Collins v Addies (Inspector of Taxes) ; Greenfield v Bains (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 31 July 1992 |
| Date | 31 July 1992 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Nourse, Glidewell and Stocker L JJ.
Andrew Thornhill QC (instructed by Franks Charlesly & Co) for the taxpayers.
Launcelot Henderson (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment of NourseJ:
British Russian Gazette and Trade Outlook Ltd v Associated Newspapers Ltd ELR[1933] 2 KB 616
IR Commrs v Plummer ELR[1980] AC 896
Income tax - Close company - Loans by close company to participators - Taxpayers were shareholders in and directors of company - Sale of shares by taxpayers to a fellow director who by a novation assumed liability for debts owed by taxpayers to company - Whether "release" of debts to be treated as taxpayers' income giving rise to higher-rate income tax charge - 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 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, sec. 287(1) was not limited to gratuitous releases.
The two taxpayers, who were directors 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 assume liability for the two taxpayers' debts to the company by a novation of the two loans. The company released the taxpayers from liability on their current accounts on condition that B was substituted for the taxpayers as debtor to the company. At some time later B repaid the debts to the company.
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 287 subsec-or-para (1)sec. 287(1) on the footing that the outstanding debts owing to the company had been released.
The question was whether the novation of the two loans, by which B's obligation to repay was substituted for that of the taxpayers, amounted to a "release" of the debt previously due from the taxpayers within the meaning of Income and Corporation Taxes Act 1970 section 287 subsec-or-para (1)sec. 287(1).
It was common ground that the taxpayers' current accounts constituted loans to participators and that if there had been a release of the debt within the meaning of Income and Corporation Taxes Act 1970 section 287 subsec-or-para (1)sec. 287(1), it would fall to be treated as a distribution by the company by virtue of Income and Corporation Taxes Act 1970 section 286sec. 286 of the 1970 Act and the taxpayers would be liable to higher-rate income tax.
A special commissioner and the High Court held that the novation constituted a "release" of the debts owed by the taxpayers to the company within Income and Corporation Taxes Act 1970 section 287 subsec-or-para (1)sec. 287(1).
The taxpayers contended that Income and Corporation Taxes Act 1970 section 287 subsec-or-para (1)sec. 287(1) applied only to releases given gratuitously or for less than full consideration and not to releases given for full consideration, such as those in the present case. A limitation should be put on the ordinary meaning of "release", which would include a release given for full consideration. Such a limitation was required by the context both of Income and Corporation Taxes Act 1970 section 287 subsec-or-para (1)sec. 287(1) itself and of the provisions of the 1970 Act relating to company distributions as a whole (Income and Corporation Taxes Act 1970 section 233sec. 233-Income and Corporation Taxes Act 1970 section 237 section 282237 and 282-Income and Corporation Taxes Act 1970 section 286286).
The Crown conceded that some limitation was to be put on Income and Corporation Taxes Act 1970 section 287sec. 287 as a result of Income and Corporation Taxes Act 1970 section 286 subsec-or-para (5)sec. 286(5) which gave relief where a loan or part of a loan was repaid. That relief would apply in circumstances such as where a debt was released as a result of payment by a third party where there was accord and satisfaction. The taxpayers argued that such a concession produced an illogicality in that accord and satisfaction fell within Income and Corporation Taxes Act 1970 section 286 subsec-or-para (5)sec. 286(5) but not within Income and Corporation Taxes Act 1970 section 287 subsec-or-para (1)sec. 287(1).
Held, dismissing the taxpayers' appeal:
1. There was nothing in the wording of Income and Corporation Taxes Act 1970 section 287 subsec-or-para (1)sec. 287(1) itself to indicate that the word "releases" should be limited to gratuitous releases. To do so would be to legislate not to interpret. If Parliament had intended the word to mean "releases otherwise than for full value" it could and must have said so: nor did the provisions of the 1970 Act relating to company distributions as a whole justify a limitation on the ordinary meaning of the word "release".
2. There was no illogicality in the Crown's limited concession. "Release" did not include any transaction which either consisted of or amounted to a repayment of the loan, even if the transaction, when viewed in isolation, might be said to have the effect of releasing the debtor from his obligation to repay the loan. The repayment of the loan, or the acceptance by the company of something equivalent to it, effectively enabled it to recover its money, in which event there was no justification for imposing a liability to tax on the participator. The limitation had nothing to do with gratuitousness. Moreover it was not one which excluded a novation, being a transaction which did not enable the company to recover its money.
By a notice of appeal dated 15 July 1991 the taxpayers appealed against the decision of Millett J given on 12 June 1991. The grounds of appeal were that the judge was wrong in law in holding that, on the facts found by a special commissioner, the taxpayer company (an unlimited close company), "released" £68,000 to the taxpayers for the purposes of Income and Corporation Taxes Act 1970 section 287sec. 287 of the Income and Corporation Taxes Act1970.
Nourse LJ:...
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