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Special Commissioners Case - John T Newth FCA, FTII, FIIT, ATT reports a recent decision

12 September 2000 / John T Newth

John T Newth FCA, FTII, FIIT, ATT reports a recent decision.
Effective legislation

John T Newth FCA, FTII, FIIT, ATT reports a recent decision.
Effective legislation
In the case of Padmore v Commissioners of Inland Revenue 62 TC 352 the court decided that Mr Padmore was entitled to exemption from United Kingdom income tax in respect of a share of the profits of an independent Jersey commercial enterprise known as Computer Patent Annuities (CPA). This was on the basis of what was then section 497(1), Taxes Act 1970 and is now section 788(3), Taxes Act 1988. In conjunction with paragraph 3 of the arrangement scheduled to the Double Taxation Relief (Taxes on Income) (Jersey) Order 1952 (SI No 1216 of 1952).
The point at issue in a fresh appeal by Mr Padmore before the Special Commissioners was whether the enactment of section 62, Finance (No 2) Act 1987, now section 112(4) and (5), Taxes Act 1988, was effective to reverse the Court of Appeal decision in the previous case. Accordingly Mr Padmore had appealed against the refusal by the Inland Revenue of his claim to relief for exemption upon the Jersey partnership income for the years 1987-88 and 1988-89.
There was no dispute about the facts of the case, which were well known and had already been heard in the Court of Appeal. Computer Patent Annuities, a partnership, was established to carry on the business of furnishing a world-wide renewals service in connection with letters patent and (since 1976) trade marks and designs and other equivalent forms of incorporeal property.
The partnership (or more accurately a series of partnerships) had numerous partners, all of which were either chartered patent agents or members of the Institute of Trade Mark Agents or equivalent bodies. The business of the partnership had always been carried on from its offices in St Helier, Jersey and its day-to-day business was dealt with by the three managing partners who were Jersey residents. It was common ground that the control and management of the business of computer patent annuities was situated abroad for the purposes of section 112, Taxes Act 1988.
Mr Padmore had been one of the partners since 1 February 1976 and had at all times been resident in the United Kingdom.
The tribunal, which consisted of Mr T H K Everett and Dr J F Avery-Jones, considered a number of matters which were common ground between the parties and which had been considered already in the original case in the Court of Appeal.
Counsel for Mr Padmore contended that section 788(3), Taxes Act 1988 overrides the provisions of section 112(4), Taxes Act 1988. The result of this contention would be that tax treaties have effect 'notwithstanding anything in any enactment' but this provision itself is 'subject to the provisions of this Part'. Therefore it was argued that the only way to override a tax treaty by legislation was to put the legislation in Part XVIII of the Act.
Counsel for Mr Padmore accepted that specific legislation not contained in Part XVIII would be effective if that were clearly the intention of Parliament. He distinguished Commissioners of Inland Revenue v Collco Dealings Limited 39 TC 509 and Woodend (K V Ceylon) Rubber and Tea Company Limited v Ceylon Commissioners of Inland Revenue [1971] AC 321.
He also characterised the Inland Revenue's attempt to rely on a statement by Mr Norman Lamont in a debate on the Finance Bill on second reading on 15 July 1987 as reported in Hansard as 'entirely misconceived' and 'an improper use of the relaxed rule introduced by Pepper v Hart 1992' (STC 898).
The main argument of counsel for the Inland Revenue was that the clear purpose of section 62, Finance (No 2) Act 1987, now consolidated in section 112(4)(5), Taxes Act 1988, was to reverse the decision of the High Court in the previous Padmore case. That legislation's purpose was also to override the provisions of the Arrangement (and other double taxation agreements in similar form) insofar as they would otherwise relieve from United Kingdom income tax or capital gains tax a United Kingdom resident partner's share of the income on capital gains of a non-resident partnership. In his submission the language of section 62, on its true construction, achieved its purpose clearly and unambiguously.
The Special Commissioners considered the original legislation in section 497(1), Taxes Act 1970 as well as section 62, Finance (No 2) Act 1987. They accepted counsel for Mr Padmore's contention that the attempt by the Crown to introduce reference to Parliamentary material was misconceived in this instance.
In Pepper v Hart Lord Browne-Wilkinson stated 'in my judgment, subject to the question of the privileges of the House of Commons, reference to Parliamentary material should be omitted as an aid to the construction of legislation which is ambiguous or obscure of the literal meaning of which leads to an absurdity'.
It was the understanding of the Special Commissioners that it was common ground in the appeal that neither the appellant nor the respondents contended that the words used in section 62(4) were ambiguous or obscure or that their literal meaning led to an absurdity. Accordingly they held that in this particular appeal there was no basis for the introduction and reliance upon Parliamentary material.
However, the Commissioners held that the legislation contained in Part VIII of the Taxes Act 1988 undoubtedly overrides a tax treaty, but this says nothing about the legislation in question which is not contained in that Part. This must depend on the intention of Parliament in enacting section 62. It was abundantly clear from section 62(2) that the legislature planned to overturn the decision of the Court of Appeal in Padmore for the future and in the judgment of Mr Everett and Dr Avery-Jones this attempt was successful. Accordingly the appeal was dismissed.
Presumably we can expect this case to go further as any challenge by a taxpayer to our statutory machinery could never be an easy success.
(Maurice Keith Padmore (No 2) (SpC 244).)

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