Commissioners of Inland Revenue v Frere
| Jurisdiction | England & Wales |
| Judge | THE MASTER OF THE ROLLS,LORD JUSTICE DONOVAN,LORD JUSTICE RUSSELL |
| Judgment Date | 29 November 1963 |
| Judgment citation (vLex) | [1963] EWCA Civ J1129-4 |
| Date | 29 November 1963 |
| Court | Court of Appeal |
[1963] EWCA Civ J1129-4
In The Supreme Court of Judicature
Court of Appeal
Revenue Paper
The Master of the Rolls (Lord Denning),
Lord Justice Donovan and
Lord Justice Russell
MR ALAN S. ORR, 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 Commissioners of Inland Revenue.
MR C.N. BEATTIE, Q.C. arid MR PETER REES (instructed by Messrs. Frere, Cholmeley & Nicholsons, 28, Lincoln's Inn Fields, London, W.C.2.)appeared as Counsel on behalf of Mr Frere.
I will ask Lord Justice Donovan to give the first Judgment in this case.
The question in this case is whether interest payable for less than a year is deductible by a taxpayer in computing hie total income from all sources for the purposes of surtax. Such interest is usually called "short interest" in contrast to "annual interest" or "yearly interest", which is payable, or at any rate potentially payable, for a year or more.
Mr. Prere, the Appellant, paid short interest to a concern called Model Roland and Stone Company during the two years of assessment, 1957-58 and 1958-59. He sought to deduct this interest in computing his total income for surtax purposes. For 1957-58 he had to do this by what is known as an error or mistake claim because, by inadvertence, he omitted to deduct the interest in his return of total income for that year. For the next year, 1958-59. he did so deduct the interest paid in that year. The Commissioners of Inland Revenue refused to admit the error or mistake claim for 1957-58. and refused to allow the deduction claimed for 1958-59. Mr. Frere appealed to the Special Commissioners, who allowed both claims. The Revenue appealed by way of Case Stated to the High Court, and Mr. Justice Wilberforce allowed the Revenue's appeal. Mr. Frere now appeals to this Court. The remainder of the facts will be found set out in the Case Stated.
The question is a simple one to state, but the argument has been long and elaborate. This comes about because, in order to meet the case made against him by the Crown, the taxpayer has been obliged to go back almost to the beginnings of income tax, and to the actual beginnings of supertax, in order to demonstrate, as he says, that the Crowm is wrong and that he is right. It is a good thing, no doubt, from time to time to get back to first principles to help to resolve some troublesome problem. The difficulty about doing this in relation to income tax problems is usually that principles, first or otherwise, are few and far between: and such of them as may exist are expressed in the language of well over a century ago, which today is at times obscure.
If Mr. Frere had paid interest for a year or more, his claim to deduct it in computing his total income for surtax purposes would be conceded. On what principle should interest paid for less than a year be differently treated? To that question, nobody knows the answer. The Revenue simply says that that is the affect of the Statutes.
What can, I suppose, be asserted with some confidence is that, leaving out those cases where the contrary, for one reason or another, is specially provided, one would not expect to have to pay surtax on somebody else's income. For the Appellant, it is asserted that this basic principle is indeed to be found in the relevant statutory provisions, and effect should be given to it by excluding the short interest here in question from his sur-taxable income, for it is really the income of the payee. The Crown's approach is different. They point to certain provisions allowing such exclusion in the case of yearly interest or annual interest, and say that this is as far as the Statutes go. As regards judicial authority, each side cites decisions said to be in its favour. Some of these decisions are relied upon by both sides.
In 1927, surtax took the place of supertax and was called a deferred instalment of income tax. Section 39(3) of that Act dealt in a somewhat oblique fashion with the deduction of annual interest from a return of total income for surtax purposes. The provision now appearasSection 2(2) in the Consolidation Act of 1952, and, so far as is here material, reads as follows. I preface the citation with the remark that, by its reference back to subsection (l), the Act is dealing with a year for which surtax is imposed. "There, for a year for which income tax is charged in the manner specifiod in subsection (l) of this section, a person is required to be assessed and charged with income tax in respect of any property, profits or gains out of which he makes any payment in respect of (a) any annual interest, annuity or other annual sum… he shall, in respect of so much of the property, profits or gains as is equal to the said payment, and may be deducted in computing his total income, be charged at the standard rate only". The Crown does not claim that this provision is conclusive of the present problem; but it is some indication, they say, that you may deduct only annual interest in computin your sur-taxable income. On such interost you are to be taxed at the standard rate only. By implication, on any other interest you must pay surtax as though it were your own income.
This contention, if it be right, involves that the Crown may get surtax twice on the same income, for the recipient of short interest has undoubtedly to include it as part of his total income. If the Crown be right, so has the payer, in the sense that he may deduct nothing in respect of the payment of such interest. This anomaly the Crown recognises with suitable regret. But when Section 2(2) enacts that yearly interest shall be taxed at the standard rate only in the case of an individual who has to pay it, and thus thf:t it shall not be charged to surtax in his hands, the conclusion does not follow necessarily that in the case of short interest a different result shall obtain. The matter is left at large, unless it be legitimate to draw the inference for which the Crown contends.
The contention for the Appellant is that it is wholly illegitimate, and it is for the purpose of establishing this contention that he goes back to the beginnings of supertax. It was, of course, introduced in the historic Budget of 1910. It was to be an additional tax in respect or total incomes of over £5,000. Income tax, as distinct from supertax, was, although one single tax, levied Schedule by Schedule on different categories of income. Supertax, by contrast, was now to be levied on "the income of any individual the total of which from all sources exceeds £5,000": see Section 66(2) of the Finance 1909-10 Act, 1910.
How was this "total income" to be calculated? It might, of course, have been done by making some special provision solely for the purpose of supertax. But the Legislature found ready to hand a different solution. Already the taxpayer, who wanted to claim exemption or abatement from income tax, was obliged to make a return of his total income. So, said the Legislature, the supertax payor shall make a similar return on the same lines, and the total income thus estimated "shall be taken to be" his income for supertax purposes. This was enacted by Section 66(2) of the Finance 1909-10 Act, 1910, reading as follows: "For the purposes of the super-tax, the total income of any individual from all sources shall be taken to be the total income of that individual from all sources for the previous year, estimated in the same manner as the total income from all sources is estimated for the purposes of exemptions or abatements under the Income Tax Acts".
This takes us first to Section 163 of the Income Tax Act of 1842, providing that any person shall be exempt from tax who proves that his aggregate income is less than £150, such aggregate income being estimated "according to the several rules and directions of this Act". These rules and directions are laid down by Section 190 of the same Act,and the combined effect of the section and No.XVII of the Schedule to which it refers is that the claimant for exemption must return: (l) the amount of any profits on which he is or is liable to be assessed; (2) the amount of any income which he receives under deduction of tax; (3) the amount of any interest, annuities or other annual payments which he has to make out of the profits assessed upon him; (4) the amount of his income after deducting (3) from the total of (l) and (2). Thus, "interest" payable by the claimant would form a deduction in arriving at his total income for the purposes of exemption: and, since the calculation of total income for the new supertax was to be the same, it would follow that "interest" — that is, not merely yearly or annual interest — would form a deduction in computing total income for the purposes of supertax.
It may here be usefully remarked that the Legislature deliberately distinguished for some reason between "interest" and "annual interest": see, for example, Section 100 of the same 1342 Act and the Third Case of Schedule D, taxing, under that Case, "all interest of money not being annual interest".
As a condition of exemption from tax, Section 163 of the 1342 Act required a claimant to prove — and here I quote the words of the section — "… before the Commissioners for General Purposes, in the manner hereinafter mentioned, that the aggregate amount of his income, estimated according to the several rules and directions of this Act, is less than £150 …". The manner in which the claim is to be proved is prescribed in Section 164, which requires a claimant to deliver to the assessor, inter alia, a statement "setting forth therein all the articular sources from whence the income of such...
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Commissioners of Inland Revenue v Frere
...except as to costs. The Contents have it. [Solicitors:-Solicitor of Inland Revenue; Frere, Cholmeley & Nicholsons.] 1 Reported (Ch.D.) [1964] Ch.359; [1963] 3 W.L.R.854; 107 S.J. 852; [1963] 3 All E.R. 243; 234 L.T. Jo.513; (C.A.) [1964] Ch.359; [1964] 2 W.L.R.405; 107 S.J.1001; [1964] 1 Al......
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Commissioners of Inland Revenue v Frere
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