R v HM Inspector of Taxes, ex parte Lansing Bagnall Ltd

JurisdictionEngland & Wales
Judgment Date29 January 1986
Date29 January 1986
CourtDivisional Court

Queen's Bench Division (Divisional Court).

R
and
H.M. Inspector of Taxes, ex parte Lansing Bagnall Ltd

Mr. Leolin Price Q.C. and Mr. James Denniston (instructed by Messrs. Gouldens) for the taxpayer company.

Mr. Donald Rattee Q.C. and Mr. Alan Moses (instructed by the Solicitor of Inland Revenue) for the Crown.

Before: Peter Gibson J.

The following cases were referred to in the judgment:

Re Baker ELR(1980) 44 Ch.D. 262

British Oxygen Co. Ltd. v. Board of Trade ELR[1971] A.C. 610

C. & J. Clark Ltd. v. I.R. Commrs. TAXELR(1974) 50 T.C. 103. Re Findlay [1985] A.C. 318

I.R. Commrs. v. National Federation of Self-Employed and Small Businesses Ltd. ELR[1982] A.C. 617

I.R. Commrs. v. Parkhouse Collieries Ltd. TAX(1955) 36 T.C. 675

Julius v. Bishop of Oxford (1880) 5 A.C. 214

R. v. I.R. Commrs., ex parte Preston TAXELR[1985] BTC 208; [1985] A.C. 835

R. v. Lord Commissioners of the Treasury ENR(1872) 7 Q.B. 387

Special Commissioners of Income Tax v. Linsleys Ltd. ELR[1985] A.C. 569

Vestey v. I.R. Commrs. ELR[1980] A.C. 1148

Corporation tax - Close company - Annual payments to charity under covenant - Apportionment - Whether tax inspector under duty to make apportionment of all covenanted payments to charity made by the company among its participators - Whether discretion to make such apportionment - Finance Act 1972 schedule 16 subsec-or-para 3Finance Act 1972, Sch. 16. para. 3.

This was an application by the taxpayer company for judicial review of four notices of proposed apportionment issued by the tax inspector to the company. The taxpayer sought an order against the inspector and the Inland Revenue Commissioners quashing the notices and other associated orders.

The taxpayer was a close company in the business of manufacturing fork-lift trucks. For many years it made payments to charity under covenant. In the years prior to 1978 and in 1979 it obtained clearances from the Revenue which precluded any apportionment of the payments underFinance Act 1972 schedule 16Sch. 16 to the Finance Act 1972. However, clearances were not sought in respect of the accounting periods ended 30 April in the years 1978, 1980, 1981 and 1982.

On 14 March 1984 the tax inspector informed the taxpayers that she intended to make an apportionment under Finance Act 1972 schedule 16 subsec-or-para 3Sch. 16, para. 3 in respect of annual payments made in those years. In doing so she was following directions made by the Board of Inland Revenue to all its inspectors.

On 11 December 1984 four notices were served on the taxpayer by which the inspector proposed that the annual payments made by the company to charity during the relevant years should be apportioned among the participators of the company.

The taxpayer objected and applied for judicial review of the notices. The Crown submitted that the power to apportion was coupled with a duty. The power was to enable the recovery of tax which would not otherwise be recovered and the general duty of the Revenue was to get in as much tax as possible. The taxpayers argued that the power was discretionary and there was no duty to collect the maximum amount of tax.

Held, quashing the notices:

1. Parliament intended the word "may" in Finance Act 1972 schedule 16 subsec-or-para 3Sch. 16, para. 3 to the Finance Act 1972 to have its ordinary permissive meaning.

2. Finance Act 1972 schedule 16 subsec-or-para 3Paragraph 3(1) of Sch. 16 gave the Revenue a discretionary power to apportion any amount, deducted in respect of annual payments made by close company in arriving at its distributable income, among its participators.

3. The inspector had erred in law in issuing the notices on the footing that there was a mandatory obligation to do so.

APPLICATION

Lansing Bagnall Ltd. (the company) applied for judicial review under R.S.C., O. 53, r. 3 of four notices of proposed apportionment underFinance Act 1972 schedule 16Sch. 16 to the Finance Act 1972 issued to the company by the tax inspector on 11 December 1984 in respect of its accounting periods ended 30 April 1978, 1980, 1981 and 1982.

The company sought relief on the grounds that in giving the notices the inspector:

  1. (2) failed to exercise the discretion conferred on her byFinance Act 1972 schedule 16 subsec-or-para 3para. 3 of Sch. 16 to the Finance Act 1972;

  2. (3) acted in the erroneous belief that para. 3 imposed a duty on her to make an apportionment under Finance Act 1972 schedule 16 subsec-or-para 1para. 1 of Sch. 16 in respect of all covenanted payments to charity made by the company during the relevant accounting periods and failed to take into account that on its true construction, para. 3 conferred on her a discretion whether or not to make an apportionment;

  3. (4) failed to exercise the discretion fairly and reasonably;

  4. (5) failed to give any or any proper consideration to relevant factors (including the size of the company, its turnover and profits, the number of its employees, the amount and nature of its covenanted payments to charity and the practice previously adopted for many years by the Inland Revenue Commissioners and their officers in relation to such payments by the company) which were material to and should have been given proper consideration prior to any exercise of discretion under para. 3 in respect of such payments.

  5. (6) Further or alternatively relief was sought on the grounds:

  6. (7) that the Inland Revenue Commissioners and their officers, including the inspector, were estopped from making any apportionments underFinance Act 1972 schedule 16Sch. 16 to the Finance Act 1972 in respect of covenanted payments to charity made by the company during the relevant accounting periods;

  7. (8) that the inspector was wrong in law in giving or purporting to give the notices to the company;

  8. (9) that the notices were void.

JUDGMENT

Peter Gibson J.: This case raises an important question in respect of the statutory functions of the Revenue. That question arises in the context of what is worded as a power given by Parliament to inspectors of taxes to apportion to participators of a close company amounts equal to certain annual sums paid by the company and hence to cause a liability to tax to arise on those amounts which on apportionment are treated as income of the participators. But in view of the way the case has been argued by the Revenue, the question can be put generally: do such powers confer on the Revenue a discretion which would allow the Revenue not to exercise its powers or are they powers which the Revenue is obliged to exercise in order to collect as much tax as possible, subject only to its managerial discretion, for example, not to collect tax which it is uneconomic to collect. In this case it is the Revenue which is contending that it has no discretion other than its managerial discretion and it is the close company which is contending that Parliament has conferred a discretion.

The relevant power of apportionment is one of the apportionment powers conferred in the first place on inspectors by the combined effect ofFinance Act 1972 section 94sec. 94 of andFinance Act 1972 schedule 16Sch. 16 to the Finance Act 1972. Since the Finance Act 1922 there have been statutory provisions designed to prevent the avoidance of supertax or surtax or tax at other than the basic rate by individuals through the medium of companies controlled by not more than five persons, such provisions allowing or requiring the net income of the close companies (as they have been called since 1965) to be apportioned to participators.

The obvious philosophy of the legislation was that the company's income should be treated as at the disposal of the participators who controlled the company but originally it was applied only to income in the company's hands at the end of the accounting period. That philosophy was applied by the Finance Act 1939 so as to disallow for apportionment purposes certain payments which were made by investment companies but which would not have been allowable in computing an individual's total income; such payments, as a result of the Finance Act 1946, included charitable payments. By the Finance Act1965 covenanted donations made by all close companies to charity become apportionable for surtax. With the introduction of the unified tax system and the replacement of tax at the standard rate and surtax by tax at the basic rate and higher rates, the Finance Act 1972 introduced new provisions drawn from but amending the previous apportionment provisions.

Finance Act 1972 schedule 16 subsec-or-para 1Paragraph 1(1) of Sch. 16 contains the basic provision by which the inspector of taxes may apportion to participators the excess of a close company's income over its distributions and para. 1(4) allows any amount apportioned to a close company to be further apportioned among the participators in that company. Paragraph...

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