Commissioners of Inland Revenue v J. B. Hodge & Company (Glasgow) Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Reid,Lord Cohen,Lord Hodson |
| Judgment Date | 13 July 1961 |
| Judgment citation (vLex) | [1961] UKHL J0713-3 |
| Date | 13 July 1961 |
| Court | House of Lords |
[1961] UKHL J0713-3
Lord Reid
Lord Cohen
Lord Hodson
Lord Guest
House of Lords
My Lords,
The Respondents carried on a business of selling heavy earth-moving equipment from 1941 to 1950. During that period they were allowed non-distribution relief under section 30 (2) of the Finance Act, 1947. On 5th April, 1950, they sold that business to another company and thereafter they carried on business as a holding or investment company. They went into voluntary liquidation on 18th March, 1955. They were assessed in respect of their last chargeable accounting period, 1st November, 1954, to 18th March, 1955, to a distribution charge of £63,237 under section 30 (3) of the 1947 Act. They maintain that that assessment is invalid on two separate alternative grounds. First, they say that they are relieved of liability by section 36 (4) of the 1947 Act. Alternatively, they say that in any event the assessment is bad because made in respect of the wrong chargeable accounting period. The First Division sustained the first objection but not the second.
Admittedly section 36 (4) applies. The former business was sold to another company as part of a scheme of reconstruction, the consideration consisted wholly or mainly of shares of the purchasing company, and the two companies jointly elected that the section should apply. This section enacts two "modifications" of the other provisions of the Act and this first point turns entirely on the proper construction of the second of these modifications. They are—
"(i) any distribution of those shares to any persons in a winding up of the first company shall, notwithstanding anything in subsection (I) of this section, not be deemed for the purposes of the last preceding section to be a distribution to that person; and
(ii) in considering what distribution charge, if any, falls to be made on the second company, any difference on which non-distribution relief for chargeable accounting periods before the transfer was given to the first company or other person assessable to profits tax on the profits of the trade or business of the first company shall, except so far as it has already operated to increase a distribution charge on the first company, be taken into account as if it had been a difference arising in relation to the second company on which non-distribution relief has been given to that company, and shall also be taken into account, in the case of the last chargeable accounting period of the second company, so as to increase the amount which, for the purposes of paragraph ( c) of subsection (I) of the last preceding section, is to be treated as not a distribution of capital."
The general scheme of the 1947 Act was to encourage the retention of profits in the business by granting non-distribution relief under section 30 (2). But if the retained profits were later distributed that relief was withdrawn by means of a distribution charge under section 30 (3). So a purchaser of a business, not having received relief, would not be liable to pay a distribution charge, but the seller would remain liable in the event of the retained profits being later distributed.
The modifications alter this in two respects: the second makes the purchasing company liable to pay distribution charges in future as if it had received the non-distribution relief which the selling company received before the sale, and the first grants a limited exemption from distribution charges to the seller—limited in that it only applies on a liquidation of the selling company and only applies to certain assets of that company, its shares in the purchasing company.
These modifications would be comparatively easy to apply if the selling company went into liquidation soon after the sale. But that did not happen in this case. The selling company, the Respondents, carried on business for a considerable time and during that time they sold their shares in the purchasing company. Accordingly, modification (i) gave them no benefit. But they maintain that the terms of modification (ii) are such as to relieve them from all liability for distribution charges, and if I had to consider this modification by itself I would agree with the First Division in reaching that conclusion.
But if that were right, modification (i) would be unnecessary. No doubt there are cases where an unnecessary provision is inserted in an Act to avoid some possible doubt. But in the circumstances of this case I cannot regard that as a possible explanation. I cannot imagine any competent draftsman inserting modification (i) if he intended that every distribution whether of shares or money and whether in a winding-up or not should not be deemed for the purposes of subsection (1) to be a distribution. But that is said to be the effect of modification (ii).
Of course, if the language of modification (ii) were capable of no other interpretation that would be an end of the matter. But the most that can be said is that it has failed to provide for important matters which clearly ought to have been provided for if the intention was to make the purchasing company liable and also to preserve the liability of the selling company subject only to the relief given by modification (i). I do not think that in the circumstances that is sufficient to turn the scale. The draftsmen may have overlooked the possibility that companies would make this election and yet the selling company would not go into liquidation at once: it is difficult to see why companies should make this election otherwise, because the selling company would get no immediate benefit from it whereas the purchasing company would get an immediate detriment. But whether or not that is a possible explanation I find it impossible to dissent from your Lordships' view on this point, though I recognise the strength of the Respondents' case.
The second point is highly technical, and I agree with the decision of the First Division. The Respondents first argue that section 43 of the 1947 Act does not apply to this case. It is in the following terms:
"43.—(1) All trades or businesses to which section nineteen of the Finance Act, 1937, applies carried on by the same person shall be treated as one trade or business for the purposes of the enactments relating to the profits tax."
Under the original 1937 Act if a person carried on two trades simultaneously these trades had to be dealt with separately. It is argued that the sole purpose of section 43 is to require that all trades carried on by a person simultaneously shall be treated as one for the purposes of this tax, and that it has no application where, as in the present case, a taxpayer first carries on one trade and then, after ceasing to carry it on, he starts another.
Then the Respondents go to section 35 (1) ( c) which includes in the gross relevant distribution "in the case of the last chargeable accounting period in which the trade or business is carried on, so much of any distribution made after the end of that period … as is not a distribution of capital." If section 43 does not apply, then " the trade or business" must in this case be the former trade in machinery because it was in respect of the profits of that trade that the non-distribution relief was granted, and a distribution charge is merely a belated collection of the tax of which payment was postponed by the non-distribution relief. The reasoning in this House in Commissioners of Inland Revenue v. Butterley Co., Ltd. (1956) 36 T.C. 411 shews that profits tax in respect of the profits of any trade can never be assessable except for a chargeable accounting period during which that trade is in fact being carried on. So, it is argued, both the general scheme of the Act and the express terms of section 35 (1) ( c) shew that any assessment for the purpose of collecting by means of a distribution charge the tax of which payment was postponed by non-distribution relief can only be effective if it is made in respect of the last chargeable accounting period in which the trade which yielded the profits sought to be taxed was actually carried on.
If one stops there the argument is attractively logical, but it would lead to strange consequences, and I do not think that it can be reconciled with the scheme of section 30, subsections (2) and (3), which are in the following terms:—
"(2) Subject to the provisions of this Part of this Act, if, in in the case of any trade or business, the net relevant distributions to proprietors (as defined in the subsequent provisions of this Part of this Act) for any chargeable accounting period are less than the profits thereof for that period chargeable to the profits tax, the amount chargeable by way of the profits tax in respect of that period shall be reduced by an amount equal to seven and a half per cent. of the difference.
(3) Subject to the provisions of this Part of this Act, if, in the case of a trade or business, the net relevant distributions to proprietors (as defined in the subsequent provisions of this Part of this Act) for any chargeable accounting period are greater than the profits thereof for that period chargeable to the profits tax, there shall be charged for that period, in addition to the other profits tax, if any, chargeable therefor, profits tax at the rate of seven and a half per cent. on the amount of the difference:
Provided that the amount on which tax is chargeable under this subsection for any chargeable accounting period shall not, when added to the total of the amounts on which tax is charged thereunder for previous chargeable accounting periods, exceed the total of the differences in respect of which reductions have been made under subsection (2) of this section for previous chargeable accounting periods."
I cannot see how these provisions can...
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