Walker (Inspector of Taxes) v Centaur Clothes Group Ltd
Jurisdiction | England & Wales |
Judge | LORD SLYNN OF HADLEY,LORD NOLAN,LORD NICHOLLS OF BIRKENHEAD,LORD HOFFMANN,LORD CLYDE |
Judgment Date | 06 April 2000 |
Judgment citation (vLex) | [2000] UKHL J0406-2 |
Date | 06 April 2000 |
Court | House of Lords |
[2000] UKHL J0406-2
HOUSE OF LORDS
Lord Slynn of Hadley
Lord Nolan
Lord Nicholls of Birkenhead
Lord Hoffmann Lord Clyde
My Lords,
I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Hoffmann. For the reasons he gives I would allow the appeal.
My Lords,
I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann. I agree that, for the reasons he gives, this appeal should be allowed.
My Lords,
I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann. I agree that, for the reasons he gives, this appeal should be allowed.
My Lords,
Centaur Clothes Group Ltd. ("Centaur") is a company in the William Baird group which traded in men's clothing. On 6 January 1992 it ceased trading and sold its assets and undertaking to another company in the group called Baird Textile Holdings Ltd. ("Baird Textiles"). The price of £4,290,249 was left outstanding, payable on demand but without interest. It also agreed to carry on its former business as unpaid agent for Baird Textiles. These arrangements might have been unusual between parties at arms' length but made perfectly good sense within the group.
On 5 April 1993 Centaur declared a dividend of £2,087,113 out of accumulated profits. The payment created a liability under section 14 of the Income and Corporation Taxes Act 1988 (as it then stood) to advance corporation tax ("ACT"). So Baird Textiles paid £695,704.10 to the Inland Revenue on behalf of Centaur. On 8 December 1993 Centaur declared another dividend which resulted in a further payment of £265,645.16 by way of ACT.
ACT, which was abolished by section 31 of the Finance Act 1998 with effect from 6 April 1999, was corporation tax charged by reference to the amount of a distribution rather than profits. It was chargeable "in advance" because ordinarily it could afterwards be set off against the company's liability to corporation tax charged upon its profits. Section 239(1) of the Act of 1988 provided that a company which had paid ACT in an accounting period could set off the payment against its assessed liability to corporation tax in that accounting period. This was no use to Centaur: its accounting period had come to an end on 6 January 1992 when it ceased to trade (see section 12(3)(c)) and it had not subsequently earned any profit. But section 239(3) allowed the benefit of the payment of ACT to be carried back and set off against the company's corporation tax liabilities for earlier years. The relevant words read:
"Where in the case of any accounting period of a company there is an amount of surplus advance corporation tax, the company may, within two years after the end of that period, claim to have the whole or any part of that amount treated for the purpose of this section … as if it were advance corporation tax paid in respect of distributions made by the company in any of its accounting periods beginning in the six years preceding that period…and corporation tax shall, so far as may be required, be repaid accordingly."
"Surplus" ACT was defined, in relation to any accounting period, as ACT which could not be set against the company's liability to corporation tax because the company had no profits for that period. Centaur therefore made a claim to have the two 1993 payments of ACT set off against the corporation tax paid in earlier years, when it had been carrying on business, and asked for the appropriate refund.
The revenue refused the claim for the first dividend but accepted the claim for the second. This may seem rather odd. The reason given was that section 239(3) allows surplus ACT "in any accounting period" to be carried back. At the time when Centaur paid the first dividend, said the revenue, it had no accounting period. Section 12 specifies when, for the purposes of corporation tax, accounting periods begin and end. By section 12(3)(c), as I have already mentioned, an accounting period ends when a company ceases to trade. So Centaur's accounting period ended on 6 January 1992. By section 12(2)(b), if the company remains "within the charge to corporation tax," a new accounting will begin at once. If the company ceases to be within the charge, a new accounting period will begin (under section 12(2)(a)) only when the company again comes within it: "whether by the company becoming resident in the United Kingdom or acquiring a source of income, or otherwise." But the revenue contend that the effect of the cessation of trade and the arrangements for transfer of the assets and undertaking to Baird Textiles was that Centaur ceased to be within the charge to corporation tax and was still not within the charge when it became liable to pay corporation tax on the first dividend. Therefore it had no accounting period and the payment of ACT has disappeared into a black hole from which no set-off can ever be extracted.
The reason for the paradox by which a company can be liable to pay corporation tax without being within the charge to that tax is, say the revenue, that "within the charge to corporation tax" is not an expression which can be construed by the light of nature. Section 832(1), the definition section, gives it a narrow and specialised meaning. The definition reads:
"a source of income is within the charge to corporation tax or income tax if that tax is chargeable on the income arising from it, or would be so chargeable if there were any such income, and references to a person, or to income, being within the charge to tax, shall be similarly construed."
The revenue argue that "similarly construed" means that the definition must, so to speak, be read cumulatively. A source of income is within one or other tax if the income is, or would be, liable to that tax. Income is within the charge to a tax if it is from a source within the charge to that tax and a person is within the charge to a tax if he has a source of income within the charge to that tax. In the case of Centaur, the arrangements under which it transferred its assets and undertaking to Baird Textiles left it with no sources of income whatever. The outstanding debt carried no interest and the agency contract carried no remuneration. Therefore it was not within the charge to corporation tax.
After payment of the first dividend Centaur seems to have learned about the revenue's views on the matter and took the precaution of obtaining £2,000 from within the group, which on 30 September 1993 it placed in an interest-bearing deposit account at a bank. By the end of the year it had yielded £8 in interest. This was enough to satisfy the revenue. The company had acquired a source of income chargeable to corporation tax. A new accounting period had therefore begun. This allowed Centaur to recover the £265,645.16 ACT paid on 8 December 1993.
The special commissioner (Mr. Paul W. de Voil) said [1996] S.T.C. (S.C.D.) 222, 226 that the revenue's submission was contrary to common sense:
"On the revenue's argument, Centaur is to be repaid £265,000 because it had received a tiny amount of bank interest at the right time, and refused payment on an entirely similar £695,000 because it had not received a tiny amount of bank interest at the right time."
On appeal, Sir John Vinelott [1997] S.T.C. 72 agreed that the result was "paradoxical" and "arbitrary" but held that it was inescapable. It was the natural meaning of the definition, which was not fairly capable of being given a different construction. The problem arose because when ACT was introduced by the Finance Act 1972 it was "bolted on" to an existing structure of corporation tax going back to the ...
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