Earlspring Properties Ltd v Guest (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 10 May 1993 |
| Date | 10 May 1993 |
| Court | Chancery Division |
Chancery Division.
Vinelott J.
David Ewart (instructed by Stafford Young Jones) for the company.
Launcelot Henderson (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Copeman (HMIT) v William Flood & Sons Ltd ELR[1941] 1 KB 202
Robinson (HMIT) v Scott Bader Co Ltd TAX(1981) 54 TC 757
Vestey & Ors v IR Commrs ELR[1979] Ch 177
Corporation tax - Close company - Loans to individuals - Loans repaid to company before assessment - Whether Revenue entitled to make assessment - Income and Corporation Taxes Act 1970 section 286 subsec-or-para (1) section 286 subsec-or-para (5)Income and Corporation Taxes Act 1970, sec. 286(1), (5) (as amended by Finance Act 1972) (Income and Corporation Taxes Act 1970 section 286 subsec-or-para (5)sec. 286(5) amended by Finance Act 1986 with effect from 18 March 1986 and replaced by Income and Corporation Taxes Act 1988 section 419 subsec-or-para (1) section 419 subsec-or-para (4)sec. 419(1), (4) of the 1988 Act).Corporation tax - Interest - Returns made and accounts submitted but details of loans to associate of participator not specified - Whether neglect - Whether liability for default interest - Taxes Management Act 1970 section 10 section 88 section 109Taxes Management Act 1970, sec. 10, 88, 109.Corporation tax - Expenditure wholly and exclusively for the purposes of the company's trade - Property consultancy - Remuneration to director - Company paid substantial remuneration to sole director - All consultancy services carried out by director's husband - Whether remuneration paid wholly and exclusively for purposes of company's trade - Income and Corporation Taxes Act 1970 section 130 subsec-or-para (a)Income and Corporation Taxes Act 1970, sec. 130(a) (replaced by Income and Corporation Taxes Act 1988 section 74 subsec-or-para (a)sec. 74(a) of the 1988 Act).
This was an appeal by a close company against the determination of the general commissioners for Finsbury who had confirmed assessments to corporation tax under the Income and Corporation Taxes Act 1970 section 286Income and Corporation Taxes Act 1970, sec. 286 on loans made to individuals; interest under the Taxes Management Act 1970 section 88Taxes Management Act 1970, sec. 88; and refusal by the inspector to allow deduction from the company's profits of the whole amount of remuneration paid to the sole director.
The company was incorporated in 1974 and was initially a property investment company. In 1978 a lady who was beneficially entitled to the entire issued share capital of the company, and was also the sole director, married a Mr Broomfield. He carried on the business of estate agency and property consultancy under the name of John Broomfield & Co ("the firm"). At some time between 1978 and 31 March 1982 the activities of the company were enlarged to include the property consultancy part of the business previously carried on by the firm.
The work relating to the consultancy business continued to be carried on by the firm on behalf of the company but fees from that business were invoiced and received by the firm and paid into a deposit account. Transfers were made from the deposit account to the company at irregular intervals and any balance at the end of the each accounting period (ending 31 March in each year) was shown in the company's accounts as a debt to the company. The interest was retained by the firm as remuneration for services.
Mrs Broomfield's services to the company were described as "on the social side". She was not involved in the property consultancy work of the company in any way but she was paid £1,000 in the year ending 31 March 1982 as remuneration for her services to the company. In the following year her remuneration was increased to £31,488 and in addition the company paid a contribution to a pension fund for her benefit of £20,000. The level of her remuneration thereafter fluctuated between a maximum of £38,777 in the year to 31 March 1984 and smaller but substantial sums over £20,000 in the following years up to 31 March 1988. Contributions to the pension fund continued.
The Revenue claimed that the balances on the deposit account were loans by the company to Mr Broomfield, being an associate of a participator in the company. Assessments were made on the company pursuant to the Income and Corporation Taxes Act 1970 section 286Income and Corporation Taxes Act 1970, sec. 286 for the accounting periods 1981-82 to 1985-86 and interest was claimed under the Taxes Management Act 1970 section 88Taxes Management Act 1970, sec. 88. At the time when the assessments were made for the years ending in March 1982 and 1983, the loans had been repaid.
The company also appealed against estimated assessments to corporation tax for the accounting periods from 1982-83 to 1987-88 on the basis that the remuneration paid to Mrs Broomfield during those years was not money wholly and exclusively laid out for the purposes of the company's trade within Income and Corporation Taxes Act 1970 section 130 subsec-or-para (a)sec. 130(a) of the Taxes Act.
The general commissioners confirmed the Income and Corporation Taxes Act 1970 section 286sec. 286 assessments and, having found that the company was guilty of neglect, issued interest certificates. They also decided that the remuneration paid to Mrs Broomfield was not money wholly and exclusively laid out for the purposes of the company's trade but that part of it, equal to five per cent of the company's profits in each year, could be treated as so paid out.
In the High Court the company accepted that the outstanding balances were to be regarded as loans to Mr Broomfield.
The first question for the court, relevant only to the years ending in March 1982 and 1983, was whether the Revenue was entitled to raise assessments under Income and Corporation Taxes Act 1970 section 286 subsec-or-para (1)sec. 286(1) in respect of a loan by a close company to an individual after the loan had been repaid.
The company contended that, literally construed, if Income and Corporation Taxes Act 1970 section 286 subsec-or-para (1)sec. 286(1) applied and gave rise to a charge to tax whenever a close company made a loan to a participator or associate of a participator, even if it had been repaid, and relief under Income and Corporation Taxes Act 1970 section 286 subsec-or-para (5)sec. 286(5) only applied when a loan was repaid after the company had been assessed to tax in respect of the loan, the liability underIncome and Corporation Taxes Act 1970 section 286 subsec-or-para (1)subsec. (1) would remain and the company would not be entitled to any relief. Such a result could not have been intended. The question was whether Income and Corporation Taxes Act 1970 section 286 subsec-or-para (1)subsec. (1) should be impliedly restricted to loans which had not been repaid when the assessment was made, or whether Income and Corporation Taxes Act 1970 section 286 subsec-or-para (5)subsec. (5) should be enlarged by treating it as applicable when a company had been either assessed or had become liable for an assessment. Alternatively, the company contended that Taxes Management Act 1970 section 10sec. 10, which specifically applied to corporation tax, did not affect tax assessed under Income and Corporation Taxes Act 1970 section 286sec. 286 because it was not corporation tax.
The Revenue contended that, by the combined effect of Taxes Management Act 1970 section 109 subsec-or-para (4) section 10991sec. 109(4) and 91 of the Taxes Management Act 1970, ifIncome and Corporation Taxes Act 1970 section 286 subsec-or-para (1)sec. 286(1), before its amendment by the Finance Act 1986, were to be impliedly limited to the case where a loan had not been repaid when the assessment was raised it would be open to a company to make a loan to a participator, to repay the loan immediately before and re-lend it after the end of each accounting period. Consequently, the Revenue submitted, interest should be payable on tax chargeable on a loan by a company even if the loan had been repaid before the assessment was made.
The second question related to the years ending in March 1984 and 1985 for which Income and Corporation Taxes Act 1970 section 286sec. 286 assessments were made in respect of loans which had not been repaid. The question was whether the company was guilty of neglect in failing to notify details of the loans resulting in a liability to interest under the Taxes Management Act 1970 section 88Taxes Management Act 1970, sec. 88. The company contended that the only relevant obligation on the company under theTaxes Management Act 1970 section 10Taxes Management Act 1970 was that imposed by sec. 10, with which it had complied. It had given notice that it was chargeable to corporation tax for each accounting period in question; it had made a return of its profits; and no notice had been issued by the inspector under Taxes Management Act 1970 section 11sec. 11 requiring the details needed for the purpose of raising an assessment under Income and Corporation Taxes Act 1970 section 286sec. 286.
The third question was whether the remuneration paid to Mrs Broomfield was money wholly and exclusively laid out for the purpose of the company's trade. The company submitted that the commissioners had overlooked the well settled principle that it was for the company to decide what was reasonable remuneration for services rendered.
Held, allowing the company's appeal against the sec. 286 assessments for the years ending in 1982 and 1983 but dismissing its appeal in relation to neglect and the director's remuneration:
1. No assessment under Income and Corporation Taxes Act 1970 section 286sec. 286, before its amendment by the Finance Act 1986, could be made once a loan had been repaid. Since the intended scope of Income and Corporation Taxes Act 1970 section 286 subsec-or-para (1) section...
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