Commissioners of Inland Revenue v Herd
| Jurisdiction | Scotland |
| Judgment Date | 14 February 1992 |
| Date | 14 February 1992 |
| Docket Number | No. 21. |
| Court | Court of Session (Inner House - Extra Division) |
EXTRA DIVISION.
Revenue—Income tax—Company director taking up appointment on condition that he acquire shares—Relevance of shares being acquired on employee's initiative rather than employer's initiative—Whether income tax payable on gain resulting from disposal of shares—Finance Act 1972 (cap. 41), sec. 791—Finance Act 1976 (cap. 40), sec. 67.2
Revenue—Income tax—Disposal of shares acquired by reason of employment—Whether gain emoluments of the employment requiring deduction of tax at
source so that liability to account for tax fell on the employer to the exclusion of the employee—Income and Corporation Taxes Act 1970 (cap. 10), sec. 2043—Income Tax (Employments) Regulations 1973 (S.I. 1973 No. 334), regs. 2 (1), 13 (1) and 26 (3).4A taxpayer was offered an executive directorship within a company and proposed to take up the position on condition that he acquired a shareholding in one of the company's subsidiaries for the sum of £1, which was the market value at the time, and a right to require the parent company to purchase the holding in defined circumstances. The company accepted the proposal. Subsequently the taxpayer sold the shares back to the company for the sum of £380,000, declared a gain of £379,999 and paid capital gains tax thereon. The market value of the shares at that time was £211,300. The Inland Revenue took the view that the gain was properly chargeable to income tax and made assessments, under sec. 79 of the Finance Act 1972 in respect of the increase in market value i.e. £211,299, and under sec. 67 of the Finance Act 1976 in respect of the excess of the price over the market value, i.e. £168,700.
The taxpayer appealed to the Special Commissioners against the assessments, arguing that as the initiative for the share acquisition had come from him, no "opportunity" had been offered to him in terms of sec. 79 of the 1972 Act so no income tax was payable. The Special Commissioners accepted that argument and further held that there was no liability in terms of sec. 67 of the 1976 Act as there had not been an "opportunity available" to the taxpayer by reason of his employment. They rejected an argument under the Income Tax (Employments) Regulations 1973 that if the payment was chargeable to income tax it was in its nature an income payment and accordingly fell to be dealt with as emoluments under the 1973 Regulations, with the result that the employer ought to have deducted tax at source and was accountable therefor, the collector being unable to require payment from the employee.
The Inland Revenue appealed to the Court of Session by stated case, arguing that the Special Commissioners had erred in their interpretation of sec. 79 of the 1972 Act as it would require the law to go behind a concluded contract to see which party had proposed which term. The taxpayer contended that the
Special Commissioners had erred in rejecting the argument under the 1973 Regulations.Held (1) that if, by reason of being a director or employee, a party was enabled to acquire shares either through a pre-existing contract or through a casual opportunity arising later, regardless of who proposed the kind of acquisition which was ultimately agreed, the acquisition fitted the requirements of sec. 79 of the 1972 Act and sec. 67 of the 1976 Act and was properly chargeable to income tax; (2) (Lord Sutherland dissenting), that the statutory provisions which subjected the gain to income tax thereby also defined it as income, with the result that liability to account for the tax payable fell on the employer under the 1973 Regulations; and both questions stated by the Special Commissioners answered in the negative.
Opinion (per Lord Sutherland), that although income tax was chargeable under secs. 79 and 67, this was stated to be on an amount equal to the gain, which did not alter the capital nature of the gain itself, so it could not be regarded as emoluments in respect of which the employer was accountable for tax.
Charles Anderson Peden Herd appealed to the Commissioners for the Special Purposes of the Income Tax Acts against an additional assessment to income tax on a gain of £379,999 for the year 1983-84 arising from the disposal of shares acquired by reason of his employment.
The questions for determination by the Special Commissioners were broadly as follows: (1) Whether the circumstances in which the taxpayer acquired the shares were such as were referred to in sec. 79 of the Finance Act 1972 and sec. 67 of the Finance Act 1976. (2) Whether the liability to account for any tax fell on the taxpayer's employer to the exclusion of the taxpayer.
The Special Commissioners answered both questions in the negative and reduced to nil the amount of the additional assessment.
The Inland Revenue Commissioners appealed by way of stated case to the Court of Session. The questions for the opinion of the court were: (1) Whether the Special Commissioners had answered question (1) correctly. (2) Whether they had answered question (2) correctly.
Parties' contentions and the Special Commissioners' findings-in-fact are adequately set forth in the opinion of Lord McCluskey.
The cause called before an Extra Division, comprising Lord McCluskey, Lord Sutherland and Lord Coulsfield for a hearing thereon on 17th and 18th December 1991. On 18th December 1991 the court madeavizandum.
At advising, on 14th February 1992;—
LORD MCCLUSKEY.—This appeal to the Court of Session sitting as the Court of Exchequer is brought by case stated under sec. 56 of the Taxes Management Act 1970. The appeal is taken by the Commissioners of Inland Revenue (the revenue) against a determination by the special commissioners of an appeal by the respondent, Charles Anderson Peden Herd (the taxpayer) against an additional assessment to income tax for the year 1983-84 on the figure of £379,999. Two questions were raised by the appeal to the special commissioners and they are narrated in the stated case as follows: "(i) whether, on the true construction of sec. 79 (1), Finance Act 1972 and of sec. 67 (1), Finance Act 1976, the circumstances in which Mr Herd acquired certain shares in Cruden Building and Civil Engineering Limited ("CBE") were such circumstances as are referred to in the said statutory provisions; and (ii) whether (since a charge to tax under the said statutory provisions falls to be made under Schedule E) the liability to account for any such tax to the Commissioners of Inland Revenue fell on Mr Herd's employer, under the Income Tax (Employments) Regulations 1973, to the exclusion of Mr Herd."
From the oral and documentary evidence, including a statement of agreed facts, the commissioner hearing that appeal made findings in fact which are set forth in para. V of the case. On that factual basis he decided the first question in the negative, that is to say in favour of the taxpayer; he also decided the second question in the negative, that is to say in favour of the revenue. In the result, following sundry incidental procedure, the appeal was determined in the taxpayer's favour. The revenue having declared their dissatisfaction with the determination as erroneous in point of law, required the commissioners to state a case for the opinion of this court. The taxpayer wished to challenge the special commissioners' ruling on the second question. The commissioners, therefore, in accordance with the guidance given by the Lord President (Hope) in Gordon v. I.R.CSC. 1991 S.C. 149, included a question in the case so as to enable the issue lying behind the second question to be placed before this court for its opinion.
The factual background to this case is contained in the findings in fact and for the purposes of this opinion I shall simply summarise them, quoting verbatim from certain only of the findings. The Crudens Group contains several companies operating within the construction industry. The parent company of the group is Cruden Investments Ltd. ("Investments") and it has a number of operating subsidiaries. The latter include Crudens Ltd., Hart Builders (Edinburgh) Ltd. ("Hart") and CBCE. Save as appears below, these subsidiaries have at all material times been wholly owned by Investments. In October 1966 Mr Herd joined the group as an employee of Crudens Ltd. Some time later he moved to Hart and in 1973 he was appointed managing director of Hart. That company proved successful under his management. Early in 1979 Crudens Ltd. was reorganised and its building operations in the west of Scotland passed to CBCE (previously thereto a dormant company in the group). Within a few months it became apparent to the board of Investments (which received monthly management accounts from its subsidiaries) that CBCE had problems and that its first year accounts were likely to show a large loss. Following discussions with him, Mr Matthew, a Crudens director negotiating for the group, proposed to Mr Herd that he should act as group construction manager and take certain steps to deal with the problems that had arisen; it was proposed that he would be rewarded for these additional responsibilities, but it was not then proposed that any shares in CBCE would be transferred to him as part of that reward. Mr Herd, however, in responding, proposed that he should have (a) a holding of ordinary shares in CBCE, and (b) rights in certain defined circumstances to require Investments to reacquire that holding from him. The proposals advanced by Mr Herd were accepted by the board of Investments and the holding was agreed at 10 per cent, but negotiations continued for some time on other details of the reward package.
Findings in fact (ix) and (x) should be narrated in full: "(ix) If Mr Herd had not been prepared to accept executive responsibility for CBCE, the board of Investments would have acceded to a demand for the same terms made by any individual to whom the task was offered. (x) On 25th March 1980, Investments sold...
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