Monarch Assurance Company Ltd v Income Tax Special Comrs
| Jurisdiction | England & Wales |
| Judgment Date | 24 April 1986 |
| Date | 24 April 1986 |
| Court | Chancery Division |
Chancery Division.
Mr. T.M. Ashe (instructed by Messrs. Waltons & Morse) for the company.
Mr. A. Moses (instructed by the Solicitor of Inland Revenue) for the Crown.
Before: Hoffmann J.
The following case was referred to in the judgment:
I.R. Commrs. v. Montgomery ELR[1975] Ch. 271
Penalty - Failure to comply with notices issued requiring production of records for inspection - Validity of notices - Whether powers of Revenue should be restricted - Taxes Management Act 1970 section 20 section 98 subsec-or-para (1)Taxes Management Act 1970, sec. 20, 98(1); Income and Corporation Taxes Act 1970 section 186 subsec-or-para (6)Income and Corporation Taxes Act 1970, sec. 186(6).
This was an appeal by Monarch Assurance Co. Ltd. (M) against a decision of a Special Commissioner holding that the company was liable to a penalty for failing to comply with two notices served by a tax inspector pursuant to Taxes Management Act 1970 section 20 subsec-or-para (3)sec. 20(3) of the Taxes Management Act 1970.
In 1979, M was party to a scheme under which some of the employees of CI Ltd. exchanged their interests in options to buy shares in CI for options to acquire shares in Isle of Man companies. It was said that the purpose of the scheme was to defer any charge to tax until a gain accrued in respect of the new options under the "roll-over" relief provisions in Income and Corporation Taxes Act 1970 section 186 subsec-or-para (6)sec. 186(6) of the Income and Corporation Taxes Act 1970. The inspector served notices on M requiring it to produce documents which he considered might contain information relevant to the tax liabilities of the employees. M declined to comply with the notices stating that the inspector had no power to issue them under the provisions of Taxes Management Act 1970 section 20sec. 20 of the Act. A single Special Commissioner decided that the notices had been lawfully served and awarded a nominal penalty of 50p. against M in respect of each notice. M appealed to the High Court.
Held, dismissing M's appeal:
1. Taxes Management Act 1970 section 20 subsec-or-para (4)Section 20(4) was intended to give tax inspectors wide powers to require the production of documents relating to a taxpayer's liabilities in respect of certain gains. However it required that the alleged gains be derived from "the business" which was something different from the company that owned the business. The business was a collection of assets and for Taxes Management Act 1970 section 20 subsec-or-para (4)sec. 20(4) to apply there had to be an economic nexus between those assets and the alleged gains.
2. Capital gains realised by dealings in the assets of the business or the securities deriving their value from that of the business could all be said to be "derived from" that business.
3. For the purpose of obtaining information about the tax liabilities of persons conducting or managing businesses, an inspector could obtain information from persons conducting other businesses or companies. The power was not restricted to cases where the tax liability arose from receipt of assets that belonged to the business nor was it excluded where the liability arose from dealings with other assets that resulted in a receipt from a third party.
4. The notices served by the inspector on M were within the powers conferred on him.
By Notice of Motion dated 30 April 1985, Monarch Assurance Co. Ltd. (Monarch) sought an order that it was not liable to penalties awarded against it by a Special Commissioner under Taxes Management Act 1970 section 98 subsec-or-para (1)sec. 98(1) of the Taxes Management Act 1970 for its failure to comply with two notices dated 26 June 1984. The notices were served on the company pursuant toTaxes Management Act 1970 section 20 subsec-or-para (3)sec. 20(3) of the 1970 Act as substituted byFinance Act 1976 schedule 6Sch. 6 to the Finance Act 1976.
The grounds of the appeal were that the Special Commissioner:
(2) was wrong in awarding penalties for the non-compliance by Monarch with two Notices dated 26 June 1984 served on it pursuant toTaxes Management Act 1970 section 20 subsec-or-para (3)sec. 20(3) of the Taxes Management Act 1970;
(3) was wrong in holding that the power given to H.M.I.T. underTaxes Management Act 1970 section 20 subsec-or-para (3)sec. 20(3) of the Taxes Management Act 1970 enabled him to serve a notice pursuant to such section in order to assist him in supporting an assessment under appeal;
(4) failed to give sufficient or any weight to the statutory functions of H.M.I.T. as assessors of tax, and failed to give sufficient or any weight to the distinct statutory functions of appeal Commissioners appointed under the Taxes Management Act 1970, in respect of tax assessments made by an inspector of taxes which are under appeal;
(5) gave undue weight to the powers of H.M.I.T. under Taxes Management Act 1970 section 43 section 55 subsec-or-para (7)sec. 43 and sec. 55(7) of the Taxes Management Act 1970;
(6) failed to give sufficient or any weight to the legislative history of the Taxes Management Act 1970 in determining power under H.M.I.T. Taxes Management Act 1970 section 20 subsec-or-para (3)sec. 20(3) of such Act;
(7) was wrong to hold that gains arising out of transactions in options in Carlton Industries Ltd. were derived from such company's business for the purposes of Taxes Management Act 1970 section 20 subsec-or-para (4)sec. 20(4)(b)(ii) of the Taxes Management Act 1970, and was in consequence wrong to hold that Monarch was in respect of each of the aforesaid notices a person subject toTaxes Management Act 1970 section 20 subsec-or-para (3)sec. 20(3) of such Act;
(8) was wrong to hold that Taxes Management Act 1970 section 20B subsec-or-para (2)sec. 20B(2) of the Taxes Management Act 1970 was in the nature of an extended privilege rule and that such subsection only applied to documents brought into existence for the purpose of a tax appeal;
(9) misdirected himself in law in deciding that Monarch had failed to comply with the aforesaid Notices;
(10) should not have awarded any penalties.
By notice dated 26 June 1984 the inspector of taxes required Monarch Assurance Co. Ltd. to make available for inspection the company's records evidencing, and all documents in respect of:
(a) the acquisition of options in ordinary shares in Carlton Industries Ltd. issued under that company's shares option scheme of 1973 originally issued to the managing director,
(b) the acquisition by the company of 100,000 ordinary 25p. shares in Carlton Industries Ltd. under the option,
(c) the disposal by the company of the shares,
(d) the payment by the company for the acquisition of the shares,
(e) receipt of the moneys received by the company on the disposal.
The proceedings in the present case are for the recovery of penalties under the Taxes Acts, and have been instituted by way of informations and summons in accordance with Taxes Management Act 1970 section 100 subsec-or-para (7)sec. 100(7) of the Taxes Management Act 1970 ("TMA"). Put shortly, the informant Mr. Ward (one of HM Inspectors of Taxes) stated, and the Special Commissioners' Summons recited, that Monarch Assurance Co. Ltd. ("Monarch") had been served with two notices under Taxes Management Act 1970 section 20 subsec-or-para (3)sec. 20(3), TMA requiring Monarch to deliver certain specified documents to Mr. Ward within a certain time; and that Monarch had failed to comply. Mr. Ward accordingly claimed, on behalf of the Board of Inland Revenue, a penalty in respect of each failure, and a declaration of failure (Taxes Management Act 1970 section 98 subsec-or-para (1)sec. 98(1), TMA).
Part of the argument before me requires some knowledge of background facts. These are not in dispute.
In 1973 Carlton Industries Ltd. ("Carlton"), a public company established in Bristol, set up a share option scheme, apparently for the benefit of directors and senior executives. In 1976 eight persons acquired options under the scheme of whom two, a Mr. Bonfield and a Mr. Saxby, were at all material times respectively the managing director and secretary of Carlton. Options in respect of a total of 437,000 Carlton shares were acquired by the eight, Mr. Bonfield acquiring 100,000 and Mr. Saxby 47,000. The options were exercisable on payment of 521/2p. per share; the legal title to the options was not transferable.
In the middle of 1979 each of the eight entered into an agreement with Monarch under which his beneficial interest in his options was transferred to Monarch. The consideration for those transfers (at the rate of £1.871/2p. per share) was - or is alleged to have been - the transfer to each of the eight of a number of options to acquire shares in an Isle of Man company. (There were in fact eight Isle of Man companies involved, each of the eight Carlton executives obtaining options in respect of shares in a different one.) At various dates between October 1979 and May 1981 Monarch procured the exercise of the Carlton options and the related Carlton shares were registered in the name of a nominee for Monarch. Those Carlton shares have since been sold.
By virtue of Income and Corporation Taxes Act 1970 section 186 subsec-or-para (1)sec. 186(1), Income and Corporation Taxes Act 1970, any gains accruing to the eight Carlton executives by the exercise (or assignment) of their Carlton options would, prima facie, constitute emoluments chargeable to tax under Sch. E. However, subsec. (6) of that section provides in effect that where such options are exchanged for others, the new options are to be regarded as representing the old and no charge to tax arises until a gain is realised in respect of the new options.
In or about 1982, officers of the Inland Revenue, examining the affairs of the Carlton...
To continue reading
Request your trial
-
A Taxpayer v Inspector of Taxes
...provide the taxpayer with the opportunity to question the validity of the notice: Monarch Assurance v The Special Commissioners & CIR 59 TC 594; Kempton v Special Commissioners & CIR 1992 BTC 553; R v CIR ex p. Taylor (No.2) 62 TC 578 per Bingham L J at p.594 D-F (and note his reference to ......