Commissioners for H M HM Revenue and Customs v Trustees of the Peter Clay and Another (Respondents/Appellants)
| Jurisdiction | England & Wales |
| Judge | Sir John Chadwick,Lady Justice Arden,Lord Justice Lloyd |
| Judgment Date | 19 December 2008 |
| Neutral Citation | [2008] EWCA Civ 1441 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2007/2662 |
| Date | 19 December 2008 |
[2008] EWCA Civ 1441
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR JUSTICE LINDSAY
ON APPEAL FROM THE SEPCIAL COMMISSIONERS OF INCOME TAX
[2007] UKSPC SPC00595
Lady Justice Arden
Lord Justice Lloyd and
Sir John Chadwick
Case No: A3/2007/2662
Mr Christopher McCall QC (instructed by Speechly Bircham LLP of 6 New Street Square London EC4A 3LX) for the Trustees of the Peter Clay Discretionary Trust
Mr Kevin Prosser QC and Mr Rupert Baldry (instructed by Solicitor for H M Revenue & Customs of East Wing, Somerset House, London WC2R 1LB) for the
Commissioners for H M Revenue & Customs
Hearing date: 10 October 2008
Judgement
This is an appeal from the order made on 15 November 2007 by Mr Justice Lindsay on an appeal and cross appeal under section 56A of the Taxes Management Act 1970 from a decision of the Special Commissioners (Mr Adrian Shipwright and Dr John Avery Jones CBE) released on 27 February 2007.
The issue before the Special Commissioners was whether the Commissioners for H M Revenue & Customs had been correct, in a closure notice dated 30 November 2005, to disallow the attribution in part to income in the year 2000–01 of certain expenses incurred by the trustees of a United Kingdom resident discretionary trust. That issue arose in the context of section 686 of the Income and Corporation Taxes Act 1988 (TA 1988).
Section 686(1) TA 1988 (as in force at the relevant time) – read with section 686(2) —provided, so far as material, that the income arising to trustees of accumulation and discretionary trusts should be taxed not at the basic rate but at the higher rates (“the Schedule F trust rate” or “the rate applicable to trusts”) specified in sections 686(1AA) and 686(1A). But that provision was subject to section 686(2AA):
“686(2AA) The rate at which income tax is chargeable on so much of any income arising to trustees in any year of assessment as –
(a) is income to which this section applies, and
(b) is treated in accordance with section 689B as applied in defraying the expenses of the trustees in that year which are properly chargeable to income (or would be so chargeable but for any express provisions of the trust),
shall be the rate at which it would be chargeable on that income apart from this section, instead of at the rate applicable to trusts or the Schedule F trust rate (as the case may be).”
Section 689B TA 1988 prescribed the order in which expenses were to be set against different classes of income. In the present case nothing turned on the particular class of income against which expenses were to be set: the issue was whether the income arising to the trustees had been applied in defraying expenses which, in part, were properly chargeable to income.
It was common ground that the effect of section 686(2AA) TA 1988 was that, to the extent that income had been applied in defraying expenses which were properly chargeable to income, that income did not suffer tax at the higher rates applicable to the income of accumulation and discretionary trusts. The dispute between the trustees and the Revenue was whether it was proper for trustees to charge part of certain annual expenses to the income of the trust on the footing that that was what the proper application of the general law as to the incidence of trustees' expenses required. Put shortly, the trustees contended that, where a particular expense of managing the trust related partly to income, that expense could and should be apportioned fairly between income and capital; so that part was attributed to income. The Revenue contended that apportionment between capital and income was not permissible in such a case: it was only those expenses which related wholly and exclusively to income that could be attributed to income: an expense which related partly to income and partly to capital was to be charged wholly to capital.
The expenses in issue before the Special Commissioners fell into five categories: (i) trustees' fees, (ii) investment management fees, (iii) bank charges, (iv) custodian fees and (v) professional fees for accountancy and administration. The Special Commissioners ruled in favour of the trustees in respect of each of those categories save investment management fees. They held ( [2007] UKSPC SPC00595) that:
“In accordance with the requirement to achieve a fair balance between income and capital beneficiaries, a proportion of all the expenses in issue, with the exception of the investment management fees, is attributable to income and is properly chargeable to income for the purposes of s 686(2AA)”.
But that statement of principle must be read with the further qualification (at paragraph 19(3) of the decision) that no part of the fixed fee payable to the individuals identified as “non-executive trustees” was attributable to income. The Special Commissioners adjourned the appeal to enable the parties to agree the proportion (or proportions) to be attributable to income; with a direction that that question could be restored for determination if need be. They held, further, that expenses should be allocated to a particular year of assessment on the accruals basis.
The Revenue appealed to the High Court from the Special Commissioners' decision that a proportion of those expenses which related partly to income and partly to capital could be attributed to income. It was made clear, however, in the skeleton argument filed on their behalf in support of that appeal (at paragraphs 22, 49 and 50) that – although contending that the Special Commissioners had erred in principle in that respect —the Revenue did not challenge the conclusion that a proportion of expenses within categories (iv) and (v) – custodian fees and accountancy and other professional fees – could be attributed to income. It was accepted that a part of those fees could be said to relate exclusively to income: so satisfying the principle for which the Revenue contended. The Revenue appealed, also, in respect of the decision that expenses be allocated on the accruals basis. The trustees cross-appealed in respect of the decision that no part of fixed fee payable to non-executive trustees or of investment management fees could be attributed to income.
The judge allowed the Revenue's appeal in respect of the attribution of expenses to income; but dismissed the appeal in respect of allocation on the accruals basis. He dismissed the trustees' cross-appeal. Given that there was no challenge before him to attribution of a portion of expenses within categories (iv) and (v) – nor, in the event, to the attribution of a portion of expenses within category (iii) (bank charges) —it may be that his order of 15 November 2007 (paragraph (1) of which allowed the Revenue's appeal save in respect of the decision that the accruals basis was a proper way to allocate expenses to a year of assessment) went further than he had intended.
It is from that order of 15 November 2007 that the trustees appeal to this Court. Permission to appeal was granted by Lady Justice Arden on 29 January 200There has been no cross-appeal. Further, the Revenue now accepts (as appears from paragraph 5 of the skeleton argument filed in this Court) that a proportion of the fees paid to the executive trustee is properly chargeable to income. The submissions before us have been confined to the fees paid to the non-executive trustees (that is to say, to a relatively small element of the expenses within category (i)) and to investment management fees (expenses within category (ii)).
The underlying facts
The trust known as “the Peter Clay Discretionary Trust” was constituted by a deed dated 5 December 1995. It is one of a family of six trusts with the same trustees and broadly similar investment policies. At the relevant time there were four trustees: two individuals (described as “non-executive trustees”) who claimed only limited fees (fixed in amount) for the time spent in preparing for and attending trustee meetings; a family trust company which made no charge; and an accountant (described as the “executive trustee”) who was remunerated on a time basis for his service as a consultant to the firm of which he was formerly the senior partner. In the year in question (2000–01) the trustees' fees amounted to £46,712: of which £41,712 was paid for the services of the executive trustee and £5,000 was paid to the non-executive trustees.
The Special Commissioners made the following findings of fact as to the role of the executive trustee:
“4(2) Mr Stockwell's role is very active. He spends about 15 hours a week on the investments and a similar amount of time on the income of the six trusts, equating to about 1 1/2 hours a week on the income of this particular trust. The work on income includes checking that the withholding taxes are deducted at the correct tax treaty rate in about 17 countries. Investments are held in a similar number of currencies. He sees daily income records of the Custodians on each account and in each currency on his computer. …
(3) Rawlinson & Hunter bill quarterly for Mr Stockwell's services as a trustee and separately for accounting services performed by other members of the firm. The amount of each part of the fee varied from quarter to quarter (although Mr Stockwell's part is the same except for being less in one quarter) in the period under appeal from which...
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