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Public Accounts CommitteeWritten evidence from Republic

About Republic

1. Republic is a membership-based pressure group calling for an elected head of state and an end to any political role—or state funding—for the royal family. We propose keeping our current parliamentary system but replacing the monarch with a directly elected, largely ceremonial head of state. Our campaign is supported by over 29,000 republicans from across the political spectrum, including 15 Members of Parliament.

Republic and the Duchy of Cornwall

2. The notion that the law should apply equally to all citizens is a key republican principle which has driven our interest in challenging tax exemptions and reliefs enjoyed by members of the royal household and the Duchies.

3. Our research made the connection between the issue of the Duchy’s tax status and findings of the Information Rights Tribunal which contradicted the Duchy’s previous claims of exemption. This research was the basis of renewed media interest in the issue in December 2012.

4. Republic has long campaigned on issues relating to the Duchy of Cornwall, building up considerable knowledge and expertise in this area. In December 2012 we reported the Duchy to the avoidance unit at HM Revenue and Customs tax-avoidance and wrote to the chair of the PAC, asking her to investigate its tax status.

5. Republic’s view—supported by the evidence below—is quite simple: the Duchy is a legal entity in its own right, separate from the person of the Duke, which operates as a commercial enterprise. There is no good moral or legal reason why the Duchy of Cornwall should not pay Corporation Tax in the same way as any other commercial body generating profits from property and other investments.

6. Republic would welcome the opportunity to support our written submission by giving oral evidence to the Committee. To arrange this, please contact: [contact details redacted]

Introduction

7. It is not for us to prove that the Duchy of Cornwall should pay Corporation Tax in the ordinary way, rather it is for the Duchy of Cornwall to provide a clear and convincing explanation of why it is not paying tax in the normal way which it has so far failed to do.

8. A number of different and inconsistent arguments have been put forward over the years as to why the Duchy of Cornwall and/or the Duke of Cornwall should not pay tax in the normal way. These excuses include:

The Duchy is not a body or other legal person.

The Duchy is not a company and therefore need not pay Corporation Tax.

The Duchy of Cornwall has Crown Immunity from Taxation.

The Duke of Cornwall has a “peculiar title” to the Duchy and therefore the Duchy need not pay Corporation Tax.

It would be unfair for the Duchy to pay Corporation Tax as it would mean that the same income was taxed twice.

9. This document explains why none of these claims should be accepted as a valid reason for not paying Corporation Tax. In truth, there is no good moral or legal reason why the Duchy of Cornwall should not pay Corporation Tax in the same way as any other corporate body generating profits from property and other investments.

The Duchy is wrong to claim it is not a legal person or to suggest it does not exist separately from the Duke of Cornwall

10. The Duchy’s 2012 financial statements state that it is “not subject to Corporation Tax as it is not a separate legal entity for tax purposes”. There is substantial evidence that the Duchy’s claim not to be a body or other legal person existing separately from Prince Charles is incorrect:

(a)“If there is a living male son of the Monarch who is also heir apparent then the Duchy is managed by the Duke. When there is no Duke then the Duchy is managed by the Crown, but it does not belong to the Crown or to the Monarch.” (source: EA 2010/0182 para 33)

(b)The Duchy’s 1997 financial statements (which were audited and presented to Parliament) state that “The Duchy of Cornwall is a body created by charter in 1337”. (source: EA 2010/0182 para 33)

(c)“There have been transactions between the Duchy and Duke, for example the Duke pays rent to the Duchy for his occupancy of Highgrove House and the Duchy has purchased quantities of timber from the Duke.” (source: EA 2010/0182 para 43)

(d)The Duchy’s Staff Handbook headed “Duchy of Cornwall” refers to “employment by the Duchy”. (source: EA 2010/0182 para 44)

(e)Contracts with employees are entered into with the Duchy. (source: EA 2010/0182 para 44)

(f)The Duchy is notified as the Data Controller under the Data Protection Act 1998. (source: EA 2010/0182 para 44)

(g)The Information Rights Tribunal was “given to understand that the Duchy contracts in its own name and has sued and been sued in its name …” (source: EA 2010/0182 para 45)

(h)The Duchy holds bank accounts in its own name. (source: EA 2010/0182 para 48)

(i)Walter Ross described himself to the Information Rights Tribunal as “in effect, the Chief Executive Officer”. The Tribunal found that “From the evidence before us he can only be the CEO of the Duchy.” (source: EA 2010/0182 para 51)

(j)The Health and Safety Executive (HSE) issued an improvement notice against the Duchy of Cornwall under Section 21 of the Health and Safety at Work etc. Act 1974. The notice was not challenged either by the Duchy or by the Duke. If the Duchy was not a legal person in its own right the HSE would have had no power to issue the notice against it.

(k)The Environmental Agency has granted more than fifteen environmental permits to the Duchy of Cornwall, which could only have been granted to a legal person. (source: Environment Agency public registers)

The Duchy’s evidence has been found by a Tribunal to be confusing and unclear

11. When considering the Duchy’s claim that it was not a body, the Information Rights Tribunal judgement included the following comments in relation to the Duchy’s only witness, Walter Ross (the Secretary and Keeper of the Records of the Duchy):

“we found Mr Ross’s evidence at times confusing and unclear” (source: EA 2010/0182 para 43)

“In any case in evidence Mr Ross was unclear as to the way the revenue and capital accounts held by the Duchy operated.” (source: EA 2010/0182 para 48)

The Information Rights Tribunal has ruled that the Duchy exists separately from the Duke of Cornwall

12. “… whatever the basis of the Duchy under the 1337 Charter, we find that the Duchy is now a body or other legal person. Taking into account all the above evidence and other statutory provisions, the practices of the Duchy and the way it has presented itself to the world including Parliament, the differentiation of the Duchy and Duke in commercial and tax matters as well as under legislation and the contractual behaviour of the Duchy, we are led to the conclusion that the Duchy is a body or other person …” (source: EA 2010/0182 para 57)

The Duchy is wrong to claim that is not a company and therefore need not pay Corporation Tax

13. The Duchy website states that:

“Only companies pay Corporation Tax;” (Source: Tax page on Duchy of Cornwall website) This claim is linked to the claim that the Duchy is not a body which is considered in paragraphs 10–12 above.

14. All companies based in the UK are within the scope of Corporation Tax. In addition, some other types of bodies are also subject to Corporation Tax eg some members’ clubs, associations, societies, Community Amateur Sports Clubs, and other unincorporated organisations. (source: Clubs page and Who is liable for Corporation Tax page, HMRC website.)

The Duchy’s attempt to compare itself to other large organisations is misleading

15. The Duchy website states that:

“many other large organisations which are not companies pay income tax” (source: Tax page on Duchy of Cornwall website)

16. It has been shown in paragraphs 10–12 above that the Duchy is a body in its own right and therefore it is subject to Corporation Tax. It is unclear which “other large organisations” the Duchy would like to be compared to.

Comparison to the position of a partnership

17. “The Duchy is not subject to Corporation Tax … (in the same way as, for example, a partnership is not a separate legal entity for tax purposes)” (source: page 5, Duchy of Cornwall 2012 Annual Report)

18. It is true that partners in partnerships (as defined by the Partnerships Act 1890) are subject to Income Tax as oppose to the partnership paying Corporation Tax.

19. The Duchy of Cornwall is clearly not a partnership under the 1890 Act which defines “Partnership” as being “the relation which subsists between persons carrying on a business in common with a view of profit.”

20. It should also be noted that partners in partnerships have to pay Class 2 and Class 4 National Insurance Contributions and Capital Gains Tax on Partnership assets. Prince Charles does not pay Capital Gains Tax on Duchy assets. There is no suggestion that Prince Charles pays NICs on his income from the Duchy of Cornwall. (Source: National Insurance—the basics, HMRC website)

Comparison to the position of an LLP

21. Members of limited liability partnerships (as defined by the Limited Liability Partnerships Act 2000) are subject to income tax and the LLP itself is not subject to Corporation Tax.

22. The Duchy of Cornwall is clearly not an LLP because if it were it would have to be registered as such at Companies House. It should also be noted that just as with partners in a partnership, members of LLPs have to pay Class 2 and Class 4 National Insurance Contributions and Capital Gains Tax on assets of the LLP.

Comparison to the position of a trust

23. The Duchy of Cornwall is clearly not a trust because it is a separate legal person in its own right. Trusts are required to pay capital gains tax and trust income is subject to income tax. (sources: Introduction to trusts and Capital Gains Tax and Tax on different kinds of trust income, HMRC website). If the Duchy believes it should be taxed as a trust then logically it ought to pay Income Tax and Capital Gains Tax which it does not.

The Duchy of Cornwall does not have Crown Immunity from Taxation

The Origin of the Duchy’s claim to Crown Immunity

24. The Duchy paid taxes including property tax, land tax and “other taxes” from 1842, this makes the Duchy’s claim in 1913 that it enjoyed Crown Immunity from taxation all the more surprising. (Source: The Duchy of Cornwall and the Crown, John Kirkhope)

25. The 1913 claim appears to be based on a single Legal Opinion from the Government’s Law Officers:

“We are of the opinion that the same principles which render the provisions of an Act of Parliament inapplicable to the Crown unless the Crown is expressly named, apply also to the Prince of Wales in his capacity as the Duke of Cornwall. This result arises from the peculiar title of the Prince of Wales to the Duchy of Cornwall” (source: Law Officers’ opinion, August 1913)

26. This opinion is now almost 100 years old and has not been updated to take account of a large number of legislative changes that have occurred in the intervening years including the introduction of Corporation Tax which was introduced in the Finance Act 1965.

Crown Immunity does not even extend to all public bodies

27. HMRC’s own guidance states that Crown Immunity does not even extend to all public bodies:

28. “However Non-Departmental Public Bodies (NDPBs), variously called Non-Government Organisations (NGOs) or quangoes are not Government Departments (the clue is in the name!) and do not (with a very few exceptions) enjoy Crown exemption.” (source: HMRC Tax Manual)

29. If Crown Immunity from Taxation does not apply to public bodies then the Duchy of Cornwall which claims to be a “private estate” cannot reasonably claim that Crown Immunity from Taxation extends to the Duchy.

30. The BBC claimed Crown Immunity from taxation and lost despite the fact it was incorporate by Royal Charter and despite the fact it carries out public services: (source: BBC v Johns (HM Inspector of Taxes) [1964] EWCA Civ 2 (05 March 1964), published by BAILII and Judgmental)

There is no case law to suggest that the Duchy enjoys Crown Immunity

31. The only case which the academic John Kirkhope was able to discover in which the question of whether the Duchy enjoyed Crown Immunity was considered was a county court case Hobbs v Weeks (1950). (source: Kirkhope) Kirkhope’s view was that this case suggested that Crown Immunity only applies when the Duchy “is in the Crown” (ie when there is no Duke of Cornwall or the Duke of Cornwall is in his minority). (source: Kirkhope)

Advice from Government Lawyers is that Crown Immunity exists for the benefit of the Crown and not Prince Charles

32. “There is no question of personal immunity from legislation for any member of the Royal Family other than the Sovereign. This includes the Prince of Wales.” (para 101, Crown Application guidance, Office of the Parliamentary Counsel, August 2008)

33. The Office of the Parliamentary Counsel’s guidance on Crown Immunity refers to Duchy of Cornwall land being covered by the Crown exemption, suggesting that a Statute will not apply to the land in question unless the Statute refers to Duchy land expressly or by necessary implication. There is however no suggestion at all that the Duchy of Cornwall or the Duke of Cornwall enjoy the Crown exemption. (source: Crown Application Pamphlet, March 2013, Office of the Parliamentary Counsel. March 2013)

34. It should be noted that the Government Law Officers Opinion from 1913 states that “Taxation is not exacted from land; it is exacted from subjects who are taxpayers.” The Law Officers Opinion does not refer to the tax payable by corporate bodies because it pre-dated the existence of Corporation Tax which was introduced by the Finance Act 1965.

35. Even if it could be established that Crown Immunity applied to Duchy land this would not affect the tax position of the Duchy of Cornwall or the Duke of Cornwall. The Duchy’s income is not just derived from the land it owns, in the year to 31 March 2012 the Duchy received £4.7m from investments including cash deposits, equity securities and private equity funds.

Government policy states that Crown bodies are expected to behave as if bound by regulations

36. Government policy is that departments and other Crown bodies “are not shielded from obligations placed upon others” and “Crown Immunity is being progressively reduced, as legislative opportunities arise. In the meantime Crown bodies “are expected to behave as if they were bound by regulations”. (source: Answer to a written question in 1994 referencing the Citizens Charter Second Report 1994)

37. It would wholly inappropriate for the Duchy to claim to enjoy Crown Immunity and not to follow the relevant Government policy applicable to Crown bodies.

It is wrong to suggest that the Duke of Cornwall has a “peculiar title” to the Duchy and therefore the Duchy need not pay Corporation Tax

38. The phrase “peculiar title” is sometimes used in explaining the Duchy of Cornwall’s special tax status. This is however just another way of attempting to extend Crown Immunity to the Duchy of Cornwall which has been shown to be flawed in paragraphs 24–37 above. In any case, the ownership of a body is not a relevant consideration when determining whether or not it is subject to Corporation Tax.

39. It should also be noted that officials have found themselves unable to explain what the peculiar title is. For example, a Treasury witness giving evidence in 1971 said: “What the peculiar title is, I am afraid I cannot say.” (source: TheyWorkForYou Willie Hamilton MP in 1982 quoting Mr. Strudwick, Treasury witness giving evidence on 6 July 1971).

It is incorrect to suggest that it would be unfair for the Duchy to pay Corporation Tax as it would mean that the same income was taxed twice

40. The claim:

“As The Prince already pays income tax on the Duchy’s surplus, the Duchy does not pay Corporation Tax. If the Duchy also paid Corporation Tax, The Prince would effectively be taxed twice on the same income.” (Source: Tax page on Duchy of Cornwall website)

41. The normal tax position is that a company is taxed on its profits and each shareholder is taxed on the dividend income that he/she receives from the company. It is entirely fair for Prince Charles and the entities he owns to be taxed in the same way as other for other taxpayers and the entities they own. In any case, the fact that a taxpayer (individual or corporate) considers a particular tax to be unfair does not mean they are not liable to pay the tax in question.

Conclusion

42. There is no credible support for the Duchy’s claim not to be subject to Corporation Tax and therefore the Duchy of Cornwall should pay Corporation Tax in the normal way.

Recommendations

43. The Committee should advise HMRC to collect Corporation Tax from the Duchy in the normal way. The Prince of Wales and the Duchy of Cornwall should be subject to the same tax rules as other private individuals and corporations respectively. The arrangement whereby the Prince pays income tax voluntarily and the Duchy’s profits are exempt from Corporation Tax is morally and legally untenable.

44. The Chancellor of the Exchequer should publish a revised Memorandum of Understanding on Royal Taxation stating that neither the Duchy nor the Duke should rely on any claim of Crown Immunity in order to avoid paying tax in the normal way. This advice should apply to tax in respect of prior periods as well as future periods and should extend to any penalties or interest payable in relation to the administration of taxes.

45. The Government should publish its current policy with regards to Crown Immunity and in particular clarify whether it remains Government policy that Crown bodies “are expected to behave as if they were bound by regulations”.

46. If however despite the substantial evidence provided HMRC remains in any doubt as to whether the Duchy is subject to Corporation Tax then HMRC should ensure the question is put before a Tax Tribunal as it ought to with any questionable claim made by a taxpayer in order to avoid tax.

47. The State Aid Branch of the Department for Business, Innovation & Skills should investigate whether HMRC’s failure to collect Corporation Tax from the Duchy amounts to illegal state aid.

48. It is Republic’s view that ultimately the stewardship of the Duchy should be transferred to the Crown Estate or a separate board of fully accountable commissioners, with its net surplus passing directly to the Treasury for the benefit of all taxpayers.

Graham Smith
Chief executive

2 July 2013

Prepared 4th November 2013