Commissioners of Inland Revenue v Peter Geoffrey Willoughby
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE MORRITT,LORD JUSTICE HOBHOUSE,LORD JUSTICE GLIDEWELL |
| Judgment Date | 16 December 1994 |
| Judgment citation (vLex) | [1994] EWCA Civ J1216-6 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | OTTRF 93/1846/B |
| Date | 16 December 1994 |
[1994] EWCA Civ J1216-6
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE COMMISSIONERS FOR THE SPECIAL PURPOSES OF THE INCOME TAX ACTS
Before: Lord Justice Glidewell Lord Justice Hobhouse Lord Justice Morritt
OTTRF 93/1846/B
MR A MOSES QC and MR L HENDERSON (Instructed by The Solicitor for the Inland Revenue) appeared on behalf of the Appellants
MR D GOY QC and MR P BAKER (Instructed by Messrs Baileys Shaw & Gillett, Bloomsbury London) appeared on behalf of the Respondent
LORD JUSTICE MORRITT: These are appeals of the Commissioners of Inland Revenue from the determinations of the Special Commissioner, Mr David Shirley, contained in written decisions dated 23rd March 1993 discharging assessments to income tax raised against Professor Willoughby and his wife under Section 739 Income and Corporation Taxes Act 1988 and its statutory predecessor. Those sections were enacted for the purpose of preventing individuals avoiding income tax by the transfer of assets to persons resident abroad. Before the Special Commissioner a number of points were raised all but two of which he decided in favour of the Revenue. The points he decided against the Revenue and which are the subject matter of these appeals are
1. whether the individual making the transfer must be ordinarily resident in the United Kingdom at the time of the transfer; and
2. whether the Taxpayers had established the exemptions provided for by Section 741 that either
a) the purpose of avoiding liability to tax was not the purpose or one of the purposes for which the transfer or any of the associated operations had been made; or
b) the transfer and the associated operations were bona fide commercial transactions and were not designed for the purpose of avoiding liability to tax.
The first point is one of construction of the statute and the facts relevant to it may be shortly stated. By July 1985 Professor Willoughby had been resident in Hong Kong, where he was professor of law at the University of Hong Kong, for a number of years and was neither resident nor ordinarily resident in the United Kingdom. He decided to take early retirement with the intention of returning to live in England and gave one year's notice to that end.
On retirement in July 1986 he became entitled to a lump sum payment from the University's Provident Fund. On advice he put this lump sum, paid in Hong Kong dollars and converted on behalf of Professor Willoughby into United States Dollars, into a single premium Personal Portfolio Bond with Royal Life Insurance International Ltd, a company incorporated, managed, controlled and resident in the Isle of Man. In exchange, on 8th August 1986 Royal Life issued to him a number of policies of insurance linked to Fund 1121. The investments in that fund and any subsequent changes in investment were decided on by PFC as the Fund Adviser appointed by Professor Willoughby. Professor Willoughby returned to England and became ordinarily resident in the United Kingdom in May 1987.
The relevant legislation is now contained in Chapter III of Part XVII of Income and Corporations Taxes Act 1988. For present purposes there is no material difference from its statutory predecessor Section 478 of the Income and Corporation Taxes Act 1970. It is as follows
"739. Prevention of avoidance of income tax
(1) Subject to section 747(4)(b), the following provisions of this section shall have effect for the purpose of preventing the avoiding by individuals ordinarily resident in the United Kingdom of liability to income tax by means of transfer of assets by virtue or in consequence of which, either alone or in conjunction with associated operations, income becomes payable to persons resident or domiciled outside the United Kingdom.
(2) Where by virtue or in consequence of any such transfer, either alone or in conjunction with associated operations, such an individual has, within the meaning of this section, power to enjoy, whether forthwith or in the future, any income of a person resident or domiciled outside the United Kingdom which, if it were income of that individual received by him in the United Kingdom, would be chargeable to income tax by deduction or otherwise, that income shall, whether it would or would not have been chargeable to income tax apart from the provisions of this section, be deemed to be income of that individual for all purposes of the Income Tax Acts."
"742. Interpretation of sections 739 to 741
(1) For the purposes of sections 739 to 741 "an associated operation" means, in relation to any transfer, an operation of any kind effected by any person in relation to any of the assets transferred or any assets representing, whether directly or indirectly, any of the assets transferred, or to the income arising from any such assets, or to any assets representing, whether directly or indirectly, the accumulations of income arising from any such assets.
(2) An individual shall, for the purposes of section 739, be deemed to have power to enjoy income of a person resident or domiciled outside the United Kingdom if-
(a) the income is in fact so dealt with by any person as to be calculated, at some point of time, and whether in the form of income or not, to enure for the benefit of the individual; or
(b) the receipt or accrual of the income operates to increase the value to the individual of any assets held by him or for his benefit; or
(c) the individual receives or is entitled to receive, at any time, any benefit provided or to be provided out of that income or out of moneys which are or will be available for the purpose by reason of the effect or successive effects of the associated operations on that income and on any assets which directly or indirectly represent that income; or
(d) the individual may, in the event of the exercise or successive exercise of one or more powers, by whomsoever exercisable and whether with or without the consent of any other person, become entitled to the beneficial enjoyment of the income; or
(e) the individual is able in any manner whatsoever, and whether directly or indirectly, to control the application of the income."
"743. Supplemental provisions
(1) Income tax at the basic rate shall not be charged by virtue of section 739 in respect of that income which has borne tax at the basic rate by deduction or otherwise but, subject to that, income tax so chargeable shall be charged under Case V1 of Schedule D."
"(4) Where an individual has been charged to income tax on any income deemed to be his by virtue of section 739 and that income is subsequently received by him, it shall be deemed not to form part of his income again for the purposes of the Income Tax Acts."
Following the determination of the Special Commissioner and the absence of any appeal it is now, in effect, common ground that
1. S.739 can apply to a transfer of assets situated outside the United Kingdom made by a transferor at a time when he was ordinarily resident in the United Kingdom;
2. the deferral of a liability to United Kingdom Income Tax can constitute the avoidance of liability to income tax for the purposes of s.739; and
3. the income and gains sought to be imputed to the taxpayers under s.739 are not exempted from tax in the United Kingdom by the Double Tax Arrangement between the United Kingdom and the Isle of Man.
But the question remains whether s.739 can apply to a transfer of assets made by a transferor at any time when he is not ordinarily resident in the United Kingdom. The Special Commissioner decided that it could not.
To explain his conclusion and the argument before this Court it is necessary to trace the history of the relevant legislation. The original enactment was made in, for present purposes, identical terms in s.18 Finance Act 1936. The taxpayers seek to rely on statements, as recorded in Hansard, relating to the proposal for that legislation made to the House of Commons by Mr Neville Chamberlain, then the Chancellor of the Exchequer, on 21st April 1936 and by Mr WS Morrison, then the Financial Secretary to the Treasury, on 15th June and 1st July 1936. One issue that arises on this appeal is whether the decision of the House of Lords in Pepper v Hart (1993) AC 593 entitles them to do so.
The first occasion when the relevant provisions were considered in any detail material to the point now in issue was the decision of the House of Lords in Congreve v CIR (1948) 1 AER 948. As recorded in the headnote the House of Lords decided that
"An individual can, within the meaning of s.18 Finance Act 1936, be said to acquire rights "by means of" a transfer of assets though the transfer is effected neither by the individual nor by his agent, but by a company, the whole or greater part of the share capital of which is held by or on behalf of that individual."
The point at issue on this appeal came before the Court of Appeal in Northern Ireland in Herdman v CIR (1968) NI 74 in considering the proper construction of the legislation then in force which was contained in s.412 Income Tax 1952. The Court decided that the section did not require that the transferor should be ordinarily resident in the United Kingdom at the time of the transfer. In that case there was an appeal to the House of Lords but this point was not argued or decided.
In 1979 the House of Lords had to consider in Vestey v Inland Revenue Commissioners (1980) AC 1149 the ambit of the legislation then contained...
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