Stephens v T. Pittas Ltd

JurisdictionEngland & Wales
CourtChancery Division
Judgment Date09 Jun 1983

Chancery Division.

Stephens (H.M. Inspector of Taxes)
and
Pittas Ltd

Mr. R. Carnwath (instructed by the Solicitor of Inland Revenue) for the Crown.

Mr. C.W. Koenigsberger (instructed by Messrs. Fugler Middleweek) for the taxpayer.

Before: Goulding J.

Corporation tax - Close company - Misappropriation of funds by director - Whether company paid sums to director - Whether company liable to tax on that part of profits - Finance Act 1965 section 75Finance Act 1965, sec. 75 (see now Income and Corporation Taxes Act 1970 section 286Income and Corporation Taxes Act 1970, sec. 286).

This concerned an appeal by the Crown and a cross-appeal by the taxpayer from a decision of the Special Commissioners that a company was not liable to corporation tax on that part of its profits taken wrongfully from it by a director ("P").

The taxpayer was a close company for the purposes of Finance Act 1965 section 75sec. 75 of the Finance Act 1965. At the material time P was the beneficial owner of 99 of the 100 issued shares of the company. It was through him that the company acted. P put much of the company's money into his own pocket for his own purposes; it was never shown in the company's accounts. As a result the accounts much understated the receipts of the company, and hence its profits for the purpose of corporation tax. Further assessments to corporation tax were made on the company. These assessments rested on the footing that in the relevant periods substantial amounts of money had been received by P from trade debtors of the company and were not reflected in its books and accounts.

The crucial question was whether the company paid the money in question to P. He undoubtedly took it from the company's till or debtors, but did the company pay it to him?

The Crown argued that the company was to be treated as having received the money in question for the purpose of computing its liability to corporation tax, and also that it was chargeable with income tax in respect of the sums P misappropriated.

Held, appeals dismissed.

1. An outright misappropriation of a company's money cannot be treated as the act of the company except possibly if all the corporators of a solvent company consent to it. In the present case there was no consensus between the company and P to pay the money to him. He had taken the money without any intention to return it, and so it was not possible to regard the sums as a loan or advance. A charge to tax could not be made.

2. The decision of the Commissioners was not erroneous in point of law. In the case of a company with a minority shareholder it seems very hard if through the company the minority shareholder is indirectly to bear a burden because of the wrongful conversion of the company's money by a controlling shareholder.

CASE STATED

1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 27 April 1982 T. Pittas Limited (hereinafter called "the company") appealed against the following assessments made pursuant to provisions contained in Income and Corporation Taxes Act 1970 section 286sec. 286 of the Income and Corporation Taxes Act 1970:

1966/67

£9,943.31

1967/68

£6,043.53

1968/69

£8,060.25

1969/70

£8,425.31

1970/71

£8,425.31

2. We the Commissioners who heard the appeals gave our decision in writing on 25 May 1982. A copy of that decision, which sets out the question for determination, the agreed facts, the additional facts found by us, the contentions of the parties, the reasons for our decision and our final determination, is annexed hereto and forms part of this case.

3. It will be seen (from para. 2 of our decision) that the company did not seek to contest the assessments for 1969/70 and 1970/71, which we determined in accordance with figures agreed between the parties, but reserved the right in any appeal against our decision in respect of the three earlier years to make certain contentions in respect of those assessments.

[Paragraph 4 listed the documents proved or admitted before the Commissioners.]

5. The inspector of taxes immediately after the determination of the appeal declared to us his dissatisfaction therewith in respect of the assessments for 1966/67, 1967/68 and 1968/69, as being erroneous in point of law and on 16 June 1982 required us to state a case for the opinion of the High Court pursuant to Taxes Management Act 1970 section 56sec. 56 of the Taxes Management Act 1970. The company similarly expressed dissatisfaction with that part of our decision which was adverse to it, namely, in respect of the years 1969/70 and 1970/71 and in due course required us to state a case as aforesaid. We have stated and do sign such case accordingly.

6. The questions of law for the opinion of the court are:

  1. 1. Whether, in so far as the same is a question of fact, we were entitled to find and, in so far as the same is a question of law, we were correct in holding that sums of £2,260.10s.0d, £8,183.10s.11d and £10,083.18s.0d did not constitute loans or advances, within the meaning of Finance Act 1965 section 75sec. 75 of theFinance Act 1965 (as enacted), made by the company to Mr. Pittas during the years 1966/67, 1967/68 and 1968/69 respectively.

  2. 2. Whether a debt to the company was incurred by Mr. Pittas in either or both of the years 1969/70 and 1970/71. [This question was not argued before us.]

Decision

1. The assessments appealed against are as follows:

1966/67

£9,943.31

1967/68

£6,043.53

1968/69

£8,060.25

1969/70

£8,425.31

1970/71

£8,425.31

It is common ground that they were made on 19 September 1977 in reliance upon Taxes Management Act 1970 section 36sec. 36 of the Taxes Management Act 1970, and pursuant to provisions at that time contained in Taxes Management Act 1970 section 286sec. 286 of the Income and Corporation Taxes Act1970.

2. The provisions relevant to the first three assessments were contained in Finance Act 1965 section 75sec. 75 of the Finance Act 1965. Mr. Koenigsberger (counsel for the company) did not object to treating as relevant to the whole of 1969/70 the provisions contained inFinance Act 1965 section 75sec. 75 of the Finance Act 1965 as amended by Finance Act 1969 section 29sec. 29 of the Finance Act 1969 and Finance Act 1969 schedule 14 subsec-or-para 2Sch. 14, para. 2 (which, strictly, had effect as respects loans, advances or debts made or incurred on or after 15 April 1969). The 1970/71 assessment is governed by Finance Act 1965 section 286sec. 286 itself. The provisions of the amended Finance Act 1965 section 75sec. 75 and of Finance Act 1965 section 286sec. 286 are more stringent than those of Finance Act 1965 section 75sec. 75 in its original form in that a debt, as well as a loan or advance, invokes a charge, and Mr. Koenigsberger, having regard to an earlier decision of the Special Commissioners which Mr. J.F.W. Hinson, who appeared for the Inland Revenue, brought to his attention did not seek to contest the assessment for 1969/70 and 1970/71, though he reserved the right to contend in any appeal against our decision that no debt to the company was incurred as a result of the matters referred to in para. 5.7 below.

In relation to the disputed assessments we are therefore concerned only with Finance Act 1965 section 75sec. 75 as originally enacted. References hereafter to Finance Act 1965 section 75sec. 75 are to that section in its original form.

3. Finance Act 1965 section 75 subsec-or-para (1)Subsection (1) of sec. 75 reads:

  1. 75(1) Where after the end of the year 1965-66 a close company, otherwise than in the ordinary course of a business carried on by it which includes the lending of money, makes any loan or advances any money to an individual who is a participator in the company or an associate of a participator, there shall be assessed on and recoverable from the company, as if it were an amount of income tax chargeable on the company, an amount equal to income tax on the grossed up equivalent of the loan or advance.

4. The question for determination is whether, in the circumstances mentioned in para. 5.7 below, there was in the years 1966/67, 1967/68 and 1968/69 a loan or advance by the company to its director Mr. Theodosious Pittas ("Mr. Pittas").

5. The following facts are agreed between the parties.

5.1 The company was incorporated on 20 May 1955 and on 1 January 1960 commenced to trade as a manufacturing baker and confectioner. That trade was carried on by the company at all material times. The business of the company has never included the lending of money or the giving of guarantees in connection with loans.

5.2 At all material times prior to 5 September 1974 the issued share capital of the company was £100 divided into 100 ordinary shares of £1,99 of the shares being registered in the name of Mr. Pittas, the remaining share being registered in the name of his wife Mrs. Magda Pittas. On 5 September 1974 the share capital of the company was increased to £10,000 divided into 10,000 ordinary shares of £1 each. On that day 9900 ordinary shares were allocated as follows:

To Mr. Pittas

2901 shares

To Mrs. Magda Pittas

1999 shares

To Mr. Michael Pittas (the son of Mr. Pittas)

3000 shares

To Mrs. H. Mouskas

2000 shares

At all material times subsequent to 4 September 1974 3000 shares each were registered in the names of Mr. Pittas and Mr. Michael Pittas and 2000 shares each were registered in the names of Mrs. Magda Pittas and Mrs. H. Mouskas.

5.3 At all material times before 6 April 1971 Mr. Pittas was the beneficial owner of 99 per cent of the issued shares in the company.

5.4 At all material times Mr. Pittas was a director of the company.

5.5 At all material times:

  1. (a) the company was a close company within the meaning ofFinance Act 1965 section 75sec. 75 of the Finance Act 1965 and Income and Corporation Taxes Act 1970 section 286sec. 286 of the Income and Corporation Taxes Act1970, and

  2. (b) Mr. Pittas was a participator in the company within the meaning of those provisions.

5.6...

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