Commissioners of Inland Revenue v Plummer

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLord Wilberforce,Viscount Dilhorne,Lord Diplock,Lord Fraser of Tullybelton,Lord Keith of Kinkel
Judgment Date01 Nov 1979
Judgment citation (vLex)[1979] UKHL J1101-3

[1979] UKHL J1101-3

House of Lords

Lord Wilberforce

Viscount Dilhorne

Lord Diplock

Lord Fraser of Tullybelton

Lord Keith of Kinkel

Commissioners of Inland Revenue
(Appellants)
and
Plummer
(Respondent)

Upon Report from the Appellate Committee to whom was referred the Cause Commissioners of Inland Revenue against Plummer, That the Committee had heard Counsel as well on Tuesday the 19th as on Wednesday the 20th and Thursday the 21st days of June last upon the Petition and Appeal of the Commissioners of Inland Revenue of Somerset House, Strand, London WC2R 1LB 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 5th day of May 1978 so far as therein stated to be appealed against might be reviewed before Her Majesty the Queen in Her Court of Parliament and that the said Order so far as aforesaid might be reversed, varied or altered or that the Petitioners 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 Ronald Anthony Plummer 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 (Civil Division) of the 5th day of May 1978 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 Appellants do pay or cause to be paid to the said Respondent the Costs incurred by him in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments if not agreed between the parties.

Lord Wilberforce

My Lords,

1

This case arises out of a "Tax Saving Scheme" devised by a firm of insurance and investment brokers. They sent out to a number of persons thought likely to be interested, under the heading "Most Confidential", details of what they called a "Capital Income Plan". The general nature of this was to enable taxpayers paying income tax at a high marginal rate to turn some of this income into capital, while, conversely, enabling a non income-taxpayer (viz. a charity) to convert some capital into income. Operations of this general description are quite common, and legal; indeed many investors in annuities or in insurance policies do just this in the normal course of prudent investment. This particular operation is perhaps an extreme case.

2

The plan now involved was explained by the brokers in great detail, and its intended accomplishment set out, with timetables, in almost military precision. This (as I ventured to suggest in I.R.C. v. Church Commissioners for England [1977] A.C. 329) entitles and requires us to look at the plan as a whole. It does not entitle us to disregard the legal form and nature of the transactions carried out. It was not suggested that any part of the plan as executed was a sham�indeed the special commissioners found to the contrary. It is entitled to a fair, if not a particularly benevolent, analysis.

3

The respondent decided to enter into the plan in a modest way. By an annuity agreement made on 15th March 1971 with Home and Overseas Voluntary Aid Services Ltd. ("HOVAS"), a body with charitable status, he agreed, in consideration of £2,480 paid by HOVAS, to pay HOVAS for five years, or the lesser duration of his life, an annual sum of such an amount as after deduction of income tax at the standard rate for the time being would equal £500. This amounted in fact to £851.06. HOVAS paid £2,480 to an account which the respondent had opened shortly before, with a credit of £40, with Slater Walker Ltd. The respondent had instructed Slater Walker Ltd. when they received the £2,480 to pay £15 to the brokers as their fee and to pay £2,500 to Old Change Court (Investments) Ltd.�"O.C.C."�a company in the Slater Walker group, in exchange for five promissory notes of £500 each. These notes were then to be lodged with HOVAS as security for payment of the annual sums, and were to be released as the respondent paid the latter. O.C.C. agreed to pay interest at 6 1/2 per cent on the amounts of the notes. There were further arrangements involving the borrowing by HOVAS of the money they needed in order to pay the capital sum, and insurance of the respondent's life which I need not detail: they are neutral as regards the issues under consideration. What happened thereafter was that the respondent, by means of a standing order on Slater Walker Ltd., paid the annual sums to HOVAS on overdraft, which was liquidated a few days later by the release of a promissory note. The respondent signed each year and sent to HOVAS the usual certificate as to deduction of tax and HOVAS applied for the repayment of this tax. But this part of the plan miscarried: the Inland Revenue refused to make the refund and on appeal to the special commissioners their refusal was upheld. HOVAS has not taken the matter further. Then the respondent claimed to deduct the amount of each payment as an "annuity or other annual payment" in computing his total income for surtax purposes. This claim has succeeded before the special commissioners and in both courts below.

4

In the courts the plan has been subjected to a four-way attack.

5

1. The first is based upon the terms of section 52 of the Income and Corporation Taxes Act 1970 which opens with the words "Where any annuity or other annual payment charged with tax under Case III of Schedule D" � Then the maker of the payment is entitled to deduct tax at the standard rate.)

6

It is common ground that these words cover, and cover only, payments having the character of income and do not cover capital payments even if made annually. The argument for the Crown was that the payments of £500 p.a. made by the respondent were in reality capital payments and not payments having the character of income. In the courts below this argument took the form of a contention that the £2,480 was paid to the respondent by way of loan, and that the "annuity" payments were nothing other than repayments of this loan. This argument having been rejected (rightly in my opinion) in both courts, the Revenue presented a reconstructed form. This, as I understood it, was that the payments represented nothing but a repayment to HOVAS of its own capital. While it may be true that an annuity bought for a capital sum has the character of income, and while there was such an annuity in this case, it was said that the concomitant arrangements, in particular the arrangements for security, changed the character of the payments. The capital sum of £2,480 paid by HOVAS remained in existence�in the form of promissory notes�and it was this sum, in that form, which was paid back to HOVAS. HOVAS instead of receiving an annuity was simply receiving back its own capital in instalments.

7

My Lords, if it were possible to disregard the legal form of the documents and to look behind them for an underlying substance, there would be attractions-beyond those of ingenuity�in this argument. But I do not find it possible to do this. The classic analysis of this type of transaction is the judgment of Sir Wilfrid Greene M.R. in Sothern-Smith v. Clancy [1941] 1 K.B. 276. There, on the facts, there was a strong case for saying that the annuitant or the annuitant plus the named recipient was simply receiving his capital back. But the Court of Appeal would not have this. Sir Wilfrid Greene thought that there could be much to be said for regarding a purchase of an annuity for a term of years as being one for purchase of instalments consisting mainly of capital and partly of interest, but did not feel himself at liberty to adopt any such principle. "I feel bound to regard the purchase of an annuity of the kind to which I have referred as the purchase of an income and the whole of the income so purchased as a profit or gain notwithstanding the way in which the payments were made" (page 285). If this is the general rule, is there anything in the present case which causes it not to apply? In my opinion there is not. The £2,480 when paid became the property of the respondent. It remained his property none the less though he invested it, plus £20, in promissory notes and deposited them by way of security. He became entitled to release of a portion of it each year as he paid the annuity, each portion coming to him with interest: at the end of the five years he had received the whole, with interest. During the five years the respondent had a right�a limited one it is true�to select the manner in which the money should be invested.

8

Looked at from the other side, HOVAS's right was to receive an annual sum under covenant. If the respondent did not pay, they could sue him on his covenant. There was no identity between the amount they paid and that which they might receive back. In the first place the sums they were entitled to were the gross amount of the "annuity" which, assuming that the value remained unchanged, would be five times £851.06, i.e. £4,255.30 subject, or not, to tax at the standard rate. In the second place, if the respondent died during the five years they would receive from the respondent only those annuity payments which he made during his life. (In addition they would recover something on the insurance policy they took out.) Such rights as they might have over the promissory notes were rights by way of security only. In short, unless we are prepared to disregard the legal structure of these transactions, their nature is clear: a covenant, for a capital sum, to make annual payments, coupled with security arrangements for the payments. But no attack was made on the transactions as a sham and we must...

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