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A taxpayer argued that a tax avoidance purpose is essential for income to be assessed under the anti-avoidance provisions of section 739, Taxes Act 1988 (transfer of assets abroad). However it was held that the onus is on the taxpayer to prove that such a purpose does not exist for the defence under section 741 (no avoidance motive) to apply.
Background
Mr Carvill was domiciled in Ireland, but had formed companies in the United Kingdom and Bermuda, which were involved in the reinsurance business. As a consequence of transactions between these, he was paid dividends abroad from the Bermudan company.
The Revenue issued assessments to income tax for 1987-88 to 1992-93 inclusive under the anti-avoidance provisions of section 739, Taxes Act 1988, which apply when assets are transferred abroad and can be enjoyed by a non-domiciled or non-resident person. Exemption from this section is possible under section 741, Taxes Act 1988 if the taxpayer can show that the transfer of assets and associated operations were bona fide commercial transactions, not designed to avoid tax.
The taxpayer’s appeal against these assessments was dismissed and he paid the tax on them. Subsequently, the Revenue issued assessments under section 739 for 1993-94 to 1995-96. At that second hearing ([2000] STC (SCD) 143), the Commissioners agreed that Mr Carvill had proved bona fide commercial reasons for the transactions and the assessments were discharged. As a result, the Revenue decided not to issue section 739 assessments for later years. Perhaps not unnaturally, Mr Carvill considered that the tax paid for 1987-88 to 1992-93 should be repaid and sought claims to restitution and judicial review of the Revenue’s decision not to repay him.
(Elizabeth Gloster QC and Giles Goodfellow for the taxpayer; Timothy Brennan QC, Rabinder Singh QC and Hugh McKay for the Revenue.)
Judgment in the High Court
Counsel for Mr Carvill argued that:
- assessments should not be made under section 739 without the existence of a tax avoidance purpose;
- section 741 was only a procedural protection;
- the second Commissioners’ hearing had shown that there was no tax avoidance purpose as had the fact that the Revenue had not appealed or issued assessments for the following years;
- sums paid by a citizen as a result of a demand made outside of an authority’s powers were recoverable as of right (Woolwich Equitable Building Society v Commissioners of Inland Revenue [1992] STC 657); and
- the right to recovery was not restricted by the limited (error or mistake) statutory régime of section 33, Taxes Management Act 1970, which, it was agreed, did not apply to Mr Carvill.
Mr Justice Hart disagreed. Although section 739 was an anti-avoidance provision, the existence of an anti-avoidance purpose was not a pre-requisite of the section being applied. It is the proof by the taxpayer that there was no such purpose which then prevents the application of the section. Such proof was not forthcoming in the first hearing and that decision was therefore correct. More information was available in the second hearing, the case was proven by the taxpayer and the assessments were discharged. Although this might appear odd, it was simply the doctrine of res judicata in action, i.e. Commissioners were not bound by the decisions of Commissioners in previous hearings.
In support of their request for a judicial review of the Revenue’s decision not to repay the tax, counsel argued that the Revenue’s discretionary ‘care and management’ powers under section 1, Taxes Management Act 1970 were wide enough to allow a repayment to be made even if Parliament had not intended it (in R (on the application of Wilkinson) v Commissioners of Inland Revenue [2002] STC 347, a repayment was made to a man in respect of a ‘notional’ widow’s bereavement allowance). However, the Revenue argued that because it did not appeal against the second decision, this did not mean that the first decision was wrong. Mr Justice Park agreed that the first decision was a complete defence to the claim for judicial review.
Decision for the Revenue
(Reported at [2002] STC 1167.)
Commentary
There may have been a slight widening of the defence provided by section 741. ‘Meeting Points’ in Taxation, 19 October 2000 at page 69 mentioned the decision of the Commissioners in the second hearing in this case alongside Commissioners of Inland Revenue v Willoughby [1997] STC 995 and A Beneficiary v Commissioners of Inland Revenue [1999] STC (SCD) 134. In both of those cases, the distinction was drawn between tax mitigation and avoidance. In the former case, Lord Nolan said: ‘It would be absurd in the context of section 741 to describe as tax avoidance the acceptance of an offer of freedom from tax which Parliament has deliberately made. Tax avoidance within the meaning of section 741 is a course of action designed to conflict with or defeat the evident intention of Parliament’. The latter case also mentioned the importance of the subjective test of looking into the mind of the taxpayer to determine the purpose behind the transaction.
On a more mundane point, and if nothing else, perhaps the case illustrates the importance of having all possible evidence available to prove the purpose behind transactions. The assessments that were the subject of the first hearing were determined in sums totalling in excess of £3.5 million.
