Commissioners of Inland Revenue v Parker; Commissioners of Inland Revenue v Tomlinson
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE DIPLOCK |
| Judgment Date | 08 February 1965 |
| Judgment citation (vLex) | [1965] EWCA Civ J0208-2 |
| Court | Court of Appeal |
| Date | 08 February 1965 |
[1965] EWCA Civ J0208-2
In The Supreme Court of Judicature
Court of Appeal
(Revenue Paper)
The Waster of the Rolls
(Lord Denning)
Lord Justice Danckwerts
Lord Justice Diplock
MR. W. A. BAGNALL, Q. C. and MR. J. R. PHILLIPS (instructed by the Solicitor of Inland Revenue, Somerset House, Strand, London, 'W. C. 2.) appeared as Counsel on behalf of the Appellants.
MR. F. HEYWORTH TALBOT, Q. C. and L. J. BROMLEY (instructed by Messrs. Whetstone & Frost, Town Hall Square, Bishop Street, Leicester) appeared as Counsel on behalf of the Respondents.
THE MASTER 0F THE BOLLS: In this case there was a company called Parker Shoes, Ltd., a private company, a controlled company. Its issued capital was 35,002 shares of £ 1 each, nearly all held by members of the Parker family. George Parker held 18,002 of the shares. In 1953 the company had accumulated substantial profits which it had not distributed by way of dividend. It was apparent that if George Parker died and his shares were valued for estate duty purposes, the amount of estate duty would be so high that the shares would probably have to be sold. He had not got enough other funds to enable his estate to pay the duty without selling the shares. But he did not want the shares to be sold: for then the control might go out of the family. In these circumstances, so as to provide funds in the event of his death, it was arranged that debentures should be issued in 1953 to the shareholders in this company. The debenture issued to George Parker was a debenture for £ 16,002. It was somewhat unusual. No interest was payable. No charge was given on the company's assets. It was repayable at George Parker's death, or at the end of seven years, by the company giving notice in writing to the holder. It was also provided that the principal money should become immediately payable if a distress or execution be levied on the company or if there was a resolution for winding up or if a receiver was appointed. There were, however, provisions for enabling the debenture to be transferred. The debenture was, of course, evidence of a debt by the company to Mr. George Parker.
I would notice at once this fact. The company had in 1953 substantial undistributed profits, and this debenture was calculated to absorb some of them. So it mould have been possible, if the Revenue authorities had thought fit, for a direction to have been given under Section 245 and Section 246 of the Income Tex Act, 1952, on the ground that the profits had not been distributed. If such a direction had been given in 1953 or the succeeding six years, the income of the company would have been deemed to be the income of the members and the amount apportioned among them for the purposes of surtax. But no such direction was given. After the seven years were up, on 14th January, 1961, the company paid over to Mr. George Parker the amount secured by the debenture, namely, £ 18,002. On that sum being paid, the Revenue authorities claim that they are entitled to put into operation Section 28 of the Finance Act, 1960. They say that George Parker obtained a tax advantage by a transaction in securities; that they are enabled to counteract that tax advantage; and that they will do so by charging him to surtax for the year 1960-61 on the basis of this sum of £ 18,002 grossed up as if £ 18,002 were the net amount received after the tax had been deducted.
The question is whether this transaction falls within Section 28 of the Finance Act, 1960. The Special Commissioners thought it did not, but Mr. Justice Ungoed-Thomas thought it did. Now there is an appeal by the taxpayer to this Court. We have gone through the detailed provisions of Section 28 of the Finance Act, 1960, and the definition section, Section 43, in order to try to see what those sections mean. Now one thing is plain to anyone who has had any experience of tax matters. It is that Section 28 is designed to deal with avoidance of tax by dividend stripping. There are many cases in the books which show how people used to get money out of the Revenue by this means. If one reads Section 28, sub-section (2) (a), (b) and (c), it is quite plain that those particular sub-sections are directed to the well-known operation of dividend stripping.
This, of course, is not such a case. It was not dividend stripping, but simply the redemption of a debenture. The Revenue say, however, that it comes within the words of Section 28, sub-section 2(d). Mr. Bagnall says that this particular sub-section scores a hit againstthis taxpayer even though it was not aimed at him: whereas Mr. Talbot says the whole section, including sub-section (d) was aimed at the rooks and should only hit the rooks. Now let us see about it. We have had this section closely analysed to our great advantage.
The first question is whether this case comes within the opening words of a "transaction in securities" remembering that, to be within the section, it must be a transaction carried out after 5th April, 1960. "Transaction in securities" is defined in Section 43, sub-section (4)(i), which says: "'transaction in securities' includes transactions, of whatever description, relating to securities, and in particular (i) the purchase, sale or exchange of securities, (ii) the issuing or securing the issue of, or applying or subscribing for, new securities, (iii) the altering, or securing the alteration of, the rights attached to securities."
The only way in which Mr. George Parker con be caught by this section is by reason of the redemption of the debenture in January, 1961: for that is the only transaction which took place after 5th April, 1960. The question is therefore whether the redemption of the debenture, that is, the payment off of the debenture, is a transaction in securities within the definition.
If it were permissible to take the ordinary meaning of a "transaction in securities" I would think of a sale or purchase of shares or debentures. I would not myself describe the payment off of a debenture as a transaction in securities. But the definition extends the ordinary mailing so as to include "transactions, of whatever description, relating to securities." It is said that the repayment of a debenture is a transaction relating to securities. I think that is giving this definition far too wide an interpretation. I think that those opening wide words should be read together with the particular instances (l), (ii) and (iii) so as to show the nature of the transactions which the legislature had in mind. The legislature had in mind such transactions as the transfer and sale and issue of securities. It is plain to me that the phrase cannot be extended so as to include dividends paid on shares, nor money which is paid out on liquidation of a company, or a reduction of capital. It does not include the payment off of a debenture. I am confirmed in this view by looking at the general mischief which this section is designed to hit. It is designed to hit dividend stripping end not the redemption of debentures. On this first point, therefore, I hold that Section 28 does not hit this transaction at all because it was not a transaction in securities.
But then in case I am wrong and the redemption of the debentures was a "transaction in securities", I must consider the next point. Did Mr. Farker "in consequence of" that transaction in January, 1961, obtain a "tax advantage" or was he then put "in a position to obtain a tax advantage"? Tax advantage is defined in Section 43, subsection 4(g) as meaning I will miss out some immaterial words ".the avoidance of a possible assessment" to income tax, "whether the avoidance is effected by receipts accruing in such a way that the recipient does not pay or bear tax on them, or by a deduction in computing profits or gains.". The question here is whether, by receiving payment of the debenture, Mr. Parker avoided a possible assessment to income tax, including, of course, surtax. The short answer is that there was no possibility of his being assessed on the money he received in January, 1961, when the debenture was paid off. He could not possibly be taxed on that capital receipt. The only transaction which gave him a tax advantage was the transaction in 1953 when, instead of distributing a dividend, the company issued to him the debenture. If it were not for the debenture, the companymight well have declared a dividend (which could be "receipts accruing") on which he would be taxed. So, by accepting the debenture, he avoided a possible assessment to tax. But that took place...
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