Deanby Investment Company Ltd v HM Inspector of Taxes
| Jurisdiction | Northern Ireland |
| Judgment Date | 12 January 2001 |
| Date | 12 January 2001 |
| Court | Court of Appeal (Northern Ireland) |
Court of Appeal (Northern Ireland).
Carswell LCJ, Nicholson and Campbell L JJ.
Ronald Weatherup QC and Paul Maguire (instructed by the Crown Solicitor's Office) for the Crown.
The taxpayer company was not represented.
Nicholas Hanna QC (instructed by the Crown Solicitor's Office) as amicus curiae.
The following cases were referred to in the judgment of the court:
Calkin v IR Commr [1984] 1 NZLR 440
Edgelow v McElwee ELR[1918] 1 KB 205
Newton v Pyke (1908) 25 TLR 127
Steen v Law ELR[1964] AC 287
Stephens (HMIT) v T Pittas Ltd TAXTAX[1983] BTC 367; (1983) 56 TC 722
Corporation tax - Close company - Loans to participators - Assessment - loans made in ordinary course of business including money lending - Investment company - Eight loans made in 14 year period to associate of participator - Whether company taxable on loan - Whether investment business included making of loans - Whether business included money lending - Whether loan made in ordinary course of business - Income and Corporation Taxes Act 1988, Income and Corporation Taxes Act 1988 subsec-or-para 419s. 419.
This was an appeal by the inspector of taxes from a decision of the special commissioners given on 20 March 2000, allowing an appeal from an assessment in the sum of £7,500 under Income and Corporation Taxes Act 1988 section 419 subsec-or-para (1)s. 419(1) of the Income and Corporation Taxes Act 1988 on the basis that a close company was not taxable on a loan made to an associate of one of its participators because it was made in the ordinary course of the company's business, which included money lending.
The taxpayer was a company incorporated in Northern Ireland whose main object was investment. It also had power to lend and advance money. In 1997, it made a loan of £30,000 to its chairman, "M". Some 37 per cent of the shares in the company were held by each of "B Ltd" and "C Ltd" which were close companies in which members of M's family were participators. The remaining 26 per cent was held by M's wife and children.
Since 1978, the three companies had made various loans to M at a commercial rate of interest. The purpose of the loan in question was to enable M to purchase shares in another company in which the taxpayer company had a shareholding.
The taxpayer appealed against an assessment to tax under the Income and Corporation Taxes Act 1988, Income and Corporation Taxes Act 1988 section 419 subsec-or-para (1)s. 419(1). A special commissioner found that the taxpayer was an investment company carrying on a business which included money lending. The special commissioner also found that the 1997 loan was made in the ordinary course of business, so that the loan came within the exception contained inIncome and Corporation Taxes Act 1988 section 419 subsec-or-para (7)s. 419(7) for a loan by a close company to an associate of a participator made in the ordinary course of a business carried on by the close company which included money lending. The Revenue appealed to the Court of Appeal of Northern Ireland.
Held, allowing the appeal and confirming the assessment:
1. The object of Income and Corporation Taxes Act 1988 section 419s. 419 was to prevent tax avoidance by the device of companies making loans to participators which, if left outstanding indefinitely, would in effect constitute distributions. The exception contained in Income and Corporation Taxes Act 1988 section 419 subsec-or-para (7)s. 419(7) was designed to omit from the operation of the section a loan made to participators by companies all or part of whose business consisted of money lending.
2. The words "a business carried on by it which includes the lending of money" in Income and Corporation Taxes Act 1988 section 419 subsec-or-para (1)s. 419(1) connoted a certain regularity of recurrence of such transactions. To carry on the business of doing something ordinarily meant that it was done as a regular practice by way of a trading operation, if not with all comers, at least with a variety of customers.
3. The making of loans on eight occasions over 14 years to one associate of a participator did not amount to a business, even when intercompany loans and one loan to an unconnected company were included. If it were otherwise, a company could make a series of loans to its participators and their associates (the very acts at which the provision was aimed) and then say that the lending of money was included in a business carried on by it. That could not have been Parliament's intention.
4. The special commissioner was entitled to find that the loans to M were made as investments. However, he erred when he failed to consider what more than making loans by way of investment was required to bring the case within the Income and Corporation Taxes Act 1988 section 419s. 419 exception; or in assuming that the making of such loans was sufficient per se to bring it within the exception. Therefore, the commissioner's decision could not stand. No reasonable tribunal, properly directed, could have concluded that the case came within the s. 419 exception. The taxpayer could not bring itself within the exception and was liable for the charge to tax, even though M neither sought nor obtained any tax advantage from the transaction.
Carswell LCJ:
1. One of the recurring themes in the continuing struggle between taxpayers seeking loopholes in the tax laws and the Revenue striving to close them is the operation of the law of unintended consequences. Parliament not infrequently enacts a provision aimed at a particular type of tax avoidance which has proved successful and which the government of the day wishes to prevent, but frames it in such a way that other persons who have not been attempting to escape tax in the same way are caught by its provisions. The same thing can happen in the related field of company law: the similar drafting of s. 54 of theCompanies Act 1948 designed to prevent companies from providing financial assistance for the purchase of their own shares was so wide that, as the Jenkins Committee observed, it penalised many unobjectionable transactions. The present case is a good example. It is abundantly clear that the taxpayer company, the respondent in this appeal, and its corporators have not been seeking the type of advantage which the provision which we have to construe was designed to nullify. If we hold that that provision must be construed in the way for which the appellant inspector of taxes contends, it will nevertheless result in the imposition of a charge upon the taxpayer.
2. The present proceedings are brought by the appellant by way of appeal from a decision of the special commissioners given on 20 March 2000, allowing an appeal from an assessment in the sum of £7,500 underIncome and Corporation Taxes Act 1988 section 419 subsec-or-para (1)s. 419(1) of the Income and Corporation Taxes Act 1988. The case for the appellant is that liability to pay the sum assessed is the consequence of the making of a loan of £30,000 on or about 1 September 1997 by the respondent company the Deanby Investment Co Ltd ("Deanby") to its chairman Mr John D McCaughey. The appeal is brought under Taxes Management Act 1970 section 56As. 56A (as applied by Taxes Management Act 1970 section 58s. 58) of the Taxes Management Act 1970, which provides for an...
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RKW Ltd
...or directed ("the 419 Mischief") can be extracted from the decision of the Court of Appeal in Brennan (HMIT) v Deanby Investment Co Ltd[2001] BTC 205 at p.466: - The legislation includes provisions to counter avoidance of tax by the making of loans or advances of money to participators of c......
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Aspect Capital Ltd
...its business, the appellant made this concession relying on the Court of Appeal's decision in Brennan (HMIT) v Deanby Investment Co LtdTAX[2001] BTC 205. We agree with the appellant that the mere fact that the Company entered into a large number of facility agreements with its Employees did......