Grant and Another v Watton (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 11 February 1999 |
| Date | 11 February 1999 |
| Court | Chancery Division |
Chancery Division.
Pumfrey J.
Michael Sherry (instructed by Garretts) for the taxpayer and the company.
James Tayler (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Ensign Tankers (Leasing) Ltd v Stokes (HMIT) TAXTAXTAXTAX[1989] BTC 410 (ChD); [1991] BTC 74 (CA); [1992] BTC 110 (HL); 64 TC 617
O'Driscoll v Manchester Insurance Committee ELR[1915] 3 KB 499
R v Miller UNK[1977] 3 All ER 986
R v Peters ELR(1886) 16 QBD 636
R v William Jones ELR[1898] 1 QBD 119
Income tax - Beneficial loan to director - Service company incorporated to pay day to day outgoings of taxpayer's estate agency business for a cost plus fee - No written agreement but the taxpayer made payments on an ad hoc basis, adjusting the amount when the business's accounts were made up - Whether credit granted to taxpayer by company and if so whether taxpayer entitled to relief for years during which taxpayer traded in partnership - Income and Corporation Taxes Act 1988 section 160 subsec-or-para (1) section 353 section 367Income and Corporation Taxes Act 1988, ss. 160(1), 353, 367.Corporation tax - Whether employee/director "incurred" a debt to the company -Income and Corporation Taxes Act 1988 section 419Income and Corporation Taxes Act 1988, s. 419.
This was an appeal by the taxpayer against the decision of a special commissioner upholding assessments to income tax under Income and Corporation Taxes Act 1988 section 160s. 160 of the Income and Corporation Taxes Act 1988 (loan agreements benefiting employees) for the years 1985-86 to 1993-94, and against refusal of relief for interest on capital invested in a partnership under Income and Corporation Taxes Act 1988 section 353s. 353 by virtue ofIncome and Corporation Taxes Act 1988 section 362 section 367 subsec-or-para (3)ss. 362 and 367(3). The Revenue cross appealed against the commissioner's decision that credit was extended to the taxpayer at the time when the company made payments to third parties.
A company set up to handle the day to day expenses of the taxpayer's estate agency business also appealed against the special commissioner's decision upholding assessments to corporation tax under Income and Corporation Taxes Act 1988 section 419s. 419 of the 1988 Act (loans to participators in close companies).
The taxpayer had carried on an estate agency business ("the business") since the 1970s. In 1977 a service company was incorporated, controlled by the taxpayer and of which he was a director. The company provided staff, other office facilities and advertising for a service fee calculated by reference to cost plus a mark-up. There was no written agreement as to amount or time of payment. In fact the fee was calculated at the end of the year when the business accounts were drawn up, but the taxpayer made payments during the year on an ad hoc basis as the need arose.
In 1990 the taxpayer's brother became a limited partner in the business, and in 1993 the company also became a limited partner.
The purpose of the arrangement was that the service fee would be an expense of the business and profits would be retained within the service company at a lower rate of tax than that borne by The taxpayer.
Between 1990 and 1997, estimated assessments were raised on the taxpayer under s. 160 of the 1988 Act (or its predecessor) for the years ending 5 April 1986 to 5 April 1994 on the footing that the expenditure incurred by the company for the benefit of the business constituted loans by the company to the taxpayer. Assessments were also raised on the company under s. 419 (or its predecessor) on the footing that the payments made by the company for the benefit of the taxpayer's business were loans by a close company to a participator.
It was conceded for the purposes of Income and Corporation Taxes Act 1988 section 1603s. 160 of the 1988 Act that in the relevant years the taxpayer was an employee of the service company and that, if he was to be treated as having obtained the benefit of a loan as a result of the service fee arrangements, then that was by reason of his employment as a director of the company. It was also accepted that the company was a close company and that the taxpayer was a participator.
The special commissioner held that credit was given to the taxpayer by the company, and that the time when the credit was given was, in the absence of any actual or implied agreement as to when the service fee was to be paid, the date of the actual payment of expenses by the service company to third parties. The commissioner also held that liability under Income and Corporation Taxes Act 1988 section 419s. 419 arose on the company.
Held, dismissing both appeals and allowing the Revenue's cross appeal:
1. By Income and Corporation Taxes Act 1988 section 160 subsec-or-para (5)s. 160(5) of the 1988 Act, credit included "any form of credit". Credit was granted if payment was not demanded at the time when goods or services were supplied: if there was a deferral of payment. Since payment fell due when the services were rendered by the company, not at the end of the year when the audited accounts ascertained the total amount for the year, credit on the outstanding amount was given by the company to the taxpayer from that time until the final settlement.
2. When the services were rendered was a question of fact, and it was inescapable from the facts found by the commissioner that services were rendered to the business by the company from day to day and credit was given when services were supplied to the business rather than when the company made payment to third parties.
3. Relief for notional interest chargeable to tax underIncome and Corporation Taxes Act 1988 section 160s. 160 of the 1988 Act was not covered by the relief for interest on a loan to buy into a partnership under Income and Corporation Taxes Act 1988 section 362s. 362.
4. Whether the company had made a loan to the taxpayer withinIncome and Corporation Taxes Act 1988 section 419s. 419 of the 1988 Act depended on whether the relevant person had "incurred" a debt to the company. "Incurred" meant to commit the debtor to future expenditure, even if it was not yet payable and not yet quantified. The taxpayer was committed to pay the company, and received a loan of, an unascertained amount accruing from day to day as services were supplied.
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 taxpayer, Mr Grant, and Andrew Grant Services Ltd appealed to the High Court against the following decision of a special commissioner (Mr MJF Palmer sitting in private), released on 6 August 1998.
1. These are two appeals agreed to be heard together. The first is an appeal by the taxpayer who carries on an estate agency business. His appeal is against estimated assessments issued between November 1990 and March 1997 under the provisions of Income and Corporation Taxes Act 1988 section 160s. 160 of the Income and Corporation Taxes Act 1988 (or its predecessor s. 66 of the Finance Act 1976) in respect of the years from the year ended 5 April 1986 to the year ended 5 April 1994. The second is an appeal by HCB Ltd ("the service company") which was a close company and which entered into arrangements with the taxpayer dating back to 1977 or 1978 for the provision of administrative and other services to the taxpayer. This second appeal is against estimated assessments issued between October 1989 and April 1996 under the provisions of Income and Corporation Taxes Act 1988 section 419s. 419 of the 1988 Act (or its predecessor s. 286 of the Income and Corporation Taxes Act 1970) in respect of the years from the year ended 31 March 1987 to the year ended 30 April 1994.
2. The appeals relate to the effect of the arrangements for the provision of services by the service company to the taxpayer. I am not, at least at this stage, asked to determine any figures. There are three principal issues that I am asked to determine in principle. The first is when, under the arrangements for the provision of services by the service company to the taxpayer, did any form of credit arise within the terms of Income and Corporation Taxes Act 1988 section 160 subsec-or-para (5)s. 160(5)(a) so that the taxpayer is to be treated as having received a beneficial loan from the service company within Income and Corporation Taxes Act 1988 section 160s. 160? Secondly, did the taxpayer, under those arrangements, incur a debt to the service company for the purposes of Income and Corporation Taxes Act 1988 section 419 subsec-or-para (2)s. 419(2)(a) so that the service company was to be treated as having made a loan to a participator, and, if so, when? The third broad issue for me is, if those arrangements did give rise to the taxpayer being treated as having received a loan from the service company withinIncome and Corporation Taxes Act 1988 section 160s. 160 or to have incurred a debt to the service company for the purposes of Income and Corporation Taxes Act 1988 section 419s. 419, are those conclusions affected by either of two changes to the way in which the taxpayer carried on his estate agency business? The first change to be considered was the taking into partnership of his brother as a limited partner: the second change was the taking into partnership of the service company as a limited partner.
3. Evidence was given by:
(a) Mr William P Silsby who is an associate of the Chartered Institute of Taxation and who from 1981 to March 1990 was, firstly as an employee and later as a partner, with firms of accountants advising the taxpayer on his tax affairs;
(b) Mr Pate who is a chartered accountant employed by the service company and who is the accountant and financial controller for the taxpayer's business;
(c) Mr Fortune who is a...
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