R v Commissioners of Inland Revenue, ex parte MFK Underwriting Agencies Ltd and Others and related applications
| Jurisdiction | England & Wales |
| Judgment Date | 07 July 1989 |
| Date | 07 July 1989 |
| Court | Divisional Court |
Bingham L.J. and Judge J.
Queen's Bench Division (Divisional Court).
Five applications for judicial review were made by Lloyd's underwriting agents and syndicates seeking an order of certiorari to quash a decision of the Board of Inland Revenue that the capital uplift on certain US and Canadian index-linked bonds should be taxed as income.
In 1982 the Revenue had issued a press release stating, in principle, that if the capital uplift on redemption of index-linked bonds reflected a true rate of inflation and bore a commercial rate of interest it would attract capital gains tax. On that basis Lloyd's underwriters had invested in index-linked sterling bonds and had been taxed accordingly.
In 1985, in consultation with Lloyd's underwriters, American investment banks arranged for US and Canadian index-linked bonds to be issued for the investment of funds which underwriters were required to hold in US and Canadian dollars against the possibility of future dollar claims. The banks and their advisers, in correspondence with the Revenue, sought confirmation that the policy stated in the 1982 press release would be adhered to in respect of the proposed issue of US and Canadian bonds. Statements made by the Revenue in the course of the correspondence that that was the position in general terms were generally known among Lloyd's underwriters.
Between 1985 and 1988 a number of US and Canadian bonds were issued in respect of which the indexation uplift was taxed as a capital gain. In 1988, however, the Revenue decided that the indexation uplift on certain bonds which had been issued would be taxed as income.
The applicants contended that it was unfair and an abuse of power if a public body such as the Revenue acted inconsistently with assurances given without sufficient notice or retrospectively and it must recognise and give effect to the legitimate expectations of those who dealt with it.
The applicants submitted that the policy of the Revenue, as stated in the press release and in correspondence, was well-known to potential investors and their advisers and was an effective inducement to the applicants to buy the bonds. The Revenue had repeatedly made known its view of the bonds. It need not have done so, but having done so it would be grossly unfair and an abuse of power to alter its position with retrospective effect to the prejudice of the applicants.
The Crown contended that the Revenue could never in breach of statutory duty agree in advance that tax which, on a proper construction of the relevant legislation, was lawfully due would not be collected, and even if no question of breach of statutory duty arose the Revenue could not be bound by general and qualified statements such as were relied on by the applicants.
Held, dismissing the applications:
1. A statement formally published by the Revenue might be regarded as binding in a case falling clearly within its terms if a taxpayer relied on it and the conduct of the Revenue amounted to an abuse of power. However, the qualified statement of policy in the 1982 press release could not be relied on as creating a legitimate expectation that the Revenue would not tax the bonds in question on what they believed to be the correct principles.
2. Equally, the response to an informal approach to the Revenue might be binding where full details of the specific transaction on which the Revenue's ruling was sought were given, but the correspondence between the Revenue and individual underwriting agents and syndicates could not be regarded as giving a general assurance to the Lloyd's market as a whole as to the treatment of future bond issues.
Per Curiam: The Revenue had an administrative discretion to abstain from collecting tax which would otherwise be due and the court might direct that that discretion should be exercised if it was satisfied that unfairness amounting to an abuse of power would result if the Revenue insisted on performing its statutory duty to collect the tax.
The following cases were referred to in the judgments:
Attorney-General of Hong Kong v. Ng Yuen Shiu ELR[1983] 2 A.C. 629
Brodie's Will Trustees v. I.R. Commrs. TAX(1933) 17 T.C. 432
Council of Civil Service Unions & Ors. v. Minister for the Civil Service ELR[1985] A.C. 374
Gresham Life Assurance Society Ltd. v. Attorney-General TAX(1916) 7 T.C. 36
H.T.V. Ltd. v. Price Commission ICR[1976] I.C.R. 170
I.R. Commrs. v. National Federation of Self-Employed and Small Businesses Ltd. ELR[1982] A.C. 617
Lomax (H.M.I.T.) v. Peter Dixon & Son, Ltd. ELR[1943] K.B. 671
R. v. Attorney-General, ex parte Imperial Chemical Industries plcTAXTAX(1986) 60 T.C. 1; [1986] BTC 8015
R. v. I.R. Commrs., ex parte Preston ELRTAX[1985] A.C. 835; [1985] BTC 208
R. v. Secretary of State for the Home Department, ex parte KhanWLR[1984] 1 W.L.R. 1337
R. v. Secretary of State for the Home Department, ex parte Ruddock & Ors. WLR[1987] 1 W.L.R. 1482
Vestey & Ors. v. I.R. Commrs. TAX(1979) 54 T.C. 503
Western Fish Products Ltd. v. Penwith District Council & Anor.UNK[1981] 2 All E.R. 204
Mr. Jonathan Sumption Q.C., Mr. David Milne Q.C., Mr. Colin Rimer Q.C., Mr. Charles Flint and Mr. David Pannick (instructed by Ashurst Morris & Crisp, Carter Faber, Barlow Lyde & Gilbert, Titmuss Sainer & Webb and Clyde & Co.) for the applicants.
Mr. Michael Beloff Q.C., Mr. Alan Moses, Mr. Nicholas Warren and Miss Alison Foster (instructed by the Solicitor of Inland Revenue) for the Crown.
The applicants, MFK Underwriting Agencies Ltd. and others, DP Mann Underwriting Agency Ltd. and others, R.J. Kiln & Co. Ltd. and others, Merrett Underwriting Agency Management Ltd. and Pieri (Underwriting Agencies) Ltd. and others, applied for judicial review to quash the decision of the Board of Inland Revenue to charge income tax in respect of the increase in capital value on redemption of certain index-linked bonds.
The grounds of the application were that the applicants had relied on a press release issued by the Inland Revenue and on assurances given in correspondence between the Revenue and banks issuing the bonds to the effect that the increase in the capital value of the bonds would be treated as capital gains. It was therefore unfair, unlawful and abuse of power on the part of the Revenue to assess the capital increase as income.
Bingham L.J.: In the ordinary course of their business Lloyd's underwriters receive payments of premium from which in due course claims must be paid. There is necessarily a time lag after premiums are received before claims are made and established. For a period of two years after the close of an underwriting year underwriters are accordingly required to hold funds representing premium payments in trust funds for the potential benefit of policy-holders.
Premium income received in US dollars is required to be held in US dollar accounts or invested in US dollar securities. Premium income received in Canadian dollars is subject to a similar requirement, the account or investment being in Canadian dollars. Premium income received in all other currencies, including sterling, is held in a sterling account or invested in sterling securities.
Since the premium income received by Lloyd's syndicates is very large, it naturally follows that large funds become available for investment in the respective trust funds. Prudence requires that in investing these funds certain principles be observed. First, the funds must be readily accessible in case they are needed to meet claims. Long dated securities, unless readily marketable, will not provide the necessary liquidity. Secondly, the funds must, for the protection of policy-holders, be protected against devaluation through inflation. Thirdly, and for the same reason, investments must be secure and not speculative. There is also another, entirely legitimate, consideration. Such parts of the trust funds as are not needed to pay claims or meet expenses are available for distribution to members of the syndicates. The proceeds of the trust fund investments then become taxable in members' hands. It is in the interest of members that their tax liability on these proceeds should be minimised. Throughout the period with which this case is concerned the rate of tax charged on income in this country was higher than the effective rate charged on capital gains. So it was advantageous to syndicate members, if the result could be achieved whilst observing the investment principles described above, so to invest the trust funds that they yielded capital gains rather than income.
Investment of the sterling trust funds presented no problem. Index-linked gilt-edged stocks were available which were readily marketable, protected against inflation and secure. While the low coupon interest payable on such stocks was treated as income for tax purposes, there was never any doubt but that the indexation uplift in the redemption value of the stock was to be treated as capital and any gain taxed as a capital gain.
Until April 1986 no similar index-linked security denominated in US or Canadian dollars was available for the investment of the US and Canadian dollar trust funds. Changes in UK legislation had made pressing the need for such a medium of investment. It had been the practice to buy US and Canadian interest-bearing securities early in the interest period and sell them at an increased price with the benefit of accrued interest shortly before the interest date, the price difference being taxed as a capital gain; but the Finance Act 1985 section 73Finance Act 1985 in sec. 73 to 75 provided that accrued interest should be charged to income tax in the hands of the transferor and not to capital gains tax. The Finance Act 1984 section 36 schedule 9Finance Act 1984 (sec. 36 and Sch. 9) provided that where securities ("deep discount...
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