(back to preceding text)

    44. No amendment was made to section 412(1) when, in 1965, corporation tax was introduced and companies were no longer liable to income tax on their income. It is not possible to suppose that Parliament, in introducing corporation tax, intended without any mention or discussion to draw a distinction between the effect of the section 412(1) deeming provision as between company transferees and individual transferees.

    45. Section 412 of the 1952 Act was replaced by section 478 of the Income and Corporation Taxes Act 1970. The deeming provision in subsection (1) was in the same terms as in its statutory predecessors. Section 478 of the 1970 Act was in turn replaced by section 739 of the 1988 Act.

    46. This legislative history makes it impossible, in my opinion, to attribute to Parliament any intention that there should be a distinction between the effect of the deeming provision on the liability to tax of a company transferee and its effect on the liability to tax of an individual transferee. In my opinion, therefore, either section 739(2) exonerates both company transferees and individual transferees from liability to tax on their income or it exonerates none of them.

    47. Section 18 was not the only provision in the 1936 Act that sought to combat tax avoidance. Section 21 dealt with settlements made by a settlor on his children. Subsection (1) provided that any income of a settlement paid to or for the benefit of an unmarried infant child of the settlor . . . .

"shall . . . . be treated for all the purposes of the Income Tax Acts as the income of the settlor . . . . and not as the income of any other person." (emphasis added).

    48. Confronted by the express words in section 21(1), ". . . . and not as the income of any other person", it seems to me very difficult, if not impossible, to argue that those words, or something similar, which are notably absent from section 18(1) should be an implied addition to section 18(1). A comparison between section 18(1) and section 21(1) suggests strongly that the omission of any such words from section 18(1) was deliberate.

    49. Section 24 of the 1938 Act ( 1 + 2 Geo 6, c 46) fortifies the point. The section deals with the case where an owner of securities has transferred to someone the right to receive interest payable in respect of the securities while himself remaining the owner of the securities. Subsection (1), which provides in paragraph (a) that the interest "shall be deemed to be the income of the owner . . . . ", provides also, in paragraph (c), that the interest "shall not be deemed to be the income of any other person". Section 730 of the 1988 Act reproduces the deeming provisions originally to be found in section 24 of the 1938 Act. Paragraphs (a) and (c) are to all intents and purposes in the same terms as in the 1938 Act.

    50. In other statutory deeming provisions, too, there is express reference to the tax liability of persons other than the person at whom the deeming provision is principally aimed. Section 660 of the 1988 Act deals with short term dispositions. Subsection (1) provides that the income of the property thus disposed of —

"shall be deemed for all the purposes of the Income Tax Acts to be the income of the person, if living, by whom the disposition was made, and not to be the income of any other person."

    51. The wording in these tax avoidance provisions strongly supports, in my opinion, Mr Milne's approach to the deeming provision in section 739(2).

The double taxation point

    52. Mr Venables submitted that it was to be presumed that Parliament did not intend the same income to be taxed twice, once in the deemed hands of the transferor and also in the actual hands of the transferee. This is, to my mind, a submission of weight but it is not a conclusive one. It is apparent that the draftsman of the legislation did give thought to the need to avoid double taxation. Subsection (6) of section 18 of the 1936 Act incorporated the provisions of the 2nd Schedule to the Act. Paragraph 1 of the 2nd Schedule said:

"Tax at the standard rate shall not be charged by virtue of the principal section in respect of income which has borne tax at the standard rate by deduction or otherwise."

    53. This provision would have dealt with the case where the transferee's income included income sourced in the United Kingdom and from which tax had already been deducted at source. But the words "or otherwise" show that the provision would have covered also any case in which the transferee had paid tax on its income. It is worth repeating that in 1936 income tax was payable by individuals and by companies. This provision, too, did not distinguish between individual transferees and company transferees. It did not need to.

    54. In 1965, when companies became liable to corporation tax, the provision should, I think, have been amended so as to prevent a transferor being charged tax on deemed income where the transferee had paid corporation tax on the actual income. Section 480(1) of the 1970 Act replaced section 413(1) of the 1952 Act which had replaced paragraph 1 of the 2nd Schedule to the 1936 Act. All were in the same terms. Section 743(1) of the 1988 Act provided:

"Income tax at the basic rate shall not be charged by virtue of section 739 in respect of income which has borne tax at the basic rate by deduction or otherwise."

    55. The provision, like its predecessors, caters for the deduction of tax at source. It would cater also for a case where the transferee, being an individual, had paid tax at the basic rate (or, now, the lower rate or Schedule F ordinary rate) on the income in question. But it does not cover, expressly at any rate, the case of a company transferee that has paid corporation tax on the income. It seems to me clear that this must be the result of an inadvertent oversight. If the point ever arose for decision I would be attracted by the view that section 743(1) should be construed so as to cover income which had been included in the computation of profits on which a company had paid tax. That construction would, in my opinion, accord with the Parliamentary intention. But it is not necessary to decide the point now. All that is necessary is to notice that Parliament did pay attention to possible double taxation and the possibility that the income of the section 739 transferee might have borne tax. Section 743(1) and its statutory predecessors show, in my opinion, that section 739(2) is not intended to exclude the normal tax liability that would lie on a transferee in respect of its income.

    56. Section 743(1), like its predecessors, is looking at the double taxation problem from the point of view of the transferor on whom the liability to pay tax on deemed income is being imposed. There is no comparable provision protecting the transferee in a case where, under section 739(2), the transferor has paid tax on his deemed income.

    57. This, however, is more a theoretical point than a real one. It is in practice highly unlikely that UK tax can be recovered from a section 739 transferee. Transferees are chosen by tax avoiders in order to avoid UK tax. Non-resident and foreign domiciled transferees are likely to be chosen. They do not submit tax returns to the revenue. In the present case it is only because Mr Chipping, the transferor, so involved himself in the affairs of his off-shore companies that they became resident in the UK that their liability to corporation tax arose.

    58. Accordingly, the double taxation possibilities that the revenue's case undoubtedly leaves theoretically open do not seem to me to carry weight in considering the correct construction of section 739(2).

    59. This conclusion does not seem to me to detract in the least from the principles expressed by this House in the Vestey case [1980] AC 1148. The revenue's contention in Vestey was that each of the beneficiaries, none of whom was a transferor, was caught by section 412(1) of the 1952 Act and liable to tax on the whole of the income of the trustees, the transferees. The situation for which the revenue was contending was not simply one of double taxation. It was one of multiple taxation. The revenue was contending for an administrative discretion which would enable them to assess one or more of the beneficiaries in such sums as they, the revenue, thought fit subject only to the limitation that the total income of the trustees should not be taxed more than one. This was the context which led Lord Wilberforce to say, at p 1172:

"Taxes are imposed upon subjects by Parliament. A citizen cannot be taxed unless he is designated in clear terms by a taxing Act as a taxpayer and the amount of his liability is clearly defined. A proposition that whether a subject is to be taxed or not, or, if he is, the amount of his liability, is to be decided (even though within a limit) by an administrative body represents a radical departure from constitutional principle. It may be that the revenue could persuade Parliament to enact such a proposition in such terms that the courts would have to give effect to it; but, unless it has done so, the courts, acting on constitutional principles, not only should not, but cannot, validate it."

    60. None of this, in my opinion, bites in the present case. There is no doubt about the liability in principle of companies resident in the United Kingdom to corporation tax. There is no constitutional problem. The question is whether Parliament, in imposing the section 739 tax liability on tax avoiders, intended thereby to relieve the transferees of their normal liability to tax on their income, the income which forms the basis of the tax liability imposed on the tax avoider. Vestey's case does not, in my opinion, assist in answering this question. I would answer the question in the negative. Section 739(2) on its true construction does not, in my opinion, relieve transferees of their normal liability to pay tax on their income.

    61. Mr Milne accepted that the 1988 Act must now be construed, so far as it is possible to do so, in a way compatible with Convention rights (see section 3, Human Rights Act 1998).

    62. Article 1 of the 1st Protocol to the Convention says:

"Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties."

    63. Mr Lyons, the other junior counsel for the appellant, has submitted that a construction of section 739(2) that would leave the transferor liable to tax on its deemed income and the transferee liable to tax on its actual income, leaving it to the discretion of the revenue which liability to seek to enforce and to what extent, would be inconsistent with this article.

    64. In Gasus Dosier-und Fördertechnik GmbH v Netherlands [1995] 20 EHRR 403, the European Court of Human Rights said this about article 1:

"62.  According to the Court's well-established case law, the second paragraph of article 1 of Protocol No 1 must be construed in the light of the principle laid down in the article's first sentence. Consequently, an interference must achieve a 'fair balance' between the demands of the general interest of the community and the requirements of the protection of the individual's fundamental rights. The concern to achieve this balance is reflected in the structure of article 1 as a whole, including the second paragraph: there must therefore be a reasonable relationship of proportionality between the means employed and the aim pursued." (p 435)

    65. Mr Milne submitted that such element of discretion as the revenue enjoyed in deciding whether to pursue the transferee for tax on its actual income or the transferor for tax on the deemed income was proper, as a matter of public policy, in order to enable tax to be collected. Section 739 is, after all, a provision designed to combat tax avoidance.

    66. Lord Howard de Walden v Inland Revenue Commissioners [1942] 1 KB 389 is in point. The taxpayer appealed against an assessment to income tax and surtax made against him in respect of income deemed to be his under section 18 of the 1936 Act. The taxpayer had power to enjoy only a small part of the income of the transferee companies but he was assessed to tax in respect of the whole of their income. The Court of Appeal declined to accept the invitation of the taxpayer's counsel to construe the section so as to limit the charge to tax to the benefit which the taxpayer had actually obtained. Lord Greene MR said this, at p 397:

"Even if the only alternative to Mr Tucker's construction is the second of the three constructions, we are not prepared to say that it is necessarily as unjust as he contends. The section is a penal one and its consequences, whatever they may be, are intended to be an effective deterrent which will put a stop to practices which the legislature considers to be against the public interest. For years a battle of manoeuvre has been waged between the legislature and those who are minded to throw the burden of taxation off their own shoulders on to those of their fellow subjects . . . It would not shock us in the least to find that the legislature has determined to put an end to the struggle by imposing the severest of penalties. It scarcely lies in the mouth of the taxpayer who plays with fire to complain."

    67. In National & Provincial Building Society v United Kingdom (1997) 25 EHRR 127 the European Court of Human Rights had to consider the effect of article 1 of Protocol No 1 on legislation which retrospectively validated certain regulations which had been held to be invalid and which had imposed a tax liability on building societies in respect of past interest payments. The Court, in holding there had been no violation of the Convention, said, at p 169:

"76.  Having regard to a Contracting State's margin of appreciation in the tax field and to the public interest considerations at stake, it could not be said that the decisions taken by Parliament to enact these measures with retrospective effect were manifestly without reasonable foundation or failed to strike a fair balance between the demands of the general interest of the community and the protection of the rights of the applicant societies."

    68. In considering the implications of article 1 in a section 739 case, it is necessary, in my opinion, to distinguish between the position of the tax avoider/transferor and that of the transferee. The tax avoider/transferor has a tax liability imposed upon him. The income of the transferee is deemed to be his for tax purposes. The tax avoider cannot, however, be taxed on income of the transferee which has already borne tax (see section 743(1) and paras 48 to 51 above). There is no element of administrative discretion involved here.

    69. The tax liability being imposed on the tax avoider does not depend on his having actually received any benefit from the income or assets of the transferee. The liability may be regarded as having a penal character and as intended to discourage United Kingdom residents from seeking to avoid tax by transferring assets abroad. The imposition of such a tax liability is, in my opinion, well within the margin, of appreciation allowed to member states in respect of tax legislation.

    70. What about the transferee? The transferee will usually be resident abroad and will not be liable to pay United Kingdom tax on its income generated abroad. If, however, in any tax year the transferee becomes resident in the United Kingdom, it will have the normal tax liability of any other UK resident. Recovery by the revenue of the tax may be difficult if the transferee, although resident, has no assets in the United Kingdom, and I imagine that in such cases the revenue would usually not try to do so but instead would prefer to recover tax under section 739(2) from the transferor. I do not follow, however, how this state of affairs could possibly be represented as, constituting an infringement of the transferee's article 1 rights.

    71. In my opinion, section 739(2), construed so as to deem the transferee's income to be the income of the transferor, the tax avoider, for income tax purposes but so as to leave the liability of the transferee to pay tax, income tax or corporation tax as the case may be, on its income unaffected by the deeming provision, is well within the margin of appreciation allowed to member states in respect of tax legislation. The public interest requires that legislation designed to combat tax avoidance should be effective. That public interest outweighs, in my opinion, the objections, mainly theoretical, that Mr Venables has taken to the effect of section 739(2) construed as I would construe it. There is nothing, in my opinion, in article 1 of Protocol No 1 that requires a different construction of section 739(2) in order to render it Convention compliant.

    72. For the reasons I have given the three off-shore companies, resident in the United Kingdom through Mr Chipping's activities as the jury must have found, were in law liable to corporation tax. It follows that there was no legal impediment standing in the way of a conviction of the appellant, and the others, of the offence of conspiring to cheat the revenue of corporation tax payable by the three companies.

    73. I would, therefore, dismiss this appeal.