R v HM Inspector of Taxes and Another.ex parte Lansing Bagnall Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 31 July 1986 |
| Date | 31 July 1986 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Mr. Donald Rattee Q.C. and Mr. Alan Moses (instructed by the Solicitor of Inland Revenue) for the Crown.
Mr. Leolin Price Q.C. and Mr. James Dennison (instructed by Messrs. Gouldens) for the taxpayer company.
Before: Kerr, Parker and Balcombe L.JJ.
The following cases were referred to in the judgments:
British Oxygen Co. Ltd. v. Minister of Technology ELR[1971] A.C. 610
C. & J. Clark Ltd. v. I.R. Commrs.TAX(1974) 50 T.C. 103
I.R. Commrs. v. National Federation of Self-Employed and Small Businesses Ltd. ELR[1982] A.C. 617
Julius v. Lord Bishop of Oxford [1880] 5 A.C. 214
R. v. I.R. Commrs., ex parte Preston TAXELR[1985] BTC 208; [1985] A.C. 835
Vestey v. I.R. Commrs. ELR[1980] A.C. 1148
Corporation tax - Close company - Annual payments to charity under covenant - Apportionment - Judicial review - Whether tax inspector under duty to apportion among its participators all covenanted payments to charity made by company - Whether discretion to make such apportionment - Finance Act 1972 schedule 16 subsec-or-para 3Finance Act 1972, Sch. 16, para. 3.
This was an appeal by the taxpayer company against the decision of Peter Gibson J. (reported at [1986] BTC 92) whereby he ordered that notices of apportionment served on the taxpayer company in respect of covenanted payments to charity be quashed.
The taxpayer was a close company in the business of manufacturing fork-lift trucks. For many years it made payments to charity under covenant and in the years prior to 1978 and in 1979 it obtained clearances from the Revenue precluding apportionment of the payment under Finance Act 1972 schedule 16Sch. 16 to the Finance Act 1972. During its accounting periods ending 30 April 1978, 1980, 1981 and 1982, the company made donations to charities without obtaining such clearances. Subsequently, in 1984, a tax inspector served the taxpayer company with notices indicating that those covenanted payments, being annual payments deducted by the taxpayer in arriving at its distributable income, were to be apportioned among its participators under para. 3(1) of Finance Act 1972 schedule 16Sch. 16 to the Finance Act 1972. The instructions issued to inspectors by the Board of Inland Revenue relating to apportionment were formulated on the basis that an inspector had no discretion whether to apportion other than their managerial discretion, and the inspector regarded herself as bound by those instructions.
The taxpayer company applied to the Queen's Bench Division for judicial review seeking an order quashing the notices on the ground that they were invalid because para. 3(1) expressly gave the inspector a discretion whether or not to apportion and that she had issued the notices without exercising that discretion. That application was upheld by Peter Gibson J. who made an order quashing the notices.
The Crown appealed to the Court of Appeal, contending that the use of the word "may" in para. 3(1) conferred a power on the Revenue; it did not impose a duty to apportion. However, subject only to a residual discretion not to exercise such a power when to do so would prove uneconomic, the Revenue was under a duty to exercise the power in order to recover "every part of inland revenue" under the Inland Revenue Regulations Act 1890, section 13 subsec-or-para (1)sec. 13(1). Parliament had given no guidance as to the circumstances in which the power was to be exercised and since it was not likely that Parliament would give inspectors an unguided discretion, the tax inspector was entitled to issue valid notices following instructions properly issued by the Board of Inland Revenue.
The taxpayer company said that use of the word "may" in the statutory provision gave a tax inspector a discretion that he had to exercise before a notice of apportionment could be issued. When Parliament intended to impose a mandatory duty it did so by using the word "shall".
Held, dismissing the Crown's appeal:
1. (per Balcombe L.J.) The power conferred by the use of the word "may" in Finance Act 1972 schedule 16 subsec-or-para 3para. 3(1) of Sch. 16 was a general discretion and did not impose a duty on the Revenue to apportion the income of a close company. The statutory history of the provision supported that conclusion because where Parliament intended to impose a duty to apportion it had used mandatory and not permissive language, by use of the word "shall". This was also the case elsewhere within Sch. 16 as currently enacted.
2. (per Parker L.J.) The Revenue's duty to collect tax under section 13sec. 13 of the Inland Revenue Regulations Act 1890 did not arise until a tax had been imposed. The duty could not, therefore, arise until the power under para. 3(1) had been exercised and section 13sec. 13 could not assist to ascertaining the nature of that power.
3. (per Parker L.J.) In exercising the discretion it was permissible for general guidelines to be issued to inspectors but it was not permissible to lay down inflexible rules. The guiding principles had to be fair as between the taxpayers and to the individual taxpayers concerned on the basis that the object of the legislation was not to penalise the participators in the close company but to see that they did not, by reason of their position as such, obtain an unfair advantage over others. If it was the duty of the Revenue to be fair as between participators, it followed that Parliament must be taken to have enacted legislation designed to enable it to carry out such duty.
Balcombe L.J.: Lansing Bagnall Ltd. manufactures fork lift trucks. It has a substantial business and employs some 2400 employees. For many years it has made payments to charity under covenant. For the ten-year period 1973-1982 those payments were as follows:
1973 |
£15,247 |
1974 |
£28,960 |
1975 |
£31,849 |
1976 |
£32,143 |
1977 |
£30,674 |
1978 |
£53,363 |
1979 |
£57,025 |
1980 |
£54,252 |
1981 |
£53,168 |
1982 |
£39,333 |
Lansing Bagnall is, however, a close company as defined byIncome and Corporation Taxes Act 1970 section 282 subsec-or-para (1)sec. 282(1) of the Income and Corporation Taxes Act ("ICTA") 1970, i.e. it is under the control of five or fewer participators. Lansing Bagnall is the subsidiary of another close company, Kaye Organisation Ltd. In the result Lansing Bagnall is subject to the provisions of Finance Act 1972 schedule 16Sch. 16 to the Finance Act 1972, which deals with the apportionment of income etc. of close companies.
For the years prior to 1978 and in 1979 Lansing Bagnall obtained clearances from the Revenue such as precluded any apportionment under Sch. 16. However, clearances were not sought in respect of the accounting periods ended 30 April in each of the years 1978, 1980, 1981 and 1982. In 1982 a new inspector of taxes (the first respondent to Lansing Bagnall's application for judicial review) was appointed to the district concerned with the tax affairs of Kaye Organisation and its subsidiaries, and she took the view that she was bound by certain instructions issued to inspectors of taxes by the Board of Inland Revenue to apportion among the participators of the Kaye Organisation the amounts paid to charity in the years 1978, 1980, 1981 and 1982. On 11 December 1984 she served four notices of apportionment of these amounts on Lansing Bagnall.
Lansing Bagnall did not accept the inspector's view that she was bound to issue the notices of apportionment and in due course applied for judicial review to quash the notices, on the grounds that the inspector had failed to exercise the discretion conferred on her by statute. On 29 January 1986 Peter Gibson J. upheld Lansing Bagnall's contentions and quashed the notices. The Revenue have appealed to this court.
The relevant statutory provisions are contained in Finance Act 1972 schedule 16Sch. 16 to the Finance Act 1972. Paragraph 1(1) of that Sch. provides that (subject to certain provisions not directly material for present purposes):
the income of a close company for any accounting period may, for the purposes of this Schedule, be apportioned by the inspector among the participators.
Paragraph 3(1) provides:
…there may be apportioned under paragraph 1 above as if it were income of a close company for an accounting period any amount which was deducted in respect of annual payments made by the close company in arriving at its distributable income for that period and which in the case of an individual would not have been deductible or would have been treated as his income in computing his total income.
Annual payments made under covenant to charities fall within this description. (For the years 1981-82 and following there is an exemption for covenanted payments to charity not exceeding an amount which has progressively risen from £3,000 to £10,000 in any year. UnderFinance Act 1986 section 32sec. 32 of the Finance Act 1986, this limit is (subject to certain exceptions) removed altogether, so that the particular...
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