Commissioners of Inland Revenue v Parker; Commissioners of Inland Revenue v Tomlinson
| Jurisdiction | UK Non-devolved |
| Judge | Viscount Dilhorne,Lord Morton of Henryton,Lord Hodson,Lord Guest,Lord Wilberforce |
| Judgment Date | 27 January 1966 |
| Judgment citation (vLex) | [1966] UKHL J0127-1 |
| Date | 27 January 1966 |
| Court | House of Lords |
[1966] UKHL J0127-1
Viscount Dilhorne
Lord Morton of Henryton
Lord Hodson
Lord Guest
Lord Wilberforce
House of Lords
Upon Report from the Appellate Committee, to whom was referred the Cause Commissioners of Inland Revenue against George Gustave Parker, that the Committee had heard Counsel, as well on Tuesday the 16th, as on Wednesday the 17th and Thursday the 18th, days of November last, upon the Petition and Appeal of the Commissioners of Inland Revenue, of Somerset House, Strand, London, W.C.2, 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 8th of February 1965, 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 George Gustave Parker, 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 8th day of February 1965, in part complained of in the said Appeal, be, and the same is hereby, Reversed, except as to Costs, and that the Order of the Honourable Mr. Justice Ungoed-Thomas of the 28th day of July 1964, thereby Reversed be, and the same is hereby, Restored except as to Costs:
And it is further Ordered, That the Cause be, and the same is hereby, remitted back to the Chancery Division of the High Court of Justice, to do therein as shall be just and consistent with this Judgment.
My Lords,
On the 16th August, 1962, the Appellants served a notice under section 28 of the Finance Act, 1960, upon the Respondent. That notice recited that on the 17th July, 1961, the Commissioners of Inland Revenue had, in accordance with section 28 (4) of the Finance Act, 1960, notified the Respondent that they had reason to believe that section 28 might apply to him in respect of certain transactions in securities and that the matter had gone before the Tribunal appointed under that section who had held that there was a prima facie case for proceeding. By the notice the Revenue informed the Respondent that, in their view, section 28 applied and that, to counteract the tax advantage obtained or otherwise, the computation or recomputation of his liability to surtax for the year 1960-61 should be on the basis that £18,002 received from Parker Shoes, Ltd., by the Respondent on the 14th January, 1961, should be taken into account as if it were the net amount received in respect of a dividend payable at the date of its receipt from which deduction of tax was authorised.
The Respondent appealed against this notice and the Special Commissioners allowed the appeal and cancelled the notice. The Revenue appealed to the High Court, and Ungoed-Thomas J. on the 28th July, 1964, gave judgment allowing the appeal. The Respondent appealed to the Court of Appeal who allowed the appeal. The Revenue then appealed to your Lordships' House.
In 1925 a company called Parker Shoes, Ltd., was formed to acquire the business then carried on by a Mr. Frank Parker. On the 18th May, 1953, the members of the Company were Mrs. Annie Parker, the Respondent, Miss Marjorie and Miss Hilda Parker, sisters of the Respondent and a Mr. Frederick Tomlinson.
On that date at an Extraordinary General Meeting the following Resolution was passed:
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"(i) That it is desirable and that the Members of the Company be recommended to capitalise the sum of £35,002 being part of the undivided profits of the Company standing to the credit of the Profit and Loss Account of the Company, and accordingly that such sum be set free for distribution amongst the Members of the Company whose names appear in the Register of Members at Noon on the 18th day of May, 1953, in proportion to the amounts paid up on the Shares held by them respectively, on condition that the same be not paid in cash, but that the Directors be authorised to apply such sum in paying up in full at par Debentures for securing the sum of £35,002, such Debentures to be allotted and distributed, credited as fully paid up, to and amongst the said Members of the Company in the proportion aforesaid.
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(ii) That the Debentures so to be paid up and distributed as aforesaid be in the form of the draft submitted to this Meeting and for the purpose of identification signed by the Chairman thereof."
The issued share capital of the company consisted of 35,002 £1 ordinary shares, so each member of the Company received a debenture for each share he held. The Respondent received debentures for £18,002.
The Debentures were in the following form:
"1. FOR VALUABLE CONSIDERATION already received PARKER SHOES LIMITED (hereinafter called 'the Company') will, as and when the Principal Money hereby secured becomes payable in accordance with the Conditions endorsed hereon, pay to
.
of.
or other the Registered Holder hereof for the time being, his Executors, Administrators, or Assigns, the Sum of
2. This Debenture is issued subject to the Conditions endorsed hereon, which are to be deemed part of it."
The only conditions to which it is necessary to refer are conditions 8 and 9. They were as follows:
"8. The Company may at any time after the death of the Registered Holder hereof or after the expiration of 7 years from the date hereof (whichever is the earlier) give notice in writing to the Registered Holder hereof, or his executors or administrators, of its intention to pay off this Debenture, and upon the expiration of six calendar months from such notice being given the Principal Money hereby secured shall become payable.
9. The Principal Money hereby secured shall immediately become payable:—
( a) If a distress or execution be levied or sued out upon or against any of the property and assets of the Company, and be not paid out within five days;
( b) If an Order be made or an effective Resolution be passed for the winding up of the Company;
( c) If a Receiver of the property and assets of the Company be appointed by any Court of competent jurisdiction."
The debentures were not secured on any property of the Company. No interest was payable on them.
The debentures, in my view, amounted to no more than a recognition by the Company of an obligation to pay the amounts for which they were issued, dischargeable, unless condition 9 applied, after the happening of certain events, solely at the discretion of the Company.
If, instead of capitalising this £35,002 of the undivided profits of the Company, the sum had been distributed by way of dividend, it would have been liable to surtax. The only object of this operation can have been to enable the Company at some date in the future to pay to the members of the Company their shares of the £35,002 in such a way as not to attract liability to surtax.
In 1958 a Mr. Nangle, F.C.A., advised the Respondent as to the liability of his estate to death duties. He estimated that they might be of the order of £65,000 and it was obvious that an amount of this size could not be met from the Respondent's free resources or from those of his sisters, his next of kin. Therefore, unless something was done, there would have to be a forced realisation of the Respondent's shares in the Company. Mr. Nangle advised that steps be taken to increase the assets held by the Respondent and his sisters outside their shares in the Company.
On the 14th July, 1960, the Company gave notice to the debenture holders, who were then the Respondent, his two sisters and Mr. Tomlinson, of its intention to redeem the debentures on the 14th January, 1961. Mrs. Annie Parker, the only other person to whom debentures had been issued, died in 1953 and the debentures issued to her had been redeemed.
Pursuant to this notice, the Respondent on the 14th January, 1961, received £18,002, his sisters £6,075 each and Mr. Tomlinson £600.
By virtue of section 245 of the Income Tax Act, 1952, the Special Commissioners could, if it appeared to them that the Company had not within a reasonable time after the end of any year or other period for which accounts had been made up, distributed so as to be liable to surtax a reasonable part of its income from all sources for the year or other period, have served a notice on the Company directing that for the purpose of assessment to surtax the income of the Company for the year or other period specified in the notice should be deemed to be the income of the members and apportioned among them.
No such notice was served on the Company. Whether it could have been, one does not know. It is to be noted that such a notice can only be issued if a reasonable part of its income for a year or other accounting period had not been distributed. The £35,002 capitalised on the 18th May, 1953, may not have represented income received in any one year but accumulated over a number of years.
Were it not for the provisions of section 28 of the Finance Act, 1960, it is clear that the £18,002 received by the Respondent would not be liable to surtax.
The material parts of section 28 (1) are as follows:
"(1) Where—
( a) in any such circumstances are as mentioned in the next following subsection, and
( b) in consequence of a transaction in securities or of the combined effect of two or more such transactions,
a person is in a position to obtain, or has obtained, a tax advantage, then … this section shall apply to him in respect of that transaction or those transactions:
Provided that this section...
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