Congreve v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Date | 1948 |
| Court | House of Lords |
NO. 1404-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income Tax and Sur-tax - Avoidance of tax by transfer of assets abroad - Transfer by individual ordinarily resident in United Kingdom - Transfer by a third party - Transfer by a company in which an individual resident in the United Kingdom has a controlling interest - Transfer to United Kingdom company of which control subsequently removed abroad - "Associated operations" - "Power to enjoy income" - Finance Act, 1936 (26 Geo. V & 1 Edw. VIII, c. 34), Section 18 and Second Schedule, Paragraph 6; Finance Act, 1938 (1 & 2 Geo. VI, c. 46), Section 28.
The first named Appellant, Mrs. C, was the only child of G, an American citizen who had built up a substantial business in the United Kingdom. During the material period this business was carried on by a United Kingdom trading company, Humphreys & Glasgow, Ltd., with an issued capital of 100,000 shares. In 1927 G held 93,000 of these shares. Mrs. C was born in London but on attaining her majority she confirmed her American citizenship. In 1935 she married Mr. C, the second Appellant, who was domiciled in Eire. At all material times both Appellants were ordinarily resident in the United Kingdom.
From 1932 onwards a series of transactions was carried out involving the creation of three Canadian and four United Kingdom investment companies; in outline these transactions are described in the following sub-paragraphs (1) to (9).
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(2) In 1932 G gave to his daughter, Mrs. C, the whole issued share capital of an American corporation to which he had earlier transferred 60,000 shares in Humphreys & Glasgow, Ltd. Later in 1932 the 60,000 shares were transferred to a Canadian investment company (Humphreys & Glasgow (Canada)) which also acquired a further 5000 shares from Mrs. C. In exchange for both transfers the Canadian company issued to Mrs. C redeemable debentures and all its shares (except 5 qualification shares held by Canadian directors). In 1936 this company purchased
from G for cash his remaining (28,000) shares in Humphreys & Glasgow, Ltd. (see (5) below). The whole of the Canadian company's income was accumulated in a bank in London where the redeemable debentures were repayable on demand. (3) In 1932 and again in 1936 Mrs. C sold a number of her American and Canadian investments to a (second) Canadian investment company (Rockbridge) in exchange for all its shares (except 5 directors' qualification shares) and redeemable debentures. The whole of the company's income was accumulated.
(4) In 1933 Humphreys & Glasgow, Ltd. transferred to a (third) Canadian investment company (Humglas) in which it held all the shares (except 5 qualification shares), its foreign investments in exchange for £1,290,000 redeemable debentures of the company.
(5) On 16th July, 1936, Section 18 of the Finance Act, 1936, became law.
(6) In the course of 1936 the first and second Canadian companies -see (1) and (2) above-were wound up and the 65,000 shares in Humphreys & Glasgow, Ltd. and her American and Canadian investments were transferred to Mrs. C in specie.
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(7) On 18th November, 1936, a United Kingdom investment company (Margreve) was incorporated and acquired for cash
(a) from the first Canadian company-see (1) above-prior to its dissolution, the 28,000 shares purchased from G,
(b) from Mrs. C, 17,000 shares in Humphreys & Glasgow, Ltd., and a number of her foreign investments.
(8) By October, 1937, Mrs. C owned all the shares of Margreve.
(9) On 30th July, 1937, the Finance Act, 1937, became law. By Section 19 thereof a new tax called National Defence Contribution was levied on trades and businesses, including the holding of investments, carried on in the United Kingdom.
(10) On 21st October, 1937, Margreve distributed a capital bonus of £350,000 out of its share premium reserve and Mrs. C became entitled to this sum in redeemable debentures. On the same day she renounced £215,000 of the debentures in favour of a (second) United Kingdom investment company (Seventy Three), which had been incorporated a few days earlier, and received in exchange £430,000 redeemable debentures of that company, issued at a discount of 50 per cent. and repayable at a premium of 20 per cent.
(11) In the same month (October) a (third) United Kingdom investment company (Marglas) was formed. Margreve immediately thereafter entered into an arrangement with Marglas which had the result that
(a) Margreve held only foreign investments, and
(b) Marglas held the 45,000 shares of Humphreys & Glasgow, Ltd.
(12) In the course of the transaction £135,000 debentures, the balance of the £350,000 Margreve debentures-see (6) above- were redeemed. Mrs. C acquired the entire share capital of Marglas.
(13) The first and second United Kingdom investment companies (Margreve and Seventy Three), within a few days of the transactions referred to above, adopted new articles of association under which the control of each company was transferred abroad. The control of the third United Kingdom company remained unaltered until 22nd August, 1940, when it went into liquidation, but up to June, 1945, it had not been finally dissolved.
(14) In December, 1937, Humphreys & Glasgow, Ltd. sold its debentures in the (third) Canadian company-referred to in (3) above-to another (fourth) United Kingdom investment company (Glow), which was incorporated for the purpose, and received in exchange £515,000 redeemable debentures issued at a discount of 50 per cent. and repayable at a premium of 20 per cent. A few days later Glow adopted new articles of association vesting control of the company abroad.
At all material times Mrs. C was the controlling shareholder of Humphreys & Glasgow, Ltd.
An assessment to Sur-tax for the year 1935-36 was made on the first Appellant, and assessments to Sur-tax for the years 1935-36 to 1940-41, inclusive, and to Income Tax for the years 1936-37 to 1940-41, inclusive, were made on the second Appellant (her husband) under the provisions of Section 18 of the Finance Act, 1936, and Paragraph 6 of the Second Schedule to that Act, and Section 28 of the Finance Act, 1938, on the basis that all the foregoing transactions were transfers of assets or associated operations within the meaning of Section 18, and that the Appellants had power to enjoy the whole income of the foreign companies concerned. On appeal to the Special Commissioners it was contended on behalf of the Appellants that the transfers made to the first and second Canadian investment companies by the first Appellant in 1932 were not made for the purpose of avoiding liability to tax; that none of the subsequent transactions were transfers or associated operations within the meaning of Section 18; that the removals abroad of the control of the two United Kingdom companies, Margreve and Seventy Three, were not associated operations related to any transfer of assets, and that in any event the Appellants were only liable on such income of the transferee companies as arose from the assets transferred or from assets acquired as a result of associated operations related to those assets. The Special Commissioners dismissed the appeal.
In the House of Lords it was not disputed by the Appellants that the transactions together constituted one inter-connected series or that the avoidance of liability to taxation was the purpose or one of the purposes of the transactions.
Held, that the provisions of Section 18 of the Finance Act, 1936, apply:-
(a) where there has been a transfer such as is described in the introductory words of the Section and an individual has by means of such transfer, either alone or in conjunction with associated operations, acquired rights by virtue of which he has power to enjoy income of a person resident or domiciled abroad, irrespective of whether the transfer was made by the individual who acquired those rights or by another person, and
(b) where a transfer of assets was made to a person who, at the time of the transfer, was resident in the United Kingdom but who, at the time when the relevant income arose, was resident or domiciled out of the United Kingdom.
Stated under the Income Tax Act, 1918, Section 149, and the Finance Act, 1927, Section 42 (7), and Income Tax Act, 1918, Section 149, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the King's Bench Division of the High Court of Justice.
1. At meetings of the Commissioners for the Special Purposes of the Income Tax Acts held on 21st October, 1942, 2nd, 3rd, 4th November, 1942, and 27th September, 1944, Mrs. M.G. Glasgow Congreve and A.C. Congreve (hereinafter called "Mrs. Congreve" and "Mr. Congreve", respectively) appealed against the following assessments :-
Mrs. Congreve against an assessment to Sur-tax in the sum of £15,059 for the year ending 5th April, 1936.
Mr. Congreve against assessments to Sur-tax in the sums of £17,281, £26,314, £40,061, £70,066, £117,803 and £97,866 for the years ending 5th April, 1936, to 5th April, 1941, inclusive.
Mr. Congreve against assessments to Income Tax in the sums of £10,000, £20,000, £40,000, £60,000 and £60,000 for the years ending 5th April, 1937, to 5th April, 1941, inclusive.
2. All the above assessments are raised under the provisions of the Finance Act, 1936, Section 18, and Paragraph 6 of the Second Schedule to that Act, and Section 28 of the Finance Act, 1938. The appeals raise the question whether the said assessments were correctly made by reason of the matters hereinafter set out.
The following table sets out the respective dates of registration, the full names and the short labels of the several English, Canadian and American companies hereinafter mentioned :-
17th June, 1912. |
Humphreys & Glasgow, |
hereinafter |
Humphreys |
Ltd., an English company |
called |
& Glasgow |
|
(England) |
|||
29th December, 1927. |
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...but important points) are in issue in these appeals, and the House is invited if necessary to depart from its previous decision in Congreve and to overrule the Court of Appeal's decision in Bambridge . Since, if it were to do so, that would dispose of all the appeals in the taxpayers' favo......
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