Venables v Hornby (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | LORD NICHOLLS OF BIRKENHEAD,LORD SLYNN OF HADLEY,LORD MILLETT,LORD SCOTT OF FOSCOTE,LORD WALKER OF GESTINGTHORPE |
| Judgment Date | 04 December 2003 |
| Neutral Citation | [2003] UKHL 65 |
| Date | 04 December 2003 |
| Court | House of Lords |
and others
[2003] UKHL 65
The Appellate Committee comprised:
Lord Nicholls of Birkenhead
Lord Slynn of Hadley
Lord Millett
Lord Scott of Foscote
Lord Walker of Gestingthorpe
HOUSE OF LORDS
My Lords,
I have had the advantage of reading in draft the speech of my noble and learned friend Lord Millett. For the reasons he gives, with which I agree, I would allow this appeal.
My Lords,
I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Millett. I agree that the appeal should be allowed for the reasons he gives.
My Lords,
In March 1997 the appellant taxpayer was assessed to income tax in respect of three payments totalling £580,591 made to him in July and August 1994 from the funds of his pension scheme. The assessment was made under section 600(2) of the Income and Corporation Taxes Act 1988 as amended by the Finance Act 1989. Section 600 provides:
"(1). This section applies to any payment to or for the benefit of an employee, otherwise than in course of payment of a pension, being a payment made out of funds which are held for the purposes of a scheme which is approved for the purposes of … (b) Chapter II of Part II of the Finance Act 1970….
(2). If the payment is not expressly authorised by the rules of the scheme … the employee … shall be chargeable to tax on the amount of the payment under Schedule E for the year of assessment in which the payment is made."
It is common ground that the payments were made from funds which were held for the purposes of an approved pension scheme. The revenue claim that the payments were not "expressly authorised by the rules of the scheme" because, at the time they were made, the taxpayer remained a director of one of the participating employers in the scheme and so (it is said) had not "retired" within the meaning of the rules. It is not disputed that when the payments were made the taxpayer was still a non-executive director of a participating employer. The principal issue in this appeal is whether it follows that the taxpayer had not "retired" within the meaning of the rules of the scheme so that the payments were unauthorised (for nothing seems to turn, at least in this case, on the word "expressly").
A secondary issue is whether, if the payments were unauthorised, they should be treated for tax purposes as if they had not been made. The taxpayer contends that if the payments were not authorised then, as one of the trustees of the scheme, he received and held them throughout as a constructive trustee on the trusts of the scheme. It is common ground that if the payments were not authorised then, unless they can be treated as not having been made (or at least not made "out of" the funds of the scheme), the assessment was properly made.
The proceedings
The taxpayer's appeal against the assessment was dismissed by the single special commissioner on the ground that, although the taxpayer had "retired", he had not retired "in normal health" as required by the rules of the scheme. On the taxpayer's appeal and the revenue's cross-appeal the judge (Lawrence Collins J) [2002] ICR 81 upheld the commissioner's finding that the taxpayer had retired but reversed his finding that he was not then in normal health and discharged the assessment. On appeal to the Court of Appeal the revenue did not challenge the judge's conclusion that he had been in normal health at the relevant time but continued to maintain that the taxpayer had not retired. The Court of Appeal [2003] ICR 186 allowed the revenue's appeal and held that at the time the payments were made the taxpayer had not retired because he continued in office as a non-executive director. It also held that although the payments, being unauthorised, were made in breach of trust, they were not to be treated as if they had not been made.
The facts
The Fussell Pension Scheme ("the scheme") was established by a Trust Deed ("the trust deed") dated 25 September 1980 as an occupational pensions scheme for the benefit of directors and employees of Fussell Estates Ltd and other participating employers. The scheme was approved by the Commissioners of Inland Revenue with effect from the same date. At all material times it was an exempt approved scheme. On 26 May 1989 the terms of the trust deed were amended so that thereafter Ven Holdings Ltd ("the company") was treated as the founder of the scheme in place of Fussell Estates Ltd. With effect from that date the participating employers under the scheme were the company and Fussell Estates Ltd. The taxpayer and a trust corporation were the trustees of the scheme. At all material times the taxpayer held approximately 20% of the shares in the company and the remaining 80% of the shares were held by a family discretionary trust of which the taxpayer was the settlor and one of the trustees.
The company, which had a number of subsidiaries, was engaged in the construction industry. The taxpayer, who was a carpenter by trade, was aged 53 in June 1994. In the early days he had worked on building sites, though he had not done so for many years. He had worked for the company for upwards of 30 years, and had for some time been an executive director and chairman of the company, in which capacity he worked about 30 hours a week and was paid some £25,000 per annum.
In March 1993 the group's managing director retired and the taxpayer's workload increased so that he worked nearly 50 hours a week. He became responsible for the day to day running of the group and, although never formally appointed as such, he undertook the functions previously performed by the group's managing director. The commissioner described him as having "stepped into the gap" left by the retirement of the former managing director without any formality.
On 23 June 1994 a board meeting of the company took place at which it was resolved that the taxpayer:
"will be retiring as an executive director on 30 June 1994 to pursue other interests but will continue as an unpaid non-executive director."
In a letter of the same date the taxpayer notified the other trustee of the scheme that he would be retiring from employment with the group from 30 June 1994 and that he wanted to take most of his lump sum pension entitlement from the scheme in the form of property.
The commissioner found that after 30 June 1994 the taxpayer was an unpaid non-executive director of the company and ceased to be an employee, not having even an oral contract. He now spent a large part of his time in the USA, buying a house in Florida in May 1996, though he returned to the United Kingdom from time to time. He was still a major shareholder and the remaining shares were held by a family trust which he had established. He naturally maintained an interest in the company's affairs and continued to give advice - usually by telephone - to those now running the company, but he received no remuneration for doing so. He no longer visited building sites or normally attended the office. He was for the most part physically absent being, as the commissioner put it, "not an hour's drive from the business, but on the other side of the Atlantic."
The commissioner found that the taxpayer, who suffered from a heart condition, (i) was not in normal health on 30 June 1994 (as I have explained, this finding was reversed on appeal); (ii) did not retire from the office of managing director, because he had never been appointed to it; but (iii) did retire from employment with the company and from normal service on its behalf. When discussing the relevant statutory provisions the commissioner later recorded that it was "common ground" that the taxpayer was a director both before and after the 30 June 1994 and an employee before that date. This was not entirely correct. In the absence of any written contract of employment the revenue has not accepted that he was ever an employee of the company.
The Fussell Pension Scheme
The scheme was a contributory final salary pension scheme of a familiar kind. The trust deed recited that it had been decided to establish a scheme for providing "relevant benefits as defined in section 26(1) of the Finance Act 1970" for eligible "directors and employees" of participating companies.
Consistently with the recitals clause 3 of the trust deed provided that the funds of the scheme were to be held on trust for the provision of "relevant benefits as defined in section 26(1) of the Finance Act 1970" for eligible "employees"; and "employee" was defined as meaning:
"a person in the service of [the company] and includes a director".
"Normal retirement date" was defined as the date stated in the rules applicable to the particular member. In the taxpayer's case this was stated to be 13 December 2000, when he would be aged 60 and would have been a member of the scheme for 20 years. On retirement at normal retirement date a member became entitled to a pension in accordance with the rules applicable to him. In the taxpayer's case he was entitled to elect to take part of his benefit in the form of a tax-free capital sum not exceeding 150% of his final remuneration.
Clause 2 of schedule F to the trust deed made provision for early retirement. This gave the trustees a discretion exercisable with the consent of the company:
"to award an immediate pension to a member who retires in normal health at or after age 50".
The rules applicable to the taxpayer provided that with the company's consent he might retire with reduced benefits at any time after age 50. It was, however, expressly stated that the trust deed governed the matter and that it would always...
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