Bird and Others v Commissioners of Inland Revenue. Breams Nominees Ltd and Another v Commissioners of Inland Revenue. Harley (H.M.I.T.) v Ilmarish Investments Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 07 March 1985 |
| Date | 07 March 1985 |
| Court | Chancery Division |
Chancery Division.
Mr. C. Beattie Q.C. and Mr. S. Brandon (instructed by Messrs. Wedlake) for the taxpayers.
Mr. D. Rattee Q.C. and Mr. C.H. McCall (instructed by the Solicitor of Inland Revenue) for the Crown.
Before: Vinelott J.
Income tax - Surtax - Tax advantages from transaction in securities - Scheme to avoid payment of tax on commercial profits - Whether tax advantage obtained - Whether obtained in circumstances mentioned inIncome and Corporation Taxes Act 1970 section 461para C or Income and Corporation Taxes Act 1970 section 461D of sec. 461 of the Income and Corporation Taxes Act 1970 -Income and Corporation Taxes Act 1970 section 460 subsec-or-para (3) section 461 section 466Income and Corporation Taxes Act 1970, sec. 460(3), para. C and D, 466.
These were appeals by the taxpayers respectively as executors and trustees, against two decisions of the Special Commissioners upholding assessments to income tax and surtax in the case of the late Mr. E and to income tax in Mrs. E's case made under Income and Corporation Taxes Act 1970 section 460 subsec-or-para (3)sec. 460(3) of the Income and Corporation Taxes Act 1970. The third appeal to the Special Commissioners succeeded and the assessment was discharged.
The only substantial asset of a company, CCD, was a valuable property which it owned subject to a mortgage. The shares in CCD were held by a charity and a company, Ilmarish. The shares in Ilmarish were owned mainly by Mr. E and his wife Mrs. E and the trustees of Mrs. E's settlement of 1961. Mr. E wished to realise his investment without incurring cumulative liabilities to tax. An elaborate scheme, which used a number of companies, was devised and carried out. Its primary features were the sale by CCD of its shares, the payment of an abnormal dividend and a loan to the taxpayers which represented the value of the shares they had sold. Its aim was to enable the property to be sold in the most advantageous way from the point of view of the shareholders.
A notice of assessment to income tax and surtax in the case of Mr. E and to income tax in the case of Mrs. E and the trustees of her settlement was made under Income and Corporation Taxes Act 1970 section 460 subsec-or-para (3)sec. 460(3) of the Income and Corporation Taxes Act 1970 on the basis that, in consequence of a transaction in securities in circumstances mentioned in Income and Corporation Taxes Act 1970 section 461sec. 461, para. C of the Act the taxpayers had obtained a tax advantage within the meaning ofIncome and Corporation Taxes Act 1970 section 466sec. 466. The taxpayers appealed unsuccessfully to the Special Commissioners.
For the Crown it was argued that Income and Corporation Taxes Act 1970 section 461para. C of sec. 461 was satisfied since by paying an abnormal dividend to companies as part of the scheme, CCD received loans in such a way as to avoid paying tax on them as income. Those loans were a consideration which represented the value of assets of CCD which were (or apart from anything done by CCD would have been) available for distribution by way of dividend.
For the taxpayers it was submitted that there was no sufficient causal connection between the receipt of the loans by the taxpayers and the transaction whereby one of the companies used in the scheme was paid the dividend by CCD. The taxpayers were not aware that it was part of the overall scheme that the available assets would be extracted from CCD by way of dividend. The loans represented moneys derived from the sale of certain CCD shares by Ilmarish. Further transactions could not be identified with the proceeds of sale of the property.
For the Crown it was contended that the circumstances mentioned inIncome and Corporation Taxes Act 1970 section 461para. D of sec. 461 were also satisfied. For the taxpayers it was argued that the burden of proof was on the Crown to show that the companies in question were controlled companies within the meaning of Income and Corporation Taxes Act 1970 section 461para. D(2), and the Crown had failed to discharge that burden.
It was submitted for the Crown that to determine whether or not a tax advantage had been obtained, in contrasting the receipt which in fact accrued in a non-taxable way with the receipt which might have accrued in a taxable way, no regard was to be had to the tax which directly or indirectly fell on the taxpayer in consequence of the transactions which he actually carried out. The fact that the imposition of income tax and in Mr. E's case surtax on the full amount of the loans received, which did not attract income tax or surtax apart from Income and Corporation Taxes Act 1970 section 460sec. 460, resulted in a cumulative tax burden was wholly irrelevant.
For the taxpayers it was maintained that regard should be had to the tax which fell on the taxpayer in consequence of the transactions carried out. The potential liability to tax under different sections of the Act should also be taken into account.
Held, dismissing the taxpayers' appeals:
1. Income and Corporation Taxes Act 1970 section 461Paragraph C of sec. 461 required a causal link. The sale of the shares in CCD indirectly to a company as part of the overall scheme was a transaction whereby that company received an abnormal amount by way of dividend from CCD. The Crown did not have to show that the taxpayer knew when he sold his shares that the purpose of the purchase was to declare a dividend of an abnormal amount.
2. The loans received by the taxpayers were received in consequence of that transaction and represented moneys which could have been distributed to the taxpayers, but for the scheme.
3. The sale of the shares of CCD and the payment of the abnormal dividend were conceived as part of a single design leading to a pre-arranged end. Therefore, there was a sufficient causal link between the sale of the shares and the receipt of the dividend to satisfyIncome and Corporation Taxes Act 1970 section 461para. C and the Revenue were entitled to assess the taxpayers on the tax advantages obtained.
4. In assessing the amount of tax payable under Income and Corporation Taxes Act 1970 section 460sec. 460 the Revenue had to take account of any other tax for which the taxpayer would be liable as a result of the transactions they carried out. The amounts assessed to tax under Income and Corporation Taxes Act 1970 section 460sec. 460 in this case were excessive and ought to be reduced by the appropriate proportion of corporation tax for which Ilmarish was liable.
1. At a meeting of the Commissioners for the special purposes of the Income Tax Acts held on 30 and 31 March and 1 April 1981 Fraser Stephen Bird, Donald Roy Huntingford, Nigel Edward Goodeve-Docker and Evelyn Mildred Noding, the Executors of the will of Charles H. Ellis deceased (hereinafter called "the Executors") appealed against a notice issued on 5 September 1975 to Mr. Ellis under Income and Corporation Taxes Act 1970 section 460 subsec-or-para (3)sec. 460(3)Income and Corporation Taxes Act 1970 ("the Act") and consequential assessments to income tax and surtax respectively each in the sum of £1,215,000 for the year 1972/73.
2. We heard at the same time an appeal by Breams Nominees Limited (formerly Elysia Trading Company Limited) and Fifth CB Trustee Limited (formerly Maradima Trading Company Limited), the Trustees of Mrs. D.M. Ellis' Settlement dated 18 September 1961 against a similar notice issued to them on 21 June 1976 and a consequential assessment to income tax in the sum of £972,000 for the year 1972/73. All the appeals were heard and argued together and we gave one decision relating to them.
3. The evidence before us consisted of an agreed statement of facts and a bundle and supplementary bundle of agreed documents. [The Commissioners here listed those documents.]
4. Particulars of the notices under appeal, the question for our determination, the facts, the contentions of the parties and our conclusion upholding the notices appear from our decision in principle which we delivered in writing on 14 July 1981. A copy of this decision is annexed hereto and forms part of this case.
5. The parties in both cases were unable to agree figures in accordance with our decision in principle. We sat again on 6 January 1982 and heard argument on the quantum of the tax advantage which accrued to Mr. Ellis and the Trustees respectively. The question in issue on quantum, the contentions of the parties and our conclusion in favour of the Commissioners of Inland Revenue confirming the assessments appear from a further decision which we delivered in writing on 24 March 1982. A copy of this decision is annexed hereto and forms part of this case.
6. The following cases, in addition to those referred to in our decisions, were cited in argument: Ranson v. Higgs TAX50 T.C. 1Shearer v. Bercain Limited T.L. 2773
7. The Executors immediately after the determination of the appeals expressed dissatisfaction therewith and requested us to state a case for the opinion of the High Court pursuant to Income and Corporation Taxes Act 1970 section 56sec. 56Taxes Management Act 1970, which case we have stated and to sign accordingly.
The questions for the opinion of the court are whether we erred in law in holding that:
(2) tax advantages were obtained in circumstances mentioned inIncome and Corporation Taxes Act 1970 section 461para. C of sec. 461 of the Act and in consequence of the transactions in securities referred to in our decisions;
(3) Income and Corporation Taxes Act 1970 section 461para. D of sec. 461 of the Act had no application in this case; and
(4) assessments to tax were avoided in amounts equal to the loans made by Interlude Investment Co. Limited on 5 October 1972 to Mr. Ellis and his wife and the Trustees...
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