Commissioners of Inland Revenue v Bates
| Jurisdiction | England & Wales |
| Judge | Lord Reid,Lord Morris of Borth-y-Gest,Lord Guest,Lord Upjohn,Lord Wilberforce |
| Judgment Date | 08 December 1966 |
| Judgment citation (vLex) | [1966] UKHL J1208-1 |
| Date | 08 December 1966 |
| Court | House of Lords |
[1966] UKHL J1208-1
House of Lords
Lord Reid
Lord Morris of Borth-y-Gest
Lord Guest
Lord Upjohn
Lord Wilberforce
Upon Report from the Appellate Committee, to whom was referred the Cause Geoffrey Booth Bates against Commissioners of Inland Revenue, that the Committee had heard Counsel, as well on Tuesday the 11th, as on Wednesday the 12th, Thursday the 13th and Monday the 17th, days of October last, upon the Petition and Appeal of Geoffrey Booth Bates, of 67 Station Lane, Birkenshaw, in the County of York, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 2d of June 1965, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioner might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the Case of the Commissioners of Inland Revenue, lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:
It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of Appeal, of the 2d day of June 1965, complained of in the said Appeal, be, and the same is hereby, Affirmed, and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered, That the Appellant do pay, or cause to be paid, to the said Respondents the Costs incurred by them in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments.
My Lords,
This is an appeal against additional assessments to surtax in the years 1953-4, 1954- 5 and 1955-6 laid under Part VIII of the Income Tax Act 1952 and in particular under section 408 thereof. The Appellant was a director and shareholder of a company T. Ambler & Sons to which the provisions of chapter III of Part IX applied. In 1948 he made an irrevocable settlement in favour of his children in which accumulation of the trust income was directed, and he conveyed to the trustees of the settlement some of his shares in that company. It was his practice to have a current account with that company. From time to time sums accruing to him were paid in and sums owing by him were paid by the company and debited to this account. There was generally a considerable balance owing by him but at the end of each financial year of the company he paid to them enough to meet this balance, thereby creating a large overdraft from his Bank, and at the beginning of the next year the company paid out enough to cover that overdraft from his Bank. In April of 1950, 1951 and 1953 this was done by the company paying a sum direct to the Bank but in 1952 and 1954 it was done by the Company drawing cheques in favour of the Appellant which he paid into his account with the Bank. We are particularly concerned with a payment of £9,100 made by the company to the Appellant on 5th April 1954. I have no doubt that this was a sum paid by way of loan within the meaning of section 408(7).
The case against the Appellant is that section 408 requires that the sum of £9,100 shall be treated as the income of the Appellant to the extent therein provided. The section requires that any loan to the settlor by "any body corporate connected with the settlement" shall be treated as having been paid by the trustees of the settlement, and the definition in section 411(4) of "body corporate connected with the settlement" is so wide that in my opinion it must be held to include this company although there was in fact no connection whatever between the company and the settlement beyond the fact that the settlement trustees held some shares of the company, and the Appellant had no intention of gaining any tax advantage and in fact gained none by taking this loan from the company.
This startling proposition makes it necessary to examine these statutory provisions with some care. They are as follows:
"408. (1) Any capital sum paid directly or indirectly in any relevant year of assessment by the trustees of a settlement to which this section applies to the settlor shall—
These provisions were first enacted in 1938. The mischief against which they were directed appears to have been that some taxpayers, intending to avoid paying surtax, transferred to trustees of settlements shares in companies controlled by them: then they borrowed money from the trustees, who used the dividends in these shares to make the loans. In that way the settlors got possession of the income from the shares which they had settled in the form of capital payments which did not attract surtax. And if the trustees were complacent the settlors might never repay these "loans".
The reason why some companies were brought in appears to have been that some settlors had devised rather more elaborate schemes. A settlor might form a company, controlled by him, to which he transferred assets yielding income. He would then put the whole, or the greater part, of the shares of that company in the settlement, and then he would cause that company to lend to him the whole or a part of its income thereby diminishing the dividends which would otherwise have gone to the settlement trustees. He would not repay these loans during his lifetime and in that way he would receive and enjoy the income of the assets which he had transferred to the company without being liable to pay surtax in respect of it.
Of course it was necessary to stop that kind of tax evasion and of course it was necessary to try to anticipate and forestall more complicated variations of this plan. But this was an early example of legislation directed against tax evasion and experience has shown that in at least one respect it is too narrow—see Potts' Executors v. C.I.R. [1951] A.C. 443 to which I shall return—and in other respects it is too wide. Its provisions suffer from two glaring defects. In the first place they impose heavy liabilities in respect of many kinds of ordinary and innocent transactions which no laymen and indeed few lawyers not familiar with this section would ever imagine could be caught in this way—in short they are a trap. And secondly they are framed in such a way that their plain meaning in many cases leads to a result which Russell L.J. has rightly called monstrous.
Normally when we construe a statute we are attempting to discover the intention of Parliament from the words used in the Act; but here it is obvious, and indeed admitted, that Parliament could never have intended some of the results which are inescapable if certain of the provisions of the section are not to be disregarded. But we cannot apply a statutory provision in one way in cases where it creates injustice and in a different way in cases where it serves to defeat attempts to evade tax.
The first and main question in this case involves the construction of section 411(4). I have tried to explain why it was necessary to bring in companies controlled by settlors and used in aiding schemes for tax evasion, and this subsection is intended to do that. The fact that it is so widely drawn as to be a trap for the innocent does not in my judgment entitle a Court to attribute to any of its provisions a strained or unnatural meaning so as to make it impotent in those cases where tax evasion is attempted. It applies to companies subject to surtax directions which would be followed by apportionment of the whole income for the year where that is directed. There is no difficulty about ( a). If in any year there has been apportionment of any part of the company's income to the settlement trustees (or a beneficiary) the subsection applies. The difficulty is in ( b). This requires that there could have been such an apportionment "if the income" of the company "had not been distributed to the members". There can be apportionment if, and only if, the Special Commissioners are of opinion that a reasonable part of the company's income has not been distributed. So it appears to me that the natural meaning of the words I have quoted is—if a reasonable part of the income had not been distributed. We are to look at the year retrospectively: if there was no apportionment we are to enquire whether there could have been apportionment, and there could have been apportionment in that case but in no other. If that is right it is not disputed that if a reasonable part of the company's income had not been distributed in the year when the loan of £9,100 was made there could have been apportionment. In fact a reasonable part must have been held to have been distributed and no apportionment was made of that year's income, but that is immaterial.
The argument for the Appellant was that "the income" must mean the whole income and that to hold that it means a reasonable part of the income or that part which in fact was distributed involves writing in words which are not there. But in my view "the income" must take its meaning from the context. The expression is capable of meaning "the whole income", or "income" without the article "the", or "part of the income", or such part of the income as the context indicates to be relevant. And to give the words the meaning "the whole income" would make nonsense of the paragraph. It would only apply if the whole of the company's actual income from all sources had in fact been distributed but not if only 90 per cent. had been distributed. The Appellant admits that that would be so unreasonable that no one could possibly have intended that to be the test. It may not be easy to see why paragraph ( b) is there at all, but we are not entitled either to disregard it or to attribute an absurd meaning to it if it is...
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