Burton (Collector of Taxes) v. Mellham Ltd [2006] UKHL 6 (15 February 2006)

Burton (Her Majesty’s Collector of Taxes) (Respondent) v. Mellham Limited (Appellants)

[2006] UKHL 6

LORD NICHOLLS OF BIRKENHEAD

My Lords,

    1.   I have had the advantage of reading in draft the speech of my noble and learned friend Lord Walker of Gestingthorpe. For the reasons he gives, with which I agree, I would allow this appeal.

LORD HOFFMANN

My Lords,

    1.   I have had the advantage of reading in draft the speech of my noble and learned friend Lord Walker of Gestingthorpe. For the reasons he gives, with which I agree, I would allow this appeal.

LORD PHILLIPS OF WORTH MATRAVERS

My Lords,

    1.   I have had the advantage of reading in draft the speech of my noble and learned friend Lord Walker of Gestingthorpe. For the reasons he gives, with which I agree, I would allow this appeal.

LORD WALKER OF GESTINGTHORPE

My Lords,

    1.   This appeal is concerned with interest on advance corporation tax (“ACT”) which should have been paid to the Revenue by the appellant, Mellham Ltd (“Mellham”) in respect of a dividend which it paid to its holding company, Mellham Holdings Ltd (“Holdings”). The issue is in the end a fairly short point of statutory construction, but it takes some time to get to it, because the dividend was paid as a foreign income dividend and represented profits of an overseas subsidiary of Mellham, Mellham Inc (“the American subsidiary”). The American subsidiary was not resident in the United Kingdom and did not trade in the United Kingdom. Its distributed profits had already borne tax in the United States of America. It has therefore been necessary for your Lordships to consider, not only the basic statutory provisions about late payment of tax and repayment of overpaid tax, but also some of the very complex provisions, now repealed, which formed Chapter VA in Part VI of the Income and Corporation Taxes Act 1988 (“ICTA 1988”).
    2.   Chapter VA was introduced by the Finance Act 1994 to provide some measure of relief in respect of a long-standing grievance of companies (such as Mellham) which had (directly or through subsidiaries) overseas earnings which attracted double taxation relief (“DTR”) (see generally Peter Harris, “The Foreign Income Dividend Scheme: A Damage Assessment” [1997] BTR 82). Such a company might pay amounts of ACT which exceeded its eventual liability to mainstream corporation tax (“MCT”), so that ACT became a free-standing tax rather than (as the general scheme of the legislation envisaged) an advance payment on account of MCT. The problem originated in 1973 when the United Kingdom adopted the imputation system of corporation tax, of which ACT was an important feature. ACT was abolished with effect from 6 April 1999, and with it went relief for foreign income dividends. The relevant dividend was paid by Mellham during its 12 month accounting period ending on 31 December 1997, that is during the period when both ACT and foreign income dividend relief were in force.
    3.   The problem of surplus ACT, and the operation of the relief for foreign income dividends, can be explained and illustrated by the facts of the present case. I shall consider first what ought to have happened had Mellham complied with its statutory obligations, and had the Revenue immediately conceded a point about DTR which in fact remained in issue for over three years. I shall then consider the consequences of what actually happened. During 1997 Mellham received dividends from the American subsidiary of £21.75m (this figure, and all the others which follow, are the approximate figures used for the sake of simplicity in the judgment of Buxton LJ in the Court of Appeal). On 7 October 1997 Mellham paid to Holdings a dividend of £1.4m. In consequence Mellham became liable to pay ACT of £350,000 due 14 days after the end of the quarter in which it was paid—in this case, 14 January 1998. That payment, if duly made, would have been taken into account in determining the MCT which became due nine months after the end of the accounting period, that is on 1 October 1998. The principal statutory provisions in point were sections 10, 14 and 239 of and Schedule 13 to ICTA 1988.
    4.   For reasons which have never been explained, Mellham did not pay the ACT due on 14 January 1998. The reason can hardly have been shortage of funds, as it had recently received a dividend more than 60 times the size of the ACT liability. A subsidiary contention put forward by the Revenue is that Mellham’s unexplained failure to comply with its statutory obligation (which it eventually admitted, to the extent of £100,000, but only after the Revenue had commenced proceedings) is (together with other shortcomings in its compliance with its obligations) a reason for withholding relief by way of equitable set-off.
    5.   Apart from any question of set-off, interest ran on the unpaid ACT under section 87(1) of the Taxes Management Act 1970 (“TMA1970”):
        “Any tax assessable in accordance with Schedule 13 or 16 to [ICTA 1988] shall carry interest at the rate applicable under section 178 of the Finance Act 1989 from the date when the tax becomes due and payable until payment.”

Section 178 of the Finance Act 1989 (replacing section 90 of TMA 1970) gives the Treasury a general power to make regulations for ascertaining rates of interest for a variety of statutory purposes listed in section 178(2). These include section 87 of TMA 1970 and section 826 of ICTA 1988 (mentioned below). The Treasury has exercised this power by regulations providing for a “reference rate” of interest which is the average of the base lending rates of six leading British banks. The regulations fix rates for particular purposes at one or more percentage points above or below the reference rate for the time being in force (sometimes with further adjustments): see the Taxes (Interest Rate) Regulations 1989 (SI 1989/1297) as from time to time amended. This is the mechanism under which repayment supplement is always at a lower rate than interest on unpaid tax. The details are not relevant to this appeal. It is common ground that if annual interest under section 87 of TMA 1970 was for the time being at (say) 7%, interest on a repayment under section 826 of ICTA 1988 would have been at a significantly lower rate (say 4%).

    1.   If Mellham had duly paid the ACT payable by it on 14 January 1998, this would have provided the Revenue with a cash-flow advantage until the due date for payment of MCT, that is 1 October 1988. Mellham did not in fact put in its MCT return until 24 December 1998, but had it done so before 1 October 1998 then as at the last-mentioned date it would have been necessary to focus on Mellham’s liability (if any) to pay further MCT, and (so far as Mellham had paid ACT in excess of its MCT liability) on its entitlement to foreign income dividend relief under sections 246N to 246Q in Part VI, Chapter VA of ICTA 1988. I will summarise those provisions as briefly as possible.
    2.   Chapter VA, in force from 1 July 1994 until 6 April 1999, started (section 246A(1)) by granting the company a right to elect, in appropriate circumstances, for a dividend which it paid to be treated as a foreign income dividend. The most important requirement (elaborated at great length) was that it should be paid, directly or indirectly, out of profits earned overseas. Section 246N (ACT to be repaid or set off against corporation tax liability) provided in subsection (2):
        “In a case where—
      • (a)  the company pays an amount of advance corporation tax in respect of qualifying distributions actually made by it in the relevant period,
      • (b)  the amount, or part of it, is available to be dealt with under this section, and
      • (c)  there is as regards the company an amount of notional foreign source advance corporation tax for the relevant period,
      • an amount of the advance corporation tax paid shall be repaid to the company, or set off, or partly repaid and partly set off, in accordance with this section and section 246Q.”

Section 246N(7) provided:

      • “No amount shall be repaid or set off under this section and section 246Q unless the company makes a claim for the purpose.”
    1.   Section 246Q(2) provided:
        “If at the time when it falls to be determined whether the amount mentioned in subsection (1) above is to be repaid or set off—
      • (a)  advance corporation tax paid (or treated for the purposes of section 239 as paid) by the company in respect of distributions made by it in the relevant period has so far as possible been set against its liability to corporation tax for the period under section 239(1), but
      • (b)  the company’s liability to corporation tax for the period is to any extent undischarged,
      • the amount mentioned in subsection (1) above shall so far as possible be set off against the company’s liability to corporation tax for the relevant period (and an amount of that liability equal to the amount so set off shall accordingly be discharged); and any excess of the amount mentioned in subsection (1) above over the amount so set off shall be repaid.”

Subsection (4) provided:

      • “No amount shall be repayable under section 246N and this section until the expiry of nine months from the end of the relevant period.”

In these provisions “the relevant period” means the relevant accounting period (see sections 246N(1)(a) and 246Q(11)).

    1.   Mellham’s income for the 1997 accounting period consisted of two payments from the American subsidiary, that is the dividend of £21.75m already mentioned and an interest payment of about £313,000, which by itself attracted an MCT liability of £100,000. It is common ground that MCT was payable on the interest payment, and that if ACT of £350,000 had been duly paid £100,000 would not have been repayable by way of foreign income dividend relief. There was, it seems, a protracted dispute as to whether, apart from the interest payment, Mellham’s MCT liability was (as the Revenue contended) nearly £7m or (as Mellham contended) nil. This startling disparity was apparently caused by a technical issue about the classification of a corporate merger in the United States of America, that issue being determinative as to whether DTR was available. Regrettably the statement of facts and issues before your Lordships (signed only by counsel for Mellham) says nothing at all about this dispute, or why it took more than three years before the Revenue conceded the point (as they did on 4 December 2001). Like Mellham’s failure to pay a comparatively modest sum in ACT, it remains an unexplained feature of this case.
    2.   If Mellham had duly paid its ACT and had then put in its MCT return more promptly, and if the Revenue had promptly accepted its claims to foreign income dividend relief and DTR, the consequences would have been as follows. It would have been apparent on 1 October 1998 that Mellham’s liability to MCT was limited to £100,000, and that the other £250,000 paid in ACT attracted relief under sections 246N to 246Q of ICTA 1988. The relief would have taken the form of a repayment under section 246N(2), and this repayment would have carried interest under section 826(1)(aa) of ICTA 1988 (as amended). Interest would have run from the “material date”, identified in section 826(2)A as the date when MCT for the accounting period became due and payable (in this case, 1 October 1998). The Revenue would have had an interest-free cash-flow advantage from 14 January to 1 October 1998, but thereafter interest would have run against the Revenue and in favour of Mellham.
    3.   My Lords, I have so far outlined what should have occurred, but in the course of doing so I have indicated the irregularities that in fact occurred: first, Mellham did not pay the ACT due on 14 January 1998; second, it was late in putting in its MCT return, incorporating a repayment claim (and, it is said by the Revenue, the return was in an incomplete state); third, there was a long delay (for which neither side accepts responsibility, and on which your Lordships’ House cannot form a view) in settling the dispute about DTR.
    4.   The outcome was that on 23 March 2001 the Collector of Taxes for the Nottingham district issued proceedings in the Nottingham County Court claiming corporation tax of about £350,000 and interest (from 14 January 1998 to 22 March 2001) of about £72,000. Mellham admitted liability for £100,000 “with differential interest” (presumably meaning interest at the rate from time to time payable under section 87 of TMA 1970). Mellham claimed a set-off in a pleading which is to my mind barely comprehensible, especially as it seemed to assert that ACT of £350,000 had been paid. It stated that full particulars of the claim to DTR were set out in an annex, but the annex is no more than a print-out of an accountants’ proforma which gives no clear picture of the point at issue (which was then still unresolved).
    5.   On 23 July 2001 a deputy district judge gave summary judgment for the admitted sum of £100,000 (without interest). As regards the issues remaining in dispute, the action was transferred to the Birmingham Mercantile Court and was heard by Her Honour Judge Alton, who gave judgment on 24 April 2002 (that is, after the dispute about double taxation relief had been resolved). She gave an extemporary judgment in which she identified two particular issues: the meaning of “payment” in section 87(1) of TMA 1970; and (as regards the set-off claim) the material date at which Mellham’s entitlement to a repayment arose (the rival dates being stated as 1 October 1998, as the supposed date of submission of the MCT return, and 4 December 2001, the date of resolution of the issue about DTR). The judge resolved the latter issue in favour of Mellham, by reference to section 826 of ICTA 1988. She then turned to the issue of construction as to “payment”, recording the Revenue’s reliance on the difference in language between “paid” and “repaid” in section 246N(2). She referred to some authorities on equitable set-off cited by counsel for Mellham but did not accept their relevance:
        “I conclude that one cannot establish a set-off, whether at common law or equity it matters not, against an admitted liability, a right to repayment which can only arise once the admitted liability has been discharged. The two liabilities are not concurrent. The second liability is ultimately contingent upon the discharge of the first.”

She gave judgment in principle for the Revenue, subject to final determination of the figures if the parties could not agree them. A later order dated 23 May 2002 quantified the interest liability at £82,000.

    1.   Mellham appealed to the Court of Appeal with permission granted by Clarke LJ. On 17 January 2003 the Court (Brooke and Buxton LJJ and Morland J) dismissed the appeal: [2003] STC 441. There is a single judgment of Buxton LJ with whom the other members of the court agreed. Buxton LJ’s conclusion is set out in para 8 of his judgment:
        “The issue therefore is one of simple statutory construction. Can the expression ‘payment’ when used in section 87 of the 1970 Act, or ‘pays’ when used both in section 246N(2) of the 1988 Act and section 239 of the 1988 Act, encompass a set-off of the sort that the appellant asserts? In order to succeed, the appellant has to establish, both that those statutory references to payment or paying can potentially include a situation of set-off; and that also that in this case ‘set-off’ was in fact available to the appellant. In my judgment, the appellant fails on both of those scores.”

He proceeded to set out his reasons in detail, taking the two main points in reverse order. As to equitable set-off he observed, after a reference to Hanak v Green [1958] 2 QB 9, that this was not a case of “cross-claims in legal proceedings”. He regarded an observation by Lord Wilberforce in The Aries, Aries Tanker Corp v Total Transport Ltd [1977] 1 WLR 185, 188, as inimical to what he called Mellham’s “self-help set-off.” He regarded other authorities relied on by Mellham as unhelpful. Then he turned to statutory construction.

    1.   On the issue of statutory construction Buxton LJ explained his reasoning as follows (para 16):
        “I am quite satisfied that, both in section 246N(2) and in section 87, ‘payment’ cannot extend to a set-off. First, it is the literal meaning of the statute that payment means payment, not to be departed from without good reason. Secondly, the statute itself distinguishes payment from set-off. It does so in terms in section 246N(2), and the judge drew attention to that, if I may say so rightly, when she said this:
      • ‘Part of the pattern of the Act is to use words “paid” and “repaid” in circumstances which do not sit comfortably with the concept of set-off. It is interesting also to note that where it regards it as appropriate, the statute does, indeed, refer to set-off and one sees those words in section 246N(2) itself.’
      • Third, there is a clear policy reason, in the interests of the Revenue’s cash flow, why advance corporation tax must be actually paid, and not treated as a suspended book debt which the taxpayer can revert to or fall back on when his corporation tax comes to be assessed. The judge so found:
      • ‘It is plain that advance corporation tax is designed to define and instigate an income stream to be paid in to the Revenue in advance of the corporation tax assessment.’
      • That, I think, is not a controversial point, but it is valuable to see it as the basis of the judge’s approach to this subject. It points very strongly against any suggestion that a taxpayer can be counted as having ‘paid’ advance corporation tax when he has paid nothing at all. Fourthly, the very outline account that I have ventured to give of the background to the law of set-off indicates that, on any view, it is something very different from, much more complicated than, and much more many-headed than the single concept of payment. It would be odd indeed if the legislature had imported the concept of set-off into a statute without making it plain what aspect of set-off it was referring to, and even more difficult to know, against the background that I have set out, exactly what it is that counts as a set-off that can be relied on as equivalent to statutory payment.”
    2.   These reasons all call for respectful attention, but I have to say that the brevity of the first reason suggests to me that the Lord Justice may not have stood back and considered the position in the round. As he had already recorded (para 6),
        “The logic of the Revenue’s case is that interest continues to be due on the whole of that sum, but as a concession it limits its claim to interest due before 4 December 2001.”

The proposition that a failure to pay tax should carry a statutory liability to pay interest forever afterwards, if the principal liability is discharged or satisfied otherwise than by payment, is so startling as to suggest that it would be a good reason for construing the statute more flexibly. No doubt the Revenue were displeased at Mellham’s unexplained failure to pay the ACT, and some observations of Buxton LJ seem to reflect this displeasure (paras 20 to 21):

      • “[20] … had it paid its advance corporation tax as the statute required, in January, none of this trouble would have occurred and we would not have had to spend time investigating what I have to say are arcane matters of equitable law.
      • [21]  This system is simple and straightforward. Taxpayers may not like it but it is what Parliament has decided. If people keep the rules everybody knows where they are. The rules were not kept in this case.”

I have to say that I feel some sympathy with these observations (except as regards the simplicity of the tax system). Nevertheless a perpetual liability to pay interest, subject only to a discretionary (and possibly dubious) official power of remission would be so disproportionate a penalty as to raise real doubt whether Parliament can have intended the system to work like that.

    1.   Buxton LJ’s second reason was that the statutory language distinguished between “paid” and “repaid”, and also referred expressly (in another context) to set-off. These points must be given due weight. But sections 246N(2) is describing the statutory machinery as it ought to operate. It is not concerned with the consequences of non-compliance. Moreover the reference in section 246N(2) to tax being “set off” looks forward to section 246Q(2) which refers to an amount being “set off against the company’s liability to corporation tax for the relevant period”, a clear echo of the familiar process under section 239(1) of ICTA 1988. This is not an ordinary set-off of cross-claims. It is treating a payment of ACT by a company to the Revenue as discharging in advance a liability for MCT to be paid by the same company to the Revenue.
    2.   The third reason mentioned by Buxton LJ was that the statutory purpose of ACT was to help the Revenue’s cash flow, and that this would not be achieved unless ACT were actually paid. Plainly that point is correct, so far as it goes. But there is a deterrent to non-payment in the interest charge under section 87 of TMA 1970. If the Treasury considers that the deterrent is insufficiently severe it can (within the limits of what is authorised by section 178 of the Finance Act 1989) provide a stiffer sanction. But the notion of a perpetual liability to pay interest, subject only to the possibility of administrative remission, cannot in my view be justified on grounds of policy.
    3.   Buxton LJ’s fourth and final reason was that if Parliament had intended the complicated concept of equitable set-off to apply in this area, it would have said so expressly. Again, I have some sympathy with this view. The provisions for the assessment, collection and repayment of corporation tax in force between 1994 and 1999 were complex, and had to be gathered from the sometimes obscure provisions of TMA 1970 (as amended) and ICTA 1988 (as amended). Nevertheless set-off is a general principle founded in simple convenience and fairness, even if it has some arcane fringes. It should be taken to apply generally to all liquidated cross-claims unless excluded by statute or contract. I think that the difficulties said to arise in this case are not as intractable as the Court of Appeal took them to be. I draw attention to three points in particular.
    4.   In the first place, it is worth noting that section 87 of TMA 1970 was enacted some years before ACT was introduced, and many years before foreign income dividend relief was introduced. It is in a statute concerned with the management of the tax system. To my mind there is no good reason why “payment” in section 87(1) should not include other forms of discharge or satisfaction. Although TMA 1970 is to be construed as one with ICTA 1988 (see section 119 (3) of the former Act) it would be unrealistic to let the detailed provisions in Chapter VA of ICTA 1988, introduced in 1994, have much influence on the construction of section 87 of TMA 1970. The setting off referred to in sections 246N to 246Q is, as I have explained, a different sort of set-off.
    5.   Secondly, Mellham’s claim to DTR cannot in my view be described as an attempt at self-help. It had a statutory claim to DTR which was eventually conceded in its entirety. It is no doubt true to say that the claim, if not conceded by the Revenue, could not have been resolved in the county court or the mercantile court but would have had to go to the Special Commissioners. But the courts below do not seem to have been worried about that jurisdictional point. Mellham’s cross-claim was on a definite, justiciable issue which might in due course have had to be resolved by the High Court on appeal from the Special Commissioners. It had in fact been conceded by the Revenue before the case came before Her Honour Judge Alton for decision.
    6.   We do not know the reasons for the long delay in resolving the DTR claim. But it is a very common occurrence that (for a variety of reasons, including the need for further investigation of the facts) the amount of a monetary claim or cross-claim cannot be finally ascertained until long after its due date for payment. Nevertheless interest may run from when the amount, if ascertained, would have been due and payable. In this case, as I understand it, the delay in resolving the DTR claim was not because it depended on any contingency, but because of a need to satisfy the Revenue about facts which already lay in the past.
    7.   But, it was said on behalf of the Revenue—and this is the third point—there could be no question of the Revenue having to make any repayment under section 826 of ICTA 1988 until the ACT was actually paid. Any cross-claim by Mellham was therefore truly contingent on an event which had not happened and has still never happened, except for the £100,000 extracted from Mellham under the summary judgment on admissions. This is a point which carried weight with the judge, in a passage which I have already quoted. Buxton LJ (para 19) also quoted the passage, and agreed with it.
    8.   In answer to this point Mr Ghosh (for Mellham) relied before your Lordships on the decision of the Court of Appeal in Safa Ltd v Banque du Caire [2000] 2 Lloyd’s Rep 600 (which does not seem to have been cited below). Safa claimed summary judgment as assignee of letters of credit opened by the bank. In unusual circumstances which I need not detail, it was established (partly by concession, and partly by decision, at any rate for the purposes of the summary judgment application) that even if payment was due under the letters of credit, the bank would have been entitled to immediate reimbursement by the beneficiary (and assignor) of the liquidated sum payable under the letters of credit. The right to reimbursement would necessarily have been contingent on actual payment. Nevertheless Waller LJ (with whom Schiemann and Hale LJJ agreed) concluded (for the purposes of the appeal against the refusal of summary judgment) that a defence of set-off would be available. The present case is a simpler case, as only two parties were involved. It would have been an absurd formality (as Mr Cunningham QC for the Revenue himself said, farcical) for each side to make a solemn exchange of cheques for £250,000, Mellham’s payment being regarded as a necessary precondition of the Revenue’s almost instantaneous repayment.
    9.   No point seems to have been taken below as to Mellham having by its conduct disentitled itself to a set-off to which it was otherwise entitled. That submission was made, but not very strongly pressed, before your Lordships. I would not accept it. Mellhams’s unexplained failure to pay the ACT, although apparently replete with cash, is unattractive. But that (and any shortcomings in the MCT return) are in my opinion far short of the sort of conduct (truly amounting to unlawful self-help) referred to by my noble and learned friend Lord Hoffmann in Smith (Administrator of Cosslett (Contractors) Ltd) v Bridgend County Borough Council [2002] 1 AC 336, 351, para 36.
    10.   The Revenue did not place any reliance on the differential between the rates of interest from time to time payable under section 87 of TMA 1970 and those payable under section 826 of ICTA 1988. I think they were right not to do so, since set-off operates to extinguish the liability in question, and the rate at which interest might have been payable, but for its extinction, is immaterial.
    11.   For these reasons I would allow the appeal and set aside the orders dated 24 April 2002 and 23 May 2002 of Her Honour Judge Alton, except as regards (i) the admitted liability for interest on the sum of about £100,000 (to be precise, £100,177) from 14 January 1998 until payment and (ii) interest on the sum of about £250,000 (to be precise, £250, 833) from 14 January 1998 until the date on which foreign interest dividend relief would (if the ACT had been paid, and but for administrative delays over the DTR claim) have been granted. The judge rightly took that date as 1 October 1998, since section 246N(7) simply imposes a condition, and does not regulate the date from which interest is to run. That is, as I understand it, now agreed.

LORD BROWN OF EATON-UNDER-HEYWOOD

My Lords,

 

  1. I have had the advantage of reading in draft the speech of my noble and learned friend Lord Walker of Gestingthorpe. For the reasons he gives, with which I agree, I would allow this appeal.

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