Glaxo Group Ltd and Others v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 14 December 1995 |
| Date | 14 December 1995 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Leggatt and Millett L JJ and Sir Ralph Gibson.
John Gardiner QC and Jonathan Peacock (instructed by Slaughter and May) for Glaxo.
Ian Glick QC and Michael Furness (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
IR Commrs v Sneath ELR[1932] 2 KB 362
Knight v IR Commrs TAX(1974) 49 TC 179
R v Special Commrs, ex parte Elmhirst TAX(1935) 20 TC 381
Vandervell Trustees Ltd v White ELR[1971] AC 912
Corporation tax - Transfer pricing - Direction by Board when appealed assessments remained open - Whether open assessments could be adjusted where sales made at undervalue or overvalue or whether fresh assessments had to be made - Income and Corporation Taxes Act 1970 section 485 subsec-or-para (3)Income and Corporation Taxes Act 1970, s. 485(3) (Income and Corporation Taxes Act 1988 section 770 subsec-or-para (2)Income and Corporation Taxes Act 1988, s. 770(2)); Taxes Management Act 1970 section 50 subsec-or-para (7)Taxes Management Act 1970, s. 50(7).
This was an appeal by Glaxo Group plc against a decision of Robert Walker J ([1995] BTC 429) that the Revenue were entitled to ask the special commissioners to make transfer pricing adjustments to open assessments which, if fresh assessments had to be made, would be time-barred.
By an originating summons issued on 30 August 1995 three subsidiaries of Glaxo Wellcome plc sought declarations that a direction following a transfer pricing inquiry made by the Board of Inland Revenue under theIncome and Corporation Taxes Act 1970 section 485 subsec-or-para (3)Income and Corporation Taxes Act 1970, s. 485(3) was ineffective unless followed by an assessment.
Assessments on companies in the Glaxo Group going back many years had been appealed and remained open. Correspondence between the Revenue and Glaxo about the group's transfer pricing position had continued intermittently over the years but the principal transaction giving rise to the present dispute was the transfer of technology relating to the manufacture of the active ingredients of the drug Zantac to a subsidiary in Singapore.
Glaxo contended that effect could not be given to a direction underIncome and Corporation Taxes Act 1970 section 485 subsec-or-para (3)s. 485(3) by making adjustments to assessments which had been appealed but remained open. Once a direction had been made, the provisions of Income and Corporation Taxes Act 1970 section 485s. 485 were mandatory, requiring any adjustments leading to a tax liability to be made "by assessment". Thus, a further assessment had to be made before additional tax could be recovered. But if the six-year time limit had elapsed, an assessment could not be made and the tax could not be recovered. Most of the necessary adjustments, if made by assessment in the present case, would be out of time.
The Revenue contended that no further assessment was required because an alternative procedure under the Taxes Acts was available. Where there was an open assessment, the inspector was entitled to ask the special commissioners to exercise their power under Taxes Management Act 1970 section 50 subsec-or-para (7)s. 50(7) of the Taxes Management Act 1970 to make the necessary transfer pricing adjustments.
Held, dismissing Glaxo's appeal:
1. "An assessment" was not mandatory under Income and Corporation Taxes Act 1970 section 485s. 485. But the making of "all such adjustments … as may be necessary to give effect to the direction" was mandatory. The immediately preceding words "by assessment" were not exhaustive but merely illustrative as indicated by the words "or otherwise". All necessary adjustments were to be made to give effect to the direction, even if that involved a further assessment.
2. It was open to the inspector to ask the special commissioners to exercise their power under the Taxes Management Act 1970 section 50 subsec-or-para (7)Taxes Management Act 1970, s. 50(7) to increase the amount of the assessment under appeal. By s.50(6) of the Taxes Management Act, the commissioners were entitled to hear evidence which might lead to an increased assessment, and underTaxes Management Act 1970 section 54 subsec-or-para (4)s. 54(4) a taxpayer was precluded from withdrawing an appeal without the consent of the inspector. The only reason an inspector might refuse consent would be that it was sought to increase the assessment. Dictum of Lord Diplock in Vandervell Trustees Ltd v White [1971] AC 912 at pp. 942-943 doubted.
Millett LJ: These appeals are brought by three wholly-owned subsidiaries of Glaxo Wellcome plc, formerly wholly-owned subsidiaries of Glaxo plc. The respondents to the appeal are the Commissioners of Inland Revenue. The appeals are brought with the leave of the judge from orders of Robert Walker J made on 9 November 1995 when he dismissed the appellants' applications for declaratory relief. They have been heard with considerable expedition.
The issue, on which very substantial amounts of tax could be at stake, is whether the Revenue is out of time for applying the transfer-pricing provisions formerly contained in Income and Corporation Taxes Act 1970 section 485s. 485 of the Income and Corporation Taxes Act 1970 (the Taxes Act 1970) and now contained inIncome and Corporation Taxes Act 1988 section 770s. 770 of the Income and Corporation Taxes Act 1988 (the Taxes Act 1988). As the appeals relate to accounting periods before 1988 it is convenient to refer, as the judge and counsel have done, to the provisions of s. 485 as amended in 1975. The principal transaction which has given rise to the present dispute is the transfer by Glaxo plc of technology relating to the manufacture of ranitidine hydrochlorine, the active ingredients of the drug Zantac, to a wholly-owned subsidiary in Singapore.
Part XVII of the Taxes Act 1970 (now Pt. XVII of the Taxes Act 1988) deals with tax avoidance. In that part, s. 485 deals with transactions between associated persons.
Section 485(1) is in the following terms:
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(1) Subject to the provisions of this section, where any property is sold and-
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(a) the buyer is a body of persons over whom the seller has control or the seller is a body of persons over whom the buyer has control or both the seller and the buyer are bodies of persons and some other person has control over both of them; and
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(b) the property is sold at a price less than the price which it might have been expected to fetch if the parties to the transaction had been independent persons dealing at arm's length,
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then, in computing the income, profits or losses of the seller for tax purposes, the like consequences shall ensue as would have ensued if the property had been sold for the price which it would have fetched if the transaction had been a transaction between independent persons dealing as aforesaid:
Provided that this subsection shall not apply where the buyer is resident in the United Kingdom and is carrying on a trade therein, and the price of the property falls to be taken into account as a deduction in computing the profits or gains or losses of that trade for tax purposes.
Subsection (2) is the counterpart of subs. (1) covering the converse case of purchase at an overvalue, with the appropriate change in the proviso. Subsection (3), on which the present appeals turn is as follows:
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(3) The preceding provisions of this section shall not apply in relation to any sale unless the board so direct, and where such a direction is given all such adjustments shall be made, whether by assessment, repayment of tax or otherwise, as are necessary to give effect to the direction.
Subsection (6) extends the concept of sale to include lettings, grants of rights and the giving of business facilities.
It is common ground between the parties that the transfer-pricing provisions cannot be applied to transactions in a given accounting period unless the Revenue has first given a direction to that effect. The Revenue has given the necessary directions. The question in issue is whether (as the appellants contend), following such a direction, the Revenue is required to make a further assessment before the computation of the taxpayer's profits can be adjusted to take account of the transfer-pricing provisions; or whether (as the Revenue contend) without any further assessment the Revenue can ask for an open assessment to be increased to take account of the transfer-pricing provision. The question is important, because the Revenue is out of time for making further assessments in relation to many of the years of account in dispute.
Corporation tax is charged on all the income and chargeable gains of a company: ss. 238(1), 238(4)(a) and 243(1) of the Taxes Act 1970(nowss. 6(1), 6(d) and 8(1) of the Taxes Act 1988). In the present case Glaxo plc was liable to be assessed and charged to corporation tax on the full amount of its profits for the accounting period ending on 30 June in each year: s. 247(1) of the Taxes Act 1970 (now s. 12(1) of the Taxes Act 1988).
The procedure of assessment, collection and repayment of corporation tax is governed by the Taxes Management Act 1970Taxes Management Act 1970. The legislation contemplates...
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