Baylis v Roberts
| Jurisdiction | England & Wales |
| Judgment Date | 24 July 1989 |
| Date | 24 July 1989 |
| Court | Chancery Division |
Chancery Division.
Knox J.
Mr. Alan Moses (instructed by the Solicitor of Inland Revenue) for the Crown.
The taxpayers did not appear and were not represented.
The following cases were referred to in the judgment:
I.R. Commrs. v. National Federation of Self-Employed and Small Businesses Ltd. ELR[1982] A.C. 617
Julius v. Bishop of Oxford ELR(1980) 5 App. Cas. 214
Manson (H.M.I.T.) v. Wesley TAX(1932) 16 T.C. 664
R. v. H.M. Inspector of Taxes, ex parte Lansing Bagnall Ltd.TAX[1986] BTC 92; 353
Income tax - Discontinuance of trade - Profits in penultimate and antepenultimate years before discontinuance exceeded profits on which tax had been charged on preceding year basis - Additional assessments raised on taxpayers - Whether inspector had a duty or a discretion to raise additional assessments - Whether "he may be charged" meant "he shall be charged" - Income and Corporation Taxes Act 1970 section 118 subsec-or-para (1)Income and Corporation Taxes Act 1970, sec. 118(1)(b) (now Income and Corporation Taxes Act 1988 section 63 subsec-or-para (1)sec. 63(1)(b) of the 1988 Act).
This was an appeal by the Crown against a decision of the General Commissioners for Pontypridd that additional assessments to tax underIncome and Corporation Taxes Act 1988Sch. D, Case Ifor the last two years before discontinuing their business were improperly made.
The taxpayers, who made up their accounts to 30 September in each year, discontinued their greengrocery trade permanently on 7 July 1985 and, in accordance with the normal preceding year basis of assessment, the taxpayers had been assessed to tax for the years 1983-84 and 1984-85 by reference to the profits earned in 1982-83 and 1983-84.
When it became apparent that the actual profits for 1983-84 and 1984-85 in aggregate exceeded the profits for 1982-83 and 1983-84 the inspector raised additional assessments on the taxpayers under the Income and Corporation Taxes Act 1970 section 118Income and Corporation Taxes Act 1970, sec. 118. He considered that he was under standing instructions to raise additional assessments in all cases where an increased liability would result. He had not therefore exercised any discretion of his own or taken into account any other factors than the mere fact that the later profits exceeded the earlier ones.
The taxpayers accepted that Income and Corporation Taxes Act 1970 section 118 subsec-or-para (1)sec. 118(1)(a), in which the word "shall" was used in relation to the year in which discontinuance occurred was mandatory, but contended that Income and Corporation Taxes Act 1970 section 118 subsec-or-para (1)sec. 118(1)(b), dealing with the previous two years, conferred a discretion on the inspector whether or not to make a further assessment. The section used the words "he may be charged" rather than "he shall be charged". If the inspector had exercised his discretion he should have borne in mind that the additional charge to tax was unexpected by the taxpayers and penal in amount.
The Commissioners discharged the assessments, concluding thatIncome and Corporation Taxes Act 1970 section 118 subsec-or-para (1)sec. 118(1)(b) was discretionary and, since the inspector had failed to exercise his discretionary power, the assessments were improperly made.
Held, allowing the Crown's appeal:
1. Income and Corporation Taxes Act 1970 section 118Section 118 was derived from the Finance Act 1926 which was re-enacted without significant amendment in the Income Tax Act 1952, section 130sec. 130. The words in that section, "an additional assessment may be made so that [the taxpayer] shall be charged", were plainly mandatory and the effect of Income and Corporation Taxes Act 1970 section 118sec. 118 was the same.
2. Income and Corporation Taxes Act 1970 section 118 subsec-or-para (1)Section 118(1)(b) was designed to have effect in precisely defined circumstances where one computation produced greater tax liability than another, and it was not easy to see what factors it would be appropriate for an inspector to take into account in exercising a general discretion. In any event, neither of the factors relied on by the taxpayers would succeed. (R. v. H.M.I.T. & Anor., ex parte Lansing Bagnall Ltd. TAX[1986] BTC 353,distinguished.)
1. At a meeting of the Commissioners for the general purposes of the income tax for the Division of Pontypridd in the County of Mid Glamorgan held on 4 August 1987 and 10 November 1987 Mr. Robert Carl Roberts and Mrs. Valerie Roberts ("the taxpayers") appealed against the following further assessments to income tax made upon them under Sch. D and in accordance with Income and Corporation Taxes Act 1970 section 118sec. 118 of the Income and Corporation Taxes Act1970.
Income and Corporation Taxes Act 1970 section 118 subsec-or-para (1)Sec. 118(1)(b)
| "Actual | "Normal | |||
| Basis" | Basis" | |||
| £ | £ | |||
| 1983/84 | 6/12 × 10,161 = | 5080 | ||
| 6/12 × 11,330 = | 5665 | |||
| 10,745 | 6054 | |||
| 1984/85 | 6/12 × 11,330 = | 5665 | ||
| 6/9 × 7145 = | 4763 | |||
| 10,428 | 10,161 | |||
| Total of actual profits | 21,173 | Total of assessed profits | 16,215 |
Further assessments now appealed:
| ££ | £ | ||
| 1983-84 | 10,745 - 6054 | = | 4691 |
| 1984-85 | 10,428 - 10,161 | = | 267 |
2. As a preliminary question application was made under Taxes Management Act 1970 section 49sec. 49 of the Taxes Management Act 1970 for leave to appeal out of time, which was granted by the Commissioners, but that was not an issue in the case.
3. The question for determination was whether or not Income and Corporation Taxes Act 1970 section 118sec. 118 of the 1970 Act had been properly applied and whether or not the inspector of taxes had properly applied his mind to exercising any discretion in the matter.
4. The taxpayers were present to give evidence and were represented by Mr. D.C.H. Vaughan, accountant, but in the event, the taxpayers were not required to give evidence, as there was no dispute as to the figures and facts, but only as to the point of law. Mr. Robert Anthony Baylis the respondent ("the inspector") appeared in person.
5. The following documents were proved or admitted in evidence.
6. Assessments issued on 22 April 1986 for 1983-84 in the additional sum of £4,691 and for 1984-85 in the additional sum of £267.
7. As the result of all the evidence both oral and documentary the Commissioners made the following findings of fact:
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(a) The taxpayers had been carrying on a greengrocery business for some few years, during which time their accounts were assessed on a preceding year basis in accordance with Income and Corporation Taxes Act 1970 section 115 section 116sec. 115 and 116 of the 1970 Act.
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(b) Due to adverse trading results, the taxpayers ceased trading on 7 July 1985 on a permanent basis.
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(c) On a "preceding year basis" an assessment had been raised for the year 1983- 84 in the sum of £6,054 such assessment being based on the trading accounts for the year of trading ending 30 September 1982.
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(d) On a "preceding year basis" an assessment for the year 1984-85 and based on the trading accounts for the year ended 30 September 1983 had been raised in the sum of £10,161.
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(e) Following the cessation the inspector issued additional assessments on 22 April 1986 for 1983-84 in the sum of £4,691 and for 1984-85 in the sum of £267.
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(f) The taxpayers operated a comparatively moderate business, and had not sought to obtain any particular advantage for tax purposes that might have been available under the terms of the 1970 Act.
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(g) The inspector had raised the additional assessments in accordance with Income and Corporation Taxes Act 1970 section 118 subsec-or-para (1)sec. 118(1)(b), as he considered he was under standing instructions so to do in all appropriate cases involving businesses assessable under Income and Corporation Taxes Act 1988Sch. D, Cases I or Income and Corporation Taxes Act 1988II where permanent discontinuance took place. He had not therefore at the time of making the further assessments for 1983-84 and 1984-85 exercised any discretion as he considered that in a case where the application of Income and Corporation Taxes Act 1970 section 118 subsec-or-para (1)sec. 118(1)(b) would result in further assessments being made on the taxpayer that he should automatically apply the provisions of that section and make such assessments without giving consideration to any other factors.
8. Mr. Vaughan on behalf of the taxpayers contended:
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(a) The plain meaning of Income and Corporation Taxes Act 1970 section 118 subsec-or-para (1)sec. 118(1)(b) was to confer a discretion on the inspector in relation to the issuing of additional assessments for the two preceding years prior to a discontinuance, since the words in that section stated in relation to the taxpayer "he may be charged instead" rather than "he shall be charged instead".
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(b) Although Income and Corporation Taxes Act 1970 section 118 subsec-or-para (2)sec. 118(2) stated that where a person has been charged with income tax otherwise than in accordance withIncome and Corporation Taxes Act 1970 section 118 subsec-or-para (1)para. (a) or Income and Corporation Taxes Act 1970 section 118 subsec-or-para (1)(b) of sec. 118(1)any such assessment to tax, reduction or discharge of an assessment of tax, or on a claim therefore, repayment of tax shall be made as maybe necessary to give effect to those paragraphs, nevertheless in applying Income and Corporation Taxes Act 1970 section 118 subsec-or-para (1)sec. 118(1)(b) it was still necessary to exercise a discretion because of the words "may be charged" although he accepted that the terms of Income and Corporation Taxes Act 1970 section 118 subsec-or-para (1)sec. 118(1)(a) in regard to the period commencing on 6 April in the year of...
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