![]() |
[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback] [DONATE] | |||||||||
England and Wales Court of Appeal (Civil Division) Decisions |
||||||||||
PLEASE SUPPORT BAILII & FREE ACCESS TO LAW
To maintain its current level of service, BAILII urgently needs the support of its users.
Since you use the site, please consider making a donation to celebrate BAILII's 25 years of providing free access to law. No contribution is too small. If every visitor this month gives just Β£5, it will have a significant impact on BAILII's ability to continue providing this vital service.
Thank you for your support! | ||||||||||
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Inland Revenue v John Lewis Properties Plc [2002] EWCA Civ 1869 (20 December 2002) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2002/1869.html Cite as: [2003] STC 117, [2003] Ch 513, [2003] 2 WLR 1196, [2002] EWCA Civ 1869 |
[New search] [View without highlighting] [Printable RTF version] [Buy ICLR report: [2003] 2 WLR 1196] [Buy ICLR report: [2003] Ch 513] [Help]
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF
JUSTICE, CHANCERY DIVISION
(The Hon Mr Justice Lightman)
Strand, London, WC2A 2LL | ||
B e f o r e :
LADY JUSTICE ARDEN
and
LORD JUSTICE DYSON
____________________
Commissioners of Inland Revenue | Appellant | |
- and - | ||
John Lewis Properties plc | Respondent |
____________________
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
David Goldberg QC and Wayne Clark (instructed by Messrs Lovells) for the Respondent
____________________
AS APPROVED BY THE COURT
Crown Copyright ©
Lady Justice Arden :
"The value of JLP's reversionary interests in the Properties would be reduced immediately following the Rental Assignment as any purchaser of those interests would have to take subject to the Rental Assignment and would only acquire the right to receive rentals after the five year Rental Assignment period had expired. The value of the Properties should gradually increase again as the period of the Rental Assignment outstanding reduces over time."
The Special Commissioner also accepted the evidence of Mr Asher ([2001] STC 1118 at 1124). However, the amount of the reduction in value which in Mr Asher's opinion would occur was not quantified by him as at any point in time.
"37. The guidance afforded by Lord Hoffmann in my view supports the approach of Lord Romer in Paget and reinforces the view that the price received by JLP was capital and not income: (1) JLP was perfectly entitled for the avoidance of tax to structure its commercial transaction with the bank so that in place of an income receipt of rent it received a capital sum. There is no broad 'economic equivalence test' entitling the court to treat a capital item as income because it is the economic equivalent of income; (2) the transaction produced in the hands of JLP, in place of an income stream, an up-front capital sum; (3) the [proceeds were] not merely (as in McGuckian) the bank's receipt of the rents from the lessees 're-labelled': it was a distinct sum paid out of the resources of the bank under a transaction which had commercial reality; (4) in these circumstances it is not open to the court to recharacterise the [proceeds] as income; (5) the reference by Lord Hoffmann to exchanges of income for capital involving a transfer of risk does not mean that there can be no such exchange for tax purposes in any particular case unless there arises a substantial risk of loss through non-payment which is unsecured or unprovided for. In any event there is in this case a theoretical risk of loss undertaken by the bank if JLPG, JLP and JL went into insolvent liquidation." (judgment, paragraph 37).
"depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured or exhausted in the process."
"In my judgment it is equally established by authority that to decide whether a particular receipt is in the nature of income or in the nature of capital one has to look at all the circumstances of the particular case and apply judicial common sense in reaching a conclusion as to how a receipt is to be classified."
i) Cases illustrating the realisation principle: Glenboig Union Fireclay Co Ltd v IRC 1922 SC (HL) 112, Paget v IRC [1938] 2 KB 25 per Lord Romer, Trustees of Earl Haig v IRC 1939 SC 676, Nethersole v Withers (1948) 28 TC 501, Lowe (Inspector of Taxes) v Ashmore [1971] Ch. 545, McClure (Inspector of Taxes) v Petre [1988] 1 WLR 1386. I use the expression "realisation principle" to denote the principle decided by these cases. "Sterilisation" might have been a better word.
ii) Cases on premiums on leases: Strick (Inspector of Taxes) v Regent Oil Co Ltd [1966] AC 295, CIR v Wattie, above.
iii) Compensation cases: the Glenboig case above, J Gliksten & Son Ltd v Green [1929] AC 381, London and Thames Haven Oil Wharves Ltd v Attwool [1967] Ch 772, Raja's Commercial College v Gian Singh & Co Ltd [1977] AC 312, Deeny v Gooda Walker Ltd [1996] STC 299.
iv) Cases on the sale of rights to income: Paget v IRC above, IRC v McGuckian [1977] 1 WLR 991, and see MacNiven (Inspector of Taxes v Westmoreland Investments Ltd [2001] 2 WLR 377.
The realisation principle
" the differentiation in any particular case of profits as resulting in capital appreciation on the one hand or on the other in accruer of income may be expected to introduce questions of difficulty. In determining any such question, however, it may perhaps be helpful to distinguish between a fruit-bearing subject and its fruits. The right of usufruct as conferred by the Civil law and so described, or again our own requirement that liferents be enjoyed salva substantia rei, may perhaps be regarded as illustrative. When fruits are ingathered and realised, this in general results in an addition to income; and this will equally be true in the case of natural fruits, industrial fruits or civil fruits. When the subject which provides the fruits is realised on the other hand, this generally results in a transaction on capital account. He must expect a loss, and not a gain, of income, who kills the goose that lays the golden eggs. "
"Here we have the sale and transfer outright of an item of property which previously belonged to the respondent, not the licence to use it granted by its unchanged owner, and this does not give rise to annual profits or gains unless the sale takes place in the course of carrying on a trade or profession." (page 518).
"The relevant fact is that the owner of an asset, entitled by law to divide it into two distinct assets, has done so by selling one of those assets for an agreed consideration payable in a lump sum. A sale, not in the course of trade, of an asset does not attract tax on the consideration." (page 520).
It is to be noted that Nethersole's case concerned the sale of part of the copyright to a dramatic work, not the sale of royalties earned under a licence to use the copyright work.
"[This] contention can be disposed of quite shortly. The purchase price received by Miss Paget was not income arising from the bonds at all. It arose from contracts of sale and purchase whereby Miss Paget sold whatever right she had to receive such income in the future as well as her right to take what was offered by the defaulting debtors. It is, in my opinion, quite impossible to treat this as equivalent in any sense to 'income arising from' the bonds." (page 35).
"In these circumstances, the only question to be decided is whether the proceeds of sale of a right to receive income in the future can be treated as income for the purpose of the Income Tax Acts. The question thus broadly stated plainly admits of but one answer; and that answer must be in the negative. The proceeds of the sale for a lump sum of an annuity, for instance, are capital in the hands of the vendor and not income. And this is true even when the subject of the sale is not the annuity for its whole duration but the right to be paid the annuity for a number of years or even for one year." (pages 44 45).
Premiums on leases
"They were lump sums, paid at the start of the transactions to procure the immediate emergence of an asset or advantage, enjoyment of which was secured for a period. They were not, and did not represent the aggregation of, current payments made for the day-to-day use of or continuation of an advantage."
"But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of the trade, I think there is very good reason for treating such an expenditure as properly attributable not to revenue but to capital." (emphasis added).
Compensation cases
"The whole point is that the business of the company is to buy timber and to sell timber and when they sell timber they turn it into money. This particular timber was turned into money, not because it was sold, but because it was burned and they had an insurance policy over it. The whole question comes to be whether it is turnover in the ordinary course of their business. I think that it was. They had that amount of timber, which they got rid of and for which they got a certain price, and then they could begin again." (per Viscount Dunedin in J Gliksten and Son, Ltd v Green [1929] AC 381, 385).
Sale of rights to income
"[39.] My Lords, I venture to suggest that some of the difficulty which may have been felt in reconciling the Ramsay case with the Duke of Westminster's case arises out of an ambiguity in Lord Tomlin's statement that the courts cannot ignore 'the legal position' and have regard to 'the substance of the matter'. If 'the legal position' is that the tax is imposed by reference to a legally defined concept, such as stamp duty payable on a document which constitutes a conveyance on sale, the court cannot tax a transaction which uses no such document on the ground that it achieves the same economic effect. On the other hand, if the legal position is that tax is imposed by reference to a commercial concept, then to have regard to the business 'substance' of the matter is not to ignore the legal position but to give effect to it
[50.] The distinction between commercial and legal concepts has also been drawn in other areas of legislation. So, for example, the term 'financial assistance' in section 151 of the Companies Act 1985 has been construed as a commercial concept, involving an inquiry into the commercial realities of the transaction: see Burton v Palmer [1980] 2 NSWLR 878, 889-890; Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1. But the same is not necessarily true of other terms used in the same section, such as 'indemnity'. As Aldous LJ said in British & Commonwealth Holdings plc v Barclays Bank plc I [1996] 1 WLR 1, 14:
'It was submitted that as the words 'financial assistance' had no technical meaning and their frame of reference was the language of ordinary commerce, the word 'indemnity' should be similarly construed. The fallacy in that submission is clear. The words 'financial assistance' are not words which have any recognised legal significance whereas the word 'indemnity' does. It is used in the section as one of a number of words having a recognised legal meaning.'
I would only add by way of caution that although a word may have a 'recognised legal meaning', the legislative context may show that it is in fact being used to refer to a broader commercial concept.
[51] In IRC v McGuckian [1997] STC 908, [1997] NI 157 a Republic of Ireland company called Ballinamore had substantial distributable reserves. The shareholders, Mr and Mrs McGuickan, wanted to receive this money but not to pay income tax on the dividend. So they entered into a scheme by which they first transferred their shares to an offshore trustee called Shurltrust. By a series of preplanned transactions, it then assigned the right to receive the dividend to a United Kingdom company called Mallardchoice in consideration of the payment of a sum equal to 99% of the expected dividend. Ballinamore then declared the dividend and paid it to Mallardchoice, which immediately paid 99% to Shurltrust.
[52.] The statutory question was whether Shurltrust had received income or capital. If it was income, the effect of various tax avoidance provisions concerning the transfer of assets abroad was that the payment would be deemed to be income of the McGuckians. If it was capital, the McGuckians would not be liable for tax. The McGuckians said that if Shurltrust had simply received the dividend, it would of course have been income. But Shurltrust did not receive the dividend. It received a payment from Mallardchoice which was a capital payment for an assignment of its right to income.
[53.] The Inland Revenue's argument, relying upon the formulation in the Furniss case [1984] AC 474 was that the assignment should be disregarded. The Northern Ireland Court of Appeal said (not, if I may respectfully say so, without justification) that one could not simply 'disregard' the assignment. The payment of the money by Mallardchoice to Shurltrust was the consideration for the assignment and an integral part of that transaction. If the assignment had to be disregarded, one could not explain how Shurltrust had received any money at all.
[54.] In IRC v McGuckian [the question] was the nature of the payment received by Shurltrust capital or income? The question was not whether the assignment should be disregarded but whether, from a commercial point of view, it amounted to an exchange of income for capital. Such exchanges usually have a commercial reality: the purchase or sale of an annuity, for example, is an exchange of capital for an income stream, involving a transfer of risk. But the transaction in IRC v McGuckian was nothing more than an attempt to relabel a sum of money. The fact that the assignment had no commercial purpose did not mean that it had to be disregarded. But it failed to perform the alchemy of transforming the receipt of a dividend from the company into the receipt of a capital sum from someone else. For the purpose of the fiscal concept at stake, namely the character of the receipt as income derived from the company, it made no difference.
[58.] The limitations of the Ramsay principle therefore arise out of the paramount necessity of giving effect to the statutory language. One cannot elide the first and fundamental step in the process of construction, namely to identify the concept to which the statute refers. I readily accept that many expressions used in tax legislation (and not only in tax legislation) can be construed as referring to commercial concepts and that the courts are today readier to give them such a construction than they were before the Ramsay case. But that is not always the case. Taxing statutes often refer to purely legal concepts. They use expressions of which a commercial man, asked what they meant, would say 'You had better ask a lawyer'. For example, stamp duty is payable upon a 'conveyance or transfer on sale': see Schedule 13, paragraph 1(1) to the Finance Act 1999. Although slightly expanded by a definition in paragraph 1(2), the statutory language defines the document subject to duty essentially by reference to external legal concepts such as 'conveyance' and 'sale'.
[59.] Even if a statutory expression refers to a business or economic concept, one cannot disregard a transaction which comes within the statutory language, construed in the correct commercial sense, simply on the ground that it was entered into solely for tax reasons. Business concepts have their boundaries no less than legal ones
[60.] Likewise the use of business concepts like "income" and "capital" may give the taxpayer a choice of structuring a commercial transaction so as to come within one concept or the other. As Lord Greene MR said in a celebrated passage in IRC v Wesleyan and General Assurance Society (1946) 30 TC 11 at 16: "In dealing with Income Tax questions it frequently happens that there are two methods at least of achieving a particular financial result. If one of those methods is adopted, tax will be payable. If the other method is adopted, tax will not be payable. It is sufficient to refer to the quite common case where property is sold for a lump sum payable by instalments. If a piece of property is sold for £1,000 and the purchase price is to be paid in ten instalments of £100 each, no tax is payable. If, on the other hand, the property is sold in consideration of an annuity of £100 a year for ten years, tax is payable. The net result from the financial point of view is precisely the same in each case, but one method of achieving it attracts tax and the other method does not."
[61.] It follows that a transaction which, for the avoidance of tax, has been structured to produce, say, capital, and does produce capital in the ordinary commercial sense of that concept (unlike the payment in IRC v McGuckian) cannot be "recharacterised" as producing income (see Comr of Inland Revenue v Wattie [1998] STC 1160, [1999] 1 WLR 873)."
"The words have no technical meaning and their frame of reference is in my judgment the language of ordinary commerce. One must examine the commercial realities of the transaction " (Charterhouse Investment Trust v Tempest Diesels Ltd [1986] BCLI 1, 10 (per Hoffmann J) (case cited by Lord Hoffmann in MacNiven at paragraph 50).
Points arising from the English and Scottish cases
The Australian cases
"If the lender sells his mere right to interest for a lump sum, the lump sum is received in exchange for, and ordinarily as the present value of, the future interest which he would have received. This is a revenue not a capital item the taxpayer simply converts future income into present income: see Commissioner of Internal Revenue v P.G. Lake Inc.
In Paget the coupons had come to represent, like a contract to pay an annuity, the sole source of the expected payments. Lord Romer drew that analogy, treating the sale for a lump sum of an annuity as an instance of a sale of a right to receive income in the future, the proceeds of which are not treated as income. Unlike the sale of the coupons in Paget, the sale of a right to interest severed from the debt is not a sale of a tree of which the future payments are the fruit. The present case may thus be distinguished from the view of the facts which was the foundation of the decision in Paget. If Paget is not to be distinguished in this way, we should be unable to accept its authority for the purposes of the Act." (page 218 219).
Statutory provisions
The judge's analysis
Conclusions
"The question was not whether the assignment should be disregarded but whether, from a commercial point of view, it amounted to an exchange of income for capital. Such exchanges usually have a commercial reality "
The subsidiary question the head of charge
Lord Justice Dyson:
Introduction
"While each case is found to turn upon its own facts, and no infallible criterion emerges, nevertheless the decisions are useful as illustrations and as affording indications of the kind of considerations which may relevantly be borne in mind in approaching the problem".
"So it is not surprising that no one test or principle or rule of thumb is paramount. The question is ultimately a question of law for the court, but it is a question which must be answered in light of all the circumstances which it is reasonable to take into account, and the weight which must be given to a particular circumstance in a particular case must depend rather on common sense than on strict application of any single legal principle."
"These may be useful, so long as it is recognised that they have emerged a posteriori from the facts of a given situation and that they may not always be suitable as guiding lines in other situations. I begin by asking two questions, which may be said to be generally relevant: what is the nature of the payment, and for what was the payment made? These, together with a third question, namely, how that, for which the payment was made, was to be used, were stated by Dixon J in his classic judgment in Sun Newspapers Ltd v Federal Commissioner of Taxation 61 CLR 337, 363".
"three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment."
"What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process."
It is common ground that this approach should be applied equally to the
classification of receipts.
Strick in more detail
"Premiums paid for leases have always been regarded as capital but we were not referred to any case where a premium had been paid for a very short lease say two or three years, and I do not wish to decide whether even in such a case a premium would necessarily be treated as capital outlay. But I am satisfied that the weight of this factor in the present cases is sufficient to turn the scale if otherwise there were doubt, and I would therefore hold that in each of the four cases the lump sums paid by the appellants cannot be allowed as revenue outgoings."
"Aided by the word pictures or descriptions of a capital asset which the decided cases contain I consider that a tie of the kind now being examined is a capital asset. If a lump sum is paid for such a tie for five years (or for a lesser number of years) it would give a false and unreal picture if the whole sum were debited to the profit and loss account for the first year or for the year in which the payment was made. If it is said to be hard that no part of the lump sum can be a debit in the profit and loss account that is merely to voice regret that there is no statutory provision which enables periodic allowances to be made. That however is not a matter for the courts."
"But the amount of the payment and the length of the tie are important elements among all the other relevant facts. I part company at once with the submissions of counsel on both sides on the one hand that a lump sum payment for a tie for more than an annual accounting period is necessarily capital and, on the other, that it is a trading expense and the length of the tie is utterly immaterial save as a factor in calculating the anticipated gallonage and so the amount of the lump sum payment. The lump sum payments here are large. But one must not attribute to that too much importance because after all the lump sum payment is calculated on the basis that it represents no more than one penny per gallon on the expected sales over the length of the tie. So I approach this matter as one of judicial common sense ..."
"Here the nature of the payments lump sums the nature of the advantages obtained security in respect of the placing of orders for a period the substantial periods involved, the shortest being a period of five years, more than adequately establish the expenditure as made for the acquisition of capital assets."
He went on to say that he could see no logical basis for saying that 21 or 10
years was good enough to qualify as capital, but 3 or 5 years was too short, or
for saying that 5 years or 3 years may be long enough when there is a lease, and
not long enough where there is merely a personal covenant.
Indicia of a capital payment
"One might perhaps have expected that where a piece of property, be it copyright or anything else, is turned to account in a way which leaves in the owner what we may call the reversion in the property, so that upon the expiration of the rights conferred, whether they are to endure for a short or a long period, the property comes back to the owner intact, the sum paid as consideration for the grant of the rights, whether consisting of a lump sum or of periodical or royalty payments, should be regarded as of a revenue nature."
"A principle on some such lines as these would not, we think, be out of accord with the popular idea of the distinction between capital and income. But it is not, we think, open to this Court to adopt it as in itself affording a sufficient test "
The present case
Lord Justice Schiemann :