Earlspring Properties Ltd v George Guest Esq.(HM Inspector of Taxes)

Wednesday, 8th March 1995

This appeal by the taxpayer, Earlspring Properties Ltd. ("Earlspring") is from so much of the Order of Vinelott, J. dated 10 May 1993 as refused to quash interest determinations under section 88 of the Taxes Management Act 1970 (" TMA 1970") in the sum of £5376.28 for the year ended 31 March 1984 and in the sum of £3455.35 for the year ended 31 March 1985. The decision of Vinelott, J. is reported in [1993] S.T.C. 473. A cross-appeal by the Revenue relating to another aspect of the judge's order was not pursued before us.

Earlspring is a company resident in the U.K. which at all material times carried on the businesses of property consultancy and property investment. Mrs. C.G. Broomfield was beneficially entitled to the entire issued share capital of Earlspring and was also its sole director. Mrs. Broomfield's husband, Mr. John Broomfield, carried on the business of estate agency and property consultancy under the firm name of John Broomfield & Co. ("the firm"). The property consultancy part of Earlspring's business was carried on by the firm as the agent of Earlspring. The fees paid by Earlspring's property consultancy clients were paid to the firm which held the money in a deposit account. Transfers were made from this deposit account to Earlspring at irregular intervals, and any balance due at the end of an accounting period was shown in the accounts as a debt due to Earlspring. The interest earned on the deposit account was retained by the firm as remuneration for its services.

Certain matters are now common ground: (1) At all material times Earlspring was a "close company" for the purposes of section 286 of the Income and Corporation Taxes Act 1970 (" ICTA 1970"); (2) For the like purposes Mrs. Broomfield was a participator in Earlspring and Mr. Broomfield was an associate of a participator; (3) The fees due to Earlspring and left outstanding with the firm amounted to a loan by a close company to an associate of a participator in that company. (4) As a result Earlspring had a liability to the charge to tax under section 286 of ICTA 1970.

The issue between the parties relates to interest on that tax.

Interest is chargeable under section 88(1) of TMA 1970 which, so far as material, provided:

"Where an assessment has been made for the purpose of making good to the Crown a loss of tax wholly attributable to the….. neglect of any person, the tax charged by the assessment….. shall carry interest at the prescribed rate from the date on which the tax ought to have been paid until payment."

Neglect was defined by section 118(1) of TMA 1970 to mean:

"….. a failure to give any notice….. required by or under the Taxes Acts."

So the question is: was Earlspring required to give notice to the Revenue that it was chargeable to tax under section 286 of ICTA 1970?

Section 10 of TMA 1970 provided:

" 10. Notice of liability to corporation tax

(1) Every company which is chargeable to corporation tax for any accounting period and which has not made a return of its profits for that accounting period shall not later than one year after the end of that accounting period give notice to the inspector that it is so chargeable.

(2) If a company fails to give a notice which it is required to give under this section the company shall be liable to a penalty not exceeding £100."

Now it is common ground that tax charged under section 286 of ICTA 1970 was not corporation tax. It was a tax sui generis. However section 286 itself provided that there should "be assessed on and recoverable from the company, as if it were an amount of corporation tax chargeable on the company for the accounting period in which the loan….. is made, an amount….."

Further, section 109(1) of TMA 1970 provided:-

"(1) The provisions of section 286 of the principal Act (charge of tax in connection with loans by close companies to participators etc.) directing that tax be assessed and recoverable as if it were an amount of corporation tax shall be taken as applying, subject to the provisions of the Taxes Act, and to any necessary modifications, all enactments applying generally to corporation tax, including those relating to the assessing, collecting and receiving of corporation tax, those conferring or regulating a right of appeal and those concerning administration, penalties, interest on unpaid tax and priority of tax in cases of insolvency under the law of any part of the United Kingdom."

The judge held that section 109 operated so as to require Earlspring to give notice of its chargeability to tax under section 10, and that its failure so to do amounted to neglect under section 118.

On this appeal Earlspring makes two submissions:

1) Section 10 was not applied at all by section 109 to tax chargeable under section 286 of ICTA 1970.

2) If section 10 was applicable, Earlspring's only obligation was to notify chargeability, not liability.

1. The application of section 10 by section 109.

Section 109(1) expressly provided that "the provisions of section 286….. shall be taken as applying….. all enactments applying generally to corporation tax." I can see no justification for limiting the generality of these words. Mr. Ewart for Earlspring submitted that we should do so because section 286 itself provided that the amount due under it should only be regarded "as if it were an amount of corporation tax" for the purposes of assessment and collection, and that therefore section 109 should be read as incorporating only all those enactments relating to assessment and recovery, but no more. He submitted, by taking us carefully through the structure of the TMA 1970, that notification is a procedure separate to, and preceding, assessment. Accordingly the absence of reference to notification in section 286 is significant, and the tax under that section is not to be regarded "as if it were an amount of corporation tax" for the purposes of notification. He further submitted that that construction was confirmed by the specific list in section 109(1) which refers to "those relating to the assessing, collecting and receiving of corporation tax". But those words are prefaced by the word "including" and while that word may extend the words "all enactments applying generally to corporation tax" which precede it, it cannot restrict or confine them. As I have said, I do not accept that anything in either section 286 or in section 109 itself requires any limitation of the generality of the words "all enactments applying generally to corporation tax". Accordingly section 109(1) of TMA 1970 applied section 10(1) of TMA 1970 to the tax chargeable under section 286.

A similar argument was advanced by the taxpayer in the case of Joint v. Bracken Developments [1994] S.T.C. 300 and was rejected by Vinelott, J. in that case also.

2. The scope of section 10.

Section 10 (as modified) requires every company which is chargeable to tax under section 286, and which has not made an appropriate return, to give notice that it is so chargeable.

Mr. Ewart on behalf of Earlspring submits that "chargeable" in section 10 is to be read in contradistinction to "liable". He submits that every individual is chargeable to income tax, regardless as to whether or not he had any income for the year in question, and has to give notice under section 7 of TMA 1970; that every company is chargeable to corporation tax, regardless as whether or not it made any profits for the relevant accounting period, and has to give notice under section 10 of TMA 1970. So, he submits, every close company is chargeable to tax under section 286 of ICTA 1970, regardless as to whether or not it has made any loans to participators or their associates during the relevant accounting period, and has to give notice —of the fact that it is a close company —under section 10 as modified. But that is the extent of its obligation to give notice.

This submission would, if correct, have such far-reaching and extraordinary results that my initial instinct was to reject it. Fortunately Mr. Henderson, for the Revenue, was able to demonstrate the fallacy in the submission. He drew our attention to section 527(1) of ICTA 1970 and to the definition there of "source of income":

"….. a source of income is 'within the charge to' corporation tax or income tax if that tax is chargeable on the income arising from it, or would be so chargeable if there were any such income, and references to a person, or to income, being within the charge to tax, shall be similarly construed."

This definition makes it clear that...