IRC v Willoughby, [1995] S.T.C. 143
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COURT OF APPEAL, CIVIL DIVISION
[1995] STC 143
HEARING-DATES: 6, 7, 16 December 1994
16 December 1994
CATCHWORDS:
Tax avoidance - Transfer of assets abroad - Income payable to persons
resident or domiciled outside the United Kingdom - Residency of
transferor - Whether transferor had to be ordinarily resident in
United Kingdom for charge to income tax - Income and Corporation Taxes
Act 1988, s 739.
Tax avoidance - Transfer of assets abroad - Income payable to persons
resident or domiciled outside the United Kingdom - Investment in
offshore premium bonds - Holder having ability to choose underlying
investments - Offshore bonds subject to separate tax regime - Whether
purpose of transfer the avoidance of liability to taxation - Income
and Corporation Taxes Act 1988, s 741.
HEADNOTE:
>From 1973 W and his wife (the taxpayers) were resident in Hong Kong
and were neither resident nor ordinarily resident in the United
Kingdom. In July 1986 W retired from his post as professor of law at
the University of Hong Kong whereupon he became entitled to a lump sum
payment from the university's provident fund. On advice he put the
lump sum into a single premium personal portfolio bond with RL, a
company incorporated, managed, controlled and resident in the Isle of
Man. In exchange, in August 1986, RL issued to him 19 policies of
insurance linked to fund 1121. The investment in that fund and any
subsequent changes in investment were decided on by a fund adviser
appointed by the taxpayers. The single premium bond had appealed to W
because it provided him with something like a retirement annuity and
he had specifically chosen a RL offshore bond since the income could
be rolled up gross and it would be subject to a tax regime recently
introduced by Parliament (s 553 of the Income and Corporation Taxes
Act 1988). W returned to England and became ordinarily resident in the
United Kingdom in May 1987. In February 1989, on the maturity of the
first of three insurance policies previously taken out, W chose to
effect a further single premium personal portfolio bond with RL (no
2387). The proposal was made by his wife and the appropriate policies
were issued to her on 13 March 1989. In February that procedure was
repeated with the surrender values of the second and third insurance
policies which were transferred in payment of the single premium due
for the policies in respect of the bond (no 3343) which were issued to
Mrs W. The investment in funds 2387 and 3343 were decided on by the
fund adviser appointed by the taxpayers. Finally in August 1990 three
further policies were issued to W under the first bond, in return
further investments were added to that bond. On 18 March 1991 W
disclosed the three bonds to the Revenue. The Revenue assessed W to
tax on the income arising under the bonds for the years 1987-88,
1988-89, 1989-90 and 1990-91 and his wife for the year 1990-91 under s
7391 of the 1988 Act (and its statutory predecessor) on the ground
that they had sought to avoid income tax by the transfer of assets
abroad. The Revenue took the view that a bond or policy could only be
regarded as not effected for the purpose of avoiding a liability to
taxation and thereby qualify for exemption from the charge in s 739 by
s 7412 if the investments to which the bond or policy was linked were
pooled and that personal portfolio bonds like those taken out by the
taxpayers in which the policyholder had the ability to nominate the
underlying investments did not qualify for the exemption in s 741. A
Special Commissioner allowed the taxpayers' appeals. In relation to
fund 1121, he held that as W had not been resident or ordinarily
resident in the United Kingdom when the funds were transferred, s 739
did not apply. In relation to all three bonds he rejected the Crown's
distinction between personal portfolio bonds in which the policyholder
had the ability to nominate the underlying investments and all the
others (98% of the whole) which had no such ability, there being no
grounds for concluding that the 98% sought the less to avoid liability
to income tax or that the 2% sought the more to avoid such liability.
The commissioner decided that the transfers had not been made for the
purpose of avoiding liability to tax and held that the charge under s
739 was disapplied by s 741(a). The Crown appealed.
Held - (1) The words 'effected by him' should be interpolated after
the words 'transfer of assets' in s 739(1) so as to establish a link
between the transferor and the individual who avoided tax. Such a
construction carried with it the requirement that the transferor
should be ordinarily resident in the United Kingdom. The same result
was reached by focusing attention not to the point of time when tax
was avoided but rather to the point of time when the transfer which
enabled the subsequent avoidance to be achieved was carried out. As
the individual in question had to be ordinarily resident in the United
Kingdom at whatever was the relevant time it followed from that that
the transferor had to be so resident at the time of the transfer.
Accordingly, the court would uphold the Special Commissioner's
decision on the first point. Vestey v IRC [1980] STC 10 applied.
Herdman v IRC (1967) 45 TC 394 not followed.
(2) By choosing an offshore bond or policy, the taxation of which had
been provided for expressly in recent legislation, tax was not avoided
it was deferred. Indeed, it was deferred to an event which Parliament
had prescribed not to a time of the taxpayer's choice. Moreover, the
genuine application of the taxpayer's money in the acquisition of a
species of property for which Parliament had determined a special tax
regime did not amount to tax avoidance merely on the ground that the
taxpayer might have chosen a different application which would have
subjected him to less favourable tax treatment. It was not one of the
purposes of the transfer or of the associated operation by which W and
his wife effected any of the RL bonds or policies that liability to
taxation should be avoided. Accordingly, the commissioner's conclusion
that the charge under s 739 was disapplied by s 741 would be upheld.
Comr of Inland Revenue v Challenge Corp Ltd [1986] STC 548 and IRC v
Brebner (1966) 43 TC 705 considered.
The Crown's appeal would therefore be dismissed.
NOTES:
For the liability of a transferor who seeks to avoid tax by
transferring assets abroad, see Simon's Direct Tax Service E1.731.
For the exemption from charge on income arising from a transfer of
assets abroad, see ibid, E1.726.
For reliefs for investors on gains from non-resident policies, see
ibid, E3.512.
For the Income and Corporation Taxes Act 1988, ss 739, 741, see ibid,
Part G1.
CASES-REF-TO:
Comr of Inland Revenue v Challenge Corp Ltd [1986] STC 548, [1987] AC
155, PC.
Congreve v IRC [1948] 1 All ER 948, 30 TC 163, HL; [1947] 1 All ER
168, CA
Edwards (Inspector of Taxes) v Bairstow [1956] AC 14, [1955] 3 All ER
48, 36 TC 207, HL.
Ensign Tankers (Leasing) Ltd v Stokes (Inspector of Taxes) [1992] STC
226, [1992] 1 AC 655, [1992] 2 All ER 275, HL.
Herdman v IRC [1968] NI 74, 45 TC 394, CA (NI).
IRC v Duke of Westminster [1936] AC 1, 19 TC 490, HL.
IRC v Brebner [1967] 2 AC 18, [1967] 1 All ER 729, 43 TC 705, HL.
Pepper (Inspector of Taxes) v Hart [1992] STC 898, [1993] AC 593,
[1993] 1 All ER 42, HL.
Vestey v IRC [1980] STC 10, [1980] AC 1148, [1979] 3 All ER 976, 54 TC
503, HL; varying [1977] STC 414, [1979] Ch 177, [1977] 3 All ER 1073.
CASES-CITED:
Abbott v Philbin (Inspector of Taxes) [1960] Ch 27, [1959] 3 All ER
590, CA; rvsd [1961] AC 352, [1960] 2 All ER 763, 39 TC 82, HL.
Hague v IRC [1969] 1 Ch 393, [1968] 2 All ER 1252, 44 TC 619, CA.
Howard De Walden (Lord) v IRC [1942] 1 KB 389, 25 TC 121, CA.
IRC v Brackett [1986] STC 521, 60 TC 134.
IRC v Goodwin [1975] STC 173, [1975] 1 WLR 640, [1975] 2 All ER 708,
CA; affd [1976] STC 28, [1976] 1 WLR 191, [1976] 1 All ER 481, 50 TC
583, HL.
Macdonald v IRC [1940] 1 KB 802, 23 TC 449.
Philippi v IRC [1971] 1 WLR 1272, [1971] 3 All ER 61, 47 TC 75, CA.
Sheppard and anor (Trustees of the Woodlands Trust) v IRC (No 2)
[1993] STC 240.
Vestey's Exors v IRC [1949] 1 All ER 1108, 31 TC 1, HL
INTRODUCTION:
Cases stated Inland Revenue Commissioners v Willoughby (Peter)
1. At a hearing before a single Commissioner for the special purposes
of the Income Tax Acts on 18, 19 and 20 January 1993, Peter Geoffrey
Willoughby (Professor Willoughby) appealed against the undermentioned
assessments to income tax:
Year Amount of assessment
1987-88 £5,566
1988-89 £1,594
1989-90 £881
1990-91 £254
For the year 1987-88 the income which formed the subject matter of the
assessment was charged to tax under s 478 of the Income and
Corporation Taxes Act 1970 ('Transfer of assets abroad'). For the
remaining years the income was charged under s 739 of the Income and
Corporation Taxes Act 1988 (the 1988 Act) (the successor to s 478). No
distinction was drawn between the two charging provisions. Hereafter
the commissioner referred to s 739 of the 1988 Act unless the context
otherwise required.
2. At the same time as the commissioner heard the appeal of Professor
Willoughby he heard also the appeal of Ruth Marylyn Willoughby, the
wife of Professor Willoughby (Mrs Willoughby), against two assessments
to income tax charged as aforesaid for 1986-87 and 1990-91 in the sums
of £17,493 and £1,754 respectively. It was agreed between the parties
that the assessment on Mrs Willoughby for 1986-87 should be
discharged. Subject to that, the issues in her appeal against the
assessment for 1990-91 were the same as those in the appeal of
Professor Willoughby. Their appeals were heard together.
3. The issues which arose were as follows: (1) Whether s 739
('Prevention of avoidance of income tax') could apply to a transfer of
assets made by a transferor at any time when he was not ordinarily
resident in the United Kingdom. (2) Whether s 739 could apply to a
transfer of assets situated outside the United Kingdom made by a
transferor at a time when he was ordinarily resident in the United
Kingdom. (3) Whether s 739 could apply to the income arising under a
policy of life insurance to which the provisions of ss 539 to 554 of
the 1988 Act were applicable. (4) Whether the deferral of a liability
to United Kingdom income tax could constitute the avoidance of
liability to income tax for the purposes of s 739. (5) Whether on the
facts as found: (a) the purpose of avoiding liability to taxation was
the purpose or one of the purposes for which the transfer of assets to
Royal Life Insurance International Ltd or any operation associated
therewith was effected; or (b) that transfer and any operations
associated therewith were bona fide commercial transactions and not
designed for the purpose of avoiding liability to taxation. (6)
Whether the income and gains sought to be imputed to Professor
Willoughby under s 739 were exempted from taxation in the United
Kingdom by art 3(2) of the Arrangement scheduled to the Double
Taxation Relief (Taxes on Income) (Isle of Man) Order 1955, SI
1955/1205, as being the 'industrial or commercial profits of a Manx
enterprise'.
4. Professor Willoughby was represented by Mr Robert Carnwath QC and
Mr Philip Baker. The Commissioners of Inland Revenue (the Crown) were
represented by Mr S J Tabbush of the Inland Revenue Solicitor's
Office.
5. Oral evidence was given by Professor Willoughby and on his behalf
by Mr David Thomas Wilkie who until 1987 was a director of Personal
Financial Consultants Ltd and had since that date been a director of
Matheson PFC Ltd.
[Paragraph 6 listed the documentary evidence.]
7. At the conclusion of the hearing the commissioner reserved his
decision which he gave on 23 March 1993. It was annexed hereto and
formed part of the case. The facts and contentions of the parties were
set out in his decision. It will be seen therefrom that he decided the
first and fifth issues in the negative in favour of Professor
Willoughby and Mrs Willoughby and the second, third, fourth and sixth
issues in favour of the Crown. He discharged all the assessments.
8. In addition to the cases referred to in the commissioner's decision
there were cited:
Astor v Perry (Inspector of Taxes) [1935] AC 398, 19 TC 255.
Ramsden v IRC (1957) 37 TC 619.
Sargent (Inspector of Taxes) v Barnes [1978] STC 322, [1978] 1 WLR
823.
Sun Life Assurance Co of Canada v Pearson (Inspector of Taxes) [1986]
STC 335.
Vestey's Exors v IRC (1946) 31 TC 1.
9. After the determination of the appeal the Crown on 23 March 1993
expressed its dissatisfaction therewith as being erroneous in point of
law and on 16 April 1993 required the commissioners to state a case
for the opinion of the High Court pursuant to s 56 of the Taxes
Management Act 1970.
10. The questions of law for the opinion of the court were: (a)
whether the commissioner had erred in answering in the negative the
first question in issue set out in para 3 above, and (b) whether there
was no evidence upon which the commissioner could have answered in the
negative the fifth question in issue as aforesaid.
For the purposes of para 2 of the Revenue Appeals Order 1987, SI
1987/1422, the commissioner certified that his decision involved a
point of law relating wholly or mainly to the construction of an
enactment which had been fully argued before him and fully considered
by him.
Inland Revenue Commissioners v Willoughby (Ruth)
1. At a hearing before a single Commissioner for the special purposes
of the Income Tax Acts sitting on 18, 19 and 20 January 1993, Ruth
Marylyn Willoughby (Mrs Willoughby) appealed against assessments to
income tax for 1986-87 and 1990-91 in the sums of £17,493 and £1,754
respectively charged under s 478 of the Income and Corporation Taxes
Act 1970 ('Transfer of assets abroad') in the case of the earlier
assessment and under s 739 of the Income and Corporation Taxes Act
1988 (the 1988 Act) (the successor to s 478) in the case of the later
assessment.
2. At the same time as the commissioner heard the appeal of Mrs
Willoughby he heard also the appeal of Peter Geoffrey Willoughby, the
husband of Mrs Willoughby (Professor Willoughby), against assessments
to income tax under the aforesaid statutory provisions as from time to
time in force for the years 1987-88 to 1990-91 inclusive. It was
agreed between the parties that the assessment on Mrs Willoughby for
1986-87 should be discharged. Subject to that the issues in Professor
Willoughby's appeal were the same as those in the appeal of Mrs
Willoughby. Their appeals were heard together.
3. The issues which arose were as follows: (1) Whether s 739
('Prevention of avoidance of income tax') could apply to a transfer of
assets made by a transferor at any time when he was not ordinarily
resident in the United Kingdom. (2) Whether s 739 could apply to a
transfer of assets situated outside the United Kingdom made by a
transferor at a time when he was ordinarily resident in the United
Kingdom. (3) Whether s 739 could apply to the income arising under a
policy of life insurance to which the provisions of ss 539 to 554 of
the 1988 Act were applicable. (4) Whether the deferral of a liability
to United Kingdom income tax could constitute the avoidance of
liability to income tax for the purposes of s 739. (5) Whether on the
facts as found: (a) the purpose of avoiding liability to taxation was
the purpose or one of the purposes for which the transfer of assets to
Royal Life Insurance International Ltd or any operation associated
therewith was effected; or (b) that transfer and any operations
associated therewith were bona fide commercial transactions and not
designed for the purpose of avoiding liability to taxation. (6)
Whether the income and gains sought to be imputed to Mrs Willoughby
under s 739 were exempted from taxation in the United Kingdom by art
3(2) of the Arrangement scheduled to the Double Taxation Relief (Taxes
on Income) (Isle of Man) Order 1955, SI 1955/1205 (the Arrangement),
as being the 'industrial or commercial profits of a Manx enterprise'.
4. Mrs Willoughby was represented by Mr Robert Carnwath QC and Mr
Philip Baker. The Commissioners of Inland Revenue (the Crown) were
represented by Mr S J Tabbush of the Inland Revenue Solicitor's
Office.
5. Oral evidence was given on behalf of Mrs Willoughby by Professor
Willoughby and Mr David Thomas Wilkie who until 1987 was a director of
Personal Financial Consultants Ltd and had since that date been a
director of Matheson PFC Ltd.
6. In order to save repetition the commissioner repeated herein,
substituting Mrs Willoughby for Professor Willoughby where the context
required, paras 6 to 9 of the case the commissioner had stated for the
opinion of the High Court at the request of the Crown concerning
Professor Willoughby and substituting for the second sentence in para
7 thereof 'It formed part of the case but it was not annexed hereto
since it was annexed to the said case the commissioner had stated
concerning Professor Willoughby'. The commissioner decided the first
and fifth issues in the negative in favour of Mrs Willoughby and the
second, third, fourth and sixth issues in favour of the Crown.
10. The questions of law for the opinion of the court were: (a)
whether the commissioner had erred in answering in the negative the
first question in issue set out in para 3 above, and (b) whether there
was no evidence upon which the commissioner could have answered in the
negative the fifth question in issue as aforesaid.
For the purposes of para 2 of the Revenue Appeals Order 1987, SI
1987/1422, the commissioner certified that his decision involved a
point of law relating wholly or mainly to the construction of an
enactment which had been fully argued before him and fully considered
by him.
DECISION
1. (a) Professor Willoughby appeals against assessments to income tax
for the years 1987-88 to 1990-91 inclusive. Mrs Willoughby appeals
against assessments to income tax for the year 1986-87 and the year
1990-91. It is agreed between the parties that the assessment on Mrs
Willoughby for 1986-87 should be discharged. I am satisfied that that
should be so. (b) Professor Willoughby also appeals against the
Board's rejection of his claim for relief under s 788 of the Income
and Corporation Taxes Act 1988 (the 1988 Act) and art 3(2) of the
Arrangement scheduled to the Double Taxation Relief (Taxes on Income)
(Isle of Man) Order 1955, SI 1955/1205 (the Arrangement), for the
years 1988-89, 1989-90 and 1990-91.
2. The income which forms the subject matter of the assessments is
charged to tax under the provisions of Ch III ('Transfer of assets
abroad') of Pt XVII ('Tax avoidance') of the 1988 Act and in
particular the first section of that Chapter, s 739, for the years
1988-89 onwards. The income for 1987-88 technically is charged under s
478 of the Income and Corporation Taxes Act 1970 (the 1970 Act), the
predecessor of s 739 and the successor to s 412 of the Income Tax Act
1952 which in its turn replaced the original enactment in s 18 of the
Finance Act 1936. For present purposes no distinction is drawn between
the guise in which the charging provisions appear at any time. I shall
refer to the 1988 Act throughout this decision except where the
context otherwise requires.
3. The issues which arise are as follows: (1) Whether s 739
('Prevention of avoidance of income tax') can apply to a transfer of
assets made by a transferor at any time when he was not ordinarily
resident in the United Kingdom. (2) Whether s 739 can apply to a
transfer of assets situated outside the United Kingdom made by a
transferor at a time when he was ordinarily resident in the United
Kingdom. (3) Whether s 739 can apply to the income arising under a
policy of life insurance to which the provisions of ss 539 to 554 of
the 1988 Act are applicable. (4) Whether the deferral of a liability
to United Kingdom income tax can constitute the avoidance of liability
to income tax for the purposes of s 739. (5) Whether on the facts as
found: (a) the purpose of avoiding liability to taxation was the
purpose or one of the purposes for which the transfer of assets to
Royal Life Insurance International Ltd or any operation associated
therewith was effected; or (b) that transfer and any operations
associated therewith were bona fide commercial transactions and not
designed for the purpose of avoiding liability to taxation. (6)
Whether the income and gains sought to be imputed to Professor and Mrs
Willoughby under s 739 are exempted from taxation in the United
Kingdom by art 3(2) of the Arrangement, as being the 'industrial or
commercial profits of a Manx enterprise'.
4. Professor and Mrs Willoughby were represented by Mr Robert Carnwath
QC and Mr Philip Baker. The Crown was represented by Mr S J Tabbush of
the Inland Revenue Solicitor's Office. Mr Carnwath and Mr Tabbush very
helpfully provided respectively a skeleton and a note of argument.
5. Oral evidence was given by Professor Willoughby and on his behalf
by Mr David Thomas Wilkie. No oral evidence was led on behalf of the
Crown.
[Paragraph 6 listed the documentary evidence.]
7. Facts
(1) Professor Peter Willoughby was born in 1937 in the United Kingdom.
Mrs Ruth Willoughby was born in 1936 in the United Kingdom. Professor
Willoughby is a solicitor and was until 1986 professor of law at the
University of Hong Kong. Following his retirement from the University
of Hong Kong, Professor Willoughby became a partner with the
solicitors' firm of Turner Kenneth Brown, a position which he held
until April 1992. Mrs Willoughby is a retired solicitor.
(2) Professor and Mrs Willoughby have both spent much of their working
lives in employment outside the United Kingdom. From 1962 to 1966 they
were resident in parts of Africa. In 1973 they became resident in Hong
Kong. Mrs Willoughby returned to England and became ordinarily
resident in the United Kingdom on 13 August 1986. Professor Willoughby
returned to England and became ordinarily resident in the United
Kingdom in May 1987. Prior to their return, they were each ordinarily
resident outside the United Kingdom. On 14 May 1992 Professor and Mrs
Willoughby left the United Kingdom and became resident in Alderney.
(3) Professor Willoughby is a well-known expert in the field of
revenue law, particularly the revenue law of Hong Kong. He is the
author of the leading three-volume work on Hong Kong Revenue Law, and
is a member of the Board of Review under the Hong Kong Inland Revenue
Ordinance (a body equivalent in status to the combined Special and
General Commissioners in the United Kingdom). He was until 1992 a
member of the Revenue Law Committee of the English Law Society, and of
the Value Added Tax Sub-Committee of that committee. He is chairman of
the Hong Kong Joint Liaison Committee on Taxation, which brings
together representatives of the Inland Revenue of Hong Kong and
professional advisers in the taxation field. At the University of Hong
Kong, Professor Willoughby lectured on general legal subjects such as
land law and company law besides tax law. He was a member of the Law
Reform Committee and of the Securities Commission in Hong Kong. He now
spends about five months of each year in Hong Kong where he is a
visiting professor and a consultant to a large firm of lawyers.
(4) During most of their working lives Professor and Mrs Willoughby
have been in non-pensionable employment. They have had to make and
have made their own provision for retirement. At the University of
Hong Kong there was a university superannuation fund of which
Professor Willoughby was a member, and to which, whilst he was
employed by the university, he duly contributed out of his income
subject to Hong Kong taxation, but it was not going to provide him
with adequate resources for his retirement. So in 1978 he consulted
Personal Financial Consultants Ltd (PFC) which offers a variety of
financial and investment services. As a result Professor and Mrs
Willoughby entered into a Save and Prosper International Ten Plus
Flexible Policy with Save and Prosper International Insurance Ltd of
Bermuda, commencing on 14 February 1979. They effected a similar
policy commencing on 14 February 1981 and another on 14 January 1982.
(5) Each of the Save and Prosper policies were certified by the
Commissioners of Inland Revenue under para 1(1)(a) of Sch 2 to the
Finance Act 1975 as a 'qualifying policy'. The premia were payable
monthly and the policies matured at the expiration of ten years from
their inception. Two of the policies were linked to shares in an open-
ended company named Save and Prosper Jardine Far Eastern Fund SA and
the third (1981) was linked to Save and Prosper International Growth
Fund Ltd. The obligation of Save and Prosper International Insurance
Ltd in condition 2 was to credit the 'share fund' with each premium
and an amount equal to any distribution received by it in respect of
shares in the share fund being a separately identified account
maintained by Save and Prosper International Insurance Ltd for the
purpose of calculating benefits due to the persons assured under the
policy and to which cash and shares are credited and debited under
condition 2. Condition 8 enables the assured within one month of
maturity to extend the period of maturity by ten years paying a
further premium each month during the extended period. The benefits
assured on maturity date are the value of the share fund less a tax
deduction payable in cash or by transfer of the number of shares in
the share fund.
(6) On 17 November 1983 the Revenue published a press release entitled
Offshore and Overseas Funds; Life Assurance Policies Issued by Non-
Resident Life Offices (see Simon's Tax Intelligence 1983 p 512). This
followed upon the answer given on that date by the Financial Secretary
to the Treasury to a written parliamentary question seeking details of
proposed legislation.
The question put to the Chancellor of the Exchequer was 'what will be
the details of his proposed legislation for taxing disposals of
holdings in offshore and overseas funds, and whether, in addition to
proposing legislation on investments in such funds, he intends to
change the tax treatment of life assurance policies issued by non-
resident life offices to UK residents.'
The answer reads as follows:
'I have authorised the Inland Revenue to issue today a statement
giving the details of the new provisions for investments in offshore
and overseas funds and of changes we intend to introduce in the tax
rules for life assurance policies issued by non-resident life offices.
The overall shape of the new provisions relating to the funds will be
as follows:
(i) they will apply to disposals after 1 January 1984 of interests in
funds held by investors resident or ordinarily resident in the UK;
(ii) they will apply to all funds not resident in the UK, irrespective
of the type of investment they undertake -- they will not be confined
to specific types of fund such as money funds;
(iii) the new rules will not apply where it is established that a fund
genuinely distributes all its income. For this purpose, funds will be
able to obtain regular clearance as "distributors" from the Inland
Revenue;
(iv) except for any gain accruing before 1 January 1984, the whole of
the investor's gain on disposal will be taxed as income;
(v) as at present, the capital gains regime will apply to gains
accruing before 1 January 1984: the new rules will not apply
retrospectively to such gains.
As regards life assurance policies issued by non-resident life offices
to UK residents, there are a number of anomalies in the present rules.
We propose to make the following changes in their tax treatment:
(i) policies issued in respect of insurances made after midnight
tonight will not satisfy the qualifying conditions unless issued or
administered in the course of UK branch business.
(ii) UK residents will be liable to income tax in full on their
profits from non-qualifying policies issued after midnight tonight.
The provisions will also apply to existing policies in certain
circumstances; but special measures will be taken to safeguard the
bona fide expatriate business of non-resident life companies. Fuller
details are given in the Inland Revenue statement.
It is proposed to legislate in the 1984 Finance Bill. Draft Clauses
will be published in due course.'
Professor Willoughby saw the press release. It caused him concern, so
much so that he wrote to the Financial Secretary. With his Save and
Prosper policies in mind, it seemed from para (iv) and the reference
in the second para (ii) to 'profits' that all permitted withdrawals
during the currency of a policy would be charged to tax at the full
rates. His Save and Prosper policies would be charged to tax under the
proposed regime. In 1983-84 Professor Willoughby was not alive to the
provisions of s 478 of the 1970 Act which is not mentioned in any part
of the press release nor was it referred to by the Financial Secretary
in his reply to Professor Willoughby's letter. The new legislation was
enacted in 1984 (and is now contained in ss 539-554 of the 1988 Act).
(7) In 1985 Professor Willoughby decided to take early retirement from
the university and in July of that year he gave one year's notice
accordingly. He was to receive on retirement a lump sum payment from
the university's provident fund and he sought advice from PFC. He saw
Mr Glover, the managing director, and Mr David Wilkie who was another
director. He wanted something in the nature of a formal arrangement
for a pension. The Save and Prosper arrangements were all right but
they were not equivalent to a pension. Ideally he would have liked a
deferred pension approved by the Revenue under s 226 of 1970 Act, but
he did not qualify for such a pension. In 1986 he was aged 49. He
intended to return to live in the United Kingdom. He had a job lined
up with Turner Kenneth Brown in London. He was retaining contacts in
Hong Kong. He had a useful earning capacity and did not need income
from his overseas savings in the university provident fund. He wanted
to lock up his retirement payment from the university fund. His sole
concern was to provide for his ultimate retirement and to have an
arrangement which was flexible and also simple for his wife to deal
with in the event of his death. Avoiding United Kingdom tax was not in
his mind. He rejected a suggestion from a third party that he should
adopt a scheme under which it was said no tax would ever be payable.
He knew about the new taxation provisions introduced by the Finance
Act 1984 (the 1984 Act).
PFC suggested that he put his money into a single premium bond taken
out with Royal Life Insurance International Ltd (Royal Life). Such a
bond he was advised had the merit of flexibility in that the
investments to which it was linked could be changed. Professor
Willoughby adopted the proposed course of action.
(8) In 1984 PFC had prepared a pamphlet entitled The Single Premium
Bond: The Offshore and Onshore Versions. The notes were written as a
guideline to the then current position following the enactment of the
1984 Act as PFC understood it. They reflect the advice given orally to
Professor Willoughby. Messrs Glover and Wilkie were the authors of the
pamphlet. Paragraphs 1 to 3 and para 6 read as follows:
'1. INTRODUCTION
1.1 The Single Premium Bond was originally designed to take advantage
of the tax concessions given to the U.K. life assurance industry in
the sweeping changes of the 1974 Finance Act. Since then, there have
been many alterations, and in the early 1970's some of the more
adventurous international life assurance companies set up "off-shore"
Bonds investing in "off-shore" unit trusts but still retaining the in-
built U.K. tax advantages for the returning investor.
1.2 The Bond is a lump sum life assurance policy where the underlying
investment is in a unit trust or a range of unit trusts.
1.3 The Bond is principally of use to the expatriate who intends to
return to the United Kingdom.
2. GENERAL
2.1 Control
The Bond can be written on a single-life or on a joint-life, last
survivor basis. The contract may also be assigned.
2.2 Flexibility
The Bond may be encashed at any time or partial surrenders made from
time to time. The Bond does not have to be held for a specific number
of years, although it must be stressed that the benefits are greater,
as a general rule, the longer the bond is held.
2.3 Withdrawals
Bonds automatically re-invest all dividends and yields from the
underlying investments. Regular withdrawals can be made to provide
income, and, as part of each withdrawal is treated as a return of
capital, the level of taxation on regular withdrawals is substantially
reduced, if not eliminated. The level of withdrawals, expressed as a
percentage of the initial investment, may be varied to meet the
specific needs of the investor.
2.4 Investment Policy
The investment of each Bond may be spread over a number of funds
giving a sound and secure spread of international investments. These
are managed by well proven, long established management houses, and
can be arranged to produce capital growth and/or income in the form of
regular withdrawals. The investor does not have to leave his assets in
the spread of funds selected at the time of taking out a Bond. The
facility exists for him to change the investment emphasis by switching
from one fund to another to take advantage of changing investment
trends and to meet personal requirements.
The selected investments are dominated in U.S. dollars or Sterling,
although the underlying assets are invested in a spread of currencies,
depending on the fund selected.
2.5 Life Assurance
The contract provides for a death benefit, linked to the value of the
underlying assets.
3. DESCRIPTION OF TAXATION AND INVESTMENT CONSIDERATIONS
This is where it is necessary to distinguish between "off-shore" and
"on-shore" Bonds:>100>>101>
On-Shore
3.1 Tax
a. Design U.K. registered life office using U.K.
registered unit trusts.
b. Corporate Both the life company and unit trust pay
Tax U.K. tax on income, though at reduced
rates.
c. Tax on i. The initial investment can be
Proceeds for withdrawn over 20 years with no tax
U.K. resident liability i.e 5% per annum tax free for
20 years.
ii. Any additional withdrawals are only
subject to higher rate tax when added
on to the individual's taxable income
in the year of withdrawal.
iii. Final surrender -- overall profit "top-
sliced" and liable only to higher rate
tax levels in year of surrender, if
applicable.
3.2 Governed by performance of U.K. unit
Investment trusts -- enormous choice covering every
Implications market sector ranging from ultra-
conservative to highly specialised and
hence more speculative.
Off-Shore
3.1 Tax
a. Design Tax haven (Jersey, Bermuda, etc.)
registered life office using off-shore
unit trusts.
b. Corporate No U.K. tax liability.
Tax
c. Tax on i. Same as On-shore Bonds.
Proceeds for
U.K. resident
ii. Additional withdrawals are subject to
standard rate income tax plus the
higher rate if applicable, with a
proportionate reduction based on the
number of complete policy years spent
by the policyholder outside the U.K.
iii. Final surrender -- overall profit "top-
sliced" and liable to standard and
higher rate tax in year of surrender,
with the same proportionate reduction
in respect of policy years spent
overseas. (N.B. Pre-November 1983
Bonds have the same treatment as
on-shore Bonds.)
3.2 Dependent on performance of off-shore
Investment funds, but it should be noted that there is
Implications a considerable advantage with fixed
interest, deposit, bond and gilt funds for
tax-free "roll-up" within the funds. No
standard rate tax relief. No tax if not
drawn in the U.K. Potential gain if held
whilst abroad and "money funds" -- see
above -- are used
6. CONCLUSION AND SUMMARY
The Bond has been designed to provide a tax efficient, flexible and
easily controlled form of capital investment, and international
results have proved this right. There are marginal extra costs over
and above direct investment in unit trusts but set against a long term
investment, these must be acceptable. The question for the expatriate
of "On-shore" v "Off-shore" is easily balanced and depends on personal
circumstances, but the latter still continue to provide an excellent
long term accumulation investment vehicle for the secure range of
deposit and bond funds.'
(9) In July 1986 Professor and Mrs Willoughby jointly proposed for a
private portfolio bond with Royal Life which is a company
incorporated, managed and controlled and resident in the Isle of Man
not having a permanent establishment in the United Kingdom within the
terms of art 2(1)(k) of the Arrangement. On or before 8 August 1986, a
time when neither Professor nor Mrs Willoughby were resident in the
United Kingdom, Professor Willoughby paid out of moneys situated
outside the United Kingdom a cash premium to Royal Life and 19
separate policies of insurance were issued on 8 August 1986. The
policy of assurance occupies five lines. It was issued by Royal Life
on the terms and conditions contained in the policy and the schedule
issued therewith. There follow two pages of general conditions and
then a 'Schedule to a policy of assurance issued by Royal Life
Insurance International Limited on the Terms set out in its Standard
Life Policy Form Number RL2 and in this Schedule.' The policy number
is 4371599. Fund No 1121. Class of Assurance: Single Premium Bond.
Professor Willoughby and Mrs Willoughby are respectively the life
assured and the second life assured. Their dates of birth are given.
They are recorded as the policyholders. The schedule goes on to record
'A premium of US$10,000700 was paid, due 8 August 1986. Minimum Charge
Rate US$100700 per annum. Review date 8 August 1994 [8 years later]
No. of units allocated 10000 at a price of $1700 per Unit'. There were
identical schedules for policies numbered 4371600 to 4371616. The last
schedule for policy number 4371617 follows the same format, but the
premium, minimum charge rate and number of units is geared to
11,963.14.
(10) I need not set out all the general conditions. The policy is
governed by Manx law. The definitions in cl 1 indicate how the policy
operates.
'General Conditions
Definitions
1. (1) "The Company" means Royal Life Insurance International Limited.
(2) "The Fund" means each and any of the Funds specified in the
Schedule forming part of the Policy which are separately identified
accounts maintained by the Company solely for the purpose of
calculating benefits under this Policy and certain other Policies
issued by the Company.
(3) "Units" means the units into which the Fund is divided
representing proportionate shares of the investments of the Fund. The
number of Units for the time being need not correspond precisely with
the number of Units allocated to Policies for the purpose of
determining benefits payable. The number of Units in the Fund may at
any time at the discretion of the Company be divided or consolidated
into a greater or lesser number of Units as the case may be. In such
event the number of Units allocated to the Policy at the date on which
the division or consolidation is made will be increased or decreased
as the case may be. The allocation of Units is purely notional and
reference to Units is made solely for the purpose of computing
benefits under the Policy.
(4) "The Life Assured" means the person named in the Schedule to this
Policy as the Life Assured, or the survivor of them where more than
one Life Assured is named.
(5) "Policy Value" means the value of the Units (calculated at the Bid
Price) standing to the credit of the Policy less the amount of any
premiums due but unpaid.'
Clause 8 deals with the valuation of the fund and provides that there
shall be credited to the fund all amounts arising from the investment
thereof. Then follows a list of items that might be debited to the
fund. Quoted securities are valued at middle-market prices. Clauses 9
and 10 provide for death benefit and surrenders respectively.
'Death Benefit
9. On the death of the Life Assured (or, if two Lives Assured are
named in the Schedule, that of the longer surviving of them) the
amount payable will be the Policy Value on the next valuation date
following the date when all the assets of the Fund have been realised
for cash.
Surrenders
10. After first giving such prior written notice as the Company may
from time to time require, the Policyholder may elect to surrender the
Policy whereupon a cash sum will be paid equal to the Policy Value at
the date of the valuation of the Fund, less a charge of half the
Minimum Charge Rate applied to the period, if any, from the date of
surrender to the Review Date.'
Clause 12(a) states that 'The allocation of Units is purely notional
and reference to Units is made solely for the purpose of computing
benefits under the Policy.'
(11) The premium paid to Royal Life under bond 1121 was invested and
has remained invested in unit trusts and other investments held by
Royal Life within the fund to which the bond was linked. In their
proposal form dated 21 July 1986 Professor and Mrs Willoughby
requested the appointment of PFC as fund advisers to the fund to which
the policies were to be linked. They also authorised PFC to make the
initial choice of funds and to exercise any of the options for
switching between funds relevant to the Royal Life policies they had
effected. PFC were to have the same investment powers to exercise
options for switching between funds as if they were the policyholder.
These powers have been exercised. With the exception of one investment
the original investments have been changed. The exception is Personal
Financial Consultants International Portfolio Balanced Growth Fund the
holding in which increased between 30 September 1986 and 28 March
1991. This fund is a 'distributing fund' within s 760 of the 1988 Act.
(12) A Royal Life policy appealed to Professor Willoughby as he
considered that it provided him with something like a s 226 retirement
annuity in that he could make annual withdrawals free of tax within
limits, the withdrawals resembling an annuity, but unlike an annuity
capable of being timed, a feature which is not unique to Royal Life
bonds. Professor Willoughby was concerned about the tax charging
provisions under the 1984 Act (now s 539 of the 1988 Act) but he
decided to accept them and forgo the capital gains tax reliefs to
which he would have been entitled on realisation of investments held
by himself. It was his understanding also that the expense or the
charges levied by Royal Life were less than those charged by a
stockbroker or by PFC for managing his investments. In this he was
right but it emerged in cross-examination of Mr Wilkie that the
difference may not have been as much as he had supposed. If that be
the case I find that Professor Willoughby was not aware of it at any
material time. He knew that there were no 'front end charges' of 5%
which he would have had to pay had he himself bought units in
investment trusts. In this way the policy was 5% more valuable to him
than a direct investment would be. There was a strong disincentive to
procure the surrender of the policy within eight years of effecting it
since there would be an appreciable charge for doing so (which though
dated November 1988 I infer from the evidence was applicable in 1986).
(13) In 1989 the first of the three Save and Prosper Ten Plus policies
(the 1979 policy) was due to mature. By this time Professor and Mrs
Willoughby were ordinarily resident in the United Kingdom with every
intention of remaining there permanently.
On 1 February 1989 Matheson PFC (London) Ltd (a fellow company of PFC
which by this date had become part of the Jardine Matheson Group),
wrote to Professor Willoughby as follows:
'On maturity of your Save and Prosper 10+ Policy No. RPP/100092 there
are three options which are worthy of consideration:
1. Convert into a UK whole life contract which would provide you with
income free from personal tax liability in the future. However, the
underlying funds in which the investment would be held would have to
be Save & Prosper's standard UK range and all of these would be taxed
on income received as well as capital gains. The growth would,
therefore, be substantially less than an equivalent fund which was not
taxed. As you do not intend to start drawing an income for several
years it would seem to be important to get the gross roll-up.
2. Convert the policy into an offshore whole life policy which would
provide gross roll-up on the underlying funds but the income, when
taken, would be liable to personal tax at both basic and higher rates.
The investment funds which would be available to you under these
circumstances would be Save & Prosper's offshore funds, IPF and some
of the Jardine Fleming offshore funds. The 5% per annum withdrawal,
free from tax liability would apply.
3. Take the tax-free proceeds and invest in an offshore Personal
Portfolio Bond. This would provide gross roll-up in the investment
fund selected and there is virtually no restriction on what investment
may be selected, including building society and bank deposits, gilts
and equities. There is total flexibility to be able to switch between
all these investments as thought necessary. The 5% p.a. tax-free
withdrawal facility is available but on final surrender the gain is
subject to basic and higher rate tax if applicable at that time. Using
this reinvestment vehicle would enable the bond to be written on your
joint lives but to be owned by your wife, which means that any amount
withdrawn in excess of 5% would be regarded as taxable income in her
hands and could be set off against her own Personal Allowance which
will apply as from April 1990. This would be a tax efficient thing to
do.
The maturity date is the 13th March but Save & Prosper need to receive
your instructions by about the middle of February. Please let me know
your decision before then so that I can help you with any arrangements
which are necessary.'
(14) There was no tax difference between option 2 and option 3. Option
2 arises under the Save and Prosper Ten Plus policies themselves.
Professor Willoughby opted for option 3 and another personal portfolio
bond with Royal Life since it provided more flexibility and 'it was
all under one roof'. He did not select option 3 for the purpose of
avoiding United Kingdom tax. If he had appreciated any serious risk
from the application of s 739 he would have selected option 2. A
further possibility would have been to exercise the option in
condition 8 of the Save and Prosper policy to extend the period of
maturity by ten years.
(15) Mrs Willoughby proposed for the second Royal Life bond in
February 1989. The proceeds of the first (1979) Save and Prosper
policy which consisted of units in a unit trust not situated in the
United Kingdom (Personal Financial Consultants International Portfolio
Balanced Growth Fund) were transferred to Royal Life as payment of the
premium on the bond. On 13 March 1989 six policies were issued under
bond 2387. Royal Life retained those units together with cash on
general transaction account as the fund to which the bond was linked.
The formal parts of the policies and the schedules thereto are similar
to but not quite the same as those in bond 1121. Nothing turns on the
differences.
(16) In February 1990 Mrs Willoughby proposed for the third Royal Life
bond. The two remaining Save and Prosper Ten Plus policies were
surrendered and the proceeds in the form of units in the same unit
trust, Personal Financial Consultants International Portfolio Balanced
Growth Fund, were transferred to Royal Life as payment of a premium on
the bond. On 30 March 1990 nine policies were issued under bond 3343.
Again the formal parts are similar to but not the same as those in
bond 1121. In the case of bond 2387 and bond 3343 Mrs Willoughby is
the life assured and Professor Willoughby is the second life assured.
(17) On 17 August 1990 three further policies were issued to Professor
and Mrs Willoughby under bond 1121. The premium for these policies was
paid in the form of the transfer of units in a unit trust not situated
in the United Kingdom (Person Financial Consultants International
Portfolio Balanced Growth Fund). These units were then sold within the
bond by Royal Life to meet administrative charges on general
transactions account.
(18)(a) There are in evidence brochures issued by Royal Life giving
details about private portfolio bonds. Professor Willoughby was
provided with a brochure by PFC after he had signed the proposal forms
in 1986. It played no part in his decision to invest in bond 1121. He
relied on the advice he received from PFC. The brochures current in
1989 and 1990 played no greater part since at that time he had the
advice of Matheson PFC (London) Ltd. The earliest brochure containing
any reference to s 739 is dated June 1990. (b) PFC have many clients
investing in these bonds the majority of whom retire in Hong Kong.
They are useful where an individual receives a lump sum on retirement.
They are appropriate for residents in the European Communities and
Australia. Their favourable tax treatment is an attraction.
Administratively they are convenient for an individual since Royal
Life does all the work. Royal Life is an efficient company and it is
backed by a strong parent company in the United Kingdom.
(19) It is an agreed fact that the effect of the arrangements was that
the income arising in respect of the three bonds during the years of
assessment in issue was (apart from the operation of s 739 and its
predecessor) free of United Kingdom income tax until such time as the
respective insurance policies matured or were surrendered in such a
way as to enable Professor or Mrs Willoughby to receive sums equal to
the value of the contents of the fund. At that point, the gain arising
in connection with the policies would be chargeable in accordance with
s 541(1) of the 1988 Act (or its predecessor). Income has arisen in
each of the three funds; gains have arisen in the fund for bond 1121.
It is unnecessary to record here the amounts.
(20) On 18 March 1991 Professor Willoughby wrote to the Special
Investigations Section of Inland Revenue informing them of the three
bonds. Notices of assessment under s 478 of the 1970 Act and s 739 of
the 1988 Act were issued as indicated in para 1 above.
(21) It is accepted by the Crown that all of Professor Willoughby's
investment savings held in the funds were earned abroad and have never
been transferred from the United Kingdom to a non-resident (letter
dated 8 August 1991).
(22) Professor Willoughby's removal to Alderney in 1992, along with
Mrs Willoughby, represents a complete change of plan.
8. Statutory provisions
Section 739:
'(1) Subject to section 747(4)(b), the following provisions of this
section shall have effect for the purpose of preventing the avoiding
by individuals ordinarily resident in the United Kingdom of liability
to income tax by means of transfers of assets by virtue or in
consequence of which, either alone or in conjunction with associated
operations, income becomes payable to persons resident or domiciled
outside the United Kingdom.
(2) Where by virtue or in consequence of any such transfer, either
alone or in conjunction with associated operations, such an individual
has, within the meaning of this section, power to enjoy, whether
forthwith or in the future, any income of a person resident or
domiciled outside the United Kingdom which, if it were income of that
individual received by him in the United Kingdom, would be chargeable
to income tax by deduction or otherwise, that income shall, whether it
would or would not have been chargeable to income tax apart from the
provisions of this section, be deemed to be income of that individual
for all purposes of the Income Tax Acts . . .'
I need not read the remaining subsections. Subsection (1) contains
what used to be called 'the preamble' to s 478 of the 1970 Act and the
earlier legislation. Section 740 is not relevant. Section 741 reads:
'Section 739 and 740 shall not apply if the individual shows in
writing or otherwise to the satisfaction of the Board either --
(a) that the purpose of avoiding liability to taxation was not the
purpose or one of the purposes for which the transfer or associated
operations or any of them were effected; or
(b) that the transfer and any associated operations were bona fide
commercial transactions and were not designed for the purpose of
avoiding liability to taxation.
The jurisdiction of the Special Commissioners on any appeal shall
include jurisdiction to review any relevant decision taken by the
Board in exercise of their functions under this section.'
No question arises on s 742 ('Interpretation of ss 739 to 741').
9. The first issue
This concerns only the first transaction. The transfers of assets in
respect of the 19 policies issued under bond 1121 were made on or
before 8 August 1986 when neither Professor Willoughby nor Mrs
Willoughby were ordinarily resident in the United Kingdom.
Mr Carnwath submits that sub-s (1) on a literal reading restricts the
operation of s 739 to transfers of assets made by individuals who are
ordinarily resident in the United Kingdom at the time they make the
transfers. This follows from the decision of the House of Lords in
Vestey v IRC [1980] STC 10, [1980] AC 1148.
In that case two settlors who were ordinarily resident in the United
Kingdom conveyed in 1942 valuable property outside the United Kingdom
to trustees resident outside the United Kingdom to hold upon
discretionary trusts for a number of beneficiaries to some of whom
capital payments were made in the 1960s. The recipients were charged
to income tax under s 412 of the Income Tax Act 1952. The settlors
were not so charged since they received nothing nor had they any right
to receive any sum. It was held by the House of Lords that s 412 only
applied to an individual who made, or, maybe was associated with, the
transfer. In so doing the House reversed its own decision in Congreve
v IRC (1946) 30 TC 163 the ratio of which was that Mrs Congreve could
be taxed under s 18 of the Finance Act 1936 (the predecessor of s 412)
in respect of assets transferred by her father, thereby interpreting
the section in a wide manner.
For the Crown it is submitted that notwithstanding the decision in
Vestey the decision of the Court of Appeal in Northern Ireland in
Herdman v IRC (1967) 45 TC 394 is still good law. In that case,
Herdman being ordinarily resident in the Republic of Ireland
transferred shares in a Northern Irish company to a company resident
in the Republic in which he held shares. Herdman later became
ordinarily resident in the United Kingdom. It was found as a fact that
the transfer itself came within the statutory defence to s 412 (no tax
avoidance). The Court of Appeal rejected (as did the Special
Commissioners) the contention that s 412 did not apply because Herdman
was not ordinarily resident in the United Kingdom at the time of the
transfer Herdman succeeded on another point and that was the only
point considered in the Crown's appeal to the House of Lords. There
was no cross-appeal by Herdman.
In order that the instant issue can be properly appreciated I should
cite at some length the judgment of Lord MacDermott CJ (at 403-405):
'This concession recognises the width of meaning given to these words
"power to enjoy" by subs. (5), and brings us at once to the first
proposition submitted by Mr Potter on behalf of [the taxpayer],
namely, that the words "such an individual" must relate to the words
of the preamble ". . . by individuals ordinarily resident in the
United Kingdom" and must therefore connote an individual who is so
resident at the time of the scheme for tax avoidance, which I take to
mean at the time of the transfer of assets and such associated
operations as may have to be regarded in conjunction therewith. If
this is the meaning of the subsection then, the argument proceeded,
[the taxpayer] was not within it, as he was not ordinarily resident in
the United Kingdom at the time of the transfer or at any material
time. The Attorney-General, for the Crown, vigorously disputed this
construction of the subsection, and submitted that the words
"ordinarily resident in the United Kingdom" simply referred to the
year of charge. This point does not seem to have been the subject of
decision, but there are passages in some of the reported cases which,
at any rate at first sight, appear to lend support to Mr Potter's
contention. Thus, in MacDonald v Commissioners of Inland Revenue 23 TC
449, at page 456, Macnaghten J (speaking of the similar wording of
section 18 of the Finance Act 1936) says: ". . . the section has no
application to any transfer of assets unless . . . it is a transfer
made by an individual ordinarily resident in the United Kingdom . . ."
And, again, in Vestey's Executors v Commissioners of Inland Revenue
(1949) 31 TC 1, at page 116, Lord Reid observes: "Section 18 applies
if individuals ordinarily resident in the United Kingdom seek to avoid
liability to Income Tax by transferring assets so that income becomes
payable to persons resident out of the United Kingdom." In my view
such passages do not suffice to sustain Mr. Potter's submission, and I
have come to the conclusion that that of the Crown is to be preferred.
Macnaghten J and Lord Reid were not directing their observations to
the point which has been raised before us, and their paraphrase of the
corresponding language of s 18 was not, I feel certain, intended to
settle any issue of construction. It is clear that the "individual" of
s 412 need not be the maker of the transfer or an active participant
in the scheme for avoidance: see Congreve v Commissioners of Inland
Revenue (1948) 30 TC 163, at pages 196-7, and at page 204, where Lord
Simonds says: "The preamble or introductory words of the Section which
state its purpose do not, in my view, assist the contention, which was
developed upon its operative words, that the avoidance by an
individual of liability to tax must be achieved by means of a transfer
of assets effected by that individual. They are, on the contrary, in
the widest possible terms, and I do not know what better words could
be used if the Legislature intended to define its purposes as covering
a transfer of assets by A, by means of which B avoided liability to
tax. When I turn to the operative words, I cannot reach any other
conclusion. It was urged that in their context the words 'by means of
any such transfer' can mean only a transfer effected by the individual
who avoids tax liability. It was said that they do not mean the same
as 'as a result of' or 'by virtue or in consequence of', and the
immediate proximity of the latter phrase was referred to as pointing
the contrast. My Lords, this is altogether too fine a distinction. The
difference of the language is sufficiently explained by the wish of
the draftsman not to use the same expression twice. But it is to my
mind clear, first, that in their ordinary grammatical sense the words
'by means of' do not connote any personal activity on the part of the
person who is said to enjoy or suffer something by those means, and,
secondly, that in their present context it is not necessary or
legitimate in order to give a limiting sense to the words to read them
as if they were followed by such words as 'effected by him'." The
individual, accordingly, at whom s 412 is aimed is the person who
seeks to avoid liability to charge, irrespective of whether he was or
was not a participant in setting up the scheme for avoidance. This
explains the reference to "ordinarily resident in the United Kingdom",
for that points to those who would gain by the avoidance rather than
those who may have contrived it -- perhaps in some earlier year. There
seems no reason why the section should make such residence necessary
for those who play a part in the scheme for avoidance at the time they
do so, and I do not think the language used provides for such a
requirement. The section is drafted in comprehensive terms and there
can be no doubt it was intended to cast a wide net. That being the
nature of the enactment, it would be surprising if Parliament had left
such a large loophole open as would be the case if Mr Potter's
argument were well founded. Contrast, for example, the following
instances. A, whose career abroad ends when he attains a certain age,
decides to retire to the United Kingdom, and before his return from
abroad transfers his United Kingdom assets to a company he has
incorporated in the Irish Republic with a view to future tax
avoidance. B, on the other hand, who has always been resident in the
United Kingdom, does likewise for the same reason. Why should A be
outside and B within s 412? Neither the wording of the section nor its
underlying purpose seems to me to call for such an anomalous
distinction. I would therefore hold against [the taxpayer] on this
part of the case.'
Mr Tabbush relies on this judgment even though Congreve was later
reversed. It is a specific decision that the transferor need not be
resident in the United Kingdom when he makes the transfer of assets by
virtue of which income becomes payable to persons resident outside the
United Kingdom. That he should be ordinarily resident in the United
Kingdom at the time of the transfer is not necessary: he must be
resident in the United Kingdom when the income arises which would be
his but for the transfer. Professor Willoughby is in exactly the same
position as Herdman on this score. If he were not ordinarily resident
in the United Kingdom when the income so arises he would not be
taxable anyway.
Although the House of Lords in Vestey did not consider the case where
a transfer is made by a non-United Kingdom resident who later becomes
resident, the construction of s 412 of the 1952 Act adopted by their
Lordships in my opinion points towards a requirement that the
transferor shall be ordinarily resident at the time he makes the
transfer. Lord Wilberforce says that s 412 has a limited effect
particularly having regard to the preamble. He contrasts this with an
extended meaning (see [1980] STC 10 at 20, [1980] AC 1148 at 1174).
Viscount Dilhorne states ([1980] STC 10 at 26, [1980] AC 1148 at
1183):
'Cohen LJ [in Congreve], with whose judgment Lord Simonds agreed on
all points, treated the words "such an individual" in sub-ss (l) and
(2) as meaning an individual ordinarily resident in the United
Kingdom. Their meaning does not appear to have been debated in the
House. A possible meaning appears to me an individual ordinarily
resident who has sought to avoid liability to income tax by means of a
transfer of assets abroad. If that was their meaning, then the scope
of s 412 is limited. If on the other hand, the words just mean an
individual ordinarily resident in the United Kingdom, the decision of
this House in Congreve was I think right.'
That last sentence, it seems to me, is reflected in the Crown's
submission in the instant appeal and was rejected by Viscount Dilhorne
([1980] STC 10 at 27, [1980] AC 1148 at 1184-1185). Lord Edmund-Davies
([1980] STC 10 at 36, [1980] AC 1148 at 1195-1196) holds that 'the
words "such an individual" appearing in sub-ss (1) and (2) [sub-ss (2)
and (3) of s 739 of the 1988 Act] hark back to the opening words of
the preamble [sub-s (1) of s 739], namely to individuals whose purpose
is the avoidance of liability to tax, and do not refer simply to any
individual "ordinarily resident in the United Kingdom''.' Finally Lord
Keith of Kinkel says ([1980] STC 10 at 38, [1980] AC 1148 at 1197):
'I have arrived at the firm opinion that the principal ground of
decision in Congreve was indeed erroneous. I consider that the natural
and intended meaning of the words "such an individual" in s 412(1) is
that they indicate not merely an individual ordinarily resident in the
United Kingdom, but an individual so resident who has sought to avoid
liability to income tax by means of such transfers of assets as are
mentioned in the preamble.'
In Herdman's case Lord MacDermott relied wholly on Lord Simonds'
speech in Congreve and he cited the ratio decidendi of that speech.
Following Vestey, his statement cannot be right 'that "the individual"
of s 412 need not be the maker of the transfer or an active
participant in the scheme for avoidance'. His conclusion (at 405) was
also erroneous that 'the individual . . . at whom s 412 is aimed is
the person who seeks to avoid liability to charge [true], irrespective
of whether he was or was not a participant in setting up the scheme
for avoidance [false] . . . The section . . . was intended to cast a
wide net.' (Vestey per contra).
In my opinion it is unsafe to rely on this decision that Herdman was
within the scope of s 412 being resident in the Republic of Ireland as
a guide to the application of s 478 of the 1970 Act in relation to
Professor Willoughby and the 19 policies issued under bond 1121. The
same may be said of Philippi v IRC (see [1971] 1 WLR 1272 at 1276, 47
TC 75 at 111 per Lord Denning MR).
The result of the Vestey case, as perceived by Whiteman on Income Tax
(3rd edn, 1988), para 23-08, is that s 478 'only applies to
individuals ordinarily resident in the United Kingdom who have sought
to avoid income tax by the transfer of assets abroad, and who yet
manage when resident in the United Kingdom to obtain or to be in a
position to obtain benefits from those assets.' Implicit in this
formulation of the result of Vestey is that the section 'will only
come into play where the transferor was ordinarily resident in the
United Kingdom at the time of the transfer of assets in question'.
The facts in the instant appeal with regard to bond 1121 are not the
same as in Vestey's case since there the settlors who made the
transfer were ordinarily resident in the United Kingdom. But if the
preferred construction of the preamble to the legislation (now s
739(1) of the 1988 Act) is the narrower one of the two possible
constructions in my opinion it follows that my decision should be, as
I hold, that s 739 does not apply to an individual who is not resident
in the United Kingdom when he makes the transfer.
Any lingering doubt there may be on this topic is put to rest if one
reads the two following statements of the then Financial Secretary to
the Treasury, Mr W S Morrison, in the debates on the Finance Bill,
which became the Finance Act 1936, in the House of Commons on 15 June
1936 and 1 July 1936.
Having described the clause (which became s 18 of the Finance Act
1936) as being 'of a very restricted nature', the Financial Secretary
said (313 HC Official Report (5th series) col 685):
'Under the Clause for the purpose of treating a man's income in an
exceptional manner, there have to be three conditions present. In the
first place, there has to be a transfer of assets abroad by an
individual resident in this country. Secondly, that transfer must have
given rise to rights in the individual who makes it. Thirdly, the
individual must have power to enjoy the income of the foreign company.
It is not until these three conditions are present that the Clause
comes into operation.'
His second statement (314 HC Official Report (5th series) col 435)
reads:
'[The member for Ashford (Mr Spens)] asked us to imagine the case of a
foreigner ordinarily resident here who has transferred foreign
securities to a foreign company. If the foreigner made that transfer
in the past, before he became ordinarily resident here, the Clause
would not apply to him, because in its opening words it refers to:
"individuals ordinarily resident in the United Kingdom." '
I cite these passages following the guidance of the House of Lords in
Pepper (Inspector of Taxes) v Hart [1992] STC 898 at 923, [1993] AC
593 at 640 per Lord Browne-Wilkinson.
10. Second issue
Mr Carnwath submits that s 739 is ambiguous as to whether the assets
transferred must be situated in the United Kingdom at the time of the
transfer. He cites dicta in three cases in support of the view that
the section only applies to transfers of assets abroad, that is, from
the United Kingdom to overseas. The cases are Vestey, Corbett's
Executrices v IRC (1942) 25 TC 305 and Lord Chetwode v IRC [1977] STC
64, [1977] 1 WLR 248. He prays in aid statements by the Financial
Secretary (see 313 HC Official Report (5th series) cols 678 and 685)
and adopts as part of his argument the conclusion in Whiteman on
Income Tax (at para 23-08) that a transfer from one overseas territory
to another will not suffice (citing passages from Vestey in para 23-09
to which Mr Carnwath refers).
However, reading s 739(1), the relevant words in my opinion leave this
question open. The heading of Ch III of Pt XVII is 'Transfer of assets
abroad'. This connotes primarily transfers from the United Kingdom,
but I think not necessarily so. The material words in the section are,
'avoiding by individuals ordinarily resident in the United Kingdom of
liability . . . by means of transfers of assets by virtue . . . of
which . . . income becomes payable to persons resident . . . outside
the United Kingdom.'
In my opinion, and I so hold, this language may be satisfied whether
the assets are transferred from the United Kingdom to outside the
United Kingdom or being outside the United Kingdom they are
transferred to a person outside the United Kingdom.
It is notable that in the Vestey case itself the assets transferred
were foreign assets and Lord Wilberforce says of the transfer, 'There
is no doubt that this was a transfer of assets by virtue of which
income became payable to persons resident out of the United
Kingdom . . . so as potentially to bring s 412 [of the Income Tax Act
1952] into operation' (see [1980] STC 10 at 14, [1980] AC 1148 at
1166).
The parliamentary debates give no specific answer to this question
which was in terms raised by Mr Maxwell Fyfe (see 313 HC Official
Report (5th series) cols 726-727) but there is little doubt left in my
mind from reading the Financial Secretary's statement (see 314 HC
Official Report (5th series) col 435) that transfers of assets outside
the United Kingdom to another person outside the United Kingdom would
be within the scope of s 412 of the Income Tax Act 1952.
Mr Carnwath concedes that it is difficult to interpret the dicta in
the cited cases to which he referred as requiring that the assets must
be physically removed out of the United Kingdom since that would raise
problems with regard to the transfer of immovable property. He
submits, however, that the object of s 739 is to prevent the removal
of assets out of the United Kingdom tax net (i e removing an asset
presently subject to United Kingdom tax from that liability to tax).
Section 739 accordingly has no application where assets which are not
within the United Kingdom tax net to start with are transferred to a
non-resident person.
Ingenious though this submission may be, I am not persuaded by it. I
can see no reason on the language of s 739 why an individual resident
in the United Kingdom should be able to transfer, with immunity from
the section, to a person resident outside the United Kingdom an
overseas asset producing no income which then becomes income producing
or is changed for an income-producing asset. It may be said that the
asset was never within the United Kingdom tax net, but in my view it
is irrelevant that the asset transferred is non-income producing at
the time of the transfer if the object is to avoid United Kingdom
income tax by means of the transfer.
11. Third issue
This involves the interaction, if any, between s 739 and ss 539-554
(the chargeable event provisions) which deal with, inter alia, the
taxation of life policies including in particular offshore or non-
resident life insurance policies the subject matter of the Revenue
press release of 1983. Can s 739 apply to the income arising under a
policy to which the provisions of ss 539-554 are applicable? Mr
Carnwath's submissions are as follows: (1) Section 739 applies where a
person avoids liability to income tax by means of a transfer of
assets. (2) In this case no income tax is avoided. The gain arising in
connection with a policy as computed under the statute will be treated
as income and be taxed at the basic and higher rates on surrender or
maturity. The policies are subject to the form of taxation deemed
appropriate and enacted by Parliament for this specific type of
transaction. This is not tax avoidance.
In support of this submission Mr Carnwath cites Comr of Inland Revenue
v Challenge Corp Ltd [1986] STC 548, [1987] AC 155. This was an appeal
to the Privy Council from the Court of Appeal in New Zealand. It
concerned the tax avoidance provisions in s 99 of the Income Tax Act
1976 of New Zealand which provided that 'Every [contract] . . . shall
be absolutely void as against the Commissioner for income tax purposes
if . . . its purposes or effect is tax avoidance' (sub-s (2)(a)),
defined as including, inter alia, 'directly or indirectly avoiding,
reducing or postponing any liability to income tax' (sub-s (1)(c)).
Lord Templeman says ([1986] STC 548 at 554-555, [1987] AC 155 at
167-168):
'The material distinction in the present case is between tax
mitigation and tax avoidance . . . Income tax is mitigated by a
taxpayer who reduces his income or incurs expenditure in circumstances
which reduce his assessable income or entitle him to reduction in his
tax liability. Section 99 does not apply to tax mitigation because the
taxpayer's tax advantage is not derived from an "arrangement" but from
the reduction of income which he accepts or the expenditure which he
incurs. Thus when a taxpayer executes a covenant and makes a payment
under the covenant he reduces his income. If the covenant exceeds six
years and satisfies certain other conditions the reduction in income
reduces the assessable income of the taxpayer. The tax advantage
results from the payment under the covenant. When a taxpayer makes a
settlement, he deprives himself of the capital which is a source of
income and thereby reduces his income. If the settlement is
irrevocable and satisfies certain other conditions the reduction in
income reduces the assessable income of the taxpayer. The tax
advantage results from the reduction of income. Where a taxpayer pays
a premium on a qualifying insurance policy, he incurs expenditure. The
tax statute entitled the taxpayer to reduction of tax liability.
The tax advantage results from the expenditure on the premium. A
taxpayer may incur expense on export business or incur capital or
other expenditure which by statute entitles the taxpayer to a
reduction of his tax liability. The tax advantages result from the
expenditure for which Parliament grants specific tax relief. When a
member of a specified group of companies sustains a loss, s 191 allows
the loss to reduce the assessable income of other members of the
group. The tax advantage results from the loss sustained by one member
of the group and suffered by the whole group. Section 99 does not
apply to tax mitigation where the taxpayer obtains a tax advantage by
reducing his income or by incurring expenditure in circumstances in
which the taxing statute affords a reduction in tax liability. Section
99 does apply to tax avoidance. Income tax is avoided and a tax
advantage is derived from an arrangement when the taxpayer reduces his
liability to tax without involving him in the loss or expenditure
which entitles him to that reduction. The taxpayer engaged in tax
avoidance does not reduce his income or suffer a loss or incur
expenditure but nevertheless obtains a reduction in his liability to
tax as if he had.'
(3) If the Crown is right that both s 739 and ss 539-554 apply,
Professor Willoughby would be taxed on income and gains as they arose
and later under the chargeable events provisions. Double taxation is
possible. This is acknowledged by the Revenue in correspondence (a
letter dated 9 November 1990 from the Revenue to Royal Life). It is
said that relief against double tax would be given but it is not clear
how it would be given.
In principle relief by concession is undesirable (see Vestey).
Mr Tabbush submits that s 739 is absolute in its terms and if the
effect is that income is taxed as it arises under the section and the
net increase in value of the policy is taxed on realisation under the
chargeable events provisions that has to be endured. As to this he
makes no admission and submits that the provisions in s 547(2) and s
743(4) provide relief.
Mr Tabbush contends that there is here 'tax avoidance' within
Challenge Corp principles, not 'tax mitigation' since the arrangement
is indistinguishable from holding a normal portfolio, unlike the case
where the taxpayer has 'genuinely' deprived himself of something. In a
normal policy a premium is invested in a pool of securities shared
with all other policyholders. Professor Willoughby's bond fund is
invested in securities 'unique to the policyholder' which he can
change at will. Moreover, tax deferment constitutes tax avoidance: see
Furniss (Inspector of Taxes) v Dawson [1984] STC 153, [1984] AC 474
where a sale of shares by A to C took place by means of a transfer of
those shares to B, a Manx company, in exchange for shares in B which
then sold on the shares to C thereby (for reasons I need not rehearse)
deferring the charge on A to capital gains tax to which A would have
become liable in the absence of the interposed B. It was held that
capital gains tax was nevertheless chargeable on A since the inserted
step had no business purposes apart from the deferment of tax.
The arguments addressed to me on this issue to some extent impinge on
the fourth and fifth issues. So far as double taxation is concerned,
in my view s 547(2) and s 743(4) do not provide relief. The former
gives relief if the amount of the gain arising in connection with a
policy on the happening of a chargeable event, which is deemed to form
part of the individual's total income for the year in which the event
happens, is chargeable to tax apart from sub-s (1) of s 547. This does
not provide relief for the taxation of income under s 739 in the years
before the chargeable event occurs. And s 743(4) only relieves from
tax income which is subsequently received by an individual whose
income it has been deemed to be in earlier years under s 739(2).
In my opinion there could very well be some double taxation in effect
if s 739 were applied in respect of income arising to Royal Life
during the life of a policy and the gain realised on surrender or
maturity were taxed under s 539 et seq, since part of that gain is
derived from such income.
However I do not think that consideration alone is sufficient to
enable me to hold that s 739 cannot apply to the income of Royal Life
from investments underpinning a policy to which the provisions of ss
539 to 554 apply. Even taking account of the fact that such relief
from double taxation as may be given will be by concession I feel no
more emboldened so to hold despite Walton J's aphorism that 'one
should be taxed by law, and not be untaxed by concession' (see Vestey
[1977] STC 414 at 439, [1979] Ch 177 at 197).
I will deal below with the submission that income tax has not been
avoided by Professor Willoughby.
12. Fourth issue
This is whether the deferment of liability to United Kingdom income
tax can constitute the avoidance of liability to income tax for the
purposes of s 739.
In the abstract this is a difficult question to answer. In the very
first sentence of his speech in the House of Lords in Furniss v Dawson
Lord Brightman said ([1984] STC 153 at 159, [1984] AC 474 at 518) 'My
Lords, the transaction which we are called upon to consider is not a
tax avoidance scheme, but a tax deferment scheme', thereby singling
out a scheme whereby tax is deferred as distinct from one whereby tax
is avoided. The fiscal defect in the scheme was the insertion of a
step for which there was no commercial justification and the result
was the same as it would have been without that step. In a true sense,
however, but for that step tax to which A would otherwise have been
liable on a sale of shares was then avoided.
I do not see why in principle 'the avoiding by individuals . . . of
liability to income tax by means of transfer of assets' should not
include the deferring by individuals of liability to income tax. I am
not sure that this is a convincing concept, however, for how does one
defer an annual income tax liability? It is more natural, and I would
think in keeping with the statute, to consider whether what is done by
means of a transfer of assets is not rather the avoiding of a current
liability to income tax, non constat that at the end of the day when a
policy is surrendered a 'deferred' (and different) liability to tax
arises.
We are not in the realm of 'unacceptable tax avoidance' where
'structures are designed to achieve an adventitious tax benefit for
the taxpayer and in truth are no more than raids on the public funds
at the expense of the general body of taxpayers, and as such are
unacceptable': see Ensign Tankers (Leasing) Ltd v Stokes [1992] STC
226 at 244, [1992] 1 AC 655 at 681 per Lord Goff of Chieveley who
accepted that 'there is a fundamental difference between tax
mitigation and unacceptable tax avoidance'. The enactment of s 739 or
rather its ancestor, s 18 of the Finance Act 1936, was prompted by the
unacceptable want of civic sensibility on the part of those
individuals ordinarily resident in the United Kingdom who transferred
assets abroad for the purpose of avoiding liability to income tax
whereby income became payable to persons resident outside the United
Kingdom from which the individual transferor could benefit, enjoying
the benefits of residence in the United Kingdom without sharing in the
appropriate burden of British taxation (see Latilla v IRC [1943] AC
377 at 381, 25 TC 107 at 117 per Viscount Simon LC).
Accordingly I hold that deferring liability to income tax can
constitute the avoidance of liability to income tax for the purposes
of s 739.
The question in any particular case is, does it? This question
underlies the third issue and to my mind it is fundamental to the
whole case. It is the fifth issue.
13. Fifth issue
The statutory defence, s 741.
Of the four types of transaction noticed by Lord Templeman in Comr of
Inland Revenue v Challenge Corp Ltd [1986] STC 548 at 554-555, [1987]
AC 155 at 168, no transaction effected by Professor Willoughby and
relevant to this appeal is (as I find) a sham nor one which effects
the evasion of tax. For the Crown it is contended that the
transactions avoid tax and for Professor Willoughby that they mitigate
tax.
The Crown takes as its text the passage in Lord Templeman's speech
([1986] STC 548 at 555, [1987] AC 155 at 168):
'Section 99 does apply to tax avoidance. Income tax is avoided and a
tax advantage is derived from an arrangement when the taxpayer reduces
his liability to tax without involving him in the loss or expenditure
which entitles him to that reduction. The taxpayer engaged in tax
avoidance does not reduce his income or suffer a loss or incur
expenditure but nevertheless obtains a reduction in his liability to
tax as if he had.'
The text for Professor Willoughby is contained in the preceding
paragraph coupled with an illustration on the same page:
'Section 99 does not apply to tax mitigation where the taxpayer
obtains a tax advantage by reducing his income or by incurring
expenditure in circumstances in which the taxing statute affords a
reduction in tax liability.'
'Where a taxpayer pays a premium on a qualifying insurance policy, he
incurs expenditure. The tax statute entitles the taxpayer to reduction
of tax liability. The tax advantage results from the expenditure on
the premium.'
I should cite two further paragraphs from Lord Templeman's speech
which throw some light on the present problem. Challenge group sought
to reduce its assessable income. It bought for $10,000 a company which
had sustained losses of $578m. It attempted to set the losses against
its profits. Challenge did not practise tax mitigation because the
group never suffered the loss of $578m. The tax advantage stemmed from
the purchase arrangement. It was argued that if the commissioner's
appeal succeeded a purchase of shares in a company which becomes part
of a specified group will always be void under s 99. Lord Templeman
commented ([1986] STC 548 at 555, [1987] AC 155 at 168-169) that --
'. . . a purchase of shares will only be void in so far as it leads to
tax avoidance and not tax mitigation. In an arrangement of tax
avoidance the financial position of the taxpayer is unaffected (save
for the costs of devising and implementing the arrangement) and by the
arrangement the taxpayer seeks to obtain a tax advantage without
suffering that reduction in income, loss or expenditure which other
taxpayers suffer and which Parliament intended to be suffered by any
taxpayer qualifying for a reduction in his liability to tax.'
In a letter dated 27 June 1991 to Professor Willoughby the Revenue
write that 'we do not consider it to be tax avoidance in the meaning
of section 739 merely because a taxpayer chooses to invest in a policy
with an offshore company. We have looked at a large number of products
offered by the offshore insurance industry but are only challenging
certain highly personalised products of which the Royal Life Private
Portfolio Bond is an example.' In a letter dated 8 August 1991, the
Revenue tell Professor Willoughby that they understand from the
Association of International Life Offices that policies of this nature
represent only some 2% of the market. Section 739 is not being applied
against the whole range of offshore life assurance policies. The
Revenue have concentrated their attention 'on the so-called personal
portfolio bonds and similar products which confer on the policyholders
rights to invest in a unique fund of assets and to choose assets not
within a standard menu of pooled funds which unit-linked policies
normally offer.'
Now, the provisions of s 739 'have effect for the purpose of
preventing the avoiding by individuals . . . of liability to income
tax by means of transfers of assets'. The section does not apply if
the individual shows 'that the transfer and associated operations were
bona fide commercial operations and were not designed for the purpose
of avoiding liability to taxation' (s 741(b)) .
The Revenue accept in a letter dated 9 November 1990 to Royal Life
that 'personal portfolio bonds' are bona fide commercial transactions.
This is without any qualification. Mr Tabbush demurs. He says that
they are such transactions for Royal Life but not for Professor
Willoughby. I do not agree. If a contract is entered into by two
people and it is a bona fide commercial transaction for one of them,
it cannot be not a bona fide commercial transaction for the other
party to the contract in the absence of any reason for impeaching the
latter's good faith.
Turning to the taxation aspect Mr Tabbush suggests that Professor
Willoughby would have invested his superannuation payment from the
university and would have received income from the investment. If he
had left in Hong Kong the units he received from the Save and Prosper
Ten Plus policies income would have arisen on which he would have been
taxed in the United Kingdom. He invested the money and the said units
in a personal portfolio bond (in the Isle of Man). In reality that was
no different from retaining in his own name the investments as they
stood in Hong Kong. He merely reduced his liability to tax without
involving himself in the loss or expenditure (bar small administrative
charges) which entitles him to that reduction. In a normal policy, the
premium is invested in a pool of securities shared with all the other
policyholders (which they cannot, but Royal Life can, change at will).
Professor Willoughby's policy is invested in securities including unit
trusts unique to him and which he can change at will. There was little
administrative difference between holding shares directly and holding
them through a bond.
I have read and reread Mr Tabbush's notes of argument, my own note,
and the Revenue letters to Professor Willoughby dated 27 June and 8
August 1991 in order to understand why the 98% offshore unit-linked
life policies which provide 'a standard menu of pooled funds' fall
within Lord Templeman's concept of (acceptable) tax mitigation whereas
the policies taken out by Professor Willoughby are said to fall within
the concept of (unacceptable) tax avoidance. All policies are subject
to the same tax regime. Any policy may be a single premium policy
which may be large or relatively small; if premia are recurrent the
effect is merely to add to the investment in terms of units. Most, if
not all, policyholders will have been advised more or less
comprehensively on the advantages and disadvantages (fiscal and
otherwise) of offshore and onshore policies (I have in mind PFC's
paper). The sole difference appears to lie in the ability to Professor
Willoughby and others like him to nominate an investment to be
included in the fund to which the policy is tied. The 98% of
policyholders do not have this power. The life office makes its own
selection, the policyholder having made a selection at the inception
of the policy. Nevertheless it may be supposed that the aim and object
of the 98% of policyholders is likely to be the same as Professor
Willoughby's. I cannot see that the 98% seek the less to avoid
liability to income tax or that the 2% seek the more to avoid such
liability by virtue of that one distinction. The essence of the matter
is that the tax regime in the same. Investment flexibility greater or
less can hardly be determinant of the category of tax saving into
which a policyholder falls.
It is suggested by Mr Tabbush that there is little difference between
the fund held by Royal Life and Professor Willoughby holding the
investments directly. This glosses over the fact that the bond is by
its nature a long-term investment since there is a penalty imposed on
withdrawals for eight years and there are no 'front end' commissions
charged on making an investment. Additionally Professor Willoughby
himself looked on the bond as a long-term arrangement. In all the
circumstances I am unable to find that that arrangement falls within
Lord Templeman's description of tax avoidance any more than the
arrangements made by the vast majority (98%) of the holders of
offshore policies.
Professor Willoughby must nevertheless satisfy me either (a) that the
purpose of avoiding liability to taxation was not the purpose or one
of the purposes for which the transfer or associated operations or any
of them were effected or (b) that the transfers made by him whilst
resident in the United Kingdom and operations associated therewith
were bona fide commercial transactions and were not designed for the
purpose of avoiding liability to taxation.
Although Professor Willoughby was never asked in cross-examination
whether avoiding liability to taxation was not one of the purposes for
which the transfer of investments to Royal Life was effected in 1989
and 1990 (or in 1986) and he denied in re-examination that it was, I
take it that I can draw my own conclusions on the facts (of which, of
course, his denial is one) whether it was or was not such a purpose.
This involves weighing up the evidence and it could be the case that
though Professor Willoughby did not have such a purpose he does not
satisfy me on balance of probabilities that that is so. The onus is on
him.
In 1986 he had a substantial sum of money from the university
provident fund for investment. With that money he wanted to make
further provision for his eventual retirement. He was well aware of
the tax aspects. He wanted an investment which could be a substitute
for a s 226 retirement annuity. PFC advised him regarding tax
advantages and tax disadvantages. He specifically chose a Royal Life
offshore bond since the income could be rolled up gross and it was
subject to a tax regime recently introduced by Parliament.
>From a commercial point of view an offshore bond had the attraction
that the incidence of tax was bearable. It was tax efficient though he
would not be able to utilise his personal relief from capital gains
tax. Professor Willoughby perceived other advantages in the bond,
flexibility, security, economy which were none the less perceived by
him even though to some extent on examination before me some may have
been less significant than he had thought in 1986. That does not
detract from them as he perceived them at that time. I do not consider
that because you adopt a course which is less fiscally expensive than
another your purpose in adopting the one course involves as a
corollary that one of your purposes is avoiding liability to taxation,
specially if the one course falls within a tax regime which Parliament
considers appropriate.
With regard to the 1989 and 1990 transfers, the case is a fortiori
because under one of the three options in the letter of 1 February
1989 (the second option) the units from the Save and Prosper Ten Plus
policies could have been left where they were in the Ten Plus Fund
subject to the same tax regime Parliament imposed in 1984. But that
option was not adopted since Professor Willoughby wanted some
flexibility with regard to the investments. Moreover he could have
extended the period of maturity by another ten years.
Overall I find that having regard to the overseas origin of the
provident fund payment and the Save and Prosper Policies providing for
Professor Willoughby's retirement their application in the acquisition
of Royal Life bonds had the same continuity of purpose, to make
further provision for his retirement. Taxation was taken into account.
It could not be otherwise. But I do not find that avoiding liability
to taxation was one of the purposes for which the transfer of the
provident fund payment or the units in the Save and Prosper Ten Plus
policies or associated operations were effected. On balance I find
that Professor Willoughby makes out his case under s 741(a). I also
find that the transfers and associated operations were bona fide
commercial transactions and were not designed for the purpose of
avoiding liability to taxation. They were designed for the increase of
Professor Willoughby's retirement funds taking advantage of a
favourable tax regime and not for the purpose of avoiding liability to
taxation. The augmentation in August 1990 of bond 1121 does not fall
to be treated differently.
In making these findings I bear in mind the celebrated passage from
Lord Upjohn's speech in the House of Lords in IRC v Brebner [1967] 2
AC 18 at 30, 43 TC 705 at 718:
'My Lords, I would only conclude my speech by saying, when the
question of carrying out a genuine commercial transaction, as this
was, is reviewed, the fact that there are two ways of carrying it out
-- one by paying the maximum amount of tax, the other by paying no, or
much less, tax -- it would be quite wrong, as a necessary consequence,
to draw the inference that, in adopting the latter course, one of the
main objects is, for the purposes of the section, avoidance of tax. No
commercial man in his senses is going to carry out a commercial
transaction except upon the footing of paying the smallest amount of
tax that he can.'
14. Sixth issue
This is whether art 3(2) of the Arrangement prevents s 739 applying to
the industrial or commercial profits of Royal Life, an insurance
company resident in the Isle of Man and not having a permanent
establishment in the United Kingdom.
Premiums were paid to Royal Life for the issue of policies to
Professor and Mrs Willoughby. Income and gains have accrued to Royal
Life, a Manx enterprise, from the investment fund attached to the
bond. On redemption or surrender of a policy, Professor Willoughby or
Mrs Willoughby or their respective estates are entitled only to the
policy value with respect to each bond and not to the underlying
investments contained in the fund attached to the bond.
Article 3(2) of the Arrangement provides:
'The industrial or commercial profits of a Manx enterprise shall not
be subject to United Kingdom tax unless [as is not the case] the
enterprise is engaged in trade or business in the United Kingdom
through a permanent establishment situated therein . . .'
A 'Manx enterprise' means 'an industrial or commercial enterprise or
undertaking carried on by a resident of the Island' (art 2(1)(i)).
Royal Life is such an enterprise. The term 'industrial or commercial
profits' includes 'rentals in respect of cinematograph films' (art 2(1)
(j)).
Mr Carnwath submits that the income and gains arising from the
investments in the fund attached to the bonds accrue to Royal Life,
are profits of Royal Life derived from its commercial activities and
therefore are commercial profits of Royal Life, a Manx enterprise.
Such profits 'shall not be subject to United Kingdom tax.' An
Arrangement of this kind 'shall, notwithstanding in any enactment,
have effect in relation to income tax and corporation tax in so far as
[it provides] -- (a) for relief from income tax, or from corporation
tax in respect of income or chargeable gains . . .' (s 788 (3)(a)).
Mr Carnwath argues that the exemption attaches to the profits. Section
739 attributes them (or part of them) to Professor Willoughby, a
United Kingdom resident. Therefore they are exempt from United Kingdom
tax. In support of this argument he cites Padmore v IRC [1989] STC 493
in which it was held that a United Kingdom resident partner of a
Jersey resident partnership having no United Kingdom place of business
was entitled to relief from United Kingdom tax in respect of his share
of the partnership profits under an article contained in the Double
Taxation Relief (Taxes on Income) (Jersey) Order 1952, SI 1952/1216,
corresponding to art 3(2) of the Arrangement.
For the Crown Mr Tabbush contends that the exemption under art 3(2) is
personal to the Manx enterprise: Royal Life cannot be taxed in the
United Kingdom on its industrial or commercial profits. It does not
follow that those profits cannot be taken as the measure of anyone
else's profits. Secondly, he says that the 'investment income of
Professor Willoughby's portfolio does not form part of Royal Life's
'commercial profits' which must mean the net surplus arising from
Royal Life's business of managing investments and available for
distribution to Royal Life's shareholders. Only the charges and
commission levied by Royal Life represent its profits. Most of the
profits it is said must be kept in the funds attached to Professor
Willoughby's bonds.
I go back to s 739(2). I ask myself what income of Royal Life has
Professor Willoughby power to enjoy (now or in the future) which, if
it were his income received in the United Kingdom would be chargeable
to income tax? It must surely be the income arising from the
investments owned by Royal Life accepted in specie as a premium or
purchased with the cash paid by way of a premium. That income whether
it would or would not have been chargeable to income tax apart from
the provisions of s 739 is to be deemed to be income of Professor
Willoughby for all the purposes of the Income Tax Acts. As part of
Royal Life's income it would not have been chargeable in fact or by
virtue of art 3(2), nevertheless it is to be deemed to be Professor
Willoughby's income. May one apply the provisions of the Arrangement
to that income deemed to be his when the actual income is not subject
to United Kingdom tax for so art 3(2) provides? One cannot, as it
seems to me, apply the provisions twice nor to two different people.
In my opinion there is a distinction between actual income of an
individual and actual income of another person which is deemed to be
the income of the individual. Such income is not industrial or
commercial profits of the individual nor quoad the individual is it
deemed to be industrial or commercial profits or deemed to be his
income as if it were such profits. I distinguish Padmore's case since
Padmore has a real share in real profits of a real partnership.
Professor Willoughby's income under s 739 is deemed to be his when in
reality it is not his although the receipt of the actual income by
Royal Life enures indirectly to some extent to his or his estate's
ultimate benefit when he surrenders a policy or a policy matures.
I hold therefore that the income of Royal Life deemed to be Professor
Willoughby's income does not come within the provisions in art 3(2).
It is not exempt from United Kingdom tax by virtue of the Arrangement.
15. Conclusion
(a) I uphold the Board's rejection of Professor Willoughby's claims
for relief under the Arrangement with the Isle of Man.
(b) I discharge the assessments.
COUNSEL:
Alan Moses QC and Launcelot Henderson for the Crown; David Goy QC and
Philip Baker for the taxpayers.
JUDGMENT-READ:
Cur adv vult 16 December 1994. The following judgments were delivered.
PANEL: GLIDEWELL, HOBHOUSE, MORRITT LJJ
JUDGMENTBY-1: MORRITT LJ
JUDGMENT-1:
MORRITT LJ, (giving the first judgment at the invitation of Glidewell
LJ): These are appeals of the Commissioners of Inland Revenue from the
determinations of the Special Commissioner, Mr David Shirley,
contained in written decisions dated 23 March 1993 discharging
assessments to income tax raised against Professor Willoughby and his
wife under s 739 of the Income and Corporation Taxes Act 1988 (the
1988 Act) and its statutory predecessor. Those sections were enacted
for the purpose of preventing individuals avoiding income tax by the
transfer of assets to persons resident abroad. Before the Special
Commissioner a number of points were raised all but two of which he
decided in favour of the Crown. The points he decided against the
Crown and which are the subject matter of these appeals are: (1)
whether the individual making the transfer must be ordinarily resident
in the United Kingdom at the time of the transfer; and (2) whether the
taxpayers had established the exemptions provided for by s 741 that
either: (a) the purpose of avoiding liability to tax was not the
purpose or one of the purposes for which the transfer or any of the
associated operations had been made; or (b) the transfer and the
associated operations were bona fide commercial transactions and were
not designed for the purpose of avoiding liability to tax.
The first point is one of construction of the statute and the facts
relevant to it may be shortly stated. By July 1985 Professor
Willoughby had been resident in Hong Kong, where he was professor of
law at the University of Hong Kong, for a number of years and was
neither resident nor ordinarily resident in the United Kingdom. He
decided to take early retirement with the intention of returning to
live in England and gave one year's notice to that end.
On retirement in July 1986 he became entitled to a lump sum payment
from the university's provident fund. On advice he put this lump sum,
paid in Hong Kong dollars and converted on behalf of Professor
Willoughby into United States dollars, into a single premium personal
portfolio bond with Royal Life Insurance International Ltd, a company
incorporated, managed, controlled and resident in the Isle of Man. In
exchange, on 8 August 1986 Royal Life issued to him a number of
policies of insurance linked to fund 1121. The investments in that
fund and any subsequent changes in investment were decided on by
Personal Financial Consultants Ltd (PFC) as the fund adviser appointed
by Professor Willoughby. Professor Willoughby returned to England and
became ordinarily resident in the United Kingdom in May 1987.
The relevant legislation is now contained in Ch III of Pt XVII of the
Income and Corporations Taxes Act 1988. For present purposes there is
no material difference from its statutory predecessor s 478 of the
Income and Corporation Taxes Act 1970. It is as follows:
'739. Prevention of avoidance of income tax
(1) Subject to section 747(4)(b), the following provisions of this
section shall have effect for the purpose of preventing the avoiding
by individuals ordinarily resident in the United Kingdom of liability
to income tax by means of transfer of assets by virtue or in
consequence of which, either alone or in conjunction with associated
operations, income becomes payable to persons resident or domiciled
outside the United Kingdom.
(2) Where by virtue or in consequence of any such transfer, either
alone or in conjunction with associated operations, such an individual
has, within the meaning of this section, power to enjoy, whether
forthwith or in the future, any income of a person resident or
domiciled outside the United Kingdom which, if it were income of that
individual received by him in the United Kingdom, would be chargeable
to income tax by deduction or otherwise, that income shall, whether it
would or would not have been chargeable to income tax apart from the
provisions of this section, be deemed to be income of that individual
for all purposes of the Income Tax Acts . . .'
742. Interpretation of sections 739 to 741
(1) For the purposes of sections 739 to 741 "an associated operation"
means, in relation to any transfer, an operation of any kind effected
by any person in relation to any of the assets transferred or any
assets representing, whether directly or indirectly, any of the assets
transferred, or to the income arising from any such assets, or to any
assets representing, whether directly or indirectly, the accumulations
of income arising from any such assets.
(2) An individual shall, for the purposes of section 739, be deemed to
have power to enjoy income of a person resident or domiciled outside
the United Kingdom if --
(a) the income is in fact so dealt with by any person as to be
calculated, at some point of time, and whether in the form of income
or not, to enure for the benefit of the individual; or
(b) the receipt or accrual of the income operates to increase the
value to the individual of any assets held by him or for his benefit;
or
(c) the individual receives or is entitled to receive, at any time,
any benefit provided or to be provided out of that income or out of
moneys which are or will be available for the purpose by reason of the
effect or successive effects of the associated operations on that
income and on any assets which directly or indirectly represent that
income; or
(d) the individual may, in the event of the exercise or successive
exercise of one or more powers, by whomsoever exercisable and whether
with or without the consent of any other person, become entitled to
the beneficial enjoyment of the income; or
(e) the individual is able in any manner whatsoever, and whether
directly or indirectly, to control the application of the income . . .
743. Supplemental provisions
(1) Income tax at the basic rate shall not be charged by virtue of
section 739 in respect of that income which has borne tax at the basic
rate by deduction or otherwise but, subject to that, income tax so
chargeable shall be charged under Case VI of Schedule D . . .
(4) Where an individual has been charged to income tax on any income
deemed to be his by virtue of section 739 and that income is
subsequently received by him, it shall be deemed not to form part of
his income again for the purposes of the Income Tax Acts.'
Following the determination of the Special Commissioner and the
absence of any cross-appeal it is now, in effect, common ground that:
(1) s 739 can apply to a transfer of assets situated outside the
United Kingdom made by a transferor at a time when he was ordinarily
resident in the United Kingdom; (2) the deferral of a liability to
United Kingdom income tax can constitute the avoidance of liability to
income tax for the purposes of s 739; and (3) the income and gains
sought to be imputed to the taxpayers under s 739 are not exempted
from tax in the United Kingdom by the Double Taxation Relief (Taxes on
Income) (Isle of Man) Order 1955, SI 1955/1205.
But the question remains whether s 739 can apply to a transfer of
assets made by a transferor at any time when he is not ordinarily
resident in the United Kingdom. The Special Commissioner decided that
it could not.
To explain his conclusion and the argument before this court it is
necessary to trace the history of the relevant legislation. The
original enactment was made in, for present purposes, identical terms
in s 18 of the Finance Act 1936. The taxpayers seek to rely on
statements, as recorded in Hansard, relating to the proposal for that
legislation made to the House of Commons by Mr Neville Chamberlain,
then the Chancellor of the Exchequer, on 21 April 1936 and by Mr W S
Morrison, then the Financial Secretary to the Treasury, on 15 June and
1 July 1936. One issue that arises on this appeal is whether the
decision of the House of Lords in Pepper (Inspector of Taxes) v Hart
[1992] STC 898, [1993] AC 593 entitles them to do so.
The first occasion when the relevant provisions were considered in any
detail material to the point now in issue was the decision of the
House of Lords in Congreve v IRC (1946) 30 TC 163. As recorded in the
headnote the House of Lords decided that ([1948] 1 All ER 948):
'An individual can, within the meaning of s 18 of the Finance Act
1936, be said to acquire rights "by means of" a transfer of assets
though the transfer is effected neither by the individual nor by his
agent, but by a company, the whole or greater part of the share
capital of which is held by or on behalf of that individual.'
The point at issue on this appeal came before the Court of Appeal in
Northern Ireland in Herdman v IRC (1967) 45 TC 394 in considering the
proper construction of the legislation then in force which was
contained in s 412 of the Income Tax Act 1952. The court decided that
the section did not require that the transferor should be ordinarily
resident in the United Kingdom at the time of the transfer. In that
case there was an appeal to the House of Lords but this point was not
argued or decided.
In 1979 the House of Lords had to consider in Vestey v IRC [1980] STC
10, [1980] AC 1148 the ambit of the legislation then contained in s
412 of the Income Tax Act 1952 in relation to assessments raised for
years prior to 1970-71. I shall have to refer to the speeches in
detail later. For the moment it is sufficient to record that the House
of Lords decided that the section was limited in its operation and
charging effect to the individual who was the transferor of the assets
and that, in consequence, Congreve v IRC had been wrongly decided.
It was in these circumstances that the Special Commissioner concluded
that s 739 and its predecessor, s 478 of the Income and Corporation
Taxes Act 1970, did not apply to the transfer made by Professor
Willoughby to Royal Life in respect of the single premium personal
portfolio bond issued to him in August 1986 because Professor
Willoughby was not then ordinarily resident in the United Kingdom. He
considered that the principle established by the decision of the House
of Lords in Vestey, though not directly in point, linking the transfer
with the individual necessitated linking the transfer with such an
individual as is referred to in sub-s (1), namely one who is
ordinarily resident in the United Kingdom. He thought that the
decision in Herdman could not be relied on after the decision in
Vestey because of the reliance in the former case on Congreve which
had been reversed by the latter; preferring instead the statement in
Whiteman on Income Tax (3rd edn, 1988), para 23-07 that the transferor
must be ordinarily resident in the United Kingdom at the time of the
transfer of assets in question. He said that any lingering doubt he
might have had was put to rest by the statements recorded in Hansard
to which I have referred.
The Crown contends that the Special Commissioner was wrong. It is
submitted that the point is covered by the decision in Herdman which
this court should follow as persuasive authority on the construction
of a revenue statute applicable throughout the United Kingdom and
because Herdman was right in principle, not wholly dependent on the
validity of the decision in Congreve and unaffected by the decision in
Vestey. It is submitted that the speeches made in the House of Commons
in 1936, as reported in Hansard, do not affect the conclusion either
because of their content or because the legislation has been amended
twice since the decision in Herdman. Professor Willoughby supports the
decision of the Special Commissioner essentially for the reasons he
gave.
In Congreve v IRC (1946) 30 TC 163 the issue was whether the
transferor of the relevant assets had to be the individual avoiding
the liability to income tax. It was argued for the taxpayer that as
the transferor and that individual were different people the
consequence was that the section, then s 18 of the Finance Act 1936,
could not apply. This argument was rejected by the House of Lords.
Lord Simonds said (at 204-205):
'The preamble or introductory words of the Section which state its
purpose do not, in my view, assist the contention, which was developed
on its operative words, that the avoidance by an individual of
liability to tax must be achieved by means of a transfer of assets
effected by that individual. They are, on the contrary, in the widest
possible terms, and I do not know what better words could be used if
the Legislature intended to define its purpose as covering a transfer
of assets by A, by means of which B avoided liability to tax. When I
turn to the operative words, I cannot reach any other conclusion. It
was urged that in their context the words "by means of any such
transfer" can mean only a transfer effected by the individual who
avoids tax liability. It was said that they do not mean the same as
"as a result of" or "by virtue or in consequence of" and, the
immediate proximity of the latter phrase was referred to as pointing
the contrast. My Lords, this is altogether too fine a distinction. The
difference of language is sufficiently explained by the wish of the
draftsman not to use the same expression twice. But it is to my mind
clear, first, that in their ordinary grammatical sense the words, "by
means of" do not connote any personal activity on the part of the
person who is said to enjoy or suffer something by those means, and,
secondly, that in their present context, it is not necessary or
legitimate, in order to give a limiting sense to the words, to read
them as if they were followed by such words as "effected by him". It
was suggested in the course of the argument that other limiting words
should be written in, such as "effected by him or by his procurement",
for it was reasonably apprehended that to read the Section as
excluding a case where an individual did not himself transfer assets
but procured their transfer by another would be to ignore the
substance of the Legislature's intention. But I see no reason for any
limiting words. The language of the Section is plain. If there has
been such a transfer as is mentioned in the introductory words, and if
an individual has by means of such transfer (either alone or in
conjunction with associated operations) acquired the rights referred
to in the Section, then the prescribed consequences follow.'
Thus he specifically rejected the argument for the taxpayer that the
words 'effected by him' should, as a matter of construction, be
interpolated after the words 'transfer of assets'.
In Herdman v IRC (1969) 45 TC 394 the transferor was the same person
as the individual who had avoided the liability to income tax but the
initial transfer which had enabled that result was made by him at a
time when he was not ordinarily resident in the United Kingdom. The
taxpayer argued that the relevant section, then s 412 of the Income
Tax Act 1952, could not apply on the basis that the reference to 'such
an individual' in sub-s (1) must refer back to the individual referred
to in the preamble, namely one 'ordinarily resident in the United
Kingdom'. This argument was rejected by Lord MacDermott CJ, with whom
Curran and McVeigh LJJ agreed. After quoting the passage in the speech
of Lords Simonds in Congreve v IRC to which I have referred, he said
(at 405):
'The individual, accordingly, at whom s 412 is aimed is the person who
seeks to avoid liability to charge, irrespective of whether he was or
was not a participant in setting up the scheme for avoidance. This
explains the reference to "ordinarily resident in the United Kingdom",
for that points to those who would gain by the avoidance rather than
to those who may have contrived it -- perhaps in some earlier year.
There seems no reason why the section should make such residence
necessary for those who play a part in the scheme for avoidance at the
time they do so, and I do not think the language used provides for
such a requirement. The section is drafted in comprehensive terms and
there can be no doubt it was intended to cast a wide net. That being
the nature of the enactment, it would be surprising if Parliament had
left such a large loophole open as would be the case if Mr Potter's
argument were well founded. Contrast, for example, the following
instances. A, whose career abroad ends when he attains a certain age,
decides to retire to the United Kingdom, and before his return from
abroad transfers his United Kingdom assets to a company he has
incorporated in the Irish Republic with a view to future tax
avoidance. B, on the other hand, who has always been resident in the
United Kingdom, does likewise for the same reason. Why should A be
outside and B within s 412? Neither the wording of the section nor its
underlying purpose seems to me to call for such an anomalous
distinction. I would therefore hold against [the taxpayer] on this
part of the case.'
It is true that that passage refers to two reasons for the decision,
namely the principle established in Congreve and the loophole which
any other construction would reveal. But in my judgment it is plain
that the value of the decision as persuasive authority must depend
heavily on the validity of the decision in Congreve. As I have already
indicated the decision of the House of Lords in Congreve was reversed
by the House of Lords in Vestey. In my judgment it follows that such
persuasive authority which the decision in Herdman would otherwise
have had is destroyed.
But before leaving Herdman it is necessary to consider its aftermath.
The case also involved another point on which the Crown was
unsuccessful. It appealed unsuccessfully to the House of Lords. In the
Finance Act 1969 legislation was enacted, s 33, to nullify the
decision of the House of Lords on the latter point but leaving
untouched the decision of the Court of Appeal in favour of the Crown
on the former point. This was followed by the re-enactment of s 412 of
the Income Tax Act 1952 in s 478 of the Income and Corporation Taxes
Act 1970.
In my judgment a consideration of this forensic and legislative
history shows that the reports of the speeches of ministers when
introducing the legislation in 1936, even if the conditions laid down
in Pepper v Hart for allowing reference to such statements are
complied with, are of no value. Whatever might have been the intention
of ministers in 1936 the court had decided in 1948 and again in 1969
that the words used by Parliament manifested a different intention.
Yet in 1952 and again in 1970 the same formula is used and
notwithstanding the changes made in 1969. In these circumstances it
must be assumed that the original intention, whatever it was, was
superseded by acceptance of the decisions of the courts.
Thus the question must be decided on the basis of the wording of the
sections with such assistance as may be derived from the decision of
the House of Lords in Vestey. In that case two individuals ordinarily
resident in the United Kingdom transferred assets situate abroad to
non-resident trustees to be held by them on trust to accumulate the
income with power to advance capital and subject thereto on
discretionary trusts for classes of beneficiaries comprising members
of their respective families. Both the transferors were dead and the
income had been accumulated. The Revenue sought to assess the
beneficiaries under what was then s 412 of the Income Tax Act 1952 in
respect of a proportion of the income of the trust fund irrespective
of whether it reflected the capital sums advanced to them. The House
of Lords concluded that the Revenue were not entitled to do so because
none of the beneficiaries so assessed had been a transferor. In view
of the unjust and indeed unconstitutional result of any other decision
on the construction of the section the House of Lords decided that the
decision in Congreve v IRC should be overruled.
There are a number of passages in the speeches which require
consideration. Lord Wilberforce referred to the question of
construction in these terms ([1980] STC 10 at 20, [1980] AC 1148 at
1174):
'There are undoubtedly two possible interpretations of s 412 . . .
particularly having regard to the preamble. The first is to regard it
as having a limited effect; to be directed against persons who
transfer assets abroad; who by means of such transfers avoid tax, and
who yet manage when resident in the United Kingdom to obtain or to be
in a position to obtain benefits from those assets. For myself I
regard this as being the natural meaning of the section. This avoids
all the difficulties discussed above. No difficulty arises from cases
of multiple transferors. The second is to give the whole section an
extended meaning, so as to embrace all persons, born or unborn, who in
any way may benefit from assets transferred abroad by others. This is
or follows from the Congreve interpretation. This I regard as a
possible but less natural meaning of the section.'
Later he referred ([1980] STC 10 at 21, [1980] AC 1148 at 1176) to the
meaning which he thought to be the natural meaning as:
'The alternative which is supported by the language is to suppose that
the section was intended by Parliament as a limited section,
attacking, with penal consequences, those who removed assets abroad so
as to gain tax advantages while residing in the United Kingdom and not
a section representing such a departure from principle, yet without
any prescribed mechanism to operate it, as the alternative can now be
seen to involve.'
Viscount Dilhorne dealt with the point in the passage in the following
terms ([1980] STC 10 at 26, [1980] AC 1148 at 1182-1183):
'I can see no ground for distinguishing that case [Congreve] from
this, so unless the House is prepared to hold that that case was
wrongly decided, the Crown must in my opinion succeed on this issue.
Cohen LJ with whose judgment Lord Simonds agreed on all points,
treated the words "such an individual" in sub-ss (1) and (2) as
meaning an individual ordinarily resident in the United Kingdom. Their
meaning does not appear to have been debated in the House. A possible
meaning appears to me an individual ordinarily resident who has sought
to avoid liability to income tax by means of a transfer abroad. If
that was their meaning, then the scope of s 412 is limited. If on the
other hand, the words just mean an individual ordinarily resident in
the United Kingdom, the decision of this House in Congreve was I think
right. Lord Simonds in the course of his speech did not refer to sub-s
(8) of s 412. It states, inter alia: "For the purposes of this section
-- (a) a reference to an individual shall be deemed to include the
wife or husband of the individual . . ." These words have considerable
significance and importance if "such an individual" means an
individual ordinarily resident in the United Kingdom who has sought to
avoid income tax by the transfer of assets abroad. If the decision in
Congreve is right, it is not easy to attach significance to them. Mr
Nolan QC [for the Crown] suggested that they might have been inserted
to cover a case where and husband and wife jointly but not separately
had control of a company. I find it difficult to accept that this
provision was inserted by Parliament to meet that situation. I think
it is much more likely that they were inserted to secure that the wife
or the husband of the transferor was brought within the scope of the
section and I consequently regard this provision as an indication that
by "such an individual" is meant an individual who has sought to avoid
tax by the transfer of assets abroad.'
Lord Salmon agreed with Lord Wilberforce. Lord Edmund-Davies said
([1980] STC 10 at 36-37, [1980] AC 1148 at 1195):
'But the alternative explanation, my Lords, may in the instant case be
that the fault lies not in s 412 of the Income Tax Act 1952, but in
the way in which it (like its forerunner, s 18 of the Finance Act
1936) has been interpreted. In my judgment, the words "such an
individual" appearing in sub-ss (1) and (2) hark back to the opening
words of the preamble, namely to individuals whose purpose is the
avoidance of liability to tax, and do not refer simply to any
individual "ordinarily resident in the United Kingdom". Indeed, as the
noble and learned Lord, Viscount Dilhorne, has observed, if the
latter, restricted interpretation is to be adopted it is not easy to
see why sub-s (8) of s 412 provided that: "For the purposes of this
section -- (a) a reference to an individual shall be deemed to include
the wife or husband of the individual . . ." As was submitted in the
taxpayers' printed case: "Section 412(8)(a) has a positive and
important function if the [taxpayers] . . . are correct; but otherwise
is superfluous." And, indeed, Walton J ([1977] STC 414 at 428, [1979]
Ch 177 at 183) had himself expressed the view that "the provisions of
sub-s (8)(a) . . . do not otherwise make good sense . . ." It follows
that in my judgment the extension of s 412 by the judgment of this
House in Congreve to beneficiaries wholly disconnected with the
original transferor or transferors was erroneous.'
Finally Lord Keith of Kinkel said ([1980] STC 10 at 38, [1980] AC 1148
at 1197):
'I have arrived at the firm opinion that the principal ground of
decision in Congreve was indeed erroneous. I consider that the natural
and intended meaning of the words "such an individual" in s 412(1) is
that they indicate not merely an individual ordinarily resident in the
United Kingdom, but an individual so resident who has sought to avoid
liability to income tax by means of such transfers of assets as are
mentioned in the preamble.'
It is common ground that the point raised on this appeal was not an
issue in Vestey for both transferors in that case were ordinarily
resident in the United Kingdom at the time of the transfers. For the
Crown it is contended that the principle of Vestey has no bearing on
the point at all. For the taxpayers it is submitted that the logic of
it supports their case.
There is no doubt that in Vestey the House of Lords overruled
Congreve. In Congreve the House of Lords had rejected the submission
that as a matter of construction the words 'effected by him' should be
interpolated after the words 'transfer of assets' in what is now sub-s
(1). It seems to me that the logic of the decision in Vestey is that
that interpolation should now be made. If it is then it establishes
the link between the transferor and the individual which, it seems to
me, carries with it the requirement that the transferor should be
ordinarily resident in the United Kingdom.
The same result is reached by a consideration of the focus of
attention of the majority of the House of Lords in Vestey. The
passages in the speeches of Viscount Dilhorne, Lord Edmund-Davies and
Lord Keith of Kinkel which I have quoted indicate an approach which
refers not to the point of time at which the tax is avoided or to the
achievement of that purpose but rather to the act which initiates that
result or the point of time when the transfer which enables the
subsequent avoidance to be achieved is carried out. As the individual
in question has to be ordinarily resident in the United Kingdom at
whatever is the relevant time it follows from this that the transferor
must be so resident at the time of the transfer.
This consideration also deals with the anomaly which Lord MacDermott
referred to in Herdman. For if, as the House of Lords considered in
Vestey, the section is of limited effect then there is no reason to
extend it, the more so as the effect of the extension would be to
discourage the return of the expatriate rather than to penalise those
who, being amenable to the United Kingdom legislation due to their
ordinary residence, seek to avoid a liability to income tax.
For these reasons I would decide the first point in the same sense as
the Special Commissioner and in favour of the taxpayer. The
consequence would be that the assessments based on the income of the
fund underlying bond 1121 should be discharged. This would dispose of
the appeal in relation to that bond. But it is not a point that arises
with respect to bonds 2387 and 3343. Thus it is necessary to deal with
the second point in respect of those bonds and also with bond 1121 in
case I am wrong on the first point.
The second point concerns the applicability of s 741 which is in the
following terms:
'741. Exemption from sections 739 and 740
Sections 739 and 740 shall not apply if the individual shows in
writing or otherwise to the satisfaction of the Board either --
(a) that the purpose of avoiding liability to taxation was not the
purpose or one of the purposes for which the transfer or associated
operations or any of them were effected; or
(b) that the transfer and any associated operations were bona fide
commercial transactions and were not designed for the purpose of
avoiding liability to taxation.
The jurisdiction of the Special Commissioners on any appeal shall
include jurisdiction to review any relevant decision taken by the
Board in exercise of their functions under this section.'
In order to deal with this point it is necessary to explain the facts
in more detail.
As I have already indicated Professor Willoughby and his wife were
resident in Hong Kong from 1973 until May 1987 in the case of the
former and 13 August 1986 in the case of the latter. During that
period they effected three ten-year term policies with Save and
Prosper International Insurance Ltd of Bermuda. These policies were
effected on the advice of PFC. They were dated respectively 14
February 1979, 26 February 1981 and 14 January 1982. Each of them was
certified by the Revenue under para 1(1)(a) of Sch 2 to the Finance
Act 1975 as a 'qualifying policy'. Premia were payable monthly and the
policies matured after ten years. Each provided for linking the
benefits payable to the performance of certain specified funds, which
might be changed from time to time at the instance of the
policyholder. The conditions enabled the holder to postpone maturity
for a further ten years on paying further premia over the extended
period.
On 17 November 1983 the Revenue published a press release entitled
Offshore and Overseas Funds; Life Assurance Policies Issued by Non-
Resident Life Offices (see Simon's Tax Intelligence 1983 p 512)
foreshadowing the intention of the Revenue to seek legislation
designed to tax in the hands of the policyholder the income and
capital gains accruing from the underlying investments on and after 1
January 1984. Professor Willoughby was concerned at the effect this
might have on the policies issued by Save and Prosper to him and his
wife and wrote to the Financial Secretary about it. But the relevance
for present purposes is that the press release did not refer to the
legislation then in force equating to s 739 (and Professor Willoughby
did not know about it until after all the policies with which this
appeal is concerned had been effected) but it did bring home to
Professor Willoughby the provisions for taxing in the hands of a
policyholder the income and capital gains of an offshore fund
underlying the policy. The relevant legislation is now contained in Ch
II of Pt XIII of the Income and Corporation Taxes Act 1988 as applied
by s 553 to non-resident policies and offshore capital redemption
policies. The broad effect is to tax the policyholder with both
standard rate and higher rate tax on the benefits received by him. In
the case of both onshore and offshore policies the holder may withdraw
not more than 5% p a of the value of the policy without then paying
tax on it. Tax on the benefits obtained are payable on maturity or
other chargeable event.
I have already referred to the fact that the single premium personal
portfolio bond taken out with Royal Life in August 1986 was on the
advice of PFC. That advice reflected the contents of PFC's own
pamphlet entitled The Single Premium Bond: The Offshore and Onshore
Versions written in the light of the legislation foreshadowed in the
Revenue press release which is now contained in Pt XIII of the Income
and Corporation Taxes Act 1988. The conclusion and summary stated:
'The bond has been designed to provide a tax efficient, flexible and
easily controlled form of capital investment, and international
results have proved this right. There are marginal extra costs over
and above direct investment in unit trusts but set against a long term
investment these must be acceptable. The question for the expatriate
of "On-shore v Off-shore" is easily balanced and depends on personal
circumstances, but the latter still continue to provide an excellent
long term accumulation investment vehicle for the secure range of
deposit and bond funds.'
A pamphlet issued by Royal Life in 1988 emphasised particular
advantages of the private portfolio bond as being investment in a
portfolio structured to meet the investors individual requirements,
the ability to appoint the investment of one's choice, all the
benefits of a personal international portfolio, accumulation virtually
free of tax and access to capital at all times.
The proposal for the first bond (no 1121) was completed by both
taxpayers on 21 July 1986. They appointed PFC to be the fund advisers.
As I have said already the policies thereunder were issued on 6 August
1986. There were ten of them; the first nine recorded the payment of a
single premium of $ US 10,000 and the tenth of S 11,963. The general
conditions linked the benefits payable to the value of the underlying
investments.
The finding of the Special Commissioner in respect of this bond was as
follows:
'A Royal Life policy appealed to Professor Willoughby as he considered
that it provided him with something like a s 226 retirement annuity in
that he could make annual withdrawals free of tax within limits, the
withdrawals resembling an annuity, but unlike an annuity capable of
being timed, a feature which is not unique to Royal Life bonds.
Professor Willoughby was concerned about the tax charging provisions
under Finance Act 1984 (now s 539 et seq of the 1988 Act) but he
decided to accept them and forgo the capital gains tax reliefs to
which he would have been entitled on realisation of investments held
by himself. It was his understanding also that the expense or the
charges levied by Royal Life were less than those charged by a
stockbroker or by PFC for managing his investments. In this he was
right but it emerged in cross-examination of Mr Wilkie that the
difference may not have been as much as he had supposed. If that be
the case I find that Professor Willoughby was not aware of it at the
material time. He knew that there were no "front end charges" of 5%
which he would have had to pay had he himself bought units in
investment trusts. In this way the policy was 5% more valuable to him
than a direct investment would be. There was a strong disincentive to
procure the surrender of the policy within eight years of effecting it
since there would be an appreciable charge for doing so . . .'
As I have already recorded Mrs Willoughby returned to England on 13
August 1986 and Professor Willoughby in May 1987. Thereafter they were
both ordinarily resident in the United Kingdom until, contrary to
their original plans, they moved to and became resident in Alderney in
May 1992.
On 1 February 1989 Matheson PFC (London) Ltd who had by then become
the Willoughbys' advisers wrote to Professor Willoughby concerning the
options open to him on the maturity of the first Save and Prosper Ten
Plus Policy. They were as follows:
'1. Convert into a UK whole life contract which would provide you with
income free from personal tax liability in the future. However, the
underlying funds in which the investment would be held would have to
be Save & Prosper's standard UK range and all of these would be taxed
on income received as well as capital gains. The growth would,
therefore, be substantially less than an equivalent fund which was not
taxed. As you do not intend to start drawing an income for several
years it would seem to be important to get the gross roll-up.
2. Convert the policy into an offshore whole life policy which would
provide gross roll-up on the underlying funds but the income, when
taken, would be liable to personal tax at both basic and higher rates.
The investment funds which would be available to you under these
circumstances would be Save & Prosper's offshore funds, IPF and some
of the Jardine Fleming offshore funds. The 5% per annum withdrawal,
free from tax liability would apply.
3. Take the tax-free proceeds and invest in an offshore Personal
Portfolio Bond. This would provide gross roll-up in the investment
fund selected and there is virtually no restriction on what investment
may be selected, including building society and bank deposits, gilts
and equities. There is total flexibility to be able to switch between
all these investments as thought necessary. The 5% p a tax-free
withdrawal facility is available but on final surrender the gain is
subject to basic and higher rate tax if applicable at that time. Using
this reinvestment vehicle would enable the bond to be written on your
joint lives but to be owned by your wife, which means that any amount
withdrawn in excess of 5% would be regarded as taxable income in her
hands and could be set off against her own Personal Allowance which
will apply as from April 1990. This would be a tax efficient thing to
do.'
In the event Professor Willoughby chose option 3 and decided to effect
a further single premium personal portfolio bond with Royal Life (no
2387). The proposal was made by his wife, the premium being the value
of the investments to be received from Save and Prosper. Those
investments were transferred in specie to the fund linked to the
second bond and the appropriate policies were issued to Mrs Willoughby
on 13 March 1989.
In the case of the second bond the Special Commissioner said:
'He did not select option 3 for the purpose of avoiding UK tax. If he
had appreciated any serious risk from the application of s 739 he
would have selected option 2.'
In February 1990 the procedure was repeated with the surrender values
of the second and third Save and Prosper Policies. The investments
were transferred to Royal Life in payment of the single premium due
for the policies in respect of the bond (no 3343) which were issued on
the application of Mrs Willoughby to Mrs Willoughby. In the case of
both the second and third bonds the nominated investment adviser was
Matheson PFC (London) Ltd.
Finally in August 1990 three further policies were issued to the
taxpayers under the first bond in return for further investments added
to the fund attributed to that bond.
In paras 7(18) and (19) of his decision the Special Commissioner said:
'(18)(a) There are in evidence brochures issued by Royal Life giving
details about private portfolio bonds. Professor Willoughby was
provided with a brochure by PFC after he had signed the proposal forms
in 1986. It played no part in his decision to invest in bond 1121. He
relied on the advice he received from PFC. The brochures current in
1989 and 1990 played no greater part since at that time he had the
advice of Matheson PFC (London) Ltd. The earliest brochure containing
any reference to s 739 is dated June 1990. (b) PFC have many clients
investing in these bonds the majority of whom retire in Hong Kong.
They are useful where an individual receives a lump sum on retirement.
They are appropriate for residents in the European Communities and
Australia. Their favourable tax treatment is an attraction.
Administratively they are convenient for an individual since Royal
Life does all the work. Royal Life is an efficient company and it is
backed by a strong parent company in the United Kingdom. (19) It is an
agreed fact that the effect of the arrangements was that the income
arising in respect of the three bonds during the years of assessment
in issue was (apart from the operation of s 739 and its predecessor)
free of United Kingdom income tax until such time as the respective
insurance policies matured or were surrendered in such a way as to
enable Professor or Mrs Willoughby to receive sums equal to the value
of the contents of the fund. At that point, the gain arising in
connection with the policies would be chargeable in accordance with s
541(1) of the 1988 Act (or its predecessor). Income has arisen in each
of the three funds; gains have arisen in the fund for bond 1121. It is
unnecessary to record here the amounts.'
On 18 March 1991 Professor Willoughby disclosed the three Royal Life
bonds to the Revenue. In the ensuing correspondence the Revenue wrote:
'However I should add that we do not consider it to be tax avoidance
in the meaning of section 739 merely because a taxpayer chooses to
invest in a policy with an offshore company. We have looked at a large
number of products offered by the offshore insurance industry but are
only challenging certain highly personalised products of which the
Royal Life Private Portfolio is an example. It is the Revenue's view
that by purchasing such bonds you have however unwittingly bought your
way into an avoidance scheme which nevertheless does not work because
of the operation of section 739.'
In his decision the Special Commissioner considered the four types of
transactions described by Lord Templeman in Comr of Inland Revenue v
Challenge Corp Ltd [1986] STC 548, [1987] AC 155, to which I shall
refer later. After referring to a letter dated 9 November 1990 from
the Revenue to Royal Life conceding that the personal portfolio bonds
are bona fide commercial transactions the Special Commissioner
concluded that in the absence of any reason for impeaching the good
faith of the other party thereto it must be a bona fide commercial
transaction for him as well. He considered the Revenue's suggested
distinction between bonds of this sort and all the others (98% of the
whole) which they had not challenged based on the ability to nominate
the underlying investments and said:
'The sole difference appears to lie in the ability to Professor
Willoughby and others like him to nominate an investment to be
included in the fund to which the policy is tied. The 98% of
policyholders do not have this power. The life office makes its own
selection, the policyholder having made a selection at the inception
of the policy. Nevertheless it may be supposed that the aim and object
of the 98% of policyholders is likely to be the same as Professor
Willoughby's. I cannot see that the 98% seek the less to avoid
liability to income tax or that the 2% seek the more to avoid such
liability by virtue of that one distinction. The essence of the matter
is that the tax regime is the same. Investment flexibility greater or
less can hardly be determinant of the category of tax saving into
which a policyholder falls.'
Finally the Special Commissioner set out the provisions of s 741 and
concluded in these words:
'In 1986 he had a substantial sum from the university provident fund
for investment. With that money he wanted to make further provision
for his eventual retirement. He was well aware of the tax aspects. He
wanted an investment which could be a substitute for a s 226
retirement annuity. PFC advised him regarding tax advantages and tax
disadvantages. He specifically chose a Royal Life offshore bond since
the income could be rolled up gross and it was subject to a tax regime
recently introduced by Parliament. From a commercial point of view an
offshore bond had the attraction that the incidence of tax was
bearable. It was tax efficient though he would not be able to utilise
his personal relief from capital gains tax. Professor Willoughby
perceived other advantages in the bond flexibility, security, economy
which were none the less perceived by him even though to some extent
on examination before me some may have been less significant than he
thought in 1986. That does not detract from them as he perceived them
at that time. I do not consider that because you adopt a course which
is less fiscally expensive than another your purpose in adopting the
one course involves as a corollary that one of your purposes is
avoiding liability to taxation, specially if the one course falls
within a tax regime which Parliament considers appropriate. With
regard to the 1989 and 1990 transfers the case is a fortiori because
under one of the three options in the letter of 1 February 1989 the
units from the Save and Prosper Ten Plus policies could have been left
where they were in the Ten Plus fund subject to the same tax regime
Parliament imposed in 1984. But that option was not adopted since
Professor Willoughby wanted some flexibility with regard to the
investments. Moreover he could have extended the period of maturity by
another ten years. Overall I find that having regard to the origin
overseas of the provident fund payment and the Save and Prosper
policies providing for Professor Willoughby's retirement their
application in the acquisition of Royal Life bonds had the same
continuity of purpose, to make further provision for his retirement.
Taxation was taken into account. It could not be otherwise. But I do
not find that avoiding liability to taxation was one of the purposes
for which the transfer of the provident fund payment or the units in
the Save and Prosper Ten Plus policies or associated operations were
effected. On balance I find that Professor Willoughby makes out his
case under s 741(a). I also find that the transfers and associated
operations were bona fide commercial transactions and were not
designed for the purpose of avoiding liability to taxation. They were
designed for the increase of Professor Willoughby's retirement funds
taking advantage of a favourable tax regime and not for the purpose of
avoiding liability to taxation. The augmentation in August 1990 of
bond 1121 does not fall to be treated differently.'
The Crown contends that that conclusion is wrong and that this court
is entitled to reach a different conclusion consistently with the
decision of the House of Lords in Edwards (Inspector of Taxes) v
Bairstow [1956] AC 14, 36 TC 207. For the Crown it was contended that
the Special Commissioner was wrong to conclude that there was no
relevant distinction between the position of the taxpayers and others
holding similar policies, about 2% of the whole, who the Crown
contended did not satisfy the requirements of s 741, and the remaining
98% who the Crown accepted could establish that the purpose of
avoiding liability to tax was not one of the purposes for which the
relevant transfers and associated operations were made. Secondly it
was contended that the Special Commissioner was wrong in thinking that
the fact that the taxpayers wished to provide for their retirement in
a tax efficient way was not inconsistent with the statutory exemption.
In relation to para (b) it was submitted that to be commercial the
transactions must be carried out as part of the trade or commerce of
both parties.
For the taxpayers it was submitted that the deliberate choice of a
transaction by which an asset was acquired which Parliament had
determined should be subject to a specific tax regime could not be tax
avoidance because the result was that the regime applicable to other
transactions or types of asset did not apply. Thus it was submitted
the purpose of avoiding liability to taxation was not one of the
purposes for which the transfer and associated operations had been
effected and that in any event the transfer and associated operations
were bona fide commercial transactions for they were genuine, for
value and at arm's length.
Both parties relied on a passage in the advice of the Privy Council
delivered by Lord Templeman in Comr of Inland Revenue v Challenge
Corp. That case concerned the proper construction and application of
legislation in New Zealand designed to counter tax avoidance. In
relation to that concept Lord Templeman said ([1986] STC 548 at
554-555, [1987] AC 155 at 167-168):
'The material distinction in the present case is between tax
mitigation and tax avoidance. A taxpayer has always been free to
mitigate his liability to tax. In the oft quoted words of Lord Tomlin
in IRC v Duke of Westminster [1936] AC 1 at 19, 19 TC 490 at 520
"Every man is entitled if he can to order his affairs so as that the
tax attaching under the appropriate Act is less than it otherwise
would be." In that case however the distinction between tax mitigation
and tax avoidance was neither considered or implied. Income tax is
mitigated by a taxpayer who reduces his income or incurs expenditure
in circumstances which reduce his assessable income or entitle him to
reduction in his tax liability. Section 99 [of the Income Tax Act 1976
(New Zealand)] does not apply to tax mitigation because the taxpayer's
tax advantage is not derived from an "arrangement" but from the
reduction of income which he accepts or the expenditure which he
incurs. Thus when a taxpayer executes a covenant and makes a payment
under the covenant he reduces his income. If the covenant exceeds six
years and satisfies certain other conditions the reduction in income
reduces the assessable income of the taxpayer. The tax advantage
results from the payment under the covenant. When a taxpayer makes a
settlement, he deprives himself of the capital which is a source of
income and thereby reduces his income. If the settlement is
irrevocable and satisfies certain other conditions the reduction in
income reduces the assessable income of the taxpayer. The tax
advantage results from the reduction of income. Where a taxpayer pays
a premium on a qualifying insurance policy, he incurs expenditure. The
tax statute entitles the taxpayer to reduction of tax liability. The
tax advantage results from the expenditure on the premium. A taxpayer
may incur expense on export business or incur capital or other
expenditure which by statute entitles the taxpayer to a reduction of
his tax liability. The tax advantages result from the expenditure for
which Parliament grants specific tax relief. When a member of a
specified group of companies sustains a loss, s 191 [of the Income Tax
Act 1976 (New Zealand)] allows the loss to reduce the assessable
income of other members of the group. The tax advantage results from
the loss sustained by one member of the group and suffered by the
whole group. Section 99 does not apply to tax mitigation where the
taxpayer obtains a tax advantage by reducing his income or by
incurring expenditure in circumstances in which the taxing statute
affords a reduction in tax liability. Section 99 does apply to tax
avoidance. Income tax is avoided and a tax advantage is derived from
an arrangement when the taxpayer reduces his liability to tax without
involving him in the loss or expenditure which entitles him to that
reduction. The taxpayer engaged in tax avoidance does not reduce his
income or suffer a loss or incur expenditure but nevertheless obtains
a reduction in his liability to tax as if he had.'
The principle of that statement was reaffirmed in the House of Lords
in Ensign Tankers (Leasing) Ltd v Stokes (Inspector of Taxes) [1992]
STC 226 at 240 and 244, [1992] 1 AC 655 at 675 and 681.
The Crown accepts that the bonds in this case are bonds or policies to
which s 553 of the Income and Corporation Taxes Act 1988 applies. But
it contends that the hallmark of such a bond or policy not effected
for the purpose of avoiding a liability to taxation is that the
investments to which the bond or policy is linked are pooled and the
choice of individual investment does not lie with the holder of the
bond or policy. It is submitted that in this case the substance of the
matter is that the holder continues to manage his own portfolio but by
the insertion of the bond or policy escapes tax on the income as it
arises. An analogy is drawn with the example Lord Templeman gives of
obtaining the tax advantage without incurring the cost or expenditure
on which the advantage depends.
I do not accept this submission or the validity of the analogy. As I
have already recorded the Crown does not suggest that these bonds or
policies are shams or outside the regime imposed by s 553 of the
Income and Corporation Taxes Act 1988. It is not a statutory condition
for the application of that regime that the investments to which the
policy or bond is linked must be pooled or chosen by someone other
than the holder; such conditions are irrelevant to the application of
that tax regime. I agree with the Special Commissioner. I can see no
material difference between the position of the taxpayers and the
others with bonds or policies in respect of which the Revenue seek to
raise assessments under s 739 because choice of and control over the
underlying investments is retained and the remaining 98% of those
holding offshore bonds or policies where there is no such retention
and which are accepted to satisfy s 741. Thus, in my view all satisfy
the provisions of s 741 or none of them do.
The test is whether one of the purposes was the avoidance of liability
to taxation. In the context of this case that means the avoidance of
liability to income tax (including higher rate tax) for that is the
only type of tax in question. The Special Commissioner found in
respect of the fourth issue, on which there is no appeal, that
deferring liability to income tax can constitute the avoidance of
liability to income tax. But he did not decide that in this case it
was. As he said at the conclusion of para 12 of his decision that was
the fifth issue.
The difference between the tax consequences of an offshore and onshore
policy or bond is that because the income of the underlying
investments of the former is not liable to tax in the United Kingdom
as it arises the holder of the policy or bond is liable to income tax
at the standard rate on the gain as defined at maturity or other
chargeable event. There is no difference in the case of higher rate
tax for the holders of both types pay such tax on the gain when the
chargeable event occurs. In essence that is also the difference
between the holder of the private portfolio of investments and the
holder of the offshore policy or bond save that in the latter case the
liability to higher rate tax is also deferred.
I do not see why the choice of an offshore bond or policy, for the
taxation of which Parliament has made express and recent provision,
should be regarded as tax avoidance at all. The tax is not avoided it
is deferred. Moreover it is deferred to an event which Parliament has
prescribed not to a time of the taxpayer's choice. If it were
otherwise the purchase by the self-employed of a retirement annuity,
which attracts tax relief on the premium, favourable tax treatment of
the income and gains arising in the underlying fund and beneficial
options when the policy matures would amount to tax avoidance. It does
not because, as Lord Templeman pointed out in Challenge, in such a
case the taxpayer has genuinely paid the premium and complied with all
the other conditions on which these advantages are available. In my
judgment the Special Commissioner was right on this point as well. The
genuine application of the taxpayer's money in the acquisition of a
species of property for which Parliament has determined a special tax
regime does not amount to tax avoidance merely on the ground that the
taxpayer might have chosen a different application which would have
subjected him to less favourable tax treatment. Although said in a
different context, like the Special Commissioner, I would refer to the
dictum of Lord Upjohn in IRC v Brebner [1967] 2 AC 18 at 30, 43 TC 705
at 718-719 where he said:
'My Lords, I would only conclude my speech by saying, when the
question of carrying out a genuine commercial transaction, as this
was, is reviewed, the fact that there are two ways of carrying it out
-- one by paying the maximum amount of tax, the other by paying no, or
much less, tax -- it would be quite wrong, as a necessary consequence,
to draw the inference that, in adopting the latter course, one of the
main objects is, for the purposes of this section, avoidance of tax.
No commercial man in his senses is going to carry out a commercial
transaction except upon the footing of paying the smallest amount of
tax that he can. The question whether in fact one of the main objects
was to avoid tax is one for the Special Commissioners to decide upon a
consideration of all the relevant evidence before them and the proper
inferences to be drawn from that evidence.'
In my judgment it was not one of the purposes of the transfer or of
the associated operations by which the taxpayers effected any of the
bonds or policies with Royal Life that liability to taxation should be
avoided. Accordingly in my judgment the taxpayers did establish the
defence for which s 741(a) provides and they are entitled to have all
the assessments made under s 739 discharged.
The Special Commissioner also dealt with the exemption afforded by s
741(b) and found that to be established as well. In view of my
conclusion in respect of tax avoidance the only other point which
arises is whether the transfer and associated operations were 'bona
fide commercial transactions' and 'not designed' for the purpose of
tax avoidance. The arguments before this court revealed considerable
differences on the points of construction to which those words give
rise. As they do not require resolution on this appeal I think that it
is better that their further consideration awaits a case in which they
are essential to the conclusion of the court.
Accordingly, I would dismiss this appeal.
JUDGMENTBY-2: HOBHOUSE LJ
JUDGMENT-2:
HOBHOUSE LJ: I agree that these appeals should be dismissed for the
reasons given by Morritt LJ.
JUDGMENTBY-3: GLIDEWELL LJ
JUDGMENT-3:
GLIDEWELL LJ: I have read the judgment of Morritt LJ in draft, and
agree with it in every respect.
DISPOSITION:
Appeals dismissed with costs. Leave to appeal to the House of Lords
refused.
SOLICITORS:
Solicitor of Inland Revenue; Baileys Shaw & Gillett
Y