another tax risk, namely the number of security staff, and, in Mr Carmichael's words, "the fact that they were available for use by the family". As mentioned above (at para.267), the 1996 KPMG benefits review had explained how the costs of security staff were said to be met.

[286] Mr Carmichael also noted a passage concerned with "Kez's" work at Barrow Green Court:

"Kez's job had been largely with the younger children, the 2 boys and 2 girls he had watched grow up... Kez loved horses, both fantastic jet black stallions pull the shops carriages, with loads of feathers, and also the quiet riding horses that were available. There was even a wonderful riding instructor, but the children never rode."

Mr Carmichael considered that that passage, and the passage already quoted concerning the "grazing horses", identified a further tax risk, namely the main family residence and the facilities available to the family there. In his evidence, Mr Carmichael said that this was a tax risk because no mention had been made of the availability of horses in the KPMG benefits review. The review had however dealt generally with costs of a non-capital nature relating to Barrow Green Court.

[287] Mr Carmichael also considered that the passage already quoted, in which reference was made to "toys scooped up from the shop", demonstrated a further tax risk: it was, in Mr Carmichael's words, "confirmation that Harrods goods were consumed by family members."

[288] Mr Carmichael also noted a passage concerned with the apartments in Park Lane, which stated inter alia:

"F had apartments and offices in 60 Park Lane... The complex of offices also housed F's room and the security accommodation. F's cousins and uncles stayed in apartments there when they were in town. F and his family and D's apartment were there too and all shared a common kitchen with chef and staff 'it was like having a hotel kitchen' D's valet would note..."

Mr Carmichael considered that this passage demonstrated a further tax risk, namely the family's use of 55 and 60 Park Lane and the availability of staff. He regarded it as significant in demonstrating a tax risk, because the KPMG reviews had not stated that cousins and uncles stayed in the apartments when they were in London. The 1996 review had however stated that flats were made available to "guests of the brothers". As explained earlier (at para.57), section 168(4) of the 1988 Act defines a person's family or household, for the purpose of determining whether benefits are to be treated as emoluments: the definition does not include the person's cousins or uncles, but does include his guests.

[289] Finally, Mr Carmichael considered that the statement, already quoted, that "F ran his empire... from a white plastic tent" demonstrated another tax risk, as it was, in Mr Carmichael's words, "an indication that offshore companies might be managed and controlled in the UK". When asked about this, Mr Carmichael said that the fact that Mr Al Fayed was said in the book to run "his empire" from a tent was "a reasonable indication that offshore companies might be managed and controlled in the UK", since Mr Carmichael interpreted the word "empire", as used by the author of the book, to mean any company under Mr Al Fayed's authority or with which he was associated.

[290] As explained below, reading this book was one of the principal pieces of research into Mr Al Fayed's affairs which was carried out by SCO Edinburgh (the others being the reading of the Hamilton trial transcript and the reading of the SCO London papers). It is understandable that Mr Carmichael would wish to have information about Mr Al Fayed's life-style, since that could shed light on such matters as his income and his receipt of benefits in kind, or at least point towards areas suitable for further enquiry; and The Bodyguard's Story was a source of information of that nature. It did indeed indicate certain tax risks, such as irregular payments to staff. On the other hand, some of the inferences drawn by Mr Carmichael (notably the possible UK tax residence of companies incorporated overseas) were based on material so exiguous that it is difficult to avoid the impression that he was, to some extent, fastening upon passages which could be construed as supporting a suspicion which he had already formed. As explained above (at para.20), a company incorporated abroad is generally treated as resident where its central management and control are to be found. The person who wrote that Mr Al Fayed ran his empire from a tent cannot be expected to have had that issue in mind. There is no way of knowing whether the author had in mind overseas companies as well as UK companies when he used the word "empire", or whether he had in mind, when he used the word "ran", the degree of involvement in management which would render an overseas company tax resident in the UK.

[291] On 30 March Mr Carmichael submitted a registration report to Mr McGuigan. As this is one of the most important documents in the case, it is necessary to consider it in some detail. The report was headed: "Registration Report for: Mohamed Al Fayed". The case name was stated to be "Mohamed Al Fayed". It is therefore apparent that the report was in respect of Mr Al Fayed, and no other individual or company.

[292] The report began by describing the "Background", under the headings "Taxation History", "Origin of Investigation" and "Review Work To Date". The section on "Taxation History" stated:

"2. Background

2.1 Taxation History

Al Fayed's links to Special Compliance Office go back to 1985 when a settlement was negotiated between the Al Fayeds and Special Office, Solihull to cover the years 1973/74 to 1985/86. There were 4 settlements and the total yield was 2,550,000. Special Office also entered into an ad hoc agreement with Al Fayeds' tax agents, KPMG, to the effect that their annual payment of tax would be 150,000 in 1985/86 (within the Letter of Offer) and annually thereafter increased by reference to Retail Prices Index. This arrangement continued until 5 April 1991.

Subsequent to the personal settlement Special Office, Solihull opened enquiries into various offshore companies linked to the Al Fayeds. This investigation was eventually subsumed into Enquiry Branch, London's investigation which commenced in 1989.

The EB investigation focused on the Al Fayeds' remittances to the United Kingdom to purchase the House of Fraser. This investigation was based upon the DTI Report on the same subject published in 1990. It resulted in an omnibus settlement which included the tax due on remittances, the taxable benefit on legal expenses incurred by [ ] on behalf of the Al Fayeds and the residence position of various offshore companies investigated by Special Office, Solihull. The resultant offer prepared by Herbert Smith, is self-contained, and is without prejudice to any of the negotiations leading up to the offer. Indeed a no representation clause within the offer prohibits review of the negotiations. The offer is in full and final settlement of all liabilities up to and including the 5 April 1990. The offer was for 31,118,744.

Also in 1990 KPMG negotiated the formalisation of the previously ad hoc agreement with Special Office Solihull. Under the formal agreement the tax payable in respect of remittances was 200,000 per annum. The agreement covered the years 1991/92 to 1996/97, with a renewal clause for subsequent years.

In 1997 EB and KPMG renegotiated their agreement and on the 28 April 1997 a new 'forward tax' agreement was signed covering the years 1997/98 to 2002/03. The tax payable under the agreement was 240,000 per annum. The agreement is irrevocable except within certain closely defined circumstances and there is a renewal clause for subsequent years."

[293] The section on "Origin of Investigation" stated:

"2.2 Origin of Investigation:

Mohamed Al Fayed was a litigant in the case of Hamilton v Al Fayed. In the context of that trial allegations were made and evidence given of substantial cash expenditure by Al Fayed and cash gifts to employees.

These disclosures came about at the time when Harrods Group accounts were being risk assessed by Glasgow Large Business Office and that District wished to undertake a comprehensive risk analysis of the director's tax affairs under CCW [Combined Case Working]. Coincidentally Al Fayed's ownership of highland estates was coming under scrutiny by Wick District under their 'Who Owns Scotland' project. The increasingly Scottish connection to Al Fayed resulted in SCO London transferring responsibility for the case to SCO Edinburgh.

Exceptionally, at the time of the transfer a letter was written to Al Fayed's agents intimating that the agreement between the Revenue and Al Fayed was suspended. Not surprisingly this has met with a robust response from KPMG but at the same time the agents disclosed that there are Pay As You Earn irregularities in companies with which Al Fayed is connected and within his personal household. KPMG have been instructed to prepare a Report about this which will be submitted to SCO Edinburgh in due course. The agents have intimated that the tax at risk will be within SCO limits."

[294] For reasons explained above (at para.276), I do not accept the accuracy of Mr Carmichael's statement that KPMG had intimated that the tax at risk, in respect of payments to employees, was within SCO limits, i.e. in excess of 100,000. Nor do I consider that it was entirely accurate to state that "KPMG have been instructed to prepare a Report .... which will be submitted to SCO Edinburgh". At one point in his evidence, Mr Murray said that he would not quarrel with the gist of that sentence, inasmuch as KPMG were intending to provide further information to the Revenue in due course. Mr Carmichael's statement might however be understood as meaning (as Mr Carmichael stated more clearly, later in the report: see para.297) that KPMG had at that point been requested to prepare a report; and that was not the case. What Mr Murray had said on 20 March was that he had been instructed to draw the issue to the Revenue's attention and that he had been authorised to deal with any PAYE or Schedule E consequences, but that his clients were inhibited in taking the matter forward by the uncertainty over the Revenue's attitude to the agreements on remittances (see para.275). He had made it clear that whether KPMG would be able to take the matter forward was dependent on the Revenue's clarifying the meaning of the suspension letter (see para.277). In his letter of 28 March, Mr Murray had reiterated that he had been authorised to deal with the issue, and said that:

"in due course [he] would hope to be able to discuss with [Mr McGuigan] how [they might] satisfactorily resolve this issue" (see para.281).

It appears therefore that, although it was reasonable to expect that KPMG would at some future time provide information to the Revenue about the PAYE issue, KPMG were expecting that the Revenue would first clarify its position about the future tax agreements, and that the PAYE issue would then be discussed. I note that documents subsequently prepared by Mr Carmichael undermine his statement that a report had already been instructed (see paras.372, 383 and 459). The procedure which would normally follow a disclosure to SCO, whereby SCO would draw up a remit for the taxpayer's accountants to prepare a disclosure report for submission to SCO (see paras.372 and 383), with "progress meetings" held in the interim to ensure that the preparation of the report was proceeding satisfactorily, had not been begun in this case; nor was it begun following the registration of an investigation on the computer system on 30 March. On this issue I accept the evidence of Mr Murray:

"They [the Revenue] certainly were not awaiting a report on the PAYE payments because we had not actually had our meeting to discuss what such a report was going to look like."

[295] The section on "Review Work To Date" stated:

"2.2 Review Work to Date

The sensitive nature of this case means that traditional third party work is virtually impossible. The Investigator has however met with Solicitors Office and is seeking Counsel's opinion on the merits of the Herbert Smith agreement (1990) and the 2 KPMG agreements (1990 and 1997). It may well be Solicitors opinion that these agreements cannot be set aside in which case the focus will be on setting up Al Fayed's affairs for proper compliance within the self assessment system for the years 2003/04 onwards.

Considerable information regarding Al Fayed's personal/domestic and business expenditure came out from the Hamilton v Al Fayed trial. A transcript of the trial will be purchased and closely scrutinised".

It appears from that paragraph that SCO Edinburgh wanted advice not only in relation to the 1997 agreement but also in relation to the 1990 agreements. Mr McGuigan eventually accepted that in his evidence. Counsel's advice was expected on or before 10 April.

[296] The next section of the report dealt with the "Anticipated Investigation". It stated:

"3. ANTICIPATED INVESTIGATION

3.1 Reason for registration:

Areas of Interest Compliance (The Returns)

Avoidance

International Issues - Complex

3.2 Tax at Risk:

At this stage it is impossible to specify the tax at risk without a legal opinion as to the merits of the agreements entered into by the Inland Revenue. The PAYE settlement is however expected to be at least 100,000.

3.3 Other Factors:

The political profile of Mohamed Al Fayed in the UK is such that this case should be regarded as sensitive. The earlier investigations were worked on a 'need to know' basis only and it is recommended that a similar level of security is maintained over the current investigation. Al Fayed's UK organisation is substantial but commercially prone to leaks. By contrast his personal tax affairs are a closely guarded secret and his many enemies within the public domain would be more than interested to learn of the arrangements he has with the Inland Revenue. For these reasons the need for confidentiality is overriding but this aspect should not deflect us from a thorough and professional investigation.

It behoves me to say again that the agreements entered into by Al Fayed and the Revenue are unusual and it may not be possible to set them aside. If that happens then at least until the year 2003 we will not be able to look at Al Fayed's personal remittances into the UK and to look at certain taxable benefits. We will however lay down clear matters for the future is [sic] to set Al Fayed on the same basis of taxation as the rest of the country, but a word of warning is necessary. The latest agreement includes at Clause 12 an obligation upon part of the Inland Revenue to renew the agreement. We will be seeking actively not to renew this agreement".

In paragraph 3.2, the statement that the PAYE settlement was expected to be at least 100,000 appears to reflect Mr Carmichael's earlier assertion, which I have found to be incorrect, that Mr Murray had made a statement to that effect.

[297] The final section of the report completed by Mr Carmichael was headed "Recommendation". It stated:

"4. RECOMMENDATION
4.1 Information:

A report has been requested in respect of Pay As You Earn irregularities.

Counsel's opinion has been requested in respect of the Revenue's standing within the agreement.

4.2 Proposal

I propose that this case be worked under Code of Practice 8.

4.3 Intended Opening:

Although exceptionally there has been first party contact it is anticipated that this case will move quickly by a series of meetings towards conclusion."

In paragraph 4.1, the statement that a report had been requested in respect of PAYE irregularities was inaccurate.

[298] In his evidence, Mr Carmichael maintained that the registration report was necessary because he had received a disclosure from Mr Murray of PAYE and Schedule E irregularities falling within SCO limits. According to Mr Carmichael, the only purpose of the registration report was to enable the Revenue to obtain a disclosure report from KPMG. I accept that it is SCO practice for a case to be registered on the computer system as an investigation, primarily for reasons of internal accountability, when there is to be "first party contact" between investigators and a taxpayer or his advisers after such a disclosure has been made: this practice was mentioned above (at paras.237-238). Mr Middleton explained that this practice reflected the computer-based system of internal audit and management which was introduced following the prosecution and conviction of an SCO investigator named Michael Allcock on charges of corruption. Following those events, SCO introduced a practice that all material work must be registered on the computer system, each case being registered in a review file or an investigation file; that a case can only be registered as an investigation on the authority of a group leader, and on the basis of a registration report which he has approved; and that the details of such an investigation must also be entered on SCO's computerised case management system. As explained below, the registration report is created using a computerised template which calls for the details of the investigation (including the "areas of interest", i.e. the matters to be investigated) to be specified. The purpose of this practice is to enable senior staff to check that cases have been dealt with properly, and to discourage corrupt arrangements being made between the investigator and the taxpayer. Once the case has been registered as an investigation, first party contact can then take place. I accept, therefore, that if (contrary to my findings) Mr Murray had made a disclosure of PAYE irregularities falling within SCO limits, it would be appropriate that the case should be registered as an investigation. Similarly, if Mr Carmichael and Mr McGuigan mistakenly believed that Mr Murray had made such a disclosure, SCO practice would require the case to be registered on the computer system as an investigation before the matter could be discussed further with KPMG. Nevertheless, for the reasons explained below, I do not accept that an investigation was registered in the present case solely as a result of the PAYE issue.

[299] The registration report was created using a template provided by computer software. The template, and related documents, were produced by the Revenue after the ninth day of the proof. The template called for the "reason for registration" and the "areas of interest" to be entered in paragraph 3.1 of the report. For that purpose, the template provided a list of options on a pull-down menu, from which the investigator could select the appropriate items. One of the options available was "PAYE Compliance/Remuneration". If the purpose of registering an investigation was to process a PAYE disclosure, then that would be the appropriate option to select (as Mr Carmichael acknowledged in his evidence), so that the computer system would then contain a record of the reason for the registration and of the subject-matter of the investigation. In his report, however, Mr Carmichael did not enter that option, but under "areas of interest" listed three matters which did not relate to PAYE compliance but related to wider concerns about compliance in relation to Mr Al Fayed's tax returns, the possibility of tax avoidance and complex international issues: concerns of the kind which had resulted in the issue of the suspension letter.

[300] Mr Carmichael's explanation, in evidence, was that he had made a mistake when he prepared the report: he had taken the matters listed in his report as "areas of interest" from another pull-down menu on a different computer screen, namely the screen relating to "Risk and Quality". He maintained that, on the computer screen relating to "Areas of Interest", he had selected "PAYE Compliance/Remuneration" as an area of interest, but that he had mistakenly failed to use this screen when preparing his registration report. A difficulty with that explanation is that the menu for "Risk and Quality" also included an option for PAYE. Mr Carmichael's explanation for not having selected that option, albeit from the wrong screen, was that he had selected options from that menu when he first entered the case on the computer system as a review on 26 January (see para.201), and he had not then selected the PAYE option, as he had not anticipated PAYE being an issue.

[301] I have some difficulty accepting this as a complete explanation. First, I note that the registration report is an important document in SCO practice. According to Mr McGuigan, such reports are prepared by the investigator, and reviewed by the group leader, with care. They are, in Mr McGuigan's words, "well-founded, well-researched, technically sound and indicating areas that do genuinely need to be looked at". According to Mr McGuigan, however, this report listed under "reason for registration" three areas of interest, none of which was a reason for registration, and failed to list the only area of interest (namely PAYE compliance) which was a reason for registration. For Mr Carmichael, who gave his evidence with meticulous care, to have submitted a registration report with a glaring error would be somewhat surprising in itself. For Mr McGuigan to have failed to notice such an error would also be somewhat surprising. For both these events to occur seems to me to be unlikely. I am prepared to accept that Mr Carmichael used the wrong computer screen, and that, on the correct screen, PAYE compliance had been identified as an area of interest. What seems to me to be more significant, however, is that Mr Carmichael submitted a registration report which made no reference to PAYE compliance as an area of interest or as a reason for registration, but referred to wider issues; and that Mr McGuigan approved the report in the terms in which it had been submitted to him, and authorised the registration of an investigation on the computer system based on what was stated in that report.

[302] Paragraph 3.1 is not the only part of the report which does not fit well with Mr Carmichael's account. The first paragraph to be numbered 2.2, on "Origin of Investigation" (see para.293), mentioned three matters: the transfer of the case to SCO Edinburgh following the Hamilton trial, and in the light of Glasgow LBO's wish to undertake a combined case-working exercise and Wick District's interest in Highland estates; the sending of the suspension letter; and the PAYE issue. The second paragraph 2.2, on "Review Work to Date" (see para.295), was concerned with the need to obtain legal advice about the agreements, and the need to study the trial transcript for information concerning Mr Al Fayed's expenditure. In paragraph 3.2 (see para.296), the description of the "tax at risk" was not confined to the PAYE issue. The implication of the first sentence is that the tax at risk also arose from wider issues upon which the 1990 and 1997 agreements might impinge. In paragraph 3.3, the discussion of "other factors" returned to the topic of the agreements, and warned that whether personal remittances and certain benefits could be looked at prior to 2003/04 would depend on whether the agreements could be set aside. The implication appears to be that, subject to that latter question, the investigation would encompass remittances and benefits. In paragraph 4.1 (see para.297), the supposed fact that a disclosure report had been requested in respect of PAYE was narrated as "information", along with the fact that counsel's opinion was awaited on the implications of the agreement. In paragraph 4.3, Mr Carmichael stated that "exceptionally" there had been first party contact. First party contact prior to the registration of an investigation would not be exceptional in a case where registration was the consequence of a disclosure made by the taxpayer's advisers at a meeting with Revenue officials. First party contact prior to registration would however be exceptional in a case where registration was not the consequence of such a disclosure.

[303] I also note that in a file note prepared on 30 March 2000 Mr Carmichael recorded that he had discussed the case with Mr McGuigan. In the note, Mr Carmichael stated:

"The circumstances of this case are extremely unusual in that we were forced into first party contact with the agent following Whitehead's letter of 8 March. This meeting took place before the formal registration of the investigation. At this meeting however it was disclosed that Pay As You Earn irregularities do exist and that settlement will be within SCO perimeters. This is notwithstanding the problematic issue as to whether or not a full enquiry can take place into earlier years or the current arrangement.

Jim [McGuigan] and I have agreed that reference 159238 [the computer file relating to Mr Al Fayed] should be registered as a Code 8 Investigation to enable continued contact with KPMG and to receive the Report which that firm will prepare in respect of Pay As You Earn irregularities."

[304] Reading this note in the context of the minute of the meeting on 11 February ("it was anticipated the investigation can be formally opened about 21/2 months time"), the second sentence strengthens the impression that "the formal registration of the investigation" was anticipated prior to the meeting on 20 March. The circumstances were "extremely unusual", since the meeting constituted first party contact before the formal registration of an investigation which was already in prospect. It was "forced" upon SCO Edinburgh as a result of the suspension letter. At the meeting the PAYE disclosure had been made. The question whether a full enquiry could take place remained problematic, pending the resolution of the question whether the Revenue was bound by the 1997 agreement and its predecessors. In order for there to be "continued contact with KPMG" - something which was inevitable (and had been agreed at the meeting on 20 March) in consequence of the sending of the suspension letter - and in order to receive (at some point in the future) a disclosure report on PAYE, it was appropriate that the case should be registered as an investigation. The only criticisms to be made of the note are that the statement that the PAYE settlement would be within SCO parameters appears to be based on a mistaken belief that that had been said by Mr Murray; and the statement that KPMG "will" prepare a disclosure report was questionable, insofar as no such report was in prospect at that time.

[305] In his evidence, Mr Carmichael maintained that this note referred to only one reason for registration, namely to follow through the work on the PAYE disclosure. I find that difficult to accept: the "continued contact with KPMG" envisaged in late March 2000 was not primarily concerned with PAYE. It appears that the principal focus of SCO Edinburgh's concerns and efforts at this time was to work out how to respond to KPMG's request for clarification of the suspension letter, and to find (if possible) material on the basis of which the Revenue might maintain that it was not bound by the 1990 and 1997 agreements. SCO Edinburgh had undertaken, at the meeting on 20 March, to return to KPMG by the week commencing 17 April, "with clarifications as to their view of the current status of the 1997 agreement", and with clarification as to "whether they had any other enquiries and, if so, .... their nature" (see paras.272 and 277). The questions which KPMG wished the Revenue to answer at the next meeting had been listed in Mr Murray's letter of 28 March, and were all concerned with issues arising from the suspension letter (see para.280). In his telephone call to Mr Murray on 29 March, Mr McGuigan had agreed to answer those questions on or before 19 April (see para.282). Although Mr Murray had expressed a hope that "in due course" it would be possible for there to be discussion of the PAYE issue (see para.281), no meeting or timetable had been arranged for that purpose.

[306] The final section of the registration report was completed by Mr McGuigan on 30 March 2000 (the same day as he received the report), and was in the following terms:

"GROUP LEADER'S COMMENTS

In a perfect world I would have preferred to have had the benefit of a full review of the MAF papers from SCO London, Solicitors and Counsel's Opinion and a detailed examination of the recent trial transcript before deciding that the case was suitable for registration. However we cannot now afford ourselves of these luxuries because first party contact has been made via SCO London's 'suspension' letter of the 7 March 2000 and the arguments which flow from the issue and content of that letter oblige us to have the case formally registered.

As to the issues involves it seems clear that before we can determine whether the 1997 Agreement is the correct way to continue to proceed to the year 2003, bearing in mind the recent public revelations about MAF's spending habits, we will have to overcome the most robust defence of that existing Agreement by MAF and his advisers. In this clear advice and support from our own Solicitors Office will be absolutely essential.

We have on the table an offer to review the position regarding payments made to employees and we have been assured a healthy settlement is likely to result. That offer needs to be seen in the context of, perhaps, a more fundamental challenge to the taxpayer's personal tax affairs. It should not distract us from that primary objective.

I approve registration."

[307] Mr McGuigan maintained in his evidence that his decision to approve registration was based solely on the PAYE disclosure and that in the absence of that disclosure he would not have authorised registration. In his affidavit, he stated:

"In the Group Leader's comments I state that 'we cannot now afford ourselves of these luxuries because first party contact has been made via SCO London's "suspension" letter of 7 March 2000 and the arguments which flow from the issue and content of that letter oblige us to have the case formally registered'. I was saying that the disclosure flowed from the suspension letter in the sense that the meeting of 20 March 2000 was arranged to discuss the suspension but at that meeting the disclosure was made. In the light of that disclosure the case at that time was suitable for investigation in the name of Mr Al Fayed."

Mr McGuigan maintained that position in his oral evidence. Although, for example, the "reason for registration" and "areas of interest" were stated in the registration report to be "Compliance (The Returns), Avoidance and International Issues", he maintained in evidence that he knew that there was no registration report in respect of those matters, and that the reason for registration was the disclosure of PAYE irregularities.

[308] I have come to the conclusion that I am unable to accept that evidence. In the second sentence of his "Group Leader's Comments", Mr McGuigan gives as his reason for approving registration, without a full review, the fact that "first party contact has been made via SCO London's 'suspension' letter and the arguments which flow from the issue and content of that letter oblige us to have the case formally registered". No reference is made to the PAYE disclosure. The PAYE disclosure cannot, according to any ordinary use of language, be described as "the arguments flowing from the issue and content of that letter". The true meaning of the second sentence appears to me to be reasonably clear from its terms and the surrounding circumstances, as explained below; and it has nothing to do with the disclosure.

[309] As mentioned earlier (at paras.270-273), Mr Murray had questioned at the meeting on 20 March the compatibility of the suspension letter with the Revenue's obligations under the system of self-assessment; and Mr McGuigan had acknowledged that that was a matter to be considered. Mr Murray had subsequently repeated his concerns in writing (see para.280). Mr Murray said in evidence that the suspension letter constituted a challenge to the taxpayer's tax affairs; and he would have expected that a decision would have been taken to carry out an investigation before SCO issued such a letter.

[310] Mr Pegler, Mr McGuigan's line manager, had made it clear at his meeting with Mr McGuigan and Mr Carmichael on 27 March that he also was concerned about the suspension letter (see para.279). Mr Pegler explains his concerns, which appear to correspond to those of Mr Murray, in his affidavit:

"In my view the suspension letter of 7 March 2000 constituted a challenge to a taxpayer. In accordance with SCO general practice the case should have been appropriately reviewed and then registered for investigation before that letter was issued. That had not happened as the letter of suspension had been sent from a review file. It is difficult to see how in any case an appropriate Code of Practice could be decided upon without a formal review being undertaken."

Whether Mr Pegler was correct in regarding the suspension letter as a "challenge" is not entirely clear on the evidence. Mr Middleton explained in evidence that a "challenge", in SCO parlance, is the opening of an investigation. It ordinarily takes the form of a letter written to the taxpayer or his advisers, informing him that SCO is investigating his affairs, enclosing a copy of the relevant code of practice, and requesting a meeting. As explained above (at paras.195, 204 and 206), no decision to conduct an investigation had been taken by the time the suspension letter was issued, and Mr Whitehead and Mr Hartlib had not regarded it as necessary to carry out a review prior to sending the letter. It appears therefore that the letter was not intended by them to be a "challenge". On the other hand, the return of the cheque for 240,000 might be thought to imply the rejection of Mr Al Fayed's self-assessment, and therefore an intention to enquire into his return under section 9A of the 1970 Act; and such an enquiry, if carried out by SCO, could only be conducted under a code of practice for investigations. Whether the letter constituted a "challenge" in terms of SCO's internal practices, notwithstanding the absence of any intention to conduct an investigation at that time, was not explored in evidence with Mr Whitehead, Mr Hartlib, Mr Middleton or other witnesses. In the parties' submissions, however, it was common ground that the suspension letter was a "challenge".

[311] Mr McGuigan agreed with the passage from Mr Pegler's affidavit quoted above. Seen in this light, it is not difficult to understand Mr McGuigan's statement, in his comments on the report, that he could not afford to await a full review "because first party contact has been made via SCO London's 'suspension' letter of the 7 March 2000 and the arguments which flow from the issue and content of that letter oblige us to have the case formally registered." What that statement appears to mean is that registration on the computer system was necessary for reasons of internal accountability, notwithstanding the absence of a full review, because Mr Whitehead had made first party contact and had issued a challenge to the taxpayer, raising issues which necessitated further first party contact. SCO Edinburgh had indeed already been involved in first party contact, at the meeting with KPMG on 20 March. The "arguments" which flowed from the issue and content of the suspension letter were those which had been raised by Mr Pegler (and, to some extent, by Mr Murray), to the effect that the letter should not have been issued before an investigation had been registered. In their submissions, counsel for the Revenue accepted that Mr McGuigan's statement could be so construed.

[312] When the second sentence of Mr McGuigan's comments (see para.306) is so construed, his remaining comments also make sense. The "issues involved", to which the second paragraph refers, do not relate to the PAYE disclosure: they are issues arising from the suspension letter, as to the legal effect of the 1997 agreement and its appropriateness. Specifically, Mr McGuigan is saying in that paragraph that the defence of the 1997 agreement by KPMG will have to be overcome before SCO can form a view as to whether a forward tax agreement in the terms agreed in 1997 remains the appropriate method of dealing with Mr Al Fayed in the period up to 2003. In the third paragraph, the "primary objective" is said to be a fundamental challenge to Mr Al Fayed's personal tax affairs: the PAYE disclosure is said to be a potential distraction from that objective. Whether that primary objective can be pursued is however uncertain (hence "perhaps"), pending the legal advice to which the preceding paragraph refers, since it depends on the effect of the 1997 agreement. The concern recorded in Mr McGuigan's first sentence can also be understood: he had authorised the registration of an investigation in exceptional circumstances (as a consequence of the sending of the suspension letter), without a full review.

[313] If, on the other hand, as Mr McGuigan maintained, the purpose and effect of the registration were merely to enable the PAYE disclosure to be processed, Mr McGuigan's second sentence would not make sense, unless one placed upon it the strained construction which Mr McGuigan suggested; and the second paragraph would not be relevant to "the issues involved" in the investigation whose registration had been authorised. There would also be no apparent reason for him to record concern over the absence of a review, as he did in his first sentence: as Mr Middleton explained in his evidence, there would be no need for a full review prior to registration where the registration was based on a disclosure.

[314] The fact of the matter is that on 30 March Mr McGuigan approved the registration of an investigation of Mr Al Fayed in which the areas of interest were identified as Compliance (The Returns), Avoidance and International Issues - Complex. He maintained in his evidence that that was a mistake, and that his intention was solely to authorise an investigation for the purpose of processing the PAYE disclosure. What he wrote in his group leader's comments appears to me however to be inconsistent with that evidence. It appears to me that on 30 March Mr McGuigan authorised the registration on the computer system of an investigation of Mr Al Fayed under which wide-ranging areas of interest were registered. He did so at that point in time, notwithstanding the absence of a review of Mr Al Fayed's tax affairs, in order to comply with SCO's internal procedures, given the issue of the suspension letter and the consequent need for further contact with KPMG. The PAYE disclosure was an additional reason for registration, if the tax involved was believed to exceed 100,000. The areas of interest which were registered were not however confined to that matter (and, indeed, did not include it).

[315] At the same time, it appears that Mr McGuigan did not propose at that stage to make any enquiries of the taxpayer, i.e. to "open" an investigation: indeed, he did not intend to have any further meeting with KPMG until he had obtained legal advice as to the effect of the agreements. As he states in his affidavit, he required that advice in order to know the extent of any legal constraints upon SCO's ability to carry out an investigation of Mr Al Fayed's tax affairs. In these circumstances, further first party contact would be postponed until the legal advice had been obtained. There could therefore be no question of undertaking any investigation until that advice had been obtained. In the meantime, work not requiring first party contact (i.e. based on publicly available material, and material already in the possession of the Revenue) could be done to overcome the defence of the agreement and "build the case for re-opening", as agreed with Mr Pegler on 27 March.

[316] LBO was not involved in the decision to register an investigation; nor was it involved in, or informed of, SCO's dealings with KPMG.

[317] The investigation of Mr Al Fayed was registered on the SCOLS system on 31 March 2000. Mr Pegler, Mr McGuigan and Mr Carmichael all state in their affidavits that Mr Al Fayed's case was at that point converted from a review into an investigation. That is correct, in the sense that the computer file changed from a review file to an investigation file; but SCO did not at that point begin to carry out an investigation.

[318] Summarising the position from the meeting on 11 February to this point, it appears that on 11 February Mr McGuigan had assumed that a comprehensive investigation into Mr Al Fayed's affairs, as part of a joint exercise with LBO, was appropriate, and he had given LBO an anticipated timetable for the opening of such an investigation. At that time Mr McGuigan had very little knowledge of Mr Al Fayed's tax affairs, and he was under the impression that the expiry of a forward tax agreement was imminent. On 7 March the suspension letter was issued. By 13 March Mr McGuigan had discovered that the agreement still had some years to run and was seemingly irrevocable, and that Mr Whitehead had purported to "suspend" it. The suspension letter was regarded by Mr McGuigan and Mr Pegler as amounting to a challenge to the taxpayer; but it had been issued without a review of the taxpayer's affairs; without express notice being given under section 9A of the 1970 Act; without a code of practice being identified or issued; without an investigation being registered; and without legal advice being taken as to the effect of the agreements. Mr McGuigan's reaction appears to have been one of consternation: the suspension letter might well be ineffective; the scope for investigation, if the agreement was enforceable, was unclear; and the Revenue was being threatened with judicial review. Legal advice had been sought, and mistake and misrepresentation had been identified as possible grounds on which the Revenue might not be bound by the agreement. Mr McGuigan had discussed the case with his line manager, Mr Pegler, on 27 March. Mr Pegler considered that the case should have been registered as an investigation before the suspension letter was issued and before any meeting had been held with KPMG. He also wanted work done on finding material that might provide a basis for the Revenue's not being bound by the agreement. Mr McGuigan authorised the registration of an investigation on 30 March. The report which he approved described the areas of interest in terms which were broad enough to cover a wide-ranging investigation of Mr Al Fayed's personal tax affairs, as Mr McGuigan had envisaged on 11 February; and he stated that that remained the primary objective. He also however recorded that it would be necessary first to overcome the defence of the agreement by KPMG. In the meantime, LBO was not informed of the difficulties SCO had encountered. The sending of the suspension letter thus led directly to the registration of an investigation on 30 March. The PAYE disclosure appears to have been treated by Mr McGuigan as relevant to registration, but not as a separate (or the sole) reason for registration. Mr McGuigan appears to have regarded the PAYE issue as a matter of secondary importance: a potential distraction from the primary objective. Since Mr McGuigan was not intending on 30 March to "open" an investigation (i.e. to make enquiries of the taxpayer), the purpose of the registration of an investigation on SCO's computer system on that date appears to have been to secure compliance with SCO's internal accountability procedures.

April 2000

[319] On 4 April 2000 Mr Carmichael received the transcript of the Hamilton trial. At some point between 4 and 9 April he prepared a "sensitive case report" for submission to Mr Pegler. Such reports were submitted on a quarterly basis in relation to all cases registered as investigations and designated as sensitive. They were submitted by each group leader to his Deputy Director, and by each Deputy Director to Mr Middleton. Mr Middleton then copied the reports to the Deputy Chairman of the Board, Mr Matheson. The reports on the Al Fayed case were thus copied up the line of management to Mr Matheson. The report in question begins:

"Mohamed Al Fayed was registered as a Code 8 investigation on the 31 March 2000 following disclosure of Pay As You Earn irregularities within his personal household and companies closely associated to him."

That sentence was founded upon, by counsel for the Revenue, as evidence that the reason for the registration of the investigation was the disclosure of PAYE irregularities. I decline to accept that, for the reasons I have explained. In the section of the report on "Work to Date", Mr Carmichael wrote:

"I have met with Solicitors Office who in turn are seeking counsel's opinion on the merits of the Herbert Smith Agreement (1990) and the 2 KPMG Agreements (1990 and 1997). Counsel will give his opinion no later than 10 April. I have a tentative arrangement to meet our Solicitor on 12 April.

A copy of the transcript of the Hamilton trial is now in our hands and the tedious job of reading it has started."

[320] On 10 April Mr Carmichael and Ms McKenzie-Boyle attended a conference with counsel. Advice was given, subject to confirmation in writing, that the 1990 and 1997 forward tax agreements were ultra vires. Considered advice was to be provided in writing by 5 May 2000. Mr Carmichael informed Mr McGuigan of the advice.

[321] On the same date, Mr Murray telephoned Mr McGuigan to fix a date for the meeting which had been arranged for the following week. Mr McGuigan said that a great deal of work had been done on the issues, that they had consulted the Solicitor of Inland Revenue and counsel, and that he was due to have a meeting with SCO senior management in London the following day. He was unclear as to when the Revenue would be able to respond, but he agreed to telephone Mr Murray on 12 April. Mr McGuigan did not (either then or subsequently) inform Mr Murray of the registration of an investigation on 30 March.

[322] On 11 April Mr McGuigan and Mr Carmichael attended a meeting with Mr Pegler, Ms McKenzie-Boyle and another member of the Solicitor's Office. There was a discussion of the legal advice which had been received. Mr McGuigan said that, given the time required to obtain counsel's written advice, he would have to tell KPMG that the Revenue could not meet the deadline which had been agreed at the meeting on 20 March. It was agreed that there should be a further meeting with the Solicitor's Office on 11 May, when counsel's advice would be available. The meeting of 11 May was intended to consider whether, and in what circumstances, the Revenue had the power to enquire into back years. One view in SCO was that the proper approach, if counsel's advice were confirmed, might involve treating all of the forward tax agreements between the Fayeds and the Revenue as nullities, in which event all of Mr Al Fayed's tax affairs (back to the 1970s) might have to be addressed.

[323] On 12 April Mr McGuigan telephoned Mr Murray. He said that there were a number of areas, personal and corporate, which the Revenue felt required further consideration. He felt it would be mid May before the Revenue could respond fully to the points made by Mr Murray at the meeting on 20 March. He requested that the Fayeds be patient meantime, and provide as much notice as possible of any legal proceedings.

[324] Mr Pegler had requested copies of the letters sent by KPMG to SCO Edinburgh on 28 March; and these were faxed to him on 13 April. He highlighted the passages emphasising the urgency of the matter, the question as to the legal basis of any termination of the agreement, and the question:

"What are the prior representations on which the Revenue rely in support of any attempt to vary the terms of the 1997 agreement prior to its expiry in 2003?"

[325] Mr Pegler wrote to Mr Middleton the same day, in view of the threat of judicial review. He was concerned that only five weeks remained of the eight week deadline set by KPMG. In his letter to Mr Middleton, Mr Pegler narrated the history of the agreements, and continued:

"During the recent libel trial involving Mohammed Al-Fayed, things were claimed and said that throw doubt on the sufficiency of liability paid to the Revenue.

...

KPMG, their client and his lawyers are unhappy with the Revenue's attempt to overcome the permanency of the contract and have said they will take the matter to court (via a Judicial Review of our decision to suspend the Agreement) unless we withdraw our letter...

I do not know why we sent out our letter of suspension when we did but that is another matter altogether. What we now have to deal with is the urgent matter of how to take the case forward. I attach copies of the two recent letters from KPMG. They are clear as to their purpose, that is to place time pressures on us to withdraw the letter of suspension."

[326] After explaining that the trial transcript was being examined, and that legal advice had been received that both the 1990 and 1997 forward tax agreements were ultra vires, Mr Pegler continued:

"We cannot deal with this case in isolation as apparently KPMG are aware of other cases involving forward agreements negotiated with officers of SCO. It would therefore be naïve to seek to break Mohammed Al-Fayed's forward agreement in isolation without assessing the efficacy of others. Otherwise, we could face an allegation that we were dealing with Mohammed Al-Fayed unfairly. Solicitor's Office agreed and we will be seeking Counsel's opinion on two unassociated forward contracts that will, for this purpose, be anonymised...

At my request Jim McGuigan has contacted KPMG to explain that we are taking their letters very seriously indeed and are seeking further advice on the matter. In a telephone call yesterday Tom Murray, the KPMG partner representing Mohammed Al-Fayed, had indicated that he will recommend to his client taking no precipitative action until mid-May. This is good news and allows us time to receive legal advice and discuss the way forward....

Diane McKenzie-Boyle asked that the Chairman be advised through your good office about the possibility that the other side may seek a listing for a Judicial Review next week. The fact of the application will be public but any detail will not appear in that arena for some weeks to come. In view of Tom Murray's comments, I doubt there will be any such listing but we cannot take that for granted.

Steps are already underway to identify the number of cases we have or have dealt with in the previous five years through forward contracts. By Friday we should know the number involved and the size of the potential problem if Counsel's opinion goes against us on the general principle that forward contracts such as those we have generated are ultra vires. However, for now I would wish to exercise caution and await further facts before reaching any conclusions."

[327] As appears from the passages quoted, there was concern that the vires issue might affect not only the agreements entered into with the Fayeds, but also other forward tax agreements with other taxpayers; and the Revenue knew that KPMG were aware of such agreements. Mr Pegler put forward KPMG's knowledge of other cases as a reason why the Revenue could not deal with Mr Al Fayed's case in isolation. Mr Pegler states in his affidavit that he was concerned to ensure that Mr Al Fayed was dealt with in the same manner as others in a similar position. Mr Middleton began gathering information about other forward tax agreements. He also decided to attend the meeting on 11 May. Mr Middleton would not normally become involved in an operational matter, but became involved in this case because of the advice that the Revenue had entered into agreements which were ultra vires.

[328] On 18 April a meeting was held between Mr Pegler, Mr McGuigan and Mr Carmichael for the purpose of informing Mr Pegler about the trial transcript. Mr Carmichael and other staff had been reading the transcript and had given oral reports to Mr McGuigan. By the date of the meeting, Mr Carmichael had read most of the relevant parts of the transcript.

[329] At the time Mr Carmichael was reading the transcript, his thinking was that the Revenue would not be bound by the 1990 agreement if it had been induced by a misrepresentation; and that, if the Revenue was not bound by the 1990 agreement, it would equally not be bound by the 1997 agreement, as that had been based on the 1990 agreement. The trial had been concerned primarily with events during the late 1980s, and might therefore be relevant to the circumstances existing around the time the 1990 agreement had been entered into. Mr Carmichael appreciated that the figure of 200,000 agreed in 1990 had not been based on evidence of actual remittances (except, indirectly, to the extent that it might have been based on the figure of 150,000 agreed in 1985, which had itself been based on treating one-third of remittances as constituting income; but the remittances on which the figure of 150,000 was based had been understated, as had been accepted in 1990). Mr Carmichael's reading of the transcript led him to consider that the 200,000 agreed in 1990 (and, therefore, the 240,000 agreed in 1997) might not have been the full measure of Mr Al Fayed's tax liability. In those circumstances, he believed that the Revenue might be able to re-open the earlier years and re-calculate the tax due.

[330] At the meeting, Mr McGuigan reported what Mr Carmichael had found in the trial transcripts, including evidence of payments to Mr Hamilton and to staff, and references to bundles of cash. Mr Pegler is recorded as saying that "undoubtedly [Mr Al Fayed's] corporate and personal affairs merit close and thorough investigation", and that the Revenue should "consider investigation of corporate entities and use that as a 'in' to [Mr Al Fayed]". Mr McGuigan understood the latter remark to mean that SCO could use enquiries into the corporate side of Mr Al Fayed's business affairs as a way in to investigate his personal tax affairs. It was noted that Mr Carmichael should prepare an enquiry plan for each company susceptible to enquiry. The note also states:

"Consider how we investigate each entity.

Do same for [Mr Al Fayed].

Interaction between him and [companies].

Liaise with LBO.

If agreement is [ultra vires] decide what we will do immediately after meeting on [11 May]."

[331] In relation to Mr Pegler's reported remark that "undoubtedly [Mr Al Fayed's] corporate and personal affairs merit close and thorough investigation", Mr McGuigan states in his affidavit:

"While I was still awaiting the final report on the trial transcript and the clarification of our enquiry powers this statement, based on the oral reports, coincided with my developing view that there appeared to be reasons to adopt the more fundamental challenge envisaged in the registration report of 30 March 2000. But no final decision had been reached. The final notes on the Trial Transcript were not yet available and it is noted that if the forward tax agreement was ultra vires we should decide what we would do immediately after the meeting planned for 11 May 2000. That meeting was intended to discuss options in the light of clarification of our right to enquire."

[332] Mr McGuigan's reference to a "developing view" has to be seen in the context of what he said at the meeting on 11 February and what he wrote in his comments on the registration report on 30 March. As explained above (at para.241), his statements at the meeting on 11 February indicate that he was already envisaging a comprehensive investigation of Mr Al Fayed's affairs; and his comments on the registration report described "a more fundamental challenge to the taxpayer's personal tax affairs" as SCO's "primary objective". By 18 April, however, Mr McGuigan had received reports on the trial transcript, which he regarded as providing grounds for undertaking such an investigation. It was also on the basis of those reports that Mr Pegler said that "undoubtedly" Mr Al Fayed's corporate and personal affairs merited investigation. It appears from that observation that, by this stage, it was regarded as almost inevitable that a decision would be taken to investigate Mr Al Fayed's corporate and personal affairs, unless the legal advice placed a difficulty in the path of such an investigation or some unforeseen problem emerged. That state of affairs would appear to be reflected in the fact that Mr Carmichael was asked to prepare an enquiry plan for each company susceptible to enquiry: as explained above (at para.233), an investigator would ordinarily prepare an enquiry plan as part of the registration report, or after the registration report had been approved, but in either event only if he considered that an SCO investigation appeared to be warranted. An issue which remained uncertain, pending a consideration of counsel's written advice, was the effect of the 1990 and 1997 agreements, and the consequent restrictions, if any, which those agreements placed upon the matters which might be enquired into. In those circumstances, it is understandable that it was agreed that a decision as to what to do should be postponed until after the meeting on 11 May, at which the effect of the agreements was to be discussed.

[333] On 20 April Mr Murray wrote to Mr McGuigan, requesting a meeting during the week beginning 15 May. Mr Carmichael responded, and agreed the date of 19 May.

[334] On 27 April Mr Carmichael completed his review of the trial transcript. That was the last substantial research which he carried out.

May 2000

[335] In advance of the meeting arranged for 11 May, Mr McGuigan received and considered the notes which Mr Carmichael had prepared on the trial transcript. He also received oral reports from Mr Carmichael on his review of the SCO London papers and his reading of The Bodyguard's Story. Mr McGuigan also himself reviewed some of the SCO London papers.

[336] The passages from the trial transcript which were noted by Mr Carmichael included the following:

(1) a passage in which Mr Al Fayed described his current business interests as Harrods, "shipping business, oil business, mining business and aviation business", the Ritz hotel and Fulham Football Club.

(2) a passage in which he said that he "owned" Hyde Park Residence Ltd.

(3) a passage in which he responded to a suggestion that his business interests were in companies which were owned ultimately in Panama and the British Virgin Islands: "It is my own companies. Belongs to me."

(4) a passage in which he said that (as at the time of the trial) he withdrew 10,000 to 50,000 per month in cash from the Midland Bank in Park Lane, the amounts withdrawn at one time being normally 10,000 or 20,000.

(5) a passage in which Ms Bozek said, in response to a question as to whether, if the butler at Balnagown Castle were being reimbursed expenses which he had incurred, one would expect the reimbursement to be made by Balnagown Castle Properties Ltd: "No, you would not. Mr Al Fayed treated his members of staff not as employees of a particular company, but as his personal employees. They may have been paid by a particular company but, if they worked in his house, they were his personal employees. So it is not true to say that any expenses paid to that employee would have been reimbursed through the company."

(6) a passage in which Ms Bond said that Mr Al Fayed "gets some of his money now from the Harrods Bank".

(7) a passage in which Mr Douglas Marvin, formerly a partner in a U.S. firm of lawyers of which Mr Al Fayed was a client, explained that he had left that firm in 1997 in order to become a director of a number of companies in which Mr Al Fayed had an interest. He said that he was a director of Harrods Energy Ltd of Bermuda; a director and president of Harrods Energy (Thailand) Ltd, a Thai company; a director and president of Harrods Minerals, of Bermuda; a member of the management company of Harrods Minerals (Mongolia) Ltd, a Mongolian company; a director of Harrods Minerals (Peru) Ltd, a Peruvian company; a director of Harrods National Resources Ltd, of Bermuda; president, secretary, treasurer and director of Harrods Natural Resources Inc, a Delaware company; a director of The Map Factory, a Californian company; a director of three other Californian companies of Mr Al Fayed's, namely HJW Inc, HJW Federal Inc and Globe Xplorer Inc; and president, treasurer and director of Allied Stars Inc, a Californian company originally owned by Emad Al Fayed.

[337] Mr McGuigan states in his affidavit that it was clear from his review of the notes of the trial transcript, his discussions with Mr Carmichael and his assistants, his review of the SCO London papers, and what he had been told about The Bodyguard's Story, that there were aspects of Mr Al Fayed's tax affairs which merited investigation. These fell into five broad categories: benefits in kind; PAYE/Schedule E issues; overseas companies and other offshore entities; UK companies and other UK entities; and remittances. During May, as will appear, it was decided that it would be inappropriate to investigate remittances in respect of past years, when Mr Al Fayed had acted in reliance on the forward tax agreements. Mr McGuigan therefore focused in his evidence on the remaining four categories, which he described as forming "the basis for a fundamental review of Mr Al Fayed's affairs."

[338] In relation to benefits in kind, Mr McGuigan refers in his affidavit to a number of passages in the notes of the transcript, and states:

"Each of these transactions could give rise to a taxable benefit on Mr Al Fayed if the benefit was not fully recharged (section 154 Income and Corporation Taxes Act 1988)".

It is not apparent from the transcript, in relation to any of these matters, that Mr Al Fayed had received a benefit the cost of which had not been reimbursed; and, in his evidence, Mr McGuigan accepted that there was no evidence that benefits received by Mr Al Fayed had not been dealt with properly for tax purposes. He said, however, that he wanted to check the position. In his affidavit, Mr McGuigan similarly states that he was not relying on any particular incident, but rather upon "a possible modus operandi which... might give rise to loss of tax." In that regard, he appears to have had in mind the close relationship between Mr Al Fayed and the companies in question, and the possibility, arising from a passage in the transcript, that full records might not have been kept.

[339] In relation to PAYE/Schedule E issues, Mr McGuigan correctly notes that the transcript disclosed evidence of regular cash payments to some members of staff, subject to an explanation that the payments were regarded as gifts or allowances towards clothing and other expenses, rather than as a supplement to salaries. Mr McGuigan states that he "was again more concerned by modus operandi than any particular instances", and he notes that SCO had already been made aware of a problem in this area through the disclosure made on 20 March.

[340] In relation to overseas companies, Mr McGuigan states:

"[T]he transcript contained information about a number of entities which might be subject to UK tax. There were indications of companies located offshore which Mr Al Fayed claimed belonged to him and the possibility that they were centrally managed and controlled in the UK was a possible tax risk in that the UK may be able to tax those companies in that situation. International businesses were identified raising additional questions in this area... Mr Al Fayed might be controlling offshore companies from the UK and his perceived character as a 'tyrannical employer' may support the view that his character is such that he may exercise control personally. The point was again one of modus operandi and not necessarily of any particular instance or instances. The indications meant that it was possible that there might be tax loss arising from non-UK companies which could be liable to UK tax but were not known to the Revenue".

The companies and other entities mentioned, in the passages cited by Mr McGuigan, included the companies mentioned in Mr Marvin's evidence (see para.336); a company named Altafin Investments Inc, of the British Virgin Islands; a number of offshore companies of which the Revenue was previously aware (Alfayed Investment and Trust PVT LP, International Marine Services SA, Prestige Properties SA and Tane Fount SA); and Genavco Air Ltd, which was in fact a UK company of which the Revenue was previously aware (see para.17). The description of Mr Al Fayed as a "tyrannical employer" appears to have been taken from the opening speech of his counsel. It appears that Mr McGuigan's concern in respect of the overseas companies extended to the potential tax liabilities of the overseas companies themselves.

[341] In relation to UK companies, Mr McGuigan states:

"[T]here were questions of deductibility of expenses in computing liability to tax arising from, for example, legal fees, and I was concerned by the types of payments... which might be being allowed wrongly against business expenses of UK companies when they may not be genuinely allowable. The concerns were not specific to any recorded incident or time but again went to modus operandi."

These concerns extended to the tax affairs of the UK companies themselves.

[342] Mr McGuigan also notes in his affidavit a more general concern arising from the transcript:

"In general, the widespread use of cash in Mr Al Fayed's business dealings, while not necessarily relevant to the computations of his liabilities on remittances of past years, led me to the conclusion that there was scope for loss of tax through inadequate record keeping which is, in my experience, and from the disclosure made on 20 March 2000 an aspect of cash payments. KPMG had reported that 'given the absence of records, it was likely that reporting to IR could only be on a very "broad brush" basis' [see para.275]. This was a concern which appeared to be relevant to much of the affairs of Mr Al Fayed and those associated with or controlled by him."

This was an issue which had also been of concern to Mr Pegler.

[343] Returning for a moment to Glasgow LBO, SCO Edinburgh had not informed Glasgow LBO of the extent of its involvement with KPMG or of the issues arising from the "suspension" of the 1997 agreement. Mr Williams had still not been told the terms of the agreement. He expressed his concerns to his Deputy Director, who in turn discussed matters with the Director of LBO, Mrs Marjorie Williams, and with the Director of SCO, Mr Middleton. As a result of this, it was arranged that Mr Williams should attend the meeting on 11 May 2000. At some point during May he expressed to Mr Carmichael the view that neither SCO Edinburgh nor Glasgow LBO should undertake any form of review without the other, saying that the whole matter should go forward as a co-ordinated case or not at all. Mr Murrin had begun reading through the Harrods accounts for the period to 31 January 1999 in about March or April 2000, to determine whether there had been any material changes to the control or operations of the companies. None was identified. The concerns identified by Mr Williams in his review of the 1998 accounts (see paras.152-155) accordingly remained.

[344] On 10 May 2000 counsel's written advice was obtained. On 11 May the meeting was held. It was attended by Mr Middleton, Mr Pegler, Mr McGuigan and Mr Carmichael of SCO, Mr Williams of LBO, and representatives of the Solicitor's Office. At the meeting, Mr Pegler expressed concern about the reasonableness and fairness of the treatment of Mr Al Fayed. In his affidavit, he does not explain the reason for his concern; but, as he mentions his concern in the context of a discussion at the meeting of the question whether the Revenue could enquire into back years, it may be that his concern was that it would be unfair for the Revenue to re-open years when Mr Al Fayed had acted in reliance on the agreement. It is apparent that that was indeed a concern. According to Mr Carmichael, whose evidence on this matter I accept, the possibility of an enquiry under section 9A of the 1970 Act was considered, but at the conclusion of the meeting it remained unclear whether such an enquiry would take place or, if so, in respect of which years. In his view, the merits of the matter suggested by then that an enquiry would be appropriate. The question which needed to be addressed was whether it was, in all the circumstances, proper to proceed with an enquiry. The legal position appears still to have been not wholly clear. Co-ordination between SCO and LBO was discussed. A further meeting was arranged for 16 May. It was to take the form of a conference with counsel.

[345] At the meeting on 11 May, Mr Williams still did not get to examine the 1997 agreement. He learned enough, however, to be:

"satisfied that... with the partial exception of the payment of dividends offshore and the availability of remittances to meet living expenditure the risks I had originally identified had not been satisfactorily addressed and would need to form part of the LBO's enquiries on the 1999 accounts."

[346] On 12 May Mr Williams prepared two documents: one setting out possible sources of income which might not be covered by the 1997 agreement (so far as Mr Williams could infer its terms from counsel's advice), and the other noting aspects of the risk assessments of Harrods companies which might affect personal tax liabilities. The latter document was based on an initial examination of the 1999 accounts. It identified a number of issues, including whether specific categories of corporate expenditure (e.g. on premises, staff and professional fees) had been incurred by members of the Harrods group wholly and exclusively for the purpose of the companies' trade. It also identified some additional corporate tax issues, including the issue of transfer pricing (e.g. the extent to which the Harrods group should be charging overseas companies for the use of the Harrods name). After receiving copies of these documents, Mr Carmichael and Mr McGuigan attempted to identify areas of responsibility for SCO Edinburgh and Glasgow LBO.

[347] On 15 May Mr Middleton wrote to the SCO Senior Management Team (comprising himself, the Deputy Directors, and two Assistant Directors) seeking further information about the potential scale of the problem in relation to forward tax agreements, so that the matter could be discussed at their meeting later that week. He wrote:

"2. Counsel has advised that the forward contract in the particular case
under review is invalid because the Revenue do not have the vires to enter into such a contract. The principal reasons are that the contract was irrevocable (i.e. it can run forever) and there is no provision for review/revision if the facts or circumstances change. Indeed, there is a specific provision the effect of which denies us immediate access to what the facts and circumstances are in respect of each year - i.e. the agreement provides for returns to be completed 'as per agreement', so that IR is unable to ascertain the actual circumstances in any year.

3. Faced with such an opinion from Counsel, we need to act on the particular case. I shall want to alert with the Board before we do anything. It is also possible that the taxpayer in question may seek judicial review and may raise the question of consistency with other cases. (And the Board will undoubtedly ask about any other cases). Therefore I need more information now about how many future contracts are current and their terms. But this is a very sensitive case and the information gathering will therefore need careful handling.

4. From what you told me previously, the vast majority of forward contracts in existence would not be ultra vires (following Counsel's opinion). They have an end date and in most cases are not dissimilar to advance pricing agreements which are commonly used in transfer pricing - i.e. following a review or investigation, the liability for future years is agreed to be x% of profit/turnover subject to review if the circumstances change. And we can get out of the arrangement after a defined number of years. I am not too concerned about those. But I need to know whether there are any more like the present case."

[348] The matter to which Mr Middleton wished to alert the Board was counsel's advice that the Revenue had acted ultra vires. For the Revenue not to abide by an agreement which it had entered into would be exceptional (in the absence of misrepresentation), and would be a matter for decision at Board level. It appears from the letter that the features which rendered the 1997 agreement ultra vires, according to counsel's advice, were understood to be absent from the vast majority of the forward tax agreements which the Revenue had entered into.

[349] On 16 May a conference with counsel was held, which was attended by Mr Middleton, Mr Pegler, Mr McGuigan, Mr Carmichael, Mr Williams and legal advisers. The way forward in the case was considered.

[350] Mr McGuigan maintains that he took an important decision at the meeting. In his affidavit, he states:

"At that meeting I decided that we should check the position on re-imbursement of benefits under the agreement in respect of the tax year 1998/99 (which was then the tax year which was open under Self Assessment) and possibly subsequent years. Other risks, which had been identified through my review of the case, including the notes of the Trial transcript, such as the risks inherent in the use by Mr Al Fayed of off shore companies and trusts, also required to be decided upon. I had made no decision on these other risks pending the time when I was in a position to make a decision on benefits. I wished to address, as far as possible, all perceived areas of risk at once. Therefore on 16 May 2000 I concluded that we should proceed with the more fundamental review which I had envisaged in my Group Leader comments on the registration report.

Mr Middleton decided that he would refer issues in relation to [Mr Al Fayed's] forward tax agreement to Mr Matheson and that he would meet with Mr Matheson the next day to explain the position to him. By that stage I was satisfied that we would proceed with the more fundamental review. On or before 18 May 2000 it was confirmed to me that my senior officers were content with my decision."

His oral evidence was to the same effect.

[351] It is apparent from what Mr McGuigan says that he drew a distinction between, on the one hand, a check that benefits had been reimbursed in accordance with the requirements of clause 3 of the 1997 agreement (see para.99) during 1998/99, and possibly subsequent years, and, on the other hand, a more fundamental investigation of Mr Al Fayed's affairs of the kind he had envisaged on 30 March, encompassing the areas of risk identified in his review of the case (see paras.337-342). As explained below (at para.464), it seems to me to be difficult to draw a clear distinction between these two matters. Be that as it may, Mr McGuigan maintains that at the meeting he "decided that we should check the position on reimbursement of benefits" and "concluded that we should proceed with the more fundamental review".

[352] Mr Pegler's evidence about the meeting is as follows:

"The meeting considered the way forward in this case. By the end of that meeting agreements in principle on the way forward had been reached by those acting on behalf of the Revenue. Those agreements included that the Revenue should check the benefits position in respect of 1998/99.

Mr Middleton notified Mr Matheson, a member of the Board of Inland Revenue of the decision, and Mr Matheson was content for SCO to proceed on the basis proposed."

Mr Pegler makes no express mention of a decision being taken to proceed with a wide-ranging investigation.

[353] Mr Carmichael's affidavit states:

"On 16 May 2000 I met Mr McGuigan, Mr Pegler, Mr Middleton, Mr Williams and legal advisers when it was established that I would be in a position to enquire into the 1998/99 tax return of Mr Al Fayed for the year ended 5 April 1999. I also established that I would not be in a position to enquire into remittances covered by the agreement for years to 5 April 2000. I was aware that it was likely that the investigation would proceed along these lines but my future course of action still had to be authorised.

It was not until later, on or around 17 May 2000, that I was told by Mr McGuigan that I could investigate matters other than the disclosed irregularities and that co-ordinated case-working would apply."

Mr Carmichael's evidence does not suggest that he was aware of a decision being taken by Mr McGuigan at the meeting on 16 May to proceed with a wide-ranging investigation. Mr Carmichael appears to have understood that his future course of action still had to be authorised; and that what was envisaged was an enquiry into Mr Al Fayed's tax return for 1998/99. The investigation described by Mr McGuigan however went beyond the matters in Mr Al Fayed's tax return, since it involved (for example) ascertaining the tax liabilities of UK and offshore companies. Counsel for the Revenue accepted in their submissions that there was an inconsistency between the evidence of Mr Carmichael and that of Mr McGuigan.

[354] Mr Middleton, in his evidence, had no clear recollection of the meeting. His minute of his meeting with Mr Matheson on 17 May however records what he told Mr Matheson about SCO's intentions, and what Mr Matheson decided. The minute is quoted and discussed below (at paras.365-368). In summary, Mr Middleton told Mr Matheson, in relation to the 1997 agreement, that SCO did not propose to go back into years before 6 April 2000 in respect of the matters which were covered by the agreement (which were listed as being foreign source income and gains, and remittances). In relation to benefits and other matters which were not covered by the agreement, Mr Middleton told Mr Matheson that there was good reason to check that there were mechanisms in place for the companies recharging Mr Al Fayed for benefits provided, and how expenses payments were dealt with. SCO intended to look at 1998/99. The PAYE disclosure also had to be dealt with. Mr Matheson agreed with these proposals. No mention appears to have been made by Mr Middleton of an intention by SCO to carry out a wide-ranging investigation, extending to such matters as offshore companies and trusts, or the tax liabilities of such entities, UK companies or other individuals.

[355] Mr Williams's evidence about the meeting does not concern the SCO proposals, but is relevant to other issues in these proceedings. Mr Williams's interest at the meeting was to obtain confirmation that the issues arising from the 1997 agreement placed no limitation on the nature or extent of LBO's anticipated enquiries, provided they were specifically directed at corporate issues and not at the liabilities of family members. That confirmation was obtained.

[356] The absence of any indication that Mr Williams was aware of the decision which Mr McGuigan claims to have taken at the meeting might however be regarded as significant, in much the same way as the curious incident of the dog in the night-time. Mr Williams's objective since August 1999 had been to bring about a joint exercise involving both LBO and SCO under combined case-working, under his own direction as case director or "ringmaster". That any SCO investigation should form part of a joint exercise with LBO had apparently been accepted by Mr McGuigan on 11 February. Although contact with LBO had ceased for several weeks while the issues arising from the suspension letter were addressed by SCO, it had resumed a few days prior to the meeting on 16 May. Co-ordination between SCO and LBO had been discussed; Mr Williams had sent SCO a note of aspects of the corporate risk assessment which might impinge upon personal tax liabilities; and Mr McGuigan and Mr Carmichael had begun an attempt to allocate areas of responsibility between SCO and LBO. In that context, one might have expected that a decision by Mr McGuigan to proceed with an investigation (especially one encompassing UK and offshore companies) would be a matter of significance to Mr Williams.

[357] Counsel for the petitioners invited me, in their submissions, to disbelieve Mr McGuigan's evidence that he took a decision on 16 May as he claimed. They pointed to a number of factors:

(1) The absence of any indication that any other person present at the meeting was aware of such a decision being taken.

(2) The Revenue's failure to produce any note or minute of the meeting, even edited to protect the confidentiality of legal advice. It is apparent from the evidence that notes of meetings were habitually taken.

(3) The absence of any other contemporaneous record of such a decision.

(4) The absence of any reference to such a decision in any later document (other than Mr McGuigan's affidavit).

(5) The absence of any reference to such a decision in the Revenue's pleadings (which were last amended on the first day of the proof).

Counsel submitted that Mr McGuigan's account of taking such a decision on 16 May was designed to enable him to maintain that his decision to authorise a wide investigation was taken on the basis of a review of Mr Al Fayed's tax affairs (Mr Carmichael having made enquiries into those affairs, and Mr McGuigan having considered Mr Carmichael's written and oral reports, the excerpts from the transcript, and some of the SCO London papers, by 16 May, but not by 11 February or 30 March), and also to maintain that the notification of the investigation to the taxpayer (on 2 June), and the issue of the relevant code of practice (on the same date), occurred reasonably promptly after his decision had been taken.

[358] Counsel for the petitioners also founded on evidence given by Mr Middleton about SCO procedures. Mr Middleton was asked to consider the case on the hypothesis that the registration on 30 March had been intended solely to enable the PAYE disclosure to be taken forward. He was asked about the procedure which would be followed, if a review was thereafter carried out of the wider circumstances, and a decision was made by the group leader to extend the investigation into areas beyond the disclosure. Mr Middleton said that he would expect there to be a note on the file of the areas identified as being of concern. He was not sure whether it would necessarily take the form of a formal registration report - although he thought that it would - but there would be some record on the file, such as an investigation plan. In the present case, Mr McGuigan had received by 16 May no supplementary registration report and no investigation plan.

[359] In considering Mr McGuigan's evidence about the decision he claims to have taken on 16 May, it is essential to bear in mind the factual context. I am satisfied that a decision to conduct an investigation of Mr Al Fayed's affairs had not been taken on or before 11 February, although the statements made by Mr McGuigan at the meeting on that date suggest that he was assuming that such a decision would be taken at a later date (see paras.241-243). On 30 March, Mr McGuigan had authorised the registration of an investigation on the computer system, with wide areas of interest registered; but he had done so primarily in order to regularise the position created by the issue of the suspension letter, in conformity with the Revenue's internal policy about accountability and case management as he understood it. He had not at that stage decided to undertake a comprehensive investigation of Mr Al Fayed's affairs: as his group leader's comments make clear, no decision on that matter could be taken at that stage. His reference to the "primary objective" however indicated that he was still assuming that a comprehensive investigation was, in principle, desirable. By 18 April, Mr McGuigan had received oral reports about the matters disclosed by the trial transcript, and considered that there appeared to be reasons to undertake a comprehensive investigation. It appears to have been regarded as almost inevitable by then that a decision would be taken to investigate Mr Al Fayed's corporate and personal affairs; but the scope of any investigation, both in time and in subject-matter, was uncertain pending clarification of the issues arising from the 1997 agreement and the suspension letter. No decision was taken at that stage: it was envisaged that a decision would be taken after the meeting on 11 May. By the date of that meeting, Mr McGuigan had reviewed the case. He had read the notes of the trial transcript and some of the SCO London papers, and had received oral reports about those papers and The Bodyguard's Story. He had identified specific aspects of Mr Al Fayed's affairs (and those of companies associated with him) which appeared to him to merit investigation. In the event, the meeting on 11 May left unclear the question to what extent, as a matter of fairness, SCO could enquire into previous years which were covered by the agreements. That matter was to be considered further at the meeting on 16 May.

[360] Against that background, it can be understood that the agreement in principle which was arrived at on 16 May, subject to the approval of Mr Matheson, made clear for the first time the extent to which the scope of enquiry work was restricted as a consequence of the 1997 agreement. That matter having been clarified, the way was clear for Mr McGuigan to authorise Mr Carmichael to conduct a wide-ranging investigation of Mr Al Fayed's affairs, covering the matters which appeared to Mr McGuigan to merit enquiry. Accordingly, as soon as Mr Matheson's approval was obtained, Mr McGuigan would be able to tell Mr Carmichael to proceed with the investigation, subject to the limitations upon enquiries which had been agreed at the meeting on 16 May.

[361] Following the meeting on 16 May, Mr Matheson approved the proposed course of action on 17 May, as explained below. On or about the same date, Mr Carmichael was told by Mr McGuigan that he could investigate matters other than PAYE compliance and that co-ordinated case-working would apply. On 19 May Mr Carmichael prepared the first draft of an enquiry plan, covering the issues (other than remittances) which Mr McGuigan had identified as meriting investigation: benefits, PAYE, offshore companies and UK companies.

[362] From the sequence of events described in the last three paragraphs, it is reasonable to infer that Mr McGuigan took a decision to conduct a wide-ranging investigation on or about 16 May. This does not appear to have been a decision which was taken in a formal manner or which was recorded. Indeed, given the absence of any indication that the other persons present at the meeting on 16 May were aware at the time that such a decision had been taken, it may be that the decision was a purely mental event. Notwithstanding the points made by counsel for the petitioners, and my reservations about aspects of Mr McGuigan's evidence (in the light of which I have considered this matter with particular care), I do not consider that there is any adequate reason to disbelieve Mr McGuigan's evidence about this issue: putting the matter more positively, I believe Mr McGuigan's evidence. I also note that this part of his evidence does not appear to have been challenged by counsel for the petitioners. While that does not compel me to accept his evidence, I take into account the fact that he was not given an opportunity to answer the points which were subsequently made by counsel for the petitioners, and I bear in mind the salutary warning of Megarry J in John v Rees [1970] Ch 345 at page 402:

"As everybody who has anything to do with the law well knows, the path of the law is strewn with examples of open and shut cases which, somehow, were not; of unanswerable charges which, in the event, were completely answered; of inexplicable conduct which was fully explained; of fixed and unalterable determinations that, by discussion, suffered a change."

[363] In relation to Mr Middleton's evidence about the desirability of keeping the areas of interest (as identified on the file) up to date, for the sake of accountability and good management, I note that Mr McGuigan's evidence was that his usual practice was to deal with the widening of an investigation by way of an enquiry plan. It is not apparent in the present case that there was a need for additional areas of interest to be entered on the file in consequence of the decision taken on 16 May, since the areas entered on the file on 30 March (in the registration report) were themselves of a wide scope. This issue was not explored in evidence. In any event, a draft enquiry plan, describing the areas of interest in greater detail, had been prepared by 19 May, two weeks before the investigation was opened.

[364] On 17 May the meeting took place between Mr Matheson, Mr Middleton, Mr Williams and Ms McKenzie-Boyle, at which it was intended to seek Mr Matheson's approval for the decisions in principle which had been taken the previous day. The issues discussed, and the decision reached by Mr Matheson, were recorded in a memorandum prepared by Mr Middleton dated 19 May 2000, which was produced by the Revenue on the eighth day of the proof. It was copied to the Chairman of the Board of Inland Revenue, to every other member of the Board (with the exception of the Chief Executive of the Valuation Office), to the Solicitor to the Board, and to Mrs Williams, Mr Williams and Mr Pegler.

[365] After an introductory paragraph, the memorandum set out the history of the case. After narrating the history of the 1985, 1990 and 1997 agreements, Mr Middleton continued:

"6. As a consequence, inter alia, of matters aired in Court in the recent libel trial involving Mr Fayed, SCO looked again at Mr Al Fayed's tax affairs this year. In particular, things were said at the trial which throw doubt on the sufficiency of payments made to the Revenue. On 7 March, SCO wrote to KPMG (agents for Mr Fayed) suspending the 1997 'agreement' and returning the recently received cheque for 240,000. KPMG have intimated their client is considering what options are open to him by way of action against the Revenue's suspension of the agreement."

After summarising legal advice received, Mr Middleton continued:

"LBO

8. Glasgow LBO deal with Harrods and other Al Fayed companies. In the past they have been constrained from tackling issues on the companies which might involve Mr Al Fayed personally because of the 'agreements'. Jim Williams, the PI [Principal Inspector] at Glasgow LBO responsible for the companies, believes that a full risk assessment of the Al Fayed companies would raise a raft of issues which ought to be reviewed."

[366] Mr Middleton continued:

"ACTION RE THE 'AGREEMENT'

9. In the light of Counsel's opinion, which Solicitor's Office endorses, there are four lead options.

10. First, allow the agreement to continue. There are no legal precedents 'on all four' with this. Mr Al Fayed may argue that we are bound by the agreement or that he has irrevocably arranged his affairs in such a way as to enable him best to comply with the terms of the agreement. He might argue it would be grossly unfair for us to seek to withdraw from it. [--------------------LEGAL ADVICE DELETED ---------------

----------------------------------------------------------------------], I do not believe the Board should acquiesce in it. We should terminate it even if that results in legal action (e.g. Judicial Review) against the Board, [-----------LEGAL ADVICE DELETED---------------------------]

11. Second, allow the "agreement" to run until 2003 and at that point refuse to renew it. Similar arguments run to those in para 10 above. It is probable that Mr Al Fayed would challenge us in 2003 if we withdrew from what he considers to be an irrevocable agreement. If that happened, it would come out that we have known Counsel's view of the agreement for about 3 years and done nothing about it. That would be embarrassing and very difficult to justify with Ministers and the NAO [National Audit Office] given Counsel's strong advice.

12. Third, terminate the 'agreement' as from 6 April 2000, and seek to get Mr Al Fayed on a proper SA footing for 2000/01 onwards. We effectively gave notice of our concern in the letter in March suspending the agreement, so a termination letter sent now notifying termination from 6 April would not be damaging.

13. The fourth option was to terminate the agreement from 6 April 2000, and seek to re-open earlier years. [-------LEGAL ADVICE DELETED -----] Mr Al Fayed could well persuade a Court that this would be grossly unfair as it is retrospective and he had ordered his affairs in such a way as to comply with the 'agreement' and would have acted differently if he had known the 'agreement' was invalid.

14. After discussion, you decided that option 3 (para 12) should be the way forward. For the sake of clarity, it is not proposed to go back into years before 6 April 2000 in respect of matters covered by the 'agreement' (foreign source income and gains, and remittances). But we do propose, and you agreed, to look at other matters relating to Mr Al Fayed's personal liabilities, including benefits and expenses (see below).

OTHER ACTION

15. There remain issues relating to possible taxation liabilities of Mr Al Fayed and his companies that need to be reviewed. LBO intends, and you have approved this, to do a full risk assessment of the companies. There is also the matter of Mr Al Fayed's personal benefits and other matters not covered by the 'agreement'. There is good reason to check that there are mechanisms in place for the companies recharging Mr Al Fayed for benefits provided, and how expenses payments are dealt with. Also, KPMG have intimated there may be PAYE or Schedule E consequences in respect of payments made by Mr Al Fayed to employees (this came out during the trial, so it is hardly a spontaneous disclosure). [----------------LEGAL ADVICE DELETED -------------------------------]

16. We intend, and you agreed, to look closely at the year 1998/99 - the earliest SA 'open' year. This fits neatly with the LBO's position as they have the accounts for accounting years ended in 1998 and 1999 still open.

17. SCO and LBO intend to work closely on this. Since you authorised the review, I have agreed with Jim Williams that a 'co-ordinated caseworking' approach should be applied.

...

20. It will be important in all our dealings to stress the CCW approach. We don't want people to get the impression this is a 'special project' or a 'special team' - that will only fuel claims that we have targeted Mr Al Fayed or are harassing him. Everyone must be professional in the way they approach this.

...

NEXT COMMUNICATION WITH MR FAYED

22. SCO Edinburgh have told KPMG that advice has been taken and is being considered. You have authorised us to terminate the 'agreement' from 6 April 2000, and to review areas outside the 'agreement' for 1998/99 (for LBO, the companies' accounts for 1998/1999).

23. I intend that we tell KPMG formally within the next 14 days that the agreement is terminated and that we propose to review certain aspects of the corporate and personal affairs. Solicitor's Office will help with drafting a letter."

[367] It appears from paragraph 14 that Mr Matheson agreed to a proposal by SCO to investigate "matters relating to Mr Al Fayed's personal liabilities, including benefits and expenses", but not "matters covered by the 'agreement' (foreign source income and gains, and remittances)". The matters to be investigated by SCO are explained further in paragraph 15. Two matters are mentioned. One is the PAYE issue. The other is a "check that there are mechanisms in place for the companies recharging Mr Al Fayed for benefits provided, and how expenses payments are dealt with". It appears from paragraph 15 that Mr Matheson also approved the intention of LBO to do a full risk assessment of the companies, as narrated in paragraph 8. In relation to paragraph 23, the period of 14 days from the date of the memorandum expired on 2 June, shortly before the expiry of the three month time limit applicable to proceedings in England for judicial review of the suspension letter (see para.271). Paragraph 23 appears to be the genesis of the letters of 2 June.

[368] As appears from paragraphs 17 and 20, it was unequivocally agreed at this point that LBO and SCO were to adopt a co-ordinated case-working approach. A meeting between LBO and SCO was arranged to be held on 7 June.

[369] It appears from the evidence of Mr Middleton, whose evidence on this matter I accept, that the decisions recorded in this memorandum were the only operational decisions taken at Board level in relation to Mr Al Fayed's tax affairs during the period with which these proceedings are concerned. Mr McGuigan was informed of the outcome of the meeting, and instructed Mr Carmichael accordingly.

[370] At the meeting on 16 May, it had been agreed that the meeting with KPMG scheduled for 19 May would have to be postponed. On 18 May Mr McGuigan telephoned Mr Murray to postpone the meeting. Mr McGuigan read out a draft letter which he had received from Mr Middleton, according to which the Revenue were in the process of considering legal advice and would be able to respond to the points raised by Mr Murray within a further 14 days. It was agreed that 2 June would be kept free for a meeting. Mr McGuigan agreed to make every effort to set out the Revenue's position in writing in advance of that date.

[371] On 19 May Mr Carmichael prepared a document entitled "Thoughts for Enquiry Plan", setting out his preliminary thoughts in respect of four areas for investigation: the PAYE disclosure, offshore companies, the personal tax returns (i.e. benefits and other personal tax issues) and UK companies. It was copied to LBO.

[372] In relation to PAYE, Mr Carmichael wrote:

"2. Al Fayed has acknowledged that corporate entities that he owns or controls either directly or indirectly have a 'problem' in respect of payments made by Mohammed Al Fayed to employees. Furthermore Al Fayed instructed KPMG to contact the revenue and discuss how the matter may best be resolved.

3. The last action was a letter from KPMG dated 28 March 00 suggesting that a discussion is necessary to take matters forward.

4. In the normal course of events I would ask for a disclosure report on the subject. If we are to regard and treat Al Fayed in the same way as other taxpayers to proceed by way of a report would not be unreasonable.

5. LBO are suggesting that as part of a CCW they would want to task LECO [see para.211] to undertake an employer compliance review. This would not be incompatible with a full review of corporate affairs but LECO must be informed of the disclosure and any discovery implicating Al Fayed must be reported to SCO. SCO can then liaise with the reporting accountants to verify the tax implications arising from the LECO discovery."

Paragraphs 2 to 4 support my conclusion (see para.294) that the registration report of 30 March was inaccurate in stating that KPMG had already been instructed to prepare a report for submission to the Revenue: if that were so, Mr Carmichael would not be likely to have written paragraph 4 in particular. In relation to paragraph 5, Mr Carmichael said in evidence that he did not want LECO to recover tax that was being investigated by SCO.

[373] In relation to offshore companies, Mr Carmichael wrote:

"1. There are the main stream Harrods group parent companies and possibly subsidiary companies - this trail will lead ultimately to Al Fayed Investment Trust of Liechtenstein. Investigation of this category of company will be fit in well with the LBO risk assessment.

2. Then there is the family Trust structure probably put in place to protect the family assets, again this may also lead to Al Fayed Investment Trust of Liechtenstein. This aspect of the family affairs can best be examined by SCO as part and parcel of the personal side review. The 'pot of gold' will be protected by the Al Fayed Investment Trust of Liechtenstein.

3. Next there will be offshore trading companies, which may or may not carry the Harrods name but will in all likelihood have some measure of formal offshore presence. Some companies are referred to in the testimony [at the Hamilton trial] directly e.g. in Marvin's testimony, other companies can be inferred from Fayed's testimony e.g. International Marine Services or ownership of the Paris Ritz or the Parisian car hire company that provided the Mercedes used by Dodi and Diana. These companies need to be identified and tested for the normal international tax implications and management and control tests. The main stream nature of these companies probably lend this work to an LBO approach and testing for impact on the Harrods and other UK trading corporate entities.

4. Finally there will be the singleton or family companies (perhaps used to facilitate the enjoyment of assets by the family). Here I am thinking of Bocardo SA, Prestige Properties SA, Etablissement Wallon, Limousine Etoille or Ross Estates Ltd. There is ample evidence of the existence of these companies in both old and new SCO papers. This type of company may well not withstand a management and control test and will possibly have little in the way of an offshore presence and by their nature be more suited to an SCO style of appraisal.

5. We must consider exchange of information to obtain public record information through SCO London Liaison for all non UK entities...

6. Are there any UK tax records or files in FICO [see para.120] Overseas Landlords - individual or corporate or charities.

7. The Jersey airline flies into UK, what public records are there - ATC [air traffic control] or CAA [Civil Aviation Authority]...".

[374] Before proceeding further, it may be helpful to say something about the various offshore companies and other entities mentioned by Mr Carmichael:

Al Fayed Investment Trust of Liechtenstein:- Mr Carmichael may have had in mind Alfayed Investment and Trust SA, to which the 1990 back duty settlement had referred (see para.54).

International Marine Services SA:- This company was mentioned in the trial transcript. It was said to be incorporated in Dubai and to be owned, ultimately, by the three Fayed brothers and the late Emad Al Fayed. It was said to own supply vessels used in the oil industry. A list was produced at the trial of 31 vessels belonging to the company which were said to have been sold in October 1997. It was one of the companies covered by the 1990 back duty settlement.

The Ritz Hotel Ltd:- The Ritz hotel featured in the evidence given at the trial, and Mr Al Fayed accepted in his evidence that it was controlled by his family. The SCO London papers also contained information about the company which operated the hotel, and Mr Al Fayed's interest in it, as mentioned above (at paras.17 and 28). As the London papers disclosed, the company was in fact incorporated in the UK, but paid tax to the French authorities. The company is discussed in greater detail below.

Bocardo SA:- The SCO London papers contained information about this company, as mentioned above (at paras.17, 21 and 50), concerned inter alia with the question whether it should be regarded as tax resident in the UK. It was one of the companies covered by the 1990 back duty settlement. The 1996 benefits review stated that any costs of a capital nature relating to Barrow Green Court and Balnagown Castle were met in the first instance by AIT Services (United Kingdom) Ltd and invoiced on a monthly basis to Bocardo SA. Those invoices were said to be settled from personal funds in Geneva. The motor vehicles available in the United Kingdom for use by the Fayed brothers were said to be registered in the name of Bocardo SA. The cost of the vehicles, and the costs of their insurance, maintenance and fuel, were said to be met by the brothers from personal funds.

Prestige Properties SA:- This was another of the companies covered by the 1990 back duty settlement. As mentioned above (at para.173), it also featured in the 1996 benefits review, where it was described as the owner of the buildings in Park Lane.

Etablissement Wallon:- As mentioned above (at para.173), this company also featured in the 1996 benefits review, where it was said to pay the rent due in respect of the flats in Park Lane made available to the Fayed brothers, and to be reimbursed thereafter by the brothers. Mr Carmichael said in evidence that he had been advised by the Revenue department which dealt with international matters that "Etablissement Wallon" was probably not the name of a company, but (as the literal sense of the words would suggest) a type of Belgian corporation.

Limousine Etoile:- This entity was mentioned in The Bodyguard's Story as having provided the car and chauffeur involved in the accident in which Diana, Princess of Wales, and Emad Al Fayed died. It was said to be owned jointly by Mohamed Al Fayed and The Ritz Hotel Ltd.

Ross Estates Ltd:- The SCO London papers contained information about this company, as mentioned above (at paras.21 and 50), concerned inter alia with the question whether it should be regarded as tax resident in the UK. It was another of the companies covered by the 1990 back duty settlement.

Mr Carmichael also mentioned "companies... referred to... in Marvin's testimony": these were the offshore companies mentioned in Mr Marvin's evidence at the Hamilton trial (see para.336).

[375] Paragraphs 2 and 4 of the part of Mr Carmichael's document concerning offshore companies indicate the matters which he envisaged as falling within the scope of the investigation by SCO. In relation to paragraph 2, no specific tax purpose is mentioned: family trusts could however give rise to a variety of issues, potentially of considerable complexity, under anti-avoidance and other provisions of the Taxes Acts. Such issues would depend on a variety of factors, including the place of residence of the trust and the identities of the settlors and beneficiaries. In relation to paragraph 4, one tax purpose of the enquiry appears to be to establish whether the companies in question are UK resident, which could have a variety of tax implications for the companies themselves and for other taxpayers involved in transactions with them.

[376] In relation to personal tax returns, Mr Carmichael wrote:

"1. This whole area is best suited to SCO.

2. The starting point is probably the KPMG benefits report of September 1996. The main thrust of this report is that a charge to tax on benefits is negated by the Fayed family reimbursing from personal funds the costs to the providing company.

3. Consider tax profile of extended family e.g. wife, children, brothers and their families. Can we compile a family tree with addresses.

4. Check for tax and other public records - TI [see para.153], FICO, Cardiff [i.e. Companies House], FT Profile, Wincheck (appointments), IR Sols Office, Westminster Council, NSIS and CEDRIC, Aliens Registration and Home Office papers and Exchange of Information.

5. The yachts are kept outside British waters can SCO Intel Group help us here.

6. IMS [International Marine Services SA] apparently sold 32 ships in 1997, was this a reportable event i.e. a disposal exceeding the 15m threshold [see para.98]....

7. What about Barrow Green Farm (500 acres) are accounts submitted.

8. He keeps bloodstock at Oxted and provides an instructor. Can Tattersalls or Intel help trace bloodstock.

9. Cars are owned by Bocardo, does this include the 100 Rolls Royces? Can we get info from DVLA or police. The chauffeurs may give rise to a benefit but watch out for compensating expense claim - also for aeroplanes. Who insures the cars?

10. Consider S20 [see para.232] on Midland Bank and Harrods Bank and credit and charge card companies.

11. We need sight of Harrods current account and the reimbursement records for all UK corporate entities."

[377] From paragraph 2, it appears that this part of the investigation was to focus on benefits. It appears from paragraph 3 that Mr Carmichael envisaged that the investigation would encompass enquiries into Mr Al Fayed's extended family: his wife, his children, his brothers and their families. Some idea of the scope of these enquiries can be obtained from paragraph 4. The Taxpayers Index has been mentioned above: since Mr Al Fayed was known not to be on it (see para.163), Mr Carmichael presumably envisaged searching it for other members of the family. It appears that Mr Carmichael had not yet ascertained whether the Revenue had tax records for any of the persons in question. FT Profile and Wincheck are business information services.

[378] In relation to UK companies, Mr Carmichael wrote:

"1. Broadly 2 categories of companies will exist. The main stream trading
companies such as the Harrods group, Liberty Radio, Fulham Football FC, Punch etc and the singleton companies such as HPR [Hyde Park Residence Ltd] or Balnagown. The former group rest comfortably with the LBO investigation whereas the latter group are within the scope of the SCO investigation.

    1. The companies for SCO to review will include, Hyde Park Residence Ltd, AIT Services UK Ltd, Balnagown Properties Ltd, Pinegrove Ltd. But all the companies, trusts and charities need to be identified and traced. The tax profile including paye and funding needs to be examined and a judgement where the company fits into the overall scheme of Fayed's affairs.
    2. AIT Services UK Ltd seems to be pivotal in the arrangements, a full enquiry may be needed here.
    3. Who or what entity owns 14 South Street and where does it fit into the scheme of things.
    4. Genavco Air Ltd and HPR both handled Fayair Jersey Ltd business, consider transfer pricing issues.
    5. The Charity Commission must be approached on a third party basis - SCO has a contact in that respect.
    6. Other third parties are Westminster Council and the CA.
    7. The LBO will need to consider inter alia Customs and Excise visits - import and export controls, transfer pricing with off shore affiliates, office accommodation provided for Fayed's global business, security costs, sponsorship, legals and golden handshakes (S74 argument).
    8. Liaise with PTD [BTD: Business Tax Division] re security costs."

[379] It appears from these paragraphs that Mr Carmichael envisaged that the SCO investigation would include enquiries concerning a number of UK companies. It may be helpful to say something about the companies mentioned:

The Harrods group:- This group of companies was discussed above (at para.138).

Liberty Radio Ltd and Punch Ltd:- These companies were members of the Liberty group, which was discussed above (at para.139). Mr Carmichael had seen these companies mentioned in the material downloaded by Mr Lockyer from the internet (see para.265), and they had also been mentioned by the LBO officials at the meeting on 11 February (see para.221).

Fulham FC:- Mr Al Fayed's involvement in the affairs of Fulham FC was mentioned in the trial transcript and in the internet material which Mr Carmichael had read. Fulham had also been mentioned by LBO at the meeting on 11 February. The Fulham companies are discussed in greater detail below.

Hyde Park Residence Ltd:- This company was mentioned in the trial transcript, where it was said to manage the flats in Park Lane and to employ security staff at the Villa Windsor in Paris. Mr Al Fayed gave evidence that he owned the company. The KPMG review contained more detailed information about the company's role in relation to the flats, aircraft and security staff, as discussed above (at paras.173-174 and 267).

Balnagown Castle Properties Ltd:- This company was mentioned in the trial transcript as managing Balnagown Castle and employing staff there. The SCO London papers also contained information about the company, as mentioned above (at para.21).

AIT Services (United Kingdom) Ltd:- As mentioned above (at para.374), this company featured in the KPMG review as being involved in the arrangements for the payment of capital costs relating to Barrow Green Court and Balnagown Castle. It was also said to meet capital costs in relation to the flats in Park Lane, which were thereafter reimbursed by Prestige Properties SA. It was also said to meet non-capital costs relating to Barrow Green Court, and council tax in respect of all the domestic accommodation, subject to reimbursement by the brothers from personal funds.

Pinegrove (Millbrae) Ltd:- This company was mentioned in the trial transcript. From the evidence of Ms Bond, it appeared that Mr Ali Fayed had purchased an apartment for an elderly couple, as an act of charity. The company was said to have been used as a vehicle for the purchase, in order to protect his anonymity. One of the elderly people had subsequently died. On the death of the remaining occupant, the apartment was to go to charity.

Genavco Air Ltd:- This company was mentioned in the trial transcript, where it was described as a management company. Further information about the company was contained in the KPMG review, where it was said to have met the costs of air travel until 1993, the costs being reimbursed by Fayair (Jersey) Company Ltd. That information was also contained in the SCO London papers (see para.17). Since 1993, the costs had been met by Hyde Park Residence Ltd and then reimbursed, as explained above (at para.174).

[380] It appears from Mr Carmichael's document that he envisaged that the LBO "investigation" (as he described it) would encompass the Harrods group, its parent companies, possibly the other subsidiaries of those companies, the Liberty group and Fulham FC, and offshore trading companies such as International Marine Services SA, The Ritz Hotel Ltd (actually a UK company) and the companies in Bermuda, California, Delaware, Thailand, Mongolia and Peru which had been mentioned in the evidence given in the Hamilton trial by Mr Marvin. The offshore trading companies appear to have been proposed for allocation to LBO not because questions relating to them had arisen from LBO's risk assessment of the Harrods group accounts, but rather because LBO was considered by SCO to be better suited to carrying out that part of the combined exercise.

[381] On 23 May a meeting was held, attended by Mr Middleton, Mr Pegler, Mr McGuigan and Mr Carmichael, at which there was a discussion of how SCO would wish the various entities connected to Mr Al Fayed to be allocated between SCO and LBO. Mr Carmichael's document was discussed. No issue was taken with it.

[382] On about 24 May Mr Carmichael prepared additional documents. Those documents, together with the "Thoughts for Enquiry Plan", formed a set of papers described by Mr Carmichael as his enquiry plan. An allocation of responsibilities between SCO and LBO was proposed:

"The SCO investigation will cover several discrete areas:

    1. A check of the 1999 Tax Return to ensure that all benefits have been
      identified within the 1997 KPMG Report and that where appropriate the costs of benefits have been reimbursed by the Fayed family.
    2. The PAYE disclosure previously intimated.
    3. The offshore companies associated to the Fayeds but not the Harrods Group or mainstream trading companies. Here we have in mind the companies which own, control or manage UK assets whether real, heritable or moveable.
    4. The UK companies associated to the Fayeds but not the Harrods Group or mainstream trading companies. Here we have in mind the companies which manage or control UK assets or meet the costs of assets provided to the Fayed family.

The LBO will have responsibility for:

    1. Harrods Holdings plc and its subsidiaries - see Group structure effective from 01 Sept 1998 this includes inter alia Harrods Gp, Liberty, Punch & Harrods Aviation
    2. Fulham FC
    3. The offshore companies associated to the Harrods Group or mainstream trading companies.
    4. The use and deployment of LECO but LECO must be in no doubt that irregularities implicating Al Fayed, his family or staff must be reported to SCO for consideration in the light of the commissioned disclosure report."

[383] Mr Carmichael prepared separate lists of enquiries headed "check of benefits", "offshore companies to be investigated" and "UK companies to be investigated". There was no list in relation to the PAYE disclosure, but the list headed "UK companies to be investigated" began:

"The PAYE Disclosure Report needs to be initiated and terms of reference drawn up."

This provides further support for my conclusion that SCO had not instructed the preparation of such a report, and was not awaiting the submission of such a report, on 30 March.

[384] The separate lists were amalgamated in a cumulative list:

"The questions we will ask and the documents we want to see:

1. Domestic property is provided at Barrow Green Farm, Barrow Green Court, Balnagown Castle and 55 & 60 Park Lane. We need a narrative description of each property to include the accommodation made available, policies, number of household and estate staff. For Park Lane we will additionally need to know which flats are made available.

2. The domestic PAYE scheme for each property should be identified.

3. The capital costs relating to Barrow Green Farm and Court and Balnagown Castle is met by AIT Services United Kingdom Ltd (dealt with by Kensington 2 [district office]). What costs are invoiced and what is the machinery for determining what is capital expenditure.

4. The capital costs are then invoiced monthly to Bocardo SA and settled monthly from personal funds from Geneva. I want to see the business books and records of AIT Services and the corresponding books of Bocardo SA. I want to see the accounts of Bocardo for a corresponding or straddling period of account. Sample invoices and bank statements of Bocardo need to be examined.

5. Ultimately no benefit arises because a transfer from personal funds settles the cost. The taxpayers must satisfy us that there are sufficient offshore funds available to meet the various costs identified as settled by these means.

6. KPMG reviewed sample RBS [Royal Bank of Scotland] statements of AIT Services number 2 & 3 accounts together with supporting details of cheques paid. I want to see all RBS account statements and must be prepared to S20(3) the bank so at the least bank details must be obtained.

7. Aim of 3, 4, 5 & 6 is to identify costs of Barrow Green and Balnagown and ensure appropriate amount is reimbursed.

8. This will also lead into an appraisal of Bocardo SA. Confirm RO [Registered Office], names and addresses of directors, function of company, management and control exercised by MAF over company.

9. 55 & 60 Park Lane owned by Prestige Properties SA and rented to HPR [Hyde Park Residence] Ltd. Is a market rate charged for rent? How is it set? Has there been an independent rent review undertaken to establish MV [market value]? This leads into a firm and fundamental review of the activities of HPR. HPR also incurs security costs, invoiced to the Fayeds and then reimbursed. We need to establish the costs met by HPR, examine invoices, check books and bank statements.

10. Costs (capital) are met by AIT Services then invoiced to Prestige; cost (repair and maintenance) are met by HPR. What MV [sic: MU, i.e. mark-up, is intended] is levied by HPR in providing this service on behalf of Prestige?

11. The family pay rent for their flats through Etablissement Wallon to HPR. What is the market rent, how does it compare to the rent paid by the family? The Fayeds need to demonstrate that reimbursement is made to Etablissement Wallon. Request for sight of EW [Etablissement Wallon] accounts. What is its RO names and addresses of directors? What management and control is exercised by Fayed?

12. Other running costs of Barrow Green Farm and Court are met by AIT Services through No 4 account with RBS and invoiced to the brothers who settle with funds from Geneva. Request all invoices, examine books and bank statements, follow the flow of cash. Who meets the costs of stables, instructors, mechanics and domestic staff?

13. Office accommodation and staff provided for UK corp interests - can this be verified? What staff and accommodation available? No recharge made - we need to be satisfied that no benefit to the brothers arise eg legal staff - put litigation control of worldwide corporate entities, transfer pricing implications for HO [head office] costs.

14. A detailed narrative of the security provided is necessary to establish if the 2/3: 1/3 cost allocation [see para.267] remains valid. Who meets the cost of security in St Tropez and other offshore locations. Has the recharge been properly effected - review books and records of HPR. Also cost recharge between HPR and HH [Harrods Holdings plc] re 60 Park Lane and South Street [see para.267] needs to be verified.

15. Aircraft and helicopter provided by Fayair Jersey Co Ltd - what is the residence position of this company? What physical structure exists in Jersey? Where is it centrally managed and controlled? Since 1995 all costs met by HPR and recharged by Fayair for a fee of 25K pa. (Is it reasonable and calculated on an arms length basis? Has an independent transfer pricing study been undertaken and can I see it?) What year end balances are extant? Fayair is funded by the brothers from personal funds - evidence of this must be ingathered.

16. What are the names of all yachts owned by the family? What are their home berths? Any ships logs must be offered up for inspection.

17. Obtain a list of vehicles kept in the UK - make, model and registration. Why no benefit from HH chauffeur? What about security staff acting as drivers. What estate vehicles are there. Where are they garaged? What maintenance staff are employed?

18. What events are sponsored personally and what events on a corporate basis? What other sponsoring exists - pipe bands - and how is that funded?

19. We need a schedule of all UK bank and building society accounts over which the brothers have control - directly or indirectly - same for credit and charge cards. Name of account, bank branch, account number.

20. External entertaining met by brothers - what does this mean?

21. Legal costs - testimony implies retained for firm or firms working exclusively for Fayed. How is this funded? Which firms? Evidence that fees are not incurred by HH.

22. Harrods current accounts need to be examined for preferential treatment - S20(3) may be necessary on HH. Cross-reference back to Midland Bank or other personal bank to ensure cleared in cash.

23. Discounted goods at a rate applicable to other employees. What evidence is there to support this? What about non Harrods companies eg Fulham etc?

24. The benefits report states that no commission, bonus or fee is paid by a UK company to the brothers. To check this I want to examine personal bank statements with credits cross-referenced back to source.

25. The PAYE Disclosure Report needs to be initiated and terms of reference drawn up.

26. Ask for a family tree identifying all UK associated around directly or indirectly to MAF and other family members.

27. Ask for a WW [worldwide] family tree as above.

28. Ask for an actual family tree to identify UK resident family members - any other UK taxpayers eg his wife.

29. Request log books of aircraft and helicopters, yachts and cars. As an alternative request particulars of all travel undertaken by the family with a note of who has provided the service.

30. Request personal diaries, security records to trace MAF UK/worldwide movements- if he is always in UK this will strengthen management and control arguments.

31. What is the background to the dividend reported by Ali Fayed [see para.120]. Tax due? When paid?

32. Testimony discloses sale of vessels in 8/97 [see para.374] - reportable?

33. Any UK Trusts and what charities sponsored by MAF and family?"

[385] A list of potential third party enquiries included the district valuer, Companies House, H.M. Customs & Excise, the Immigration Service, DVLA, the police, the Civil Aviation Authority, Air Traffic Control, the Home Office, various company enquiry agents, Westminster Council and the Charities Commission.

[386] Mr Carmichael's list brings together enquiries relating to benefits, offshore companies and UK companies. It illustrates the extent to which these issues are inter-related, so that enquiries which may be relevant to the tax liabilities of one individual or entity may also be relevant to the tax liabilities of another individual or entity. [387] In relation to benefits, several paragraphs are concerned with establishing whether the cost of benefits has been reimbursed (e.g. paras. 1 to 7, 11 to 13, 15 and 20 to 23). These do not appear to be concerned solely with the tax liabilities of Mr Al Fayed. In paragraph 5, for example, Mr Carmichael states that "the taxpayers [in the plural] must satisfy us...". In paragraph 11, he is concerned with the rent paid by "the family" for "their flats", and states that "the Fayeds need to demonstrate that reimbursement is made". This reflects the approach adopted in the KPMG benefits review, which dealt with "the brothers" as a whole, without differentiating between one brother and another. That approach in turn arguably reflected the terms of clause 3 of the 1997 agreement, which provided that the annual payment of 240,000 was to cover any assessment under section 154 of the 1988 Act (i.e. any assessment in respect of any of the three brothers or Emad Al Fayed) where it could be shown that the benefit was habitually provided to "our clients" prior to 6 April 1990, on the understanding that the cost was then reimbursed (if that was the practice prior to 6 April 1990) and continued to be reimbursed.

[388] It appears from paragraphs 26 to 28 that Mr Carmichael was also interested in identifying other family members, as he had indicated in his earlier document. That information could be relevant for a number of tax purposes, including the tax issues arising in relation to family trusts. So far as benefits are concerned, and the liabilities of Mr Al Fayed and his brothers, it was explained above (at paras.57 and 59) that sections 145 and 154 of the 1988 Act require that there be treated as the income of a director or employee the value of certain benefits provided for members of his family or household; and, for the purposes of these provisions, a person's family or household is defined by section 168(4) as meaning "his spouse, his sons and daughters and their spouses, his parents and his servants, dependants and guests". A wider class of relatives falls within the ambit of the close company provisions concerning distributions. As explained above (at para.141), any expenses incurred by a close company in providing benefits for a participator or an associate are treated as a distribution, taxable on the participator, unless reimbursed. The expression "associate" includes "any relative... of the participator"; and "relative" means "husband and wife, parent or remoter forebear, child or remoter issue, or brother or sister". These provisions only apply, however, if a number of conditions are satisfied. In particular, the company providing the benefit must be a close company, and must therefore be tax resident in the UK.

[389] In relation to offshore companies, several paragraphs propose enquiries designed to establish whether they are liable to UK taxation (e.g. paras 8, 11, 15 and 30, relating in particular to Bocardo SA, Etablissement Wallon and Fayair Jersey Co Ltd). In relation to UK companies, several paragraphs propose enquiries relevant to their tax liabilities, especially as they may be affected by "transfer pricing" (an expression which is explained below: see para.445) (e.g. paragraphs 9, 10, 13, 14 and 15, relating in particular to Hyde Park Residence Ltd and Harrods Holdings plc). In relation to paragraph 13, for example, Mr Carmichael said in evidence that if UK companies were providing head office facilities for offshore affiliates, then the UK companies should be rewarded for that service. Enquiries as to the tax residence of offshore companies, and as to transfer pricing, could also be relevant to the tax liabilities of individuals (e.g. in relation to the application of provisions concerning distributions by close companies, or in relation to benefits).

[390] When asked about his risk assessment, Mr Carmichael maintained that his risk assessment was contained in the bundle of documents just discussed. He said:

"The risk assessment is in amongst all that lot."

There was no particular document headed "Risk Assessment".

[391] Mr Carmichael forwarded his proposals to LBO on 25 May, describing them as "our thoughts as to allocation of responsibility once the investigation gets underway". He also copied them to Mr McGuigan. Mr Williams was broadly content with the proposed allocation of responsibilities.

[392] On 25 May Mr McGuigan contacted the Inspector in charge of the SCO Liaison Group, with responsibility for arranging liaison with the Home Office, to attempt to gain access to the Home Office papers concerning Mr Al Fayed.

[393] On 30 May Messrs D.J. Freeman, Solicitors, faxed a letter before action to SCO Edinburgh on behalf of Mr Al Fayed, Ali Fayed and Salah Fayed. They said that if the Revenue was unable to confirm by close of business on 2 June that the 1997 agreement remained in full force and effect and that the Revenue would abide by its terms, they were instructed to seek permission to apply for judicial review of the purported suspension of the agreement. The letter stated that, failing such confirmation, an application for leave would be lodged by 6 June (i.e. just before the expiry of the time limit applicable in England and Wales). Mr McGuigan acknowledged receipt of the letter. Mr Murray had previously telephoned Mr McGuigan to advise him that the letter was on its way.

[394] After receiving the letter, Mr McGuigan telephoned Mr Williams. Mr McGuigan's note of the conversation states:

"I also then spoke with Jim Williams of Glasgow LBO and we discussed again our plans for ensuring that as far as we could there was simultaneous notice to the other side of a joint personal/corporate review of the family's affairs."

Mr Williams said that he would telephone the Harrods group tax manager, Mr Hadden, on 31 May to let him know his intentions as far as the group accounts were concerned.

[395] Mr Williams's thinking, as at 30 May 2000, is described in his affidavit:

"44. I was aware that SCO were intending to advise Messrs Freemans on 2 June 2000 that the Department regarded the forward tax agreement as ultra vires and hence unenforceable. I was also aware through various conversations that Mr McGuigan and Mr Carmichael were intending to meet with Mr Murray of KPMG on that same day to discuss the implications with him. By that stage the risk assessment process in Glasgow LBO had progressed to the point that it was clear that there were still a number of fundamental points arising from the risk assessment of the accounts to 31 January 1998 [see paras.143-155] that needed to be addressed and a study of the accounts to 30 January 1999 confirmed that that remained the case. Although there was still work to be done on the detail of the tax computations of the various companies concerned, I had agreed with SCO that given the extent to which we wished to examine the interaction between the companies and those controlling them, principally Mr Al Fayed, it would be wrong for us not to make clear the extent of the CCW exercise. The problem was that although we believed the various companies to be closely controlled by Mr Al Fayed they were separate legal entities and were not to our knowledge represented by Messrs Freemans or KPMG. Knowing Mr Al Fayed's reputation for litigation from the media I was firmly of the view that despite the extent of the interaction we would be open to criticism if we put a foot wrong on questions of confidentiality. I was equally concerned that if we did not act openly we would be accused of acting in an underhand way. The solution that emerged was for me to telephone Mr Hadden, the Group Taxation Manager for Harrods, a couple of days before the meeting to advise him of what we were proposing to do on the corporate front, to make it clear that it was to be a CCW exercise and to offer to discuss the matter with the Group's senior executives or professional advisers. The matter was described as urgent in order to prompt Mr Hadden into referring the matter up the line in the hope and expectation that it would quickly reach a level at which it would be connected with the forthcoming meeting with SCO. This would enable those responsible for the affairs of the companies to involve themselves in that meeting if they so wished. The arrangement clearly worked in that I understand that Mr Murray indicated at the meeting on 2 June 2000 that he was aware of the contact with Harrods. My telephone call to Mr Hadden on 31 May 2000 was followed up by a letter of the same date [see para.2] that was also faxed to him following our conversation. Mr Hadden wrote to me on 2 June 2000 confirming that he had spoken with Mr McGuigan which again confirmed that someone had made the link with the enquiries on Mr Al Fayed without our specifically telling them.

45. ...All that was fundamentally different in this case was that due to the pressure on SCO to act by 2 June 2000 and our desire not to be seen to be acting in bad faith by not advising the relevant parties of where the LBO risk assessment was taking us I made my initial approach to Harrods a little earlier than I might otherwise have done. There was, and remains, no doubt in my mind, however, that on the basis of the risk assessment findings up to 31 May 2000 it was by then inevitable that an in depth review of the group's tax affairs would be necessary. As explained at paragraph 44 the reason for contacting Harrods a little in advance of 2 June 2000 was an attempt to be helpful by creating a situation in which KPMG could have discussed the wider issues had they been instructed to do so.

...

48. My understanding was that SCO had to act quickly on the matter of the agreement and that the pressure they were under from Mr Al Fayed's advisers was by that stage dictating the pace of their actions. If it were not for the need to be open about our intentions as regards the companies then I would have preferred to have left the announcement of our intention to make enquiries until later. But I remain of the view that had we done so we would in all probability have been accused of not being candid, a view that I would have had more sympathy with."

That evidence is consistent with the evidence concerning the surrounding circumstances, and concerning LBO's assessment of the 1998 and 1999 accounts, and I accept it.

[396] It appears therefore that, at this point, Mr Murrin had not completed his study of the Harrods accounts for the period to 31 January 1999. The risk assessment was under way, but had not been completed. It had however reached a stage by which it was apparent that a review involving extensive enquiries was appropriate. Mr Williams would not ordinarily have contacted Harrods until the risk assessment had been completed; but he decided that if Mr Al Fayed's advisers were to be informed of the SCO investigation on 2 June, then it was appropriate to make clear to the taxpayers (both corporate and individual) at that stage the extent of the combined case-working exercise which was intended. Mr Williams accordingly telephoned Mr Hadden on 31 May, and then faxed to Mr Hadden a letter confirming what had been said. That letter is the first letter identified by the petitioners as notifying them of a decision which is challenged in the present proceedings.

[397] The terms of the letter have been quoted above (see para.2). As I have mentioned, it was addressed to the Group Taxation Accountant of the Harrods group. It reminded him that the accounts of the group companies were "open" for the two years to 31 January 1999: in other words, that the companies' tax liabilities for those years had not yet been assessed. It informed him that Mr Williams proposed "to carry out an in depth review of the group's tax affairs" for those two years. It stated that the review would be carried out on combined casework lines and would involve other Revenue agencies, including SCO. It also stated that the review would extend to related matters such as Cylena SA.

[398] It appears from Mr Williams's evidence that his decision to send the letter was a result of the decision that SCO and LBO were to adopt a co-ordinated case-working approach. It was because that approach was being adopted that SCO's imminent notification to Mr Al Fayed's advisers of an investigation was regarded as necessitating, as a matter of candour, that the Harrods group (and Mr Al Fayed's advisers) should also be made aware of LBO's intentions, and of the fact that a co-ordinated case-working approach was to be applied. If there had not been, first, a decision by SCO to carry out an investigation of Mr Al Fayed, secondly, a decision by SCO and LBO to adopt a co-ordinated case-working approach, and thirdly, a decision by SCO to notify KPMG of the SCO investigation on 2 June, Mr Williams would not have sent the letter to Mr Hadden on 31 May, prior to the completion of the risk assessment. Mr Williams states in his affidavit:

"Were it not for the involvement of SCO then I would probably not have written to Mr Hadden quite so early but have fully wrapped up all of the loose ends of the risk assessment first. I would then have rung or written to him offering to meet on similar terms to those used in the final paragraph of my letter of 31 May 2000 but without the reference to senior executives and advisors and without any mention of urgency."

[399] Summarising the position from the beginning of April to this point, it appears that Mr Carmichael had undertaken research during the earlier part of the period, initially with a view to finding a basis for the repudiation of the 1990 and 1997 agreements on the ground of mistake or misrepresentation. An important development had occurred on 10 April, when counsel gave provisional advice that the arguments were ultra vires: if confirmed, that advice might resolve the problem of the agreements so far as the future was concerned, but it raised new issues in relation to past years, and it had potential implications for agreements with other taxpayers. The importance of these issues was such that Mr Middleton, and ultimately Mr Matheson, became involved. After representations were made by LBO to Mr Middleton, Mr Williams was also included in SCO's discussions. Matters came to a head in the middle of May. By that time, a review of Mr Al Fayed's affairs had been carried out, based on the transcript of the Hamilton trial, the SCO London papers and The Bodyguard's Story. Mr McGuigan had identified, on the basis of that review, wide-ranging aspects of Mr Al Fayed's affairs (and those of companies and trusts associated with him) which appeared to him to merit investigation. On 16 May there was a conference with counsel, to discuss the implications of the written advice received on 10 May. Provisional decisions were taken, which were confirmed by Mr Matheson the following day. The 1997 agreement was to be treated as at an end with effect from 6 April 2000. Mr Al Fayed's tax affairs in earlier years, so far as governed by the agreement, were therefore not to be investigated. That issue having been (provisionally) resolved, Mr McGuigan decided that he should authorise Mr Carmichael to conduct a wide-ranging investigation of Mr Al Fayed's affairs. On 17 May Mr Matheson approved the proposed treatment of the agreement, and the proposal that SCO should investigate Mr Al Fayed's personal tax affairs and that LBO should do a full risk assessment of the 1998 and 1999 accounts of the companies. It was decided at about the same time that SCO and LBO were to apply a combined case-working approach. Mr McGuigan was informed of Mr Matheson's decision, and then instructed Mr Carmichael to proceed. Mr McGuigan also agreed at that point to meet KPMG on 2 June. KPMG were to be informed of SCO's decision at that meeting. Mr Carmichael proceeded to prepare an enquiry plan, which envisaged enquiries bearing not only on the potential tax liabilities of Mr Al Fayed but also on those of his brothers, other members of his family, offshore trusts and companies, UK companies and other entities. It was envisaged by SCO that LBO's enquiries would extend to the major UK groups of companies, other mainstream trading companies, and offshore companies associated with them. LBO's risk assessment of the Harrods group had not been completed by 31 May, but LBO nevertheless notified the Harrods group at that point of its intention to carry out an in-depth review of the group's tax affairs on combined casework lines which would involve SCO. It did so in order that the Harrods group and KPMG's clients would be aware in advance of the meeting on 2 June that a combined exercise involving both SCO and LBO was to be undertaken.

June 2000

[400] In the meantime, the letters to be issued to KPMG and Freemans had been going through several drafts, revised by Mr Middleton, Mr McGuigan, Mr Carmichael and the Solicitor's Office. The sixth and final drafts were ready on 1 June. For an SCO letter on an operational matter to go through this process was an exceptional event. The letter addressed to Freemans was faxed to them at 10am on 2 June. The letter addressed to KPMG was handed to Mr Murray at 11.40am that morning, at his meeting with Mr McGuigan and Mr Carmichael. Those two letters are the other letters identified by the petitioners as notifying them of a decision which is challenged in the present proceedings. The letter to KPMG was quoted above (at para.3), but for convenience I shall quote it again. The terms of the letter to Freemans, so far as material, were the same.

[401] The letter is headed "The Al Fayed Family". That was the heading which had been used in the previous correspondence between KPMG, Freemans and SCO since the sending of the suspension letter.

[402] The first part of the letter is concerned with the 1997 agreement:

"I am advised that the letter of agreement dated 28 April 2000 is not enforceable because it is ultra vires. The agreement takes no account of the possibility of there being a false factual basis for the contract. Also it does not allow for any changes in the facts or circumstances for any unexpired years or for changes in future legislation. I should also make it plain the agreement is ultra vires because it does not reflect as it should the performance by the Revenue of its statutory duties and care and management powers to assess and collect tax. Accordingly, the letter dated 7 March 2000 can be disregarded in respect of its reference to the suspension of the agreement. The agreement is not and never has been binding in law.

In view of the history of the arrangements the Inland Revenue do not believe that it would be appropriate to re-open the back years in respect of liability to income tax and capital gains tax on foreign source income and capital gains prior to 5 April 2000. Accordingly, in this connection I would be grateful if you could arrange for your client to forward to me a cheque for 240,000 made payable to Inland Revenue in respect of the year to 5 April 2000.

For the years from 6 April 2000 onwards Tax Returns will have to be completed in accordance with the family's statutory responsibilities, and without reference to the agreement."

This part of the letter thus notifies KPMG that the Revenue has been advised that the 1997 agreement ("2000" being an error) is ultra vires and therefore unenforceable; it specifies the aspects of the agreement which are regarded as rendering it ultra vires; it states that, in consequence, the reference in the suspension letter to the "suspension" of the agreement can be disregarded; and it explains the position adopted by the Revenue in consequence of receiving that advice.

[403] The remaining part of the letter states:

"The Revenue will also be looking to verify the position as set out in the KPMG benefits report of 1996. This will entail a detailed examination of the mechanism by which all benefits are identified, quantified and recharged. To do this I propose to review in depth the 1999 Tax Returns and appropriate notices of enquiry will be sent by separate letter.

Furthermore, in the light of matters raised in the recent Hamilton libel case, the Revenue does not consider it has a sufficiently full picture of the Fayed Family circumstances and does not consider it would be discharging its duties appropriately unless it sought to satisfy itself concerning any other liabilities. Accordingly there will be a need to review the Fayed Family position and that of any individual, companies or organisations connected with them. To do this I shall need a comprehensive list of Family members including their respective names, addresses and ages and a list of all the companies, charities and trusts associated to them.

This enquiry work will be undertaken by Special Compliance Office under Code of Practice 8, a copy of which is enclosed and should be brought to your clients attention. I also enclose Inland Revenue Leaflet IR 120."

[404] The meeting on 2 June was attended by Mr McGuigan and Mr Carmichael of SCO, and Mr Murray and Mr Thomson of KPMG. Notes were taken by Mr Carmichael and Mr Thomson. I accept Mr Murray's evidence that the note taken by Mr Thomson is a more complete and accurate record of the meeting.

[405] Mr Thomson's note records:

"9. There was a brief discussion of the definition of "the Fayed family", for the purposes of today's meeting. While the Revenue will clarify the individuals about whom it wishes to make enquiries, for the purposes of the meeting the family was agreed to be Mr Mohammed  Al Fayed, Mr Ali Fayed, Mr Salah Fayed and their respective dependent families."

[406] Mr Thomson's continues:

"22. AC [Mr Carmichael] spoke to the nature of the intended enquiries referred to in the letter to KPMG dated 2 June.

a) The Revenue wished to conduct an in depth review of the 1998/99 personal tax returns. Accordingly S9A notices would be issued to the relevant family members shortly. JM [Mr McGuigan] confirmed that on the Revenue proposal the enquiry would not extend to issues within the 1997 agreement.

b) AC commented that 'in view of the recent Hamilton trial' he would like to:

i) Undertake a full review of the finances of the family.

ii) Consider whether any reviews were necessary as regards the tax residence position of family members and their interests. TM [Mr Murray] commented that Ali Fayed was not UK resident. There had been some correspondence with Mr Whitehead and FICO [see paras.75 and 120].

iii) Identify any businesses which were controlled and managed from the UK by family members.

c) In relation to (iii) above, both JM and AC commented to the effect that statements had been made during the Hamilton trial and in course of Mr Mohammed Al Fayed's application for UK nationality which indicated that certain overseas businesses may be controlled and managed from the UK. The Revenue wished to establish both the facts and the correct tax position of these businesses.

...

d) AC indicated that SCO would be seeking a full review which identified the relevant family members for all UK taxation purposes and which identified the companies, individuals and organisations (including any charities and trusts) which may have bearing on overall tax liabilities.

AC commented that there appeared to be some 'complex asset owning structures'.

e) In conjunction with this review, the Revenue would be considering the matters addressed in KPMG's 1996 report into Sch E Benefits in Kind. This review would not address any schedule E matters within the 1997 agreement. The Revenue would review the methods and systems by which any chargeable Sch E benefits were identified, quantified and recharged. An aim of the review would be to ensure that the conclusions set out in KPMG's 1996 report still held good any other areas which required further review [sic]. SCO made clear that if any inadequacies were identified re 1998/99 then they would reconsider earlier years if the facts merited it.

f) In the course of general discussions AC commented that consideration would be given to whether the junior members of the Fayed family ought to have submitted tax returns.

23. AC stated that Inland Revenue Code of Practice 8 would govern all of the enquiries which would be undertaken by SCO."

[407] It appears from paragraph 22(a) that there were to be enquiries into the tax returns of the three Fayed brothers for 1998/99, but excluding matters covered by the 1997 agreement. From paragraph 22(b), (c), (d) and (f), it appears that SCO's enquiries were to involve the identification of the relevant family members for all UK taxation purposes, and the identification of the companies, individuals and organisations (including charities and trusts) which were relevant to overall UK tax liabilities. This would include identifying any businesses which were controlled and managed from the UK by family members (and were therefore tax resident in the UK). In the course of this review, consideration would be given to whether family members were resident in the UK, whether family members ought to have submitted UK tax returns, and whether "interests" of family members (presumably in the form of companies, trusts and other entities) were UK tax resident. From paragraph 22(e), it appears that the issue of whether benefits in kind enjoyed by family members gave rise to tax liabilities on the part of the three Fayed brothers was to be considered in conjunction with this review. From paragraph 23, it appears that all the enquiries were to be undertaken under Code 8, and therefore constituted an SCO investigation. Mr Carmichael's note of the meeting records that the issue of Mr Al Fayed's domicile was also raised: the position up to 2000 was regulated by the agreement; but information relevant to domicile would be requested, and a judgment made. The view was expressed by either Mr Carmichael or Mr McGuigan that Mr Al Fayed was domiciled in the UK for inheritance tax purposes.

[408] In relation to overseas business, Mr Thomson recorded in paragraph 22(c) that Mr McGuigan and Mr Carmichael commented that statements had been made in the course of Mr Al Fayed's application for UK nationality which indicated that certain overseas businesses might be controlled and managed from the UK. I accept Mr Murray's evidence that such comments were made. It will be recalled that Mr McGuigan and Mr Carmichael did not see the Home Office papers until 11 August 2000 (see para.224). Mr Carmichael, in his note of the meeting, did not record any reference to Mr Al Fayed's application for UK nationality. In relation to this matter, Mr McGuigan said in his affidavit:

"As we had not viewed or received the Home Office papers by 2 June  2000... what has been recorded by KPMG cannot correctly reflect what was said."

In his first affidavit, Mr Carmichael said, in relation to this matter:

"My notes of the same meeting do not record that event. I record that Mr McGuigan and myself commented on the Hamilton v Fayed trial and the nationality applications but our references were restricted to newspaper coverage and were general in nature."

In his second affidavit, Mr Carmichael said, in relation to that passage in his first affidavit:

"[0]n reflection the use of the word "record" in the sentence is perhaps ambiguous in that the only record is that set out in the affidavit itself. I should perhaps for greater clarity have used the word 'recall'. If 'recall' is substituted for 'record' the sentence would read: 'I recall that Mr McGuigan and myself commented on the Hamilton v Fayed trial and the nationality applications but our references were restricted to newspaper coverage and were general in nature.'"

Mr Carmichael adhered to this explanation in his oral evidence. He accepted that he had referred at the meeting to the contents of the nationality application, but maintained that what he had said at the meeting was based on reporting in the media, including the Sun newspaper. He had no recollection of when he had seen any such reports. This evidence illustrates why I have reservations about Mr Carmichael's (and Mr McGuigan's) evidence. What Mr McGuigan said in his affidavit was incorrect. What Mr Carmichael said in his first affidavit was also incorrect. What Mr Carmichael said in his second affidavit appears to me to be playing with words. The use of the word "record" in the first affidavit was not "ambiguous". Altering "record" to "recall" did not give the sentence "greater clarity": it altered its meaning.

[409] Mr Thomson's note also records:

"24. AC indicated that SCO would be co-ordinating their enquiries with those intended by Glasgow LBO. KPMG asked whether SCO could comment on the nature of the enquiries proposed by the LBO. SCO indicated that their understanding was broadly as follows:

a) Transfer Pricing

b) The provision of services between the UK and Offshore companies

c) Funding

d) Review of activities of mainstream Group trading companies

e) Non Grouped Companies

f) Cross Border Finance

g) Some specific offshore companies had already been singled out in correspondence : Cylena SA and Alpha.

h) Background to Fulham FC

i) What Mr Williams at LBO had termed an 'overall Risk assessment'."

[410] A curious aspect of this part of the meeting, when KPMG sought information about the enquiries proposed by LBO, is that Mr Williams and Mr Murrin were present in SCO's offices, but were not invited to join the meeting. They had travelled to SCO's offices in Edinburgh so that, if Mr Murray indicated that he had instructions to act for the companies dealt with by LBO, then they could join the meeting. Mr Murray explained at an early stage of the meeting that he had been instructed to attend the meeting on behalf of Harrods as well as the Fayed brothers, and therefore wished the Revenue to explain its intentions for the corporate enquiries. Nevertheless, Mr Williams and Mr Murrin were not brought into the meeting. The part of the meeting concerned with LBO's enquiries was omitted from Mr Carmichael's note.

[411] In his evidence, Mr Murray was critical of the width and imprecision of SCO's enquiries, as explained in the letter of 2 June and at the meeting on the same date. One matter of concern to Mr Murray was the absence of a precise definition of "the Fayed Family":

"They [Mr Carmichael and Mr McGuigan] certainly were unable to communicate any precise definition to me and I think for the purposes of the meeting we agreed to continue with the vague phrase 'the family'... The purpose of the meeting was to obtain a view as to where the Revenue thought they were going with this. There was no point in having an argument at this stage about the parameters of 'The Fayed Family', so we agreed to just proceed on the basis as noted in our note for the moment. But, frankly... I do not know who is encompassed by that."

[412] Mr Murray was also critical of the failure of the Revenue to identify specific taxation issues as being the subject of investigation, or as providing a basis for identifying the relevant family members or other entities. Mr Murray comments, in his affidavit, that the proposed enquiries would appear to extend "to any entity anywhere in the world with a connection to the Al Fayed Family, an expression which... the Revenue were unable to define and which is not a taxable person." In his oral evidence, Mr Murray asked rhetorically:

"Who are the persons or individuals covered by this intention to investigate? What liabilities does the Revenue have in mind? From the point of view of a professional adviser, it is hopelessly broadly drawn. To my mind, when I read it, the one thing that is precise is that the Revenue wishes to have a full picture of the Fayed family circumstances, and there is a very incomplete, and in some cases completely absent, link to tax liability here."

[413] Mr Murray also said, in relation to the enquiries envisaged into the management and control of offshore companies and asset-owning structures:

"It represents an enormous drift from the idea that we were examining the 1999 returns, and whereas one can postulate circumstances in which there might be a knock-on into an individual's tax affairs, one would imagine the prime objective of these enquiries is to look at the tax affairs of limited companies based overseas."

Mr Murray commented that he was uncertain what the scope of the Revenue's enquiries were, and which tax years it was interested in.

[414] Mr Murray maintained that the lack of detail as to the subjects and purposes of the investigation caused difficulties. There was no difficulty providing a list of members of Mr Al Fayed's family who were connected to him in the manner described by section 168(4) of the 1988 Act. Equally, it was not in dispute that, insofar as companies provided benefits to Mr Al Fayed which fell within sections 145 and 154, the Revenue was entitled to information establishing the position. Similarly, if a close company controlled by Mr Al Fayed claimed UK tax relief in respect of payments to charities, then it would be relevant to know whether any person connected with Mr Al Fayed, within the meaning of section 839 (discussed below at para.419), had received a benefit in consequence of the payment being made. Such information could, in that event, reasonably be requested. It was a different matter to provide information about members of an extended family, companies, trusts and other entities throughout the world without any specification of any relevant UK tax purpose: the problem was the breadth and lack of definition of the enquiries, and the absence of any clear link to UK tax liability.

[415] In relation to these points, it appears to me to be necessary to bear in mind the fact that this was an initial meeting between SCO and Mr Al Fayed's advisers at the opening of the investigation, and the voluntary nature of the requests for information being made at that stage. It is also necessary to bear in mind the limited knowledge possessed by SCO about Mr Al Fayed's affairs, and about the provisions of the Taxes Acts which might be relevant.

[416] In relation to the first of these points, Mr Carmichael discussed in his evidence the request made in the letter for "a comprehensive list of family members including their respective names, addresses and ages and a list of all the companies, charities and trusts associated to them". In his affidavit he states:

"In my view it is appropriate as a precursor to active enquiries in an investigation, and to determine the extent of any investigation, to obtain an overview of the relationship between the connected individuals and entities".

Similarly, in his oral evidence Mr Carmichael said that he had asked for details of the family, and of companies, charities and trusts associated with them, because he "needed to know the scope of the exercise which [he] had set out to undertake". He continued:

"So that the purpose of the letter was for the representatives to take an opportunity to inform me of the companies, charities, trusts and the family members. Quite simply, if Salah Fayed lives in Switzerland, and has no UK connection, then we can strike him from our list of further work. Similarly, Ali Fayed. Once we see the list of companies, we can start reducing that list to focus then on companies that we think would give a profitable outcome, a proper outcome, to an investigation."

Later in his evidence Mr Carmichael described the enquiries in the letter as "the first step, before we get into the meat of it". He said:

"In order to determine work that has to be done, I need to acquire the information which I have requested. So that is the first step. Thereafter I can focus in on the areas that I think will warrant investigation."

Asked whether he would investigate every entity or person that was listed in the overview (assuming that the information requested were to be provided), Mr Carmichael replied that he would not:

"One must be selective in what one investigates. So I would have to consider the information, determine where the risks are and tackle the risks. That is how the investigation would unfold."

He would adjust his enquiry plan in the light of the information received. It appears therefore that Mr Carmichael wanted the information requested in the letter in order to give him an overview, as an initial step, before deciding how best to deploy the resources available to him on further enquiries. According to Mr Pegler and Mr McGuigan, it is not unusual, in the absence of full information, for SCO to ask for a family tree or details of businesses, companies or other entities by way of background, to get a better understanding of the whole situation.

[417] In relation to the tax purposes of the enquiries, Mr Carmichael explains in his affidavit what he had in mind:

"Both in my letter of 2 June 2000 and at the meeting of the same date I asked for a comprehensive list of Fayed family members to include their names, addresses and ages and a list of all companies, charities and trusts associated with them. My enquiry plan and risk assessment disclose that benefits may be provided to family members but do not disclose to which family members. Under the rules for taxing benefits where benefits are provided to an employee/director or his family or household there is a charge to tax upon the employee/director. In order to consider the position in respect of benefits I need to establish the identity of any company which might be paying those benefits."

In this passage, Mr Carmichael appears to have section 168(4) in mind. The person in relation to whom section 168(4) is to be applied - that is to say, the person whose family and household are defined by that provision, and who may be liable to tax on benefits provided to members of his family and household - will be the person who is a director or employee of the company at whose cost the benefits are provided. Mr McGuigan indicated in his evidence that there were, initially at least, three persons in relation to whom section 168(4) was to be applied, namely the three Fayed brothers. That is consistent with the explanation given at the meeting that "while the Revenue will clarify the individuals about whom it wishes to make enquiries, for the purposes of the meeting the family was agreed to be Mr Mohamed Al Fayed, Mr Ali Fayed, Mr Salah Fayed and their respective dependent families."

[418] Mr Carmichael's evidence on affidavit continues:

"As explained at paragraph 40 above I need to establish the identity of any non UK company which may be controlled by Mr Al Fayed."

In paragraph 40, Mr Carmichael had said:

"Mr Al Fayed's perceived autocratic manner, which is well publicised and also features in The Bodyguard's Story, directed my attention to the locus of the central management and control of offshore companies. If the companies are centrally managed and controlled in the UK then it has taxing rights on profits. In my view there was therefore a clear indication that the residence of these and other unidentified companies might have an impact on their liability to UK tax."

It appears therefore that, in Mr Carmichael's view, part of the purpose of the enquiries in the letter was to establish whether overseas companies, identified or unidentified, were liable to UK taxation. This matter was also mentioned by Mr McGuigan in his affidavit:

"During the Hamilton Trial there were identified other entities said to belong to Mr Al Fayed or over which it appeared that he might exercise control, including entities possibly located offshore and possibly in tax haven locations. Those entities might be subject to tax according to their relationship with Mr Al Fayed or members of his family or according to transactions with him or them or any of his UK based companies."

Mr McGuigan does not detail in his affidavit the many possible ways in which liabilities might arise. Some examples were mentioned in evidence: that overseas companies might be centrally managed and controlled in the UK by Mr Al Fayed or other members of his family, with the consequence that the companies would be tax resident in the UK; or that transactions between companies which were tax resident in the UK and Mr Al Fayed or members of his family might fall within the scope of the close company provisions concerning distributions; or that transactions between overseas entities and companies liable to UK taxation might be relevant to the taxation of the latter if "transfer pricing" were taking place. There are however many other provisions of the Taxes Acts which might be relevant, depending on the information obtained: for example, the provisions relevant to overseas trusts, whose application could depend on information about the identities and residence of trustees, beneficiaries and settlors.

[419] In relation to the request for information about charities, Mr Carmichael maintains in his affidavit that it was necessary to have such information in view of sections 339 and 839 of the 1988 Act. Under section 339, a payment by a company to a charity is a qualifying donation, and as such is deductible in computing profits for the purposes of corporation tax. Such a payment made by a close company is not however a qualifying donation if the company or a connected person receives a benefit in consequence of the making of the donation. References to a connected person are to a person connected with the company, or a person connected with a person connected with the company. Under section 839, a company is connected with a person if that person has control of it or if that person and persons connected with him together have control of it. A person is connected with an individual if that person is the individual's wife or husband, or is a relative, or the wife or husband of a relative, of the individual or of the individual's wife or husband. "Relative" means brother, sister, ancestor or lineal descendant. If, therefore, it were established that a company made a donation to a charity, that the company was a close company, and that Mr Al Fayed had control of the company, then the donation would not be deductible if a person connected with Mr Al Fayed received a benefit in consequence of the making of the donation; and the range of persons "connected with" Mr Al Fayed would extend not only to his immediate family but also (for example) to his brothers and their wives. The expression would not however cover Mr Al Fayed's entire extended family: it would not, for example, extend to his brother's children. They could on the other hand be covered if Mr Al Fayed's brothers were themselves persons connected with the company in question.

[420] In relation to the request for information about trusts, Mr Carmichael explains in his affidavit that there are circumstances in which the income or gains of a trust may be assessable on the settlor or beneficiary, and that he therefore needed to know whether any person was the settlor or beneficiary of a trust and the terms of the trust. Mr McGuigan observes in his affidavit that the Revenue did not know what children or grandchildren, if any, Mr Al Fayed had in the UK.

[421] Against this background, it appears to me to be unsurprising that Mr Carmichael and Mr McGuigan were unable, at this initial meeting, to identify all the members of Mr Al Fayed's immediate and extended family who might be relevant to the Revenue's enquiries, or to identify all the taxation issues which their enquiries might cover: these two matters are indeed connected, since the identification of relevant family members depends on the taxation issue in question. The officials had however indicated that, for immediate purposes, their interest was in the three Fayed brothers and their respective dependent families (see para.405). They also made it clear that their objective was to identify the relevant family members for all UK taxation purposes, and the companies, charities, trusts and other entities which might have a bearing on overall UK tax liabilities (see para.406).

[422] The level of generality of SCO's concerns in respect of companies, as expressed at the meeting, may also have reflected the fact that the allocation of responsibilities between SCO and LBO does not appear to have been finally determined by that date. LBO had intimated on 31 May its intention to carry out an in-depth review of the accounts of the Harrods group, which would extend to related matters; and, as explained below, it was subsequently made clear that other enquiries into companies were also to be undertaken by LBO.

(6) Subsequent Events

[423] It is necessary to consider some of the subsequent events, as they were said to cast light on the nature and motivation of the decisions challenged.

June 2000

[424] On 5 June 2000 Glasgow LBO prepared two documents headed "Fayed Family CCW Exercise", and described respectively as Plan 1 and Plan 2. In his affidavit, Mr Williams states, in relation to Plan 1 and Plan 2:

"They are broadly consistent with SCO thinking... Although we identified the need to extend our interest to other major trading elements of the Al Fayed economic entity little work had been done on that by this stage. We were, however, seeking the files for the Fulham Football Club Group which had not previously been dealt with by Glasgow LBO but which should have been in accordance with best practice by that time."

It appears from Plan 1 that Glasgow LBO envisaged the involvement of several Revenue agencies besides Glasgow LBO and Edinburgh SCO, including LECO and the relevant Schedule E district. Plan 1 also identified areas of interest: major corporates (the Harrods group, Harrods Bank and Harrods Estate Agency, the Liberty group, and Fulham FC); other UK corporates; offshore corporates; trusts; estates and properties; individuals (Mr Al Fayed, Ali Fayed, Salah Fayed and the late Emad Al Fayed); and other family members.

[425] Plan 2 was headed "Objectives", and contained a number of sections. The first was in the following terms:

"LARGE CORPORATES

To carry out and follow through a full LBO risk assessment on all large corporates (and associated pension schemes) for the two years to 31 January 1999, with particular regard to

[426] What is envisaged, in this part of the document, is thus an LBO risk assessment of large companies for the two years to 31 January 1999, as had been discussed at the meeting with Mr Matheson on 17 May 2000. The tax purpose appears to be to establish that the corporation tax liabilities of the large companies have been correctly assessed, and that PAYE has been correctly applied. The companies involved include the Harrods group, the Liberty group and the Fulham group. Mr Carmichael had also envisaged these companies being allocated to LBO. The particular matters mentioned correspond, in broad terms, with those identified in the risk assessment of the Harrods group accounts for the period to 31 January 1998 (see paras.143-155) and in the continuing process of risk assessment of the 1999 accounts (see paras.396, 436 and 442).

[427] Plan 2 continued:

"OTHER UK CORPORATES

Broadly for the three years to 5 April 2000. To identify all other UK corporates directly or indirectly controlled by or associated with the principal individuals or their families and to

In particular we will be interest in any companies that own, occupy, manage or maintain properties, estates, aircraft, yachts, motor vehicles or any other assets used by the individuals or their families."

[428] This section of the document is thus concerned with UK companies (other than the large corporates) directly or indirectly controlled by, or associated with, "the principal individuals" or their families. The "principal individuals" appear (from a later part of Plan 2 headed "The Principal Individuals", and from Plan 1) to be the three Fayed brothers.

[429] Plan 2 continued:

"OVERSEAS CORPORATES

Broadly for the three years to 5 April 1999. To identify, as far as possible, all overseas corporates directly or indirectly controlled by or associated with the principal individuals or their families and to

[430] This section of the document is thus concerned with any overseas company directly or indirectly controlled by or associated with the principal individuals or their families. The tax purpose appear to be to establish whether any of the companies are resident in the UK and therefore liable to UK taxation; whether any of the companies carries on a trade in the UK through a branch or agency; and whether any of the individuals or their families are liable to UK taxation on emoluments or benefits received from the companies, as a consequence of the UK residence either of the companies or of the person in question.

[431] The first of these matters - the UK residence of companies by virtue of central management and control in the UK - was explained above (see para.20). The second of these matters - the significance of carrying on a trade in the UK through a branch or agency - has not yet been explained. A company which is not tax resident in the UK is not, in general, within the charge to corporation tax; but that general rule is subject to an exception where the non-resident company carries on a trade in the UK through a branch or agency: section 11(1) of the 1988 Act. In that event, corporation tax is charged on the trading income of the UK branch, income from property or rights held by the UK branch, and capital gains accruing to the company from the disposal of assets within the UK: section 11(2).

[432] In relation to the third matter - personal taxation on emoluments or benefits - it is necessary to explain liability under Schedule E in greater detail than before. Tax is charged under Schedule E in respect of any office or employment on emoluments which fall under one or more of three cases, which are set out in section 19 of the 1988 Act. Case I applies where the person holding the office or employment is resident and ordinarily resident in the UK. Such a person is in principle liable to tax on any emoluments; but (in broad terms) if he is not domiciled in the UK, and the office or employment is with a person resident outside the UK and not resident in the UK, and the duties are performed wholly outside the UK, then tax is not charged under Case I on the emoluments of that office or employment: section 192 of the 1988 Act. Such emoluments are described in section 192 as "foreign emoluments". Case II applies where the person holding the office or employment is not resident in the UK (or, if resident, is not ordinarily resident there). Such a person is in principle liable to tax on any emoluments in respect of duties performed in the UK. Case III applies where the person holding the office or employment is resident in the UK (whether or not he is ordinarily resident there). Such a person is liable to tax on any emoluments received in the UK. Liability under Schedule E can thus depend on a number of factors, including the residence of the individual receiving the emolument and the residence of the employer who provides it.

[433] Plan 2 continued:

"TRUSTS AND PARTNERSHIPS

Three years to 5 April 1999. To identify, as far as possible, all UK and overseas trusts and partnerships in any way connected with the principal individuals and their families and to ensure that any UK tax liabilities are properly addressed.

THE PRINCIPAL INDIVIDUALS

THE IMMEDIATE FAMILIES OF THE PRINCIPAL INDIVIDUALS

To identify all members of the immediate families of the principal individuals resident in the UK (family tree) and to ensure that they have been issued with SA returns for the years to 5 April 1999 and 5 April 2000. Those returns to be followed up to ensure that any UK liabilities are being properly addressed."

It appears from the last paragraph quoted that LBO was envisaging enquiries only in respect of such members of the immediate families of the Fayed brothers as were resident in the UK.

[434] The final sections of Plan 2 stated:

"DISCOVERY

Although the enquiries will initially be for the periods indicated any discoveries will be followed up in the usual way. Enquiries will also extend into later years as necessary as the enquiry progresses.

OVERALL

It is intended that by the end of this exercise we will be as confident as we can be that we fully understand the business and financial interests of the Fayed family and that they have been brought properly into the SA and CTSA [corporation tax self-assessment] tax regimes. The exercise will therefore cover all aspects of the family's corporate and personal affairs on a CCW basis and will not be restricted, as in the past, only to high profile aspects."

[435] On 6 June Mr Murrin prepared notes of his work on the accounts of the Harrods group. In relation to the accounts for the period to 31 January 1998, Mr Murrin noted the points which remained open. These included:

1. The reason for, and rights attaching to, the issue of the two special shares in Harrods Holdings plc, Harrods (UK) plc and Harrods Ltd (see paras.144 and 155). An explanation had been received that one special share was issued to each of the two non-resident corporate partners in Alfayed Investment and Trust Pvt LP (the ultimate parent of the Harrods group).

2. The acquisition of Cylena SA from Mr Al Fayed (see paras.144, 146 and 155).

3. The payment of a sum to the Alfayed Charitable Foundation.

4. The sale of the former Harrods Depository in Barnes to a housing developer, a leasehold interest in one of the apartments being part of the consideration, and the lease subsequently being sold to Prestige Properties SA (see para.147).

5. Legal and professional fees (see paras.143 and 155).

[436] In relation to the accounts for the period ended 31 January 1999, Mr Murrin wrote:

"Accounts still to be reviewed".

He added however a list of 41 "areas to be explored" arising from the accounts. It is apparent from the list that Mr Murrin had studied the 1999 accounts in some detail, and had identified the issues which were subsequently the subject of enquiries by LBO, as described below.

[437] On 7 June the meeting took place between Mr Middleton and Mr McGuigan of SCO and Mrs Williams and Mr Williams of LBO. The minute of this meeting, prepared by Mr Williams, is another document which was produced by the Revenue on the eighth day of the proof. The minute is headed "Fayed Family, Harrods and Other Related Corporates", and records:

"1. The opportunity was taken to update MW [Mrs Williams] on the dealings with the Board (they were each sent a copy of JM [Mr Middleton]'s note of 19 May and Steve Matheson had replied approving the proposals) and the events of the last couple of weeks and to discuss the broad scope of the work to be done by LBO and SCO based largely around the plans and notes of objectives that had been prepared by SCOE and GLBO.

2. It was agreed that work would proceed on the basis of a close working relationship between SCOE and GLBO with work allocated on the basis of the skills available within each office but recognising that there were areas of overlap and that there were limitations on the extent of the work SCO would be doing on the personal tax front in view of the agreement and the terms on which the Revenue was withdrawing from it. I--------------- LEGAL ADVICE DELETED ------------------------------------I There was no objection to outlining to the other side's advisors how the various enquiries were going to be structured and who on the team was likely to be dealing with what.

3. The core team would consist of JW [Mr Williams] and Harry Murrin from the LBO and Alan Carmichael from SCO with involvement by JMcG [Mr McGuigan] as appropriate. SCO would also be able to call upon the services of a second Band B investigator, a Band C investigator with specialist Sch E knowledge and a senior SCO accountant as necessary. GLBO would also be able to draw upon the services of its accountant if necessary but did not currently see any need for his services. It had also been agreed in principle with Solicitor's Office that a named Solicitor would keep in touch with the exercise and would provide a point of first contact on any legal matters. It was agreed that in view of the sensitivity of the case the exercise would be carried out as far as possible on a need to know basis and that although areas such as pension schemes would need to be reviewed other Revenue agencies would not be brought in to any greater extent than was necessary.

4. It was agreed that the Revenue approach would need to be, and be seen to be, seamless and that this would entail flawless communication between GLBO and SCOE although team members would continue to operate from their current offices. One of the priorities for the team was therefore to set up lines of communication by which information was properly pooled and all team members kept up to date on progress and any developments. Another priority was for the team to consider the security implications of the exercise and to ensure that all reasonable precautions were taken as regards information, papers and personal security. GLBO will need suitable secure storage.

5. As regards accountability, JW will prepare a brief quarterly report to MW and JM covering all aspects of the exercise. It is the practice of JM to copy progress reports on sensitive cases to the Deputy Chairman. In addition the team will inform MW and JM immediately of any important or sensitive developments"

[438] It appears from this minute that the work of SCO and LBO was to be closely co-ordinated, to the extent that it was referred to as a single "exercise" in respect of a single "case". It appears that the work was to be based largely around Mr Carmichael's enquiry plan and Glasgow LBO's Plan 1 and Plan 2. It was to proceed on the basis of "a close working relationship between SCOE and GLBO with work allocated on the basis of the skills available within each office". The work was to be done by a "team" drawn from both offices, headed by an official of LBO, who was to report on all aspects of the exercise (including the work done by members of the team who were drawn from SCO) to both the Director of LBO and the Director of SCO. Although team members would continue to operate from their current offices, information was to be pooled, and the approach was to be "seamless".

[439] A separate note of the meeting, made by Mr McGuigan (and also produced on the eighth day of the proof) recorded a question being asked as to when the LBO risk assessment would be ready.

[440] In his evidence, Mr Carmichael stated that by the date of this meeting he had undertaken "a full and proper reading" of the documentation received from Mr Whitehead in March 2000, as distinct from the "cursory read-through" which had resulted in the notes prepared on 16 March (see paras.264 and 266). On this occasion he made no notes. The absence of notes on this occasion might be contrasted with Mr Carmichael's extensive notes of The Bodyguard's Story and of the Hamilton trial transcript. The documents received from Mr Whitehead appear to have been extensive (see para.92). They contained information, or references to other Revenue files containing information, concerning the Revenue's previous enquiries (particularly those preceding the 1985 and 1990 agreements) into such matters as the treatment of possible benefits (such as legal fees, office accommodation, secretarial staff and security staff (see paras.50, 52 and 68-73) and the possible UK tax residence of overseas companies (including Bocardo SA, Ross Estates Ltd and Prestige Properties SA: see paras.50-51). It appears to me that if Mr Carmichael had carried out a detailed analysis of the documents, he would have been likely to have made some notes; and I therefore infer that it is unlikely that he carried out such an analysis. That inference is strengthened by the absence of any mention in Mr Carmichael's enquiry plan of certain companies which featured in the SCO London papers (whereas he appears to have referred to every company which was mentioned in his note of the trial transcript), and by his mistaken understanding (as at 19 May, at least) that The Ritz Hotel Ltd was an offshore company, when the correct position was explained in the SCO London papers (see para.374).

[441] In the meantime, Mr Murrin had been reading the Harrods 1999 accounts in greater detail. On 13 June he prepared a note, headed "Harrods Group Risk Areas", based on his reading. The note began with comments based on the 1998 accounts:

"ACCOUNTING PERIOD ENDED 31 JANUARY 1998

To fully assess risks in the economic entity that is the Harrods Group would entail detailed consideration of the effect of the close control and involvement exercised by M. Al Fayed (and probably to a lesser extent, by A Fayed). We - that is, Glasgow LBO - are however precluded from making such a detailed assessment by the effective embargo placed on any enquiries into areas which are said to be covered by SCO's agreement with the Fayed brothers. The details of the agreement are not known except in the broadest terms - the agreement has been held out as one that covers all liabilities arising from what can broadly be regarded as benefits arising from payments made by Group Companies on behalf of the brothers and their families.

In more detail, the areas that have caused concerned to GLBO in the past are

The sale in August 1998 of the Liberty publishing group out of the Harrods Group to a M Al Fayed controlled Jersey resident company has also focussed attention on the Case 1 losses - and financing - of the Liberty group companies. Again however the possibility of a review in this area is circumscribed by the restriction put upon Glasgow LBO in the way of investigating sources of funds possibly coming from the reimportation of dividends paid up to the overseas Trust that is seen as the ultimate parent of the Harrods Group.

Thus, in assessing the risks by reference to the accounting period ended 31 January 1998, there has been a deliberate policy of focussing only on what may be terms as areas of technical concern...

As far as the January 1998 accounts are concerned, I have not proposed making any direct enquiries on the personal side but we could begin to explore the background to the overseas control of the Group. At the same time we need to initiate steps to have the personal side brought under GLBO control - or at least, some sort of co-ordinated control with SCO - on the basis that expiry of the previous SCO arrangement affords an opportunity to reappraise liabilities - both personal and corporate - in a Co-ordinated Casework framework".

[442] In relation to the 1999 accounts, Mr Murrin wrote:

"ACCOUNTING PERIOD ENDED 31 JANUARY 1999

In looking at risk areas in the 1999 accounts I am taking a broader look at the Group than has been taken for earlier accounting periods. The approaches recently made to SCO suggest that a Co-ordinated Casework approach to the economic entity that is 'Harrods' is likely to be called for....

Assuming however that GLBO is now entitled to explore whether the CT computations fully reflect all corporate liabilities and that all Sch E (and possibly Case V) liabilities have at least been identified and quantified - even if it is then shown that a separate (SCO led) agreement has to be modified/put in place to account for such liabilities - the areas detailed below require review/investigation. There will be some duplication of points as I have compiled the following from looking at the three main accounts in sequence. Much of the work to be done will involve determining how, what and where recharges have been/should have been made and where possible benefits have arisen but without at this point knowing any detail of the (expired) SCO agreement, it is not possible to be definite as to the actual Company bearing the expense.

Overhanging all of this - and the summary of points below - is the information relating to the availability and use of substantial amounts of cash and of Harrods vouchers by M Al Fayed as evidenced in the recent (Hamilton) libel trial. Cash spending, living requirements etc. are probably matters for SCO to tackle but on the assumption that Harrods must be the generator for much of the wealth of the brothers Fayed only a CCW approach can achieve a realistic degree of certainty that all risks have been addressed.

Harrods Holdings plc

...

...

Harrods (UK) Plc

...

Harrods Ltd

It is here in this Company's account that most of the larger sums are to be found, where potentially material amounts of benefits, own goods adjustments etc. may be identified. Given the comments above (in relation to the Hamilton trial) regarding the availability of cash, vouchers etc. as reward for services to employees there will be a part to be played by LECO in a CCW context.

...

Related Party Transactions

This aspect of a total economic entity review is mentioned above in the context of Harrods Ltd's accounts. There are however other UK corporates 'controlled' by M Al Fayed - some ex-House of Fraser companies retained in the Fayed fold (but not the Harrods fold) after the divestment of what is now the HOF group - that are not shown to have had transactions with the Harrods companies. Some files are held here in GLBO e.g. the Genavco companies, Turnbull & Asser, Modena Engineering - others will have to be brought in for review e.g. Fulham Football Club. The GLBO-held companies have been viewed in the past as 'clean' - i.e. there have been no apparent avoidance devices employed and the activities have mostly been of a straightforward trading nature. There has however been little, if any, effort to look at such areas as funding to see if there are connections back to UK generated i.e. Harrods, or overseas, funds.

A similar situation i.e. introduction of loans has persisted in the Liberty Group up to the point where this sub-group's ownership changed from being within the Harrods Group to being owned by an Al Fayed controlled Jersey company.

Going on from this area is the consideration of what overseas entities (corporates) could be said to be controlled from the UK and/or whether emoluments in the shape of benefits enjoyed from those assets, services etc. in the UK or abroad should be assessable under Sch E. A broad question, but one that needs consideration (and discussion with SCO and a Sch E expert)."

[443] It is apparent from Mr Murrin's notes that he was envisaging enquiries which were not confined to matters relevant to ascertaining the corporation tax liabilities of the companies whose affairs were dealt with by Glasgow LBO. Reflecting the expectation that a co-ordinated casework approach would be adopted, he explicitly took "a broader look" than in the past. He explicitly assumed that Glasgow LBO was entitled not only to explore whether the corporation tax computations fully reflected all corporate liabilities, but also whether all liabilities under Schedule E (i.e. personal tax liabilities in respect of emoluments from any office or employment: section 19 of the 1988 Act), and possibly Case V of Schedule D (i.e. personal tax liabilities in respect of income arising from possessions out of the UK: section 18(3) of the 1988 Act), had been identified and quantified. This work would cover possible benefits, and arrangements for re-charging of benefits. Another matter which Mr Murrin mentioned was the question whether overseas companies were controlled from the UK (and therefore tax resident in the UK). Mr Murrin used the expression "a total economic entity review". This was the approach which Mr Williams had envisaged in August 1999, subject to obtaining SCO's agreement to combined case-working: that "the whole of the Fayed economic entity [should be] considered in the round", with the case director at LBO acting "as 'ring master' to ensure that all areas of risk were properly addressed regardless of which Revenue agency was responsible for actually dealing with them" (see para.151).

[444] It may be helpful at this point to explain further the context of Mr Murrin's (and Mr Williams's) concern over "related party transactions" i.e. transactions between the Harrods group and other entities owned or controlled by Mr Al Fayed or members of his family. The notes to the accounts of the companies in the Harrods group for the year ending 30 January 1999 recorded transactions with a number of companies and other entities which were under the control of one or more of the group's ultimate controlling party (described in the accounts as "the Fayed family"): these included AIT Services (United Kingdom) Ltd, Alfayed Charitable Foundation, Balnagown Castle Properties Ltd, Fayair (Jersey) Co Ltd, Fulham Football Leisure Ltd (and its subsidiaries), Hyde Park Residence Ltd, Liberty Holdings Ltd (and its subsidiaries), Prestige Properties SA, The Ritz Hotel Ltd, Turnbull & Asser Ltd, and West Heath 2000 Ltd. Transactions of a similar character were also recorded in the 1999 accounts of the companies in the Liberty group, the Fulham group and FL Property Management Ltd.

[445] In a situation where a transaction takes place between persons, one of whom has control over the other (as defined in section 840 of the 1988 Act), or both of whom are controlled by the same person or persons, there may be a risk of "transfer pricing", i.e. the charging of an artificial price so as to inflate or diminish profits or losses. Situations of that kind were at the material time addressed by section 770 of the 1988 Act, the effect of which (as read with section 773(4)), was, broadly speaking, to substitute market value for the actual consideration passing between the parties on transactions between associated persons at under - or over - values, where the transaction would otherwise generate an advantage in relation to UK tax. Provisions broadly similar in effect to section 770 are now to be found in schedule 28AA to the 1988 Act, which was introduced by the Finance Act 1998 section 108 as part of the corporation tax self-assessment regime. Schedule 28AA is effective, for the purposes of corporation tax, as respects accounting periods ending on or after 1 July 1999, and for the purposes of income tax, as respects any year of assessment ending after that date. For the purposes of the present case, it is section 770 which is relevant.

[446] In his discussion of "related party transactions", Mr Murrin mentioned a number of companies or groups of companies, including the Liberty group and Fulham Football Club. The Liberty group was discussed earlier (see para.139). Fulham Football Club has also been mentioned. It may be helpful at this point to say something more about the Fulham companies, and also about The Ritz Hotel Ltd.

[447] Fulham Football Leisure Ltd (the thirteenth petitioner) is a company registered in the UK. Its accounts for the year ending 30 June 1999 record:

"The company's immediate and ultimate parent undertaking is Fulham Leisure Holdings (BVI) Limited, a company incorporated in the British Virgin Isles which is under the control and held for the benefit of Mr Mohamed Al Fayed and his family, the ultimate controlling party."

Fulham Football Leisure Ltd directly or indirectly owns 100 per cent of the share capital of the other companies in the group, which are also close companies registered in the UK. They include Fulham Football Club (1987) Ltd (the eleventh petitioner), Fulham Football Club Ltd (the twelfth petitioner) and Fulham Stadium Ltd (the fourteenth petitioner). The football club's training ground is owned by FL Property Management Ltd (the tenth petitioner), a company registered in the UK. The accounts of FL Property Management Ltd for the period ending 30 June 1999 record:

"The ultimate parent undertaking is Fulham Leisure Holdings (BVI) Limited, a company incorporated in the British Virgin Islands which is under the control and held for the benefit of Mr Mohamed Al Fayed and his family, the ultimate controlling party."

By May 2000 Mr Murrin had formed the opinion that the files for the Fulham companies should be reviewed by Glasgow LBO, in view of Mr Al Fayed's reportedly substantial involvement in the football club and the references in the Harrods group accounts to transactions with the Fulham companies. The files were received in Glasgow LBO in early June 2000.

[448] The accounts of companies in the Harrods group and the Liberty group also record, under the heading "Related Party Transactions", dealings with The Ritz Hotel Ltd (the fifth petitioner). The Ritz Hotel Ltd is a company registered in the UK, and owns the Ritz hotel in Paris. It is under the ultimate control of Mr Al Fayed.

[449] On 15 June Mr Williams was telephoned by Mr Tom Cawdron of Pricewaterhouse Coopers (PwC), who acted as auditors for the Harrods group. Mr Cawdron had been instructed to follow up Mr Williams's letter of 31 May to Mr Hadden. Mr Cawdron had been the partner in PwC responsible for tax investigations since 1998. He had previously worked for 25 years in the Revenue. Between 1987 and 1993 he had been responsible (as Deputy Controller) for the Enquiry Branch offices in Bristol and Birmingham and the Special Offices in Sheffield, Solihull and Bristol. From 1993 he had been head of the Special Investigations Section and one of two officials responsible for the Large Groups Office (a predecessor of LBO). Mr Williams had at that time been an investigator working under Mr Cawdron. Between 1995 and 1997 Mr Cawdron's responsibilities included the formation of LBO. He was thus someone with a great deal of experience, at a senior level, of tax investigations. Mr Cawdron provided an affidavit in the present proceedings. I have no reason to doubt Mr Cawdron's account of the events in which he was involved, and I accept that part of this evidence. For reasons explained below, however, I do not accept all his expressions of opinion about the conduct of the Revenue in the present case, some of which appear to reflect a lack of familiarity with internal Revenue practice subsequent to his leaving the Revenue.

[450] Mr Cawdron's note of the telephone call records:

"JW [Mr Williams] commented that I would be well familiar with LBO risk assessment techniques, even though they had moved on a little from the time that I was familiar with. The LBO had carried out a corporate risk assessment. There had been a risk assessment on the corporate group. That was what had triggered matters. Of course, this being a private group, the interaction between the corporate group and individuals would be a key feature, probably the most important feature. Undoubtedly, certain pure corporate issues would be identified, but the areas of greatest concern and interest to the Revenue were those where there was interaction between corporate issues and private issues... JW said he anticipated that various agencies would be involved in the CCW process... The Revenue would ensure that, on their side, the principal parties would be working hand in hand on CCW lines."

A meeting was subsequently arranged for 13 July, to be attended by PwC, KPMG, SCO Edinburgh and Glasgow LBO.

July 2000

[451] In advance of the meeting on 13 July, separate agendas were produced by SCO and LBO, apparently because of an expectation that KPMG and PwC would wish personal and corporate matters to be discussed separately, so as to protect taxpayer confidentiality. In relation to the LBO agenda, Mr Murrin explained, in a letter to Mr Cawdron dated 7 July, that the risk assessment of the Harrods group had produced inter alia the following areas for review:

"· The interface between the Group and its ultimate owners

· The interface between the Group and other entities owned or controlled
by the Fayed family

· Transfers of business into and out of the Group

· Utilisation of the Harrods name

· Expenditure not for the purposes of the Harrods trade

· Entertaining and sponsorship

· Legal and professional expenditure, including Public Relations etc
work

· Application of PAYE."

[452] SCO's agenda, which was sent to KPMG, was more extensive and largely distinct from the LBO agenda, although there were areas of overlap:

"1. THE FAMILY

    1. An Overview
    2. Family banking Arrangements
    3. Other Family related entities

2. CHECKING THE BENEFITS REPORT

Detailed reviews of the KPMG Benefits Report examining in detail
the following heads

    1. Domestic Arrangements
    2. Office Accommodation
    3. Security Costs
    4. Aircraft/Helicopter
    5. Yachts
    6. Motor Cars & Vehicles
    7. Sporting and Social Events
    8. Entertaining
    9. Legal Costs
    10. Loans
    11. Current Accounts
    12. Discounted Goods

3 UK COMPANIES TO BE INVESTIGATED

For each company to determine its activity, funding, ownership and benefit accruing to or for the Family. The named companies below will be examined but this is not an exhaustive list.

    1. Family tree identifying all UK companies directly or indirectly
      associated or controlled by to the Family.
    2. Specific Companies

    3. AIT Service UK Ltd
    4. Hyde Park Residence Ltd
    5. Pinegrove Ltd
    6. Balnagown Castle Properties Ltd prev Hyde Park Residence Management Co Ltd
    7. Dorchester Residences Ltd
    8. The Ritz Hotel Ltd
    9. West Heath 2000 Ltd

4 OFFSHORE COMPANIES TO BE INVESTIGATED

For each company to determine its activity, funding, ownership, central control or management and benefit accruing to or for the Family. The named companies will be examined but this is not an exhaustive list.

4.1 Family tree identifying all offshore companies directly or indirectly
associated or controlled by to the Family.

Specific Companies

4.2 Fayair Jersey Co Ltd

4.3 Bocardo SA

4.4 Prestige Properties SA

4.5 Etablissement Wallon

5 PAYE DISCLOSURE

5.1 Terms of reference to be drawn up."

[453] Most of the companies listed in items 3 and 4 as "to be investigated" have been discussed above. In relation to item 3.6 (Dorchester Residences Ltd), Mr Carmichael said in evidence that he did not know why it was on the list. It was dormant. In relation to item 3.8, it will be recalled that West Heath 2000 Ltd ran a school for children with special needs in the premises of the school which Princess Diana had attended (see para.265). Mr Carmichael wanted to find out to which district office the company made its returns, and whether there was cross-border financing, transfer pricing or any benefit flowing back to the Fayed family.

[454] The meeting proceeded on 13 July 2000, two days after a first order had been granted in the first judicial review. The LBO agenda and the SCO agenda were considered separately.

[455] In relation to the LBO agenda, the Revenue's note of the meeting records:

"3.1 Risk assessment

3.1.1 JW [Mr Williams] outlined the manner in which LBO carries out its work. He explained that the LBO cycle of work commences with a risk assessment of the economic entity. The review will identify and seek to quantify areas of risk. Any subsequent enquiries will be based on this risk assessment.

3.1.2 JW said that because Harrods Group is a private group this presents a number of problems. In a public group, it is easier to differentiate between the affairs of the companies and of their respective directors/shareholders.

3.1.3 JW said that he felt it was not possible to look at the affairs of Harrods Group without looking at the involvement of the directors/shareholders and other associated bodies. A major potential area of risk identified was the interface or the interaction between corporate interests and private interests.

3.1.4 JW indicated that the risk assessment process had been made difficult because of the lack of knowledge of how the group operates. What had been identified as a significant risk area might not be so significant if LBO was able to learn how the Harrods Group deals with the directors/shareholders.

3.1.5 JW said that his aim in this meeting was to give a general outline of issues that were to be raised.

...

3.1.7 JW will follow up this meeting with letters with detailed questions in the next few days. Most of the content of these letters had been prepared in draft form before this meeting.

3.1.8 JW said that in respect of the question of the interaction between the group and the directors/shareholders, the initial questions would be general and exploratory... JW reiterated that he was concerned that these interactions were an area of significant risk but the risk that existed now may be due to a lack of understanding.

3.1.9 [In response to a question about the letter of 31 May 2000,] JW explained that the SCO activity and the LBO risk assessment had been started independently and had been running in parallel. Once the SCO concerns had been brought to LBO notice it was realised that there was a great deal of overlap. It was inevitable that the two enquiries were going to take place. JW did not want Harrods to consider that the LBO enquiries were being directed by SCO as part of their enquiries. LBO did not wish to be accused of not being open and honest. At the same time, JW could not indicate to Harrods Group the existence of the SCO enquiry into the affairs of the family. The letter to Harrods had been designed to prompt the Harrods Group Tax Manager to pass it up the line where it would hopefully reach someone who was aware of the SCO matters - By this means, it had been hoped that the two separate strands of Revenue enquiries, LBO and SCO, could be brought together to the attention of the appropriate professional advisors. The letter had been marked urgent because of the impending meeting between JM [Mr McGuigan] and TM [Mr Murray]."

KPMG's note of the meeting is in similar terms. It also records Mr Williams as saying that there were exploratory questions to establish how things worked, and that it might be helpful to meet again after the letters had been issued.

[456] Mr Williams then went over the topics mentioned in Mr Murrin's letter of 7 July. The minute prepared by KPMG records:

"9. The Revenue referred to HM's letter of 7 July 2000.

Point 1 - The interface between the group and its ultimate owners. The Revenue wanted to understand the extent of the interface between the group and the ultimate owners.

They had read a lot in the press about the lifestyle of the Al Fayed family and wanted to understand the extent of the interface.

10. TC [Mr Cawdron] asked if the Inland Revenue would relate questions to individual companies. JW said these would be group wide but understood there was only one major company. There would be general questions to understand what sort of interaction there was and the extent of it.

11. Point 2 - The interaction of the group and other entities owned or controlled by the Fayed family. The Revenue said it seemed possible transactions normally associated with individuals may be with other corporates. This was the big discussion area. There could be other queries. There was significant overlap with SCO interests and SCO and LBO would be working extremely closely on the whole matter because they see a high degree of interaction. It was CCW. The Inland Revenue would want to bring everyone to any briefing meeting.

12. Point 3 - Transfers of business into and out of the group. There had been some significant transfers between the group and individuals. Liberty radio and the Punch sub-group were referred to which had left Harrods Group in the period... Another major corporate entity was referred to by the Inland Revenue. This was in fact Fulham...

13. Point 4 - Utilisation of Harrods name. The Inland Revenue had become more aware of a number of overseas interests some of which use the Harrods name. The LBO wanted to establish what other major overseas corporates there are and what they do. They will be looking where these are resident and where they are managed and controlled from. They will want to look at trading between overseas and UK corporates for example the use of the Harrods name and transfer pricing issues...

14. The Inland Revenue then referred to:

Point 5 - Expenditure not for the purposes of Harrods trade

Point 6 - Entertaining and sponsorship

Point 7 - Legal and professional expenditure including public relations work.

These were possible consequentials to understanding how activity takes place. There will be fact finding in the early stages and the Revenue will be asking for analysis etc. This was not an exhaustive list. They would want to ensure that all expenditure was for the purposes of the Harrods Group. Entertaining and sponsorship was an issue which was often a problem. Legal and professional including public relations were an area where they were often problems and there had been press comment. This needed examination. TC said that Harrods was a half billion turnover organisation and there must be some degree of specificity in questions as far as the Inland Revenue can. JW said that the Inland Revenue would be specific in the early stages where they can. They will also want to know how charging arrangements in general worked in the early stages.

15. Point 8 - Application of PAYE. PAYE was part of risk assessment which was looking at the whole field. They were aware of the need to know basis in looking at other areas. We would hear from the LBO. It was unclear to what extent the risks were mainly Harrods corporation. A PAYE audit had not yet been planned.

16. JW said that comprehensive letters would follow... JW suggested that the letters were read and he was then contacted to agree an amicable cost effective way of dealing with issues including fact finding."

[457] The SCO agenda was then discussed. At the outset, Mr Murray asked SCO to define the nature and basis of its enquiries. Mr Carmichael said that enquiries were to be made into the 1998/99 tax returns. Each of the three brothers would receive a section 9A notice. Mr Murray asked what the Revenue's approach was, in the context of the 1997 agreement. Mr McGuigan said that the Revenue accepted that the agreement applied to the year being looked at. SCO's enquiries concerned matters not encompassed in the agreement. In relation to benefits in kind (which were dealt with to some extent in clauses 3 and 4 of the agreement, but which were intended to be the subject of enquiry), Mr Murray said in evidence that he understood at the meeting that what SCO had in mind was to check that matters were as they had been represented to be in KPMG's 1996 review, rather than to call into question what had been agreed about benefits in the 1997 agreement. That understanding is consistent with what Mr McGuigan said at the meeting:

"JM [Mr McGuigan] explained that in respect of matters relating to the agreement there was no investigation. SCO simply required to check that all benefits provided in 1998/99 to the family had been identified, quantified and recharged as the 1996 report stated. The investigation would relate to matters that SCO believed were outside the scope of the agreement."

[458] Mr Murray observed that Ali and Salah Fayed were non-resident and non-domiciled in the UK, had no UK source income (other than dividend income, in the case of Ali Fayed, which was covered by a double taxation agreement) and had submitted tax returns only because of their contractual obligation to do so. Mr Murray questioned the basis of a self-assessment enquiry in those circumstances. Mr Carmichael responded that he was legally entitled to enquire into the returns which Ali and Salah Fayed had submitted, even if it was to establish that neither brother should be required to submit a return in the future. In his evidence, Mr Murray accepted that the Revenue's position at the meeting was that if he was able to demonstrate that Ali and Salah Fayed were non-resident and non-domiciled in the UK, then the matter was at an end as far as they and their families were concerned. Mr Murray also accepted in his evidence that Ali Fayed held offices or employments in the UK.

[459] In relation to PAYE, Mr Carmichael said (as noted by KPMG) that SCO had "a rough outline of the problem" and that it would be necessary to draw up terms of reference, i.e. for a disclosure report. This is consistent with my conclusion that, as at 30 March, Mr Carmichael and Mr McGuigan were not awaiting the submission of a disclosure report. The Revenue's note states:

"4.2.2 TM [Mr Murray] explained that Mr al Fayed had approached KPMG because of a realisation that because he was a very generous person and because he deals in cash and because he is in the habit of making cash gifts to employees then there might be a PAYE failure problem.

4.2.3 TM said that the gifts were largely in the form of birthday gifts or testimonials that would not give rise to a tax liability, but it was accepted that certain payments may give rise to a tax liability. Mr al Fayed was willing to take responsibility for the payment of any PAYE due.

4.2.4 AC [Mr Carmichael] identified the areas he would expect the disclosure report to cover. These will include the practice of giving cash to employees, domestic staff receiving cash 'top ups', payments to staff to supplement their salaries, payments to 'personal staff' at Christmas and other holidays, clothing and meal allowances paid to 'personal staff', direct payments to staff or unvouched travel, domestic and other expenses, golden goodbyes and other payments to staff under confidentiality arrangements and other payments to 'personal staff' for services to Mr Al Fayed and family.

4.2.5 AC disputed TM's assertion that the majority of the payments were true gifts. He said that it was clear from books, trial transcripts and other sources that such cash payments were regular."

Mr Murray responded (as noted by KPMG) that "it was far too early to come to any conclusion" and that there was "disputed evidence" in the trial. Mr Carmichael asked about a payment on account; but Mr Murray declined to consider a payment on account at that stage. Mr Murray's position on these issues tends to support my conclusion that he is unlikely to have accepted at the meeting on 20 March that the PAYE liability would be in excess of 100,000.

[460] In relation to item 1 on the agenda ("The Family"), the Revenue's note states:

"4.3.1 AC asked for a family tree for Mr Al Fayed. TM queried the relevance of this information. AC and JM explained that this information was not known and its possession would assist in the check of the benefits position. It would enable the Inland Revenue to check whether all benefits received by family members had been included in the [KPMG] reports."

According to the KPMG note of the meeting, an additional explanation was put forward by Mr Carmichael:

"25. AC said he wanted to get an understanding of the family presence in the UK and wanted a family tree. He wanted to identify people in the UK and who was not here, where they lived and dates of birth... AC said he needed to know who family members were and who should submit tax returns."

Mr Murray and Mr Burton (of Burton Copeland, the solicitors acting for the Harrods group and Mr Al Fayed) maintained that the provision of a family tree was not relevant, but said that the request would be considered. It appears from what was said by Mr Carmichael that this information, as well as being relevant to the check on benefits, was also regarded as relevant to the identification of other family members who might be liable to UK taxation.

[461] In relation to item 1.2 on the agenda ("Family banking arrangements"), the Revenue's note states:

"4.3.5 AC asked for details of all UK bank and building society accounts and credit card and charge cards available."

In relation to item 1.3 on the agenda ("Other Family related entities"), the Revenue's note states:

"4.3.6 AC requested details of any trusts settled by the family and any charitable trusts established. TM questioned what relevance charitable trusts could have to matters under enquiry. AC said that it was not unknown in SCO cases for persons to donate to charities but to receive benefits in return."

[462] In relation to item 2 on the agenda ("Checking the Benefits Report"), the Revenue's note records:

"4.4.1 AC said that his aim was to check the benefit report. This was not an investigation. AC said that the previous reports had not been checked. TM disputed this. He said that the Inland Revenue in the past had been given wide access to various bank statements and other records on a wholly voluntary basis. Extensive negotiations had taken place and a great deal of information had been provided and was now available to the Inland Revenue. JM agreed that information had been made available but for the purpose of reviewing the remittances position. The past benefits reports had not themselves been examined in detail.

4.4.2 JM requested as a first stage a breakdown of recharges covered by remittances. This would allow the trail to be followed back as a first stage check of the report.

4.4.3 JW said that there was considerable overlap with LBO interests in this area. He stressed the importance of a step by step approach in reviewing the machinery of the recharges and remittances.

4.4.4 TM said that he had no reason in principle to believe that the 1996 arrangements differ from those in 1999. But he did not know. It was important not to speculate. He will go away and find the information.

4.4.5 AC said that the areas he wished to examine were listed in the agenda, which was largely self-explanatory. He did not propose to run through each item during the meeting. TM agreed.

4.4.6 AC raised some specific points.

4.4.7 AC wanted to review security costs in light of what had been said in various publications. He asked TM to review this expenditure in light of S.112 & 113 FA 89 [which are concerned with the deductibility of expenditure on personal security in computing profits]. This would also affect Harrods Group accounts. AC asked TM to consider how costs of security for offshore locations have been dealt with.

4.4.8 AC asked for details of legal costs and the mechanisms employed for determining whether these costs were business or private. He asked for details of law firms retained. TM thought that these queries were uncontentious.

4.4.9 AC asked for confirmation that there were no loan accounts with the companies and that remittances actually occurred. TM understood that there were no loan accounts in existence."

[463] In relation to these issues, the KPMG note records that, in relation to the request for an analysis of the machinery of recharges, Mr Murray acknowledged that this was a relevant issue for the tax position of Mr Al Fayed and Ali Fayed, and said that a document would be prepared to bring matters to an early and correct conclusion. In relation to security costs, the KPMG note records that Mr Carmichael asked whether the previous allocations of those costs (see para.267) were still appropriate, and whether any UK companies incurred any overseas security costs. In relation to loan accounts, it appears from the KPMG note that one of Mr Carmichael's concerns was as to the timing of recharges, i.e. whether there was a significant delay between the incurring of the costs of benefits and the reimbursement of those costs.

[464] In his evidence, Mr Carmichael explained the sort of enquiries which he had in mind, in relation to benefits, by giving an example. The KPMG review stated that the flats in Park Lane were owned by Prestige Properties SA, rented to Hyde Park Residence Ltd and sublet to Etablissement Wallon. It was said that Etablissement Wallon paid rent to Hyde Park Residence Ltd in respect of the flats made available to the Fayed brothers, and was then reimbursed by the brothers (see para.173). It would be necessary to enquire whether the rent paid by Etablissement Wallon involved any transfer pricing: that could depend on whether that company was controlled in the UK and was therefore UK resident; and it could also affect the tax position of Hyde Park Residence Ltd. It was also necessary to check whether the Fayeds had paid Etablissement Wallon a rent which represented the value of the accommodation. As the example indicates, it is difficult in practice to maintain a clear distinction between the investigation of benefits and the wider investigation: a point which Mr McGuigan, Mr Carmichael and Mr Murray all appeared to acknowledge (at times, at least) in their evidence.

[465] In relation to item 3 on the SCO agenda ("UK companies to be investigated"), the Revenue's note records:

"4.5.2 JM said that he would like to draw a distinction between Harrods Group companies and other companies which were those that SCO were interested in. These were the genuine family asset owning companies. A number of these were already known and AC was actively attempting to identify any others. It would assist if TM could supply a family tree identifying all UK companies controlled by the family."

KPMG's note of the meeting records:

"AC said a lot of companies provided services for and on behalf of individuals. They wanted an overview of companies and some had been identified. JM said they were trying to distinguish between those SCO are interested in and those under the Harrods banner. TM took issue with the word 'investigated'. What are the reasons for and purpose of the investigation? JM said they wanted to know about activities of companies and benefits provided to family members... AC said he wanted to know what companies existed and were linked to family members."

[466] Mr Murray appears to have taken issue with the word "investigated" because Code 8 had not been issued to the UK companies, and it was not apparent that a thorough review of their affairs had been carried out. In his affidavit, Mr Murray observes:

"It was not apparent that these companies had been identified for investigation for any reason other than that they were connected with [Mr Al Fayed]. The Revenue appeared to have very little knowledge of the companies they had identified for investigation other than possible connections with [Mr Al Fayed]."

In his evidence, Mr Carmichael said that enquiries concerning the companies were initially being made as part of the Code 8 investigation into Mr Al Fayed. As information became available, SCO would if appropriate issue Code 8 to the companies.

[467] In relation to item 4 ("Offshore companies to be investigated"), the Revenue's note records:

"4.6.1 TM asked what grounds AC had for investigating the affairs of the overseas companies. AC said that it was clear from press articles and other publications that Mr al Fayed had an autocratic management style. It was therefore reasonable to assume that where there are offshore companies with significant UK assets owned by the family then there may be questions of central management and control.

4.6.2 AC said that he had questions relating to the central management and control of Boccardo. TM said that given the extent and nature of the assets owned by this company he did not have any reason to object to AC asking these questions.

4.6.3 IB [Mr Burton] was concerned about the volume of information that could be required by the Inland Revenue. He was not willing to consider disclosing all offshore interests in cases where those offshore interests had no bearing on UK tax liabilities. If the Inland Revenue persisted in its request, he would have to seek advice and instruction."

Remarks indicating that SCO would not necessarily be provided with all the information it wanted, on a voluntary basis, are also recorded in the KPMG note:

"IB said that we would need to consider the Inland Revenue's position and how to respond. AC said they were asking questions to add to their knowledge. JM said that the Inland Revenue did not want to have incomplete knowledge of what MF and his companies did in the UK. TM said that we were unhappy at the prospect of being lured into a world wide endeavour especially when there were families and people who no longer had contact with the UK. We would want to resolve UK issues. We would not be so accommodating with things that have no relevance to UK issues. Our obligation to our clients was to see things were dealt with clearly. A lot of the things being talked about today were in Inland Revenue files and the public arena. Much information had already been provided and not much had changed. TC said that on the corporate side he would receive the detailed questions which the Inland Revenue were entitled to ask: TC said he was entitled to try to persuade the Inland Revenue not to go down certain routes if these were not leading anywhere."

SCO's actions after 13 July 2000

[468] Events subsequent to the meeting on 13 July 2000 can most clearly be explained by dealing separately with SCO and LBO. Dealing first with SCO, on 10 August 2000 Mr Carmichael wrote to KPMG to clarify the dividing line between the respective responsibilities of SCO and LBO:

"Generally, the SCO responsibility will include:-

1. The check of the 1999 Tax Returns to ensure that all benefits have been identified as within the 1997 [sic] KPMG Benefits Report and that where appropriate the costs of benefits have been properly reimbursed by the Fayed Family.

2. To receive and deal with issues arising from the PAYE disclosure.

3. To investigate the offshore companies associated to the Family but not the Harrods Group or mainstream trading companies but including companies which own, control or manage UK assets whether real, heritable or moveable.

4. To investigate UK companies associated to the Family but not the Harrods Group or mainstream trading companies but including companies that manage or control UK assets or meet the costs of assets provided to the Family.

The Glasgow LBO will have responsibility for corporation tax issues arising within:-

1. The Harrods Group both within and without the UK.

2. Other major trading UK companies.

3. The main offshore trading associates of the UK trading companies."

[469] On 15 August 2000 letters signed by Mr Carmichael were issued to Mr Al Fayed, Ali Fayed and Salah Fayed, giving notice of an intention to make enquiries into their 1999 tax returns, in accordance with section 9A of the 1970 Act.

[470] The general treatment of forward tax agreements continued to be considered by the Revenue. Following a consultation with counsel on 26 September 2000, general advice was issued by the Solicitor's Office by letter dated 2 October 2000. In his evidence, Mr Middleton said that SCO had, on the basis of that advice, identified only one agreement (apart from that with the Fayeds) which was to some extent objectionable. Two members of the Board appear to have been involved in the conclusion of that agreement, in 1988. It was objectionable in respect that it included a clause providing that the agreement was to continue indefinitely. On the basis of legal advice distinguishing that agreement from the 1997 agreement with the Fayeds, SCO had not treated the agreement in question as void in its entirety, but had declined to adhere to the objectionable provision. Mr Middleton and a member of the Board had been involved in the discussion of that case. As at 31 May 2002 (when the Lord Justice-Clerk's Opinion was issued in the first judicial review), no forward tax agreement had been terminated by the Revenue, apart from the agreement with the Fayeds. Following the issue of the Opinion, SCO had initiated a review of forward tax agreements, with the assistance of the Solicitor's Office. SCO were not maintaining in force any forward tax agreement in respect of which they had received legal advice that the agreement was ultra vires.

[471] At some (unspecified) date subsequent to the meeting of 13 July 2000, Mr Carmichael "opened up a formal enquiry" into Hyde Park Residence Ltd, Pinegrove (Millbrae) Ltd, AIT Services (United Kingdom) Ltd and Balnagown Castle Properties Ltd, and asked questions about their accounts. Mr Carmichael did not explain what he meant by "opening up a formal enquiry". It is likely that he meant the registration of an investigation and the issue of Code 8 (since the asking of questions would constitute first party contact). He served section 9A notices annually in respect of the tax returns submitted to SCO by the Fayed brothers, so as to preserve the Revenue's position. He did not exercise any statutory power to recover information.

LBO's actions after 13 July 2000

[472] Considering next the actions of LBO subsequent to the meeting on 13 July 2000, on 25 July Mr Williams wrote to Mr Cawdron in relation to the Harrods group and other companies. He enclosed three letters of the same date, written by Mr Murrin, concerning respectively the accounts of Harrods Holdings plc, Harrods (UK) plc and Harrods Ltd. It is necessary to consider the letters in some detail.

[473] In his covering letter, headed "Harrods Group", Mr Williams made enquiries concerning overseas business activities in which the group's ultimate owners had a material interest:

"The information and documentation required is as follows:

1. A list of all overseas business activities in which the group's ultimate owners have a material interest together with a description of the business.

2. The names of any corporates owning or administering those businesses together with details of their territory of incorporation and the address of their registered office.

3. Copies of the accounts of each such business or corporate for accounting periods falling wholly or partly in the year to 31 January 1999.

4. Details of the nature and extent of the legal or beneficial interest of the ultimate owners of the Harrods group in those businesses or corporates.

5. Details of the territory in which each business or corporate regards itself as tax resident and on what basis.

6. Details of the nature and extent to which any management, control or administration is exercised in the UK and of any administration or other charges to or from any of the UK corporates.

7. Details of any trading or other transactions between any of those businesses or corporates and any of the UK corporates and of the terms under which the relevant prices or charges are set.

8. Details of any payments into or out of the UK in respect of the use of any intellectual property together with details of the terms of any licences or agreements. In particular please let me have details of the terms under which those using the Harrods name are licensed to do so.

9. Details of any branch, establishment or agency of any such business or corporate in the UK."

Mr Williams also requested information and documentation concerning The Ritz Hotel Ltd.

[474] In his letter concerning the accounts of Harrods Holdings plc for the accounting period ending on 31 January 1999, Mr Murrin wrote, inter alia:

"1) Group Ownership

I should like to have a full appreciation of the chain of ownership - both legal and beneficial - and control from Harrods Holdings plc through to the ultimate beneficial owner(s). Will you please give details of this ownership chain, indicating where each entity is considered to be resident and the basis for each residency claim. I also wish to know the status i.e. company, partnership etc. of each entity and please let me have copies of the accounts of all such entities in the chain for which any period falls within the period ended 31 January 1999.

To what extent are any of the chain entities in any way managed, controlled or administered in the UK? Do any of the chain entities operate through any branch or agency in the UK?"

[475] In relation to the accounts of Harrods (UK) plc for the same period, Mr Murrin's letter requested inter alia that PwC "identify any tenants (individuals/corporates/other entities) who are members of the Fayed family or who are in any way associated with or connected to corporates or entities controlled by or through Fayed family members." In relation to the accounts of Harrods Ltd for the same period, Mr Murrin's letter included an enquiry of a similar character, and an enquiry concerning "any transactions with associated individuals... Fayed family members... or any other entities associated with the Fayed family - whether UK resident or otherwise".

[476] On 8 August Mr Murrin sent Mr Cawdron letters of enquiry concerning the accounts of Liberty Publishing & Media Ltd, The Liberty Broadcasting Company Ltd, Punch Ltd, Brompton Press Ltd and Liberty Radio Ltd for the period ending 31 August 1998 (when those companies formed part of the Harrods group). Mr Murrin asked about the rationale behind the sale of the Liberty group to Liberty Holdings Ltd (see para.139). His other enquiries were principally concerned with the question whether the companies had been carrying on a trade on a commercial basis with a view to profit. If that was not the case, their losses could not be taken into account for the purposes of loss relief or group relief: section 393A(3) of the 1988 Act requires, as a condition for setting off a trading loss, that "the trade was being carried on on a commercial basis and with a view to the realisation of gain in the trade or in any larger undertaking of which the trade formed part"; and section 403 ZA(2) applies the same condition to group relief. Other enquiries concerned transactions between associated persons (see para.445).

[477] Reference was made earlier to the series of transactions involving Harrods Ltd, Cylena SA and Alpha Airports Group plc (see para.146). These transactions raised a number of taxation issues which appeared to Mr Williams to be relevant to LBO's risk assessment of the Harrods group and other companies associated with Mr Al Fayed. One source of concern was the apparent motive of the transactions, namely tax avoidance. Another was the ease with which the tax residence of Cylena SA had apparently been moved to the UK, which Mr Williams regarded as relevant to concerns that other overseas companies controlled by Mr Al Fayed might in reality be resident in the UK.

[478] On 14 August Mr Williams sent a letter of enquiry to Mr Cawdron under the heading "Harrods Group - Cylena SA". The letter included enquiries relating to the residence status of Cylena SA prior to its becoming a member of the Harrods group, bearing in particular on the question whether its central management and control had been located in the UK. Mr Williams noted that a report which he had received from Mr Hadden relating to Cylena SA showed the company's creditors at the material time as five trusts whose beneficiaries were members of Mr Al Fayed's family. A trial balance sheet, on the other hand, showed the creditors as individuals named as Camila, Heinfay, Jasfey, Karimott and Omarini. Mr Williams asked for information about these individuals and about the trusts. The letter further enquired:

"9. Is AIT Geneva SA controlled by the Fayed family? If so please let me have details including a description of its activities and the part that it plays in the administration of the affairs of the family and the corporates they control. It will also need to be included in the family tree that my colleagues in SCO have requested from KPMG along with the family trusts discussed above."

[479] In August 2000 the Fulham group files were formally transferred to Glasgow LBO. It appears that the 1998 accounts of Fulham Football Club (1987) Ltd remained "open", but that the 1998 accounts of other members of the group had been accepted. Assessments based on those accounts had already been issued to Fulham Football Leisure Ltd (the parent company in the group) and Fulham Stadium Ltd. The 1999 accounts had been submitted to Hammersmith District in June 2000. No risk assessment had yet been carried out.

[480] Mr Williams prepared a note of what he described as "queries arising from Case Director's initial review". His principal concern appears to have been the potential tax implications of the series of transactions by which Fulham Football Leisure Ltd had acquired Fulham Football Club (1987) Ltd. It appeared that, prior to the acquisition, Fulham Football Club (1987) Ltd was a wholly-owned subsidiary of Fulham Football Club (Holdings) Ltd, which was itself a wholly-owned subsidiary of SMH Football Ltd, which in turn was a wholly-owned subsidiary of Fulham Football Club Ltd. Fulham Football Club (1987) Ltd carried on the business of a football club, and the other companies were inactive holding companies. Fulham Football Club Ltd was a company limited by guarantee, with no share capital, but the members of which held voting rights. As a result of a series of transactions, a new company, Fulham Football Leisure Ltd, acquired the share capital of Fulham Football Club (1987) Ltd and the voting rights in Fulham Football Club Ltd. Fulham Football Club (Holdings) Ltd and SMH Football Ltd were dissolved shortly afterwards. At some stage in this exercise a substantial sum was introduced into the consolidated balance sheet as goodwill, representing the difference between the net asset value of the group and the price apparently paid for it, which was nil. Mr Williams was unable to discover from the accounts the particular company which held the goodwill or the steps by which it had been transferred to that company. He was concerned that the change in ownership of the goodwill might have given rise to a liability to capital gains tax. He also wanted to ascertain whether the transactions were at arm's length and at market value. He also wanted information about the parent company of Fulham Football Leisure Ltd, namely Fulham Football Leisure BVI Ltd (see para.447), in order to ascertain whether it was tax resident in the UK. In relation to Craven Cottage (the ground used by the club), Mr Williams's understanding was that it had been purchased from the Royal Bank of Scotland (which had become the owner of the ground following the collapse of a development company which previously owned it) by Belloc Ltd, a Jersey company acquired by Fulham Football Leisure Ltd as a vehicle for the purchase. It had then been sold on to Fulham Stadium Ltd, a UK company also acquired for the purpose by Fulham Football Leisure Ltd. Mr Williams wished to know why the acquisition had been channelled through Belloc Ltd, where Belloc Ltd was considered to be resident for tax purposes, and the stage at which stamp duty had been paid. His concern appears to have been that this series of transactions might have been motivated by tax avoidance.

[481] In relation to the 1999 accounts of Fulham Football Club (1987) Ltd, Mr Williams noted that enquiries should be made into benefits and related party transactions (including purchases from Harrods), besides more routine issues. Similarly, in relation to the 1999 accounts of Fulham Stadium Ltd, Mr Williams noted that enquiries should be made into related party transactions.

[482] On 18 August Mr Williams asked Mr Cawdron for the name of the person to whom he should address enquiries about the Fulham group. He was referred to the managing director of Fulham Football Leisure Ltd. On 15 September 2000 Mr Williams wrote to him. He prefaced his enquiries with an explanation of his involvement:

"Please note that as the group is now part of the overall economic entity controlled by Mr Al Fayed and his family its tax affairs will henceforth be dealt with by this office.

I have been reviewing the files sent to me by my colleague at Hammersmith 2 District but I am having difficulty in following the transactions by which the club and the Craven Cottage ground came under Fayed family control. Will you please therefore let me have the background and other information requested in this letter. This will enable me to consider the tax consequences of the transactions leading up to the change. It will also place me in a better position to take up the remaining open issues on the group and to make a more informed risk assessment in respect of accounts and computations for subsequent periods."

[483] Mr Williams then listed specific enquiries, including the following:

"The Shareholders

The following requests relate to the interests of the shareholders in the group. I have included them in order that this letter can set out the full extent of the background information that I am seeking but I appreciate that they may not fall within your sphere of knowledge. If you are able to meet the requests then will you please do so. If not then will you pass them on to the appropriate shareholders or their professional representatives.

1. Will you please let me know where Fulham Football Leisure (BVI) Ltd, (BVI), is considered to be resident for tax purposes and on what criteria that view is based.

2. Please also let me have copies of the accounts of that company from the date of incorporation.

3. By what route and to what extent was, and is, BVI controlled by Mr Al Fayed and his family? Who are the family members concerned?

4. What was the source of the 19m that BVI invested in Leisure [Fulham Football Leisure Ltd]...?"

[484] On 19 September 2000 Burton Copeland (the solicitors acting on behalf of the Harrods group and Mr Al Fayed) wrote to Glasgow LBO in response to the letters of enquiry issued by Mr Williams and Mr Murrin. They acknowledged that many questions contained in the letters were reasonable, but complained that many others were unreasonable. They observed, for example, that the letter headed "Harrods Group" (see para.473) requested the Harrods group to provide information not about its own business activities, but about all overseas business activities in which the group's ultimate owners had a material interest; to supply copies of the accounts of each such business; to specify the nature of the interest of the ultimate owners of the Harrods group in each such business; and to inform the Revenue as to each such business's opinion as to where it considered itself tax resident, and why. They observed that the letter concerning Harrods Holdings plc (see para.474) similarly requested that company to express an opinion as to the tax residence of each entity in the chain of ownership leading to its ultimate beneficial owners; to explain the basis for each such residence claim; to supply copies of the accounts of each such entity; and to express an opinion as to the extent to which any such entity was managed, controlled or administered in the UK. They observed that the letter concerning Fulham (see para.483) acknowledged that some of the enquiries did not relate to the taxpayer to whom the letter was addressed but to the interests of the shareholders, and that such matters might not lie within the taxpayer's sphere of knowledge. Similar criticisms were made of the other letters. The opinion was expressed that the enquiries constituted a fishing expedition.

[485] Mr Williams replied on 6 October 2000. He wrote:

"If a third party does not hold information or does not wish to supply it that decision is initially a matter for the third party and it may decline to assist. As you are presumably aware the Revenue has statutory rights to seek recovery of materials from third parties (see section 20(3) of the Taxes Management Act 1970) [see para.565]...

Against that background I am prepared at this stage... to redirect any questions which have in the recipients views been misdirected so that they are sent to the appropriate taxpayer. I cannot however, standing what I have said above, guarantee that I will not have occasion to raise third party queries in future.

... I must advise you that if we do not receive an early commitment from you to provide the information requested on a realistic time scale then given the negative approach reflected in your correspondence and in cancelling the meeting, we will proceed by way of formal information powers."

[486] It appears from this passage that Mr Williams accepted that some of the enquiries related to the tax liabilities of companies other than the company to which they were addressed; and that, if questions were not answered voluntarily, then section 20 powers would be invoked. In view of the evidence that LBO does not use section 20 powers (see para.232), Mr Williams presumably envisaged that SCO would use such powers to obtain information which LBO had requested without success.

[487] Later in the letter, Mr Williams wrote, in relation to his letter of 25 July headed "Harrods Group":

"The letter does not require or oblige the recipient to reply. At this stage these are informal requests and it is entirely open to the recipient to say that they are not able to provide the information... or even that they decline to provide it. I find it difficult therefore to see why the questions cause any difficulty."

[488] Re-drafted letters of enquiry were thereafter issued. Mr Williams did not issue any re-drafted version of his letter of 25 July headed "Harrods Group".

[489] In relation to the accounts of Harrods Holdings plc for the accounting period ending on 31 January 1999, Mr Murrin's re-drafted letter, dated 13 November 2000, omitted the paragraph headed "Group Ownership" (see para.474), but was otherwise in substantially the same terms as the original letter. It made enquiries in relation to the matters arising from the accounts which had earlier been identified by Mr Murrin as meriting enquiry (see para.442): for example, the issue of the special shares; staff costs; legal and professional fees; payments to charities; related party transactions; and the director's loan account in the name of Mr Al Fayed. Mr Murrin in his affidavit describes the enquiries as relating to "routine matters". I accept that evidence.

[490] In relation to the accounts of Harrods (UK) plc for the same period, Mr Murrin's re-drafted letter, dated 13 November 2000, re-worded the question concerning tenants (see para.475), so as to enquire whether properties were let at a rent below market value "to any person who controls or is associated with the Company or any person associated with any such person". The re-drafted letter was otherwise in substantially the same terms as the original letter. As in the case of Harrods Holdings plc, Mr Murrin made enquiries in respect of staff costs, legal and professional fees and matters of detail. In addition, Mr Murrin made enquiries into the sale of the Liberty group, requesting information as to the rationale behind its sale out of the Harrods group, and the valuation basis applied in arriving at the sales proceeds. Mr Murrin describes the enquiries, with the exception of that concerning Liberty Publishing and Media Ltd, as relating to "routine matters". I accept that evidence. I also accept that the enquiries relating to the Liberty group had a relevant tax purpose.

[491] In relation to the accounts of Harrods Ltd for the same period, Mr Murrin's re-drafted letter, dated 13 November 2000, altered the question concerning members of the Fayed family and associated entities (see para.475), so as to ask for information about transactions with "persons who control or are associated with the company and all persons associated with such persons". An explanation was given that the purpose of the enquiry was to ensure that transactions with connected persons were fully accounted for, having regard to section 770 of the 1988 Act (i.e. the statutory provisions concerning transfer pricing) and the principles established in case-law concerning transactions other than at market value. The re-drafted letter was otherwise in substantially the same terms as the original letter. In addition to enquiries concerning directors' remuneration, professional and legal charges and matters of detail, Mr Murrin also made enquiries as to the procedure used for accounting for gifts, in the light of suggestions that the chairman of the company had provided gifts in the form of goods and gift vouchers from Harrods; as to expenditure on public relations, the provision of public relations services to persons other than the company, and charges in respect of any services so provided; and as to expenditure on security, the provision of security services to persons other than the company, and charges in respect of any services so provided. Mr Murrin describes the enquiries, with the exception of those concerning transactions with connected persons, as relating to "routine matters". That appears to me to be generally correct, although one might question whether the enquiries about expenditure on gifts, public relations and security were routine. In any event, I accept that all the enquiries had a relevant tax purpose.

[492] Re-drafted letters of enquiry were also sent on 13 November in relation to the accounts of Liberty Radio Ltd and Brompton Press Ltd for the period ending 31 August 1998. The letters were in similar terms to those of 8 August 2000 (see para.476).

[493] On 29 November Mr Williams sent Mr Cawdron a re-drafted letter of enquiry concerning the acquisition of Cylena SA and Alpha Airports Group plc by Harrods Ltd. The re-drafted letter omitted many of the enquiries made in the original letter (see para.478), including those relating to the residence status of Cylena SA prior to its becoming a member of the Harrods group, those relating to the arrangements entered into between Cylena SA and Mr Al Fayed, or trusts in which members of his family had an interest, prior to its becoming a member of the Harrods group, and the enquiry relating to AIT Geneva SA. The re-drafted letter asked questions bearing on whether the arrangements under which Harrods Ltd had acquired its interest in Alpha via Cylena should be regarded as a pre-ordained series of transactions designed to achieve stamp duty savings. It also asked questions concerned with whether certain transactions were at an undervalue, and fell within the scope of section 770 of the 1988 Act.

[494] In June 2000 LBO had received the accounts of the Liberty group for the period ending 31 August 1999. In April 2001 Mr Murrin prepared notes on the risk assessment of the accounts, to which Mr Williams responded in May 2001. The principal concern remained whether some of the companies in the group had been carrying on business on a commercial basis with a view to profit. On 28 June 2001 Mr Murrin wrote to The Liberty Broadcasting Company Ltd, Punch Ltd, Brompton Press Ltd, and Liberty Publishing & Media Ltd, giving notice of his intention to enquire into each company's tax return for the accounting period to 31 August 1999. On the same date Mr Murrin also wrote to Mr Murray with enquiries concerning each of those companies, other than Liberty Publishing & Media Ltd.

[495] In relation to The Liberty Broadcasting Company Ltd, Mr Murrin wrote:

"I note that following its departure from the Harrods Group the Company is incurring losses with no indication of any prospect of profitability... I further note that the Group has now made provisions against the whole of the amount of its investment in the Company and that the accounts have been prepared on a going concern basis only on the understanding that the ultimate parent will continue to fund operations. In the circumstances it would seem that during the year the Company was not carrying on a trade on a commercial basis with a view to profit and thus the losses are not available either for group relief or to be carried forward and on that basis no purpose would be served by my raising any queries in respect of the year. Do you agree? If not will you please let me have the following:

The letters relating to Punch Ltd and Brompton Press Ltd were in identical terms. In relation to Liberty Publishing & Media Ltd, Mr Murrin wrote:

"At present I am of the opinion that no Group Relief is available to the Company. To finalise the position however the outcome of correspondence elsewhere in the Group will have to be concluded."

[496] Taking matters out of chronological order, to complete the account of events concerning the Harrods group and the Liberty group, on 16 August 2001 Mr Cawdron responded to Mr Murrin's enquiry concerning the rationale behind the sale of the Liberty group out of the Harrods group. Correspondence has continued as to the commercial or non-commercial character of the Liberty group's activities.

[497] On 16 February 2001, following an exchange of correspondence, Mr Williams sent Mr Murray re-drafted letters of enquiry concerning the Fulham group. Separate letters were sent in respect of four of the companies in question. The letter concerning Fulham Football Leisure Ltd asked about the series of transactions by which it had acquired control of Fulham Football Club Ltd and its subsidiaries, and by which the goodwill shown in the consolidated balance sheet had been acquired or created; and about the reasons for the formation of Belloc Ltd and Fulham Stadium Ltd. The letter concerning Fulham Football Club Ltd also asked about the former matters. The letter concerning Fulham Stadium Ltd asked about the reasoning behind the purchase of the ground from Belloc Ltd, rather than directly from the Royal Bank of Scotland, and about how stamp duty had been dealt with. The letter concerning Belloc Ltd asked for information bearing on the question whether it was tax resident in the UK, and for information about the rationale of its purchasing the ground from the Royal Bank of Scotland and then selling it on. When these letters are compared with the original letter of enquiry (see para.483), it appears that (as well as directing enquiries to the particular company with whose tax affairs the enquiries are concerned) the letters omit the questions in the original letter concerned with Fulham Football Leisure (BVI) Ltd and other shareholders.

[498] In March 2001 Mr Murrin reviewed the Fulham companies' accounts for the period ending 30 June 1999 and prepared risk assessment notes. These were then discussed with Mr Williams. The main concern remained the structure and financing of the acquisition of the group, but a number of additional issues arose from the accounts. These concerned, in particular, related party transactions. On 9 May 2001 Mr Murrin sent enquiry letters on the 1999 accounts of three of the companies to Mr Murray. He also sent a letter concerning the 1998 accounts of Fulham Football Club (1987) Ltd, continuing correspondence initiated by Hammersmith District.

[499] In his letter concerning the 1999 accounts of Fulham Football Club (1987) Ltd, Mr Murrin asked inter alia about related party transactions, entertainment expenditure, public relations expenditure, and legal and professional fees. The enquiries concerning the 1999 accounts of Fulham Football Leisure Ltd and Fulham Stadium Ltd were of a broadly similar nature. The remaining enquiries in the letters were concerned with matters of a more technical nature arising from the accounts. In relation to Fulham Football Club Ltd, Mr Murrin intimated that he had no enquiries to make on the accounts.

[500] I have not yet dealt with the enquiries concerning The Ritz Hotel Ltd. At the meeting on 13 July 2000, Mr Murray had said that, although The Ritz Hotel Ltd was incorporated in the UK, the company was taxed in France by reason of a double taxation agreement entered into in the 1960s between the UK and French governments. Mr McGuigan and Mr Carmichael had said that the Revenue had no information and that it might prove difficult for the Revenue to confirm the existence of the agreement.

[501] Mr Williams's letter of 25 July 2000 to Mr Cawdron concerning the Harrods group had also contained enquiries about The Ritz Hotel Ltd, as mentioned earlier (at para.473). In a further letter to Mr Cawdron, dated 8 August 2000, Mr Murrin wrote:

"We have spoken about the position of the company, The Ritz Hotel Ltd.

It would indeed appear that the Company has made no returns to the Inland Revenue... Glasgow LBO will be looking further at the matter and it would be a useful starting point if you could say why you understand the Company not to be liable to UK Corporation Tax."

[502] A company incorporated in the UK is ordinarily to be regarded as resident in the UK for the purposes of the Taxes Acts: Finance Act 1988, section 66(1). Section 249 of the Finance Act 1994 however provides:

"(1) A company which -

(a) would (apart from this section) be regarded as resident in the United Kingdom for the purposes of the Taxes Acts, and

(b) is regarded for the purposes of any double taxation relief arrangements as resident in a country outside the United Kingdom and not resident in the United Kingdom,

shall be treated for the purposes of the Taxes Act as resident outside the United Kingdom and not resident in the United Kingdom."

Double taxation relief arrangements are in force as between the UK and France, and (so far as relevant) are given effect by the Double Taxation Relief (Taxes on Income) (France) Order 1968 (S.I. 1968 No. 1869), as amended. Article 3 of the Convention scheduled to the Order is concerned with residence, and provides:

"(1) For the purposes of this Convention, the terms 'resident of the United Kingdom' and 'resident of France' mean respectively any person who is resident in the United Kingdom for the purposes of United Kingdom tax and any person who is resident in France for the purposes of French tax.

...

(3) Where by reason of the provisions of paragraph (1) a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated."

Article 26 of the Convention provides a procedure, which can be invoked by a resident of a Contracting State, whereby the Revenue and its French counterpart are bound to endeavour to resolve difficulties by mutual agreement.

[503] Since The Ritz Hotel Ltd is a company incorporated in the UK, it would ordinarily be regarded as resident in the UK for the purposes of the Taxes Act. Since its place of business is in France, it would also ordinarily be regarded as resident in France for the purposes of French tax law (according to the evidence of Mr Murray, which was not challenged on this point). Whether it is to be regarded as resident in the UK would therefore ordinarily depend, under article 3(3) of the Convention, on where its "place of effective management" was situated: a matter which, in the event of dispute, could be resolved in accordance with article 26.

[504] On 24 October 2000 Mr Williams wrote to Mr Frank Klein, the President of The Ritz Hotel Ltd, in Paris:

"I understand that The Ritz Hotel Ltd is a company incorporated in the United Kingdom but it would seem that it does not submit Corporation Tax returns to the Inland Revenue.

In the circumstances I would like to establish whether or not the company is resident in the UK for tax purposes. To enable me to do this will you please let me have the following information and documentation.

1. Please confirm the company registration number of the company and let me know the address of its registered office.

2. Please let me know what country the company regards itself as resident in for tax purposes and on the basis of what criteria. If the company does not regard itself as resident in the UK for tax purposes please let me know why.

3. Please also let me know to what extent the company is or has been managed or controlled from the United Kingdom.

4. If any administrative or other business services or facilities are or have been provided by any party in the UK please let me have details.

5. If the company has previously discussed or corresponded with the Inland Revenue on its residency position please let me have details together with the name and reference of the Inland Revenue office concerned and the date of the contact. Copies of any correspondence on the matter would be helpful.

6. To help me to consider this matter will you please also let me have

a) copies of the accounts of the company for periods of account falling wholly or partly in the year to 31 January 1999

b) copies of the minutes of the AGMs and board meetings held during those periods of accounts."

[505] On 10 November 2000 Cabinet Brizay, avocats in Paris, replied on behalf of The Ritz Hotel Ltd:

"The response to your letter can be put quite briefly. The Ritz Hotel, Limited was incorporated in 1896 and has not carried on any business operations in the UK. It has throughout been treated by the French Tax Authorities as resident here for tax purposes. We believe that the factual background and technical analysis is clearly set out in the Company's letter of 28 November 1994 to HM Inspector of Taxes Chelsea District which is attached as an enclosure to this letter.

For your information we enclose:

1. A joint ruling of the Inland Revenue and French Ministry of Finance that the Company was resident in France, as communicated in a letter dated 13 September 1965. (For convenience we enclose a copy of a translation of this document).

2. Our letter of 28 November 1994 addressed to HM Inspector of Taxes Chelsea District and reply of 28 April 1995 from HM Inspector of Taxes Kensington 2 District. This correspondence deals with the residence position in the light of section 66 and schedule 7 of Finance Act 1988 and section 249 and 250 Finance Act 1994.

3. A copy of the Company's accounts for the financial years to 31 December 1998 and 31 December 1999 which give details of registered office and registration number.

The circumstances of the Company as set out above have not changed since the letter of 28 November 1994. By reason both of the joint ruling of the respective tax authorities and of Article 3 of the 1968 Double Tax Agreement between the UK and France, the Company is to be treated as resident in France for all tax purposes in accordance with section 249 Finance Act 1994.

Given the clearly established status of the Company for tax purposes (and, indeed, the very large deficiency on profit and loss account brought forward), we find it difficult to see what purpose would be served by debate concerning UK tax residence and would be obliged to have your confirmation that this matter may now be regarded as concluded."

[506] On 6 December 2000 Mr Williams wrote to Cabinet Brizay:

"Although I note that the principal activity of the company consists of the proprietorship of the Ritz Hotel in Paris its residence for tax is determined not by reference to where that activity is managed but to where the company itself is incorporated and managed. Although it is clear that the company was incorporated in the United Kingdom there is no evidence in the material that you have sent me that either the French or British tax authorities have recently considered where that management is actually carried out. I understand, however, that although Mr Klein is responsible for the day to day running and management of the hotel itself he reports directly to Mr Al Fayed.

To enable me to review the matter further, therefore, will you please let me have the rest of the information and documentation requested in my letter of 24 October 2000."

Mr Williams maintains in his evidence on affidavit that he understood, from a witness statement given by Mr Klein in 1996 in Mr Hamilton's libel action against the Guardian (see para.107), that although Mr Klein was responsible for the day-to-day management of the hotel, he reported directly to Mr Al Fayed. Mr Williams considered that, if that were the situation, then there would be a strong possibility that the place of effective management of the company was in the UK. According to Mr Murray's evidence, on the other hand, Mr Klein's statement merely said that he had contacted Mr Al Fayed to check whether he had agreed to pay for Mr and Mrs Hamilton's stay at the hotel. The statement itself was not a production in the present case. Mr Williams further maintains that he wished to pursue the matter, notwithstanding the fact that the company's accounts for recent years showed losses, as he did not know whether that would have remained the case after adjustment for UK purposes if the company was tax resident in the UK. The accounts also revealed transactions with Mr Al Fayed which might have led to a liability under the close companies provisions, if the company were tax resident in the UK (and therefore capable of being a close company).

[507] Cabinet Brizay responded on 21 December 2000:

"We stated in our previous letter, and again reiterate, that the taxation status of the Company is governed by the long-standing agreement between the taxation authorities of France and the United Kingdom, which we enclosed with our previous letter. Are the comments in your letter of 6 December 2000 to be taken as an indication that you believe that the mutual agreement procedure provided for in Article 26 of the Double Taxation Agreement should be invoked?

If, on due reflection, you wish to continue this correspondence, please may we have a considered response to our last letter and then we will consider whether it is appropriate to invoke the mutual agreement procedure. Further demands for information and documentation when earlier detailed responses are left effectively unanswered cannot be the right way forward."

[508] Against this background, The Ritz Hotel Ltd's position, as explained by Mr Murray, is that its fiscal residence is determined by the 1965 agreement between the UK Government and the French Government, as long as that agreement remains in place; and that, if the Revenue wishes to re-open this issue, it should raise the matter with the French Government.

[509] No assessments have yet been made upon Harrods Holdings Ltd, Harrods (UK) Ltd or Harrods Ltd in respect of the accounting periods ending 31 January 1998 and 31 January 1999; or upon The Ritz Hotel Ltd in respect of the accounting period ending 31 December 1998; or upon Liberty Publishing & Media Ltd, The Liberty Broadcasting Company Ltd, Punch Ltd or the Brompton Press Ltd in respect of the accounting period ending 31 August 1998; or upon Fulham Football Club (1987) Ltd, Fulham Football Leisure Ltd or Fulham Stadium Ltd in respect of the accounting period ending 30 June 1999. The Revenue may still make an assessment in respect of those periods, since the time limit imposed by section 34 of the 1970 Act has not yet expired. The Revenue has accepted the accounts of FL Property Management Ltd and Fulham Football Club Ltd in respect of the accounting period to 30 June 1999.

[510] A number of criticisms of LBO's enquiries are made by Mr Cawdron in his affidavit. First, he observes:

"For a large owner-managed business it might be appropriate for LBO to co-ordinate its work with SCO, for instance to check on the interface between the company on the one hand and the operation of the benefits legislation relevant to the shareholders and the directors on the other. But under CCW I would expect there also to be liaison with other parts of the Revenue such as PAYE auditors. I was surprised to find in my clients' case that there appeared to have been no reference to the PAYE auditors. What was happening here seemed to me not so much co-ordination as a joint investigation."

[511] A response to the criticism that there appeared to have been no reference to the PAYE auditors was provided by Mr Robert Baird, who took over responsibility from Mr Williams in 2002 as case director of the groups of companies associated with Mr Al Fayed. Mr Baird provided two affidavits in the present proceedings. In his second affidavit, he states:

"Contact was subsequently made with the PAYE auditor in this case, but in the continuing absence of the expected KPMG report in respect of inter alia possible PAYE irregularities by the group, one would not expect PAYE auditors to be actively involved at this stage of the enquiries. I think Mr Cawdron's comment may stem from his Revenue experience in the early days of the formal CCW pilot. At that time it was the norm on pilot CCW cases for annual meetings to be held involving a large number of representatives, from various agencies in the Revenue, such as the District Valuer, the Schedule E district and the PAYE Auditor. Sine that time, though, such meetings have become unusual because they weren't a productive use of resources. Instead liaison is governed much more by the needs of the individual case. Involvement of the other agencies takes place as necessary and where required rather than being a matter of routine."

[512] It is apparent from LBO's Plan 1 and Plan 2, and Mr Murrin's note of 13 June 2000 and letter dated 7 July 2000, that LBO wished a review to be carried out of the companies' compliance with PAYE, and intended to involve LECO for that purpose (see paras.424, 425, 442 and 451); but it was explained at the meeting on 13 July that a PAYE audit had not yet been planned (see para.456). I have no difficulty accepting that an audit might be postponed until the disclosure report had been provided by KPMG, since a report on PAYE compliance by reputable accountants would be likely, at the least, to be of assistance in planning how further enquiries might best be carried out. In these circumstances, I see no reason to doubt Mr Baird's evidence on this point.

[513] A second criticism made by Mr Cawdron concerns the letter sent by Mr Williams dated 31 May 2000 (see para.2):

"I cannot recall ever having seen a letter written in the terms of the letter of 31 May 2000, announcing the start of what might otherwise be seen as a normal tax inquiry. What is unusual about my client's situation is the manner in which the Revenue's proposed actions were announced. For a long time nothing had happened. Then we were supposed to react as if there were some great unexplained mystery.

As regards the last paragraph of the letter of 31 May, an Inspector may well decide that he should start off by seeking to arrange a meeting. If he wants to have a meeting urgently, I would expect him to have his questions ready. I can think of no situation in which an Inspector would not have fully researched the questions he wanted to ask before writing such a letter. Given that the Inspector is talking about an 'in-depth review' and has marked his letter as urgent, I would be amazed if there were not a risk assessment in place at that time.

...

This [a risk assessment] means to me that research has been done; the papers have been reviewed; relevant background material has been gathered and reviewed; research analysis has been done; the Revenue have identified the precise areas for inquiry where there is specific tax that is at risk; as a result they know what questions are to be asked.

Given what Mr Williams said to me on 15 June 2000 [see para.450], and given the terms of the letter to Mr Hadden dated 31 May 2000, it was my natural assumption that a risk assessment was in place by 31 May 2000. That is not to say that there must be a formal piece of paper saying 'Risk Assessment of Harrods Group'. A lot would depend upon the practice of the individual tax inspector. There would, however, be a file of papers containing a body of material, whether it was a large formal document that the inspector would share with the client or loose bundles of papers. The second is as much a risk assessment as the first.

In one sense risk assessment is continuous. The research continues, and you build up information. But identifying specific questions related to tax at risk for a particular accounting period is a different matter. As I have said, you cannot make all the inquiries at once. You are regularly building up information that may be the basis for inquiries in later years. But what you must do is identify the issues you are going to deal with in a particular year. For any given year, you must bring your risk assessment to a conclusion. You do so before issuing a letter such as that of 31 May 2000."

[514] It is clear that it was exceptional for LBO to send a letter such as that of 31 May 2000 prior to the conclusion of the process of risk assessment. The reasons for its doing so in the present case were discussed above (at paras.395-398). They appear to me to explain satisfactorily the sending of the letter prior to the completion of the risk assessment.

[515] A third criticism made by Mr Cawdron concerns the scope of the letters of enquiry issued by Glasgow LBO. Mr Cawdron focuses in his affidavit on the original letters of enquiry issued during July and August 2000. The letter which caused him greatest concern was the letter dated 25 July 2000 headed "Harrods Group" (see para.473), principally because he considered that some of the enquiries were not related to the business activities of the companies in the group. His reaction was that the breadth of the letter was "quite staggering". He also states that a number of the enquiries made of individual companies in the group were not relevant to the tax liabilities of the companies themselves, but to potential liabilities of members of the Al Fayed family. These matters are not however discussed in his affidavit in any detail. Nor were they discussed in any detail in parties' submissions.

[516] In their affidavits, Mr Williams and Mr Murrin give only limited information about the tax purpose of the questions asked in the original letters of enquiry. Mr Williams states in general terms that the content of the letters relating to the Harrods group "was consistent with the outline discussed at the 13 July 2000 meeting". In his letter of 6 October 2000, discussed above (at paras.485-487), Mr Williams said of the letter of 25 July headed "Harrods Group":

"[I]t concerns the UK tax liabilities of members of the Harrods Group and apparently associated corporates ... it is necessary to determine the control and residence of these companies, inter alia so that we can consider any transfer pricing issues."

Mr Murrin's affidavit makes almost no mention of the original letters of enquiry, but discusses the letters which were issued subsequently.

[517] Mr Baird similarly focuses in his affidavits on the letters issued subsequently. He states:

"None of the substantive issues raised in the letters issued on the Harrods group are outside the broad range of risks identified in the 1998 risk assessment ... I understand from speaking to Jim Williams and Harry Murrin that ... the detailed letters of enquiry on the companies in the Harrods group are the product of [the 1999] risk assessment ... I cannot identify any request for information which is not proper to the corporate concerned, or might not be asked in similar circumstances on another case."

It is not clear in that passage whether Mr Baird is referring to all the letters of enquiry (including the letters of 25 July 2000), or only to the letters issued subsequently. What follows in his affidavit suggests that he does not have the letters of 25 July in mind.

[518] A clear distinction cannot be drawn between the tax affairs of the Harrods group and those of associated individuals and companies: there are areas of overlap. In particular, whether overseas companies were tax resident in the UK, and were controlled by the same persons or entities as controlled the Harrods group, could have a bearing on the taxation of the Harrods group (reflected in the treatment of "related party transactions" in the accounts), since it could (for example) result in the application of the provisions concerned with transfer pricing; but those issues would also be relevant to the taxation of the overseas companies themselves, and possibly also to the taxation of individuals (e.g. if the application of the close companies provisions was affected).

[519] Apart from the enquiries which are relevant to both the tax affairs of the overseas companies and those of the Harrods group, there are also enquiries which appear, at least at first sight, to relate solely to the tax affairs of the former. For example, in the letter headed "Harrods Group", Mr Williams asked for details of any branch, establishment or agency in the UK of any overseas business in which the group's ultimate owners had a material interest (see para.473); and in the letter concerning Harrods Holdings plc, Mr Murrin asked whether any of the entities, in the chain of ownership from Harrods Holdings plc to the ultimate beneficial owners, operated through any branch or agency in the UK (see para.474). Those questions appear to have been concerned solely with the potential tax liabilities of overseas companies under section 11 of the 1988 Act, which was discussed above (at para.431). Mr Williams indeed made it clear in his letter of 6 October 2000 that some of the enquiries in these letters were third party enquiries (see para.485): in other words, that they were relevant to the taxation of a person other than the person to whom the question was addressed. He also said in the same letter that one of his concerns was "the UK tax liabilities of ... apparently associated corporates".

[520] In these circumstances, it appears to be reasonable to infer that some of the enquiries initially made were wider in scope than could readily be explained by the sole purpose of ascertaining the tax liabilities of the Harrods group of companies (and the other "large corporates" dealt with by Glasgow LBO). That would be consistent with LBO's acceptance of responsibility, under the combined case-working exercise, for enquiries into certain categories of offshore company, including those associated with the Harrods group (see paras.382, 456 and 468). As explained earlier (at para.151), LBO's area of responsibility could extend beyond the tax affairs of the large corporate taxpayers which were its primary concern, in the event that LBO decided to assume responsibility for the tax affairs of related companies.

[521] As Mr Cawdron acknowledges in his affidavit, Mr Williams agreed to re-draft the enquiry letters (see paras.485 and 488). The re-drafted letters omitted enquiries which did not appear to be relevant to the tax liabilities of the companies to which the letters were directed (see paras.489-499). As Mr Cawdron acknowledges, no re-drafted version was issued of the letter to which the greatest exception had been taken.

[522] The re-drafted letters of enquiry were not the subject of specific criticism by Mr Cawdron. Mr Murray, who acted at the time of the proof on behalf of all the corporate petitioners other than Harrods Ltd, Harrods (UK) Ltd and Harrods Holdings Ltd (for which Mr Cawdron acted), did not in his evidence express any specific criticism of the LBO enquiry letters, other than in relation to The Ritz Hotel Ltd.

[523] As I have explained (at paras.489-499), the tax purpose of the enquiries in the re-drafted letters is in general apparent either from the affidavits provided by Mr Williams and Mr Murrin, or from the letters themselves and other contemporary documents (such as the risk assessment documents relating to the Fulham group). I accept the evidence of Mr Murrin, supported by that of Mr Baird, that most of the questions were of a routine nature. The more unusual questions - for example, as to whether the Liberty companies were carrying on a trade on a commercial basis, or as to whether the arrangements surrounding the acquisition of Cylena SA or of Craven Cottage constituted a pre-ordained series of transactions, or more generally as to transactions between associated persons - had a taxation purpose related to the tax affairs of the company in question.

[524] The enquiries relating to The Ritz Hotel Ltd are in a different position, insofar as it may be that the enquiries made by Mr Williams are not immediately relevant to any UK tax liability as long as the 1965 agreement remains in place and the article 26 procedure (see para.502) has not been invoked. It is however unnecessary for me to express any conclusion on that question; and I could scarcely do so without sight of the relevant documents and full argument on the issues. The enquiries relating to the Ritz are relevant to the issues in the present case only insofar as they shed light on the decisions challenged. Those enquiries indicate an intention to ascertain the tax liabilities of The Ritz Hotel Ltd; but, as explained above (see para.520), the existence of such an intention does not imply a departure by LBO from its ordinary functions.

[525] A fourth point made by Mr Cawdron concerns the nature of the enquiries: whether they should be regarded as an investigation, in the sense in which SCO carries out investigations:

"33. By the time of the meeting of 13 July 2000 I had become aware of the issue of Code of Practice 8 to KPMG as regards the inquiries relating to their clients. No codes of practice have been issued at any time to my clients. This is in spite of the reference by Mr Williams to his inquiries being an 'in-depth' review, which in my opinion takes the matter beyond the normal inquiries into a large organisation's tax filing. In the light of further documents that I have seen, it is clear to me that the Revenue's actions as regards my clients are as much an investigation as those taken with respect to KPMG's clients. I would therefore expect a Code of Practice in relation to investigations to have been issued to my clients and the Board's instructions in relation to investigations to apply to them.

34. An essential pre-requisite for any investigation is that a full review of the taxpayer's affairs has been carried out, and the process of and need for a full file review is instilled into inspectors when they first embark on investigation work. These processes are referred to in IH 1350 [see para.624], and Code of Practice 8.

35. From the documents I have seen it is clear that no pre-investigation review had been carried out by Glasgow LBO by 31 May 2000. Indeed, I now understand that no risk assessment had been prepared by Glasgow LBO prior to 2 June 2000, a fact that I find startling given the other documents I have seen.

36. I cannot conceive of the Revenue having issued a letter in the terms of that issued on the 31st May without having previously instituted and carried out a process of review. It would appear that no such process was followed and it seems to me that the only reason for investigating my clients' affairs was the Revenue's wider desire to investigate the affairs of Mr Mohammed Al Fayed."

[526] Code of Practice 8, and the Investigation Handbook ("IH"), are discussed in detail below (at paras.581-624). As explained there, Code 8 applies only to investigations carried out by SCO, and the Investigation Handbook is relevant to investigations carried out by certain other Revenue departments. LBO does not normally carry out investigations, in any sense in which that term is used in Revenue terminology (see paras.614-616 and 632). Mr Cawdron's contention, however, as I understand it, is that the reality of the situation is that the enquiries made of the Harrods group by LBO constitute an investigation, or part of an investigation.

[527] In support of that contention, Mr Cawdron founds primarily on the terms of the letter of 31 May 2000. I have discussed earlier (at para.514) his criticism that the letter was issued prior to the completion of the risk assessment. The use of the expression "in depth review", to which Mr Cawdron attaches particular significance, may reflect the nature of the combined case-working exercise of which the letter gave notification. The SCO letters of 2 June 2000 also used the words "review in depth" and "review", rather than the word "investigation", although the purpose of the letters was to notify the taxpayer of an investigation (which, as explained earlier, is different in SCO terminology from a review); and at the meeting on 2 June Mr Carmichael had similarly spoken of the Revenue's wish to conduct "an in depth review" of the personal tax returns (see para.406). I also note that, as discussed below (at paras.608-613), the Investigation Handbook defines the "Investigation" of business accounts (somewhat confusingly) as including "cases where there is ... a review of the private financial affairs of the directors"; and it states that "for enquiries to be recorded as an investigation settlement, an in-depth investigation must have been carried out." I see no reason to doubt that the use of the words "in-depth review" might suggest to an experienced tax practitioner that what was involved went beyond what Mr Cawdron describes as "the normal enquiries into a large organisation's tax filing".

[528] In the circumstances, I accept that the sending of the letter of 31 May was attributable to the existence of a co-ordinated exercise involving an SCO investigation, and that that fact may have influenced the choice of language. That does not however entail that LBO's subsequent enquiries amounted to an investigation, as that word is used in SCO terminology or in the Investigation Handbook: that issue is considered below (at paras.617-618 and 638-639), in the context of a discussion of Code of Practice 8 and the Investigation Handbook. For the reasons explained above (at paras.518-520 and 523), I do not accept that the only reason for LBO's enquiries of the Harrods group was a desire to investigate Mr Al Fayed's affairs.

[529] I also note that Mr Cawdron's affidavit was executed before the Revenue had lodged its affidavits. He was therefore unable to address matters arising from those affidavits; nor does he refer to the documents produced by the Revenue, most of which (including the risk assessment documents) had been lodged only shortly before his affidavit was executed, and some of which were lodged on the same date or subsequently. Following the lodging of the affidavits, it was agreed that parties would exchange notes of points on which further explanation was considered appropriate and, if so advised, lodge supplementary affidavits. The Revenue's note raised a number of questions concerning Mr Cawdron's affidavit, including questions concerning some of the points which I have discussed, and finally asked whether, in the light of the documents and affidavits now available, he departed from his conclusion. The petitioners did not lodge any supplementary affidavit by Mr Cawdron responding to those questions, nor was he called as a witness.

3 REVENUE LAW AND PRACTICE

[530] A number of aspects of Revenue law have already been touched on: notably, liability to income tax (see paras.18, 20 and 432), capital gains tax (see para.18), and corporation tax (see para.431); the remittance basis of taxation (see paras.18 and 23); the tax residence of individuals (see para.19) and companies (see paras.20 and 502); the treatment under Schedule E of living accommodation (see para.59) and other benefits in kind (see para.57); close companies (see paras.140-141); charitable donations (see para.419); transactions between associated persons (see para.445); loss relief (see para.476); and double taxation relief (see para.502). It is necessary also to consider some of the statutory provisions which form the framework of tax administration, and in particular of the work carried out by SCO and LBO with which the present proceedings are concerned. It is in addition necessary to consider a number of documents published by the Revenue in which its practices are described, and which the petitioners found upon. The actions of SCO and LBO can then be considered in the context of the relevant statutory provisions and non-statutory documents.

(1) Statutory Provisions

[531] The statutory provisions which require to be considered fall under the following headings:

Collection and assessment in general

Assessment prior to self-assessment

Self-assessment

Collection without assessment

PAYE

Information powers

Collection and assessment in general

[532] In Whitney v Commissioners of Inland Revenue [1926] AC 37, Lord Dunedin observed at page 52:

"Now, there are three stages in the imposition of a tax: there is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment. That, ex hypothesi, has already been fixed. But assessment particularizes the exact sum which a person liable has to pay. Lastly, come the methods of recovery, if the person taxed does not voluntarily pay."

A person's tax liability is thus imposed by the legislation itself. Assessment is the usual mechanism for quantifying the amount of the liability and enabling it to be recovered.

[533] Liability to taxation is a matter for Parliament. The assessment and collection of tax, on the other hand, are the responsibility of the Commissioners of Inland Revenue (insofar as the tax falls within their remit). That responsibility follows from a number of statutory provisions.

[534] Section 1 of the Inland Revenue Regulation Act 1890 provides for the appointment of the Commissioners, and confers upon them general powers:

"(1) It shall be lawful for Her Majesty the Queen to appoint persons to be Commissioners for the collection and management of inland revenue, and the Commissioners shall hold office during Her Majesty's pleasure.

(2) The Commissioners shall have all necessary powers for carrying into execution every Act of Parliament relating to inland revenue, and shall in the exercise of their duty be subject to the authority, direction, and control of the Treasury, and shall obey all orders and instructions which have been or may be issued to them in that behalf by the Treasury."

[535] Section 13 of the same Act imposes upon the Commissioners the duty of collection:

"(1) The Commissioners shall collect and cause to be collected every part of inland revenue, and all money under their care and management, and shall keep distinct accounts thereof at their chief office."

[536] Section 1 of the 1970 Act places certain taxes under the care and management of the Commissioners, designates them as "the Board", and requires them to appoint inspectors and collectors of taxes:

"(1) Income tax, corporation tax and capital gains tax shall be under the care and management of the Commissioners of Inland Revenue (in this Act referred to as 'the Board'), and the definition of 'inland revenue' in section 39 of the Inland Revenue Regulation Act 1890 shall have effect accordingly.

(2) The Board shall appoint inspectors and collectors of taxes who shall act under the direction of the Board."

[537] Taxes are ordinarily collected by the Board and their inspectors by means of assessments under the 1970 Act, which give rise to enforceable obligations under Part VI of that Act. At one time, assessment was invariably the function of the Revenue; and assessments were made under Part IV of the 1970 Act on the basis, ordinarily, of returns provided by taxpayers under Part II of the Act. Under self-assessment, the assessment is made (or is deemed to be made) by the taxpayer himself, as part of his return. As a result of the staggered introduction of the self-assessment regime for individuals and companies, both the self-assessment regime and the previous regime are relevant in the present case.

[538] Self-assessment was introduced for individual taxpayers (and for trusts and partnerships) with effect from the tax year 1996/97 (Finance Act 1994, section 199). It was introduced for companies in respect of accounting periods ending after 30 June 1999 (Finance Act 1998, section 117 and schedule 18). Self-assessment therefore applied to Mr Al Fayed at the time of the decisions complained of; and the tax returns for 1998/99 (and subsequent years) submitted by Mr Al Fayed and his brothers which have been challenged by the issue of section 9A notices are self-assessment returns. So far as the remaining (company) petitioners are concerned, on the other hand, the petitioners' submissions proceeded on the basis that the relevant accounting periods ended on or before 30 June 1999. Accordingly, it was common ground that it was unnecessary to consider the regime for corporate self-assessment, and that only the previous regime was relevant. Although there was evidence concerning LBO's enquiries concerning the accounts of the Liberty group for the period ending on 31 August 1999 (see paras.494-496), no issue was raised in submissions concerning corporation tax self-assessment.

[539] Several of the provisions governing assessment were substituted, for the purposes of the self-assessment regime only, by the Finance Act 1994. At the material time, there were thus two versions of those provisions in force. Which version was applicable in particular circumstances depended on the character of the taxpayer and the period of assessment. One version was applicable to taxpayers in respect of periods of assessment when self-assessment applied to such taxpayers, and the other applied to taxpayers in respect of periods of assessment when self-assessment did not apply to such taxpayers.

Assessment prior to self-assessment

[540] The position where self-assessment does not apply can be summarised as follows (the following account being drawn in part from the Report of the Committee on Enforcement Powers of the Revenue Departments, chaired by Lord Keith of Kinkel, Cmd.8822, 1983, to which reference was made in parties' submissions and in some of the authorities cited).

[541] A company to which a notice is issued by an inspector or other officer of the Board under section 11 of the 1970 Act is obliged to deliver a return, together with such accounts and other information as may be required. Section 8 imposes a similar obligation upon individuals. A company which is chargeable to corporation tax for an accounting period but has not made a return for that period is obliged by section 10 to notify the inspector that it is so chargeable. Section 7 imposes a similar obligation upon individuals.

[542] The critical step is for an assessment then to be made by the inspector in accordance with the version of section 29 applicable prior to self-assessment. Section 29(1) lays down the general basis for the making of assessments:

"(1) Except as otherwise provided, all assessments to tax shall be made by an inspector, and -

(a) if the inspector is satisfied that any return under the Taxes Acts affords correct and complete information concerning profits in respect of which tax is chargeable, he shall make an assessment accordingly,

(b) if it appears to the inspector that there are any profits in respect of which tax is chargeable and which have not been included in a return under Part II of this Act, or if the inspector is dissatisfied with any return under Part II of this Act, he may make an assessment to tax to the best of his judgment."

[543] Further powers are conferred by section 29(3):

"If an inspector or the Board discover -

(a) that any profits which ought to have been assessed to tax have not been assessed, or

(b) that an assessment to tax is or has become insufficient, or

(c) that any relief which has been given is or has become excessive, the inspector or, as the case may be, the Board may make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged."

[544] The inspector who has received a return or accounts (which are regarded as a supporting schedule to a return) may therefore, if he is not satisfied that the return or accounts are correct, make an estimated assessment to the best of his judgment, under section 29(1)(b). This may happen, in particular, if the inspector asks questions which are not answered in a way which satisfies him that the return or accounts are accurate. The inspector can also make an estimated assessment if it appears to him that there are assessable profits but no return has been received. If the taxpayer disagrees with the estimated assessment, he can appeal against the assessment under section 31. Such an appeal can be determined by an agreement under section 54 (in which event the agreement takes effect as if it were the appellate decision), failing which it will be determined (unless it is withdrawn) by the General or Special Commissioners.

[545] If the inspector discovers that a liability (or an additional liability) arises for a past year, either because an assessment was not made, or because an assessment has become insufficient or some relief needs to be withdrawn, then subject to the time limits explained below (at para. 547), he may make an assessment under section 29(3) in the amount (or the further amount) which should in his opinion be charged. Such an assessment is known as a "discovery" assessment.

[546] The inspector's power to make an estimated assessment is crucial to the Revenue's function of assessment. Only the taxpayer knows the full facts; and the making of an estimated assessment has the effect of placing upon the taxpayer, if he chooses to challenge the assessment, the onus of establishing that the assessment is wrong. If any appeal is taken, the General or Special Commissioners may require the appellant to deliver such particulars as they need to determine the appeal and to produce the relevant documents for inspection (General Commissioners (Jurisdiction and Procedure) Regulations 1994, S.I.1994 No.1813, reg.10; Special Commissioners (Jurisdiction and Procedures) Regulations 1994, S.I. 1994 No.1812, reg.10).

[547] Time limits apply to the making of assessments. Ordinarily, an assessment must be made not later than six years after the end of the chargeable period to which the assessment relates (section 34 of the 1970 Act). Where the taxpayer's conduct has been fraudulent or negligent, however, the time limit is twenty years (section 36).

[548] In general, interest is due on overdue tax from the time when the tax is due and payable. The provisions relating to interest (in Part IX of the 1970 Act) are complex, and their details are not material to the present case. Where a discrepancy between the tax assessed and the true liability is due to a simple mistake, the corrective action is generally confined to the raising of a discovery assessment under section 29(3). Where, on the other hand, the discrepancy is due to fraudulent or negligent conduct on the part of the taxpayer, then he is in general liable to a penalty equivalent to the amount of the tax underpaid, under provisions contained in Part X of the 1970 Act.

Self-assessment

[549] The statutory provisions governing the self-assessment of individual taxpayers have been amended since the time of the decisions under challenge, in particular by the Finance Act 2001. The provisions are discussed below as they stood prior to amendment.

[550] Under the self-assessment system, an individual may be required, by a notice issued to him by an officer of the Board, to submit a return (section 8 of the 1970 Act). An individual who is chargeable to income tax or capital gains tax and does not receive a notice is obliged to notify the officer that he is so chargeable (section 7). The return is ordinarily due by the 31 January following the year to which the return relates: thus, for example, a return for the tax year 1998/99 would ordinarily have been due by 31 January 2000. Every such return must include a self-assessment, unless the return is submitted four months earlier than would otherwise be required. In the latter case, the officer makes the assessment on the person's behalf, on the basis of the information contained in the return, and the assessment is deemed to be a self-assessment (section 9). Thus the essence of self-assessment is that the taxpayer makes his own assessment (or is deemed to do so, where the assessment is made by the Revenue on the basis of the taxpayer's return). The provisions for self-assessment or deemed self-assessment, under sections 8 and 9, effectively replace sub-section (1) of the pre self-assessment version of section 29 (see para.542).

[551] The counterpart of self-assessment by the taxpayer is a statutory regime under which the Revenue can test the veracity of self-assessments by means of enquiries. By comparison with the pre self-assessment regime, the provisions in respect of self-assessment confer on the Revenue more clearly defined powers to ensure that taxpayers comply with their obligations. In particular, section 9A of the 1970 Act provides:

"(1) An officer of the Board may enquire into -

(a) the return on the basis of which a person's self-assessment was made under section 9 of this Act ...

if, before the end of the period mentioned in sub-section (2) below, he gives notice in writing to that person of his intention to do so.

(2) The period referred to in sub-section (1) above is -

(a) in the case of a return delivered ... on or before the filing date, the period of twelve months beginning with that date."

Thus, for example, a notice of enquiry into a return for the tax year 1998/99 would ordinarily have had to be given by 30 January 2001. If enquiries are not opened within the time allowed, the self-assessment cannot be disturbed by the Revenue unless a "discovery" is made: this is discussed below (at paras. 554-556). There is no right of appeal against the issue of a section 9A notice.

[552] Section 9A confers a wide discretion to enquire into self-assessment returns. In practice, as explained by Mr Middleton and Mr McGuigan, a very small proportion of returns are selected for enquiry on a random basis by the Revenue's computer system. Such enquiries are carried out by local tax offices and not by SCO. Other returns are selected for enquiry on a "risk profile" basis, by identifying risk factors, profiling cases for those factors, and selecting those that appear to present the highest risk. Such enquiries are again carried out by local tax offices and not by SCO. An SCO investigator will also have to issue a section 9A in order to conduct an investigation which involves enquiry into a self-assessment return, in order to "open" the return; but the decision to conduct the investigation will be taken in accordance with SCO's procedures, as explained above (e.g. at paras.89-90), and will thus be based on circumstances relating to the particular taxpayer in question.

[553] An enquiry under section 9A is completed when the officer issues a "closure notice" to the taxpayer under section 28A, stating his conclusions as to the amount of tax which should be contained in the taxpayer's self-assessment. If the taxpayer then fails to amend his self-assessment so as to give effect to the officer's conclusions, the officer can himself so amend it. An amendment of a self-assessment following a section 9A enquiry can be appealed to the General or Special Commissioners under section 31. Prior to the issuing of a closure notice, the taxpayer may apply to the General or Special Commissioners under section 28A for a direction requiring the officer to issue a closure notice within a specified period. The Commissioners are required to give the direction applied for unless they are satisfied that the officer has reasonable grounds for not issuing the notice.

[554] As explained above, an enquiry into a self-assessment cannot ordinarily be commenced more than 12 months after the due date for the submission of the return. Once that "enquiry window" has closed, the Revenue cannot make any further assessment in respect of that tax year unless the conditions for a "discovery" assessment are satisfied. Those conditions are set out in the self-assessment version of section 29 of the 1970 Act.

[555] Section 29(1) provides:

"(1) If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment -

(a) that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax, have not been assessed, or

(b) that an assessment to tax is or has become insufficient, or

(c) that any relief which has been given is or has become excessive,

the officer or, as the case may be, the Board may, subject to sub-sections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax."

This provision is similar to the corresponding provision (section 29(3)) of the pre self-assessment version of section 29 (see para.543).

[556] Section 29(2) and (3) (in the self-assessment version) preclude the making of a discovery assessment in certain circumstances. In particular, section 29(3) precludes the making of a discovery assessment, following the submission of a return, unless one of two conditions is fulfilled. The first condition is that the situation described in sub-section (1) is attributable to fraudulent or negligent conduct on the part of the taxpayer or his agents. The second condition is that the relevant situation is one of which the officer could not have been reasonably expected to be aware, on the basis of the information made available to him, at the time when he ceased to be entitled to give a notice of enquiry or notified the completion of his enquiry. For the purposes of the second condition, information is made available if it is contained in the taxpayer's return (or in any accounts, statements or documents accompanying the return), or in any documents produced by the taxpayer for the purposes of any enquiry into the return, or could reasonably be inferred from information contained in the return (or accompanying documents) or in any documents so produced.

[557] Time limits apply to the making of discovery assessments under the self-assessment regime, as under the previous regime. An assessment based on the second condition mentioned in the preceding paragraph must generally be made not later than five years after 31 January next following the year of assessment to which it relates (section 34 of the 1970 Act, in its self-assessment version). Where the first condition applies, on the other hand, the time limit is twenty years (section 36, in its self-assessment version).

[558] The self-assessment regime, like its predecessor, provides for interest to be payable on overdue tax, and for penalties of up to 100 per cent of the underpaid tax in the event that the taxpayer's conduct has been fraudulent or negligent.

Collection without assessment

[559] The collection of tax need not be based on an assessment. Tax can be collected on the basis of a contractual agreement between the Revenue and the taxpayer, without any assessment having been issued. In the present case, the back duty agreements of 1985 and 1990 are examples of such agreements. Forward tax agreements of the kind entered into in 1997, on the other hand, were held in the first judicial review proceedings to be ultra vires.

[560] The practice of entering into back duty settlements is of long standing, and its competency was upheld by the Court of Appeal in IRC v Nuttall [1990] STC 194. In that case, the general powers conferred by section 1 of the 1890 Act (see para.534) were held to provide a statutory basis for the practice. The power to mitigate penalties under section 102 of the 1970 Act was also interpreted by Parker and Ralph Gibson LJJ as permitting the Revenue to enter into back duty settlements. Parker LJ quoted passages from the Keith Report which explain the practical relationship between the willingness of taxpayers to enter into back duty settlements and section 102. Paragraph 17.4.1 of the Report states:

"What happens in practice is that taxpayers who have, in the opinion of the Board's officers, rendered themselves liable to the imposition of interest and penalties are invited to make a settlement. The procedure is that the taxpayer makes a voluntary offer to pay a sum of money in consideration of the Board agreeing not to take formal proceedings for any tax underpaid and the interest and penalties. If such an offer is made and accepted, a contract binding upon both the Inland Revenue and the taxpayer is brought into being."

Paragraph 17.4.2 states:

"The practice of negotiating settlements is based upon the Board's powers to compound civil proceedings and to mitigate penalties. Since it (sc. section 102) is of such fundamental importance and admirably succinct, we quote the provision in full:

'The Board may in their discretion mitigate any penalty or stay or compound any proceedings for recovery thereof, and may also, after judgment, further mitigate or entirely remit the penalty.'"

PAYE

[561] It is necessary to explain briefly the relevant provisions of the legislation governing PAYE. PAYE is a mechanism for the collection of tax. On the payment of income assessable to income tax under Schedule E, tax is deducted by the employer in accordance with regulations made under section 203 of the 1988 Act (notwithstanding that no assessment has yet been made in respect of the income), and is paid by the employer to the collector of taxes. The employer's obligations in respect of the payment of the tax deducted are regulated by Part V of the Income Tax (Employments) Regulations 1993 (S.I. 1993 No. 744), as amended. In broad outline, the Regulations provide for returns to be rendered by the employer to the inspector of taxes (reg. 43). If it appears to the inspector that there may be tax payable which has not been paid to the collector, he can determine the amount of that tax to the best of his judgment (reg. 49). Such a determination is deemed to be an assessment for the purposes of Parts IV, V and VI of the 1970 Act (i.e. the provisions concerned with assessment, appeals and recovery). The system of determining the amount payable by the employer is therefore broadly analogous to the system of assessment of taxpayers under the 1970 Act. The Regulations also provide the Revenue with a power to inspect the employer's records.

Information powers

[562] The work carried out by SCO and LBO depends upon the Revenue's ability to obtain information about the affairs of taxpayers. The Revenue has a number of statutory powers expressly entitling it to obtain information. In addition, there are a number of statutory provisions which might be interpreted as implicitly conferring upon the Revenue a power to obtain information.

[563] Important express powers are conferred by section 20 of the 1970 Act. Section 20(1) provides:

"(1) Subject to this section, an inspector may by notice in writing require a person -

(a) to deliver to him such documents as are in the person's possession or power and as (in the inspector's reasonable opinion) contain, or may contain, information relevant to -

(i) any tax liability to which the person is or may be subject, or

(ii) the amount of any such liability, or

(b) to furnish to him such particulars as the inspector may reasonably require as being relevant to, or to the amount of, any such liability."

Section 20(2) confers a similar power upon the Board.

[564] The inspector and the Board are thus empowered by section 20(1) and (2) respectively to require the production of documents in the taxpayer's possession which in their reasonable opinion contain or may contain information relevant to any tax liability of his (with a similar power, mutatis mutandis, to require the furnishing of particulars). This is, in Revenue terminology, a first party power.

[565] Section 20(3) confers upon the inspector the power to obtain documents from a person for the purpose of enquiring into the tax liability of another named person. This is, in Revenue terminology, a third party power. Under section 20(8A), the power conferred by section 20(3) can be exercised in specified circumstances without naming the person to whom the enquiry relates.

[566] The powers conferred by section 20 are subject to control by the Board and by the General or Special Commissioners. An inspector may exercise these powers only if authorised by the Board (section 20(7). I was informed (and it was not disputed) that group leaders in SCO have a standing authorisation. It is also necessary for an inspector to obtain the consent of a General or Special Commissioner; and "the Commissioner is to give his consent only on being satisfied that in all the circumstances the inspector is justified" in proceeding under section 20 (section 20(7)). Such consent is not required when the Board act at their own hand. The Board must however have reasonable grounds for believing that the person may have failed or may fail to comply with a provision of the Taxes Acts, and that any such failure is likely to have led or to lead to serious prejudice to the proper assessment or collection of tax (section 20(7A)). A further restriction on the use of the powers is that the inspector must have given the person a reasonable opportunity to provide the documents or particulars before formal notice is given (section 20B(1)). In practice, that opportunity is provided by serving a "precursor notice". This restriction does not apply to the Board acting at their own hand. The legislation does not in general provide appeal or review procedures. Where, however, a third party notice is issued under section 20(8A), the third party may object to the notice on the ground that it would be onerous for him to comply with it; and, if the matter is not resolved by agreement, it is to be referred to the Special Commissioners, who may confirm, vary or cancel the notice (section 20(8B)).

[567] Further express powers are conferred under the self-assessment provisions. As explained above (at para.551), section 9A of the 1970 Act provides that an officer of the Board may enquire into a self-assessment return if notice is given to the taxpayer within a specified period. Where a section 9A notice has been issued, the officer may also issue a notice under section 19A, requiring the taxpayer:

"(a) to produce to the officer such documents as are in the taxpayer's possession or power and as the officer may reasonably require for the purpose of determining whether and, if so, the extent to which the return is incomplete or incomplete ... and

(b) to furnish the officer with such accounts or particulars as he may reasonably require for that purpose."

The notice may be appealed to the General or Special Commissioners (section 19A(6)). If it appears to the Commissioners that the production of the document or the furnishing of the accounts or particulars was reasonably required by the officer for the prescribed purpose, they may confirm the notice; or, if it does not so appear, they may set it aside (section 19A(9)). Section 19A thus confers on officers of the Board an information power which is specific to self-assessment. It appears to have been introduced to support the express power of enquiry conferred by section 9A.

[568] Sections 19A and 20 of the 1970 Act are not the only provisions conferring upon the Revenue an express power to obtain information; but it was common ground between the parties that it was unnecessary to consider other such provisions in the context of the present case.

[569] No notices have been served on any of the petitioners under sections 19A or 20, or under any other provision conferring an express power to obtain information.

[570] In practice, an SCO investigation, and enquiries by other departments of the Revenue such as LBO, do not necessarily involve the use of express statutory powers to recover information or documents. Such powers are normally held in reserve, while co-operation in the provision of information is sought on a basis which does not involve legal compulsion. The procedure is not however essentially consensual: co-operation is in reality secured by the Revenue's possession of certain powers, rather than being dependent on the goodwill of the taxpayer.

[571] There are at least two Revenue powers, in addition to its express powers to recover information, which are significant in this context. First, co-operation may result in the taxpayer's avoiding the making of an estimated assessment, which he would then have the onus of displacing. Since the onus rests upon the taxpayer to establish, on an appeal, that the assessment is excessive (Nicholson v Morris (1977) 51 TC 95), he will be bound by the assessment unless he produces evidence establishing that it is excessive. An estimated assessment can thus be issued, in the absence of co-operation by the taxpayer, as a practical means of extracting information. Moreover, if the taxpayer appeals against the assessment, it is then open to the inspector in any event to seek orders from the Appeal Commissioners for the production of documents and particulars, under the provisions mentioned above (at para.546).

[572] A second power which is relevant to securing the co-operation of the taxpayer, in relation to "back duty" investigations, is the Revenue's power to mitigate any penalties to which the taxpayer might otherwise be liable, under section 102 of the 1970 Act (see para.560). Code of Practice 8, for example, makes it clear that SCO will take the extent of co-operation into account in exercising its discretion to mitigate penalties (see paras. 599 and 602). As Bingham LJ (as he then was) observed in IRC v Nuttall, at page 204:

"Section 102 ... permits the Revenue to mitigate penalties or compound penalty proceedings. Like remission of a criminal sentence or reduction of sentence on a plea of guilty, this procedure is doubtless intended to encourage good behaviour and co-operation with the authorities, and it strictly need involve no bargain with the taxpayer, but in practice it is likely to do so, albeit within a coercive framework."

[573] From the evidence of Mr Murray, it appears that, in the case of the highest value taxpayers, the Revenue (and SCO in particular) rarely conducts an investigation under its express statutory powers to obtain documents and information. Such taxpayers generally perceive themselves as being under pressure to co-operate with the Revenue's enquiries, and tend to comply with informal requests even where it is questionable whether the Revenue could ultimately enforce its request by using statutory powers. The work of investigation in most such cases is in reality conducted by the taxpayer's own professional advisers, or by independent accountants instructed by the taxpayer ad hoc. Such advisers will enquire into the areas of concern identified by the Revenue and prepare a report, at the expense of the taxpayer, under a remit agreed with the Revenue. The Revenue will assess the report and may carry out further checks. In practice, therefore, the Revenue's role in most such investigations is to monitor the collection and submission of material on behalf of the taxpayer, and thereafter to negotiate an agreement on the tax, interest and penalties due (or, failing agreement, to make a formal determination of liability). The investigation conducted by Mr Stribblehill broadly followed this pattern (see e.g. paras.21, 27, 29, 33 and 35), and the practice is illustrated also by SCO's treatment of the PAYE issue at the meeting on 13 July 2000 (see para.459).

[574] It was common ground, in the submissions before me, that an investigation or enquiry of a "voluntary" character is itself carried out in the exercise of statutory powers. Reference was made by the parties, in this connection, to sections 1 and 13 of the 1890 Act and section 1 of the 1970 Act (quoted above at paras. 534-536), as well as to section 9A of the 1970 Act (quoted at para.551).

[575] It is apparent from section 1 of the 1890 Act that the Commissioners of Inland Revenue are a statutory body. Section 1 confers on the Commissioners "all necessary powers for carrying into execution every Act of Parliament relating to inland revenue". Section 1 can thus be read together with other provisions concerning the functions of the Revenue, so as to confer such powers as may be necessary for the execution of the latter provisions. The powers conferred by section 1 are not to be narrowly construed. Their width is illustrated by IRC v Nuttall where, as explained above (at para.560), section 1 was held to provide a statutory basis for the practice of entering into back duty settlements. Bingham LJ said at page 205:

"The power to make agreements with taxpayers for the payment of back duty, even in the absence of assessment and appeal, is in my view a power necessary for carrying into execution the legislation relating to Revenue within the meaning of s1 of the 1890 Act ... [I]f in an appropriate case the Revenue reasonably considers that the public interest in collecting taxes will be better served by informal compromises with the taxpayer than by exercising the full rigour of its coercive powers, such compromise seems to me to fall well within the wide managerial discretion of the body to whose care and management the collection of tax is committed."

[576] In the present case, it was common ground that the powers conferred by section 1 of the 1890 Act include a power to make enquiries on a non-coercive basis, prior to the deployment of express powers such as those conferred by section 20 of the 1970 Act.

[577] In the absence of any argument on the point, I am content to follow that approach, especially as the precise basis of the power to make informal enquiries does not appear to be material to the determination of the issues in this case. Although a power to carry out enquiries on a voluntary basis might perhaps be inferred directly from the existence of coercive powers such as those conferred by section 20 of the 1970 Act, I note that it was only in 1942 (by section 35 of the Finance Act of that year) that an express power to require the production of documents appears to have been conferred upon the Board; but investigations and other enquiries formed part of the practice of the Revenue long before that date, and may have rested on section 1 of the 1890 Act.

[578] The power to obtain information and documents from taxpayers (and others) by agreement can in any event be regarded as necessary for carrying into execution the legislation relating to inland revenue, within the meaning of section 1 of the 1890 Act. The Revenue may reasonably and properly consider that to encourage the voluntary provision of information and documents, holding its formal powers in reserve, may contribute to the performance of its duty to assess and collect taxes. That is however subject to enquiries being made for a proper taxation purpose. If an inspector were to make enquiries which did not have such a purpose, he could not be regarded as acting within the scope of the powers conferred by section 1.

[579] It might be thought that section 9A of the 1970 Act created a specific statutory basis for enquiries into self-assessment returns and that such enquiries should therefore be regarded as being based on section 9A, rather than on section 1 of the 1890 Act. I understood that to be the approach adopted on behalf of the petitioners, so far as the investigation in the present case involved enquiry into self-assessment returns. As I understood the submissions made on behalf of the Revenue, however, section 9A was regarded merely as widening the circumstances in which enquiries might be made (since the inspector was no longer bound, as under the pre self-assessment version of section 29, to accept the taxpayer's return unless "dissatisfied"), and as imposing a procedural requirement to serve a notice within a specified time. The Revenue's position, as I understood it, was that the SCO investigation with which the present case is concerned was based solely on section 1 of the 1890 Act. It does not appear to me to be critical in the present case whether the enquiries into the self-assessment tax returns are regarded as being based on section 1 of the 1890 Act or (as I am inclined to consider) on section 9A of the 1970 Act.

(2) Revenue Publications

[580] The following documents were founded on by the petitioners, as explaining the Revenue's normal practice and as giving rise to legitimate expectations: Code of Practice 8; the Investigation Handbook; and the minute of the Large Corporates Forum meeting on 28 June 2000.

Code of Practice 8

[581] Code of Practice 8 has already been mentioned. As explained above (at para. 85) it is the published code of practice under which SCO conducts investigations, other than in cases where serious fraud is suspected. It is intended to explain to the taxpayer how SCO will conduct an investigation into his affairs, and to state the policy of SCO in respect of such investigations. The edition in force at all material times was that first published by the Revenue in September 1997. It is entitled:

"Special Compliance Office investigations

cases other than suspected serious fraud".

Mr Al Fayed's advisers were handed copies of Code 8 at the meeting on 2 June and were, to the knowledge of SCO, already aware of Code 8.

[582] The first section of Code 8 is headed "Special Compliance Office investigations". It states:

"Most taxpayers do pay what is due but, unfortunately, some do not take sufficient care over their affairs and others deliberately try to pay less than is due. When we think this may have happened, we have to investigate the matter to get at the facts.

...

This Code of Practice explains how we, the Special Compliance Office, carry out investigations (other than those where serious fraud is suspected at the outset) and your rights and responsibilities in particular situations. It promises that you will be treated fairly and courteously in accordance with the law and the terms of the Taxpayer's Charter (printed on the inside back cover of this leaflet).

From April 1997 onwards, our investigation may include an enquiry into a Self Assessment tax return. We may deal with the entire tax return, or an aspect of it.

Where our involvement is limited to specific aspects of the tax return, a local Tax Office, or other specialist office, will deal with the rest of the tax return. Where this happens, our work will be co-ordinated. This Code only applies to our investigation."

[583] It appears from the first paragraph quoted that SCO will only investigate a taxpayer's affairs if it considers that there may have been an underpayment of tax, due either to a lack of care or to deliberate evasion. It appears from the last paragraph quoted that, where an SCO investigation forms part of an exercise carried out under co-ordinated case working, Code 8 applies only to the investigation carried out by SCO.

[584] The next section, headed "General", begins:

"We investigate the tax affairs of individuals, partnerships, companies and particular transactions, and also situations where substantial tax may be at risk."

This sentence implies that SCO investigations need not be confined to the tax affairs of identified individuals (or companies or other entities).

[585] A later section, headed "Opening the investigation", begins:

"Before we conduct an investigation, or take over an investigation, we will look at what you have told the Inland Revenue in your tax returns, accounts and statements. We will look at what information we may have from other sources. We may have already made third party enquiries before we contact you or your professional adviser, to establish whether or not we need to proceed.

Once we think it necessary to investigate under this Code, we will tell you or your professional adviser in writing.

If, as part of our investigation, we make enquiries into a Self Assessment tax return we are not obliged to give reasons for making the enquiries. We may however, identify particular areas on which the enquiries will focus. In other circumstances we will normally tell you the reasons for starting the investigation unless, exceptionally, we consider that to do so would prejudice the investigation"

(emphasis added).

[586] As discussed below, the petitioners lay particular stress upon the passages which I have emphasised. Before considering those passages, however, I note that the last two paragraphs quoted draw a distinction between an investigation which includes enquiries into a self-assessment tax return, and other types of SCO investigation; and the distinction drawn is that, when enquiries are made into a self-assessment tax return, SCO is not obliged to give reasons for making those enquiries. This distinction is presumably based on the difference between section 9A of the 1970 Act and section 29(1) in its pre self-assessment form (i.e. the absence, from the former, of the test of "dissatisfaction" contained in the latter). In the present case, reasons for the enquiries were in any event stated in the letter of 2 June 2000.

[587] In relation to the passages which I have emphasised, Mr Murray expressed the opinion that SCO had failed to comply with Code 8. So far as the first paragraph was concerned, he expressed the view that SCO had decided on an investigation of Mr Al Fayed's affairs by 30 March 2000 at the latest: some of the documents indeed indicated, in his opinion, that the decision had been taken earlier. No review had been carried out by then. Even by 2 June 2000, the work done by Mr Carmichael did not constitute a proper review:

"Simply looking at papers does not seem to me to constitute a proper review of the information which the Inland Revenue had and to form the basis for instituting enquiries and investigations ... I have been conducting reviews of files for almost 30 years and a proper review of a file does involve research, reconciliation, comparisons of material, and an investigation plan or any decision on a matter of complexity just does not leap into existence off the screen of the word processor. It seems to me there is an enormous amount of sweat, if one is going to do this sort of job properly, to reach an informed decision as to what action you should be taking,"

If (as Mr Murray maintained) the investigation was in reality an investigation of companies and other entities as well as of Mr Al Fayed, the review carried out was even more clearly inadequate. So far as the second paragraph was concerned, Mr Murray considered that SCO had waited for over two months before disclosing the decision taken (at latest) on 30 March, despite contact with KPMG on several occasions during the intervening period.

[588] Mr McGuigan however denied that there had been a failure to comply with Code 8 in the present case. In relation to the first paragraph quoted above (at para.585), Mr McGuigan accepted that under most circumstances a review of the taxpayer's affairs would be carried out before a registration report was submitted and the opening of an investigation was approved. A review would not however be necessary, in advance of registration, if the investigation was registered in consequence of the disclosure of an irregularity by the taxpayer (see paras.238 and 298). In the latter event, the taxpayer's advisers would prepare a report, and SCO would not consider conducting an active investigation until it had received that report. Although an investigation would be registered on the computer system, there would at that stage be no interviews with the taxpayer, no third party work, and no use made of the Revenue's information powers. SCO would await the receipt of the report prepared by the taxpayer's advisers and would then assess the report and consider whether to conduct an active investigation. As explained above, Mr McGuigan maintained that the registration of an investigation on 30 March 2000 had been the result solely of the disclosure of PAYE or Schedule E irregularities. On that basis, he maintained that it was unnecessary to have carried out a review of Mr Al Fayed's affairs by that date. According to Mr McGuigan, an investigation into matters other than the disclosure was not authorised until 16 May 2000, by which date a review had been carried out.

[589] Mr Middleton agreed with Mr McGuigan's evidence that a review would not be necessary before an investigation was registered as the result of a disclosure. In those circumstances, the case would be registered on the computer system for the purposes of internal management control and accountability, but without any intention at that stage of taking active steps by way of investigation. A distinction could be drawn between the registration of an investigation on the computer system as an internal step taken for the purpose of good management, on the one hand, and the carrying out of an active investigation by way of making enquiries, on the other hand. The disclosure of an irregularity ought, as a matter of good practice, to result in the registration of an investigation on the computer system, but not necessarily in an active investigation.

[590] For the reasons explained above (at paras.308-314), I do not accept Mr McGuigan's evidence that the registration of an investigation on the computer system on 30 March 2000 was the result solely of the disclosure of PAYE or Schedule E irregularities, although it is clear that there had been such a disclosure, and that Mr McGuigan considered (possibly on the basis of a mistaken recollection of what had been said at the meeting on 20 March: see para.276) that it was likely to result in a settlement in excess of 100,000. The principal reason for registration on 30 March was in my opinion a desire to regularise the position resulting from the sending of the suspension letter of 7 March. I accept Mr McGuigan's evidence that there was not any immediate intention to carry out an active investigation on 30 March, and (as explained at paras.359-362) that a decision to carry out such an investigation was not taken until 16 May.

[591] It was common ground, in the parties' submissions, that the suspension letter was a "challenge" to the taxpayer (see paras.310, 661 and 703). On that basis, it would appear that SCO London should not have sent the letter, since a review had not been carried out, an investigation had not been registered on the computer system, and there was no intention at that stage to open an investigation. Most importantly, notwithstanding the sending of the suspension letter, it is clear that no decision to undertake an investigation had been taken by the time the suspension letter was issued (see paras. 195, 204 and 206). No decision to carry out an active investigation was taken until 16 May 2000. The registration of an investigation on the computer system on 30 March - both insofar as it resulted from the suspension letter, and insofar as it resulted from the disclosure on 20 March - was for internal management purposes, and did not involve a decision to carry out active enquiries.

[592] The section of Code 8 in question states that (read short) a review will be carried out "before we conduct an investigation". The code is designed to provide information and advice to taxpayers who are the subject of an investigation. The interests of such taxpayers are engaged once SCO reaches the stage of making active enquiries, either of the taxpayers themselves or of third parties. It is difficult to conceive of circumstances in which it would be a matter of practical importance to taxpayers that an investigation had been registered on SCO's computer system for internal purposes of management. In that context, it appears to me that the words "before we conduct an investigation" would be understood by the ordinary taxpayer, and should be construed, as referring to the point at which active enquiries are to be undertaken: the point, in other words, at which SCO is "investigating" and the taxpayer is being "investigated". SCO does not "conduct an investigation" merely by making an entry on an internal computer system. That that is the intended meaning is confirmed by the heading of the section, "Opening the investigation". The opening of an investigation, in SCO parlance, involves notifying the taxpayer of the investigation (see paras.240, 593 and 596). By the time SCO opened an investigation in the present case, a review had been undertaken. Whether the review was adequate is a matter to which I shall return.

[593] In relation to the second paragraph quoted above (at para.585), Mr McGuigan said that the taxpayer would be notified of the investigation, and given a copy of Code 8, when the opening letter was sent inviting him to a opening meeting. Alternatively, a copy of Code 8 would be handed over at the opening meeting. This was because it would be improper for the Revenue to have first party contact with a person who was under investigation without advising him of his position. The taxpayer had a right to know that he was being investigated before he was interviewed. Mr McGuigan said, in relation to Code 8:

"It protects both investigator and the taxpayer. The reason it protects both is because the rules of engagement, so to speak, are well set out in the code of practice. The taxpayer knows where he stands, the investigator knows where he stands. The conversion of the case to a full investigation also allows SCO management to review the case, if necessary, to ensure that it is being properly conducted. The SCOLS system allows for updates by the investigator to be made on screen. So anyone with access to the system can see the developments of the case as it goes along. It think that it is an important protection, both for the taxpayer and for the investigator. The Group Leader and the Deputy Director can both see how the case is developing. But principally the protection comes via the code of practice being issued to the taxpayer, where we set out what we intend to do and we say what we expect of the taxpayer."

[594] Mr McGuigan did not explain in greater detail how the issue of Code 8 protected the taxpayer and informed him of "the rules of engagement". One matter which Code 8 draws to the attention of the taxpayer is the importance of co-operation, with a view to the mitigation of any penalties to which he might otherwise be subject (see paras.599 and 602). A second matter of which Code 8 informs the taxpayer concerns the conclusion of the investigation:

"Where there have been errors or omissions in your accounts or tax returns, we will ask you to sign a Certificate of Full Disclosure confirming that you have now declared all your taxable income or gains. We will not ask for a certificate if the investigation showed nothing was wrong.

We will take a very serious view if you sign a Certificate of Full Disclosure you know to be false, so you should consider it carefully before signing."

Mr Middleton confirmed that very serious consequences could follow if the Revenue subsequently discovered that there were other matters which had not been disclosed. More generally, Code 8 warns the taxpayer, in relation to his dealings with SCO:

"If you make a statement you know to be false you may be prosecuted."

A further matter is that an informed taxpayer will appreciate, from the issue of Code 8, that he is not covered by the protection of the Hansard procedure (see para.85), and may therefore have to take that into account in any interviews with SCO officers.

[595] Mr McGuigan assented to the suggestion that on 30 March 2000 SCO had decided to conduct enquiries into Mr Al Fayed's affairs under Code 8. He also accepted that Mr Al Fayed's advisers had not been notified of any investigation until 2 June 2000. He maintained, however, that the investigation which was decided on, as at 30 March, was intended solely to handle the PAYE disclosure made on 20 March, and that no steps to investigate those irregularities were taken prior to 2 June: in accordance with the normal SCO practice, the case had to be registered as an investigation, but no active investigation would be carried out until after a report had been submitted by the taxpayer's advisers.

[596] Mr Middleton also was asked whether, when an investigation was registered in SCO, steps were taken to inform the taxpayer of his position. He replied:

"Yes, there are ... It need not be immediately the case is registered, although I would imagine it generally would be in most cases, because the registration report would recommend opening the case as an investigation, and generally there would be no reason to delay not (sic) writing to the advisers and letting them know that we had started an investigation and there were things we wanted to talk to them about ... It is possible that, once the decision to register an investigation has been taken, there may be further third party enquiries made before a formal challenge is made. I think each case has to be looked at on its own facts and circumstances."

As explained above (at para.310), a "formal challenge" is the opening of an investigation.

[597] In relation to this issue, it appears to me to be again important to bear in mind the distinction between the registration of an investigation on the computer system as an internal act of administration, for the purposes of management (as, for example, when an irregularity has been disclosed by a taxpayer, or when a payment is received under a back duty settlement: see para.120), and the undertaking of an investigation involving active enquiry of a taxpayer or third parties. It was in the former sense that Mr McGuigan (and Mr Carmichael) accepted that there was an investigation in existence in the present case from 30 March 2000. It was not until 2 June 2000 that SCO undertook or "opened" an investigation in the second sense. It has to be acknowledged that the distinction is not reflected in the Revenue's pleadings, and in particular the averment:

"As from March 2000, and the completion of the registration report, SCO are investigating the tax affairs of [Mr Al Fayed]."

In reality, however, although there was an investigation registered on the computer system from 30 March, SCO did not begin investigating Mr Al Fayed's affairs until months later.

[598] For the reasons explained above (at para.592), it appears to me that Code 8 is concerned to provide information and advice to taxpayers about investigations: active enquiries about a taxpayer's affairs, involving "first party" or "third party" contact. The statement in question is:

"Once we think it necessary to investigate under this Code, we will tell you or your professional adviser in writing."

In its context, that statement should in my opinion be construed as referring to the stage at which SCO considers it necessary to undertake active enquiries: to construe it as referring to an internal procedure seems to me to make no practical sense. In the present case, I am satisfied on the evidence that SCO did not decide to undertake active enquiries (i.e. to "investigate", in the ordinary sense of the word) until 16 May, and that those enquiries did not begin until 2 June. On that basis, I do not accept Mr Murray's criticism that SCO delayed in notifying the taxpayer.

[599] The section of Code 8 concerned with "Opening the investigation" continues:

"At a meeting or otherwise we will give you the chance to

This opportunity extends to all aspects of your taxation affairs whether they are covered by Self Assessment or not.

....

If an offence has been committed we will always take into account, when calculating any penalty which may be due, whether you have been helpful and have freely and fully volunteered any information about income or gains which were omitted or understated. You should ensure that the answers you give us at meetings are correct to the best of your knowledge and belief.

We will make a written record of any meeting we have with you. We will provide you with a copy. You will be invited to agree or comment on the notes in writing, but are not required by law to do so. You have the right to tell us if the notes are not accurate and tell us about any matters with which you disagree.

We expect you to provide complete and accurate information relevant to your accounts and tax returns. It is your responsibility to do so. If you think that what you have told us is wrong, or you want to add anything, you should tell us as soon as possible. You should consider very carefully any points we have raised about your accounts or tax return and reply as fully and promptly as possible. You should ask your accountant or other financial adviser, if you have one, for advice."

This passage makes plain the connection between co-operation and the mitigation of penalties.

[600] The next section, headed "During the investigation", states:

"You are not obliged to attend any meeting, but we invite your co-operation in this respect. We do expect you to provide the information which is essential to the investigation. .... If you refuse to attend a meeting in such a case we may have to proceed more formally, for example, by asking the Appeal Commissioners to consider any unsettled appeals. ...

We will ask only for the information we believe to be necessary because we know that some of what we ask for may be sensitive and personal."

[601] A section headed "Your costs" states:

We will be aware throughout the investigation that dealing with our enquiries takes up your own time, and that you will have to pay the fees of any adviser you employ. We appreciate that these fees can be high, so we will make sure that our enquiries are reasonable in the overall circumstances of the case."

[602] The next section, headed "Providing information", states:

"We will take up as little of your time as possible by trying to ask for everything we need to know early in the investigation. We will do our best to avoid asking for information in a piecemeal way, but one query often leads to another...

....

You should respond promptly when we ask you for information. If you co-operate with us in our enquiries, it may limit any penalties you may have to pay."

The second paragraph quoted is a further indication that the taxpayer's voluntary production of information is taken into account by the Revenue in the exercise of its discretion to mitigate penalties under section 102 of the 1970 Act.

[603] The next section, headed "Payments on account", states:

"If we cannot reach agreement on the additional tax to be paid during the investigation, we may proceed formally. Where Self Assessment applies, we may make a provisional amendment to your self assessment before the end of our enquiries. .... We may also, whether Self Assessment applies or not, make assessments for earlier years. You have a right to appeal against any such assessments or amendments and may ask us to postpone payment of any of the tax. If we cannot reach agreement, you may ask the Appeal Commissioners to decide how much tax you should pay at this stage of our investigation."

[604] It appears from these passages that the outcome of a successful investigation is envisaged as being a back duty settlement or, failing agreement, an assessment or discovery assessment. A subsequent section on "Self Assessment, assessment, determinations and appeals" is to similar effect:

"Most cases are concluded by agreement, often by an exchange of letters contracting you to pay an amount to cover specified liabilities and also, where applicable, interest and penalties. If agreement is not possible, we will tell you why and seek to establish the formal determination of liability.

If we cannot reach agreement with you, we may make an assessment or determination of any amounts we believe are due from you, on the basis of all the relevant information available to us at that time. This can include a determination of any interest, surcharge, or penalty."

[605] A section headed "Suggestions" states:

"The investigations we conduct under this Code are a serious matter. We set high standards for the way we carry out our work".

Mr Middleton said in evidence:

"Investigation by Special Compliance Office is a very serious matter".

Mr Murray similarly described investigation by SCO as "an extremely serious business, which has consequences for the taxpayer and for the Inland Revenue".

[606] The "Taxpayer's Charter", printed at the end of Code 8, states:

"You are entitled to expect the Inland Revenue

To be fair

...

Mr Middleton made it clear in his evidence that the Revenue expects all its officers to act fairly and to take proper account of the cost of compliance on the taxpayer. He accepted that the requirements of fairness and reasonableness underlie SCO investigations. Mr Murray expressed the opinion that the expectations quoted above had not been fulfilled in the present case. I return to that matter below.

The Investigation Handbook

[607] Reference was also made in the evidence to passages taken from a Revenue publication known as the Investigation Handbook. This was published at the material time on the internet. It was described by Mr Middleton and Mr McGuigan as a manual intended for use in local tax offices by those engaged in investigation work: it was not used by SCO. Mr Murray had been told by SCO investigators that they did not regard themselves as bound by it and did not observe it.

[608] Reference was made, in relation to LBO, to sections IH 640 and IH 641 of the Handbook, which are concerned with the classification of business accounts (both those of companies and those of unincorporated businesses, including individual traders). Section IH 640 begins:

"To assist in the control of compliance work on business accounts, three classifications are used to describe the level of examination to which accounts and computations are subjected."

The three classifications are A (Accept), R (Review) and E (Examine).

[609] In relation to "A", IH 640 states:

"Classification A covers the majority of the accounts for ordinary businesses. Neither the accounts or the computations should be checked beyond the initial screening, the objective being to agree tax liabilities speedily."

It appears therefore that, in the case of ordinary businesses, the accounts are given an initial screening, and the majority of accounts are then accepted as the basis of assessment without further examination.

[610] In relation to "R", IH 640 states:

"In practice, classification R applies mainly to important limited companies and other large businesses where it seems likely that technical and computational adjustments could be large and have important tax consequences. Those cases which are not dealt with in Principal Inspector (now A2) accounts districts but are of such a size or complexity that they need to be handled on a long term basis are classified R on a permanent basis (IH 641).

....

The depth and extent of the review will vary depending on the size and nature of the case and need not lead, if the review shows this is not warranted, to enquiry or further action.

R work covers a wide spectrum of activity from the correction of simple arithmetical errors to extensive and very complex enquiries. However, it will always fall short of the fundamental review of the veracity of accounts and underlying records which is characteristic of investigation work."

It appears therefore that accounts, mainly those of large businesses, where points could arise which have important tax consequences, are reviewed, and that the largest or most complex cases are permanently classified as review cases.

[611] In relation to "E", IH 640 states:

"Classification E covers two categories of case.

Investigations

These are cases where there is a fundamental review of the accuracy and completeness of the records underlying the accounts and/or a review of the private financial affairs of the directors (or of the taxpayer in the case of unincorporated businesses).

For enquiries to be recorded as an investigation settlement, an in-depth investigation must have been carried out. For example, a quick review of the taxpayer's private financial affairs will not be sufficient to qualify a simple failure case for inclusion in the investigation category. When records have been requested they should have been examined and tested in depth and a detailed record of the findings made.

For the purpose of recording the result of enquiries, it is not the intention to investigate which counts but whether there was a fundamental review. Accounts may be classified E and enquiries begun with the intention of investigating fully. But where you are satisfied by the responses without the records or a private side review, the enquiries should be classified as an 'other compliance' case.

Other Compliance Cases

These are other cases where the taxpayer has apparently failed to comply with his or her obligations at the correct time, such that interest and/or penalties may be chargeable.

Examples Include

IH 822 gives a more detailed definition."

[612] It appears therefore that, leaving aside the majority of cases where the accounts are accepted after an initial screening, and the cases which are reviewed, the balance are cases where either (1) the inspector considers it necessary to carry out a fundamental review of the accuracy and completeness of the underlying records or to review the private financial affairs of the directors, or (2) the inspector suspects some other failure in compliance. The former type of case is referred to (in the Investigation Handbook) as an investigation. The latter type of case falls under the category "Other Compliance Cases". An investigation involves an examination "in-depth", either of the books and records or of the directors' private affairs.

[613] Section IH 641 is concerned with cases which are classified as "Permanent R", and states:

"Most cases are classified R because of specific points which arise on a particular set of accounts. But some cases are of such a size and complexity that they need to be handled on a longer term basis. Such cases are designated permanent R in districts which are not Principal Inspector (A2) accounts districts.

Cases designated permanent R require a planned programme of review which would cover all important aspects, including the less obvious ones, where a substantial amount of tax could be at risk, in some instances a review of the underlying issues would need to be spread over three or four years. The case will be classified R each year and any enquiries made will cover both the particular points which arise on each set of accounts and any underlying issues which could affect the tax position. Such treatment is likely to be very time consuming and will naturally be reserved for the very largest cases in districts and those presenting particularly high risks.

Suitable cases are identified by Officers in Charge and approved by Regional management. Some offices have very few cases, if any.

The cases to be considered are those which

Substantial should be taken as meaning tax of 50,000 a year although this limit need not be applied rigidly.

As a guide, suitable cases generally have at least one of the following broad characteristics.

[614] It appears from their terms that IH 640 and 641 are concerned with the operations of local tax offices. That is reflected, for example, in the references to districts and to regional management. They do not bear to apply to LBO, or hold out any representation of how LBO will conduct its activities. These sections are not however irrelevant to LBO. Mr Williams states in his affidavit: "LBO cases are what are called permanent R (review) cases." Mr Baird states:

"In the terms of the IH LBO cases are regarded as permanent R (see IH 640). In IH terminology, they do not normally constitute 'investigation' or 'E' cases. A large part of the material in the IH manual does not therefore apply to the LBO case."

[615] It appears therefore that the business accounts with which LBO is concerned normally fall within the classification "Permanent R", or are dealt with in the same way as the cases classified by local tax offices as "Permanent R". That evidence is consistent with Mr Cawdron's evidence that LBO carries out "a rolling audit": in other words, an annual process of review and risk assessment. Because of the nature of the work involved, this can be a protracted process. Since what is involved is not a one-off investigation, and in order to make efficient use of resources, LBO may not attempt to address every identified risk in every year, but may defer enquiry into a risk until a subsequent year, when further information may be available. That appears to have happened in the present case, where enquiries into the Harrods 1998 accounts were kept to a minimum in the expectation that risks relating to the relationship between the companies and a director (Mr Al Fayed) would be addressed in enquiries into the 1999 accounts.

[616] That LBO cases, in Mr Baird's words, "do not normally constitute 'investigations' or 'E' cases", does not entail that the work done by LBO in a particular case cannot be such that the case should properly be regarded as falling within classification E; and counsel for the Revenue accepted that it was implicit in Mr Baird's evidence that an LBO case might fall within classification E. The position appears from the evidence to be rather than it is not the normal function or practice of LBO to carry out investigations: it keeps cases under "permanent review"; and if one of its cases were to give rise to a suspicion of wrongdoing, it would wish to discuss it with SCO (as Mr Williams indicated in his letter to Mr Whitehead dated 9 August 1999: see para. 158).

[617] In the present case, there is no indication that LBO intended to carry out the first type of investigation described in IH 640, i.e. "a fundamental review of the accuracy and completeness of the records underlying the accounts". In the enquiry letters, Mr Williams and Mr Murrin requested sight of a small number of documents underlying the accounts: for example, documentation supporting the valuation of the goodwill shown in the consolidated balance sheet of the Fulham group; the valuation of the lease of the flat at Harrods Village, granted to Harrods (UK) plc as part of the consideration on the sale of the land to the developer, and sold on to Prestige Properties SA; and documentation vouching the date and nature of a payment of 14m apparently made by Harrods Holdings plc in March 1998 and described in the accounts as a dividend (Mr Murrin having queried the date and nature of the payment, as it appeared to have been established before the year end and possibly before a shareholders' meeting). These and other requests for underlying documents were directed towards particular issues where the inspector wished to be satisfied as to the accuracy of the accounts. The requests which were made were not so extensive as to amount to a fundamental review.

[618] So far as the second type of investigation is concerned (i.e. "a review of the private financial affairs of the directors"), although Mr Williams was concerned about tax risks relating to the personal tax affairs of Mr Al Fayed, his intention (and that of SCO) was that those matters should be investigated by SCO under Code 8, albeit in the context of co-ordinated caseworking with the LBO review of the relevant companies. There was thus to be "a review of the private financial affairs of the directors", conducted by members of a team of which Mr Williams was in charge, and forming part of a co-ordinated exercise in which LBO was participating; but that review was not itself to be conducted by officials of LBO.

[619] So far as concerns the remaining category of case falling within classification E, it may be arguable that some of the enquiries made by LBO, particularly in the original enquiry letters, fell within that category. No such argument was however presented to me, the focus of the submissions being on the category of "investigations". I need not therefore consider further the category of "Other Compliance Cases".

[620] Reference was also made to section IH 1200, which states:

"The following paragraphs tell you about selection of cases for investigation. You can only investigate if you are dissatisfied with accounts or returns. This follows from TMA70/S29 (IH 1201).

...

You should always remember that an investigation will be expensive for both the Department and the taxpayer. It is good practice to review the grounds for selection before opening correspondence to confirm that they are adequate."

[621] The second and third sentences in the passage quoted in the preceding paragraph are based on the pre self-assessment version of section 29(1)(a) (see para. 542). As explained above (at para. 552), the statutory test of dissatisfaction does not apply under the self-assessment regime.

[622] Reference was also made to section IH 1201, which states:

"Section 29 provides the statutory justification for most compliance work. If an inspector is satisfied that any return under the Taxes Acts affords correct and complete information he or she must make an assessment according to the figures returned. However, if it appears to the Inspector that there are any profits in respect of which tax is chargeable which have not been included in the return, or he or she is not satisfied with the return, the Inspector may make an assessment to the best of his or her judgement....

Section 29 also provides us with a statutory justification for the reopening of earlier years where we have reason to believe that irregularities in the return for the year under investigation are likely to have existed in previous years....

The statute talks of being dissatisfied with the return, but it can be useful to consider this from the other angle: are you satisfied? The Taxes Management Act does not give any guidance as to how you should go about satisfying yourself. A common sense interpretation is that you may make reasonable and relevant enquiries, and take into account any other information which is available. Where necessary any available statutory powers to obtain information (for example, TMA70/S20), may be used. In making enquiries your should be careful at all stages to be seen to be acting reasonably and with good cause. This does not mean you must have definitive proof of omissions from a return or accounts before embarking on the investigation. It is sufficient to be able to show some cause for dissatisfaction."

[623] The basis of those statements appears to be as follows. Under the pre self-assessment regime, the inspector has to consider whether he is satisfied that a return is correct and complete, for the purpose of performing his duty under section 29(1)(a). In order to determine that question, the inspector may require to carry out work for the purpose of ascertaining whether the return is in fact correct and complete. Equally, in order to determine whether there are chargeable profits which have not been included in a return, or whether he is dissatisfied with a return, and in those events to make an assessment based on his judgment under section 29(1)(b), the inspector may require to undertake work which is relevant to those issues. Similarly, in order to make a discovery of the nature described in section 29(3), and in that event to form an opinion as to the amount which ought to be charged, the inspector may require to undertake work which is relevant to those matters. Such work may take a variety of forms; but, inasmuch as the Revenue has powers to make enquiries of taxpayers and third parties so as to obtain information and documents, the powers and duties set out in section 29 can constitute a justification, or a proper purpose, for the use of such powers. In general terms, section 29 will constitute such a justification insofar as the enquiries are relevant to the due exercise of the powers conferred by section 29 and the performance of the duties imposed by that provision.

[624] As mentioned above (at para. 525), reference was also made by Mr Cawdron to section IH 1350, which states:

"Before you make any approach to the taxpayer or his or her agent, you should undertake a full review. Now is the opportunity to prepare proper foundations for your investigation. You should bring together all the information which is readily available about the business and its proprietor or directors. The extent of the review will depend upon how much information is available.

....

Once you have completed your review it is good discipline to sit back and think about your grounds for dissatisfaction .... Above all are your reasons for proceeding sufficient to justify the time you will have to invest as well as the cost and inconvenience which the taxpayer will have to bear?"

The Large Corporates Forum

[625] Following the advent of corporation tax self-assessment, the Revenue introduced a code of practice, Code of Practice 14, governing corporation tax self-assessment enquiries, including those conducted by LBO. That code of practice is not however applicable to the matters with which the present proceedings are concerned, which pre-date the introduction of corporation tax self-assessment.

[626] Until Code 14 came into effect, there was no published code of practice describing how LBO would conduct its enquiries. There was however certain material published by the Revenue relating to LBO's activities. In particular, LBO instituted in 2000 a practice of holding meetings two or three times a year between certain of its officials (and officials from other interested departments of the Revenue) and representatives of the taxpayers whose affairs it deals with. These meetings are known as the Large Corporates Forum, or LBO Forum. The minutes of the meetings are published on a website. The minute of the meeting held on 28 June 2000 was founded on by the petitioners in the present proceedings. I observe at the outset that the meeting post-dates the decisions under challenge: indeed, the minute was not published until after the meeting between KPMG, PwC, SCO and LBO on 13 July 2000.

[627] The meeting on 28 June 2000 was attended by a number of representatives of large companies (none of which are associated with the petitioners) and Revenue officials. The minute states:

"5. Risk Assessment

5.1 There were presentations by Keith Cartwright on risk assessment in the LBO and by Chris Davidson and Ursula Crosbie on its application in City A."

Mr Cartwright was a Deputy Director of LBO. City A is an LBO office which specialises in large banks. The minute continues:

"5.2 Keith Cartwright said that the principle of risk assessment - understanding what the group was about and what were the issues and risks - was not new. What the LBO was now doing, was to develop and standardise practice across all LBOs. The purpose was to identify risks to the Exchequer, then evaluate and prioritise them, and use that information to guide the deployment of resource ...."

It appears therefore that, as Mr Williams and Mr Baird state in their affidavits, LBO practice had not been standardised by the date of the meeting.

[628] The minute continues:

"5.5 Chris Davidson and Ursula Crosbie reprised the modern context in which LBOs undertake risk assessment: LBOs deal with whole groups, encourage voluntary compliance, make fewer but more thorough enquiries, and aim to make progress co-operatively by meeting. Teamworking in LBOs can encompass many parts of the Revenue, and wider, but the typical core team for risk assessment was Case Director, one or more Case Managers and an accountant. There was an annual cycle, at the heart of which was the case conference held by the core team.

[629] The minute does not imply that this description of risk assessment in City A represents the standard practice of all LBO offices; and aspects of what was said about the practice of City A (e.g. the involvement of an accountant in the core team, and the holding of an annual case conference) do not reflect the practice of Glasgow LBO at the material time. Nevertheless, I accept the evidence of Mr Williams and Mr Baird that the general principles of the procedure described in the minute were followed by Glasgow LBO in the present case. A risk assessment was carried out on the Harrods 1998 accounts, and resulted in the identification of risks in August 1999. Most of the major risks addressed in the letters of enquiry issued to the Harrods group following the meeting on 13 July 2000 had been identified in that risk assessment. A further risk assessment was carried out on the 1999 accounts. The continuing presence of the risks which had been identified the previous year was apparent by 31 May 2000, when the taxpayers were notified of the intention that enquiries would be conducted on a combined case-working basis. The risk assessment was completed before enquiries began. There was no single case conference, but it appears that discussions of a similar nature took place between Mr Williams and Mr Murrin. The taxpayers' representatives were informed of LBO's intentions and were invited to the meeting on 13 July 2000, at which the fundamental risks were discussed, before letters of enquiry were issued.

 

(3) The Concept of an Investigation

[630] A large part of the evidence and submissions in the present case involved the use of the word "investigation". A number of the issues raised in these proceedings likewise involve the use of that word: issues, for example, as to when SCO decided to undertake an investigation; as to when the investigation began to be conducted (if that is a different question); as to the scope of the investigation; and as to whether LBO's enquiries constitute an investigation or part of an investigation (and, if so, whether that is the same investigation as the SCO investigation). The concept of an investigation, in the sense in which that term is employed by Revenue officials in the relevant contexts, is however less straightforward than it might appear at first sight.

[631] One important source of ambiguity and difficulty has been explained above: namely, the distinction between the registration of an investigation on the SCO computer system, in order to comply with internal Revenue procedures concerning audit and management (a "passive investigation", as it was described by counsel for the Revenue), and investigation as an active process involving the making of enquiries of the taxpayer or of third parties (an "active" or "full" investigation, as it was described by the Revenue officials: see paras.588-592 and 595-598; also paras.120, 298 and 310-311). In the light of the foregoing discussion of the relevant legislation and Revenue publications, certain further conclusions may be drawn. In particular, although "investigation" is not a statutory concept, and the word could be used in ordinary language to describe any systematic enquiry, it appears that the distinction drawn between an SCO investigation and other forms of enquiry can be related both to Revenue practice and to the statutory framework.

[632] Considering first the publications and the other evidence concerning Revenue practice, it appears that the term "investigation" is used with a different meaning in different Revenue departments. The only definition of the term which emerged in the evidence was that contained in section IH 640 of the Investigation Handbook, quoted above (at para.611); and I was informed by counsel for the Revenue that no other Revenue definition of the term existed. Section IH 640 appears on its face to be concerned with the practice of local tax offices in relation to the "screening" of business accounts. Mr Baird's reference in his evidence to IH 640, and his evidence that LBO cases "[i]n IH terminology .... do not normally constitute 'investigation' or 'E' cases", appears to admit the possibility that an LBO case can (atypically) constitute an "investigation" as defined in IH 640. The tenor of the evidence, however, is that for LBO to carry out an investigation (as defined in IH 640) would be at least highly unusual.

[633] Since the Investigation Handbook does not govern the practice of SCO, IH 640 is not published as a definition of an SCO investigation. IH 640 is in any event concerned with the classification of business accounts; and an SCO investigation need not relate to such accounts. Counsel for the Revenue informed me that, although an important distinction was drawn between an SCO investigation and other forms of enquiry, there was no definition of the concept: it was nebulous. The account of this subject given in Simon's Direct Tax Service (at paras.A3.1368 and A3.1662) was placed before me by counsel for the Revenue, but was said to be inaccurate.

[634] On the evidence, it appears to me that there are different types of investigation which are carried out by SCO: an investigation under Code 9 differs materially from an investigation under Code 8, by reason of the Hansard procedure; and a criminal investigation is different again. A Code 8 investigation is an investigation carried out by SCO where serious fraud is not suspected at the outset. The subject-matter of most such investigations is suspected tax avoidance on a substantial scale. The procedure followed in practice before a decision is taken to undertake such an investigation has been described above. To recap briefly, a review is undertaken by an investigator to assess whether there is a tax risk involving a sufficiently large amount of tax (ordinarily, at least 100,000) and a sufficiently high degree of risk to warrant the deployment of SCO's resources. If the investigator considers that an investigation is warranted, he then submits a registration report to his group leader for approval. The report explains what has been found during the review, the scope of the investigation proposed (i.e. the areas of interest), and the code of practice under which it is proposed that the investigation should be conducted. If approval is given, the review is then converted into an investigation. The purpose of the investigation is to pursue the potential tax loss identified in the report, by enquiry into the areas of interest (see paras.84-89 and 242). The nature of the enquiries envisaged is described in the investigation plan, which may form part of the registration report or may be prepared after approval has been given (see para. 233). The investigation can develop as further information is obtained, and its scope may be widened by a supplementary registration report or investigation plan (see paras.358 and 363). Once the case has been registered on the computer system as an investigation, first party contact by SCO can take place (see paras.237 and 298), and section 20 powers can be used (see para.232), although they may not be required (see paras.570 and 573). The investigation is carried out in the manner described in Code 8, a copy of which is provided to the taxpayer on the opening of the investigation. In practice, the active work of investigation is usually carried out by accountants instructed on behalf of the taxpayer, and at his expense. They prepare material for submission to SCO in accordance with SCO's requests.

[635] Considering next the statutory provisions, it appears that enquiries made by LBO in the course of its review work are directed towards making assessments under (at the material time) section 29 of the 1970 Act in its pre self-assessment form. In order to make such assessments, they make informal enquiries, under the incidental power to make such enquiries which is conferred by section 1 of the 1890 Act. In the event that co-operation in such enquiries were not forthcoming, it appears that they might ordinarily have to issue an estimated assessment since they do not exercise the powers conferred by section 20 of the 1970 Act.

[636] SCO's operations, on the other hand, appear not to be directed in practice primarily towards making assessments. An SCO investigation, if successful, will usually result in SCO entering into a back duty settlement, under the incidental power to conclude such agreements which is conferred by section 1 of the 1890 Act (see para. 560). In the absence of agreement, however, it will make an assessment (or amend an assessment): where self-assessment applies, under section 28A or section 29 of the 1970 Act in its self-assessment form, and otherwise under section 29 in its pre self-assessment form. In order to conduct an investigation, SCO makes informal enquiries. The precise statutory basis of those enquiries is debatable, but does not appear to be important for present purposes: the power to make such enquiries might be derived from section 1 of the 1890 Act, or (in the case of enquiries into a self-assessment return) from section 9A of the 1970 Act. In the event that co-operation in such enquiries were not forthcoming, SCO could exercise the powers conferred by section 20 of the 1970 Act and similar provisions. Co-operation in first party enquiries is however generally forthcoming, partly because it is taken into account in the exercise of the discretion conferred by section 102 of the 1970 Act to mitigate penalties.

[637] Considering in this context the various enquiries with which the present proceedings are concerned, it is not in dispute (subject to one qualification) that the SCO enquiries made on and after 2 June 2000 form part of an investigation. The only qualification concerns the enquiries concerning benefits. Counsel for the petitioners, in their submissions, treated those enquiries as being separate from the investigation under challenge, the general tenor of their approach being that the enquiries were a check on benefits of a limited nature, as Mr McGuigan and Mr Carmichael had indicated on 13 July 2000 (see paras. 457 and 462). Counsel for the Revenue, although emphasising that the enquiries into benefits were not under challenge, appeared to regard them as forming a much more extensive exercise. As I have indicated (at paras.407 and 464), it appears to me that the enquiries made by SCO, including those concerned with benefits in kind, constitute an investigation under Code 8; and it seems to me to be difficult to maintain a clear distinction between the investigation of benefits and the investigation of other issues.

[638] Considering next the LBO enquiries, it appears to me that none of those enquiries falls within the category of "investigations" as defined in IH 640, for the reasons explained above (at paras.617-618). Some of the enquiries concerned the potential tax liabilities of companies in respect of which LBO had not received any accounts (e.g. The Ritz Hotel Ltd, and the offshore companies dealt with in the original enquiry letters), which might raise a question as to whether the "Permanent R" classification would apply; but, for the reasons explained above (at paras.518-520 and 523-524), I am not satisfied on the evidence that such enquiries fell outwith the normal scope of LBO's activities. Subject to the qualification just made, LBO's enquiries appear to fall within the scope of review work as described in IH 640 and 641.

[639] Considering the LBO enquiries in the context of the practice and legislation relevant to SCO investigations, it seems to me that the LBO enquiries did not form part of an SCO investigation. The enquiries were made by officers of LBO, following LBO's procedures and not those of SCO. Those officers would not have used section 20 powers in the course of their enquiries.

[640] At the same time, there was a high degree of integration between the LBO review and the SCO investigation. It is apparent from Mr Williams's memorandum of 6 August 1999 (see paras.152-153) that he regarded a comprehensive review of Mr Al Fayed's personal tax affairs as forming an essential part of a proper and meaningful risk assessment of the Harrods group. His letter to Mr Whitehead of 9 August 1999 (see para.158) envisaged a review of "the group and any associated parties", under which he would co-ordinate the work of all relevant Revenue agencies under co-ordinated case-working. His conversation with Mr Carmichael on 9 February 2000 (see para.211) made the same intention clear. Following his initial meeting with Mr McGuigan on 11 February, matters fell into abeyance for some months as SCO attempted to deal with the problems occasioned by the suspension letter, and focused on the issues arising from that letter and from the 1997 agreement. When Mr Williams became involved again in mid-May, he expressed the view that neither LBO nor SCO should undertake any form of review without the other: the whole matter should go forward as a co-ordinated case or not at all (see para.343). Once the issues troubling SCO had been resolved and Mr Matheson had given his approval to the course of action described in Mr Middleton's memorandum of 19 May, it was agreed between Mr Middleton and Mr Williams that a co-ordinated case-working approach was to be applied (see paras.365-368). SCO and LBO each thereafter prepared plans for the co-ordinated exercise, under which responsibility for the different aspects of the exercise was allocated between them. When SCO decided to notify KPMG on 2 June of its intention to undertake an investigation, Mr Williams considered that the connection between the SCO investigation and LBO's future actions was so close that SCO's action necessitated the disclosure at that point of LBO's intention to carry out an "in depth review" of the Harrods group's tax affairs in a combined case-working exercise involving SCO, notwithstanding the fact that LBO's risk assessment of the Harrods group's accounts had not yet been completed (see para. 398). When the organisational structure of the combined exercise was agreed, on 7 June, it was decided that work was to be allocated on the basis of the skills available within each office, with the information being pooled (see para.437). Accordingly, whether LBO officials or SCO officials enquired into a particular entity would depend on which officials were considered to have the most appropriate skills; and, whichever officials carried out the enquiries, the resultant information would be made available to both departments. The case team comprised officials from both departments, the senior official on the team being Mr Williams; and he was to report to the Directors of both departments. It also appears from Mr Williams's letter of 6 October 2000 that, if LBO's enquiries did not receive a satisfactory response, SCO would then pursue the matter (see paras.485-486). In the same letter, Mr Williams said that "the Revenue will be acting in a totally co-ordinated way". In these circumstances, although it would be incorrect to say that the enquiries made by LBO formed part of the SCO investigation, it would also be unrealistic to maintain that the LBO review was distinct and free-standing. The LBO review and the SCO investigation were in reality inter-dependent and mutually supportive: like the two sides of an arch, they together bore the weight of an exercise which neither alone could have supported.

[641] In these circumstances, it might be regarded as somewhat arbitrary that whether a code of practice were to be issued under the combined exercise would depend on whether the particular enquiry happened to be made by an LBO official or by an SCO official. The system of issuing codes of practice was not however entirely rational: it was developing at the material time, as also was the system of combined case-working. The events with which these proceedings are concerned occurred at a time when some departments, such as SCO, had codes of practice, and others, including LBO, did not.

4. THE SUBMISSIONS

[642] The parties' submissions have already been discussed to some extent. Both submissions can be summarised under the following broad headings:

Competency

Unfairness, unreasonableness and improper purpose

(a) General principles

(b) The statutory context

(c) The SCO investigation

(d) The LBO review

Breach of legitimate expectations

(a) General principles

(b) The SCO investigation

(c) The LBO review

Remedy

 

(1) The petitioners' submissions

Competency

[643] At the beginning of the proof, I indicated that I wished to be addressed in due course on the competency of the application for judicial review (that being a matter which it was pars iudicis to raise). I wished to be reassured that the decisions under challenge were of a character which rendered them susceptible to the supervisory jurisdiction of the court, and that the application was not premature. I had noted that the Revenue had not exercised its statutory powers to compel the provision of information or documents (e.g. under sections 19A and 20 of the 1970 Act) and that, as matters stood, the petitioners were entitled to ignore the Revenue's requests. I had also noted that if section 19A were to be invoked against Mr Al Fayed (it could not be used against the corporate petitioners in respect of the accounting periods in question, which preceded the advent of corporation tax self-assessment), he would have a right of appeal to the General or Special Commissioners (see para.567). Equally, section 20 powers could be used by an inspector only with the consent of a General or Special Commissioner (see para.566). These points had indeed been made, in relation to the LBO enquiries, in Mr Baird's affidavit:

"The suggestion has been made that the letters issued to the corporate entities exceed the powers of enquiry. This is to misunderstand the nature of the letters which have been issued. They do not constitute formal requirements to provide information. If such a requirement, under the various information provisions, were issued then there would be an opportunity to challenge the nature of the enquiry. Reference is made to section 20 and section 29 of the Taxes Management Act 1970 in the pleadings, but there are numerous other information provisions that could possibly apply depending on the accounting period concerned and the point at issue.

If such a request were made which fell outside the proper scope of an enquiry on a corporate then, the company would have an opportunity to challenge this. For instance any notice to deliver documents under section 20(1) TMA 1970 requires the consent of a Commissioner. Alternatively the Commissioners could use their own powers to request particulars or books or accounts or other documents in the course of hearing an appeal against an assessment .... In either event the use of formal information powers would allow the appropriateness of the request to be tested before the Commissioners and ultimately the courts."

Mr Williams had made the same point in his letter of 6 October 2000 (see para. 487).

[644] In relation to this issue, counsel for the petitioners submitted that the decision to investigate the affairs of the petitioners was taken in the exercise of statutory powers. Although the petitioners did not challenge the decision on the basis of the costs involved, the fact was that such an investigation involved great inconvenience to the petitioners and the expense of engaging professional advisers. The mere fact that the petitioners were exposed to a tax investigation could be detrimental to their commercial operations and to their ability to raise finance or to dispose of assets. Since they had no right of appeal at this stage, judicial review was their only means of obtaining a remedy if the powers in question were exceeded or abused. So far as Mr Al Fayed was concerned, counsel submitted that it would not be appropriate to expect him to wait until he was issued with a section 19A notice, and then to invoke his right of appeal. His complaint was directed against a wide-ranging investigation into himself and his family and all persons, organisations and companies connected with them, rather than being directed merely against the section 9A enquiry into his personal tax return, in pursuance of which a section 19A notice might be issued. The general enquiries intimated by the Revenue on 2 June 2000 had no obvious connection with his tax return. They were enquiries on a broader footing that went into other matters and might go into other tax years. Moreover, formal notices under section 19A or section 20 were not issued unless they had to be: taxpayers in Mr Al Fayed's position were under pressure to comply with the Revenue's requests for information, and ordinarily did so. The reality was that Mr Al Fayed was being put in a position where he was expected to comply with the requirements issued by the Revenue, even if it had yet to invoke a statutory procedure. Given the statutory backdrop to the Revenue's announcement of its decision to investigate, and its subsequent demands for documents and information, this was not in reality an informal request for voluntary co-operation. Furthermore, the Revenue could lawfully issue a section 19A notice only where it had first lawfully issued a section 9A notice. Where the lawfulness of the section 9A notice was itself in issue, neither the question of a section 19A notice nor of an appeal against it arose: v IRC, ex parte Preston [1985] AC 835. In any event, where it was arguable that a procedure was advancing on a false basis which was justiciable in law, it was better to decide the issue sooner rather than later: R (Alconbury Developments Ltd v Secretary of State for the Environment [2001] UKHL 23, [2003] 2 AC 295, at para.171 per Lord Clyde; County Properties Ltd v Scottish Ministers, 2000 SLT 965, at page 973; R v Secretary of State for the Environment, ex parte Richmond LBC (No.3) [1995] Env LR 409, at page 413; R (Burkett) v Hammersmith and Fulham LBC [2002] UKHL 23, [2002] 1 WLR 1593, at paras.35 and 38-39 per Lord Steyn.

Unfairness, unreasonableness and improper purpose

(a) General principles

[645] In relation to the substantive issues raised, the petitioners' submissions proceeded primarily on the basis that there was a single decision; and their principal submission was that that decision should be reduced because it was unreasonable, was made not in pursuance of the Revenue's statutory powers but with an improper motive, and because the procedure and the decision were so unfair as to amount to an abuse of power that ought to be controlled by the court.

[646] Counsel for the petitioners began by making general submissions concerning the relevant principles of law. It was submitted that the Revenue was under a duty of fairness to taxpayers. Its decisions were amenable to review on the ground of unfairness. The underlying principle was that the improper or capricious exercise of a discretionary power was a failure to exercise the discretion that the law had conferred. Reference was made in this connection to IRC, ex parte National Federation of Self-Employed and Small Businesses Ltd [1982] AC 617 (the Fleet Street Casuals case), at pages 631-632 per Lord Wilberforce, 636-637 and 644 per Lord Diplock, 650-653 per Lord Scarman, 662-663 per Lord Roskill; Ex parte Preston, at pages 851-852 per Lord Scarman, 862-868 per Lord Templeman; IRC ex parte Matrix Securities Ltd [1994] 1 WLR 334; and IRC, ex parte Unilever plc [1996] 68 TC 205, at pages 227-230 per Sir Thomas Bingham MR (as he then was), 231-236 per Simon Brown LJ (as he then was). One instance of unfairness was conduct equivalent to a breach of contract or representation, such as could in other circumstances be redressed under private law: HTV Ltd v Price Commission [1976] ICR 170; Ex parte Preston; v IRC, ex parte MFK Underwriting Agents Ltd [1990] 1 WLR 1545, at pages 1567-1570 per Bingham LJ. Another instance of unfairness was the use of statutory powers with an improper motive or collateral purpose: Padfield v Minister of Agriculture, Fisheries and Food [1968] AC 997; Secretary of State for the Environment, ex parte Nottinghamshire County Council [1986] AC 240, at pages 249-250 per Lord Scarman. The categories of unfairness were not closed. In particular, they were not exhausted by breach of an expectation or representation, or situations that could be redressed under private law: Ex parte Unilever plc. One situation justifying intervention for unfairness was where the procedure and the decision of an administrative body, although possibly just surviving challenge if viewed separately, were in combination so questionable as to impel the conclusion that something had gone wrong of a nature and degree that required the intervention of the court: Thames Valley Electric Power Board v NZFP Pulp & Paper Ltd [1994] 2 NZLR 641, at pages 652-653 per Cooke P (as he then was), 654 per McKay and Fisher JJ; R v Panel on Takeovers and Mergers, ex parte Guinness plc [1990] 1 QB 146. Such instances of unfairness might be described as abuse of power, although not all of the authorities employed that vocabulary. The central consideration was that the powers were exercised unfairly. The decision-making might also be characterized as irrational in the Wednesbury sense: R v North & East Devon Health Authority, ex parte Coughlan [2001] QB 213, at paras.57-58, 61, 67-71 and 81. The fairness or reasonableness of a decision were to be assessed on the basis of the material before the decision-maker at the time the decision was taken: R (BSkyB Group plc) v Customs & Excise Commissioners [2001] EWHC Admin 127, [2001] STC 437, at paras.10 and 16.

[647] It was a matter for the court, having heard the evidence, to consider whether the facts supported the arguments of impropriety and unfairness. It was submitted that the Revenue's conduct in the present case could not be characterized as "a bit rich but nevertheless understandable" (adopting the words used by Simon Brown LJ in Ex parte Unilever at page 236): indeed, the Revenue had never given a coherent explanation of its conduct which enabled the decision to be understood. That was in large measure the source of the difficulty which the court might have in establishing the facts of the present case.

[648] Responding to the reliance, by counsel for the Revenue, upon the presumption omnia praesumuntur rite esse acta as illustrated by R v IRC ex parte TC Coombs & Co [1991] 2 AC 283, counsel submitted that after the court had heard evidence it had to determine what weight it should accord to that presumption. Where the action of a body such as the Revenue was subject to the supervisory jurisdiction of the court, the court was entitled to expect that the Revenue would put all its cards face upwards on the table (to adopt the expression used by Bingham LJ in Ex parte MFK Underwriting Agents Ltd at page 1569): in other words, that it would candidly, fully and willingly disclose the basis and circumstances of the decision complained of. Where the court concluded that a party had not given such a full and candid account of events as the court was entitled to expect, then it might decide that little if any weight could be attached to the presumption of due execution. In Ex parte Coombs & Co the Revenue had led no evidence, on the ground that it was inhibited from doing so by reason of taxpayer confidentiality. The circumstances of that case were very different from the present, where taxpayer confidentiality had not to any material extent inhibited a candid and full disclosure of the decision-making process.

(b) The statutory context

[649] In relation to the statutory context of investigation work, counsel submitted that section 1 of the 1890 Act conferred on the Revenue whatever powers were necessary for it to carry out its statutory functions, insofar as those powers were not conferred by more specific provisions. Prior to self-assessment, section 1 conferred upon the Revenue, as part of its general management powers, the power to carry out the investigations which were necessary for it to perform its functions under the pre self-assessment version of section 29 of the 1970 Act. If the inspector was not satisfied with a return, or with the failure to make a return, then he carried out an investigation. If he then discovered that there were profits in the year of assessment, or prior years of assessment, which ought to be assessed to tax, then he made an assessment in the amount which, in his opinion, ought to be charged. Alternatively, he might at that stage receive a voluntary payment, or he might enter into a contractual arrangement with the taxpayer. The proper purpose of investigation was to enable the inspector to carry out his functions under section 29(1) and (3). The power of investigation (so far as it existed in the present case) was derived from section 1 of the 1890 Act as a consequence of the powers and duties arising under section 29 of the 1970 Act. Similarly, under the self-assessment regime, the power to investigate arose as a consequence of the power to enquire under section 9A and thereafter to amend the self-assessment under section 28A, and the power to issue a discovery assessment which was not based on the taxpayer's return, under the self-assessment version of section 29. An investigation must therefore be concerned with liability in respect of inland revenue. If an investigation was not concerned with liability for inland revenue, it had nothing to do with the collection or management of inland revenue, and therefore was not authorised by the 1890 Act.

[650] The reason why the decision to carry out an investigation was regarded as extremely serious was because it could lead to the taxpayer's receiving an assessment which was little more than an educated guess or estimate of tax due, and then having to shoulder the onus of proving that the tax was not due: Nicholson v Morris. The latter case did not however vouch the proposition for which it was cited by the Revenue, namely that the Revenue did not require to consider the documents and information in its possession before taking a decision to investigate.

(c) The SCO investigation

[651] Counsel for the petitioners considered next the evidence bearing on the grounds of challenge to the SCO investigation. It was submitted that the evidence indicated that any professed motivation for investigating Mr Al Fayed's tax affairs was not credible. The Revenue had failed to adduce any credible or consistent explanation for embarking on the investigation complained of. It was to be inferred that its reason was an improper one.

[652] That the Revenue could give no lawful justification for the decision was supported by the lack of candour which had persisted throughout both the first judicial review proceedings and the present proceedings. Documents had been produced sporadically, including several that should have been produced in response to the order for the recovery of documents granted in the first judicial review. Documents had been redacted on a basis that could not be justified by the protection of taxpayer confidentiality. Affidavits produced by the Revenue in both proceedings were partial. Much oral evidence had been directed at showing that the Revenue's documents did not mean what they said: it was the Leitmotiv of the Revenue evidence that its documents did not mean what they appeared to mean on a plain reading. The pleadings gave no candid explanation for the decision, and did not present any clear or consistent position.

[653] Counsel submitted that in order to gauge the reasonableness of the decision, and its motivation, it was necessary to have regard to the background against which it was taken. The main elements of that background were the Revenue's knowledge of Mr Al Fayed's affairs between 1985 and 1997; the Revenue's policy on forward tax agreements; the role of the Board; and normal Revenue procedures.

[654] In relation to the first of these matters, the Revenue had extensive material dealing with the tax affairs of Mr Al Fayed and his family. Those files were readily accessible to Mr Whitehead and, following the transfer of much of the material to Edinburgh, to Mr McGuigan and Mr Carmichael. The material included bank statements which showed that remittances exceeding 1m per annum were being made to the Midland Bank around 1985, and a certificate from Banque Gonet that the remittances were from capital. It also included information that the House of Fraser group was being supported in 1990 by remittances of at least 30m per annum. It also included information that the cash payments with which the Downey Enquiry and the Hamilton trial were concerned were made out of withdrawals from the Midland Bank. The Revenue could not reasonably form the view that it was suspicious that Mr Al Fayed had access to large sums of money from the Midland Bank, since it knew very well that large sums of money were being paid into his account there. The Downey Report had been referred to the Revenue, and the proceedings before Sir Gordon Downey had been published in the early months of 1997, at the very time when Mr Whitehead was considering whether to renew the forward tax agreement. The evidence given in the Hamilton trial had not opened up some extraordinary mystery: if Mr Al Fayed was remitting 150,000 per month to the Midland Bank from capital in Switzerland for personal spending, there was nothing remarkable about his having "ready access to extremely large sums of cash" (quoting from the suspension letter). Although the information in the Revenue's possession concerning remittances related to the period pre-dating the 1997 agreement, so also did the evidence concerning cash payments which was given at the trial. The Revenue also had the DTI report, which contained information about overseas business activities of Mr Al Fayed. The Revenue also had the benefits reviews, which contained detailed information about a wide range of matters, including the benefits made available to Mr Al Fayed and his brothers.

[655] In relation to the second matter (the Revenue's policy on forward tax agreements), the evidence disclosed that over a number of years the Revenue had entered into forward tax agreements where this appeared to it, in the exercise of its management of inland revenue, to be appropriate. It was well understood that the problem which such agreements sought to address was one of identifying the character of remittances to the UK. With the approach of the self-assessment regime, policy on forward contracts was reviewed at Board level. Mr Matheson determined that such contracts should continue to be employed. He set out guidelines for future contracts. One issue was that no contract should run in perpetuity. Negotiation of the 1997 agreement followed shortly after this policy review had taken place and, counsel submitted, in line with that policy. None of the agreements entered into with the Revenue by Mr Al Fayed and his brothers and late son was capable of running in perpetuity: each was for a fixed maximum period. That was well understood by the Revenue, as the re-negotiation of agreements from time to time showed.

[656] In relation to the third matter (the role of the Board), the evidence disclosed that the Board did not become involved in routine operational matters. The conclusion or re-negotiation of forward tax agreements had, however, over the years involved members of the Board. In addition, it was the evidence of Mr Middleton that a decision to terminate the 1997 agreement would have been made at Board level or Director level. That evidence was significant, given the averment on behalf of the Revenue that "by 11 January 2000 the respondents wish to terminate the agreement" (see para.198).

[657] In relation to the fourth matter (normal Revenue procedures), the Revenue witnesses accepted that there was a normal procedure, both for reviews and for investigations. They accepted that there had to be tax at risk for an investigation to be launched; that an investigation would be preceded by a review; and that the purpose of the review would be to identify matters worthy of investigation. Various of the witnesses accepted that it would be irrational to proceed with the investigation of a taxpayer without first completing a review of his affairs.

[658] Against that background, counsel considered a number of matters in support of their submission that the decision to investigate was irrational and improper. The first concerned the date of the decision to investigate and the background to that decision.

[659] From the end of 1999 and beginning of 2000, SCO had been intent on removing the forward tax agreement because it was an impediment, not to a review, but to an all-out investigation of Mr Al Fayed's affairs; and it had adopted that position before it had carried out any review of Mr Al Fayed's affairs. The origin of the decision to investigate, and the way in which matters had developed, were clear from the evidence. By November 1999 there was some indication of expressions of concern about the tax affairs of Mr Al Fayed: some at Board level, and some at Director level. By the time of the meeting with Mr Williams on 12 November 1999, Mr Whitehead was recorded as talking about the Revenue wanting to withdraw from the agreement (see para.176). By 11 January 2000 Mr Whitehead was talking about an intention to withdraw from the agreement and to carry out an investigation. On the same date, Mr Whitehead was recording that his Deputy Director had agreed to his proposed course of action (see para.197).

[660] In connection with these points, counsel referred to Mr McGuigan's e-mail to Mr Middleton dated 18 October 1999 ("The aim was to bring the LBO on board in a joint review of Al Fayed and Harrods": see paras.169-170); to Mr Williams's note of his meeting with Mr Whitehead on 12 November 1999 ("They would like to withdraw from the agreement and the idea was then that the papers would be transferred to Edinburgh SCO to register"); and to Mr Carmichael's note of his conversation with Mr Whitehead on 11 January 2000 ("The intention was to withdraw from the agreement enabling the whole tax liability of Al Fayed and Harrods to be reviewed"). Even at that stage, the intention was to challenge the taxpayer. Counsel suggested that the desire to carry out an investigation, uninhibited by restraints imposed by the 1997 agreement, was the reason why the Revenue wished at that stage to rescind the agreement (prior to any suggestion that it might be ultra vires). Counsel next referred to the minute of the meeting on 11 February 2000. At the meeting Mr McGuigan was saying that the Board were very interested in the case and had articulated concerns. He was talking about a fundamental review or investigation of the Fayed family and anyone connected with them. It was unlikely that Mr McGuigan would have invented the remarks that the Board were very interested in the case and that Mr Matheson and Mr Bush had articulated concerns (see para.218). The implication of other remarks made by Mr McGuigan at the meeting (in particular, in paragraphs 21, 23, 25, 26, 31 and 32 of the minute) was that there was to be an investigation, and not simply a review, of Mr Al Fayed's affairs: an all-out investigation of Mr Al Fayed and anyone connected with him. The minute was strong evidence that a decision to launch an all-out investigation had been taken before 11 February. All that remained was to go through the various administrative procedures which were required before the investigation was formally registered. There was not yet a formal decision; but Mr McGuigan had determined that there was going to be an investigation of the Al Fayed family and anyone connected with them. That decision had been made without any review or determination of tax risk, and for reasons which were only partly explained.

[661] On 6 March Mr McGuigan e-mailed Mr Whitehead, reporting that Mr Carmichael was to make a start on the registration report. That supported the same conclusion. On 7 March Mr Whitehead suspended the agreement. The decision to suspend the agreement was taken before a review had been carried out. The suspension letter of 7 March was, as Mr Pegler said in his affidavit, a challenge to the taxpayer, which should not have been issued prior to the completion of a review and the registration of an investigation. The return of the cheque with the letter indicated that the Revenue did not accept that Mr Al Fayed and his brothers had adequately assessed and settled their tax liabilities for the year in question. The issue of that letter was inevitably linked to a decision to investigate the taxpayer's affairs. Mr Whitehead's e-mail to Mr McGuigan of 29 March indicated that the letter had been issued with the full knowledge and encouragement of the Director of SCO (see paras.207-208). There was no credible evidence to support the Revenue's submission that whatever happened prior to the papers being transferred to SCO Edinburgh could be dismissed as an irrelevant blind alley.

[662] The Revenue itself accepted in its pleadings that as from 30 March it was investigating Mr Al Fayed's tax affairs (see para.597). The reason put forward by the Revenue for the registration of the investigation - namely, the disclosure made by Mr Murray on 20 March 2000 - was not credible. The registration report did not mention that as the reason. The decision to investigate went back well before the disclosure on 20 March. The disclosure in any event impacted on the taxation affairs of persons other than Mr Al Fayed, and not on his own, since any tax liabilities would be those of the recipients of the payments, or possibly their employers. In relation to these points, counsel criticised the evidence of Mr McGuigan and Mr Carmichael, and noted the evidence concerning the meeting with Mr Pegler on 27 March 2000, Mr Carmichael's file note of 30 March, Mr Carmichael's "Thoughts for an Enquiry Plan" document of 19 May, and Mr Pegler's evidence on affidavit concerning the sending of the suspension letter and "first party contact".

[663] In relation to the registration report of 30 March, counsel submitted that Mr McGuigan was unable to give any coherent or believable explanation of what he had written in his Group Leader's comments. There was a concern, focused by Mr Pegler and Mr Murray, that the correct procedure had not been followed. The suspension letter was a challenge to the taxpayer. It was thought that the taxpayer ought to know that an investigation was under way. Mr McGuigan's "primary objective" was an all-out investigation. The uncertainty, reflected in his use of the word "perhaps", was as to whether the 1997 agreement could be removed. It was an impediment to the investigation, and the attempt to remove it (by the suspension letter) had been challenged by KPMG. Counsel observed that the Revenue's position - that the decision to investigate Mr Al Fayed was taken on 16 May 2000 - was not disclosed or reflected in its pleadings. The first indication given to the petitioners of this position was in the affidavits lodged towards the end of 2002. It was curious that none of the contemporary records touched on that alleged decision. There was no credible evidence to support the proposition that a separate decision-making process was carried out by Mr McGuigan on 16 May.

[664] Contrary to the Revenue's pleadings, there was no credible evidence that the decision to investigate had been taken after the Revenue had received legal advice and determined that the 1997 agreement was ultra vires. The true position was that the agreement had been seen as an impediment to an all-out investigation of Mr Al Fayed's affairs since the end of 1999. It was apparent from the note of Mr Carmichael's conversation with Ms McKenzie-Boyle on 14 March 2000 that, long before the idea of the agreement being unlawful had occurred to anyone within the Revenue, it was casting around for a reason to depart from the agreement. Far from the decision to carry out the fundamental investigation of the petitioners having its origin in a decision taken on 16 May 2000 by Mr McGuigan, it could be traced back to the end of 1999 and the beginning of 2000: no later than 6 March, when Mr McGuigan, following the meeting of 11 February, told Mr Whitehead that Mr Carmichael wished to make a start on the registration report. The Revenue had asserted, falsely, that the decision to investigate was made by Mr McGuigan on 16 May in order to provide it with a cloak of respectability and rationality.

[665] Counsel considered next the evidence concerning the review carried out by the Revenue into Mr Al Fayed's affairs. Mr McGuigan and Mr Whitehead had explained the need for a decision to investigate to be based on thorough research and consideration of the materials the Revenue possessed. In the present case, however, no research or consideration of that character had been carried out. On 16 March 2000 Mr Carmichael had carried out what he himself described as a superficial examination of the Revenue files and papers. He then read The Bodyguard's Story and made some notes on 30 March. The use which he had made of The Bodyguard's Story, identifying risks from such matters as the references to horses and to Mr Al Fayed running his empire from a tent, was bizarre. Nevertheless, The Bodyguard's Story was the only up-to-date material that had been considered. That was the extent of any review up to 30 March.

[666] Thereafter Mr Carmichael had read the transcript of the Hamilton trial and made some notes during the period from 4 to 27 April. He had become concerned that the Revenue might not have achieved a proper outcome from the 1990 forward tax agreement, in view of the evidence at the trial about the availability of large sums of cash in the 1980s. It was however difficult to understand why the availability of such sums should reflect adversely on the 1990 forward tax agreement, given that that agreement was not concerned with the quantum of remittances brought into the UK. Mr Carmichael also claimed to have read the SCO London papers more thoroughly at some point, but he had made no notes whatsoever. Given the scale of the documentation and the complexity of the issues, this was simply not credible. The explanation suggested by counsel for the Revenue - that the files were of only historical interest - was not canvassed with Mr Carmichael, and made little sense given the importance he attached to the trial transcript (which was concerned with events in the 1980s) and The Bodyguard's Story (which was concerned with events up to 1997). At the least, it was reasonable to infer that he could not have reviewed the documents in any detail. A rational decision-maker would have reviewed the files more carefully, and would also have studied other relevant files (e.g. those of the UK companies which submitted tax returns), and would have found more reliable information than one could hope to elicit from the material put to witnesses during a trial. Counsel founded on Mr Murray's evidence as to the level of engagement that one would expect to be involved in a proper review of a significantly wealthy taxpayer with complex affairs. The work done by Mr Carmichael did not come close to that level of detailed scrutiny.

[667] Even by 16 May 2000 there had been no proper review of the case or of the files available to SCO, and no rational discussion to carry out such an investigation could have been made. The documents which Mr Carmichael described as his risk assessment were prepared after that date. As at 16 May there was no enquiry plan and no risk assessment; nor was there any decision by Mr Matheson as to how the 1997 agreement should be dealt with. If the purpose of the risk assessment was to enable the group leader to decide whether it was appropriate to investigate a particular matter, balancing the cost and inconvenience of the investigation against the potential tax which might be collected, there was no document in which such an evaluation of the tax risk had been made. The issues which were relevant to such an assessment had not been addressed. Taking the evidence as a whole, it was apparent that the Revenue officials were not concerned to carry out what they themselves understood to constitute a review of the taxpayer's affairs before deciding to undertake a fundamental investigation of the petitioners. The only credible explanation for the Revenue's departure from the ordinary, and rational, approach of considering fully the taxpayer's affairs before launching an investigation was that the decision to investigate had already been taken.

[668] Counsel next considered the evidence bearing on the scope of the investigation intimated by the letter of 2 June 2000. The Revenue's departure from its ordinary procedures, and from rationality, was demonstrated by the decision to investigate the tax affairs of Ali and Salah Fayed, ostensibly as part of the investigation of Mr Al Fayed, without any review or registration report.

[669] There was a wider problem about the scope of the investigation. At some points in his evidence, Mr Carmichael appeared to suggest that his only interest was in Mr Al Fayed and those members of his family to whom the benefits legislation would apply by reason of their connection with him. The enquiry plan documents prepared by Mr Carmichael during May 2000 were however of a much broader scope, and went into detail about UK and overseas companies. A desire to investigate any person or entity with any connection to Mr Al Fayed and his family could be seen not only in those documents but also in the letters of 2 June 2000.

[670] In relation to the letter of 2 June 2000, the implication of the fifth paragraph ("The Revenue will also be looking...") was that the "review" of benefits and the section 9A notices were a self-contained matter: a check that benefits had been recharged in accordance with the 1997 agreement. It was in respect of that matter alone that the section 9A notices were served. That had been confirmed by Mr McGuigan at the meeting on 13 July 2000. The sixth paragraph of the letter ("Furthermore...") gave notice of a distinct investigation of the Fayed family position and that of any individual, companies or organisations connected to them. It addressed a separate and self-contained issue. That issue was said to have arisen in the light of matters raised in the Hamilton trial. The matter raised in the trial which the Revenue had regarded as important was the availability of cash to Mr Al Fayed. Numerous other matters had been canvassed in the course of the evidence in the present case, but that was the explanation which the Revenue had put forward at the time for its decision to investigate. It was not a good explanation. The evidence at the trial was that the cash was withdrawn from Mr Al Fayed's account at the Midland Bank. The Revenue had been aware of substantial remittances to that account from overseas. Moreover, in the third paragraph of the same letter ("In view of the history...") the Revenue had said that they were not going to re-open the question of tax on remittances for the period to 5 April 2000. Since they were not going to be issuing any fresh assessments on those remittances, they had no legitimate interest in knowing what the amount or character of those remittances might have been.

[671] Counsel for the Revenue were at pains to suggest that there was some unidentified investigation which had to be "scoped": that the letter of 2 June was merely a precursor to an investigation which was to be intimated at some later date. The Revenue's enquiries might alter as the investigation proceeded; and it would not be surprising if lines of enquiry were to be closed down in the light of information provided, if the investigation was of a comprehensive nature. But the scope of the investigation had been decided and intimated: the Revenue's pleadings and evidence proceeded on the basis that a decision had been taken and was intimated by the letter of 2 June. The Revenue was now attempting to confuse the scope of the investigation with the enquiries which it might pursue from time to time in the conduct of the investigation. There was no credible evidence to support the proposition that the letter of 2 June merely intimated an intention that there should be some unspecified form of investigation, the scope of which had yet to be determined.

[672] In relation to the overall fairness of the decision, counsel submitted that there had been a delay in advising KPMG about the investigation into Mr Al Fayed and issuing Code 8. No credible explanation had been given for the gap between 30 March and 2 June 2000. On many occasions before 2 June KPMG could have been informed. Even on 2 June, the Revenue's approach exhibited a lack of fairness. There had been no attempt to let Mr Murray know in advance of the meeting so that he could prepare himself for an occasion which amounted to first party contact with the Revenue.

[673] A general point made by counsel was that there were limits to the extent to which it was possible to achieve a rational analysis of the evidence concerning SCO's actions. That was largely attributable to the fact that this was not a rational decision-making process: one could not ascribe a rational analysis to an irrational process. The Revenue, and Mr McGuigan in particular, had not given a candid or honest account of the decision-making process. The court's task should not be as difficult as the Revenue had made it. It should not be difficult to discern the process by which the Revenue had arrived at the decision to investigate the Al Fayeds, if it had been a rational process which reflected the Revenue's practices and procedures and the statutory requirements.

[674] Generally, counsel submitted that there had been an abuse of power, in the sense that there had been conspicuous unfairness in the way in which the Revenue had treated the petitioners. Such conspicuous unfairness amounted to an abuse of power: Fleet Street Casuals; Ex parte Preston, per Lord Scarman; and Ex parte Unilever, per Simon Brown LJ. A consideration of the evidence indicated strongly that "something has gone wrong of a nature and degree that requires the intervention of the court" (adopting the words of Lord Donaldson of Lymington MR in R v Panel on Take-overs and Mergers, ex parte Guinness at page 160). Whether one construed that as a failure to respect the legitimate expectations of the taxpayers, or as conspicuous unfairness, or as abuse of power, the compelling conclusion was that something had gone wrong. The court should not stand aside and allow the Revenue to conduct itself in that manner with respect to these taxpayers. No one had suggested that the Revenue could not go back and make a rational decision, if the petition were to be granted.

 

(d) The LBO review

[675] Counsel submitted that the evidence was that the corporate petitioners were to be investigated in order to provide an "in" to Mr Al Fayed. This was an improper motive for subjecting companies to a tax investigation which not only involved inconvenience and expense but might also materially inhibit their commercial operations. The Revenue's pleadings gave no clear explanation for the investigation into the corporate petitioners. The terms of the enquiry letters indicated that the principal concern was to gather information about Mr Al Fayed and his family. Counsel referred in this connection, in particular, to the evidence of Mr Cawdron, to Mr Williams's letter dated 25 July 2000 headed "Harrods Group", and to Mr Williams's letter dated 15 September 2000 to Fulham Football Leisure Ltd. Some of the questions were directed at gathering information which bore upon Mr Al Fayed rather than the taxation position of the company in question. An example was the question concerning Fulham Football Leisure (BVI) Ltd in the letter of 15 September 2000. The same applied to the attempts to investigate The Ritz Hotel Ltd. In that connection, counsel referred to the evidence of Mr Murray.

[676] The Revenue's position on whether a risk assessment had been completed by LBO before 2 June 2000 was inconsistent. Its position ultimately appeared to be that a risk assessment of the Harrods group accounts to 31 January 1999 was under way, but had not been completed or written up, when the letters of 31 May and 2 June 2000 were issued. Indeed, the accounts for the holding company had yet to be reviewed at that time (see para.436). Nevertheless, a decision to investigate the companies had already been taken. No credible explanation for this, or for the supposed urgency of the letter of 31 May 2000, had been provided. Similarly, the letter to Fulham Football Leisure Ltd of 15 September 2000 had been sent before any risk assessment had been carried out (see paras.479-482): it was not until March 2001 that Mr Murrin reviewed the Fulham companies' accounts and prepared risk assessment notes.

[677] Given the background of a lack of concern about the tax affairs of these companies, the only credible explanation of enquiries of the scope intimated by the Revenue was its desire to use the corporate investigations as a means of investigating Mr Al Fayed. This accorded with the note of Mr Pegler's meeting with Mr McGuigan and Mr Carmichael on 18 April 2000, which referred to using the companies as an "in" to Mr Al Fayed.

[678] Counsel submitted that Mr Cawdron's evidence, that the Revenue's actions with respect to the companies amounted to an investigation, and that the practices applicable to investigations (including the issuing of a code of practice) ought therefore to have been followed, should be accepted. SCO and LBO were intending to conduct a co-ordinated investigation. LBO and SCO were both engaged in a single investigation. The Revenue's submission that LBO was not involved in an investigation was unfounded. It was a matter of admission by the Revenue, in Answer 2, that there was a single decision, which was intimated in part by LBO's letter of 31 May 2000 and in part by SCO's letters of 2 June 2000. That decision encompassed Mr Al Fayed, his family, and any entity connected with Mr Al Fayed or his family. It was apparent from the letters of 2 June that there was an investigation of the Fayed family and any entities connected with them. It so happened that LBO bore responsibility for certain of those entities, including the Harrods group of companies.

[679] It was not accepted that LBO was undertaking an exercise distinct from SCO, on the basis of a rolling risk assessment. What SCO and LBO were undertaking was a combined case-working exercise, and it was up to Mr Williams as "ringmaster" to ensure that all areas of risk were properly covered. There was a division of the workload, but there was a single combined exercise to be carried out jointly by a team made up of SCO personnel and LBO personnel, with one ringmaster, namely the case director in Glasgow LBO. That was apparent from the documents, including Mr Carmichael's enquiry plan and LBO's Plan 1 and Plan 2 documents. The demarcation of responsibilities between LBO and SCO did not correspond to the enquiries notified respectively by the LBO letter of 31 May 2000 and the SCO letters of 2 June 2000: much of the work envisaged in the SCO letters was to be carried out by LBO. LBO's role in the joint exercise went well beyond the "Permanent R" type of review: that was apparent, for example, from the Plan 2 document, and from the minute of the meeting on 7 June 2000. The notion that LBO was not involved in an investigation was virtually untenable.

[680] Whether the enquiries into the companies were categorised as an investigation or not, however, the primary complaint of the corporate petitioners was one of abuse of power, arising from the impropriety of the motive for carrying out these investigations, as opposed to the permanent review process of identifying issues for clarification on a year-by-year basis.

Breach of legitimate expectations

(a) General principles

[681] In addition to a breach of the Revenue's general duty of fairness, counsel for the petitioners submitted that there had also been a breach of the petitioners' legitimate expectations as to how their tax affairs would be dealt with. The Revenue disseminated widely its handbooks, its codes of practice and the Taxpayer's Charter, and published them on the internet. On grounds of good administration, a public authority such as the Revenue, which had promised to follow a certain procedure, should act fairly and do so: CCSU v Minister for the Civil Service [1985] AC 374; Attorney-General for Hong Kong v Ng Yuen Shin [1982] 2 AC 629, at page 638; R v Home Secretary, ex parte Ruddock [1987] 1 WLR 1482. The expectation in question fell into the category of a "procedural" legitimate expectation. It was for the court to decide whether what had happened was fair: Ex parte Coughlan; R v Devon County Council, ex parte Baker [1985] 1 All ER 73, at pages 88-89 per Simon Brown LJ; Fletcher v Thompson [2002] EWHC 1447, (2002) 74 TC 710, at paras.39-43 and 47-48. There was no need in the present kind of case for there to be detrimental reliance before the legitimate expectation could be relied upon: R v Falmouth and Truro Port Health Authority, ex parte South West Water Ltd [2000] 3 All ER 306, at page 319 per Simon Brown LJ.

[682] The petitioners had a legitimate expectation that the Revenue would act rationally when dealing with their tax affairs. They had a legitimate expectation that the Revenue would act in accordance with its own practices and procedures, unless there was an identifiable reason for not doing so; and no such reason had been identified in this case. They consequently had a legitimate expectation that the Revenue would carry out a proper review and identify a risk of tax loss before deciding to carry out a joint SCO/LBO investigation of the Al Fayed family and of any corporate entity, charity or trust connected with that family in any way.

(b) The SCO investigation

[683] The Investigation Handbook (particularly IH 1350) and Code 8 were relevant both to the question whether the Revenue had acted in breach of the petitioners' legitimate expectations, and to understanding how the Revenue would ordinarily conduct itself. The practice ordinarily followed by the Revenue with respect to the investigation of a taxpayer was clear and rational. The general procedure would appear to be as follows:

(1) You review the taxpayer's affairs. At that stage, a file needs to be opened, and a thorough review carried out.

(2) You assess whether there is a tax risk.

(3) You decide whether to investigate the tax risk. For that purpose, in SCO a registration report is made by the investigator, and a group leader then decides whether or not to approve the registration report and thereby authorise the investigation.

[684] In relation to the investigation of Mr Al Fayed, the evidence concerning the meeting on 11 February 2000 suggested that a decision had been taken by that date. In any event, it was clear that an investigation under Code 8 was progressing from 30 March 2000. As at either of those dates, the evidence indicated that the decision to launch an investigation was made without any proper review of the files; that it was made without identifying any tax risk or credible purpose to be served by the investigation; and that it involved a commitment to devote to the investigation "whatever resources are necessary" (as Mr McGuigan was recorded as having said at the meeting on 11 February), made by officers who had a minimal acquaintance with Mr Al Fayed's tax affairs. This involved a departure from the Taxpayer's Charter and Code 8. The Revenue did not seek to justify any such departure: on the contrary, they maintained that they had complied with what was stated in the Taxpayer's Charter and Code 8. The delay between the taking of the decision and the notification of it was a further departure from Code 8, on which the petitioners placed some weight as a matter of fairness.

[685] In relation to these matters, counsel referred in particular to Mr Pegler's evidence that proper procedures had not been followed, with which Mr McGuigan had agreed (see paras.310-311); to Mr Pegler's evidence that a code of practice could not rationally be selected without first carrying out a review; to Mr Middleton's evidence concerning the need for a review prior to deciding whether to investigate a taxpayer; and to Mr Murray's evidence that Code 8 and the Taxpayer's Charter had not been complied with. These matters were also relevant to the rationality of the decision to investigate, since the practice stated in Code 8 would, if followed, meet the legal need for a rational procedure leading to a reasonable decision.

(c) The LBO review

[686] In relation to the "investigation" of the corporate petitioners (as it was described), counsel submitted that the evidence indicated that a risk assessment was not carried out before the decision to investigate was taken, and that the decision was taken not because of concerns about the corporate petitioners' own tax affairs, but in order to obtain information about the personal affairs of Mr Al Fayed and his family. The normal procedures that had been followed by the Revenue over the years in relation to the corporate taxpayers, of making enquiries into discrete areas year by year, was discarded in favour of an all-out investigation. The scope of the exercise amounted to an investigation of each of the companies, such that a code of practice ought to have been issued to them. This involved a departure from the Taxpayer's Charter. Code 8 had not been complied with, primarily because no proper risk assessment was in place before the decision to investigate the corporate petitioners was taken. In this connection, counsel referred in particular to Mr Pegler's statement at his meeting with Mr McGuigan and Mr Carmichael on 18 April 2000, that the Revenue should "consider investigation of corporate entities and use that as an 'in' to [Mr Al Fayed]", and to Mr Cawdron's evidence that the scope of the enquiries amounted to an investigation of the various companies and that they should therefore have been issued with codes of practice.

Remedy

[687] Counsel invited the court to sustain the petitioners' first, second, third and fourth pleas-in-law (which seek reduction on the grounds, respectively, that the decision was made in pursuance of an ulterior motive or improper purpose. that it was in breach of legitimate expectations, that it had regard to irrelevant considerations, and that it was unreasonable), and to grant decree of reduction of the Revenue's decision intimated on 31 May and 2 June 2000 to carry out an in-depth review of the Harrods group and to review the Fayed family position and that of any individual, companies or organisations connected with them.

(2) The Revenue's submissions

Competency

[688] Counsel for the Revenue submitted that the petition was competent. The decisions which were challenged were not specifically based on any statutory provisions against which there was a right of challenge before the Special or General Commissioners. Even had there been such a statutory right of challenge, judicial review would still have been competent in exceptional circumstances. The challenges to the decisions included assertions that there had been an abuse of power and unreasonableness, which were special circumstances making judicial review appropriate: Ex parte Preston at pages 862-863, per Lord Templeman. The Special or General Commissioners could not entertain a challenge to a decision on grounds of administrative law: Aspin v Estill (1987) 60 TC 549 at pages 555-556 per Sir John Donaldson MR (as he then was); Guthrie v Twickenham Film Studios [2002] EWHC (Ch) 1936, (2002) 74 TC 733 at para.39. The fact that the parties considered that judicial review was the appropriate remedy was in itself a relevant factor: R v IRC, ex parte Caglar [1995] STC 741 at page 747. It was important that the parties were ready to deal with the issues now, and that the court's declining to exercise its supervisory jurisdiction would delay matters: ibid.

[689] The assertion that a decision to enquire could not (either relevantly, or competently) be challenged by judicial review had far-reaching implications for the Revenue and was not one that it would lightly make. It was not a point that it was taking in the present case. No plea to the competency was taken. The plea to the relevancy was not insisted upon. The Revenue did not seek to argue that the decisions under challenge were not amenable to judicial review solely because they were decisions which had no legal effect. If the only ground of challenge had been the allegedly unreasonable width of the enquiries, then a point of competency or relevancy would have been taken; but it was difficult to treat that as a separate point, since the width of the enquiries was founded on as evidence of an improper motive.

Unfairness, unreasonableness and improper purpose

(a) General principles

[690] Counsel submitted that the Revenue was a responsible body with a long established reputation for propriety towards taxpayers and candour towards the court. There was a presumption of regularity covering it, as covered other public bodies: Fleet Street Casuals at page 1013 per Lord Diplock; Ex parte Coombs & Co at page 302 per Lord Lowry. The onus was on the petitioners to show an improper motive or to demonstrate that there was no rational basis for a wide-ranging enquiry. The onus was on the petitioners to establish a legitimate expectation and a breach of that expectation. The court was invited to exercise caution before concluding that there had been a decision reached by early March or that there was a conspiracy going to the top of the Revenue. That involved branding the officials who had given evidence as liars.

[691] The decisions under challenge were rational. They were taken after the Revenue had taken legal advice and had determined that the 1997 agreement was ultra vires. Standing that determination, and the voluntary disclosure of Schedule E irregularities which appeared to extend over a large number of years, the Revenue properly considered how to carry out its function of collecting and causing to be collected every part of inland revenue, in accordance with section 13 of the 1890 Act. The Revenue had to make judgments as to the extent of the information that it could reasonably hope to obtain in its enquiries into the petitioners: Fleet Street Casuals. The court would only interfere if the Revenue had exercised its discretion unreasonably. The Revenue's judgment was not lightly cast aside: Ex parte MFK Underwriting Agents Ltd at page 1568 per Bingham LJ; Al Fayed v Advocate General for Scotland [2002] STC 910 at para.109.

(b) The statutory context

[692] Sections 9A and 29 of the 1970 Act did not provide the only justification for the making of enquiries. Enquiries might, for example, relate to persons who were not identified (cf. section 20(8A)); and the Revenue could ask questions even where it had received no tax return or accounts. Those points did not have any direct relevance to the issues between the parties in the present case; but they indicated that the petitioners' submission, that the power to make enquiries under section 1 of the 1890 Act could only be exercised for the purpose of exercising functions under sections 9A or 29 of the 1970 Act, was an incomplete statement of the position. There were, for example, circumstances (as when Mr Stribblehill made enquiries in 1984) where the Revenue might discover that a person was resident and had business interests in the UK, but have very little idea of the likely tax implications when it began its enquiries.

[693] The LBO letters of enquiry had been issued under section 1 of the 1890 Act. LBO's operations (prior to corporation tax self-assessment) were based on section 29 of the 1970 Act (in its pre self-assessment version), i.e. on the making of assessments. In relation to an "open year", it might issue an assessment on the basis of the accounts submitted, under section 29(1)(a); or it might issue an estimated assessment, under section 29(1)(b) (see para. 542). In the latter situation, the assessment would normally be appealed by the taxpayer company; and, in the event that an agreement was reached during the appeal, the assessment could be treated as upheld without variation, or as varied, or as discharged or cancelled, under section 54. LBO would also be able to make discovery assessments under section 29(3), although LBO's annual review procedure made it unlikely in practice that prior years would be "opened up". Since LBO was not an "investigation branch" of the Revenue, it did not collect tax without assessment. Back duty settlements, in particular, did not form part of LBO's practice. In relation to the submission that LBO's system of annual review made it unlikely in practice that prior years would be "opened up" under section 29(3), I note that some of Mr Williams's enquiries into the Fulham group concerned years in respect of which assessments had already been issued to some of the relevant companies (see para.479). The implications of that were not however explored in evidence or submissions; and it may be that the practice when LBO first takes over responsibility for a taxpayer's affairs is different from the practice once the annual cycle of reviews has become established. That evidence is not in any event inconsistent with counsel's submission.

(c) The SCO investigation

[694] Counsel began by making submissions of a general nature. It was important to recognise that the Revenue was not a monolith. Different Revenue offices had differing amounts of information available to them at different times. Within an office, different officials had different knowledge. LBO had a long-standing difficulty in obtaining information from SCO. Within SCO, Mr McGuigan did not know what Mr Whitehead knew. The comments recorded in the documents had to be seen against the background of the maker's knowledge at the time. In addition, the terminology used in documents might vary from office to office. For example, the term "investigation" might be used by SCO in a way in which it would not be used by LBO.

[695] It was also important to remember the passing of time. The circumstances in 1985 and 1990 were different from the circumstances in 2000. The Revenue's procedures had developed, with the introduction of the Taxpayer's Charter and the emergence of codes of practice. The Revenue had very little knowledge of Mr Al Fayed's financial circumstances in 2000. One reason for that was that LBO felt prevented by SCO's secrecy from making enquiries which in fact it could have made, had it known the terms of the 1997 agreement. For a number of years, LBO had not been looking at the interface between the close companies and their controllers, and SCO had merely been processing the contractual payments. The annual return revealed little about Mr Al Fayed's tax affairs. The Revenue did not have up-to-date evidence of the extent of his overseas interests. There was no evidence that he was continuing to remit large sums to the UK from overseas.

[696] In late 1999 and early 2000, there was an awakening of concern in the Revenue that things had not been properly handled. When the SCO decision to investigate was taken by Mr McGuigan, there was a need to regularise the exit from the 1997 agreement, and also to deal with the matter of domicile. There was an important issue as to the management and control of offshore companies. There was the review of benefits. SCO had an interest in the asset-owning or service companies. There was to be collaboration with LBO under co-ordinated case-working. The fact that the particular entities were close companies gave rise to concerns for tax inspectors. Those were background factors in the SCO decision.

[697] From the affidavits, the documents and the oral evidence it could be seen that the Revenue's decisions were properly based on specific areas of taxation. There were sound tax reasons for the issues which were being raised. Both SCO and LBO had assessed the tax risks. The evidence was that there was no political intervention. There was insufficient evidence to say that there had been Board involvement in 1985, 1990 or 1997. In 1999 and 2000, the only Board involvement had been in the termination of the 1997 agreement. Insofar as Mr Bush had shown an interest, his interest was peripheral. Mr McGuigan accepted that he had embellished matters, as regards the Board's interest, at the meeting on 11 February 2000. The only decision which went to Mr Matheson for approval on 17 May 2000 concerned the treatment of the 1997 agreement. All that Mr Matheson decided was that there would be a forward tax review, and that he was not standing in the way of his operational officers doing what they intended to do. He did not carry out any assessment of the relevant material: he merely ratified Mr McGuigan's decision.

[698] So far as complaint was made about the investigation of companies as part of the SCO investigation of Mr Al Fayed, those companies were not petitioners. Nor were Ali and Salah Fayed. The third parties about whom enquiries had been made, as part of the investigation of Mr Al Fayed, were not challenging those enquiries. Those enquiries could not therefore be taken into account in considering the Revenue's treatment of the petitioners.

[699] The suggestion of a lack of candour by the Revenue was denied. The first judicial review had been concerned with different issues: whether the 1997 agreement was ultra vires, and whether the decision to terminate it was fair. The affidavits produced for those proceedings had been concerned with those issues, and not with the investigation. The Revenue had taken pains to comply with its disclosure obligations under the specification of documents. The pleadings had not focused on the date of the decision as a major issue, and the Revenue had not been alerted to that issue as one of importance.

[700] In relation to the date of the decision to investigate, and the background to that decision, counsel submitted that the disclosure of Schedule E irregularities at the meeting on 20 March 2000 had led to the requirement that an investigation of Mr Al Fayed should be registered for internal management purposes. The decision to investigate Mr Al Fayed, beyond the Schedule E irregularities, was not taken until 16 May.

[701] SCO London had entered a blind alley. Mr Whitehead had been unaware, in late 1999 and early 2000, of the terms of the 1997 agreement. Confusion arose. The documents displayed Mr Whitehead's lack of knowledge. There was no decision taken to rescind the agreement. Mr Whitehead's wish to rescind the agreement was superseded by his discussions with Mr Hartlib, when the decision was taken to suspend the agreement. That decision was in turn superseded by the advice that the agreement was ultra vires. The suspension letter had been sent by Mr Whitehead. SCO Edinburgh had had no input into it, and had been unaware of its terms until after it was sent. There was no significant connection between the actions of SCO London and the decisions subsequently taken by SCO Edinburgh.

[702] When SCO Edinburgh discussed the case with Glasgow LBO on 11 February 2000, there was a lack of understanding of the factual position. At the meeting, SCO and LBO were discussing hypothetical situations. The comments which were recorded should not be taken as being statements of fact. By the date of the meeting, Mr McGuigan was aware from press coverage of the Hamilton trial that something appeared badly wrong. There was a high likelihood of some sort of investigation once that evidence was being reported in the public domain. The evidence in the present proceedings pointed strongly to there being a perception in SCO that this was a case which needed to be reviewed and which would lead to an investigation. Mr McGuigan had expressed his views quite trenchantly, using rather bullish expressions. He had reached a view by 11 February that an investigation was likely. He admitted that that view was not formed on a very informed basis. At the end of the day, however, he was not going to make a decision until there had had been a review. The evidence did not point to Mr McGuigan acting on the basis of a pre-judged decision, before the papers were seen. What had been said on 11 February did not taint everything that followed.

[703] The suspension letter of 7 March was a challenge to the taxpayer. The meeting on 20 March was first party contact. It was anomalous for these events to take place prior to the registration of an investigation. Following the meeting on 20 March, and the voluntary disclosure, the case required to be registered as an investigation. The investigation which was begun on 30 March 2000 and registered on that date was a Code 8 investigation. It was not however necessary to tell the taxpayer that he was under investigation, or to provide him with a copy of Code 8, until the first occasion when there was a meeting and substantive communication with the taxpayer. That took place on 2 June, at which point Code 8 was provided. There was no investigation by the Revenue between 30 March and 2 June.

[704] On 16 May Mr McGuigan decided that the more fundamental review could be carried out. That was the wider ranging investigation which was intimated on 2 June and was under challenge in these proceedings. The understanding of Mr McGuigan and Mr Carmichael was that the decision to investigate was taken on 16 May. There was also a decision to investigate which had been taken on 30 March. There was only one investigation, which was registered on 30 March.

[705] Insofar as I had some difficulty following these submissions, that may have been because they did not always distinguish clearly between the different senses in which the officials spoke of an "investigation": as an internal procedure (the registration of an investigation) designed to comply with management requirements, on the one hand, and as the action of investigating (an "active investigation"), on the other hand (see e.g. paras.588-589, 592, 595 and 597-598).

[706] Even if it had been taken for granted by Mr McGuigan at an earlier stage (for example, on 11 February, or on 6 March) that an investigation was to be undertaken, the decision was subsequently taken (on 16 May) in the light of a review. The assumptions which Mr McGuigan had earlier made turned out to be well-founded. There was technically an investigation as from 30 March, but the real investigation was not decided upon until months later. On 16 May there was the decision in principle to extend from the passive investigation of PAYE into a wider, active, investigation. On 17 May, there was the decision on the forward tax agreement. That was intimated to Mr Carmichael on 17 or 18 May, and on 19 May he started to draft an enquiry plan. Although the decision on 16 May pre-dated the drafting of the enquiry plan, the decision was not operative until it was intimated on 2 June. By the time the decision was taken on 16 May, the earlier confusions had been ironed out. The confusion of January and February 2000 did not taint the eventual decision.

[707] In relation to the review carried out, counsel submitted that an SCO review was carried out to assess the prospects of an investigation and of a back duty settlement. It was the task of the investigator carrying out the review to build up a robust case which merited the use of the Revenue's resources and justified taking up the taxpayer's time with questions. Code 8 required that SCO should review the papers it had and reach a reasonable view that there was a risk of tax loss before it initiated an investigation.

[708] It was acknowledged that it was possible that Mr Carmichael might have been able to discover which district offices dealt with the UK companies, to review the files, and to discuss their affairs with the inspectors involved; but it was submitted that these points had not been suggested to Mr Carmichael during his evidence.

[709] The importance of The Bodyguard's Story and the trial transcript was that they had not been created for the purpose of disclosure to the Revenue. Obtaining information about Mr Al Fayed's affairs in the investigations leading to the 1985 and 1990 agreements had been like drawing teeth. When the Revenue asked questions, the response was to offer money. Although the Hamilton trial had principally concerned events in the 1980s, it had also covered more recent events, and Mr Al Fayed had given evidence about his current business interests. The transcript gave rise to a reasonable concern that the Revenue did not understand the relationship between Mr Al Fayed and a network of companies around the world. The Bodyguard's Story indicated that offshore companies might be managed and controlled from the UK. The information in the transcript and in The Bodyguard's Story suggested that there was an issue of central management and control, which could have tax consequences for Mr Al Fayed and his family in relation to personal assets and services, and could also affect the UK and overseas companies within his control.

[710] The SCO London papers, on the other hand, were of considerable age. The last examination of Mr Al Fayed's affairs by the Revenue was that leading to the 1990 settlement. Other than the 1991 and 1996 benefits reviews, there was nothing more recent of any significance. There was no evidence that the London files contained information about which no reasonable inspector would have failed to make notes. The information that the Revenue required to act on was current information, not information about what had happened in the past. The fact that Mr Carmichael had made no notes of his reading of the SCO London files perhaps suggested that he was not interested in what the position had been in the 1980s. The judgment of an experienced inspector as to the relevance of material to his task was entitled to some deference. It had not been explored in evidence with Mr Carmichael whether he ought to have considered the older material helpful.

[711] In relation to the scope of the investigation, junior counsel submitted that the letter of 2 June was a precursor to active enquiries in an investigation: it began the process of scoping the enquiries. SCO was looking for information to provide an overview in general terms, in the light of which a decision would be taken as to more focused and more in-depth enquiries. The scope of the investigation was that stated in the letter of 2 June; but the extent of the enquiries, within the ambit of that general statement, was something yet to be determined. Some areas might be looked at thoroughly; others might be closed down. An investigation was something which developed over time.

[712] Senior counsel's submission, in relation to this point, was that what was being proposed was a comprehensive enquiry. That was what the letter of 2 June meant. Nothing relevant to the financial affairs of Mr Al Fayed and his family was out of bounds. There was a separate issue as to how the Revenue proposed to go about that enquiry. The list of family members, and of all the companies, charities and trusts associated with them, was requested as a precursor to specific enquiries. The list was a first step. What was being requested was an overview of what SCO were dealing with, so that it could identify matters which needed to be addressed. It did not follow, from the fact that nothing was out of bounds, that the Revenue was going to investigate everything in detail. What the Revenue was asking for, at that stage, was an understanding of how the various entities related to each other. It was not asking whether a particular transaction incurred a particular tax charge. It did not have an understanding of how this complex business empire worked.

[713] In relation to the extent of the enquiries, counsel submitted that the Revenue had the power, under section 20 of the 1970 Act, to require a taxpayer to produce a wide range of information and documents: R v IRC ex parte Ulster Bank Ltd (1997) 69 TC 211. The wording of the decisions under challenge was clear and was understood by those to whom the letters were addressed. The extent of the enquiries would be determined by the information which the Revenue might receive in response to the specific questions which it had posed. There was no case made on the basis that the response would be time-consuming or expensive.

[714] The Revenue had never checked the realities behind the Fayed brothers' interests in the UK, and in particular the provision of benefits to them by companies. The Revenue had never looked behind the benefits reviews. Although KPMG were a leading firm of tax advisers, it could not be taken for granted that everything was in order. There had been back duty settlements in 1985 and 1990. PAYE or Schedule E irregularities had been disclosed in 2000. SCO was looking into only one tax year, namely 1998/99. LBO was looking at the accounts for two years, namely 1998 and 1999. It was apparent from the enquiry plan and the meeting on 13 July 2000 that SCO's concerns were concentrated on benefits and offshore companies providing onshore services. So far as the Ritz was concerned, any agreement which was based on the facts in 1965 was outdated. It was therefore reasonable for the Revenue to ask for up-to-date information so as to determine the issue between the parties.

[715] SCO's practice was to set out at the beginning of the investigation all the issues which it wished to explore, then close down lines of enquiry if the information obtained from the taxpayer demonstrated that an issue did not in fact arise. That approach was in accordance with Code 8 (see para.602). In relation to the various statutory provisions to which reference had been made - concerning such matters as transfer pricing, distributions by close companies, charitable donations by close companies, loss relief and UK tax residence - the Revenue's position was that they might be of relevance, but first of all the Revenue had to know all the facts in order to see whether the provisions in question were applicable.

[716] The only purpose behind SCO's enquiries was to ascertain UK tax liabilities. That was plain from what had been said by Mr McGuigan and Mr Carmichael at the meetings on 2 June and 13 July 2000. It was evident that the Revenue was not interested, for example, in investigating offshore entities which could have no relevance to UK tax. Mr Carmichael had indicated at the meeting on 2 June 2000 (as recorded in paragraph 22(d) of Mr Thomson's note) that SCO wanted to identify the companies, individuals and organisations (including any charities and trusts) which might have a bearing on overall tax liabilities.

[717] The Revenue owed a duty to taxpayers not to overlook the risk of significant irregularities. The issues revealed by the trial transcript and The Bodyguard's Story created a real risk that Mr Al Fayed's business empire had a structure, through central management and control, which meant that there might be offshore entities which should be subject to UK tax, and that transactions between companies, and between companies and individuals, were either not being taxed at all or were not being taxed on a proper basis. There was therefore a need to get an overview of the Al Fayed business empire so that the proper basis of taxation of the family and the entities was identified. This made a broadly drawn enquiry appropriate. The fact that the boundaries of the enquiries were broadly drawn did not mean that the enquiries actually pursued would inevitably be onerous.

[718] In any event, counsel submitted, if the Revenue's concerns related to matters which the petitioners' advisers were satisfied could have no UK tax implications, then the petitioners did not need to answer those questions. The Revenue would then have to consider whether to exercise its coercive statutory powers.

(d) The LBO review

[719] Counsel said that the Revenue accepted that there was in substance a wide-ranging enquiry; but that was brought about by two decisions, one taken by Mr McGuigan and the other by Mr Williams. The background factors to LBO's decision to carry out an in-depth review were the 1998 review; the concern that some of the transfers into and out of the Harrods group did not seem to have any commercial basis; and a loss relief issue in relation to the Liberty group. By 30 May 2000 the 1999 review was under way. It was clear to Mr Williams that the risks and issues identified in the 1998 assessment remained. The 1999 assessment was subsequently committed to paper. The petitioners' submission that the LBO review formed part of the SCO investigation ignored LBO's long-term interest in addressing the interface between the Harrods companies and their controllers, reflected in Mr Williams's letter of 9 August 1999. SCO was entitled to take the view that it might gain insight into Mr Al Fayed's personal affairs from the information which LBO would obtain about the corporates. That did not mean that LBO was acting as the agent of SCO, carrying out enquiries as an "in" to Mr Al Fayed. LBO was not carrying out an investigation: it was asking for information during its review of the accounts. LBO's enquiries might be as extensive as an SCO investigation; but investigation was what SCO did, whereas LBO carried out reviews. The review was not categorised by the Revenue as an investigation.

[720] Under co-ordinated case-working, the activities of SCO and LBO remained distinct. The objective of co-ordination was merely to avoid the duplication of work, in the interests of customer service. The system might not be entirely rational, but that absence of rationality reflected the fact that co-ordinated case-working was still in the process of development.

[721] Mr Cawdron's affidavit did not express any specific criticism of the enquiry letters. It did not say that the enquiries had no tax rationale. Mr Murray, in his oral evidence, had expressed no criticism of LBO. All of the corporate petitioners, apart from The Ritz Hotel Ltd, were close companies. Given the legislation on close companies, a review of such a company required one to look at the relationship between the company and its participators, and associates of participators. The criticisms made of the Harrods and Fulham letters were therefore unfounded.

Breach of legitimate expectations

(a) General principles

[722] The principles of ultra vires and reasonableness defined the extent of the petitioners' entitlement to a remedy, unless the Revenue publications contained a representation or promise as to procedure which gave rise to a legitimate expectation which the law would protect. Such a legitimate expectation must be based on a clear and unambiguous promise or representation: Ex parte Coughlan at page 247; Ex parte MFK Underwriting Agents Ltd at page 1569 per Bingham LJ.

(b) The SCO investigation

[723] In carrying out a review in accordance with Code 8, SCO did not require to search through every document in the Revenue's possession which might relate to the affairs of Mr Al Fayed and any companies or other associated entities: Nicholson v Morris at page 280 per Walton J. Where Code 8 said that SCO would review information, that meant the information which was in SCO's possession concerning the tax affairs of the taxpayer under review. It did not require SCO to look at the files of associated entities. In accordance with Code 8, SCO had given notice in the letter of 2 June that it was investigating under the Code. It had given reasons for starting the investigation. It had sought everything it needed to know early in the investigation. There had been a review of the files relating to Mr Al Fayed and his brothers. There had been no breach of Code 8 or the Taxpayer's Charter when read in context. In any event, not every case in which the Revenue departed from a stated position would necessarily constitute an abuse of power: Ex parte Matrix Securities Ltd. The Investigation Handbook did not apply to SCO.

(c) The LBO review

[724] Code 8 could not apply to work done by LBO, even if work was allocated between SCO and LBO on the basis of the skills of individual officers, and even if LBO was passing on the results of its enquiries to SCO. The Investigation Handbook did not apply to LBO. The LBO Forum meeting was irrelevant, since the minute was not published until after 2 June 2000.

 

Remedy

[725] In relation to the remedy sought by the petitioners, junior counsel submitted that there was only one SCO investigation. There was no challenge to the SCO enquiry into the 1998/99 tax return. Similarly, there was no challenge to the review of benefits. There would have to be care taken if an order for reduction were granted in the terms sought by the petitioners, as it might have an impact on the section 9A enquiry and the benefits review. This submission appeared to me to illustrate the difficulty of drawing a clear distinction between the investigation and the review of benefits, and a lack of clarity in the Revenue's position as to the relationship between the investigation of Mr Al Fayed's affairs and section 9A of the 1970 Act. Senior counsel indicated that he would be making submissions in support of a suggestion that the case should be put out By Order for a discussion of the order to be pronounced (in the event that the petitioners were successful), because of the ramifications. In the event, no such submissions were made.

5. DISCUSSION

[726] Many of the issues raised in these proceedings are issues of fact. I have set out earlier in this Opinion my conclusions as to the facts, and I have endeavoured to explain my reasons for reaching those conclusions, and for rejecting the parties' submissions insofar as they invited me to arrive at different conclusions. In the light of my findings as to the facts, it is unnecessary for me to consider the submissions which were predicated upon different factual premises. It remains to consider how the relevant legal principles apply to the facts which I have found. I can do that relatively briefly, bearing in mind that I have already considered Mr Murray's criticisms of the width and imprecision of SCO's enquiries (at paras.411-421), Mr Cawdron's criticisms of LBO's enquiries (at paras.510-529), the argument that SCO failed to comply with Code 8 (at paras.587-598) and the Investigation Handbook (at para.607), and the argument that LBO failed to comply with Code 8 (at paras.583 and 639-641), the Investigation Handbook (at paras.608-619 and 638) and the procedures described in the minute of the Large Corporates Forum meeting (at paras.626-629). The remaining matters can be considered under the following headings:

(1) General Considerations

(2) Competency

(3) The grounds of judicial review

(4) The SCO investigation

The decision to investigate

The review

The scope of the investigation

Conclusion

(5) The LBO review

(6) Conclusion

General Considerations

[727] The ability of the Revenue to carry out effective investigation of suspected tax evasion or tax avoidance is a matter of public importance. The reasons were explained by the Keith Committee in paragraph 1.1.1 of their Report:

"Expenditure by the state, on matters intended to be for the benefit of the population as a whole, is financed principally out of taxation. Most of the population accept that this is desirable, and appreciate the benefits derived from it, though opinions differ about its appropriate scale... While the majority of taxpayers meet their obligations with fairly good grace, some do not. It is therefore necessary for the revenue gathering Departments to have an adequately equipped armoury of coercive powers to deal with the recalcitrant minority. There are two further reasons for this. The first is simply to secure that the revenue of the state is maintained at the level which Parliament has considered appropriate and has budgeted for. The second, and no less important, reason is to secure that the burden of taxation is evenly spread. If it is not, and some people are perceived to be escaping their obligations, great dissatisfaction is likely to be aroused among the majority of conscientious taxpayers. Further, more and more of them will be inclined to become less conscientious, and to join the ranks of the evaders. Thus the tax base yield will become progressively eroded. Enforcement powers are therefore necessary not only to coerce the dishonest and the neglectful, but to encourage the honest and conscientious".

As those observations indicate, the Committee's concern was principally with tax evasion; but the reasons given for effective investigation and enforcement are equally relevant to tax avoidance. The distinction was defined by the 1955 Royal Commission on the Taxation of Profits and Income (Final Report, 1955, Cmd 9474, para.1016) as follows:

"[Tax evasion] denotes all those activities which are responsible for a person not paying the tax that the existing law charges upon his income. Ex hypothesi he is in the wrong, though his wrong-doing may range from the making of a deliberately fraudulently return to a mere failure to make his return or to pay his tax at the proper time. By tax avoidance, on the other hand, is understood some act by which a person so arranges his affairs that he is liable to pay less tax than he would have paid but for the arrangement. Thus the situation which he brings about is one in which he is legally in the right, except so far as some special rule may be introduced that puts him in the wrong."

The relevance of this topic to investigation concerns in part the means by which the Revenue polices such special rules (such as, for example, the rules explained above concerning transactions between associated persons): there is no point in having such rules unless they can be policed. Avoidance is however by no means confined to attempts to prevent the taxpayer's falling within the scope of specific anti-avoidance rules. Since attempts may be made in a variety of ways to sidestep the basic tax provisions, investigation has to extend to any debatable area where an attempt has been made to avoid or reduce liability. As in respect of tax evasion, effective investigation of tax avoidance is essential in the public interest and to ensure fairness as between taxpayers.

[728] In the present case, for example, Mr Al Fayed works as a director of major companies, but does not appear to be paid a salary. He lives in expensive accommodation, but he does not appear to own or rent it. The flats in Park Lane, for example, belong to an offshore company, which rents them to a UK company, the rent being paid by another offshore company; and a broadly similar situation exists in relation to Barrow Green Court and Balnagown Castle. The private aircraft, the yachts, the horses, the domestic staff and other trappings of wealth are similarly provided by a variety of companies, most of which are located offshore, in such jurisdictions as Liechtenstein and Jersey. Similarly, although Mr Al Fayed described himself during the Hamilton trial as owning various businesses, that needs to be glossed. Insofar as the evidence discloses the ownership of companies associated with Mr Al Fayed, the share capital appears to belong (ultimately) to offshore partnerships or trusts, based in such jurisdictions as the British Virgin Islands and Bermuda. In the case of the Harrods group, for example, the accounts state that the ultimate parent undertaking is a partnership based in Bermuda, all interests in which are "under the control and held for the benefit of the Fayed family". In the case of the Fulham group, the accounts state that the parent undertaking is a company incorporated in the British Virgin Islands which is "under the control and held for the benefit of Mr Mohamed Al Fayed and his family". The precise arrangements involved (e.g. the details of beneficial ownership, and the role of trusts, agents, nominees or other companies) are unclear. The natural inference from the evidence, however, is that a great deal of effort and ingenuity has gone into creating networks of offshore companies, trusts and other entities in order to minimise liability to tax.

[729] In the face of such opaque and sophisticated arrangements, it is important that the Revenue should be able to ensure that UK tax liabilities are accurately assessed and accounted for. The ordinary taxpayer is entitled to expect that the Revenue will exercise its powers, when necessary, to obtain any information which it reasonably requires for that purpose. By the same token, a taxpayer who chooses to receive accommodation and other benefits not by paying for them directly, as the ordinary citizen would do, but through a complex structure of companies and other entities, cannot in principle complain if the Revenue's enquiries are more wide-ranging than those directed at the ordinary citizen. Equally, if a taxpayer chooses to have an interest in UK companies not through holding shares in those companies but through having some sort of interest in offshore entities which themselves have some sort of interest in the UK companies, it is unsurprising if the Revenue wishes to clarify the relationships involved insofar as they may be material to UK taxation. In short, the more complex the structure which the taxpayer chooses to put in place, the more difficult it may be for the Revenue to understand how the Taxes Acts should be applied, and the more extensive the enquiries which it may be necessary for it to make for that purpose.

[730] At the same time, the reduction of opportunities for successful concealment of facts relevant to tax liability is not the only objective of a system of investigation. As the Revenue has recognised in the various publications referred to in these proceedings, it is also important to avoid unfairness, unreasonableness or abuse in the exercise of powers to investigate the private affairs of individuals and companies. The prevention of abuse is not only an objective of departmental procedures: it is also secured through the possibility of external judicial supervision. As the Keith Committee stated (at para.1.5.1 of their Report):

"All enforcement procedures should be subject to ultimate judicial control both broadly and in matters of detail, and such control should be capable of being applied in a summary and expeditious way. This is the only reliable and satisfactory means of securing that the taxpayer is adequately safeguarded".

The Committee had statutory procedures primarily in mind; but it is clear (from the Fleet Street Casuals case and subsequent authorities) that the Revenue is also amenable to judicial review in a proper case.

Competency

[731] I am satisfied that it would be inappropriate for the court to refuse the present application for judicial review, ex proprio motu, as being incompetent. The parties' submissions on this matter were relatively brief, there being no dispute between them; and in the circumstances it would be inappropriate to enter into a more detailed discussion than is necessary. The relationship between the present proceedings and what might be described as alternative remedies is nevertheless a matter of some importance to the approach which the court should adopt, as explained below, and it might have been helpful if that issue had been considered more fully in the parties' submissions.

[732] So far as the competency of the proceedings is concerned, I should indicate briefly why my initial concern has been alleviated.

[733] It is common ground that the present proceedings concern the exercise by the Revenue of powers conferred by statute. The Revenue's exercise of those powers is challenged as being unlawful. Prima facie, an application to the supervisory jurisdiction of the Court of Session is competent in such circumstances. A question however arises from the nature of the powers in question: compliance with the Revenue's requests for information, as matters presently stand, is voluntary. In these circumstances, one possible ground of objection to the present proceedings might be that the actions which are challenged do not give rise to a real issue which the petitioners have a real interest to raise (cf. Clyde and Edwards, Judicial Review, pp.423-427). Another objection (which is in substance a different way of formulating the same point) might be that the present application for judicial review is premature.

[734] On the evidence, it appears that the Revenue's decision to undertake a SCO investigation is a matter of practical importance, even if enquiries are being made on an informal basis. Although co-operation with such enquiries is voluntary, the enquiries are made within a coercive framework, as explained above (at paras.570-572). The Revenue's practice of taking co-operation with such enquiries into account in exercising its discretion to mitigate penalties is also of some significance in this context (although the Revenue's decision as to how to exercise that discretion could itself be susceptible to judicial supervision).

[735] Nevertheless, although the petitioners do not have an alternative remedy available against an informal request for information, that is more a matter of form than of substance. If the petitioners decline to comply with the Revenue's requests for the voluntary production of information, the Revenue will have to invoke formal powers if it wishes to obtain the information in question (e.g. under sections 19A and 20 of the 1970 Act, or similar provisions of the Taxes Acts). The exercise of those powers would be subject to important procedural safeguards, provided by Parliament, which are designed to prevent unreasonable demands being made. The petitioners can thus avail themselves of such protection simply by declining to provide information voluntarily. It has also to be borne in mind that the effect of the court's refusing the present petition would not be to compel the petitioners to provide the information requested.

[736] Counsel for the petitioners invited the court to deal with the petition on the basis that, where it was arguable that a procedure was advancing on a false basis, it was better to decide the issue sooner rather than later. I infer that the court is being invited to proceed on the basis that its determination at this stage will be conclusive (at least in the absence of some compelling reason to the contrary) insofar as the same issues might otherwise have been raised by the petitioners at a later stage, for example in proceedings for judicial review of a formal notice under section 20 of the 1970 Act. I draw the same inference from the submission by counsel for the Revenue that the court should exercise its supervisory jurisdiction at the present stage, since its declining to do so would merely delay the resolution of the matters in dispute. The fact that the parties have invited the court to exercise its jurisdiction at this stage on the basis that the same issues will not then require to be determined, as between the same parties, in the event that coercive powers are exercised, is an important factor in my decision to treat the application as competent.

[737] The approach adopted by the parties, as described in the preceding paragraph, has implications for the relationship between the present proceedings and any subsequent proceedings arising from a decision to exercise compulsory powers to require the production of information. That is a matter which is relevant to the approach which the court should adopt to the exercise of its supervisory jurisdiction in the present proceedings. It is convenient to say something about that matter at the present stage.

[738] As explained above, if section 20 of the 1970 Act were to be invoked against any of the petitioners, the inspector would require first to satisfy a General or Special Commissioner that in all the circumstances he was justified in proceeding under section 20. That would require the Commissioner to be satisfied in relation to any first party notice, that the inspector was reasonably of the opinion that any documents to be called for contained, or might contain, information relevant to any tax liability to which the person in question might be subject, and that any particulars to be called for were reasonably required by the inspector as being relevant to any such liability. A similar requirement would apply, mutatis mutandis, in respect of any third party notice issued by the inspector under section 20 (see paras.563-566). The importance of the supervisory function of the Commissioner under section 20 is clear. In Ex parte Coombs & Co Lord Mackay of Clashfern LC said, at page 289:

"In enacting these provisions Parliament obviously placed great weight on the position of the independent commissioner and the need for the commissioner's consent. It is important that this be given full effect."

In the same case, at page 300, Lord Lowry described the Commissioner as

"... an independent person entrusted by Parliament with the duty of supervising the exercise of the intrusive power conferred by section 20 ..."

[739] The relevance of the function of the Commissioner to an application for judicial review in advance of the exercise of powers under section 20 was made clear in Ex parte Ulster Bank Ltd, in which judicial review was sought of a precursor notice (i.e. the notice given prior to the exercise of powers under section 20, in order to comply with the statutory condition precedent that a reasonable opportunity to provide the documents or particulars should first be given: see para.566). Morritt LJ (as he then was) said (at pages 226-227):

"In my view, it is, initially, for the Special Commissioner to consider whether the proposed notice is, in all the circumstances, justified. In doing so it is inevitable that he will consider the burden it may impose on the [applicant] against the assistance in the performance of its statutory duties it may provide for the Revenue. The Special Commissioner will have more information than we do as well as his specialist knowledge in this field. It would, in my view, be inconsistent with the statutory provisions and premature for the court in its discretion to make an order by way of judicial review before the consent of the Special Commissioner has been sought and obtained. This point is reinforced by the fact that the [applicant] will not produce the documents sought except pursuant to a notice to which the consent necessary to its legal efficacy has been given."

In the same case, Simon Brown LJ observed, at page 228:

" ... it is difficult to think that there could ever hereafter be a proper judicial review challenge to a precursor notice."

It appears that the Commissioner would not however be entitled to consider issues going beyond the matters entrusted to him by Parliament, such as whether the inspector was motivated by an ulterior purpose or was otherwise abusing his powers (see e.g. Aspin v Estill). It follows that, although it would not be appropriate for the court to intervene, on an application for judicial review, in respect of matters which Parliament had confided to the Commissioner, the court might nevertheless exercise its supervisory jurisdiction, without infringing that principle, provided it confined itself to issues which the Commissioner could not address.

[740] Similarly, if section 19A were to be invoked against Mr Al Fayed, he would be entitled to appeal to the General or Special Commissioners. They would then have to determine whether the production of the document, or the furnishing of the accounts or particulars, was reasonably required by the officer for the purpose of determining whether the self assessment return was incorrect or incomplete (see para.567). The Commissioners would not be entitled to consider wider issues, but such issues might, in principle, be raised in proceedings for judicial review.

[741] In the present proceedings, the parties have invited the court to decide issues concerned with the lawfulness of the decision to investigate - whether, in particular, it was taken unfairly, for an improper purpose, unreasonably, or in breach of legitimate expectations - in advance of the exercise of coercive powers such as those conferred by sections 19A and 20. They have done so on the basis that it is convenient to resolve those issues sooner rather than later, in order to avoid further delay and the possible incurring of unnecessary expenditure. The basis on which the court has been invited to entertain the present petition thus implies that its decision on the issues raised in these proceedings can be expected to be conclusive (in the absence of special circumstances). Insofar as the court requires to consider the reasonableness of the scope of the investigation, that issue is of a more general nature than the questions which might arise before the Commissioners at some point in the future as to the reasonableness of requiring the production of specified documents (or categories of document), accounts or particulars. Insofar as criticism has been expressed in these proceedings of the reasonableness of particular requests which have been made of Mr Al Fayed's advisers (e.g. for a family tree, or a list of companies, charities and trusts associated with the family), those requests have been expressed in general terms, reflecting (as discussed below) their voluntary nature and the stage of the investigation at which they were made. It appears to be unlikely that a formal notice under section 19A or section 20 would be framed as loosely, or would be issued in the same context, so far as relating (for example) to the Revenue's state of knowledge. The information requested by LBO has been more specific; but insofar as the LBO enquiries have been criticised in these proceedings, the criticism has focused on whether the enquiries in general were relevant to the tax liabilities of the companies to which they were addressed or of third parties, and on the relationship between the enquiries and the SCO investigation. The evidence and submissions have not addressed the issues which would arise if such enquiries were to be pursued by notices under section 20; and those issues would have to be considered in the context of the current state of any investigation and the Revenue's current state of knowledge. In these circumstances, the court can consider in these proceedings the reasonableness of the scope of the investigation, or of particular enquiries, without pre-empting any decision which might subsequently require to be taken by the Commissioners.

[742] The courts have observed that the Revenue's powers to require the production of documents and information under section 20 of the 1970 Act and similar provisions of the Taxes Acts place upon the Revenue "a heavy responsibility" (Ex parte Coombs & Co at page 289, per Lord Jauncey). As Megarry J (as he then was) observed in Royal Bank of Canada v IRC [1972] Ch 665, at page 677:

"[I]t seems to me that the wider the powers that Parliament confides to the commissioners, the more important it is that the commissioners should not exercise those powers in an unduly burdensome or oppressive way ..."

Those observations have been applied in subsequent cases concerned with section 20 and similar provisions (e.g. R v MacDonald, ex parte Hutchinson & Co Ltd (1998) 71 TC 1, 5; R v IRC, ex parte Mohammed [1999] STC 129, 131).

[743] The present context is different, in that the powers relied upon are not supported by penal sanctions, but depend upon voluntary co-operation, encouraged by the prospect of a mitigation of any penalties which would otherwise be payable in consequence of a culpable failure to pay tax timeously. The difference between the present context and one in which compulsory powers are being exercised is however diminished by the fact that both parties have invited the court to deal at the present stage with issues which could otherwise have been raised after the compulsory powers had been exercised. In particular, since the court is being requested to exercise at this stage its jurisdiction to determine whether the Revenue's decision to investigate is unfair or motivated by an improper purpose, or is otherwise an abuse of power, on the basis that it is in the interests of the parties that those issues should be determined sooner rather than later, it appears to me to follow that the court should be no less prepared to intervene if such an abuse of power is established, notwithstanding the fact that the powers which have been exercised are not of a coercive character.

[744] On the other hand, as explained above, the court is not being invited in the present proceedings to anticipate how the Revenue might attempt to exercise its coercive powers, under such provisions as sections 19A and 20 of the 1970 Act, or to prejudge how the Special or General Commissioners would determine the issues which might come before them in the event that those powers were to be exercised. The court cannot anticipate the specific documents or particulars which might be sought, or the arguments which might be presented to the Commissioners as to the reasonableness or otherwise of each request. Nor can the court anticipate the background circumstances (including the current state of the investigation, and of the inspector's knowledge) against which the Commissioners would require to reach a decision. Insofar as issues arise in the present proceedings as to the reasonableness of the requests which have been made on a voluntary basis (as distinct from issues as to the reasonableness, fairness and purpose of the decision challenged), it appears to me that the court must therefore take into account the non-compulsory nature of the requests and the stage in the investigation at which they have been made.

(3) The grounds of judicial review

[745] The grounds on which the conduct of the Revenue may be susceptible to judicial review have been considered many times. I shall confine myself to citation from a small number of leading cases.

[746] In the Fleet Street Casuals case, Lord Wilberforce said, at page 632, that from the authorities and from principle:

"a taxpayer would not be excluded from seeking judicial review if he could show that the revenue had either failed in its statutory duty toward him or had been guilty of some action which was an abuse of their powers or outside their powers altogether. Such a collateral attack - as contrasted with the direct appeal on law to the courts - would no doubt be rare, but the possibility certainly exists."

The remaining speeches were to the same effect. In the same case, Lord Scarman made observations as to the principle of fairness. In considering the statutory provisions applicable to the Board, his Lordship said, at page 651:

"They establish a complex of duties and discretionary powers imposed and conferred in the interest of good management upon those whose duty it is to collect the income tax. But I do not accept that the principle of fairness in dealing with the affairs of taxpayers is a mere matter of desirable policy or moral obligation. Nor do I accept that the duty to collect 'every part of inland revenue' is a duty owed exclusively to the Crown ... I am persuaded that the modern case law recognises a legal duty owed by the revenue to the general body of the taxpayers to treat taxpayers fairly; to use their discretionary powers so that, subject to the requirements of good management, discrimination between one group of taxpayers and another does not arise; to ensure that there are no favourites and no sacrificial victims."

He concluded, at page 652:

"I am, therefore, of the opinion that a legal duty of fairness is owed by the revenue to the general body of taxpayers."

[747] The leading case on the existence of the principle of fairness is Ex parte Preston. It concerned an allegation that the Revenue had gone back impermissibly on its promise not to reinvestigate certain aspects of an individual taxpayer's affairs. Lord Templeman, giving the single fully reasoned speech, said at page 862:

"Judicial review is available where a decision-making authority exceeds its powers, commits an error of law, commits a breach of natural justice, reaches a decision which no reasonable tribunal could have reached, or abuses its powers."

After reviewing the law in extenso, his Lordship concluded, at pages 866-867:

"In principle I see no reason why the [taxpayer] should not be entitled to judicial review of a decision taken by the commissioners if that decision is unfair to the [taxpayer] 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 [taxpayer] 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."

Lord Scarman, expressing his agreement, said at page 851:

"... I must make clear my view that the principle of fairness has an important place in the law of judicial review: and that in an appropriate case it is a ground upon which the court can intervene to quash a decision made by a public officer or authority in purported exercise of a power conferred by law."

Lord Scarman reiterated that a claim for judicial review may arise where the Revenue has failed to discharge its statutory duty to an individual or has abused its powers or acted outside them, and that "unfairness in the purported exercise of a power can be such that it is an abuse or excess of power".

[748] The principle of legitimate expectation provides another approach to determining whether there has been an abuse of power, which is appropriate to certain types of situation. It can operate as an aspect of rationality, or of fairness. The connection between legitimate expectations and fairness was made clear in Ex parte MFK Underwriting Agents Ltd, which concerned a claim that a change of practice by the Revenue was contrary to a legitimate expectation. Having made clear the need for certainty of representation before a legitimate expectation could exist, Bingham LJ continued at pages 1569-1570:

"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 fairness."

[749] An example of the application of the principle of fairness is Ex parte Unilever plc, where the court concluded that for the Revenue to enforce a time limit which for years it had not insisted upon would be so unfair as to amount to an abuse of power. Contrary to the tenor of some of the submissions made in the present case by counsel for the Revenue, the court did not defer to the Revenue's view of what was fair, or rest its decision upon irrationality. Sir Thomas Bingham MR said, at page 228:

"The categories of unfairness are not closed, and precedent should act as a guide not a cage. Each case must be judged on its own facts, bearing in mind the Revenue's unqualified acceptance of a duty to act fairly and in accordance with the highest public standards."

Simon Brown LJ said, at page 233:

" 'Unfairness amounting to an abuse of power' as envisaged in Preston and the other revenue cases is unlawful not because it involves conduct such as would offend some equivalent private law principle, not principally indeed because it breaches a legitimate expectation that some different substantive decision will be taken, but rather because it is illogical or immoral or both for a public authority to act with conspicuous unfairness and in that sense abuse its power."

His Lordship also observed, at page 234:

"Public authorities in general and taxing authorities in particular are required to act in a high-principled way, on occasions being subject to a stricter duty of fairness than would apply as between private citizens. This approach is exemplified in cases such as R v Tower Hamlets London BC, ex p Chetnik Developments Ltd [1988] AC 858 and Woolwich Equitable Building Society v IRC [1993] AC 70 and reflected in Lord Mustill's reference in Matrix-Securities to 'the spirit of fair dealing which should inspire the whole of public life'."

[750] It is however also important to bear in mind that, as was said by Elias J in the B Sky B case, at page 643:

"... the threshold of unfairness amounting to an abuse of power is a high one, and that the court must be careful not to interfere simply because a decision can be justifiably subject to some criticism."

That observation is amply vouched by the passages which his Lordship cited from Ex parte Preston and Ex parte Unilever plc. In the latter case, for example, Simon Brown LJ used the term "conspicuous unfairness" to describe the quality of the unfairness necessary to constitute an abuse of power, and drew a distinction between

"... on the one hand mere unfairness - conduct which may be characterised as 'a bit rich' but nevertheless understandable - and on the other hand a decision so outrageously unfair that it should not be allowed to stand."

[751] In the present proceedings, the petitioners have raised several grounds of review: unfairness, breach of legitimate expectations, improper purpose and irrationality (including the taking into account of irrelevant factors). In the circumstances of the present case, these grounds are closely inter-related, and are to some extent different ways of analysing the same issues. Rather than dealing with each ground separately, it is more appropriate in the circumstances to consider the Revenue's actions in the round, looking first at the SCO investigation and then at the LBO enquiries.

(4) The SCO investigation

[752] The parties' submissions about the SCO investigation focused on three topics: the decision to investigate, and in particular the date when it was taken; the adequacy of any review which was carried out prior to the decision; and the scope of the investigation. I shall consider each of these topics in turn.

[753] It is however appropriate at the outset to address the petitioners' complaint that the Revenue's conduct of these proceedings has been lacking in candour. As I have already mentioned, the present proceedings were brought on the basis of internal Revenue documents which had been produced in the first judicial review. Those documents might reasonably have given rise to an apprehension that Mr Al Fayed's affairs had not been dealt with in accordance with the Revenue's published statements of practice. In these circumstances, it appears to me to be unfortunate that the Revenue did not provide a clear account or explanation of their actions in their pleadings. In that regard, I would respectfully adopt the observations made by Lord Clyde in Blair v Lochaber District Council, 1995 SLT 407 (at page 408), and repeated in Clyde and Edwards, Judicial Review (at page 621), to the effect that answers to a petition for judicial review should normally give notice of the respondents' position and enable any factual issues which might exist between the parties to be identified. There are, of course, circumstances in which a respondent, and the Revenue in particular, cannot be expected to give such an explanation: the Rossminster case (R v IRC, ex parte Rossminster Ltd [1980] AC 952) and Ex parte Coombs & Co provide examples of such circumstances. It does not however appear that there was a major difficulty of that kind in the present case. Even when an explanation was finally provided, in the affidavits lodged shortly before the proof, certain of the affidavits gave rise to an understandable concern as to the credibility of the explanation offered: a concern which, in relation to certain aspects of the case, I have found to be justified. I have already noted my reservations about aspects of the evidence of two of the Revenue officials. The withholding of documents which might have dispelled reasonable concerns, until a late stage in the proceedings, has been a further unfortunate aspect of this case.

[754] The Revenue's reticence in providing documents appears to have been in part the result of a desire to observe its duty to protect the confidentiality of taxpayers who were not party to the proceedings; in part, the result of a desire to observe its duty of confidence towards persons who supply information to help it in tracing and charging undeclared sources of taxable income; and in part, the result of a belief that documents were privileged on a variety of grounds. At a late stage in the proceedings prior to the proof, and during the proof itself, however, it was recognised that some of those documents could and should be produced, if need be with the court's authorisation. The unfortunate consequence was the appearance of a trickle of material documents, some of which were produced only after their existence and potential significance had emerged during the evidence. Without entering into a detailed consideration of each document, it appears to me that the Revenue was excessively reticent. I do not however see any grounds to question the good faith of the officials involved, so far as that matter is concerned: their attitude towards confidentiality explains, even if it may not entirely justify, their reticence in relation to the production of documents. The Revenue's pleadings were equally reticent in explaining its position. The pleadings were, however, a matter for the judgment of counsel; and the court possessed, and exercised, the power to require further specification to be given in the form of affidavits.

[755] In view of the Revenue's reticence, however, and in view also of my reservations about the evidence of Mr McGuigan and Mr Carmichael, I should make it clear that I have considered the evidence with care, and that my decision is based on my assessment of the evidence.

The decision to investigate

[756] I shall begin by considering in chronological order the principal events relevant to the SCO decision to investigate. In relation to the period from August 1999 until the meeting on 11 February 2000, I have summarised above (at para. 213) my findings in fact. I do not accept the petitioners' interpretation of events during that period. In particular, I do not accept that a decision had been taken by SCO London, or by members of the Board, that Mr Al Fayed should be the subject of an investigation. Nor do I accept that the officials dealing with Mr Al Fayed's affairs during this period (or subsequently) were actuated by any improper motive, or were acting under pressure from the Board or from Ministers.

[757] In view of the seriousness of the suspicions which have been expressed, I should make it clear that my rejection of those suspicions is not based upon the presumption that "in the absence of any proof to the contrary, credit ought to be given to public officers, who have acted prima facie within the limits of their authority, for having done so with honesty and discretion" (Ex parte Coombs & Co at page 300, per Lord Lowry). Having heard the evidence, I am able to reach a conclusion without having to rely upon that presumption.

[758] I recognise that the petitioners' interpretation of events is supported to some extent by aspects of the evidence, and in particular by statements recorded in Revenue documents. I have concluded however that some of those statements (e.g. in Mr McGuigan's e-mail of 18 October 1999, and in Mr Williams's note of his meeting with Mr Whitehead on 12 November 1999) were incorrect, and that others, when placed in their context, do not bear the interpretation which the petitioners have placed upon them. My rejection of the petitioners' interpretation of events during this period is however based primarily on my acceptance of the evidence of the officials that there was no improper motive or pressure influencing their actions. In particular, as I have already indicated, Mr Whitehead impressed me as a witness of integrity. He was the official with direct responsibility for Mr Al Fayed's tax affairs during the period leading up to the issue of the suspension letter. I have no doubt that he was telling the truth when he gave evidence that he had not been instructed by anyone to rescind or suspend the 1997 agreement in order to enable the Revenue to investigate Mr Al Fayed, that his intention was to enable a review to take place, and that no instructions had been issued to him by the Board in relation to Mr Al Fayed (see paras.206 and 218). I conclude that the matters relied on by the petitioners as supporting their submissions are signs of a degree of muddle and other administrative shortcomings, but not of anything which would constitute an abuse of power.

[759] The first event of real significance, so far as the issues in this case are concerned, was the meeting on 11 February 2000. My findings of fact, in relation to that meeting, were set out above (at paras.214-246). For the reasons there explained, I do not accept the petitioners' interpretation of events, so far as it is based upon an acceptance that Mr McGuigan's statements at the meeting, to the effect that the Board were very interested in Mr Al Fayed's case and that it was politically sensitive, were true. I reject the petitioners' interpretation of events because I accept the evidence of Mr Whitehead that he was not aware of any interest on the part of the Board, or any decision by the Board or by officials to investigate Mr Al Fayed prior to the end of March 2000; the evidence of Mr Middleton that he did not recall any particular concerns on the part of the Board (other than, possibly, some comments about the Hamilton trial), and would have expected any such concerns to have been expressed to himself; and the evidence of Mr McGuigan that no-one had told him that the Board were very interested in the case, that no instructions had been given to him as to what he was to do, that he was unaware of any political intervention and that he had not acted for political reasons (see paras.218, 220 and 231). I accept counsel for the Revenue's submission that Mr McGuigan had "embellished" matters, and that there was no political intervention. A more difficult issue is raised by the petitioners' submission that what Mr McGuigan said at the meeting showed that he had decided by that stage that there was to be a comprehensive investigation, and that only the various administrative procedures required to be completed before that decision was formalised. Counsel for the Revenue offered two responses to that submission. One was that SCO and LBO were merely discussing hypothetical situations at the meeting. I do not accept that. The other was that Mr McGuigan had reached the view that an investigation was likely, and expressed his view "using rather bullish expressions" so as to persuade Mr Williams that SCO could be allowed to proceed without interference from LBO.

[760] As I have explained (at para.243), I am satisfied that Mr McGuigan did not take any irrevocable decision at the meeting on 11 February. On the other hand, his statements at the meeting (and his e-mail to Mr Whitehead of 6 March 2000) appear to me to demonstrate an intention to undertake a comprehensive investigation within the next few months, based on an assumption that such an investigation was appropriate.

[761] It appears to me that an experienced group leader, such as Mr McGuigan, might have had an expectation at the meeting on 11 February that the outcome of a review of Mr Al Fayed's affairs would be a decision to carry out some sort of investigation: such an expectation might have been formed (although Mr McGuigan did not say so in his evidence) in the light of the Press reporting of the Hamilton trial (which, so far as discussed in the evidence in these proceedings, had focused on cash payments to members of staff - precisely whose staff being unclear - and to Members of Parliament), and in the light of what the LBO officials had to say. Mr McGuigan's state of mind, so far as it can be assessed from what he said, appears to me however to have gone beyond a general expectation, and to have amounted to an intention: not only that there should be an investigation of Mr Al Fayed, but that it should be of a comprehensive character. It appears to me that Mr McGuigan did not have a reasonable basis for forming that intention at that time: as Mr Middleton and Mr Whitehead accepted, a conclusion as to the appropriateness and scope of an investigation could not reasonably be arrived at on the basis of the "very slight knowledge" (as Mr McGuigan described it) which Mr McGuigan then possessed of Mr Al Fayed's tax affairs.

[762] Since the decision to investigate was not taken until a later date, Mr McGuigan's state of mind at the time of the meeting does not necessarily vitiate what followed: what is important is whether the subsequent decision to investigate was taken fairly and reasonably and in accordance with any legitimate expectations. Mr McGuigan's statements at the meeting however make it necessary to examine subsequent events with care. That is in part because they give rise to a concern that the eventual decision might be in substance a formality which had been pre-judged, rather than a decision genuinely based on a review of the relevant material in accordance with normal practice. In addition, Mr McGuigan's statements at the meeting (not only about the anticipated investigation, but also about the Board's interest in the case and its political sensitivity) give rise to a concern that Mr Al Fayed might be treated otherwise than in accordance with the undertaking in the Taxpayer's Charter to treat everyone impartially and with equal fairness.

[763] The next important event was the sending of the suspension letter on 7 March 2000. It appears to me that this was a misjudgment: as explained above (at para.257), there was no legal or factual justification at the time for the "suspension" of the 1997 agreement. The sending of the suspension letter however set in train the subsequent sequence of events. It resulted, first, in the threat of judicial review. In order to counter that threat, legal advice was sought, initially from the Solicitor's Office and subsequently from counsel; and the actions of the SCO officials until the middle of May were taken in response to the advice they were receiving. Initially, on the basis of the advice given by the Solicitor's Office, SCO Edinburgh embarked on a search for material which would demonstrate that the Revenue had entered into the 1997 agreement as a result of mistake or misrepresentation, and was therefore entitled to resile from it: that, rather than an evaluation of the tax risks currently arising from Mr Al Fayed's tax affairs, appears to have become for a time the focus of Mr Carmichael's work. Since judicial review proceedings were subject to a relatively brief time limit (i.e. the three month period applicable in England and Wales), KPMG pressed the Revenue to clarify its position in respect of the suspension letter and the 1997 agreement within a short period. SCO repeatedly temporised, while legal advice was obtained and its implications were considered; and, ultimately, in response to a letter before action, it issued the letters of 2 June. Moreover, although the suspension letter did not directly affect LBO, it was SCO's decision to issue the letters of 2 June that made it necessary, because of the combined nature of the exercise involved, for LBO to issue its letter of 31 May.

[764] Perhaps most importantly, it was the sending of the suspension letter which caused Mr McGuigan to authorise the registration of an investigation on 30 March 2000, in circumstances which involved a departure from SCO's usual procedures. In fairness to Mr McGuigan, however, it was because the sending of the suspension letter was itself considered to be contrary to SCO's usual procedures that such authorisation was regarded as necessary. It is common ground between the parties that the suspension letter was a "challenge" to the taxpayer and "first party contact". It should not therefore have been issued, in conformity with SCO's usual procedures, since SCO London had not carried out a review or registered an investigation. Given the anomalous nature of the agreement, however, and the practical difficulties which resulted from the receipt of the cheque for 240,000 at a time when SCO London was concerned about Mr Al Fayed's affairs in the light of the reporting of the Hamilton trial (albeit its concerns were somewhat unfocused, and their relevance to the agreement had not been analysed), a departure from ordinary procedures is not altogether surprising. When Mr McGuigan and Mr Pegler became aware of the implications of the suspension letter, they considered it necessary that an investigation should be registered on the computer system without further delay, for the purposes of internal audit and management. The disclosure of PAYE and Schedule E irregularities on 20 March was an additional reason for registering an investigation; but the areas of interest which were registered went beyond the issue of PAYE compliance. The decision to register an investigation on 30 March was therefore unusual in a number of related respects. Most importantly, no decision had been taken at that point to undertake an investigation: in other words, to make enquiries of the taxpayer or of third parties. That being the case, it is unsurprising that the decision to register an investigation was not based on a review of the kind which would have preceded a decision to undertake an investigation. It is equally unsurprising that the decision was not followed by the opening of an investigation: in other words, by a meeting with the taxpayer's advisers and the issue of a code of practice, as would have happened if a decision had been taken to undertake an investigation. SCO did not want to have any meeting with KPMG until it had decided what its position was to be in relation to the 1997 agreement, the suspension letter, and the threat of judicial review.

[765] Considering more fully the decision to register an investigation which was taken on 30 March 2000, it follows from my findings in fact (at para.314) that I do not accept counsel for the Revenue's submissions insofar as they proceed on the basis that that decision was merely the consequence of the disclosure made on 20 March. At the same time, I do not accept that a comprehensive investigation of Mr Al Fayed's affairs began, or was authorised, on 30 March. The decision taken by Mr McGuigan that day was of an exceptional nature, in the context of SCO practice. It is not altogether easy to understand what was intended, partly because of the apparent confusion as to what (if anything) had been said about the amount of PAYE under-accounted for, and whether or not any disclosure report had been instructed; partly because of the apparent muddle on Mr Carmichael's part in listing the areas of interest to be investigated; and partly because Mr McGuigan's evidence about the decision was, in my opinion, a rationalisation of the decision ex post facto, rather than a reliable explanation of how matters were perceived at the time. It appears to me, however (as explained above at paras.308-315), that the principal reason why Mr McGuigan authorised the registration of an investigation on that date, rather than waiting until Mr Al Fayed's tax affairs had been reviewed in accordance with normal practice, and rather than waiting also until legal advice had been obtained and considered, was in order to comply with internal Revenue requirements of audit and management in the circumstances resulting from the issue of the suspension letter. Mr McGuigan and Mr Pegler considered that the case ought already to have been registered as an investigation before the letter had been issued; and any further discussion by SCO officers with Mr Al Fayed's advisers, following the issue of the suspension letter, necessitated the registration of the case as an investigation on the SCO computer system, since the context of such discussions involved the possibility of a tax settlement. For that purpose, it was also necessary that the areas of interest identified in the report should reflect the issues arising from the suspension letter; and, whether by accident or design, the areas of interest identified were wide enough to fulfil that purpose. Mr McGuigan thus approved an investigation report which was in sufficiently broad terms to enable a wide-ranging investigation to be carried out; but Mr McGuigan had no intention at that point that such an investigation - or, indeed, any investigation at all - should be conducted, pending clarification of the effect of the 1997 agreement and of the Revenue's legal position. The terms of the report were consistent with Mr McGuigan's description of a comprehensive investigation as his primary objective; but whether that objective was open to SCO, prior to the expiry of the 1997 agreement, was uncertain on 30 March.

[766] There were thus a number of respects in which the decision taken on 30 March departed from SCO's usual practice. First, approval was given to the registration of an investigation of areas going beyond a disclosed irregularity, without a review having been carried out. Secondly, the registration of the investigation was not followed by the "opening" of an investigation: that is to say, notification to the taxpayer that he was the subject of an investigation, the issue to the taxpayer of a code of practice, and the initiation of enquiries. Thirdly, the purpose of registering the investigation on that date was to regularise the position resulting from the issue of the suspension letter, in compliance with the Revenue's internal management systems: it was not intended at that point that enquiries should be made as a consequence of the registration.

[767] These three aspects of the decision taken on 30 March are closely inter-related. They are all consequences of the issue of the suspension letter; and they all have at their heart the distinction, discussed earlier (at paras.588, 592, 595-598 and 631) between the registration of an investigation on the computer system, as an internal act of administration, and the undertaking or "opening" of an investigation in the ordinary sense of the word, as a procedure involving the making of first or third party enquiries.

[768] In the circumstances of the present case, it is not difficult to understand why the issue of the suspension letter was thought to necessitate the registration of an investigation, for the purpose of complying with the Revenue's internal procedures of audit and management , without any review having been carried out and without there being at that stage any decision to open an investigation. The decision to register an investigation for that limited purpose was not an abuse of power: when its limited significance is understood, it is apparent that it did not affect the interests of the petitioners. Nor was it a breach of the petitioners' legitimate expectations. For the reasons explained above (at paras.592 and 597), it appears to me that Code 8 (and, for that matter, the Investigation Handbook, although the latter does not appear to me to be relevant to SCO, or to have been understood by the petitioners' advisers to apply to SCO) is concerned with "investigations" in the ordinary sense of the word: the making of enquiries about a taxpayer's affairs, either of the taxpayer directly or of third parties. It is not concerned with procedures which are purely internal to the Revenue. It was not until SCO decided to make such enquires that Code 8 became relevant, and entitled the petitioners to expect that SCO would have carried out a review and would have notified them promptly of their decision. That stage was not, however, reached on 30 March.

[769] Considering the decision taken on 30 March in relation to the statements made by Mr McGuigan at the meeting on 11 February, there does not appear to me to be any significant connection between them. The plans which Mr McGuigan had made at the meeting had been disrupted by the discovery that the 1997 agreement still had some years to run. The immediate problem that had to be addressed was the threat of judicial review of the suspension letter. The question that had to be answered was whether the Revenue was bound to adhere to the 1997 agreement or was entitled to resile from it. Mr McGuigan's description of a fundamental challenge to Mr Al Fayed's personal tax affairs as the "primary objective" however indicates the same attitude as the statements about an investigation which he had made at the meeting on 11 February, and is open to the same criticism: without a review of Mr Al Fayed's affairs, it was (as Mr Middleton acknowledged) too early for a reasonable conclusion to be reached as to the scope of an investigation.

[770] Considering next the decision taken on 16 May, it follows from my findings in fact (at paras.359-362) that I reject the submissions made by counsel for the petitioners to the effect that the decision to carry out a comprehensive investigation was taken prior to that date. Although the case had been converted into an investigation on SCO's computer system on 30 March, for internal purposes, no decision was taken to "investigate", in other words to make enquiries, until 16 May. The principal question which arises in relation to the decision on 16 May, as it appears to me, is whether it was in reality the result of considering the matters disclosed by the review, or was merely the formalising of a decision which had been a foregone conclusion since 30 March, or indeed 11 February. Since that question is linked to the issue concerning the quality of the review, it is best addressed once that issue has been considered; and it is to that issue that I turn next.

The review

[771] As counsel for the petitioners submitted, Mr Carmichael does not appear to have considered, as part of the review, a variety of documents in the Revenue's possession which could be expected to contain material which might be of relevance to the tax affairs of Mr Al Fayed, his family and associated companies. Examples would include the FICO papers concerned with Ali Fayed's claims for the reimbursement of tax credits on dividends paid by the Harrods group (see paras.120 and 138); the Downey report (see paras.107-119); and the district files of the UK companies which made tax returns (with the possible exception of Hyde Park Residence Ltd: see para.267). I also accept that Mr Carmichael's consideration of the SCO London papers does not appear to have involved a detailed analysis (see para.440). I also accept that one of the inferences which Mr Carmichael drew from The Bodyguard's Story - that offshore companies might be controlled from the UK - appears to have owed more to his own suspicions than to the book itself (see paras.289-290). Since Mr McGuigan based his decision partly on Mr Carmichael's reports, supplemented by his own reading of some of the SCO London papers and of the extracts selected by Mr Carmichael from the Hamilton trial transcript, these are matters which have to be taken into account when considering Mr McGuigan's decision.

[772] I also accept that Mr Carmichael had not, as at 16 May, presented Mr McGuigan with a risk assessment in which an attempt was made to quantify the amount of tax which might be at risk (other than in respect of PAYE, in relation to which Mr Carmichael appears to me to have proceeded on a mistaken recollection of what had been said at the meeting on 20 March: see paras.276 and 296), or to evaluate the level of risk: for example, by putting a percentage figure on the probability that offshore companies were controlled from the UK, or by quantifying the amount of expenditure which might have been wrongly deducted in computing the taxable profits of UK companies as a consequence of transfer pricing.

[773] It is however important to remember that the review is a practical exercise designed to serve a practical purpose: it is not a piece of academic research; nor is the investigator sitting an examination. The purpose of the review is to enable a rational decision to be taken by the group leader as to whether the Revenue is justified in using its resources (and taking up the taxpayer's resources) on an investigation. The nature of the research and assessment of risk which require to be done for that purpose will depend on the circumstances and vary from one case to another. These are matters on which judgment has to be exercised by the investigator and the group leader, and that judgment will reflect their skills and experience. The fact that certain material might (or would) be relevant to the tax affairs of the taxpayer in question does not mean that it must form part of such a review, since the function of the review does not entail that it must involve a comprehensive consideration of all relevant or potentially relevant material. An analogy might be drawn with a decision by the Crown whether to prosecute a suspect for an offence, on the basis of a report submitted by the police. If the police have an eye-witness identification of the suspect as the person who robbed a shop, and the suspect was apprehended near the shop soon after the robbery with the stolen property in his possession, then the police and the prosecutor may well consider that that is a sufficient basis for a decision to be taken, without troubling to investigate fingerprints or other forensic material found at the scene. Whether a review is adequate to serve its purpose depends on whether it provides a proper basis for a fair and rational decision to be taken. In particular, whether the extent of the review has been sufficient to enable a rational decision to be taken is (in the first instance) a matter for the judgment of the decision-maker. In exercising its supervisory jurisdiction, the court does not substitute its own judgment on that question, but checks whether the review could reasonably have been considered to be sufficient.

[774] Similarly, the fact that in the course of the review an inference has been drawn on an issue of fact which is not supported by one of the sources on which it is based does not necessarily vitiate a decision to investigate which has been founded on the review (any more than a decision to prosecute would necessarily be vitiated by a factual error in the report submitted by the police). Whether the decision was vitiated would depend on the materiality of the mistake in its context (cf. Edwards v Bairstow [1956] AC 14).

[775] The adequacy of an assessment of risk is similarly a matter of judgment, exercised in the specific context of a particular case. When the investigator is considering a taxpayer and associated entities about whom little is known, he cannot be expected to identify, let alone quantify, potential tax risks with any degree of particularity.

[776] In the circumstances of the present case, it appears to me that Mr McGuigan could reasonably form the view by 16 May 2000 that the material before him was sufficient to enable him to take a decision whether to authorise a comprehensive investigation.

[777] First, he had received Mr Carmichael's reports on the SCO London papers, and had himself reviewed some of those papers. They disclosed that the Revenue's previous enquiries into Mr Al Fayed's affairs had revealed repeated failures to pay the tax which was properly due (despite access to tax advice of the highest quality), resulting in back duty settlements covering the period from 1973 to 1990 and amounting to 31m (see paras.35 and 54). The London papers also disclosed that no enquiry had been made into Mr Al Fayed's affairs, and no significant information provided about them (other than in the benefit reviews, which had never been checked or tested, and in the returns, completed "as per the agreement": see paras.102 and 120), since 1990. These matters were apparent without a detailed analysis of the papers.

[778] Secondly, Mr McGuigan had received Mr Carmichael's reports on The Bodyguard's Story. Whatever its literary merit, the book suggested (as Mr Carmichael noted) that Mr Al Fayed's way of life involved a number of potential tax risks, for example in respect of cash payments to staff, and in respect of the provision of goods and services to Mr Al Fayed and his family by associated companies (see paras.284-288).

[779] Thirdly, Mr McGuigan had read the passages which Mr Carmichael had excerpted from the transcript of the Hamilton trial (see para.336). As he noted, they revealed the habitual use of cash in transactions, with a consequent risk that matters might not be fully recorded. The way in which Mr Al Fayed spoke about offshore companies, and the impression of his personality which was conveyed by the transcript (and the book), suggested that it was possible that such companies might be centrally managed and controlled from the UK, and therefore tax resident in the UK: something which could have important tax consequences in respect of their own tax liabilities and also in respect of the tax treatment of their transactions with Mr Al Fayed (or members of his family) and associated companies. The transcript also disclosed evidence of regular cash payments to members of staff; and Mr McGuigan knew that KPMG had already acknowledged that there might have been underpayments of tax by the individuals involved or by their employer, for which Mr Al Fayed was accepting responsibility, and which could be quantified only on a "broad brush" basis. The transcript also revealed other potential tax risks which Mr McGuigan identified (see paras.337-342).

[780] It appears to me to be impossible to maintain that this material (which I have merely summarised) could not reasonably be regarded as sufficient to enable a decision to be taken as to whether to authorise a comprehensive investigation of Mr Al Fayed's affairs. It is not evident that any rational review would have to involve a consideration of the other material to which counsel for the petitioners referred, in addition to the material which was in fact considered. The question whether it was appropriate to take a decision without a consideration of such other material was not explored in evidence either with Mr McGuigan or with Mr Carmichael. They were not asked to consider the significance which any other material might have had. Nor were they asked to consider whether, if any particular aspect of the review was open to criticism, that would affect the review or the decision in any significant respect. It is not evident, for example, that the weight placed by Mr Carmichael on the statement in The Bodyguard's Story that Mr Al Fayed ran his "empire" from a tent was of any real significance to Mr McGuigan's decision, given that Mr McGuigan cited other material (in the trial transcript) as supporting his view that it was appropriate to enquire into the question whether offshore companies were tax resident in the UK (see para.340).

[781] In relation to the issue of risk assessment, it appears to me that the absence of a detailed or quantified evaluation of the amount of tax at risk or the level of risk cannot be regarded as unreasonable in the unusual circumstances of this case. It was known that large dividends had been generated by the Harrods group and paid to an offshore entity: that had been mentioned at the meeting on 11 February. It was known that Mr Al Fayed and his family were receiving benefits requiring a high level of expenditure by the companies involved. Much of that expenditure involved offshore companies, and was said to be reimbursed offshore. It was apparent that there must be a great deal of money circulating around the network of companies, trusts and other entities. Arrangements of this kind had been in place for many years. There were issues concerning the deductibility of expenditure in computing liability to corporation tax, and about the use of cash in transactions (with a consequent risk of inadequate record-keeping), which again appeared to be of long standing. Depending on the outcome of enquiries (e.g. into the tax residence of offshore trusts and companies), there would appear to be a possibility that large amounts of tax might be involved; but it would not be possible, in advance of enquiries being made, to be specific as to the prospects that an investigation might be successful, or as to the potential tax consequences in the event of such success.

[782] Returning to the question of the relationship between the decision to investigate which was taken on 16 May and the desire to investigate (at some point in the future) which was apparent on 11 February and on 30 March, the issue which requires to be considered, as it appears to me, is whether the decision was taken fairly and reasonably on the basis of a genuine consideration of the material produced during the review of Mr Al Fayed's affairs.

[783] On the evidence, it is clear that Mr Carmichael carried out a review of material relevant to Mr Al Fayed's tax affairs for the purpose of considering the nature and extent of any tax risks. I accept Mr McGuigan's evidence that he received and considered Mr Carmichael's notes on the trial transcript and some of the SCO London papers, and that he also gave consideration to the oral reports which he received concerning the London papers and The Bodyguard's Story (see para.335). I accept his evidence that he concluded, from his review of this material, that there were four broad areas of Mr Al Fayed's tax affairs which gave rise to concern (besides remittances): benefits in kind; PAYE and Schedule E issues; overseas companies and other offshore entities; and UK companies and other UK entities. I accept his evidence that he concluded that those areas formed the basis for a fundamental review of Mr Al Fayed's affairs (see para.337). I do not consider that he and Mr Carmichael were merely going through the motions of a review. Mr McGuigan mentioned more than once in his evidence the importance of an investigation's producing a financial return such as to justify the resources involved, and the significance of such returns as a measurement of success (see e.g. para.89). That evidence is consistent with evidence given by Mr Whitehead (see para.251) and Mr Carmichael (see para.372). I do not believe that Mr McGuigan would have authorised a comprehensive investigation of Mr Al Fayed's affairs if he had not considered, on the basis of the review, that such a commitment of resources was justified. Nor do I believe that the final decision was influenced by any tension between SCO and LBO: by 16 May, it was apparent to Mr McGuigan that the material produced by the review warranted an investigation, that there was to be close co-operation between SCO and LBO, and that the SCO office which was to deal with the case was SCO Edinburgh. I am satisfied that Mr McGuigan was not motivated by any political vendetta against Mr Al Fayed, or other extraneous purpose, and that he did not have a fixed determination to authorise an investigation, regardless of any review. In the circumstances, I conclude that his statements indicating an intention to investigate, on 11 February, 6 March and 30 March, do not justify the conclusion that he failed to give fair and reasonable consideration to a review of Mr Al Fayed's affairs, prior to taking the decision to authorise a wide-ranging investigation.

[784] Considering the review, and Mr McGuigan's decision, in the context of the section of Code 8 headed "Opening the investigation" (see para.585), it appears to me that SCO complied with the statement that "We will look at what you have told the Inland Revenue in your tax returns, accounts and statements" (a statement which may reflect one of the conditions of a discovery assessment under the self-assessment legislation: see para.556). Mr Al Fayed's returns and other statements were looked at before the decision of 16 May was taken. In relation to the statement that "we will look at what information we may have from other sources", it appears that "we" means SCO, rather than the Revenue as a whole: that is the implication of the earlier statement that the Code "explains how we, the Special Compliance Office, carry out investigations" (see para.582). So construed, the statement appears to have been complied with: the SCO London papers were looked at. The statement is not a clear and unambiguous promise or representation that SCO will look at the information held by other Revenue departments relating to the taxpayer in question, or at information relating to other taxpayers. In any event, it has not been suggested that Mr McGuigan's decision might have been different if he or Mr Carmichael had considered other material. On the contrary, it appears to me that reading the Downey report, for example, would merely have increased Mr McGuigan's concerns (e.g. about the use of cash in transactions, and the control and management of offshore companies: see paras.115-117); and a closer study of the SCO London papers would similarly have tended to increase, rather than diminish, concerns (see e.g. paras.50 and 54).

The scope of the investigation

[785] The purpose of an SCO investigation of the type with which the present case is concerned is to enable the investigator to identify any failure to comply with the provisions of the Taxes Acts. In some cases it may be that the investigation is concerned with a specific taxation issue, of which the taxpayer can be notified. It would not however be reasonable, as a general rule, to expect the investigator to be able to state with precision, before the investigation had taken place, the provisions which might not have been complied with. The degree of particularity which is appropriate appears to me to be dependent on the circumstances, and to be (in the first instance) a matter for the judgment of the investigator.

[786] In the present case, SCO had little up-to-date information about Mr Al Fayed's affairs, but had identified a number of areas of concern which related particularly (but not only) to the role of offshore companies, trusts and other entities in holding assets, channelling funds and providing benefits. The nature of these concerns was such that an investigation would inevitably be thoroughgoing and involve wide-ranging enquiries. To require specification of the relevant taxation issues at the initial stage of the investigation would in my opinion be impracticable, given the apparent complexity of Mr Al Fayed's affairs, the paucity of information available to SCO, the manifold ways in which tax might be avoided, and the multitude of persons and entities which might be involved (e.g. companies, trusts, partnerships and members of Mr Al Fayed's family). Moreover, if particularisation were required at that stage, it would merely take the form of a listing of a multitude of potential taxation issues, and would be of little utility. It would in any event be open to the Revenue, if information was obtained in connection with one issue which suggested other potential issues, to widen the scope of the investigation. Its scope could not therefore be defined by an attempt at the precise specification of taxation issues at the outset. The identification of specific taxation issues, even if practicable at the opening of the investigation in a case such as the present, would thus be of no material assistance to the taxpayer.

[787] Just as, in the circumstances of the present case, it appears to me that the Revenue cannot reasonably be criticised for failing to identify all relevant taxation issues in advance of its enquiries (see also paras.415-421), so it appears to me that criticism of its failure to identify in advance all the specific individuals or entities which are germane to its enquiries is equally misplaced. Where the Revenue is aware of what might broadly be described as arrangements (or a situation) which ought to be enquired into, it should not be disabled from making such enquiries merely because it has no lead as to what the arrangements are or who is involved in them. The point is illustrated by the Fleet Street Casuals case, and by Wilover Nominees Ltd v IRC [1974] 1 WLR 1342. In the present case, for example, if the Revenue has reasonable grounds for making enquiries to ensure that benefits to family members falling within the scope of section 168(4) of the 1988 Act, and distributions to associates of participants falling within the scope of section 417, have been properly accounted for, those enquiries should not be frustrated by a lack of knowledge as to the identities of the relevant individuals. The same principle applies, mutatis mutandis, to the proposed enquiries concerning offshore trusts and the control of UK companies.

[788] So far as specific requests for information are concerned, it appears to me to be necessary again to bear in mind the stage which matters had reached when those requests were made. Information of a general nature was being sought by SCO as a precursor to more focused enquiries. The information was sought on a voluntary basis. In the event that it was not provided, the Revenue would have to decide what information to seek under its powers of compulsion; and (depending on the particular power used) it would then be likely that the Commissioners would have an important role to play, as a safeguard provided by Parliament to strike the necessary balance between the taxpayer and the Revenue. If, for example, the inspector were to proceed under section 20 of the 1970 Act, and were to require extensive particulars, then a Commissioner would have to consider whether a reasonable inspector would have issued a notice in those terms, having regard to the burden (and cost) of compliance (Ex parte Ulster Bank Ltd at page 226 per Morritt LJ; Kempton v Special Commissioners (1992) 66 TC 249, at page 265). For the reasons explained above (at paras.738-741 and 744), however, it does not appear to me to be appropriate in these proceedings to attempt to anticipate how the Revenue might use its coercive powers or how the Commissioners might determine any matters arising in that event. The requests made by SCO to date do not, however, when viewed in their context, appear to me to demonstrate that the investigation constitutes an abuse of power.

[789] The enquiries which were most strongly criticised sought general information about family members, companies, trusts and other entities associated with Mr Al Fayed and his family. The purpose of making those general enquiries was to obtain an overview of the relationships between the individuals, companies and other entities, in order to focus on the matters which warranted further investigation (see para.416). I accept the evidence of Mr Pegler and other witnesses that that was not an unusual request in the circumstances. The enquiries about family members and connected entities were not formulated with precision: the expressions used were of a broadly descriptive nature, rather than providing strict definitions. KPMG and their clients could only comply with the requests by exercising their own judgment as to which individuals, companies and other entities might be of interest to SCO, as being potentially relevant to the determination of UK tax liabilities. In the context of a voluntary request for information, however, that open-endedness does not appear to me to be improper.

[790] So far as the petitioners complain that the scope of the SCO investigation intimated on 2 June extends to the tax affairs of Ali and Salah Fayed, and a variety of UK companies, without any evidence that the affairs of those individuals and companies had been subjected to a review, or that registration reports had been approved in respect of those individuals and companies, it appears to me to be material, in the first place, that those individuals and companies are not party to the present proceedings. That point is material not only because the petitioners lack locus standi to challenge the investigation on the basis that it infringes the rights or legitimate expectations of third parties. The fact that individuals and companies are not party to the present proceedings also inhibits the extent to which the Revenue can be expected to disclose information about their affairs, bearing in mind its obligation to respect the confidentiality of taxpayers. Unsurprisingly, the evidence in these proceedings focused on the Revenue's consideration of the tax affairs of the petitioners, rather than on its consideration of those of third parties. It appears from the evidence however that SCO has issued Code 8 to Ali and Salah Fayed (see paras.403 and 407), and probably also to four of the UK companies (see para.471). Whether those were appropriate decisions does not fall to be determined in the present proceedings.

[791] To the extent, however, that enquiries concerning third parties form part of the SCO investigation into Mr Al Fayed's affairs, they do fall within the ambit of the present proceedings. Given the nature of the concerns which have prompted that investigation, however, I see nothing untoward in the fact that such enquiries might be made: Mr Al Fayed's brothers are (for example) related to him in a way which would fall within the ambit of the provisions concerning benefits and other distributions provided by close companies; and the UK companies in which SCO are interested are material to some of the issues (e.g. as to benefits and transfer pricing) into which they wish to enquire (see e.g. paras.388-389, 417-420 and 464). Insofar as enquiries concerning those individuals and companies might be relevant to Mr Al Fayed's affairs, and might therefore reasonably be made in the course of an investigation of Mr Al Fayed, the Revenue's omission to undertake a distinct review of their affairs, as a preliminary to such enquiries, would not contravene Code 8, and would not appear to me to be either irrational or an abuse of power.

Conclusion

[792] There appear to me to be a number of aspects of SCO's internal administration, in dealing with Mr Al Fayed's affairs, which might be criticised. Those defects do not however leave me in doubt as to the fairness of the procedure by which the decision under challenge was reached, or as to the propriety of that decision. I am satisfied on the evidence that the decision intimated in SCO's letter of 2 June 2000 was not made in pursuance of an ulterior motive; that it was not in conflict with the petitioners' legitimate expectations (as to which, see paras.587-598, 607, 633, 768 and 784); that it was not based on irrelevant factors; that it was not irrational; and that it was not otherwise oppressive, unfair or an abuse of power. Many of the petitioners' complaints, as it seems to me, are based upon a confusion, understandable in the circumstances, between different senses in which Revenue officials may refer to an "investigation". That matter having been elucidated by the evidence, however, the apparent conflict between some of the Revenue's internal documents and their procedures as explained in Code 8 can be seen not to be a genuine conflict at all. Of the other complaints, the most substantial appear to me to be those based on remarks made by officials, notably Mr McGuigan, which on their face raised the possibility of an abuse of power. Having considered the evidence, however, I am satisfied, for the reasons I have explained, that the critical decision was nevertheless taken properly.

(5) The LBO review

[793] I can deal relatively briefly with the petitioners' submissions concerning the LBO review, as I have already discussed the issues in detail (see e.g. paras.510-529, 583, 608-619, 626-629, and 638-641). For the reasons explained above (at paras.617-618 and 638-639), I am satisfied that the LBO review does not form part of an investigation as defined in the Investigation Handbook, or part of an SCO investigation. Although the LBO review is closely related to the SCO investigation (as explained at para.640), it does not fall within the scope of Code 8. The enquiries made by LBO do not demonstrate that the decision to undertake the review was an abuse of power (see e.g. paras.518-528).

[794] The only aspect of LBO's treatment of the petitioners which has been shown to be a departure from usual practice was the sending of the letter of 31 May 2000. The issue of the letter to the Harrods group was unusual, because the process of risk assessment of the relevant accounts had not yet been completed. The risk assessment had however reached a stage by which it was apparent that extensive enquiries were going to be made. As explained above (at paras.395-398), that departure from usual practice was intended to assist the petitioners, by informing them at an early stage that the SCO investigation of Mr Al Fayed was to be co-ordinated with LBO's enquiries into the Harrods group. The letters of enquiry were issued subsequently, in the usual way, following a meeting (on 13 July 2000) at which the risk assessment had been discussed.

[795] In these circumstances, it appears to me that the issue of the letter of 31 May 2000 did not prejudice the petitioners in any way: on the contrary, they can only have been assisted by LBO's conduct. Although the issue of the letter was a departure from usual practice, it was understandable, and perfectly proper in the circumstances. Neither the issue of the letter, nor any other aspect of LBO's treatment of the petitioners, appears to me to have violated any legitimate expectation of the petitioners.

(6) Conclusion

[796] It is understandable that the present proceedings were brought, once the Revenue's internal documents had been produced in the first judicial review: for those documents could give rise to reasonable concerns about the manner in which Mr Al Fayed's tax affairs had been dealt with. It is also understandable that the case proceeded to a proof, given the Revenue's reticence in providing a full account or explanation of its actions, and its production of affidavits which raised further concerns. The whole matter has however now been examined by the court in detail, after a hearing at which officials have been called to give evidence and have had their accounts tested. Having examined the evidence, I have found that the way in which Mr Al Fayed's affairs were dealt with was not in all respects a model of good administration. Nevertheless, I am satisfied that his affairs were considered fairly and dispassionately, and in accordance with the Revenue's published code of practice, to decide whether an investigation was justified. I am satisfied that the decision to investigate was taken fairly and in good faith for the purpose of fulfilling the Revenue's statutory responsibility for the collection of taxes, and not for any ulterior, extraneous or improper purpose. A detailed consideration of the Revenue's treatment of Mr Al Fayed's affairs during 1999 and 2000 reveals a certain amount of muddled thinking and a certain clumsiness, but those did not affect the legality of the decisions challenged. It is also important, in fairness to the officials involved, to recognise the genuineness of the dilemmas with which they had to contend (as a result of the series of forward tax agreements and the issue of the suspension letter - the letter being itself a response to a dilemma), and their concern to act correctly in an exceptional and difficult situation. So far as the affairs of the corporate petitioners are concerned, I am equally satisfied that the decision to undertake an in-depth review was taken fairly and in good faith, and for a proper purpose.

[797] For the foregoing reasons, I shall refuse the prayer of the petition.