Cairns v MacDiarmid

JurisdictionEngland & Wales
Judgment Date16 December 1981
Date16 December 1981
CourtChancery Division

Chancery Division.

Cairns
and
MacDiarmid (H.M. Inspector of Taxes)

Mr. A. Sumption and Mr. I. Ferrier (instructed by Messrs. Herbert Smith & Co.) for the taxpayer.

Mr. D. C. Potter Q.C. and Mr. P.H. Goldsmith (instructed by the Solicitor of Inland Revenue) for the Crown.

Before: Nourse J.

Tax avoidance - Scheme to avoid income tax - Payment of annual interest - Employee paid £5,000 interest in advance on loan from employer - Employee received £5,000 bonus from employer - Whether interest payment attracted relief by set-off against bonus - Finance Act 1972 section 75 subsec-or-para (1)Finance Act 1972, sec. 75(1)(a).

This was an appeal by the taxpayer from the determination of the Special Commissioners that a payment of £5,000 by the taxpayer to his employer was not a payment of annual interest and did not attract relief.

The taxpayer entered into a scheme devised by his employers, Rossminster, to enable a bonus payment of £5,000, which was taxable asIncome and Corporation Taxes Act 1970 schedule ESch. Eincome, to attract relief from income tax.

The taxpayer borrowed £37,740 from Rossminster on 1 March 1974 for two years with interest at 131/4 per cent payable in advance. Therefore, he paid to Rossminster £5,000 which he alleged to be an interest payment.

On 5 March 1974, another company controlled by Rossminster took over the taxpayer's liability under the loan in return for the payment of £32,740 to that company by the taxpayer. The taxpayer was then relieved of any further obligations under the loan.

He claimed that the payment of £5,000 to Rossminster on 1 March 1974 was deductible from his income as an annual interest payment. However, the Special Commissioners upheld the Inspector's assessment of the sum as income under Income and Corporation Taxes Act 1970 schedule ESch. E.

The taxpayer appealed against this finding and claimed that the payment was eligible for relief under Finance Act 1972 section 75Finance Act 1972, sec. 75.

Held, appeal dismissed.

1. The payment of £5,000 was not interest because it was made to discharge an artificial liability created to achieve a tax advantage.

2. The employer only intended to lend the money for four days and therefore, even if the payment of £5,000 could properly be described as interest, it would be impossible to describe it as annual interest.

JUDGMENT

Nourse J.: The question in this case is whether a payment of £5,000 made by the Appellant, Mr. William Stephen Cairns, on 1st March, 1974 was a payment of annual interest within Finance Act 1972 section 75 subsec-or-para (1)sec. 75(1)(a) of the Finance Act, 1972, and accordingly deductible from his income for tax purposes. That payment was made as one of the steps in a tax avoidance scheme which had been devised, and was then being marketed, by Mr. Roy Tucker, a chartered accountant and a well-known tax consultant. That scheme was sometimes known as the "non-deposit scheme" and sometimes as the "one year high income scheme". Its tax advantages, if any, were given a legislative quietus in 1976. But it was estimated before the Special Commissioners that the scheme could have been provided for clients of Mr. Tucker on some 150 occasions in the early part of 1974 alone.

In 1974 Mr. Cairns was a young man of 25 employed as assistant to Mr. Tucker's senior employee. At some time in February 1974 Mr. Tucker promised to pay Mr. Cairns a bonus of £5,000, a promise which was fulfilled on 5th April following. But if the bonus had been paid to Mr. Cairns in the normal course it would have been taxable underIncome and Corporation Taxes Act 1970 schedule ESch. Eas part of the emoluments from his employment, and so Mr. Tucker also offered to make the non-deposit scheme available for Mr. Cairns' benefit. It was implicit in that offer that £5,000 would be payable by Mr. Cairns under the scheme, so that he could claim it as a payment of annual interest within Finance Act 1972 section 75 subsec-or-para (1)sec. 75(1)(a) and thus effectively set it off against the bonus. In that way he would get his bonus tax free. It appears that Mr. Cairns was not the only employee of Mr. Tucker who received a bonus in this way.

The background to the scheme and the method of its implementation are fully set out in the decision of the Special Commissioners. For present purposes I can deal with the matter comparatively briefly. On 28th February, 1974 Mr. Tucker made Mr. Cairns an interest-free loan of £5,000 for seven days. No particular significance was attached to this loan by either side in the argument before me. I can therefore approach the scheme on the footing that Mr. Cairns had £5,000 among his own resources available for the purposes of the scheme. On 1st March there was a meeting at Mr. Tucker's offices in North Audley Street. At that meeting Mr. A.J. Trotman, a director of Rossminster Acceptances...

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6 cases
  • Cairns v MacDiarmid
    • United Kingdom
    • Court of Appeal (Civil Division)
    • 17 Diciembre 1982
  • MacNiven v Westmoreland Investments Ltd
    • United Kingdom
    • Court of Appeal (Civil Division)
    • 23 Octubre 1998
    ...Yorkshire Independent Hospital (Contract Services) Ltd TAXTAX[1988] BTC 5095 (QBD); [1989] BTC 5121 (CA) Cairns v MacDiarmid (HMIT) TAXTAX[1982] BTC 74; (1982) 56 TC 556 Ensign Tankers (Leasing) Ltd v Stokes (HMIT) TAXTAXWLRELR[1989] BTC 410 (Ch D); [1992] BTC 110 (HL); [1989] 1 WLR 1222 (C......
  • Minsham Properties Ltd v Price (Inspector of Taxes) ; Lysville Ltd v Same
    • United Kingdom
    • Chancery Division
    • 26 Octubre 1990
    ...interest paid in advance for one year was held not to be yearly interest, if in the circumstances it was interest at all (asNourse J ([1982] BTC 74) and the Court of Appeal held it was not). What then are the features of the loan to Minsham? The borrowing is repayable on demand by SBA. Mins......
  • Anthony Victor Lomas and Others v HM Revenue and Customs
    • United Kingdom
    • Chancery Division
    • 11 Octubre 2016
    ... ... 40 of the Income Tax Act, 1853." ... 32 Mr Gardiner referred me also to Cairns v MacDiarmid (Inspector of Taxes) [1983] STC 178 in support of the submission that whether interest is properly describable as 'yearly interest' ... ...
  • Request a trial to view additional results

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