Commissioners of Inland Revenue v Plummer
| Jurisdiction | England & Wales |
| Judgment Date | 01 November 1979 |
| Date | 01 November 1979 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Surtax - Total income - Tax avoidance scheme - Deductions in computing total income - Covenant by surtax payer to make five annual payments to a charity - Whether such payments were "any annuity or other annual payment" and therefore deductible in computing total income -Income and Corporation Taxes Act 1970 (c 10), ss 434 and 457.
In the course of a tax-saving scheme, HOVAS, a charitable company, paid lump sums to surtax-paying individuals in return for covenants by those individuals to make five payments to HOVAS at yearly intervals. In particular, on 15 March 1971 P, one such surtax payer, covenanted, in return for an immediate payment of £2,480, to make to HOVAS on 29 March 1971 and in each of the four succeeding years (subject to his liability being terminated upon his death) a payment of such sum as after deduction of standard rate income tax should leave £500. HOVAS insured against the possibility of P's death during the period. It was calculated that, if the annual payments HOVAS was to receive were treated as being the gross amounts, it would earn a 36 per cent. per annum return on its outlay. P had to provide security for the future payments, but HOVAS agreed in the preliminary correspondence on 11 March 1971 to accept as security (i) a cheque for £300, to be devoted to the purchase of shares in a public company, and (ii) ten promissory notes to the total value of £2,500 purchased from OCC Ltd., a company in the SW group. Also in accordance with the scheme, P on 12 March opened a current account with SW Ltd., a bank, and arranged by standing order to pay the annual sum of £500 to HOVAS. P further instructed SW Ltd. that, when the remittance of £2,480 was received from HOVAS, the promissory notes should be purchased from OCC Ltd. and lodged with HOVAS. These arrangements were perfected at a completion meeting on 15 March 1971. HOVAS in turn pledged the promissory notes to B Ltd., another SW company, from which it had originally obtained a loan with which to purchase the annuities. This loan was originally to be repaid in five equal instalments, but B Ltd. agreed to the deferment of some of the instalments in return for the deposit of the amount of those instalments with RB Ltd., another SW company.
Thereafter, on or about 29 March each year, SW Ltd. paid the £500 instalment to HOVAS, thereby causing P's current account at SW Ltd. to become overdrawn. HOVAS obtained the release of two of P's promissory notes from B Ltd. and in turn released them to SW Ltd., and SW Ltd. then encashed the two promissory notes with OCC Ltd., using the proceeds to clear the overdraft. P claimed to be entitled to deduct the gross amount of each of his five yearly payments from his total income for surtax purposes for the year in question. The Special Commissioners upheld his claim. The Crown appealed.
The Chancery Division, dismissing the Crown's appeal, held (1) that the real nature of the payments made by P to HOVAS was that they were all income payments; (2) that such payments were made "out of profits or gains brought into charge" to tax under s 52, Income and Corporation Taxes Act 1970; in the absence of any election to attribute the annuity payments to capital, P was not estopped from asserting that the payments were made out of income; dictum of Lord Radcliffe in Commissioners of Inland Revenue v. Frere 42 TC 125, 148; [1965] AC 402 applied; (3) that s 434, Income and Corporation Taxes Act 1970, did not apply as P had received the market price for the disposition, i.e. the sale of the annuity for the capital sum, and this was "sufficient consideration" within the meaning of the exception contained in s 434(1); dictum of Ungoed-Thomas J. in Ball v. National & Grindlays Bank Ltd. 47 TC 287, at page 296; [1973] Ch 127 applied; (4) that, but for the decision in Bulmer v. Commissioners of Inland Revenue 44 TC 1; [1967] Ch 145 (which laid down the principle that a bona fide commercial transaction, containing no element of bounty, did not fall within the definition of a "settlement" for the purposes of s 457), the Crown would have been able to contend successfully that P being the settlor, and the income arising under the settlement (i.e. the annuity) being payable to a person other than the settlor (i.e. HOVAS), it was still his income for surtax purposes; (5) that in the absence of any element of bounty, the Bulmer principle applied, notwithstanding that the object of the scheme was tax avoidance, and consequently s 457 did not apply; (6) that the Bulmer principle extended also to s 434. The Crown appealed.
The Court of Appeal, unanimously dismissing the Crown's appeal, held that the conclusions of the High Court on points (1) and (2) above were correct; (3) that the exception to the operation of s 434(1), Income and Corporation Taxes Act 1970, for dispositions made for valuable and sufficient consideration imports for practical pu rposes the same test as that which excepts transactions which would otherwise be "settlements" from the operation of Part XVI of the Act, and s 457 in particular (that the transaction must be for full consideration and free from bounty: see Bulmer v. Commissioners of Inland Revenue); (4) that in determining for this purpose whether a transaction was devoid of bounty and effected for full consideration it was legitimate for the taxpayer to have had regard to the expected fiscal effects of the transaction; and that, on this basis, the Special Commissioners had effectively found as a fact that P had received the full market price for the annuity. The Crown appealed.
Per curiam; The rule in Bulmer v. Commissioners of Inland Revenue has no application to s 434, Income and Corporation Taxes Act 1970.
The House of Lords, dismissing the Crown's appeal by a majority, (1) (Viscount Dilhorne dissenting) held that the conclusion of the High Court and Court of Appeal on point (1) above was correct; (2) that P had taken no step which would prevent him from asserting that his annuity instalments were "payable wholly out of profits or gains brought into charge to income tax" with-in the meaning of s 52, Income and Corporation Taxes Act 1970; (quaere whether there are any steps that an individual whose income exceeds the charges upon it can take which will have this effect); (3) that the consideration received by P for the annuity was valuable and sufficient within the meaning of s 434(1), Income and Corporation Taxes Act 1970, for the reasons given in the High Court and the Court of Appeal; (4) (Lord Diplock dissenting) that there was no element of bounty in what P did and (Viscount Dilhorne and Lord Diplock dissenting) that s 457, Income and Corporation Taxes Act 1970, did not apply in this case, because the term "settlement" as defined in s 454(3) embraced only transactions containing an element of bounty.
Stated under s 56, Taxes Management Act 1970, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 12 and 13 April 1976 Ronald Anthony Plummer (hereinafter called "Mr. Plummer") appealed against the following assessments to surtax: 1970-71, £3,485, 1971-72, £3,476, and 1972-73, £4,165.
2. Shortly stated the question for our decision was whether payments made in the years in question by Mr. Plummer to Home and Overseas Voluntary Aid Services Ltd. (hereinafter called "HOVAS") in the circumstances hereinafter appearing were payments of "any annuity or other annual payment" and therefore deductible in computing Mr. Plummer's total income for surtax purposes in those years. The circumstances are substantially the same as those considered by the Special Commissioners on 18 and 19 December 1972 in an appeal by HOVAS (hereinafter called "the HOVAS appeal") in which one of the questions in issue was whether similar payments (made by persons other than Mr. Plummer) formed part of the income of HOVAS.
3. The following witnesses gave evidence before us: George Derek Hewson, managing director of Midland Montagu Personal Financial Services Ltd., Mr. Plummer, Robert Thomas Kablean, an actuary employed by the Appellants at the Estate Duty Office.
4. The following documents were proved or admitted before us: a bundle of copy correspondence and documents more particularly referred to in the list at the front of the bundle; a copy of the Case Stated in the HOVAS appeal on 3 June 1975. The bundle is annexed hereto marked A and forms part of this Case(1). The Case Stated has been transmitted to the Court pursuant to s 56(4), Taxes Management Act 1970, and is available for inspection by the Court.
5. As a result of the evidence both oral and documentary adduced before us we find the following facts proved or admitted:
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(a) During the years under appeal Mr. Plummer was employed as taxation manager by Slater Walker Ltd. (hereinafter called "Slater Walker") and he acted in that capacity for the whole of the Slater Walker group of companies. He was a director of Baldrene Ltd. (hereinafter called "Baldrene") a company in the Slater Walker group. Another company in that group was Old Change Court (Investments) Ltd. (hereinafter called "OCC").
(b) HOVAS was a company, incorporated on 30 December 1970, which at all times material to this appeal had an authorised and issued share capital of £10 divided into shares of £1 each. It was registered under the Charities Act 1960 and had a close business association with Slater Walker.
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(c) One of Mr. Plummer's duties at Slater Walker was to ensure the efficient working of a scheme whereby, with the aid of moneys borrowed by HOVAS from Baldrene (see para 5(3) of the Case Stated in the HOVAS appeal), HOVAS held itself out as prepared to purchase annuities on terms attractive to persons who paid a high...
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Moodie v Commissioners of Inland Revenue and Another ; Sotnick v Same
... ... 1 These two appeals, by taxpayers from orders made by Mr. Justice Hoffmann on 4th May 1990, raise the question whether a tax avoidance scheme, which was accepted as effective for its purpose by the House of Lords in I.R.C. v. Plummer [1980] A.C. 896 ; (1979) 54 T.C. 1 , has been rendered ineffective by the subsequent decision of the House of Lords in W.T. Ramsay v. I.R.C ... [1982] A.C. 300 ; (1981) 54 T.C. 101 ... The Special Commissioners so held and their decision was affirmed by Mr. Justice Hoffmann by the orders under ... ...