Collins v Addies (Inspector of Taxes) ; Greenfield v Bains (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 12 June 1991 |
| Date | 12 June 1991 |
| Court | Chancery Division |
Chancery Division.
Millett J.
Mr Andrew Thornhill QC (instructed by Franks Charlesly & Co) for the taxpayers.
Mr Launcelot Henderson (instructed by the Solicitor of Inland Revenue) for the Crown.
The following case was referred to in the judgment:
IR Commrs v Plummer ELR[1980] AC 896
Income tax - Close company - Loans by close company to participators - Sale of shares by directors to to a fellow director - Purchaser assumed liability for loans outstanding from company to vendors - Whether "release" of debts giving rise to liability to higher-rate income tax on vendors - Income and Corporation Taxes Act 1970 section 287 subsec-or-para (1)Income and Corporation Taxes Act 1970, sec. 287(1) (replaced by Income and Corporation Taxes Act 1988 section 421 subsec-or-para (1)Income and Corporation Taxes Act 1988, sec. 421(1)).
These were appeals by two directors of a close company against a decision of the special commissioners that debts owed by them to the company were "released" within the meaning of the Income and Corporation Taxes Act 1970, Income and Corporation Taxes Act 1970 section 287 subsec-or-para (1)sec. 287(1) resulting in a charge to higher-rate income tax.
The two taxpayers, who were directors of and shareholders in a close company, were indebted to the company on current accounts in the sums of £27,115 and £41,063 respectively, totalling £68,178.
On 11 November 1980 the taxpayers agreed to sell all their shares in the company to a fellow director ("B") for £200,000. It was a further term of the agreement that B would on completion deliver to the taxpayers a duly executed counterpart of a deed in terms set out in a schedule to the contract of sale. Under the terms of the deed there was to be a novation of the two loans. The company was to release the taxpayers from liability on their current accounts on condition that B should be substituted for the taxpayers as debtor to the company. The sale was completed and deed was duly delivered.
The taxpayers were assessed to income tax for the year 1980-81 pursuant to the Income and Corporation Taxes Act 1970, Income and Corporation Taxes Act 1970 section 287sec. 287 on the footing that the outstanding debts owing to the company had been released.
It was common ground that the taxpayers' current accounts constituted loans to participators and if there was a "release" of such debts, it would fall to be treated as a distribution by the company by virtue ofIncome and Corporation Taxes Act 1970 section 286sec. 286 of the 1970 Act and the taxpayers would be liable to a charge to higher-rate income tax pursuant to Income and Corporation Taxes Act 1970 section 287 subsec-or-para (1)sec. 287(1).
The question was whether the novation of the two loans, by which B's obligation to repay was substitued for that of the taxpayers, amounted to a release of the debt previously due from the taxpayers.
A special commissioner dismissed the taxpayers' appeals holding that the novation of the loans when B assumed liability for them constituted a release of the debt previously owed by the taxpayers.
The taxpayers appealed to the High Court contending that there had been no release such as was contemplated by Income and Corporation Taxes Act 1970 section 287sec. 287. The release of the original debtor and replacement by a new debtor was not enough to bring the section into operation because the company's assets were in no way depleted by the transaction. There was no release because the situation after the novation was the same as before except that a new debtor owed the same amount to the company. Moreover, Income and Corporation Taxes Act 1970 section 287sec. 287 required the release of the "debt", not of the debtor. Here, the debt itself subsisted. Further, the word "release" meant the diarge of a debt otherwise than by payment. Payment by a third party or acceptance by the creditor of an asset of equal value such as a promise to pay the same amount by a third party would not constitute a release of the debt but would be a diarge by satisfaction not giving rise to a charge to tax pursuant to Income and Corporation Taxes Act 1970 section 287sec. 287.
Held, dismissing the taxpayers' appeal:
1. The release of a debt was not concerned with whether or not there was a depletion of the company's assets. The true analysis of the transaction was that Income and Corporation Taxes Act 1970 section 286 section 287sec. 286 and 287 were linked withIncome and Corporation Taxes Act 1970 section 233sec. 233 (Income and Corporation Taxes Act 1970 section 209sec. 209 of the 1988 Act) (meaning of "distribution"). The original loan was exempted from tax because it was made for consideration consisting of the taxpayers' obligation to repay. If that obligation came to an end by release and new consideration was received by the company within Income and Corporation Taxes Act 1970 section 233 subsec-or-para (2)sec. 233(2)(b), then a balancing charge or liability to payment of deferred tax arose.
2. On novation of the loans, a new debt arose when B was substituted as debtor. The original debt was released by the company.
3. A fresh promise by B to repay the debt could not be treated as performance and satisfaction of the loan contract. The novation was to be regarded as release by the company of the debt within Income and Corporation Taxes Act 1970 section 287 subsec-or-para (1)sec. 287(1).
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1. On 6 February 1990 I heard the appeal of Mr Jack Collins ("the taxpayer") against an assessment to income tax for 1980-81 made pursuant to Income and Corporation Taxes Act 1970 section 287sec. 287 of the Income and Corporation Taxes Act 1970 ("the Taxes Act").
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2. I heard the taxpayer's appeal together with a connected appeal by Mr Anthony Michael Jon Greenfield and issued a single decision in relation to both appeals. The facts and the questions of law were common to both appeals.
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3. The question for my determination, my findings of fact, the respective contentions of Mr A R Thornhill on behalf of the taxpayer and Mr E Ali on behalf of the inspector and my conclusions are set out in my written decision which was issued on 13 February 1990.
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4. No oral evidence was adduced.
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5. The evidence consisted of a statement of agreed facts together with a copy of an agreement dated 11 November 1980.
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6. By my decision I dismissed the taxpayer's appeal and determined his assessment in accordance with figures agreed between the parties.
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7. The taxpayer immediately after the determination of the appeal declared his dissatisfaction therewith as being erroneous in point of law and on 21 February 1990 required a case for the opinion of the High Court pursuant to the Taxes Management Act 1970, Taxes Management Act 1970 section 56sec. 56.
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8. The question of law for the opinion of the court is whether I erred in construing the effect of Income and Corporation Taxes Act 1970 section 287 subsec-or-para (1)sec. 287(1) of the Taxes Act in its context and in relation to the facts of this appeal.
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1. On 6 February 1990 I heard the appeal of Mr Anthony Michael Jon Greenfield against an assessment to income tax for 1980-81 made pursuant to Income and Corporation Taxes Act 1970 section 287sec. 287 of the Income and Corporation Taxes Act 1970.
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2. At the same time I heard an appeal against an assessment to income tax made upon Mr Jack Collins.
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3. In the event I decided in favour of the Revenue in both appeals and adjusted the assessments accordingly.
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4. The taxpayers duly expressed dissatisfaction after the determination of the appeals and in due course required us to state cases for the opinion of the court in both appeals pursuant to the Taxes Management Act 1970, Taxes Management Act 1970 section 56sec. 56.
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5. I have today stated a case with reference to my decision on Mr Jack Collins' appeal setting out the relevant facts, my decision thereon and the question of law upon which the opinion of the court is required. To save repetition and expense we do not set them out again herein.
Mr J Collins and Mr A M J Greenfield ("the taxpayers") each appeal against assessments to income tax for 1980-81 made pursuant toIncome and Corporation Taxes Act 1970 section 287sec. 287 of the Income and Corporation Taxes Act 1970 ("the Taxes Act").
There is no dispute as to the facts which are the subject of an agreed statement, accompanied by an agreed copy of an agreement dated 11 November 1980 and to which the taxpayers were parties with others.
For the purposes of these appeals the relevant part of Income and Corporation Taxes Act 1970 section 287sec. 287 of the Taxes Act is as follows:
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287(1) Subject to the following provisions of this section where a company is assessed or liable to be assessed under section 286 above in respect of a loan or advance and releases or writes off the whole or part of the debt in respect of it, then,-
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(a) for the purpose of computing the total income of the person to whom the loan or advance was made a sum equal to the amount soreleased or written off shall be treated as income received by him after deduction of income tax from a corresponding gross amount…
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I have emphasised the words "releases" and "released" where they occur in Income and Corporation Taxes Act 1970 section 287sec. 287 as the point at issue in these appeals is the precise meaning of those words in their context. Mr A R Thornhill QC, for the taxpayers, submits that in the context of Income and Corporation Taxes Act 1970 section 287sec. 287 a release should be confined to one which is either wholly voluntary or made for less than adequate consideration. Mr E Ali, of the Inland Revenue Solicitor's Office, appearing for the inspectors of taxes, submits that there is no justification for such a qualification for the meaning of the word...
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Collins v Addies (Inspector of Taxes) ; Greenfield v Bains (Inspector of Taxes)
...subsec-or-para (1)Income and Corporation Taxes Act 1988, sec. 421(1)). These were appeals by two taxpayers from a decision of Millett J ([1991] BTC 244) that the word "releases" in the Income and Corporation Taxes Act 1970 section 287 subsec-or-para (1)Income and Corporation Taxes Act 1970,......