Girvan (Inspector of Taxes) v Orange Personal Communications Services Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 03 April 1998 |
| Date | 03 April 1998 |
| Court | Chancery Division |
Chancery Division.
Neuberger J.
Launcelot Henderson QC (instructed by the Solicitor of Inland Revenue) for the Crown.
David Goldberg QC (instructed by Linklaters & Paines) for Orange.
The following cases were referred to in the judgment:
Dewar v IR CommrsTAX (1935) 19 TC 561
Dunmore v McGowan (HMIT)TAX (1978) 52 TC 307
IR Commrs v Duke of WestminsterELR [1936] AC 1
IR Commrs v McGuckian TAXWLR[1997] BTC 346; [1997] 1 WLR 991
Jauncey, ReELR [1926] Ch 471M
Leigh v IR CommrsTAX (1927) 11 TC 590
Parkside Leasing Ltd v Smith (HMIT) TAX[1985] BTC 25
Paton (as Fenton's Trustee) v IR CommrsTAX (1938) 21 TC 626
St Lucia Usines & Estates Co Ltd v Colonial Treasurer of St LuciaELR [1924] AC 508
WT Ramsay Ltd v IR CommrsELR [1982] AC 300
Corporation tax - Interest received - Agreement with bank that quarterly interest on existing deposit accounts be compounded and rolled up until account closed or interest called for by depositor - Whether interest was "income arising" as it accrued or when account was closed -Income and Corporation Taxes Act 1988 section 64 section 70 subsec-or-para (1)Income and Corporation Taxes Act 1988, ss. 64, 70(1).
This was an appeal by the Revenue against a decision of the special commissioners that interest on deposit accounts compounded quarterly, but not paid to the depositor until the accounts were closed, was not "income arising" in each quarter during the period of the loan within the meaning of the Income and Corporation Taxes Act 1988 section 64 section 70 subsec-or-para (1)Income and Corporation Taxes Act 1988, ss. 64 and 70(1).
In 1990, because it had not commenced trading, the taxpayer ("Orange") could not set off trading losses against income from other sources and would suffer tax on deposit account interest.
Orange therefore renegotiated the terms of two existing accounts. It was agreed with the bank that interest payable quarterly from June 1990 would be deferred and compounded until 1 January 1993 or until the accounts were closed. The accounts were closed on 18 December 1992 and the interest was credited on that day. In the mean time, for its own administrative convenience, the bank had transferred the interest quarterly as it accrued to two suspense accounts each identified by number, the existence of which were not known to Orange.
On 18 December 1992, at Orange's request, the deposit accounts were closed and the interest accrued from 27 March 1990 to 18 December 1992 was credited to Orange's current account.
Orange contended that the interest was "income arising" on the date that it was credited, namely 18 December 1992, and should all have been assessed to tax in the year ending on 31 December 1992.
The Revenue contended that each quarterly instalment of interest due on each of the deposit accounts should be treated as "income arising" in respect of the accounting year in which that quarter fell, and even if they failed on general principles, a broad application of the principle in WT Ramsay Ltd v IR CommrsELR [1982] AC 300 should be adopted. The renegotiated basis for the payment of interest was entered into purely to benefit Orange's tax position and should be ignored. Orange had the right to require the bank to pay the interest at any time, even after the renegotiation, and the proper conclusion was that the interest remained income arising on each of the quarter days on which it had fallen due for payment before the renegotiation.
Held, dismissing the Revenue's appeal:
1. While the interest was accruing, and was being compounded on a quarterly basis, it was being retained by the bank and as a matter of ordinary language the compounded interest was not "income" which "arose" until it was actually paid over to Orange in December 1992. Orange had no right to receive any interest until January 1993, unless it gave notice to the bank that it wished to be paid the interest or if it closed the relevant account. Therefore, while it was a debt which was accruing, and could be called in by Orange at any time on notice, it was not, as a matter of ordinary language, income, until it was paid. Nor did it make any difference that the agreement was a renegotiation of the original basis on which the deposit accounts were set up rather than a free-standing agreement.
2. Internal arrangements within the bank, such as the suspense accounts, which were unknown to Orange could not alter Orange's tax liability.
3. Since the court had no power to alter a tax statute, the Ramsay principle could not alter the nature of "income arising" for the purposes of the 1988 Act. Moreover, the renegotiated basis on which interest was accrued and compounded quarterly was an arrangement which was quite capable of being free-standing. To achieve the same result Orange might have closed the original deposit accounts and opened new ones at the same or a different bank. It was a genuine arm's length agreement with a third party (i.e. the bank) which effected real variation on the way in which the accounts were operated. The Ramsay principle could not entitle the court to override a simple and genuine renegotiation merely because its commercial effect was not very different from the original basis for payment of interest and because the renegotiation achieved an improved tax position: IR Commrs v McGuckianTAX [1997] BTC 346 distinguished.
By originating motion pursuant to the Taxes Management Act 1970 section 56ATaxes Management Act 1970, s. 56A (as substituted by SI 1994/1813 with effect from 1 September 1994) the Revenue appealed against the following decision of the special commissioners (Mr Paul de Voil and Dr AN Brice) released on 30 September 1997.
Orange Personal Communications Services Ltd (the taxpayer) appeals against parts of two assessments to corporation tax relating to the years ending on 31 December 1990 and 31 December 1991. The relevant parts of the assessments were raised because the Revenue were of the view that interest credited to the taxpayer's bank account on 18 December 1992 was "income arising" during 1990 and 1991 as well as during 1992.
2. Income and Corporation Taxes Act 1988 section 18 subsec-or-para (3)Section 18(3) of the Income and Corporation Taxes Act 1988 (the Taxes Act) provides that income tax is charged under Income and Corporation Taxes Act 1988Case III of Sch. D in respect of "any interest of money whether yearly or otherwise … whether the same is received and payable half-yearly or at any shorter or more distant periods".
3. Section 64 of the Taxes Act provides:
… income tax under Case III of Schedule D shall be computed on the full amount of the income arising within the year preceding the year of assessment, and shall be paid on the actual amount of that income, without any deduction.
4. Income and Corporation Taxes Act 1988 section 70 subsec-or-para (1)Section 70(1) of the Taxes Act provides that, for the purposes of corporation tax, income shall be computed underIncome and Corporation Taxes Act 1988Case III of Sch. D on the full amount of the income arising in the period.
5. On 12 March 1990 the taxpayer deposited money at a bank on terms that interest would be credited to the account quarterly. Interest was so credited on 26 March 1990 but, before the June quarter's credit was due, the taxpayer agreed with the bank that further credits would be deferred. The account was closed on 18 December 1992 and the interest was credited on that day. The Revenue assessed the taxpayer to corporation tax on the basis that the interest was "income arising" in the years ending on 31 December 1990 and 31 December 1991 as well as 31 December 1992. The taxpayer argued that the interest was income arising on the date that it was credited, namely 18 December 1992, and should all have been assessed to tax in the year ending on 31 December 1992.
6. Accordingly, the issue for determination in the appeal was whether the interest credited on 18 December 1992 was income arising in the year ending on 31 December 1992 (as argued by the taxpayer) or whether it was income arising in each of the years ending on 31 December 1990, 31 December 1991 and 31 December 1992, as argued by the Revenue.
7. At the hearing five volumes of documents, including a statement of agreed facts, were produced on behalf of the taxpayer; not all the documents were referred to at the hearing. Oral evidence was given on behalf of the taxpayer by:
Mr Graham Darsley; Mr Darsley is a chartered accountant and, at the relevant time, was the financial controller of Microtel Communications Ltd, the previous name of the taxpayer; and
Mr Roger Shorland; Mr Shorland is an associate of the Institute of Bankers and is now, and was at the relevant time, a senior corporate manager for the Bristol region of Barclays Bank where the deposit accounts were held.
8. From the evidence before us we find the following facts.
9. The taxpayer was incorporated in 1989 with the name of Microtel Communications Ltd and with the object of designing, constructing and operating a personal communications network for mobile telephone communication services in the UK; at all material times its registered office was at Bristol. The taxpayer was initially owned by a consortium of four other companies and, in order to fund the development of the network, each consortium member injected funds by way of share capital. Work on the network was delayed and the funds were not required immediately and so were placed on deposit with the Bristol branch of Barclays Bank.
10. On 12 March 1990 the funds were transferred to Business Premium Account No. 40636681 and High Interest Business Account No. 10636703, both of which accounts were opened on that day. The business premium account was a high interest, no notice account with a maximum deposit of £1m. The high interest premium account was a high interest, 14 day notice account with no maximum for deposits. We call...
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