Shadbolt (Inspector of Taxes) v The Rt Hon Lord Pender, Admiral Henry William Grant and

 

Shadbolt (Inspector of Taxes) v The Rt Hon Lord Pender, Admiral Henry William Grant and

Others

TAXATION; Income Tax

KING’S BENCH DIVISION

MACNAGHTEN J

22, 23, 24 OCTOBER 1945

Income Tax – Exemption – Income derived from investments of superannuation funds – Claims for repayment of tax deducted at the source – Two Finance

Acts in respect of same financial year – Second Act increasing standard rate of tax imposed by first Act – Increased rate payable in respect of whole financial

year – Sale of investments by trustees before increase of standard rate – Deduction made at original rate – Deficiency in tax deduction to be made up by

adding to deduction due on next payment – Purchase of investments by trustees after increase of standard rate – Income received on new investments not only

less tax at increased rate but also less deficiency in tax arising through transferors having suffered tax only at former standard rate – Deficiency payment to

be “accounted for and assessed in the same manner as the tax deducted from original payment” – Paymetns of tax in fact made by transferees – Transferors

not to be treated as persons who made payments – Income Tax Act 1918 (c 40), s 27 – Finance Act, 1921 (c 32), s 32 – Finance (No 2) Act, 1939, (c 109), s 7,

Sched 6, paras 1, 2 – Finance (No 2), Act, 1940 (c 48), s 6, Sched 5, paras 1, 2.

The respondents were the managing trustees of certain superannuation funds, and the income derived from the investments of such funds was exempt from

income tax by virtue of the Finance Act, 1921, s32. Accordingly, the trustees made quarterly claims for the repayment of income tax deducted at the source

and such claims were duly allowed by the Inland Revenue Commissioners. In each of the years 1939–1940 and 1940–1941 there were two Finance Acts, the

standard rate of income tax for the year imposed by the first Act being increased by the second Act. By the Finance (No 2) Act, 1939, Sched 6, para 2, and the

Finance (No 2) Act, 1940, Sched 5, para 2, it was provided that, in the cases where the taxpayer suffered tax by deduction before the rate was increased and

the deduction had been made at the original rate, the deficiency in the amount of tax so deducted should be made good by increasing the deduction from the

next payment by an amount equal to the amount of the deficiency. During the year 1939–1940 the trustees sold certain investments before the standard rate

was increased, and they received interest thereon subject to the deduction at the original rate, with the result that their transferees had to make good the

deficiency. In the following year the trustees bought certain investments after the standard rate had been increased. On the income derived from those

investments the trustees had to pay by deduction not only the tax at the increased standard rate, but also the sum required to make good the deficiency in the

amount of tax which their transferors had suffered. On the repayment claim made by the trustees for the years in question it was contended for the Crown that,

for the year 1939–1940, when the trustees had sold stock before the increase of the standard rate, the amount paid by the transferees in respect of the

deficiency must be deemed to have been paid by the transferors, ie, the trustees, with the result that the trustees could recover, under the exemption section,

not only the tax actually suffered by deduction, but also the deficiency which was in fact paid by the transferees; conversely, for the year 1940–1941, when the

trustees had bought stock after the increase of of the standard rate, the amount of the deficiency paid by them as transferees must be deemed to have been paid

by their transferors, with the result that the trustees could not recover the amount paid for such deficiency. These contentions of the Crown were based on the

Finance (No 2) Act, 1939, Sched 6, para 2, and the Finance (No 2) Act, 1940, Sched 5, para 2, which provided that the deficiency payment “should be

accounted for and assessed in the same manner as the tax deducted from the original payment.” The deficiency which, according to the contentions of the

Crown, the trustees were entitled to claim for the year 1939–1940 was of a smaller amount than the deficiency which the trustees had actually borne by

deduction for the year 1940–1941:—

Held – The words “accounted for” in the Finance (No 2) Act, 1939, Sched 6, para 2, and the Finance (No 2) Act, 1940, Sched 5, para 2, 􀂭 16􀀉 meant that the

paying agent who had deducted the tax must account for it, and the words “… and assessed in the same manner as the tax deducted from the original

payment” meant that the deficiency payment was to be treated as if it had been included in the original assessment: they could not be construed as containing

by implication a provision that, in the case of a transfer of stock after the standard rate had been increased, the transferor was to be treated as the person who

made a payment which was in fact made by the transferee. The appellant trustees were, therefore, entitled to the repayment of the amounts claimed by them.

Notes

This case deals with the incidence of tax where stock is transferred during a year in which there is an increase in the standard rate of tax by a second Finance

Act. The deficiency in the deduction of tax at source is to be borne by the transferee out of the next payment and the transferor, being in the circumstances

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under consideration exempt from payment of income tax, cannot recover from the Revenue the increased deduction which he has not in fact paid. E converso,

where the transferee is liable for the deficiency deduction he can on a claim for repayment as not being liable for income tax, recover not only the tax suffered

but also the deficiency payment suffered by him.

For the Finance (No 2) Act, 1939, Sched 6 and the Finance (No 2) Act, 1940, Sched 5, see Halsbury’s Statutes, Vol 32, p 1218, and Vol 33, p 216

respectively.

Case Stated

Case Stated under the provisions of the Income Tax Act, 1918, ss 27(5), 149, by the Commissioners for the General Purposes of the Income Tax for the

division of the Duchy of Lancaster in the county of London, for the opinion of the King’s Bench Division of the High Court of Justice. The respondents, the

managers of eight pension and provident funds for the benefits of the employees of Cable and Wireless Ltd preferred in their capacity as such managing

trustees a claim for the repayment of income tax, the question in dispute being the amount of tax repaid in respect of the respondents’ investment income for

the years 1939–1940 and 1940–1941, and the basis upon which the repayment of the tax had been made. The following facts were admitted:

‘The company was formed in April, 1929, to acquire the “communications” assets of [various undertakings] … At the time of acquiring these assets

the company took over the employees of the various undertakings … and all the pension and provident funds of the undertakings were brought under

the management of one set of trustees … At the same time an unlimited company known as Cables and Wireless Pension Fund Trustee was

incorporated under the Companies Act, 1929, in order that it might act as custodian trustee and the investments of the funds were transferred to it in that

capacity … There are now eight funds, of which the respondents are the present managing trustees. Of these eight funds … five have been fully

approved for the purposes of the Finance Act, 1921, s. 32 by the Inland Revenue Commissioners, two have been approved to the extent of 81.5 per cent.

and 99.36 per cent. respectively, and one had not been approved … Under the Finance Act, 1921, s. 32, the respondents are entitled to exemption from

income tax on (i) the whole of the investment income of the first five of the … funds, (ii) on the other two to the extent stated … It has been the

practice of the respondents … to make quarterly claims for repayment of income tax in respect of the investment income received on behalf of the

funds under deduction of tax for the quarters ended respectively Mar. 31, June 30, Sept. 30, and Dec. 31, in each year … The claims so made were

allowed by the Inland Revenue Commissioners and repayments of tax were duly made quarter by quarter.

By the Finance Act, 1939, s. 11, which became law on July 28, 1939, it was provided that income tax for the year 1939–1940 should be charged at

the standard rate of 5s. 6d. in the pound. By sect. 7 of the Finance (No 2) Act, 1939, which became law on Oct. 12, 1939, it was provided that the

standard rate of income tax for the year 1939–1940 should as respects the last three-quarters of the year be increased by 2s. to 7s. 6d. in the pound and

that the increase should be averaged over the whole of the year, thus making the average rate 7s. in the pound. By sect. 11 of the Finance Act, 1940,

which became law on June 27 1940, it was provided that income tax for the year 1940–1941 should be charged at the standard rate of 7s. 6d. in the

pound. By sect. 6 of the Finance (No 2) Act, 1940, which became law on Aug. 22, 1940, it was enacted that the standard rate of income tax for the year

1940–1941 should be 8s. 6d. in the pound … Pursuant to these enactments tax was deducted from interest and dividends paid during the first half of

each of the years 1939–1940 and 1940–1941 at the rates of 5s. 6d. and 7s. 6d. in the pound respectively. Adjustments to give effect to the said increases

of rate were made by deducting from interest and dividends paid during the second half of each of the said years income tax at the rates of 8s. 6d. and

9s. 6d. respectively.

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During the second half of each of the said years 1939–1940 and 1940–1941 certain changes occurred in the investments of the Pension and

Provident Funds … The result of these changes was that in certain cases the income of the funds suffered tax at a rate greater or less than the standard

rate of tax for the the years 1939–1940 and 1940–1941 as fixed by the Finance (No. 2) Act, 1939, and the Finance (No. 2) Act, 1940. In making their

claims the respondents claimed repayment of the actual amounts of tax deducted from the payments of interest and dividends they received. Having

considered the claims … the appellant [inspector of taxes] expressed the view that in respect of all items of income that arose in the years in question

tax was repayable at the standard rate fixed by the second Finance Act of the year … The changes [which occurred] all took place in investments the

income whereof in the year 1939–1940 fell within the proviso to para. 1 of Sched. 6 of the Finance (No. 2) Act, 1939, and therefore within para. 2 of

that Schedule, and in the year 1940–1941 fell within the proviso to para. 1 of Sched. 5 to Finance (No. 2) Act, 1940, and therefore within para. 2 of that

Schedule.

If the contentions of the respondents were upheld, the total tax repayable to them in respect of the year 1939–1940 would be £80,776 8s. 1d., and in

respect of the year 1940–1941 would be £100,134 5s. 1d., whereas if the contentions of the Inland Revenue Commissioners were upheld the amounts

repayable for these years would be £81,168 5s. 2d., and £99,003 6s. 5d., respectively, involving an increase of the amount repayable in respect of the

year 1939–1940 of £391 17s. 1d., and a reduction of the amount repayable in respect of the year 1940–1941 of £1,130 19s. 6d. (i.e., a net reduction in

respect of the two years of £739 2s. 5d.)… ’

On these facts the Commissioners held that the respondents were entitled to the amounts claimed by them. The Crown appealed.

The Attorney General (Rt Hon Sir Hartley Shawcross KC) and Reginald P Hills for the appellant.

Cyril King KC and Heyworth Talbot for the respondents.

Cur adv vult

24 October 1945. The following judgment was delivered.

MACNAGHTEN J. The respondents are the managing trustees of seven superannuation funds established for the benefit of employees of Cable and

Wireless, Ltd. Under the Finance Act, 1921, s 32, income derived from investments belonging to the trustees is exempt from the payment of income tax. In

the case of five of these funds, the whole of the investment income is exempt: in the case of the other two, the exemption extends, in the one case, to 81.5 per

cent and, in the other, to 99.36 per cent

It might have been thought impossible to raise any question of law as to the effect to be given to so simple an enactment, and down to the tax year

1939–40 no such question was ever raised. It was the practice of the trustees to make quarterly claims for repayment of income tax in respect of the income

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received under deduction of tax for the quarters ended respectively 31 March 30 June 30 September and 31 December in each year. In each of those claims,

the trustees set out the particulars of the gross amount of interest received from each holding of stock, and the amount of tax deducted therefrom, and its

allocation to the respective funds. The claims were, in all cases, supported by the production of interest warrants and counterfoils, and the claims so made

were allowed by the Inland Revenue Commissioners, and repayments of tax were duly made quarter by quarter.

In each of the tax years 1939–40 and 1940–41, there were two Finance Acts; and the standard rate of income tax for the year imposed by the first Act was

increased by the second Act. By the Finance Act, 1939, which became law on 28 July 1939, the standard rate was fixed at 5s 6d in the pound, but, by the

Finance (No 2) Act, 1939, which became law on 12 October 1939, the rate was increased to 7s. So, too, by the Finance Act, 1940, which became law on 27

June 1940, the standard rate was fixed at 7s 6d, and by the Finance (No 2) Act, 1940, which became law on 22 August 1940, the standard rate was increased to

8s 6d. In each of those years the trustees held securities on which the interest was paid partly before and partly after the rate of tax was increased. It was

provided by the Acts which increased the standard rate of tax that, in the cases where the taxpayer suffered tax by deduction before the rate was increased, and

the deduction had been made at the original rate, the deficiency in the amount of tax so deducted should be made good by increasing the deduction from the

next payment by an amount equal to the amount of the deficiency. No question has been raised by the Crown as to the income derived by the trustees from

investments which they held continuously throughout the tax year. On 􀂭 18􀀉 the income derived from those investments, the trustees suffered tax at the

increased standard rate, and it is conceded that they were entitled to repayment in full, no more and no less. But, as to investments which the trustees sold

before the standard rate was increased, and as to investments which they bought after it had been increased, a contention is raised by the Crown which

certainly has the merit, if it be a merit, of ingenuity.

During the tax year 1939–40, it so happened that the trustees sold certain investments before the standard rate was increased, and the trustees received

interest thereon subject to deduction at the original rate, with the result that their transferees had to make good the deficiency. The contention put forward by

the Crown is that the amount paid by the transferees in respect of the deficiency must be deemed to have been paid by the trustees, and that the trustees are

therefore entitled to recover from the Inland Revenue Commissioners, not only the tax which they actually suffered by deduction, but also the deficiency

which was in fact paid by their transferees. The tax which the trustees actually suffered by deduction in tax year 1939–40 was £80,776 8s 1d; but, according

to the contention put forward by the Crown, they should be treated as if they had paid tax to the amount of £81,168 5s 2d, and the Inland Revenue

Commissioners ought to pay that sum to the trustees. That certainly seems a very surprising result.

In the following year the trustees made a number of investments after the standard rate had been raised. On the income derived from those investments,

the trustees had to pay by deduction, not only tax at the increased standard rate, but they also had to pay the sum that was required to make good the

deficiency in the amount of the tax which their transferors had suffered by deduction on income received by them before the rate was increased. In that year

the amount of tax which the trustees suffered by deduction was £100,134 5s 11d, but, according to the contention put forward by the Crown, they must be

treated as having only suffered a deduction to the extent of £99,003 6s 5d.

This contention is based upon the provisions to be found in the Schedules to the Finance (No 2) Act, 1939, and the Finance (No 2) Act, 1940. Those

Schedules provide that the deficiency payment “shall be accounted for and assessed in the same manner as the tax deducted from the original payment” and it

is said, if I rightly understand the argument, that those words support the contention advanced by the Crown. The words “accounted for” plainly mean that the

paying agent who has deducted the tax must account for it, and the words “and assessed in the same manner as the tax deducted from the original payment”

mean, I think, no more than that the deficiency payment is to be treated as if it had been included in the original assessment, they cannot, in my opinion, be

construed as containing by implication a provision that, in the case of a transfer of stock after the standard rate had been increased, the transferor is to be

treated as the person who made a payment which was in fact made by the transferee.

In my opinion, the decision of the General Commissioners was right, and the appeal must be dismissed with costs.

Appeal dismissed with costs.

Solicitors: Solicitor of Inland Revenue (for the appellant); Bircham & Co (for the respondents).

P J Johnson Esq Barrister.

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[1946] 1 All ER 20