Williams and Others v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 30 July 1980 |
| Date | 30 July 1980 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income tax and surtax - Tax advantage - Transactions in securities - Counteraction - Exchange of shares in one company for shares in another company - Subsequent loan to taxpayers by a third company before taxpayers became shareholders in that company - Whether relevant circumstances present - Whether a tax advantage obtained - Whether a tax advantage obtained in consequence of one or more transactions in securities - Income and Corporation Taxes Act 1970, ss 460(1), (9), 461 C, D and E and 466(1).
The four Appellants and the wife of Mr. A. D. Williams ("the shareholders") were the shareholders in K Ltd. K Ltd. had acquired freehold farmland in Sussex; and had, during the late 1960s, obtained planning permission to develop part of it. The shareholders, with a view to minimising the expected tax liability, entered into a tax avoidance scheme which was described by the promoters as an "overall scheme…basically divided into three stages".
The first stage comprised a number of transactions ("the property transactions") as a result of which the title to the farmland was vested in another company (also controlled by the shareholders), whilst K Ltd. was left with a distributable profit of £422,255 which it was hoped would be free from betterment levy.
In the second stage ("the share transactions") the shareholders exchanged their shares in K Ltd. for shares in G Ltd. (K Ltd. thus became the whollyowned subsidiary of G Ltd., whilst G Ltd. was owned by the shareholders.) K Ltd. and G Ltd. had made an election under s 48, Finance Act 1965 (the relevant portions of which were later re-enacted as s 256, Income and Corporation Taxes Act 1970), and K Ltd. then paid a gross dividend of £422,000 to G Ltd.
In the third stage ("the loan transactions") D Ltd. was incorporated. D Ltd. was not, initially, controlled by the shareholders; but D Ltd. agreed to lend £84,200 to each of the shareholders personally (i.e., some £421,000 in all) on terms, inter alia, that no interest should be paid after the first seven days, and that, although each loan was to be repayable on demand, no demand should be made unless repayment was demanded from all the shareholders.
The share capital of D Ltd. was later sold to G Ltd. for £421,250 and the shareholders became D Ltd.'s directors. The shareholders were thus left with the interest-free use of the loans made to them by D Ltd. in their individual capacitiesThe taxpayers were issued with notifications under s 460(6), Income and Corporation Taxes Act 1970, and, later, with notices under s 460(3) of that Act. Since the property transaction and the share transactions had taken place between January and April 1970 and the loan transactions during January and February 1971, the notices issued specified two alternative recomputations of the liability to tax:
(i) (relating to the year 1969-70) on the basis of a tax advantage allegedly obtained by receiving the shares in G Ltd.;
(ii) (relating to the year 1970-71) on the basis of a tax advantage allegedly obtained by receiving the loans made by D Ltd.
The Special Commissioners upheld the notices and the consequential assessments for 1969-70 and dismissed the consequential assessments for 1970-71. The taxpayers appealed, and the Crown cross-appealed.
In the High Court it was common ground that the property transactions and the share transactions were indistinguishable on their facts from those in Ainysz v. Commissioners of Inland Revenue 53 TC 601. The Appellants also reserved the right to argue that the notifications were invalid; they further argued that if betterment levy was ultimately held to be payable then the consequential tax assessments should be correspondingly reduced.
The Chancery Division, dismissing the appeals, held (1) that the notices and the consequential tax assessments for 1969-70 should be upheld for the reasons given in Anysz v. Commissioners of Inland Revenue; (2) that the relevant tax advantage should be quantified by reference to what had in fact been done and not by reference to what ought to have been done; and, consequently, that no adjustments fell to be made in respect of any potential liability to betterment levy. (Anysz v. Commissioners of Inland Revenue followed.)
The taxpayers appealed, and the Crown cross-appealed.
In the Court of Appeal the taxpayers took a new point and contended that, even if a tax advantage was obtained in the circumstances mentioned in s 461D s 461E(2) precluded counteraction of that tax advantage unless and except to the extent that the share capital of G Ltd. was repaid.
In relation to the cross-appeal it was contended on behalf of the Crown (1) that the taxpayers had obtained tax advantages since they had received interest-free loans from D Ltd. (which were, in substance, the moneys available for distribution by K Ltd.) and the actual receipt of these loans could be contrasted with a hypothetical receipt consisting of a dividend paid directly by K Ltd. to the shareholders; (2) that the circumstances set out in ss 461C and 461D were present; and (3) that the taxpayers had obtained tax advantages in consequence of transactions in securities either (a) because the tax advantages were obtained in consequence of transactions in securities even if the loans were not themselves transactions in securities or, (b) because the loans were transactions in securities since they were transactions "relating to securities", the shareholders being required to deposit Government stock as security for the loans.
It was contended on behalf of the taxpayers (1) that the taxpayers had not obtained tax advantages because (a) the money received by the shareholders was received by way of loan, and a receipt by way of loan could not be compared with money paid by way of dividend, and (b) the taxpayers had not avoided any assessment to tax since the Crown had made other assessments upon the taxpayers for the purpose of attacking the same profit in an alternative way; (2) that none of the circumstances set out in s 461 was present; and (3) that the taxpayers had not obtained tax advantages in consequence of transactions in securities.
The Court of Appeal, allowing both the taxpayers' appeals and the Crown's cross-appeal, held (1) that the shareholders' appeal would be allowed because where a taxpayer received non-taxable consideration under the first part of s 461E it must have been intended that the taxpayer should be entitled to the benefit of the deferment of liability provided by s 461E(2); (2) that the Crown's cross-appeal would also be allowed because (a) the taxpayers had obtained tax advantages because (i) it was not necessary to compare like with like as regards the receipt obtained, and (ii) s 460(9) made plain the independence of s 460 from all other income tax legislation, so even if it was right that there was a possibility of double taxation there was nothing in s 460 to exclude its application in that event; (b) the circumstance set out in s 461C was satisfied; and (c) tax advantages were obtained in consequence of transactions in securities because the requirement for the deposit of Government Stock made the loans transactions "relating to securities". The taxpayers appealed and the Crown cross-appealed.
Held, in House of Lords, unanimously dismissing the taxpayers' appeals and finding it unnecessary to decide the Crown's cross-appeals (which they therefore dismissed)
(1) that by receiving cash in a non-taxable form from D Ltd. in the form of interest-free loans the taxpayers avoided possible assessments which could have been made had equivalent sums been received by way of dividend from K Ltd., and thus obtained or were in a position to obtain tax advantages;
(2) that the circumstances in s 461D were present;
(3)(a) that the tax advantages were obtained in consequence of the combined effect of two or more transactions in securities (namely, the many transactions constituting transactions in securities entered into from the inception of the scheme) notwithstanding that one or more links in the chain of operations may not have been transactions in securities;
(3)(b) that the making of the interest-free loans were themselves transactions in securities.
(The House of Lords based their decision as regards the obtaining of tax advantages on the wider ground in (3)(a) above. They did not find it necessary to decide the case on the narrower ground relied on in the Court of Appeal, namely, that the tax advantages were obtained in consequence of the receipt of the interest-free loans, but Viscount Dilhorne, with whom the rest of their Lordships agreed, was "far from saying that the Court of Appeal's decision cannot be sustained on the narrower [ground]".)
Stated under s 56, Taxes Management Act 1970, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 14, 15, 16, 17, 18 and 22 June 1976 Aubrey Dan Williams (hereinafter called "Mr. Aubrey Williams") appealed against a notice issued to him by the Commissioners of Inland Revenue (hereinafter called "the Board") under s 460(3), Income and Corporation Taxes Act 1970, and against the following surtax assessments made on him in accordance with adjustments (specified on alternative bases) in the said notice: 1969-70, £170,105, including £168,902 as the adjustment specified in the notice; 1970-71, £168,400 (further assessment). Mr. Aubrey Williams had also appealed against the following income tax assessments made on him in accordance with adjustments (specified on alternative bases) in the said notice: 1969-70, Case VI of Schedule D, £168,902; 1970-71, Case VI of Schedule D, £168,400. His appeals against these income tax assessments were not formally made to...
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