Greenberg v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | Lord Reid,Lord Morris of Borth-y-Gest,Lord Guest,Lord Wilberforce,Lord Simon of Glaisdale |
| Judgment Date | 20 July 1971 |
| Judgment citation (vLex) | [1971] UKHL J0720-2 |
| Date | 20 July 1971 |
| Court | House of Lords |
[1971] UKHL J0720-1
House of Lords
Lord Reid
Lord Morris of Borth-y-Gest
Lord Guest
Lord Wilberforce
Lord Simon of Glaisdale
Upon Report from the Appellate Committee, to whom was referred the Cause Greenberg against Commissioners of Inland Revenue, that the Committee had heard Counsel, as well on Monday the 17th, as on Tuesday the 18th and Wednesday the 19th, days of May last, upon the Petition and Appeal of Henry Greenberg, of Little Orchard, Totteridge Lane, London, N.20, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 18th of December 1969, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioner might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the Case of the Commissioners of Inland Revenue, lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:
It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of Appeal, of the 18th day of December 1969, complained of in the said Appeal, be, and the same is hereby, Affirmed, and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered, That the Appellant do pay, or cause to be paid, to the said Respondents the Costs incurred by them in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments.
My Lords,
The two cases now before your Lordships exhibit slight variations of a simple scheme for tax avoidance by forward dividend stripping. Farther use of the scheme was stopped by the Finance Act, 1960. The question in this case is whether or to what extent the provisions of that Act apply to schemes which had been initiated but not completed before the critical date, 5th April, 1960.
The typical method of forward dividend stripping required the co-operation of a taxpayer who controlled a trading company and a finance company which dealt in shares. The taxpayer wished to escape from paying tax on the profits of his company for say the next five years. He caused his company to create a novel kind of shares— say 100 of them—which were to receive all dividends declared by his company for the next five years and thereafter to receive only an ordinary preference dividend. Suppose he expected his company to declare dividends of £20,000 during that period; he sold these shares to the finance company for £20,100. This price was to be paid to him by instalments, the instalments being the dividends which the finance company received from his company. So in this way he received his company's profits as capital—the price of the shares which he had sold to the finance company.
This kind of scheme was only profitable because it has been held that finance companies which trade in shares are entitled to treat participating in schemes for tax avoidance as trading operations. So in these cases the finance company could treat the difference between the price which it paid for these strange shares and the nominal value of the shares at the end of the five year period as a trading loss and so diminish the amount of tax which it had to pay. In the case which I have supposed the finance company paid £20,100 for the shares: the shares at the end of that five year period were worth £100. So the finance company could claim that it had suffered a trading loss of £20,000 during the five year period, deduct that sum from the true profits which it had earned, and thereby keep £20,000 of its true profits free of tax.
Parliament attempted to prevent this and other methods of tax evasion by provisions in the Finance Act, 1960. We are concerned with section 28. I need not set out its provisions in full because admittedly it would counteract any new scheme of this character begun after 5th April, 1960. This case turns on the meaning of proviso (i) to subsection (1). That subsection is as follows:
"28—(1) Where—
( a) in any such circumstances as are mentioned in the next following subsection, and
( b) in consequence of a transaction in securities or of the combined effect of two or more such transactions,
a person is in a position to obtain, or has obtained, a tax advantage then unless he shows that the transaction or transactions were carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments, and that none of them had as their main object, or one of their main objects, to enable tax advantages to be obtained, this section shall apply to him in respect of that transaction or those transactions:
Provided that this section shall not apply to him if—
(i) the transaction or transactions in securities were carried out, and
(ii) any change in the nature of any activities carried on by a person, being a change necessary in order that the tax advantage should be obtainable, was effected,
before the fifth day of April, nineteen hundred and sixty."
In Greenberg's case all the initial arrangements for carrying out the scheme were completed by 30th December, 1958. The special shares in the taxpayer's company had been created. They had been sold by the taxpayer to the finance company. The finance company had been registered as shareholders. What remained to be done was that in each of the next five years the taxpayer's company would declare a dividend, that dividend would be paid to the finance company, the finance company would then pay to the taxpayer the sum which it received as dividend, and the taxpayer would receive that sum as an instalment of the price of the shares which he had sold to the finance company. Admittedly the tax evasion involved succeeds if proviso (i) applies: it fails if and in so far as the "transaction or transactions in securities" were not "carried out" before 5th April, 1960.
So the first question must be what is meant by a "transaction in securities". This expression is defined in section 43 (4)(i):
"(i) 'transaction in securities' includes transactions, of whatever description, relating to securities, and in particular—
(i) the purchase, sale or exchange of securities,
(ii) the issuing or securing the issue of, or applying or subscribing for, new securities,
(iii) the altering, or securing the alteration or, the rights attached to securities."
The word "transaction" is normally used to denote some bilateral activity but it can be used to denote an activity in which only a single person is engaged. It would not be wrong to say of a person doing office work that he is transacting business. This definition shews that no bilateral element is necessary for it includes applying or subscribing for new securities which are single acts done by one person alone.
Then the definition includes not only transactions in securities but transactions relating to securities. A previous definition states as one would expect that securities include shares. So on the face of it any single act done by one person alone is a transaction in securities if it is one "relating to securities". This is a vague phrase but I do not see how to stop short of giving it a very wide meaning. Taking acts done in carrying out these schemes I think that declaration of a dividend and payment of dividend by the taxpayer's company to the finance company were acts relating to shares. Certainly declaration of a dividend is an act done relating to the company's shares and if that is so I do not see how to draw a line and say that the actual payment of dividends is not also an act relating to the shares. Then what about a sale of shares? Clearly the sale is a transaction in securities. Can it then be said that payments at later dates of instalments of the price are not acts relating to the sale? And if they are acts relating to the sale why are they not "transactions" relating to the sale and therefore transactions relating to the shares.
I must confess that I do not like being forced step by step to a conclusion of this kind. At first sight to call each payment of one instalment of the price of a share a separate transaction relating to securities seems far-fetched. We seem to have travelled a long way from the general and salutary rule that the subject is not to be taxed except by plain words. But I must recognise that plain words are seldom adequate to anticipate and forestall the multiplicity of ingenious schemes which are constantly being devised to evade taxation. Parliament is very properly determined to prevent this kind of tax evasion and, if the Courts find it impossible to give very wide meanings to general phrases, the only alternative may be for Parliament to do as some other countries have done, and introduce legislation of a more sweeping character which will put the ordinary well-intentioned person at much greater risk than is created by a wide interpretation of such provisions as those which we are now considering.
Section 28 was considered by this House in Commissioners of Inland Revenue v. Parker [1966] A.C. 141. A company had capitalised accumulated profits as debentures in 1953 and had redeemed them in 1961. This clearly conferred a tax advantage and the question was when the taxpayers received it. It was held that the unilateral act of the company in redeeming the debentures was a "transaction in securities". So as that was after 1960 the section applied. I do not think that that decision is directly relevant here, but at least I can find nothing which prevents me from holding that a payment of an instalment of...
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