Moodie v Commissioners of Inland Revenue and Another ; Sotnick v Same
| Jurisdiction | England & Wales |
| Judge | Lord Keith of Kinkel,Lord Templeman,Lord Goff of Chieveley,Lord Browne-Wilkinson,Lord Mustill |
| Judgment Date | 11 February 1993 |
| Judgment citation (vLex) | [1993] UKHL J0211-1 |
| Date | 11 February 1993 |
| Court | House of Lords |
[1993] UKHL J0211-1
House of Lords
Lord Keith of Kinkel
Lord Templeman
Lord Goff of Chieveley
Lord Browne-Wilkinson
Lord Mustill
My Lords,
For the reasons given in the speech to be delivered by my noble and learned friend, Lord Templeman, which I have had the opportunity of reading in draft and with which I agree, I would allow these appeals.
I would add only that, having been one of the majority in I.R.C. v. Plummer [1980] A.C. 896, I feel no doubt that upon the issues which were actually argued before the House, that decision was correct. On the other hand, I have equally no doubt that if the argument which was successful in W. T. Ramsay Ltd. v. I.R.C. 1982 A.C. 300 had been presented by the revenue in Plummer's case my conclusion would have been against the taxpayer.
My Lords,
Income tax is a tax on wealth so that the higher the income of the taxpayer, the greater the amount of income tax which he must pay. Conversely, if a taxpayer reduces his income, he reduces his income tax. In 1971 there were in circulation a number of tax avoidance schemes which were designed to reduce the taxable income of an individual taxpayer without reducing his actual income. The Cardale Capital Income Plan Mark I was designed to enable a taxpayer to enjoy part of his actual income tax free by exploiting the fiscal treatment of annuities.
By the Income and Corporation Taxes Act 1970 an annuity payable for at least four years and fulfilling certain other conditions ceases to be the income of the payer and becomes the income of the annuitant. By sections 108 and 109 of the Act of 1970 income tax is charged on the annuity and by section 52 income tax at the standard rate is deductible by the payer and retained by him if he pays the annuity out of his income. By sections 3 and 528 the payer may deduct from his total income for income tax purposes the gross amount of the annuity. Thus the gross amount of the annuity is paid out of the actual income of the payer reducing his actual income and reducing his taxable income by the like amount. The annuity becomes the actual and taxable income of the annuitant. Tax at the standard rate is deducted by the payer of the annuity. If the payer certifies that he has paid the annuity out of his actual income and if the annuitant's total income does not render the annuitant liable to income tax at the standard rate then the annuitant can claim from the Revenue the amount of tax which has been deducted from the annuity so far as that deduction exceeds the amount of tax for which the annuitant is liable. But the taxable incomes of payer and annuitant are only altered if an annuity is paid and received.
In March 1971 the respondent Mr. Moodie paid a fee of £3,693 for the implementation of the Cardale Capital Income Plan Mark I. The following steps were taken on 8 March 1971:
(1) The bankers SW advanced £59,400 to HOVAS, a charitable trust company formed for the purposes of the plan.
(2) HOVAS paid £59,400 to Mr. Moodie in consideration of his covenanting to pay HOVAS for five years, or, if shorter, the remainder of his life an annuity at such a rate as should equal £12,000 after deduction of tax at the standard rate. The first payment was to be made on 29 March 1971 and subsequent payment on each 29th March.
(3) Mr. Moodie paid £59,400 to Old Change Court (Investments) Ltd. (OCC) a company comprised in the SW group of companies in consideration for ten promissory notes for £60,000. The notes were deposited by Mr. Moodie with HOVAS as security for the payment of the annuity of £12,000 pursuant to Step (2).
(4) OCC advanced £59,400 to Baldrene Ltd., another SW company.
(5) Baldrene advanced £59,400 to HOVAS.
(6) HOVAS paid £59,400 to SW in discharge of the advance made under Step (1).
On 29 March 1971 and the four succeeding anniversaries of that date the following steps were taken pursuant to the plan:
(7) OCC paid £12,000 to Mr. Moodie in redemption of two of the promissory notes in discharge of its obligations under Step (3).
(8) Mr. Moodie paid £12,000 to HOVAS to discharge his agreement to pay an annuity under Step (2).
(9) HOVAS paid Baldrene £12,000 in part discharge of the advance under Step (5).
(10) Baldrene paid OCC £12,000 in part discharge of the advance under Step 4.
With the benefit of the hindsight afforded by the speeches of this House in W.T. Ramsay Ltd. v. I.R.C. [1982] A.C. 300 (" Ramsay's case") it is now plain that Mr. Moodie did not pay an annuity within the meaning of the taxing statute because the steps taken under the plan were self cancelling. The payments and receipts were recorded as book entries but it would have made no difference if payment had been made by cash or cheque. The plan provided that all ten steps should be taken and that no one should be financially better off or worse off. The Cardale Capital Income Plan was a tax avoidance scheme which had no object or effect save the manufacture for Mr. Moodie of claims that he had reduced his income by sums which amounted in the aggregate to £99,460. He had not reduced his actual income and had not been put to any capital expense save the cost of the scheme which amounted to £3,693. In due course Mr. Moodie's claims were disallowed by the Inspector of Taxes, the Special Commissioners and Hoffman J. but were allowed by the Court of Appeal (Balcombe and McCowan L.JJ. and Sir Christopher Slade). The Revenue now appeal.
The respondent Mr. Sotnick paid a fee for the Cardale Capital Income Plan Mark II. That plan incorporated variations from the Mark I plan but the results were similar. The plan Mark II was a tax avoidance scheme which manufactured claims by Mr. Sotnick that he had reduced his taxable income by sums which in the event amounted in the aggregate to £69,576. These claims were also allowed by the Court of Appeal and the Revenue now appeal.
In 1971 Mr. Plummer took advantage of the Cardale Capital Income Plan Mark I. In his case there were manufactured claims by Mr. Plummer that he had reduced his taxable income by some £20,000 and those claims were allowed by this House in I.R.C. v. Plummer [1980] A.C. 896 (" Plummer's case"). In the instant cases the Court of Appeal allowed the claims of Mr. Moodie and Mr. Sotnick on the ground that the court was bound by the result in Plummer's case. It is quite clear that the facts in Plummer's case were almost exactly the same as and cannot be distinguished from the facts in the case of Mr. Moodie or the facts in the case of Mr. Sotnick. On behalf of Mr. Moodie and Mr. Sotnick it is submitted that the House is bound by the result of Plummer's case to allow the claims of Mr. Moodie and Mr. Sotnick.
Plummer's case came before the House in 1979. The annuity was £851.06 and the capital sum was £2,500. The Revenue made four submissions, each of which, if accepted, would defeat the claim of Mr. Plummer:
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(1) That a payment made under Step (8) was the payment of an annuity but that the annuity was not paid out of income but out of the capital paid under Step (2).
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(2) That a payment made under Step (8) was paid by means of the promissory notes obtained under Step (3) and was not paid out of Plummer's income.
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(3) That the consideration for the annuity namely the sum paid by HOVAS pursuant to Step (2) was not "valuable and sufficient consideration" and the annuity fell to be disregarded under section 434 of the Income and Corporation Taxes Act 1970.
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(4) That the steps constituted a settlement within section 457 of the Act of 1970, that Mr. Plummer was the settlor and that the annuity payments remained part of his total income for income tax purposes by virtue of that section.
The four submissions made on behalf of the Revenue were rejected by this House. On the assumption, accepted by all parties, that payments were made in implementation of each of the planned ten steps which constituted the scheme, this House decided that Step 8 was the payment of an annuity out of income since the taxpayer's actual income exceeded the gross amount of the annuity. The payments of the annuity were not made out of the capital constituted by the promissory notes. The consideration for the annuity was good and sufficient. There was no element of bounty so there was no settlement. On the assumption that Mr. Plummer paid an annuity, Plummer's case was rightly decided for the right reasons.
In the light of the submissions made by the Revenue and the presentation of the facts in Plummer's case the failure of the Revenue against Mr. Plummer was inevitable.
The argument that a self cancelling tax avoidance scheme was effective to reduce tax was...
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