Walker (Inspector of Taxes) v Centaur Clothes Group Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 13 November 1996 |
| Date | 13 November 1996 |
| Court | Chancery Division |
Chancery Division.
Sir John Vinelott.
Michael Furness (instructed by the Solicitor of Inland Revenue) for the Crown.
David Goldberg QC and Conrad McDonnell (instructed by the legal department, William Baird plc) for Centaur.
The following cases were referred to in the judgment:
Aproline Ltd v Littlejohn (HMIT) SCD(1995) Sp C 36
Bray (HMIT) v Best TAX[1989] BTC 102
Cull v Cowcher (HMIT) TAX(1934) 18 TC 449
Earlspring Properties Ltd v Guest (HMIT) TAX[1995] BTC 274
Harrison v Thompson UNK[1992] BCC 962
Hart (HMIT) v Sangster TAX(1956) 37 TC 231
IR Commrs v Luke TAX(1963) 40 TC 630
National Provident Institution v Brown (Surveyor of Taxes)TAX(1921) TC 57
Whelan (HMIT) v Henning TAX(1926) 10 TC 203
Corporation tax - Surplus advance corporation tax - Claim to carry back advance corporation tax - Taxpayer company ceased trading - Company sold assets to fellow group member leaving price outstanding as inter-company debt - Agency agreement with fellow member of group - Neither produced income - Taxpayer paid dividend to parent - Whether taxpayer had an accounting period when dividend paid - Income and Corporation Taxes Act 1988 section 12 section 239 subsec-or-para (3) section 832 subsec-or-para (1)Income and Corporation Taxes Act 1988, ss. 12, 239(3), 832(1).
This was an appeal by the Revenue against a decision of a special commissioner that surplus ACT paid by the taxpayer ("Centaur") in respect of a dividend paid to its parent company on 5 April 1993 could be carried back and treated as if it were ACT in respect of distributions made in earlier accounting periods ending on 31 December 1991 and 1990 by virtue of the Income and Corporation Taxes Act 1988 section 239 subsec-or-para (3)Income and Corporation Taxes Act 1988, s. 239(3).
For many years up to 5 January 1992 Centaur had traded as a manufacturer, distributor and retailer of menswear. On 6 January 1992, it transferred its business assets and liabilities to another member of the same group ("Textiles"), for a consideration of some £4m, left outstanding with no express agreement as to interest which was never paid or demanded. At the same time Centaur entered into an agency agreement with Textiles under which Textiles was to carry on the trade of Centaur.
On 5 April 1993 Centaur declared a dividend ("the first dividend") of some £2m payable to the parent company, paid by setting off the amount against the inter-company debt of £4m. ACT attributable to the first dividend was paid by Textiles on behalf of Centaur.
On 30 September 1993 Centaur opened a bank account. It deposited £2,000 and interest of £8 was credited in December 1993.
On 8 December 1993 Centaur paid another dividend ("the second dividend") of £915,000 and the appropriate ACT was paid.
Centaur drew up accounts for the period from 1 January 1993 to 31 December 1993 and submitted computations for that year claiming a carry-back of ACT under Income and Corporation Taxes Act 1988 section 239 subsec-or-para (3)s. 239(3) of the Income and Corporation Taxes Act 1988 in respect of the ACT paid in respect of the two dividends. The accounts stated that Centaur was then only a holding company; that bank interest of £8 was received; that there were debts of some £4m (the price for assets transferred to Textiles); and cash at bank was £2,008.
The Revenue accepted a claim under Income and Corporation Taxes Act 1988 section 239 subsec-or-para (3)s. 239(3) of the 1988 Act in respect of the second dividend and repaid the tax to Textiles at Centaur's direction, but refused the claim in respect of the first dividend.
To establish a claim under Income and Corporation Taxes Act 1988 section 239 subsec-or-para (3)s. 239(3) it was essential to find an accounting period, and, by Income and Corporation Taxes Act 1988 section 12 subsec-or-para (2)s. 12(2) of the 1988 Act, an accounting period, for corporation tax purposes, began whenever another accounting period ended without the company ceasing to be within the charge to tax. On the assumption that Centaur ceased trading on 6 January 1992, it was common ground that an accounting period ended on that day, but the question was whether it remained "within the charge to corporation tax" within the meaning of the last part of Income and Corporation Taxes Act 1988 section 832 subsec-or-para (1)s. 832(1) ("the tailpiece") of the 1988 Act, which provided that a source of income was within the charge to corporation tax or income tax if tax was chargeable on the income arising from it, or would be so chargeable if there were any such income.
The special commissioner allowed Centaur's appeal holding that, if a source of income within the charge to corporation tax after 6 January 1992 was necessary, it did in fact have such a source, namely either the inter-company loan or the inter-company agency agreement. Although those sources produced no income, they could have done so.
The case for Centaur, which was accepted by the special commissioner, was that the requirement in the second limb of the tailpiece that "references to a person … shall be similarly construed" could be given literal effect only if the words "a person" were substituted for a "source of income" in the first limb, to read "a person is within the charge to corporation tax if that person is chargeable on the income arising [to] it or would be so chargeable if there were any such income."
Centaur further contended that the tailpiece to Income and Corporation Taxes Act 1988 section 832 subsec-or-para (1)s. 832(1)of the 1988 Act could be construed as meaning that a potential source of income could constitute a source of income within the charge to corporation tax, and should be so construed because any other construction would achieve an arbitrarily unjust and anomalous result which could not have been intended. Centaur would be entitled to a substantial repayment of surplus ACT in respect of the second dividend simply because it had received a minima l amount of income and would not be entitled to any repayment on a similar dividend because it had not received even a minimal amount of income at the right time.
The Revenue contended that Centaur's construction had the consequence that it would be virtually impossible to envisage circumstances where a company would not be within the charge to corporation tax. But the draftsman had clearly contemplated that a company might be outside the charge to corporation tax and come within it on acquiring a source of income (see Income and Corporation Taxes Act 1988 section 12 subsec-or-para (2)s. 12(2)(a) of the 1988 Act), and that a company might cease to be within the charge (see Income and Corporation Taxes Act 1988 section 12 subsec-or-para (3)s. 12(3)). Other provisions were also framed on the footing that a company might make a qualifying distribution on a date which did not fall within an accounting period.
Held, allowing the Revenue's appeal:
1. The inter-company debt was not a source of income: it neither produced nor was intended to produce income. Nor was the agency agreement with Textiles a source of income: an obligation to pay remuneration as an implied term could not be imported into it since the relationship between Centaur and Textiles as members of the same group explained the absence of any provision for the payment of such remuneration. The position was therefore that after 6 January 1992 and until the bank account was opened, Centaur had no source of income although it had two potential sources of income.
2. The words of the tailpiece, literally construed, might bear the meaning that an actual rather than a potential source of income was required by Income and Corporation Taxes Act 1988 section 832 subsec-or-para (1)s. 832(1) of the 1988 Act and without such a source of income, a company which had ceased trading could not be said to have an accounting period to bring it within Income and Corporation Taxes Act 1988 section 12s. 12. The tailpiece toIncome and Corporation Taxes Act 1988 section 832 subsec-or-para (1)s. 832(1) of the 1988 Act was not fairly capable of being construed in the sense contended for by Centaur and the words had to be given their literal meaning unless they were fairly capable of the alternative construction to achieve a reasonable and coherent result.
By originating motion pursuant to the Taxes Management Act 1970 section 56ATaxes Management Act 1970, s. 56A (as substituted by SI 1994/1813SI 1994/1813 with effect from 1 September 1994) the Revenue appealed to the High Court against the following decision of a special commissioner (Mr Paul W de Voil) released 1 April 1996.
1. The Centaur Clothes Group Ltd ("Centaur") appeals against the rejection of its claim under Income and Corporation Taxes Act 1988 section 230 subsec-or-para (3)s. 230(3) of the Income and Corporation Taxes Act 1988 (the Act) that surplus advance corporation tax (ACT) of £695,704.10 (being the amount of ACT, duly paid by it, in respect of £2,087,113 paid by it to its parent company William Baird plc on 5 April 1993) should be treated as if it were ACT in respect of distributions made in accounting periods ending on 31 December 1991 and 31 December 1990.
2. There is no dispute as to figures or the periods to which the ACT, if available, can be carried back. The sole point at issue is whether the dividend paid on 5 April 1993 was paid in an accounting period of Centaur.
3. The following statement of facts was put in:
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(2) Centaur is a wholly owned subsidiary of William Baird plc, a publicly quoted company; it is, and has at all material times been, resident in the UK.
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(3) For many years up to and including 5 January 1992, Centaur carried on trade as a manufacturer, distributor and retailer of men's outerwear.
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(4) On 6 January 1992, Centaur transferred its business assets and liabilities to Baird Textile Holdings Ltd ("Baird Textiles")...
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