Hillsdown Holdings Plc and Others v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 11 March 1999 |
| Date | 11 March 1999 |
| Court | Chancery Division |
Chancery Division and Queen's Bench Division (Crown Office List).
Arden J.
David Oliver QC and Nigel Giffin (instructed by Herbert Smith) for the plaintiffs.
Ian Glick QC and Richard Gillis (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Banque Financière de la Cité v Parc (Battersea) Ltd ELR[1998] CLC 520; [1999] 1 AC 221
Dodworth (HMIT) v Dale ELRTAX[1936] 2 KB 503; 20 TC 285
Garforth v Newsmith Stainless Ltd WLR[1979] 1 WLR 409
Gasus Dosier-und Fördertechnic GmbH v Netherlands HRC(1995) 20 EHRR 403
Hillsdown Holdings plc v Pensions Ombudsman UNK[1997] 1 All ER 862
Kleinwort Benson v Lincoln City Council ELR[1999] AC 153
Lee (Albert) v IR Commrs TAX(1943) 25 TC 485
Morley-Clarke v Jones (HMIT) TAXELR[1985] BTC 460; [1986] Ch 311
National & Provicial Building Society v United KingdomTAX[1997] BTC 624; 25 EHRR 127
Paton v IR Commrs ELR[1938] AC 341
R v IR Commrs, ex parte MFK Underwriting Agencies Ltd TAX[1989] BTC 561; [1990] 1WLR 1545
R v IR Commrs, ex parte Preston TAXELR[1985] BTC 208; [1985] AC 835
R v IR Commrs, ex parte Unilever plc TAXTAX[1996] BTC 183; 68 TC 205
Ramsay (WT) Ltd v IR Commrs ELR[1982] AC 300
Ridge Securities Ltd v IR Commrs WLR[1964] 1 WLR 479
Secretary of State for Social Security v Harmon WLR[1999] 1 WLR 163
Spence v Crawford SC1939 SC(HL) 52
Spence v IR Commrs TAX(1941) 24 TC 311
Woolwich Building Society v IR Commrs TAXELR[1992] BTC 470; [1993] AC 70
Corporation tax - Surplus funds transferred by approved pension scheme to employer - Tax liability arose and was paid on transfer - High Court subsequently found payment of surplus by pension fund to be in breach of trust and directed the money paid to employer be repaid to the pension fund and amount paid in tax to be repaid to the fund to the extent that the tax was recoverable from the Revenue - Whether effective "payment" made to the Revenue - Whether Revenue obliged to repay the tax -Income and Corporation Taxes Act 1988 section 601Income and Corporation Taxes Act 1988, s. 601.
This was an action brought by Hillsdown to recover tax paid on the transfer of assets to it as employer from the group pension fund. The transfer was subsequently held by the High Court to be in breach of trust and directed to be repaid to the pension fund. Hillsdown also applied for judicial review seeking to quash the Revenue's decision not to repay the tax.
HF Trustee was the trustee of an approved pension scheme for the benefit of employees of Hillsdown companies. As the scheme had a substantial surplus it agreed to make two payments in 1989 and 1990 to Hillsdown. Tax under the Income and Corporation Taxes Act 1988 section 601Income and Corporation Taxes Act 1988, s. 601 was paid at the same time totalling £7,374,800. That section imposed a tax equal to 40 per cent where "a payment is made to an employer out of funds which are or have been held" for the purposes of an exempt approved scheme.
When the distribution by HF Trustee to Hillsdown was later held by Knox J ([1997] 1 All ER 862) to have been in breach of trust, the sums distributed were returned to Hillsdown, net of tax. Knox J had directed that the tax should also be repaid to the fund in so far as it was recoverable from the Revenue.
The Revenue took the view that the sums remained "due" even though the distribution was invalid and had been reversed and refused to repay the tax as a matter of discretion.
Hillsdown's primary submission was that, for the purposes of theIncome and Corporation Taxes Act 1988 section 601Income and Corporation Taxes Act 1988, s. 601, no valid and effective "payment" had been made to the Revenue; there had been no real and unfettered transfer of worth. A purposive construction should be adopted. The purpose of Income and Corporation Taxes Act 1988 section 601s. 601 was to impose a tax on the employer if it received any benefit from the funds which had been extracted from a pension fund. When money was taken out of the scheme Income and Corporation Taxes Act 1988 section 601s. 601 in a rough and ready way reversed the benefit which the employer had received when paying into the scheme and on the receipt of tax-free dividends. In this case, however, the employer had received no benefit, having been required to pay the money back and the effect of the present situation was that the Revenue had received a windfall.
The Revenue contended that the fact that money had actually moved from the pension fund to Hillsdown gave rise to a charge to tax. The words of the section were clear; there was no need to apply a purposive construction to them; and in the present context, a "payment" had been made within Income and Corporation Taxes Act 1988 section 601s. 601.
Held, giving judgment for Hillsdown in the action, but dismissing the application for judicial review:
Since there was no clear linguistic guidance as to the meaning of "payment" in Income and Corporation Taxes Act 1988 section 601s. 601, the court was entitled to consider the context and purpose of the section. If the purpose was to recoup the tax benefit received while the money was in the fund, there was no explanation why the tax should be imposed if in reality it did not leave the fund. The policy of the group of sections indicated that the payment had to be a real payment and the requirement in Income and Corporation Taxes Act 1988 section 601s. 601 itself that the payment had to be "out of" the fund indicated that the payment had to result in money leaving the fund as intended by the transaction. Accordingly, the transfer of funds, which were subsequently repaid, did not amount to "payment" within Income and Corporation Taxes Act 1988 section 601s. 601 and Hillsdown was entitled to recover the tax paid:Paton v IR Commrs ELR[1938] AC 341 applied.
Per Curiam: If the transfer of funds had been taxable underIncome and Corporation Taxes Act 1988 section 601s. 601 of the 1988 Act, the court would only have intervened on an application for judicial review if some unfairness or abuse of power on the part of the Revenue were shown, or if they had created some legitimate expectation that the tax would be repaid. Hillsdown had not shown unfairness amounting to abuse by the Revenue who had played no part in the decision to transfer money from the pension fund, and no legitimate expectation had been raised as to their action in relation to it; R v IR Commrs, ex parte Preston [1985] BTC 208, R v IR Commrs, ex parte MFK Underwriting Agencies [1989] BTC 561 and R v IR Commrs, ex parte Unilever plc [1996] BTC 183 applied.
Arden J: The matters dealt with in this judgment are the actions brought by the plaintiffs, respectively Hillsdown and HF Trustee, against the Inland Revenue for recovery of sums totalling £7,384,800 and their application for judicial review of the Revenue's decision not to refund those sums. The trial of the action was on the basis of agreed facts. In summary, the main question is whether these sums were due under Income and Corporation Taxes Act 1988 section 601s. 601 of theIncome and Corporation Taxes Act 1988.
HF Trustee is the trustee of an approved pension scheme for the benefit of employees of Hillsdown. As the scheme had a substantial surplus it agreed to make two payments in 1989 and 1990 to Hillsdown. Tax was paid at the same time. Unfortunately the distributions to Hillsdown were later held by Knox J to have been in breach of trust. The sums distributed net of the tax paid have been returned to HF Trustee and the plaintiffs seek repayment of the tax paid from the Revenue. The Revenue, on the other hand, contend that the sums are still due as tax even though the relative distribution was invalid and has been reversed.
In the statement of claim the plaintiffs allege that these sums were paid under a mistake of fact, that a valid payment had been made to Hillsdown out of the HF scheme, as defined below. If that payment had been valid there would have been a surplus out of which the HF Trustee could have made the payment to the employer. The plaintiffs' claim in the action is therefore pleaded as a claim in restitution under the principle in Woolwich Building Society v IR Commrs TAXELR[1992] BTC 470; [1993] AC 70; alternatively on the basis of a failure of consideration; or alternatively on the basis that the Revenue has received the sums as a volunteer and therefore is a trustee of them for HF Trustee.
The law, in fact, has developed in an important respect since the claim was pleaded. In Kleinwort Benson Ltd v Lincoln City CouncilELR[1999] AC 153, the House of Lords decided that a claim can lie if the money is paid under a mistake of fact as well as money paid under a mistake of law. So any issue that there might have been, had the case been argued before that decision, as to whether this was a mistake of fact or not does not now matter. Moreover, as explained in the next paragraph, the argument has in the event focused on the question of the construction of Income and Corporation Taxes Act 1988 section 601s. 601.
The Revenue's primary contention is that the payments to Hillsdown triggered a charge to tax under Income and Corporation Taxes Act 1988 section 601s. 601. However, it has also accepted that if, in the events which happened, the tax was not due it will repay the sums on the Woolwich principle. This approach has greatly simplified the issues.
I will now summarise the framework of the legislation. Income and Corporation Taxes Act 1988 section 601Section 601 imposes a tax equal to 40 per cent of the payment where:
… a payment is made to an employer out of funds which are or have been held for the purposes of … [an exempt approved scheme].
This applies even if the pension scheme has an excess of assets over liabilities which exceeds that permitted under Income and Corporation Taxes...
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