Commissioners of Inland Revenue v Frere
| Jurisdiction | England & Wales |
| Judge | Viscount Radcliffe,Lord Morris of Borth-y-Gest,Lord Guest,Lord Pearce,Lord Upjohn |
| Judgment Date | 19 November 1964 |
| Judgment citation (vLex) | [1964] UKHL J1119-1 |
| Date | 19 November 1964 |
| Court | House of Lords |
[1964] UKHL J1119-1
House of Lords
Viscount Radcliffe
Lord Morris of Borth-y-Gest
Lord Guest
Lord Pearce
Lord Upjohn
Upon Report from the Appellate Committee to whom was referred the Cause Commissioners of Inland Revenue against Frere, that the Committee had heard Counsel, as well on Wednesday the 22d, as on Thursday the 23d and Monday the 27th, days of July 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 29th of November 1963, 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 Philip Beaumont Frere, 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 29th day of November 1963, so far as complained of in the said Appeal, be, and the same is hereby, Reversed, except as to Costs, and that the Judgment of the Honourable Mr. Justice Wilberforce, of the 17th day of July 1963, thereby Reversed, be, and the same is hereby, Restored, except as to Costs.
My Lords,
Mr. Frere, the Respondent, on two occasions borrowed large sums of money for short periods. On the 28th March, 1957, he borrowed £50,000 at interest on the terms that the loan should be repaid by 31st January, 1958: it was repaid on the 3rd December, 1957, together with £2,210 19s. 2d. by way of interest. On the 14th August, 1958, he borrowed £40,000 at interest for one month and repaid it on the 17th September of the same year. The interest cost of the borrowing was £186 2s. 9d. The concern which made these loans to him was an unlimited company which, it is common ground, did not satisfy the description of a "banker", whatever that description may be.
The Respondent's claim is that in computing his total income for assessment to surtax the monies which he paid by way of interest on these loans ought to be deducted from the assessable figure. It is, again, common ground that the payments that he made were, in each case, "short interest". This is a technical phrase, significant to those who administer income tax law; but what it means for the present purpose is that the payments were not "annual interest" and are not, therefore, interest payments of the class that is, for instance, recognised or dealt with by section 2 (2), section 169 ("yearly" interest), section 511, or the Sixth Schedule ("yearly" interest) of the Income Tax Act, 1952.
His claim was allowed by the Special Commissioners. They found their authority to do so in a construction which they placed upon the joint effect of section 524 (2) of the Act (which requires a person making a return of "total income" to observe the rules and directions contained in the Twenty-fourth Schedule of the Act) and of the third sub-head of that Schedule (which calls for a declaration of the "amount of interest, annuities or other annual payments to be made out of the property or profits or gains assessed on the person in question"). In their view the "interest" referred to in that sub-head is all interest, annual, yearly or short, and they concluded that, since the return had to cover all such interest, the total income as computable for surtax must somehow be treated as diminished by an amount equal to "short", as well as "annual", interest. This view of the operative significance of the wording of the Twenty-fourth Schedule, sub-head (3), though it did not prevail with Wilberforce, J., in the High Court or with Russell, L.J., in the Court of Appeal, is, I think, accepted by the majority of the members of the Court of Appeal (Denning, M.R., and Donovan, L.J.), and constitutes the ground of their decision, which has allowed to the Respondent the deduction that he claims. With great respect to their view, I think it mistaken. In my opinion, the wide construction that it places upon the meaning of "interest" in this sub-head is unwarranted: even if, semantically, it were the right construction, I should still think that it was insufficient to support the deduction claimed, when the claim is set in the context of the Income Tax Act and the scheme of assessment which, however dimly, can be observed as that proposed and regulated by the Act. But, before I come to this in detail, I must say something about the question of principle which appears to have been the foundation of the Special Commissioners' decision and which, as I read it, was also influential in the opinion expressed by Donovan, L.J., and given effect to in his judgment.
"It appears to us, therefore" says the Case Stated (see paragraph 5) that it would be contrary to principle to charge Surtax, in effect, on two persons in respect of the same 'short' loan interest". Now I have two difficulties in seeing what principle is envisaged as threatened by a refusal to allow the Respondent to deduct short interest from his surtax assessment. First, if one uses ordinary language uncoloured by income tax conceptions, no one, I believe, would imagine that this refusal did involve charging two persons to tax in respect of the same interest. There is only one item of interest, that which arises out of the Respondent's transaction with the lenders, and there is only one payment of this, that which the Respondent makes to them. No one is surprised if they are charged to tax on that payment as being part of their income, but in the practical sense, again, no one is concerned to ask out of what resources the payer finds the money that constitutes the payment. He draws on his bankers, and that closes the transaction. The idea that the Respondent somehow has all along had this amount of interest embedded as such not merely in his personal resources but in his own taxable income of the year in which he pays it and that all he does when he pays it is to transfer the item from his income to that of the recipient is an esoteric idea which belongs to the mystique of tax doctrine, not to the realities of ordinary dealing. But then, if the case is to stand or fall by the special doctrines of the tax system, one has to establish that those who framed that system did in fact hold a doctrine about short interest that supports the Respondent's case and, moreover, made legislative provisions that would give effect to its allowance in the computation of total income.
So I turn to my second difficulty about this supposed principle, which is to see what indications there are in the tax code that the payment of short interest is to be treated as a diminution of the payer's taxable income. One can start with some safe generalisations on this subject. Income that is assessed to tax is neither measured by expenditure nor is it the residual income that lies after expenditure of an income nature. It is not the savings of income. In principle it is gross income as reduced for the purposes of assessment by such deductions only as are actually specified in the tax code or are granted by way of reliefs, usually in the form of fixed sums or proportions. No doubt the assessment of profits under Schedule D has come to require a rather different approach, since in that case the basic figure for assessment is the balance between receipts and expenditure: but even there it is plain that the code is intended to keep a control over the forms of expenditure that can appear in the profit account. It follows from this general conception that in principle it is irrelevant to the determination of a person's taxable income that some part of it has been expended by him on what would normally be regarded as his own income account, in paying rent, wages, mortgage interest, rates, insurance, for example, or that the payments that he makes for such purposes will themselves constitute or contribute to assessable income in the recipient's hands. Under our system payments may run to and fro many times in the course of a single tax year, creating new taxable income at each separate point of receipt. The idea of double taxation does not even arise in these multiple assessments. The mere fact, then, that part of a taxpayer's income has been used to pay interest on a loan during a year, even assuming that you visualise "income" as a separate spending fund, would not in itself set up a reason for reducing the assessment of his taxable income. The payment of the interest, whether long or short, would be no more, for this purpose, than an "application" of his income.
On the other hand, it is notorious that, quite apart from fixed reliefs for such kinds of expenditure as support of dependants or life assurance premiums, the code does make provision for certain "charges" on income being treated for tax purposes as if the income of the payer was, to the extent of the charge, not his income but the income of the recipient. To take the crudest case, that of the income received by a trustee for his beneficiary, probably the holder of a life interest under a settlement. If you wanted to calculate the "total income" of those two persons for the purpose of working out their rights to tax relief, as individuals, you would not, nor does the tax code, stop at the bare fact that the income payments received by the trustee were actually charged to tax in his hands either by direct assessment or by the machinery of deduction....
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