Bird v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | Lord Keith of Kinkel,Lord Brandon of Oakbrook,Lord Brightman,Lord Templeman,Lord Oliver of Aylmerton |
| Judgment Date | 12 May 1988 |
| Judgment citation (vLex) | [1988] UKHL J0512-2 |
| Court | House of Lords |
[1988] UKHL J0512-2
House of Lords
Lord Keith of Kinkel
Lord Brandon of Oakbrook
Lord Brightman
Lord Templeman
Lord Oliver of Aylmerton
My Lords,
These appeals reveal what, from the point of view of the taxpayers, is a sad story of a tax avoidance scheme which, in the opinion of all those who have so far had occasion to consider it, has not only failed but has resulted in a greater liability to tax than if it had never been entered into, to say nothing of a substantial fee paid to the vendors of the scheme.
The first appellants are the executors of the will of the late Charles H. Ellis, who died in 1978, and the second appellants are trustees of a settlement made by Mr. Ellis's wife in 1961. In 1971 Mr. Ellis, his wife and the trustees were shareholders in a company called Ilmarish Investments Ltd. ("Ilmarish"). Mr. Ellis owned 10 per cent. of the shares, his wife owned 40 per cent. and the trustees owned 40 per cent. The remaining 10 per cent. were held by a Mr. Lindgren. Ilmarish owned 70 per cent. of the shares in another company called Croydon Centre Development Ltd. ("CCD"), the remaining 30 per cent. being held by a company wholly owned by the Church Commissioners. CCD owned a building in Croydon considered to be worth £10.2m. but charged to an American bank in security of a loan of £5.8m.
It was desired to bring about a realisation of the Croydon property and a distribution of the net proceeds among the shareholders of Ilmarish and the Church Commissioners. One method of achieving this, so far as the shareholders in Ilmarish were concerned, would have been to sell the property and then wind up CCD and also Ilmarish. However, this would have involved CCD paying corporation tax at 40 per cent. on the gain arising from the sale, Ilmarish paying corporation tax at the same rate on the gain realised from the deemed disposal of its shares in CCD, and the shareholders of Ilmarish paying capital gains tax at 30 per cent. on the chargeable gain resulting from the deemed disposal of their shares in Ilmarish. The parties accordingly consulted the Bradman and Faber organisation ("Bradman") for advice on how these heavy liabilities to tax might be avoided. Bradman devised in consideration of a fee of £300,000 an elaborate scheme designed to secure that Mr. and Mrs. Ellis, the trustees and Mr. Lindgren or his nominees received between them a sum equal to approximately 70 per cent. of the net proceeds of the Croydon property free of any liability to tax. The taxpayers agreed to implementation of the scheme, and it was put into effect.
This elaborate scheme is very fully described in the case stated by the special commissioners and in the judgment of Vinelott J. [1985] S.T.C. 584, It is also summarised in the judgment of Sir Nicolas Browne-Wilkinson V.-C. in the Court of Appeal [1987] S.T.C. 168. The issues which arise in the present appeals have fortunately been narrowed to an extent which makes it unnecessary to embark upon a further full description of the scheme. It will suffice to concentrate on the fourth and final stage of the scheme, described in the judgments below as "the loan scheme." The three earlier stages are there respectively described as "the property scheme", "the share scheme" and "the extraction scheme." The material events in the implementation of the loan scheme were as follows:
| 5.2.71: | A company called Jergil was incorporated with Mr. Ellis as sole director. |
| 24.3.71: | Jergil issued 100 £1 ordinary shares to Ilmarish in exchange for the latter's 70 per cent. holding in CCD, the issue being treated as made at a premium of £2,862,850. |
| 24.3.71: | Jergil sold to Tishmear (a Bradman company) all its shares in CCD for £2,863,950. |
| 22.8.72: | A company called Interlude was incorporated by Bradman. |
| 2.10.72: | Two Bradman companies, Lomita and Fortress, each acquired one subscriber's share in Interlude. |
| 3.10.72: | A finance company, FNFC, lent £2,369,250 to Interlude. |
| 5.10.72: | Interlude lent £243,000 to Mr. Ellis, £972,000 to Mrs. Ellis, £972,000 to the trustess and £243,000 to Mr. Lindgren's children, a total of £2,430,000. |
12.10.72: Interlude issued 998 shares to Lomita and Fortress for £2,429,998.
12.10.72: Jergil bought from Lomita and Fortress their whole shareholding in Interlude for £2,431,000.
On a date not specified in the case stated Interlude repaid the £2,369,250 owing to FNFC.
On the conclusion of these transactions the position was that Ilmarish had as its only significant asset a subsidiary company, Jergil, which had as its only significant asset a subsidiary company, Interlude, which had as its only significant asset debts of £2,430,000 owing to it by Mr. and Mrs. Ellis, the trustees and Mr. Lindgren's children. CCD and the Croydon property had disappeared into the Bradman organisation. Their fate there need not be explored, apart from noting that on 17 March 1972 CCD paid to Tishmear and another Bradman company called Glengil, which had acquired the Church Commissioners' interest in CCD, dividends of £2,399,600 and £1,028,400 respectively. On 20 March 1972 the Croydon property was sold for £9,800,000 by Aromeg, another Bradman company into whose hands the property had come through a circuitous series of transactions.
It will be seen that the purpose of arranging for Interlude to make the loans to Mr. Ellis and the other shareholders in Ilmarish at a time when Interlude was still in the Bradman organisation was to attempt to avoid the application of section 286 of the Income and Corporation Taxes Act 1970. The effect of that enactment is that where a loan is made by a close company to a participator, the sum lent is to be grossed-up and tax at the standard rate on the grossed up amount accounted for by the company to the Inland Revenue. Here, if Interlude had been a subsidiary of Jergil when the loans were made Mr. Ellis and the other shareholders in Ilmarish, Jergil's holding company, would have fallen to be treated as participators in Interlude by virtue of sections 303(1) and 286(9) of the Act of 1970.
Implementation of the scheme resulted in a number of actions on the part of the Inland Revenue. Ilmarish was assessed to corporation tax on the gain arising from the disposal of its CCD shares to Jergil in the sum of £2,855,347, the tax liability being £539,629.60. The special commissioners allowed an appeal by Ilmarish against this assessment, but the revenue's appeal against their decision was allowed by Vinelott J., it being conceded by Ilmarish that in the light of Furniss v. Dawson [1984] A.C. 474 the decision could not stand. The Inland Revenue also assessed CCD to corporation tax in respect of the chargeable gain arising on the sale of the Croydon property. It appears that a global compromise was arranged of a number of claims against companies in the Bradman organisation as a result of which CCD paid only £24,000, although on the face of it the true liability was very much greater. Finally, in 1975 and 1976 notices under section 460(6) of the Act of 1970 were issued to Mr. Ellis, in respect of himself and his wife, and to the trustees, specifying the transactions embodied in the scheme as giving reason to believe that tax advantages had thereby been obtained. These notices were followed by assessments to income tax upon Mr. Ellis in the sum of £1,215,000 and upon the trustees in the sum of £972,000 and to surtax upon Mr. Ellis in the sum of £1,215,000, all in respect of the year 1972-73. The assessments upon Mr. Ellis were to £470,812.60 in income tax and £668,250 in surtax, and upon the trustees to £376,650 in income tax.
The assessments were sustained in full by the special commissioners. Vinelott J. upheld them in principle, but reduced the amounts assessed to tax by an aliquot proportion of the corporation tax to which Ilmarish had been held liable. The Court of Appeal (Sir Nicolas Browne-Wilkinson V.-C., Balcombe and Bingham L.JJ.) restored the decision of the special commissioners. The taxpayers now appeal, with leave given in the Court of Appeal, to your Lordships' House.
The assessments were made under section 460 of the Act of 1970, subsection (1) of which provides:
"Where- (a) in any such circumstances as are mentioned in section 461 below, and (b) in consequence of a transaction in securities or of the combined effect of two or more such transactions, a person is in a position to obtain, or has obtained, a tax advantage, then unless he shows that the transaction or transactions were carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments, and that none of them had as their main object, or one of their main objects, to enable tax advantages to be obtained, this section shall apply to him in respect of that transaction or those transactions: …"
There follows a proviso not relevant for present purposes. Where the section applies to a person in respect of any transaction or transactions, the tax advantage obtained by him in consequence thereof is to be counteracted, under subsection (3), in one of a number of ways including the making of an assessment, which is what has been done in this case.
Section 461 sets out five different sets of circumstances, in paragraphs lettered from A to E. The Court of Appeal held that the case fell within paragraph C. Before your Lordships' House counsel for the taxpayers accepted that paragraph ( a) of section 460(1) was satisfied, thus making it unnecessary to consider that aspect of the case. It was also accepted that if a tax advantage had been obtained it was obtained in consequence of one or more...
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