Robert Walker(Hm Inspector of Taxes) v Centaur Clothes Group Ltd
| Jurisdiction | England & Wales |
| Judge | Peter Gibson L.J.,Sir Patrick Russell,Nourse L.J. |
| Judgment Date | 25 June 1998 |
| Judgment citation (vLex) | [1998] EWCA Civ J0625-14 |
| Date | 25 June 1998 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | CHRVF 96/1724/3 |
[1998] EWCA Civ J0625-14
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(REVENUE)
(Sir John Vinelott)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Nourse
Lord Justice Peter Gibson
and
Sir Patrick Russell
CHRVF 96/1724/3
Mr. David Goldberg Q.C. and Mr. Conrad McDonnell (instructed by Legal Department, Wm Baird plc) appeared on behalf of the Appellant
Mr. Michael Furness (instructed by the Solicitor of Inland Revenue) appeared on behalf of the Respondent
The taxpayer company, The Centaur Clothes Group Ltd. ("Centaur"), is a wholly owned subsidiary of William Baird plc. For many years Centaur carried on trade as a manufacturer, distributor and retailer of men's outerwear. But by two agreements on 6 January 1992 it transferred its business assets and liabilities to another wholly owned subsidiary of William Baird plc, Baird Textile Holdings Ltd. ("Textile"), the purchase price being the net book value of the assets transferred. That price, amounting to £4,290,242, was to be paid on a date to be agreed between the parties, but it has been left outstanding, with no express agreement about the payment of interest. Also on 6 January 1992 by an agency agreement Textile appointed Centaur as its agent to manage and conduct the business transferred by Centaur to Textile. No remuneration for Centaur was provided for by that agreement.
On 5 April 1993 Centaur declared a dividend of £2,087,113. Payment of this dividend to William Baird plc was achieved by that amount being set against the debt of £4,290,249 which was thereby reduced. £695,704.10 Advance Corporation Tax ("ACT") attributable to that dividend was paid to the Revenue by Textile on behalf of Centaur. On 30 September 1993 Centaur opened an interest-bearing account with the Midland Bank, paying in £2,000, and £8 interest was credited to it in December 1993. On 8 December 1993 Centaur paid a second dividend of £915,000 and £265,645.16 ACT was paid to the Revenue, again by Textile on behalf of Centaur. Centaur drew up accounts for the year ended 31 December 1993. The balance sheet at 31 December 1993 showed as its assets the debt owed by Textile and £2,008 cash at the bank and its profit and loss account for the year showed that it had only received £8 bank interest. The Directors' Report of 17 January 1994 stated that Centaur was now only a holding company.
Centaur submitted to the Revenue computations of its corporation tax position for the year ended 31 December 1993. It claimed a carry-back of ACT under s.239(3) Income and Corporation Taxes Act 1988 ("the 1988 Act") in respect of the ACT relating to the two dividends. That claim was refused by the Revenue in respect of the ACT relating to the first dividend on the ground that that dividend was not paid during an accounting period of Centaur as required by s.239(3), but allowed in respect of the second dividend on the basis that a new accounting period commenced when the bank account was opened. The difference in the treatment of the ACT for the two dividends demonstrates the somewhat haphazard way in which on the Revenue's approach the relief in respect of ACT will operate, the mere opening of an interest-bearing account, producing a negligible amount of interest, being sufficient to allow a very substantial sum of tax wholly unrelated to that account or interest to be recovered by an otherwise dormant company.
Centaur appealed against that refusal and on 1 April 1996 a Deputy Special Commissioner allowed the appeal. The Revenue appealed and on 13 November 1996 Sir John Vinelott, sitting as a judge of the High Court, allowed the appeal ( [1997] S.T.C. 72). Centaur now appeals to this court.
To make the point in issue understandable, I must essay a summary of the relevant fiscal provisions.
Prior to 1965 the profits of companies were chargeable to income tax and profits tax. By the Finance Act 1965 corporation tax on a company's profits (not being income arising to it in a fiduciary or representative capacity) was introduced in lieu, but it was engrafted onto the structure of income tax. A company resident in the U.K. is chargeable to corporation tax on all its profits (meaning income and chargeable gains) wherever arising (ss.6(1),(2) and (4) and 8(1) of the 1988 Act).
By s.11(1):
"A company not resident in the United Kingdom shall not be within the charge to corporation tax unless it carries on a trade in the United Kingdom through a branch or agency but, if it does so, it shall, subject to any exceptions provided for by the Corporation Tax Acts, be chargeable to corporation tax on all its chargeable profits wherever arising."
By subs. (2) its chargeable profits are limited to, in effect, U.K. profits. A company is not chargeable to capital gains tax in respect of chargeable gains, they being chargeable to corporation tax (s.6(3)).
S.8 contains the general scheme of corporation tax. It includes within the profits for which a company is chargeable to corporation tax profits accruing for its benefit under any trust or arising under any partnership in any case in which it would be so chargeable if the profits accrued to it directly, and profits arising in the winding up of the company, but excludes profits arising to it in a fiduciary or representative capacity except as respects its own beneficial interest therein (s.8(2)). By s.8(3) corporation tax for any financial year shall be charged on profits arising in that year, but assessments to corporation tax shall be made on a company by reference to accounting periods, the amount chargeable of the profits arising in an accounting period being apportioned between financial years, where necessary.
S.9 prescribes the general rule that the amount of any income is to be computed in accordance with income tax principles, all questions as to the amounts to be taken into account as income or in computing income or charged to tax as a person's income or as to the time when any such amount is to be treated as arising being determined in accordance with income tax law and practice as if accounting periods were years of assessment (s.9(1)). Accordingly for corporation tax purposes income is to be computed and the assessment made under the like Schedules and Cases as apply for income tax purposes and in accordance with the provisions applicable to those Schedules and Cases; but, subject to the provisions of the Corporation Tax Acts, the amounts so computed for the several sources of income, together with any amount for chargeable gains, are to be aggregated to arrive at the total profits (s.9(3)).
S.12, which is headed "Basis of, and periods for, assessment", is in the following form (so far as material):
"(1) Except as otherwise provided by the Corporation Tax Acts, corporation tax shall be assessed and charged for any accounting period of a company on the full amount of the profits arising in the period (whether or not received in or transmitted to the United Kingdom) without any other deduction than is authorised by those Acts.
(2) An accounting period of a company shall begin for purposes of corporation tax whenever-
(a) the company, not then being within the charge to corporation tax, comes within it, whether by the company becoming resident in the United Kingdom or acquiring a source of income, or otherwise; or
(b) an accounting period of the company ends without the company then ceasing to be within the charge to corporation tax.
(3) An accounting period of a company shall end for the purposes of corporation tax on the first occurrence of any of the following -
(a) the expiration of 12 months from the beginning of the accounting period;
(b) the accounting date of the company or, if there is a period for which the company does not make up accounts, the end of that period;
(c) the company beginning or ceasing to trade or to be, in respect of the trade or (if more than one) of all the trades carried on by it, within the charge to corporation tax;
(d) the company beginning or ceasing to be resident in the United Kingdom;
(e) the company ceasing to be within the charge to corporation tax.
(4) For the purposes of this section a company resident in the United Kingdom, if not otherwise within the charge to corporation tax, shall be treated as coming within the charge to corporation tax at the time when it commences to carry on business.
….
(6) If a chargeable gain or allowable loss accrues to a company at a time not otherwise within an accounting period of the company, an accounting period of the company shall then begin for the purposes of corporation tax, and the gain or loss shall accrue in that accounting period.
(7) Notwithstanding anything in subsections (1) to (6) above, where a company is wound up, an accounting period shall end and a new one begin with the commencement of the winding up, and thereafter, subject to section 342(6), an accounting period shall not end otherwise than by the expiration of 12 months from its beginning or by the completion of the winding up."
By s.14 a company resident in the U.K. making a qualifying distribution (as therein defined) such as a dividend is liable to pay ACT. S.239 provides for the set-off of ACT against liability to corporation tax. By subs.(1):
"Subject to …. (2) below, [ACT] paid by a company (and not repaid) in respect of any distribution made by it in an accounting period shall be set against its liability to corporation tax on any profits charged to corporation tax for that accounting period and shall accordingly discharge a corresponding amount of that...
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