Clark v Oceanic Contractors Inc.

JurisdictionUK Non-devolved
JudgeLord Scarman,Lord Wilberforce,Lord Edmund-Davies,Lord Lowry,Lord Roskill
Judgment Date16 December 1982
Judgment citation (vLex)[1982] UKHL J1216-3
Date16 December 1982
CourtHouse of Lords
Clark (Inspector of Taxes)
(Appellant)
and
Oceanic Contractors Incorporated
(Respondents)

[1982] UKHL J1216-3

Lord Scarman

Lord Wilberforce

Lord Edmund-Davies

Lord Lowry

Lord Roskill

House of Lords

Lord Scarman

My Lords,

1

In this appeal the Crown seeks to have restored the determination of the Inspector of Taxes that tax amounting to £2,033,254 is payable by the respondent corporation ("Oceanic") under Regulation 26 of the PAYE Regulations ( S.I. 1973 no. 334) for the year 1977/78. The issue is of great practical importance to the Revenue and to Oceanic: it is also one of some legal difficulty. The issue turns upon the true construction of s.204 of the Income and Corporation Taxes Act 1970—the section which imposes the PAYE obligation.

2

Oceanic is a foreign corporation registered in Panama: it is not resident in the United Kingdom for the purposes of income tax. Its operations are world-wide and includes the provision of technical services and equipment to those who are engaged in the exploration and exploitation of the oil and gas resources of the North Sea. The issue in the appeal is whether Oceanic can be required to operate the PAYE procedure for tax collection in respect of the wages and salaries of those of its work force whom it employs in the United Kingdom sector of the North Sea. It is conceded that the emoluments of these employees are assessable to British income tax under Schedule E. Is that, by itself, enough to impose upon Oceanic the PAYE obligation? The Crown submits that it is. If, however, it is not, the Crown's alternative submission is that Oceanic has by reason of its operations and trading activities in the United Kingdom and in the North Sea a sufficient presence in, or connection with, the United Kingdom to justify the Revenue's requirement that it operate PAYE in respect of the earnings of the personnel it employs in the United Kingdom sector of the North Sea.

3

To these submissions the respondent makes reply as follows:—in its submission, the anomalies and enforcement problems arising from an attempt to impose the PAYE obligation upon a non-resident corporation paying emoluments abroad to persons who are working outside the United Kingdom are such that, even though those emoluments be (as they may well be) assessable to tax under Schedule E, Parliament cannot have intended to impose upon the employer the duties of deduction and collection of tax formulated in s.204 and the PAYE Regulations: the section must be subject to an implied territorial limitation which would exclude its operation in such circumstances.

4

The Special Commissioners upheld the respondent's submission. Dillon J., while he rejected the Crown's first submission because of its "world-wide" implications which he could not conceive Parliament intended and which he held to be inconsistent with the general rule that an Act of Parliament only applies to transactions within the United Kingdom, upheld the Crown's second submission, finding in s.38(6) of the Finance Act 1973 (which it will be necessary to consider later) a sufficient link with the United Kingdom to justify the imposition of the PAYE obligation in respect of emoluments arising from duties performed in the United Kingdom sector of the North Sea. He reversed, therefore, the determination of the Special Commissioners in favour of the respondents.

5

The Court of Appeal reversed the judge. They considered s.38(6) of the 1973 Act, upon which the judge relied, to be a charging provision affording no guidance as to the collecting liability imposed by s.204, They accepted the respondent's submission that some territorial limitation must be placed upon the s.204 liability. They refrained, however, from formulating the limitation. It was, in Brightman L.J.'s view unnecessary to say more than that it must exclude a non-resident corporation making payments in circumstances such as those of this case.

6

The facts have been lucidly set out by the Special Commissioners and summarised by Dillon J. at the beginning of his Judgment. It will suffice to mention specifically only the following:

(1) Oceanic is not resident for income tax purposes in the United Kingdom:

(2) It has, however, a design office at Wembley, a platform fabrication yard near Inverness, and a branch at Aberdeen providing skilled services in connection with its North Sea activities. It operates PAYE in respect of employees at these establishments:

(3) It accepts that it has a place of business within Great Britain and is liable to corporation tax on profits from its activities in the United Kingdom and in the United Kingdom sector of the North Sea, all of which are taxed as a single trade. It is an overseas company to which s.407 of the Companies Act 1948 applies. It has complied with the requirements of the section and has an address for service in Wembley:

(4) The operating base for its North Sea activities is the port of Antwerp; the headquarters of its North Sea Division are at Brussels. Its North Sea Activities consist of installation and maintenance of platforms and the laying of pipelines in the United Kingdom and Norwegian sectors of the North Sea, for which purpose it operates barges out of Antwerp:

(5) The work force employed on these operations was in 1977/78 several hundred strong (approximately 400 in 1977), of whom approximately 60 per cent were United Kingdom nationals. They had written contracts not governed by English law. They were paid (in U.S. dollars) and employed outside the United Kingdom.

7

The Statutes

8

The Continental Shelf Act 1964 makes provision for the exploration and exploitation of the natural resources of the continental shelf outside territorial waters. Its purpose is to give effect to certain provisions of the Geneva Convention on the High Seas (April 1958). The Act recognises that the United Kingdom sector of the North Sea continental shelf is not part of the United Kingdom: s.1(1). The Act provides that areas of the continental shelf outside territorial waters may be designated by Order in Council as areas within which the United Kingdom may exercise rights of exploration and exploitation: s.1(7). Certain areas of the North Sea, compendiously described in these proceedings as "the U.K. sector of the North Sea" have been so designated.

9

Consequential upon the Continental Shelf Act, s.38 of the Finance Act 1973 made provision for the territorial extension of charge to income tax, capital gains tax, and corporation tax. Subsection (1) provides that the territorial sea of the United Kingdom shall for tax purposes be deemed to be part of the United Kingdom. Designated areas under the 1964 Act, which are by definition beyond the territorial sea, are not part of the United Kingdom. The section, however, extends the application of some of our tax laws to these areas. In particular, subsection (4) provides that profits or gains arising to any person not resident in the United Kingdom from exploration or exploitation activities carried on in the United Kingdom or in a designated area shall for the purposes of corporation tax or capital gains tax be treated as the profits or gains of a trade carried on in the United Kingdom through a branch or agency. The subsection brings such a person within s.246 of the Income and Corporation Taxes Act 1970, thereby recognising a "tax presence" in the United Kingdom of a non-resident corporation if it be engaged by way of trade in exploration or exploitation activities in designated areas. Subsection (6) brings within the charge to income tax emoluments from an office or employment in respect of duties performed in a designated area: they are to be treated for the purposes of income tax as emoluments in respect of duties performed in the United Kingdom. In other words, they are chargeable to income tax under Schedule E. The effect of the section is, therefore:

(1) that a non-resident corporation, which, like Oceanic, is engaged by way of trade in exploration or exploitation activities in the United Kingdom sector of the North Sea, is liable to corporation tax and capital gains tax in respect of the profits and gains of its trade there; and

(2) that its employees engaged in the United Kingdom sector are liable to tax under Schedule E in respect of their earnings in the sector.

10

Non-resident corporations and their employees are, therefore, in certain very important respects subject to British tax laws in respect of their activities in the United Kingdom sector of the North Sea.

11

I turn now to the Income and Corporation Taxes Act 1970. Put very briefly, liability to tax depends, as it always has, upon the location of the source from which the taxable income is derived or the residence of the person whose income is to be taxed. If either the source of income or the residence of the owner of the income is in the United Kingdom, the income is liable to tax. The combination of this principle of income tax law with the provisions of s.38(6) of the Act of 1973 results in persons, whether or not resident in the United Kingdom, who are paid emoluments in respect of duties performed in the United Kingdom sector of the North Sea, being liable to income tax in respect of those emoluments.

12

For the purposes of this appeal, the critical sections of the Income and Corporation Taxes Act 1970 are sections 181 and 204, which provide for the charging and collection of income tax under Schedule E, and s.246 which imposes a corporation tax liability on a non-resident corporation in respect of the profits of a trade carried on through a branch or agency within the United Kingdom. Again, it is to be noted that a tax liability can arise in the case of non-resident persons where the income, profit, or gains arise from activities carried on within the United Kingdom.

13

Sections 181 and 204 bear directly on the issue of this appeal. Section 181 as amended by s.21 of the Finance...

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