Walker (Inspector of Taxes) v Centaur Clothes Group Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 25 June 1998 |
| Date | 25 June 1998 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Nourse and Peter Gibson LJJ and Sir Patrick Russell.
David Goldberg QC and Conrad McDonnell (instructed by the Legal Department, Wm Baird plc) for the taxpayer.
Michael Furness (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Aproline v Littlejohn (HMIT)SCD (1995) Sp C 36
Brown v National Provident InstitutionELR [1921] 2 AC 222
Earlspring Properties Ltd v Guest (HMIT) TAX[1995] BTC 274
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 with no provision for interest - Agency agreement with purchaser of assets produced no 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 taxpayer against a judgment of Sir John Vinelott ([1997] BTC 45) that the taxpayer, which had no source of income and was therefore not within the charge to corporation tax at the time when it paid a dividend, was not permitted to carry back surplus advance corporation tax ("ACT") paid in respect of the dividend.
The taxpayer ceased trading on 1 January 1992. It transferred its business to another member of the same group leaving the price outstanding as a non-interest bearing debt and entered into an agency agreement to become the agent of the purchaser without remuneration. In 1993 two dividends were declared and paid by reduction of the inter-company debt. The first dividend, of some £2m was paid on 5 April 1993 and the second, some £1m, was paid on 8 December 1993. In the mean time, on 30 September, the taxpayer had opened a bank account. It deposited £2,000 and by December 1993, had received interest of £8.
The inspector refused to allow the taxpayer's claim under theIncome and Corporation Taxes Act 1988 section 239 subsec-or-para (3)Income and Corporation Taxes Act 1988, s. 239(3) to carry back the ACT paid on the first dividend on the ground that carry-back was only permitted in relation to ACT paid in an accounting period. The taxpayer's accounting period had come to an end when it ceased trading and a new accounting period had not commenced within Income and Corporation Taxes Act 1988 section 12s. 12 of the 1988 Act since it had divested itself of all sources of income. A similar claim in respect of the second dividend was accepted because by the time that dividend was paid the taxpayer had established a new source of income from which it received interest of £8.
The taxpayer contended that it remained at all times within the scope ofIncome and Corporation Taxes Act 1988 section 6s. 6 of the 1988 Act by which all companies resident in the UK were within the charge. No income receipt or chargeable gain could have accrued to the taxpayer without a charge to corporation tax arising. A company could not be liable to pay ACT on a distribution and yet not be within the charge to corporation tax. Further, the purpose of Income and Corporation Taxes Act 1988 section 239s. 239, to enable ACT to be set off against liability to corporation tax, would otherwise be frustrated.
The Revenue accepted that the statutory provisions operated in an arbitrary way and that a company like the taxpayer which had ceased to trade might move in and out of the charge to tax according to whether or not its cash was invested in a way calculated to produce income. Although the result was anomalous in the taxpayer's case, the 1988 Act, and in particular the "tailpiece" at the end of the definitions inIncome and Corporation Taxes Act 1988 section 832 subsec-or-para (1)s. 832(1) of the 1988 Act, could not be construed in any other way. The tailpiece first provided that "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". The second limb provided: "and references to a person, or to income, being within the charge to tax, shall be similarly construed".
Held, dismissing the taxpayer's appeal:
On a true construction of the tailpiece, a source of income was a necessary ingredient of the definitions of a "person" and "income" respectively within the charge to corporation tax. Since the taxpayer had no such source of income, it was not within the charge to corporation tax and accordingly the requirement of Income and Corporation Taxes Act 1988 section 239 subsec-or-para (1)s. 239(1) that a dividend should be paid "in an accounting period" was not satisfied.
Peter Gibson LJ: 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 Income and Corporation Taxes Act 1988 section 239 subsec-or-para (3)s. 239(3) of the 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 byIncome and Corporation Taxes Act 1988 section 239 subsec-or-para (3)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] BTC 45). 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 UK is chargeable to corporation tax on all its profits (meaning income and chargeable gains) wherever arising (Income and Corporation Taxes Act 1988 section 6 subsec-or-para (1) section 8 subsec-or-para (1)s. 6(1),(2) and (4) and 8(1) of the 1988 Act).
By Income and Corporation Taxes Act 1988 section 11 subsec-or-para (1)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, UK profits. A company is not chargeable to capital gains tax in respect of chargeable gains, they being chargeable to corporation tax (Income and Corporation Taxes Act 1988 section 6 subsec-or-para (3)s. 6(3)).
Section 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...
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