Herdman v Commissioners of Inland Revenue
| Jurisdiction | Northern Ireland |
| Judgment Date | 29 January 1969 |
| Date | 29 January 1969 |
| Court | Court of Appeal (Northern Ireland) |
COURT OF APPEAL (NORTHERN IRELAND)-
HOUSE OF LORDS-
Income tax - Avoidance of tax by transfer of assets abroad - Assets transferred without purpose of avoiding United Kingdom taxation - Income accumulated with such a purpose - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), ss. 412 and 413.
The Appellant was at all material times chairman, and until March 1951 controlling shareholder, of H Ltd., a company incorporated and carrying on business in Northern Ireland. Between 1949 and October 1953 he was resident in the Republic of Ireland and not resident in the United Kingdom. In March 1951 with the object, inter alia, of avoiding super-tax and death duties in the Republic, he formed N Ltd., a company resident in the Republic, and transferred to it 30,000 preference shares and 29,000 ordinary shares in H Ltd., together with certain other assets, for a total consideration of £86,917. Of this £10,000 was satisfied by the allotment of 6000 £1 shares in N Ltd. to him and 4000 such shares to the trustees of a settlement in favour of his infant son; the balance was left outstanding on current account, payable on demand. From October 1953 onwards the Appellant was resident and ordinarily resident in the United Kingdom as well as resident in the Republic. In each of the years 1953-54 to 1957-58 N Ltd. received from H Ltd. a dividend of £14,300 gross under deduction of tax, which it recovered by repayment; it paid no dividends in those years but it reduced the balance owing to the Appellant by a total of £15,676. On 31st December 1954 the Appellant transferred 2000 shares in N Ltd. to the trustees of his son's settlement. At all material times he in fact dictated the policy of N Ltd.
The Appellant was assessed to income tax under Case VI of Schedule D for the years 1953-54 to 1957-58 in respect of the income of N Ltd. on the footing that ss. 412 and 413, Income Tax Act 1952, applied. On appeal, he contended (a) that the terms of s. 412(3)(a) were satisfied; (b) that s. 412 did not apply because he was not ordinarily resident in the United Kingdom at the time of the transfer in 1951, and not resident there when he acquired any rights mentioned in s. 412(1); (c) that tax at the standard rate was not chargeable in respect of the dividends received from H Ltd. under deduction of tax. For the Crown it was contended, inter alia, that the Appellant had acquired rights by virtue of which he had power to enjoy the income of R Ltd. by means of the transfer in 1951 in conjunction with associated operations including the allotment to himself and the trustees of shares in N Ltd., the reduction each year of the balance due to him and the accumulation each year by N Ltd. of the dividends received from H Ltd. The Special Commissioners found that the transfer in 1951 was not effected for the purpose of avoiding liability to taxation in the United Kingdom, but they were not satisfied that
that was not one of the purposes of the associated operation in N Ltd.'s accumulating its profit and so managing the assets transferred as to leave funds on which the Appellant could draw to reduce the amount due to him in consideration of the transfer. They held (1) in the light of Congreve v. Commissioners of Inland Revenue (1948)30 T.C. 163, that the income of N Ltd. from its dividends from H Ltd. was under s. 412(1) to be deemed to be the Appellant's income and (2) that it had not "borne tax" within the meaning of s. 413(1)The Appellant's contentions on points other than that decided by the House of Lords were rejected by the Court of Appeal in Northern Ireland, and he did not pursue them in the House of Lords.
Held, in the House of Lords, that s. 412(1) did not apply to the associated operations, since the Appellant had not acquired any rights by means thereof and the transfer itself was within s. 412(3).
Stated under the Income Tax Management Act 1964, s. 14(2), and the Income Tax Act 1952, s. 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the Court of Appeal in Northern Ireland.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held at Belfast on 1st and 2nd July 1964, Mr. John P. Herdman (hereinafter called "Mr. Herdman") appealed against assessments to income tax for the years and in the amounts mentioned below, which assessments were made under Case VI of Schedule D pursuant to ss. 412 and 413 of the Income Tax Act 1952:
1953-54 |
… |
… |
… |
… |
… |
£10,791 |
1954-55 |
… |
… |
… |
… |
… |
£10,056 |
1955-56 |
… |
… |
… |
… |
… |
£6,723 |
1956-57 |
… |
… |
… |
… |
… |
£14,300 |
1957-58 |
… |
… |
… |
… |
… |
£14,300 |
2. Shortly stated, the question for our determination was whether Mr. Herdman was within the charge to income tax under ss. 412 and 413 of the Income Tax Act 1952.
(2) The following witnesses gave evidence before us: Mr. Herdman; Mr. W.D. Rutledge and Mr. H.J. Thompson, partners in Messrs. George Johnston & Co., chartered accountants; Mr. E. B. Paterson, H.M. Inspector of Taxes; Mr. E. Lawson, F.C.A., principal advisory accountant to the Board of Inland Revenue.
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(3) The documents listed in the Schedule hereto(1) were admitted or proved. Of these, the following only are annexed hereto(1), the others being available for the use of the Court if required:
A. Summary of balance sheets and profit and loss accounts of North West Holdings Ltd., 1952 to 1958.
B. Copy of Mr. Herdman's loan account with North West Holdings Ltd.
C. Summary showing sources and disposition of additional finance of North West Holdings Ltd. from March 1953 to March 1958.
(4)
(5) From the evidence, oral and documentary, we found the facts set out in paras. 4 to 11 below.
4. Prior to March 1951 Mr. Herdman was controlling shareholder in, and at all material times was chairman of, Herdmans Ltd. (hereinafter called "the N.I. company"), a company incorporated in Northern Ireland which carried on business at Sion Mills, in the neighbourhood of Strabane, Co. Tyrone.
(2) Up to May 1949 Mr. Herdman was resident in the United Kingdom; he lived at Strabane, although at all times he had family, personal and business connections with the Republic of Ireland.
(3) From May 1949 he was resident in the Republic and not resident in the United Kingdom; he lived at Glenmore, Co. Donegal, about 15 miles from Strabane. He had bought Glenmore in 1946; the property consisted of house and grounds, farm lands and shooting and fishing rights.
(4) In October 1953 he moved back to Strabane, as he found it inconvenient to live at Glenmore and manage the N.I. company from that home; he continued to use Glenmore as an occasional residence until it was sold in 1957. From October 1953 he has been a double resident, being resident and ordinarily resident in the United Kingdom and also resident in the Republic.
6. In March 1951 Mr. Herdman caused to be incorporated a company named North West Holdings Ltd. (hereinafter called "the R.I. company"), which was resident in the Republic and had an authorised capital of 10,000 £1 shares.
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(2) In 1951 Mr. Herdman (being then resident in the Republic) sold to the R.I. company
£
(1) his house and lands at Glenmore for
…
5000
(2) certain farm stock and machinery at Glenmore for
…
917
(3) 30,000 preference shares in the N.I. company for
…
37,500
29,000 ordinary shares in the N.I. company for
…
43,500
86,917
(3) The total consideration was satisfied as under: as to £6,000, by the allotment to Mr. Herdman of 6000 £1 shares in the R.I. company, credited as fully paid; as to £4,000, by the allotment to Mr. J. H. Thompson (his accountant) and Mrs. Herdman (his wife) (as trustees of a trust set up for the benefit of Mr. Herdman's son, who was born in 1950) of 4000 £1 shares in the R.I. company, credited as fully paid; the balance, £76,917, remained owing by the R.I. company to Mr. Herdman on current account, payable on demand.
(4) The said trust contained provisions for the support, maintenance and education of Mr. Herdman's son during his minority.
(5) The transfer to the R.I. company of preference and ordinary shares in the N.I. company referred to above is the transfer of assets upon which the Crown relied for the purpose of the assessments under appeal.
(6) Mr. Herdman (who at the time of the said transfer was resident in, and considered himself domiciled in, the Republic) made the said transfer with the object of avoiding super-tax in the Republic; he caused 4000 of the shares in the R.I. company to be allotted to trustees for his son with the object of providing for his son and saving death duties in the Republic. One of the results of the transfer was a reduction in the profits tax payable by the N.I. company, but this was not appreciated by Mr. Herdman or his advisers until later.
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(2) The R. I. company received the following dividends from the N.I. company, paid under deduction of income tax:
Year to March 1952
£8,500
(£4,462 10s. net)
Year to March 1953
£14,300
(£7,507 10s. net)
Year to March 1954
£14,300
(£7,865 net)
Year to March 1955
£14,300
(£7,865 net)
Year to March 1956
£14,300
(£8,222 10s. net)
Year to March 1957
£14,300
(£8,222 10s. net)
Year to March 1958
£14,300
(£8,222 10s. net)
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(3) The R.I. company claimed repayment of the tax deducted from the said dividends; repayment was not made to the R.I. company direct, the amount thereof being credited to the Republic of Ireland Revenue Commissioners to satisfy tax liabilities in the Republic of the R.I. company and, at the company's request, of Mr. Herdman.
(2) As will be seen from exhibit A, the said dividends formed substantially the whole income of the R.I. company; the other income consisted of loan interest and rent for Glenmore, which the R.I. company let to Mr. Herdman at a rent of £100 per annum, the company being responsible for rates, taxes and repairs.
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(3) The outgoings in the profit and loss accounts (exhibit A) include the company's expenses in...
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