Clarke v British Telecom Pension Scheme Trustees
| Jurisdiction | England & Wales |
| Judgment Date | 14 October 1998 |
| Date | 14 October 1998 |
| Court | Chancery Division |
Chancery Division.
Lightman J.
The Solicitor General Lord Falconer of Thoroton QC and Timothy Brennan (instructed by the Solicitor of Inland Revenue) for the trustees.
Michael Flesch QC and Felicity Cullen (instructed by Maxwell Batley) for the trustees.
The following cases were referred to in the judgment:
Cooper (HMIT) v C & J Clark Ltd TAXTAX[1982] BTC 130; 54 TC 670
Davies (HMIT) v Shell Co of China LtdTAX (1951) 32 TC 133
Imperial Tobacco Co (of Great Britain and Ireland) Ltd v Kelly (HMIT)TAX (1943) 25 TC 292
Iswera v IR CommrsWLR [1965] 1 WLR 663
Ransom (HMIT) v HiggsTAX (1974) 50 TC 1
Income tax - Exemption - Pension scheme trustees - Sub-underwriting commissions - Whether sub-underwriting of share issues was taxable underIncome and Corporation Taxes Act 1988 article 18Sch. D, Case I as a trade and not under Income and Corporation Taxes Act 1988 article 18Sch. D, Case VI - Whether exemption available - If trading, whether trustees liable to additional rate tax on certain income of discretionary trusts - Income and Corporation Taxes Act 1988 article 592 article 686Income and Corporation Taxes Act 1988, ss. 592, 686.
This was an appeal by the Revenue from a decision of the special commissioners that the profits of sub-underwriting transactions undertaken by the trustees of approved pension funds did not qualify for exemption from income tax under the Income and Corporation Taxes Act 1988 article 592Income and Corporation Taxes Act 1988, s. 592(3), and a cross appeal by the trustees from the commissioners' decision that, if the sub-underwiting activity did amount to a trade, the trustees would be liable to the additional rate of tax underIncome and Corporation Taxes Act 1988 article 686s. 686 of the 1988 Act.
The trustees of three approved pension schemes, when approached by the lead underwriter of a rights issue or initial public offering of shares, would enter into a sub-underwriting agreement, in return for a payment amounting to some 1/2 per cent of the two per cent underwriting commission, undertaking to purchase a proportion of any unsold shares at the issue price.
In the ordinary case there would be no unsold shares, but if there were unsold shares and the sub-underwriter was required to take up shares, they might be sold immediately or retained if the particular shares fitted in with the scheme's investment policy or were in companies which the trustees wished to support. Sub-underwriting provided what the trustees recognised as a useful source of extra income although the sums were not very great in proportion to the schemes' investments.
The first issue was whether the income generated by sub-underwriting attracted the exemption from income tax for pension schemes provided byIncome and Corporation Taxes Act 1988 article 592s. 592(3) of the 1988 Act, which exempted underwriting commissions if they were "applied for the purposes of the scheme and would, but for this subsection, be chargeable to tax under Income and Corporation Taxes Act 1988 article 18Case VI of Sch. D". Therefore, if, as the Revenue contended, the activity of sub-underwriting for reward as carried on by the trustees amounted to a trade taxable under Income and Corporation Taxes Act 1988 article 18Sch. D, Case I, that activity would not fall within Case VI and would not qualify for exemption.
The second issue was whether, if trustees carried on a trade of sub-underwriting, they were liable to the additional rate of tax imposed by the Income and Corporation Taxes Act 1988 article 686Income and Corporation Taxes Act 1988, s. 686.
The special commissioners held in favour of the trustees that they were not trading. The commissioners' view was that, although sub-underwriting commissions might constitute the profits of a trade, they would not do so if earned by trustees of an exempt scheme. That was because a "purposive" construction was to be applied to Income and Corporation Taxes Act 1988 article 592s. 592(3) of the 1988 Act, and the purpose of that provision was to exempt the investment activities of approved pension funds, the trustees of which did not normally engage in trade.
The commissioners held in favour of the Revenue that if they had been trading they would fall within Income and Corporation Taxes Act 1988 article 686s. 686 of the 1988 Act.
Held, allowing the Revenue's appeal and dismissing the trustees' cross-appeal:
1. The commissioners had made a critical mistake as to the legal test to be applied in deciding whether the sub-underwriting commissions amounted to receipts of a trade. The criterion as to what did or did not constitute a trade was the same in all cases where the question arose, whether the taxpayers were trustees of an approved pension scheme or anyone else. There was no predisposition in favour of holding that the profits earned by trustees of exempt schemes did not fall within Case I; and there was no special meaning to be given to the word "trade" where the activity in question was carried on by trustees of exempt schemes.
2. In determining whether an activity amounted to trading, there were two stages. First, if viewed objectively, the activity bore the legal character of trade. If it did clearly and unequivocably, that would be the end of the matter. However, if the character of the activity was equivocal, the second stage was to consider what other factors might cast further light on the activity and how far its legal character was affected by the particular facts of the case, or the particular context in which the activity was carried on. The sub-underwriting activity involved operations of a commercial character by which the trustees provided a service, namely underwriting, to the lead underwriters for reward. The service was provided frequently and was well organised as well as extensive, business-like and for profit. Viewed objectively, the activity had all the hallmarks of a trade, and since the activity unequivocably constituted a trade, there was no occasion to proceed to the second stage (Dicta of Lord Reid and Lord Wilberforce in Ransom (HMIT) v HiggsTAX (1974) 50 TC 1 at pp. 78 and 88 applied.
3. The exemption from the additional tax imposed on trustees byIncome and Corporation Taxes Act 1988 section 686 subsec-or-para (2)s. 686(2)(c) was restricted to the fruits of ownership: it did not extend to the fruits of activities, whether trades or businesses carried on by trustees, or the sums payable to them under contracts entered into in the course of such activities. Accordingly, since the sub-underwriting amounted to a trading activity, the exemption from additional tax was not available to the trustees.
By originating motion pursuant to the Taxes Management Act 1970 section 56ATaxes Management Act 1970, s. 56A (as amended by SI 1994/1813 with effect from 1 September 1994), the Revenue appealed to the High Court against the following decision of the special commissioners (Mr THK Wallace and Dr AN Brice Sp C 146). The taxpayers, the British Telecom Pension Scheme Trustees, POSSS Custodian Trustee Ltd as Administrator of the Post Office Staff Superannuation Scheme and POPS Custodian Trustee Ltd as Trustee of the Post Office Pension Scheme cross appealed.
1. The trustees of British Telecom Pension Scheme, POSSS Custodian Trustee Ltd as administrator of the Post Office Staff Superannuation Scheme, and POPS Custodian Trustee Ltd as Trustee of the Post Office Pension Scheme (the appellants) appeal against estimated assessments to income tax. The assessments in respect of the British Telecom Pension Scheme ("BTPS") were for the years 1983-84 to 1994-95 inclusive and totalled £6,489,250 (tax) plus default interest; those in respect of the Post Office Staff Superannuation Scheme ("POSSS") were for the years 1989-90 and 1990-91 and totalled £210,000 (tax) plus default interest; those in respect of the Post Office Pension Scheme ("POPS") were for the years 1981-82 to 1994-95 inclusive and totalled £6,534,250 (tax) plus default interest. All of the assessments were estimated. The appeals were lodged with the special commissioners on 7 January 1996, and on 2 May 1997 the presiding special commissioner directed that the appeals of the appellants be heard together. The assessments were raised because the Revenue were of the view that sub-underwriting commissions received by the appellants were chargeable to tax under Case I of Sch. D and were also liable to the additional rate of tax applicable to trusts.
2. Income and Corporation Taxes Act 1988 section pPart XIV of the Income and Corporation Taxes Act 1988 (the Taxes Act) contains provisions relating to pension schemes. Income and Corporation Taxes Act 1988 section pSection 592 gives exemption from income tax to certain income of exempt approved schemes and the relevant parts provide:
(2) Exemption from income tax shall … be allowed in respect of income derived from investments or deposits if … it is income from investments or deposits held for the purposes of the scheme.
(3) Exemption from income tax shall … be allowed in respect of underwriting commissions if … the underwriting commissions are applied for the purposes of the scheme and would, but for this subsection, be chargeable to tax underIncome and Corporation Taxes Act 1988Case VI of Schedule D.
The italics here and in para. 4, 5 and 6 are ours.
3. Before 1988 similar provisions were contained in Income and Corporation Taxes Act 1988 section p subsec-or-para (2) section p subsec-or-para (3)ss. 21(2) and (2A) of the Finance Act 1970 as amended by the Finance Act 1971.
4. Income and Corporation Taxes Act 1988 section pSection 659A of the Taxes Act which was inserted by the Finance Act1990 with effect from 26 July 1990 clarifies the meaning of "investments" in Income and Corporation Taxes Act 1988 section p subsec-or-para (2)s. 592(2). The relevant part ofIncome and...
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