Davies v Davies Jenkins & Company Ltd

In this case the Revenue contend that the Appellant company is not entitled by virtue of section 20 of the Finance Act, 1953, as amended by section 23 of the Finance Act, 1958, when computing profits or losses for the purposes of income tax, to deduct two payments it had made to Wood Brothers (Glossop) Ltd. as if they were trading expenses.

The Revenue contend that the Appellant company cannot do so as at the time the payments were made Wood Brothers (Glossop) Ltd. had ceased to carry on a trade. They maintain that section 20 only applies to companies which at all relevant times and at the time of receipt of the payment come within subsection (9) of that section, that is to say, companies resident in the United Kingdom and carrying on a trade wholly or partly in the United Kingdom. Such a company can conveniently be referred to as a trading company.Section 20 (9) further provides that a company "whose business consists mainly in the making of investments and the principal part of whose income is derived therefrom" is for the purposes of section 20 to be treated as a trading company. When considering section 20, therefore, all references to a trading company must be taken to include what may conveniently be called an investment company.

It is further provided by section 20 (10) that to avail themselves of the rights given by the section, both the paying company and the receiving company must at all material times, including in particular the time at which the payment is made, have either been subsidiaries within the meaning of section 42 of the Finance Act, 1938, of a third company or one the subsidiary of the other.

The Appellant company was at all material times, including the time of the making of the payments in question, a subsidiary of Wood Brothers (Glossop) Ltd.

Subsection (2) of section 20 provides that such payments are only to be treated as subvention payments within the meaning of the section if they are made "under an agreement providing for the paying company to bear or share in losses or a particular loss of the payee company, and is not a payment which (apart from 'the' section) would be taken into account in computing profits or gains or losses of either company or on which (apart from 'the' section and from any relief from tax) the payee company would be liable to bear tax by deduction or otherwise."

The payments made by the Appellant company were made pursuant to such an agreement and were not payments which apart from the section would be taken into account in computing profits or losses or on which the payee company would be liable to bear tax by deduction or otherwise.

"Subject to the provisions of this section, where a company has a deficit for tax purposes during any accounting period of the company, and receives a subvention payment in respect of that period from an associated company having a surplus for tax purposes in the corresponding period, then in computing for the purposes of income tax the profits or gains or losses of those companies the payment shall be treated as a trading receipt receivable by the one company on the last day of the accounting period during which it has the deficit, and shall be allowed as a deduction to the other company as if it were a trading expense incurred on that day."

The provisions to which I have referred were not altered by the Finance Act, 1958.

Wood Brothers (Glossop) Ltd. had deficits for tax purposes in two of its accounting periods and the Appellant company had surpluses for tax purposes in its corresponding periods. They were both trading companies within the meaning of subsection (10), but Wood Brothers (Glossop) Ltd. ceased to trade towards the end of its second accounting period and had ceased to trade when it received the payments from the Appellant company. From the beginning of the relevant accounting periods, and at the time of the making of the payments, one was the subsidiary of the other.

The Appellant company contend that the payments they made are to be treated as trading receipts received by Wood Brothers (Glossop) Ltd. on the last day of each of the respective accounting periods and are to be allowed as a deduction to the Appellant company as if they were trading expenses incurred on those days.

It is only after the end of an accounting period that it can be ascertained that one company has a deficit for tax purposes and another a surplus in the corresponding period. Then, if a payment is made pursuant to an agreement which comes within subsection (2) and one company is the subsidiary of the other or both are subsidiaries of a third company, the payment can be treated as a trading receipt of one company and a trading expense of the other.

The proviso to subsection (2) of the 1953 Act provided that the payment had to be made within or before the year of assessment following that in which the period ends. This was extended by the Finance Act, 1958, to require it to be made in or before the second year of assessment following that in which the period ends.

Thus it is possible for a payment made a considerable time after the end of the accounting period to come within the section and to be treated as a payment received on the last day of the payee company's accounting period and, if the other requirements of the section are satisfied, to be treated as a trading receipt and a trading expense of the companies.

Provided that the payment is made within the prescribed time and provided that then one company was still the subsidiary of the other or that both were of a third company, nothing appears to turn on the actual date of payment. But the Revenue contend that the section only applies if at the actual date of payment the company which receives it is carrying on a trade.

There appears to be no good reason for so restricting the application of the section. The Revenue was not able to suggest one but they contended that, on its true construction, the section had that effect.

They concede that Parliament, when section 18 and paragraphs 1 and 3 of the Fourth Schedule of the Finance Act, 1954, were enacted, proceeded upon the basis that the provisions of section 20 did not cease to apply if the company which received the payment had at the time of receipt ceased to trade but they rightly say that the content of subsequent legislation affords no reliable guide to the interpretation of an earlier statute as Parliament may have proceeded upon an erroneous view on the law. (See John Hudson & Co. v. Kirkness[1955] A.C. 696[1955] A.C. 696.)

It is, however, inconceivable that the Government of the day would have introduced a Finance Bill containing what are now section 18 and paragraphs 1 and 3 of the Fourth Schedule of the Finance Act, 1954, if the Revenue had not at that time held the view that cessation of trading by the receiving company did not affect the application of section 20. Indeed, the Revenue admitted that it was not until after the decision in Bullock v. Union Construction Co. [1958] 38 T.C. 712, a case on the meaning to be attached to the word "resident" in section 20 (9), that it occurred to them that the scope of section 20 was limited as they now suggest and that it ought to be given the construction for which they now contend.

Whatever be the result of this case, one cannot help but feel some sympathy with the unfortunate taxpayer, the Appellant company, which no doubt acted in the belief, as originally the Revenue thought was the case, that it was entitled if it made the payments in question to treat them as trading expenses, and which now finds itself involved in this litigation with the result so far that it has been held not entitled to do so. The Revenue now seek, not by securing Parliamentary approval of an amendment to section 20 to make it clear that the...