Commissioners of Inland Revenue v Garvin
| Jurisdiction | England & Wales |
| Judge | Lord Wilberforce,Lord Russell of Killowen,Lord Keith of Kinkel,Lord Scarman,Lord Bridge of Harwich |
| Judgment Date | 14 May 1981 |
| Judgment citation (vLex) | [1981] UKHL J0514-1 |
| Date | 14 May 1981 |
| Court | House of Lords |
[1981] UKHL J0514-1
House of Lords
Lord Wilberforce
Lord Russell of Killowen
Lord Keith of Kinkel
Lord Scarman
Lord Bridge of Harwich
My Lords,
This case arises under sections 460-468 of the Income and Corporation Taxes Act 1970, a group of sections passed in order to deal with certain types of tax avoidance. These include, broadly, transactions by which individuals holding shares in companies having accumulated profits obtain the equivalent of such profits in a form which does not expose them to income tax. The Revenue is empowered in such cases to counteract this "tax advantage" by assessing the individual to income tax. This they have done as regards the respondent, Mr. Garvin, for a sum of £235,949 in respect of the year of assessment 1968/69. Mr. Garvin has appealed against this assessment and he has been successful in all instances up to this House.
The Revenue's claim is directed to sums arising under a tax-avoidance scheme devised and provided for the respondent by Mr. Bradman, a well-known practitioner in this business. Mr. Garvin, together with two other gentlemen, owned all the share capital in five companies, referred to in the proceedings as ABCFS, which companies owned valuable freehold and leasehold properties capable, if sold, of producing substantial distributable profits. The object of the scheme was to make these profits or part of them available to the shareholders in a tax-free form.
The scheme was complicated and involved 25 transactions. Many of these, consisting of circulating money round a number of companies in which the taxpayers had no interest, were of concern only to Mr. Bradman and his associates. Those which concerned the taxpayers were summarised by Buckley L.J. in his judgment in the Court of Appeal. As I cannot improve upon it, I reproduce this summary verbatim:
"The salient features are that immediately before 3rd April 1969 Mr. Garvin, Mr. Rose ('the taxpayers') and Mr. Philip Rose between them owned all the shares in five companies referred to in the case as ABCFS. On 3rd April 1969 they sold all the shares in those five companies to a company called Excalibur, in which they had no interest, for £471,998 payable by 200 yearly instalments of £150 and a final instalment of £441,898 payable on 3rd April 2169 with interest at 10¼% per annum on the amount from time to time outstanding in the meantime. ABCFS owned freehold and leasehold properties of substantial value, on the realisation of which substantial profits could have been obtained which would have been available for distribution by way of dividends. These sales were the first step in an admitted scheme comprising the transactions numbered 1 to 8 in annexure 2 to the case stated and a loan of £472,000 by the three vendors to a company called Central, of which they were the only shareholders.
Paragraph 5(3) of the case contains the following important findings by the Special Commissioners:
'At the time of the sale the directors of Excalibur intended that the properties owned by ABCFS should be sold. Pursuant to the admitted scheme both they and [the taxpayers and Mr. Philip Rose] hoped and expected that the latter would reacquire the properties but there was no agreement to that effect. At the time of the sale of the shares the directors of Excalibur had not decided whether to procure the payment of a dividend by those companies: it remained an open question for about a year, a decision being reached only in the spring of 1970 when a dividend was paid… None of [the taxpayers and Mr. Philip Rose] was aware at the time of the sale of his shares of any tax avoidance scheme intended to be carried out by the purchaser and no such scheme was discussed between the purchaser and the professional advisers of [the taxpayers and Mr. Philip Rose]. But the commissioners inferred from the amount of the sale price that the professional advisers knew that Excalibur intended in some way to avoid corporation tax.'
On 8th April 1969 ABCFS leased all their properties to a company called Geltan for the term of 999 years for premiums amounting to £982,862 payable by small instalments over 997 years and a very substantial final instalment payable in April 2968 with interest in the meantime at 10 1/4% per annum on the balance from time to time outstanding. Each lease, however, contained a break clause under which the lessee could determine the lease at the end of 49 years of the term. This was intended to avoid a liability to corporation tax.
On 14th April 1969 ABCFS sold the reversions on the leases to a company called County in consideration of £100 payable to each of the five companies. On the same day Geltan sold and assigned the leases to County for valuable consideration, thus effecting a merger of the long leasehold terms. County on the same day sold the properties, free from the leases, to Central for £989,095.
Also on 14th April 1969 Excalibur for consideration assumed the obligation to pay the instalments of the premiums due to ABCFS and a company called Greave, out of moneys lent by Excalibur, bought from the taxpayers and Mr. Philip Rose the right to receive the instalments of the purchase price of the shares at the price of £471,848. Central borrowed the £989,095 as to £472,000 from the taxpayers and Mr. Philip Rose and as to £517,095 from other sources.
In the outcome (a) the taxpayers and Mr. Philip Rose sold their shares in ABCFS to Excalibur for £471,998 payable by instalments, which were converted into £471,848 received from Greave; (b) ABCFS sold their properties for £928,862, payable by instalments, and £500 paid for the reversions; (c) Central bought all the properties for £989,095, part of which was provided by the taxpayers and Mr. Philip Rose lending £472,000 to Central. Before the inception of the scheme the taxpayers and Mr. Philip Rose owned ABCFS, who owned all the properties, but the taxpayers and Mr. Philip Rose could not get any money out of ABCFS except by way of dividends which would attract tax. At the close the taxpayers and Mr. Philip Rose owned Central who owned all the properties; ABCFS no longer owned any of the properties, but had received £983,362 for them, payable mainly by very small instalments and a long delayed final payment; the taxpayers and Mr. Philip Rose were creditors of Central in a sum of £472,000 which they could recover from Central on demand and which Central would or could raise out of the properties.
The only transactions comprised in the scheme to which the taxpayers and Mr. Philip Rose were parties, either directly or through Central, were (1) the sale of the shares, (2) the sale to Greave of the right to the instalments of the purchase price, (3) the purchase by Central of the properties, and (4) the loan to Central, but they were participants in the scheme as a whole."
The companies called "Excalibur", "Geltan", "County" and "Greave" were owned or controlled by Mr. Bradman. On 13th April 1970 ( viz. about a year later) Excalibur caused ABCFS, which were then wholly owned by Excalibur, to pay dividends amounting to £555,000 to Excalibur. These dividends were made exempt from income tax by section 256 of the Act, and were admittedly abnormal dividends.
The Revenue's assessment relates to the above-mentioned sum of £471,848, i.e. the sum paid by "Greave" to the taxpayers for the instalments of the purchase price of the shares in ABCFS: the respondent's share of this was £235,949. It is based, in the alternative on two of the "circumstances" stated in section 461 of the Act, namely, C or D.
I will deal first with D, since this can be shortly disposed of. The condition for the application of D is that the taxpayer shall have received consideration of a specified kind (and it is not disputable that he did) "in connection with the distribution of profits" of (relevantly) a company under the control of not more than five persons. Distribution of profits is elsewhere (section 467(2)) defined so as to include realisation of assets. The question is as to the date at which the company must be under the control of not more than five persons. The Revenue contends that it is sufficient if this control exists at any time in the period covered by the relevant transactions. If this is right, the condition would be satisfied, since it could be applied to ABCFS, all of which were initially controlled by the three taxpayers.
The respondent on the other hand says that the control must be shown to exist at the date when either there is a distribution of profits or a realisation of assets. If this is so, then the relevant company would be Excalibur. There is, however, no evidence that Excalibur was controlled by not more than five persons, and in the absence of such evidence the Revenue must fail.
In my opinion, the taxpayer is right on this point. The language is plain. The words "in connection with the distribution of profits of a company …" must contemplate distribution by that company (and similarly as to realisation of assets), and so inevitably a state of control at that date. It is impossible to relate them to the receipt of the consideration or to any other transaction. I think, therefore, that the claim under paragraph D must fail.
I deal next with paragraph C. In order for the Revenue to succeed, it is necessary to show that the taxpayer received, in consequence of a transaction whereby Excalibur subsequently received an abnormal amount by way of dividend, a consideration of a specified type, and so received it that he did not pay tax on it as income. It is clear that the taxpayer did receive a consideration of the type specified (sc. in the purchase price for the shares in ABCFS), that he so received it as not to pay tax on it as income, and that Excalibur did, on 13th April 1970, receive an abnormal...
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