Burton v Mellham Ltd
| Jurisdiction | UK Non-devolved |
| Judge | LORD WALKER OF GESTINGTHORPE,LORD BROWN OF EATON-UNDER-HEYWOOD,LORD NICHOLLS OF BIRKENHEAD,LORD HOFFMANN,LORD PHILLIPS OF WORTH MATRAVERS |
| Judgment Date | 15 February 2006 |
| Neutral Citation | [2006] UKHL 6 |
| Court | House of Lords |
| Date | 15 February 2006 |
[2006] UKHL 6
Appellate Committee
Lord Nicholls of Birkenhead
Lord Hoffmann
Lord Phillips of Worth Matravers
Lord Walker of Gestingthorpe
Lord Brown of Eaton-under-Heywood
HOUSE OF LORDS
Appellants:
Julian Ghosh
Sarah Dunn
(Instructed by Actons)
Respondents:
Mark Cunningham QC
Isabel Hitching
(Instructed by Acting Solicitor to the Commissioners for HM Revenue and Customs)
My Lords,
I have had the advantage of reading in draft the speech of my noble and learned friend Lord Walker of Gestingthorpe. For the reasons he gives, with which I agree, I would allow this appeal.
My Lords,
I have had the advantage of reading in draft the speech of my noble and learned friend Lord Walker of Gestingthorpe. For the reasons he gives, with which I agree, I would allow this appeal.
My Lords,
I have had the advantage of reading in draft the speech of my noble and learned friend Lord Walker of Gestingthorpe. For the reasons he gives, with which I agree, I would allow this appeal.
My Lords,
This appeal is concerned with interest on advance corporation tax ("ACT") which should have been paid to the Revenue by the appellant, Mellham Ltd ("Mellham") in respect of a dividend which it paid to its holding company, Mellham Holdings Ltd ("Holdings"). The issue is in the end a fairly short point of statutory construction, but it takes some time to get to it, because the dividend was paid as a foreign income dividend and represented profits of an overseas subsidiary of Mellham, Mellham Inc ("the American subsidiary"). The American subsidiary was not resident in the United Kingdom and did not trade in the United Kingdom. Its distributed profits had already borne tax in the United States of America. It has therefore been necessary for your Lordships to consider, not only the basic statutory provisions about late payment of tax and repayment of overpaid tax, but also some of the very complex provisions, now repealed, which formed Chapter VA in Part VI of the Income and Corporation Taxes Act 1988 (" ICTA 1988").
Chapter VA was introduced by the Finance Act 1994 to provide some measure of relief in respect of a long-standing grievance of companies (such as Mellham) which had (directly or through subsidiaries) overseas earnings which attracted double taxation relief ("DTR") (see generally Peter Harris, "The Foreign Income Dividend Scheme: A Damage Assessment" [1997] BTR 82). Such a company might pay amounts of ACT which exceeded its eventual liability to mainstream corporation tax ("MCT"), so that ACT became a free-standing tax rather than (as the general scheme of the legislation envisaged) an advance payment on account of MCT. The problem originated in 1973 when the United Kingdom adopted the imputation system of corporation tax, of which ACT was an important feature. ACT was abolished with effect from 6 April 1999, and with it went relief for foreign income dividends. The relevant dividend was paid by Mellham during its 12 month accounting period ending on 31 December 1997, that is during the period when both ACT and foreign income dividend relief were in force.
The problem of surplus ACT, and the operation of the relief for foreign income dividends, can be explained and illustrated by the facts of the present case. I shall consider first what ought to have happened had Mellham complied with its statutory obligations, and had the Revenue immediately conceded a point about DTR which in fact remained in issue for over three years. I shall then consider the consequences of what actually happened. During 1997 Mellham received dividends from the American subsidiary of £21.75m (this figure, and all the others which follow, are the approximate figures used for the sake of simplicity in the judgment of Buxton LJ in the Court of Appeal). On 7 October 1997 Mellham paid to Holdings a dividend of £1.4m. In consequence Mellham became liable to pay ACT of £350,000 due 14 days after the end of the quarter in which it was paid-in this case, 14 January 1998. That payment, if duly made, would have been taken into account in determining the MCT which became due nine months after the end of the accounting period, that is on 1 October 1998. The principal statutory provisions in point were sections 10, 14 and 239 of and Schedule 13 to ICTA 1988.
For reasons which have never been explained, Mellham did not pay the ACT due on 14 January 1998. The reason can hardly have been shortage of funds, as it had recently received a dividend more than 60 times the size of the ACT liability. A subsidiary contention put forward by the Revenue is that Mellham's unexplained failure to comply with its statutory obligation (which it eventually admitted, to the extent of £100,000, but only after the Revenue had commenced proceedings) is (together with other shortcomings in its compliance with its obligations) a reason for withholding relief by way of equitable set-off.
Apart from any question of set-off, interest ran on the unpaid ACT under section 87(1) of the Taxes Management Act 1970 (" TMA1970"):
"Any tax assessable in accordance with Schedule 13 or 16 to [ICTA 1988] shall carry interest at the rate applicable under section 178 of the Finance Act 1989 from the date when the tax becomes due and payable until payment."
Section 178 of the Finance Act 1989 (replacing section 90 of TMA 1970) gives the Treasury a general power to make regulations for ascertaining rates of interest for a variety of statutory purposes listed in section 178(2). These include section 87 of TMA 1970 and section 826 of ICTA 1988 (mentioned below). The Treasury has exercised this power by regulations providing for a "reference rate" of interest which is the average of the base lending rates of six leading British banks. The regulations fix rates for particular purposes at one or more percentage points above or below the reference rate for the time being in force (sometimes with further adjustments): see the Taxes (Interest Rate) Regulations 1989 (SI 1989/1297) as from time to time amended. This is the mechanism under which repayment supplement is always at a lower rate than interest on unpaid tax. The details are not relevant to this appeal. It is common ground that if annual interest under section 87 of TMA 1970 was for the time being at ( say) 7%, interest on a repayment under section 826 of ICTA 1988 would have been at a significantly lower rate ( say 4%).
If Mellham had duly paid the ACT payable by it on 14 January 1998, this would have provided the Revenue with a cash-flow advantage until the due date for payment of MCT, that is 1 October 1988. Mellham did not in fact put in its MCT return until 24 December 1998, but had it done so before 1 October 1998 then as at the last-mentioned date it would have been necessary to focus on Mellham's liability (if any) to pay further MCT, and (so far as Mellham had paid ACT in excess of its MCT liability) on its entitlement to foreign income dividend relief under sections 246N to 246Q in Part VI, Chapter VA of ICTA 1988. I will summarise those provisions as briefly as possible.
Chapter VA, in force from 1 July 1994 until 6 April 1999, started (section 246A(1)) by granting the company a right to elect, in appropriate circumstances, for a dividend which it paid to be treated as a foreign income dividend. The most important requirement (elaborated at great length) was that it should be paid, directly or indirectly, out of profits earned overseas. Section 246N (ACT to be repaid or set off against corporation tax liability) provided in subsection (2):
"In a case where—
(a) the company pays an amount of advance corporation tax in respect of qualifying distributions actually made by it in the relevant period,
(b) the amount, or part of it, is available to be dealt with under this section, and
(c) there is as regards the company an amount of notional foreign source advance corporation tax for the relevant period,
an amount of the advance corporation tax paid shall be repaid to the company, or set off, or partly repaid and partly set off, in accordance with this section and section 246Q."
Section 246N(7) provided:
"No amount shall be repaid or set off under this section and section 246Q unless the company makes a claim for the purpose."
Section 246Q(2) provided:
"If at the time when it falls to be determined whether the amount mentioned in subsection (1) above is to be repaid or set off—
(a) advance corporation tax paid (or treated for the purposes of section 239 as paid) by the company in respect of distributions made by it in the relevant period has so far as possible been set against its liability to corporation tax for the period under section 239(1), but
(b) the company's liability to corporation tax for the period is to any extent undischarged,
the amount mentioned in subsection (1) above shall so far as possible be set off against the company's liability to corporation tax for the relevant period (and an amount of that liability equal to the amount so set off shall accordingly be discharged); and any excess of the amount mentioned in subsection (1) above over the amount so set off shall be repaid."
Subsection (4) provided:
"No amount shall be repayable under section 246N and this section until the expiry of nine months from the end of the relevant period."
In these provisions "the relevant period" means the relevant accounting period (see sections 246N(1)(a) and 246Q(11)).
Mellham's income for the 1997 accounting period consisted of two payments from the American subsidiary, that is the dividend of £21.75m already mentioned and an interest...
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Subject Index
.... . . . . . . . . 228R vHasan [2005] UKHL22, [2005] 2AC 467 . . . 124R vHay (1983) 77Cr App R70 . . . . . . . . . . . . . . . 54R vHayter [2006] UKHL6 . . . . . . . . . . . . . . . . . . 280R vHenry [2005] 3SCR 609 . . . . . . . . . . . . 243, 244R v Highton [2005] EWCA Crim 1985,[2005]1 WL......