Commissioners of Inland Revenue v Garvin
| Jurisdiction | England & Wales |
| Judgment Date | 14 May 1981 |
| Date | 14 May 1981 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income tax and surtax-Transactions in securities-Tax advantage- Counteraction-Sale of shares in property companies-Subsequent payments of abnormal dividends by property companies-Whether relevant circumstances present-Whether sale of shares transactions "whereby" another person received abnormal dividends-Whether purchase price of shares received "in connection with" re-acquisition by vendors of shares of assets of property companies- Whether property companies were at material time companies to which para D of s461 applies-Insufficient evidence in Case Stated-Whether onus on taxpayer or Crown-Whether tax advantages obtained-Income and Corporation Taxes Act 1970, s 460, paras C and D of s 461, proviso to para D(2) of s 461, s 466 and s 467(2).
The taxpayers, together with the brother of Mr. J. J. Rose, owned five property companies (ABCFS) and entered into a professionally devised tax avoidance scheme comprising, inter alia, the following transactions:
(1) On 3 April 1969 they sold their shares in ABCFS for a total consideration of £471,998 payable by annual instalments of £150 (i.e. £50 to each) over 200 years, with a final instalment of £451,898 payable on 3 April 2170, and interest at 101/4 per cent. on the outstanding instalments-thus, by virtue of para 14, Sch 6, Finance Act 1965, virtually avoiding liability to capital gains tax.
(2) On 14 April 1969 they sold the right to receive the instalments of the purchase price of the shares for £471,848 (a transaction which did not attract capital gains tax).
(3) On 14 April 1969 they lent £471,848 to another of their companies (Central) as part of the finance required to acquire the property portfolios of ABCFS for £989,095.
The company which had on 3 April 1969 purchased the shares in ABCFS (Excalibur) was controlled by the devisers of the scheme. On 8 April 1969 ABCFS had disposed of their property portfolios on leases at premiums payable by instalments over 999 years, resulting in distributable profits of some £558,000 and-by virtue of elections under s 80(6), Income and Corporation Taxes Act 1970-negligible liability to corporation tax. About one year later ABCFS paid dividends of £555,000 to Excalibur.
On 31 July 1974 the Commissioners of Inland Revenue issued notifications under s 460(6) specifying (i) the sale of the shares in ABCFS, (ii) the sale of the right to the instalments of the purchase price of the shares and (iii) the payment of the abnormal dividends by ABCFS to Excalibur. The taxpayers made statutory declarations and the Commissioners prepared a counter-statement, on the basis of which the Tribunal determined that there was a prima facie case for proceeding. On 27 March 1975 the Commissioners issued notices under s 460(3) specifying the same transactions as the notifications and proposing adjustments resulting in income tax and surtax assessments for 1968-69 in the sums of £235,941 (Mr. Garvin) and £117,971 (Mr. Rose and his brother).
Before the Special Commissioners the Crown relied on the circumstances in para C of s 461, Income and Corporation Taxes Act 1970, and reserved the right to rely on para E in a higher tribunal. The Special Commissioners found that the taxpayers were not parties to any scheme which involved the subsequent payment of abnormal dividends by ABCFS, and held that accordingly the consideration for the sale of the issued share capital of ABCFS was not received by the taxpayers in consequence of a transaction "whereby" Excalibur subsequently received an abnormal amount by way of dividend. They held that the circumstances in para C were not present and they therefore cancelled the notices and quashed the consequential assessments.
On appeal to the High Court the Crown served notice of a new point under RSC Ord 91, r 4, and sought to rely on the circumstances in para D as well as those in para C.
The Chancery Division, dismissing the Crown's appeals, held that the circumstances in s 461, were not satisfied.
Per curiam: in relation to s 460, the general burden of showing that the necessary circumstances are present is on the Crown. No evidence had been laid before the Commissioners to show whether, at the time their profits were distributed, ABCFS were companies to which para D applied, since they were controlled by Excalibur, as to the status of which there was no evidence. The Crown appealed.
The Court of Appeal, dismissing the Crown's appeal, (Templeman L.J. dissenting), held that the circumstances in s 461 were not satisfied.
Per Donaldson L.J.: in applying para D, the burden of proof is not always on the Crown. It was for the Crown to prove that at the relevant time ABCFS were controlled by Excalibur, and for the taxpayer to prove that Excalibur was itself not a company to which para D applied (see s 461D (2) (a) and (b)). The Crown appealed.
Held, in the House of Lords, unanimously dismissing the Crown's appeal, that the circumstances in s 461 were not satisfied for the following reasons:
1. In para C it is not enough in order to constitute a transaction "whereby" the relevant person has received an abnormal dividend that the declaration of the dividend would not have been made but for the transaction in question; in the present case the degree of connection between the transaction and the declaration of the dividend was insufficient on the basis of the Special Commissioners' findings of fact.
2. In para D the date for determining whether the company is one to which the paragraph applies is that of the distribution of profits and accordingly para D did not apply.
Per Curiam: the taxpayers had obtained a tax advantage within s 466 but it was uncertain whether that advantage other than £150 had been obtained in 1968-69 or 1969-70.
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 10, 11, 12, 13 and 14 May and 29 and 30 July 1976 Louis Garvin (hereinafter called "the Respondent") appealed against a notice issued to him by the Commissioners of Inland Revenue (hereinafter called "the Board") under s 460(3), Income and Corporation Taxes Act 1970 ("the Act"), and against a surtax assessment made on him for the year 1968-69 in accordance with the adjustments specified in the said notice. We, the Commissioners who heard the appeals, regarded ourselves as also having jurisdiction in respect of an income tax assessment made on him for the year 1968-69 in accordance with the adjustments specified in the said notice.
2. Briefly stated, the question for our consideration was whether in any such circumstances as are mentioned in s 461 of the Act, and in consequence of a transaction in securities, or the combined effect of transactions in securities, the Respondent was in a position to obtain or obtained a tax advantage as defined in s 466 of the Act. The Board's representative contended before us that the circumstances mentioned in para C of s 461 existed; and, as a point not previously taken on behalf of the Respondent was for the first time put forward during the opening of the appeal before us-namely, that the Respondent obtained a debenture from Central London Residential Properties Ltd.-he also wished to keep open the point, without developing any argument on it before us, that the circumstances mentioned in para E of s 461 existed.
3. The following persons gave evidence before us: the Respondent; Philip Edward Rose ("Mr. Philip Rose"); John Jacob Rose ("Mr. John Rose"); Godfrey Michael Bradman ("Mr. Bradman"), a chartered accountant and at the material time senior partner in the firm of Messrs. Godfrey Bradman & Co. of 53 Queen Anne Street, London W.1.
4. The following documents were proved or admitted before us:
(2) Agreement dated 3 April 1969 for sale of shares-see para 5(3) below.
(3) Agreement dated 3 April 1969 for sale price of shares to be paid by instalments-see para 5(3).
(4) Accounts and draft accounts referred to in para 5(5) (exhibit 1).
(5) Agreement for lease, and lease, both dated 8 April 1969-see para 5(4).
(6) Assignment dated 14 April 1969 of right to receive instalments of purchase price of shares-see para 5(7)(c).
(7) Three summaries prepared by the Board and amended by us in red in the light of Mr. Bradman's evidence; the first setting out the transactions described in para 5 below, the second showing the movement of cash resulting from those transactions, and the third showing the transactions concerned with the transfer of the rights and obligations relating to the payment of instalments (exhibit 2).
(8) Notification dated 31 July 1974 under s 460(6) of the Act-see para 5(13).
(9) Statutory declaration by Respondent-see para 5(14) (exhibit 3).
(10) Notice dated 27 March 1975 under s 460(3) of the Act-see para 5(15).
(11) Income tax and surtax assessments made on the Respondent and on Mr. Philip Rose and Mr. John Rose-see para 5(16).
Copies of such of the above as are not annexed hereto as exhibits are available for inspection by the Court if required(1).
5. As a result of the evidence both oral and documentary adduced before us we find the following facts proved or admitted:
(2) In this Case, (a) the Respondent, Mr. Philip Rose and Mr. John Rose are referred to collectively as "the three notified persons"; Bernard Faber, a chartered accountant and at the material time a partner in the said firm of Messrs. Godfrey Bradman & Co. is referred to as "Mr. Faber"; Nassan Halle, a certified accountant and at the material time a partner in the firm of Messrs. Bradman Halle & Co. of 53 Queen Anne Street, London, W.1, as "Mr. Halle"; Alan Anthony David Wiseman, a solicitor and a partner in the firm of Messrs. Brecher &...
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