R v Commissioners of Inland Revenue ex parte Woolwich Equitable Building Society
| Jurisdiction | England & Wales |
| Judge | Lord Keith of Kinkel,Lord Brightman,Lord Oliver of Aylmerton,Lord Goff of Chieveley,Lord Lowry |
| Judgment Date | 22 November 1990 |
| Judgment citation (vLex) | [1990] UKHL J1122-2 |
| Date | 22 November 1990 |
| Court | House of Lords |
[1990] UKHL J1122-2
House of Lords
Lord Keith of Kinkel
Lord Brightman
Lord Oliver of Aylmerton
Lord Goff of Chieveley
Lord Lowry
My Lords,
I have had the opportunity of considering in draft the speech to be delivered by my noble and learned friend Lord Oliver of Aylmerton. I agree with it, and would allow the appeal for the reasons he gives.
My Lords,
I also have considered in draft the speech to be delivered by my noble ana learned friend Lord Oliver of Aylmerton, and for the reasons given by him would allow the appeal.
My Lords,
The appellants in this appeal, to whom it may be convenient to refer simply as "the Woolwich," call in question the validity of regulations made pursuant to section 343(1A) of the Income and Corporation Taxes Act 1970, which they claim were ultra vires. The question reduces, in the end, to a short, but by no means simple. question of construction of the relevant statutory provisions, but in order to understand the problem it is necessary to say something of the historical background to the section. This has been conveniently and intelligibly set out in the judgment of Nolan J. in the High Court [1987] S.T.C. 654 and to do more than merely to summarise it would be a work of supererogation.
The collection of income tax from the recipients of annual interest and dividends by means of deduction at source, enshrined at the date of the commencement of these proceedings in sections 52, 53 and 232 of the Act of 1970, is a system which has been established for many years and would, but for the arrangements described below, have applied to investment income from building societies in the same way as it applied to other investment income. Under this system, income tax at the basic rate is accounted for to the revenue by the paying institution and the recipient is treated, for tax purposes, as having received a grossed-up amount which, after deduction of tax at the basic rate, is equal to the income actually received by him. If he is a high-rate taxpayer he pays additional tax on that amount. If his total income is such that he is not liable to pay even basic rate tax, he is entitled to reclaim the tax deducted or the appropriate proportion of it from the revenue.
Building societies have traditionally provided a safe and simple form of investment for persons of relatively modest means, many of whom are not liable to pay basic rate income tax on the whole of their income, a circumstance which would either have given rise to a very large number of small repayment claims or would have resulted in the revenue retaining more tax than was actually due owing to the failure of investors, either from ignorance of the law or inertia, to make claims for repayment. Accordingly, in the year 1894, the revenue offered to the building societies two alternative arrangements, "A" and "B," for the discharge of the tax liability of investors in a way which obviated the necessity for claims for repayment. Under arrangement "B," which was the one elected by the Woolwich, the society discharged the liability for income tax payable in the tax year 1894-95 in respect of interest paid to its investors by paying to the revenue tax at one half of the standard rate on the amount of interest paid and in practice this was, then and thereafter, treated as applying equally to dividends. The purpose of this was to achieve a position of "revenue neutrality," the calculation being that the revenue would thus receive, as nearly as may be, the same amount in tax as it would have received under the ordinary system of tax deduction if investors qualified to make repayment claims had availed themselves of their right to do so.
The basic features of this arrangement have been repeated in each year since 1895 up to and including the tax year 1985-86, although there have been refinements. In 1925 a distinction was made between investors who were clearly liable for tax at the basic rate, such as corporate investors or commercial undertakings, and individual investors. As regards interest or dividends paid to the former, the societies account for tax at the basic rate, whilst as regards the latter, they accounted for a reduced rate of tax which was arrived at each year on the basis of statistical evidence and was calculated to produce a position of revenue neutrality. An important complication in this procedure, which has given rise to the problem raised by this appeal, is that, no doubt for administrative convenience both to the societies and to the revenue, the amount payable under each annual arrangement was calculated not by reference to the payments made in the actual fiscal year for which the tax was due but by reference to the payments shown as made or accrued in each society's annual accounts. Originally it was calculated by reference to the accounts of the accounting period ending in the previous year of assessment, but in the year 1940-41 societies were given the right to elect, once for all for that and all subsequent years, that the calculation should be based on the accounts for each society's accounting year ending in the current year of assessment. The Woolwich, whose accounting years end on 30 September in each year, made that election.
These arrangements, which were entirely voluntary on the part of the societies, were renewed annually and were, up to 1951, entirely extra-statutory. Section 23 of the Finance Act 1951, however, accorded them statutory recognition and from 1970 until the end of the tax years 1985-86 they were regulated by section 343 of the Act of 1970.
Subsection (1) of section 343 provided as follows:
"The Board and any building society may, as respects any year of assessment, enter into arrangements whereby — ( a) on such sums as may be determined in accordance with the arrangements the society is liable to account for and pay an amount representing income tax calculated in part at the basic rate and in part at a reduced rate which takes into account the operation of the subsequent provisions of this section; and ( b) provision is made for any incidental or consequential matters, and any such arrangements shall have effect notwithstanding anything in this Act…"
There followed a proviso obliging the Board to secure the position of tax neutrality already referred to. It is unnecessary to set it out here, for, as will be seen, the Finance Act 1984 transferred the function of fixing the reduced rate for the purposes of the section from the Board to the Treasury and section 26(3) of that Act contained provisions to the same effect to the terms of which I will refer a little later. Section 343(2) provided for the deduction of dividends and interest paid for the purposes of the society's corporation tax and also regulated the treatment for corporation tax purposes of dividends and interest paid by a society to company investors. The position of investors in and borrowers from a building society are dealt with subsections (3) and (4) which, so far as material, provide as follows:
"(3) Where any arrangements under this section are in force in the case of any society as respects any year of assessment — ( a) notwithstanding anything in Part II of this Act, income tax shall not be deducted from any dividends or interest payable in that year in respect of shares in or deposits with or loans to that society, ( b) subject to subsection (2)( b) above no repayment of income tax and, subject to paragraph (i) of the proviso below, no assessment to income tax shall be made in respect of any such dividends or interest on or to the person receiving or entitled to the dividends or interest, ( c) any amounts paid or credited in respect of any such dividends or interest shall, in computing the total income of an individual entitled thereto, be treated as income for that year received by him after deduction of income tax from a corresponding gross amount … provided that — (i) paragraph ( b) above shall not prevent an assessment in respect of income tax at a rate other than the basic rate; (ii) for the purpose of determining whether any or what amount of tax is, by virtue of paragraph ( c) above, to be taken into account as having been deducted from a gross amount in the case of an individual whose total income is reduced by any deductions so much only of that gross amount shall be taken into account as is part of his total income as so reducted…
(4) Where any arrangements under this section are in force in the case of any society as respects any year of assessment then, notwithstanding anything in Part II of this Act, income tax shall not be deducted upon payment to the society of any interest on advances, being interest payable in that year."
Thus it will be seen that the payment by a society under an arrangement made under this section in any year of assessment has the effect of discharging entirely any liability for individual investors for basic rate tax on dividends or interest received by them in that year of assessment even though, as previously noted, the "amount representing income tax" is in fact calculated not upon the income actually received in that year but upon those sums which have been paid or accrued in the society's accounts for the accounting period ending in that year. So long, of course, as successive arrangements continue to be made on the same basis, amounts paid during the period between the end of the society's accounting year and the beginning of the next year of assessment will be brought into account for the purposes of the computation of the society's liability in that year of assessment. If, however, the arrangement is discontinued — if, for instance, the society declines to enter into an arrangement for the next year of...
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