JUDGMENT
John Mander Pension Trustees Limited (Appellant)
v Commissioners for Her Majesty’s Revenue and
Customs (Respondent)
before
Lord Neuberger, President
Lord Sumption
Lord Reed
Lord Carnwath
Lord Hodge
JUDGMENT GIVEN ON
29 July 2015
Heard on 16 June 2015
Appellant Respondent
Andrew Thornhill QC Akash Nawbatt
Jeremy Woolf
(Instructed by Ansons
LLP
)
(Instructed by HMRC
Solicitors Office
)
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LORD SUMPTION: (with whom Lord Neuberger and Lord Reed agree)
Introduction
1. Until 2006, pension schemes could be approved by the Inland Revenue
(subsequently HM Revenue and Customs). Approved status carried with it
advantages in the tax treatment of contributions to the scheme and investments
within it, but it also imported restrictions on the form in which benefits were taken.
In particular, until recently, benefits had to be taken as income, for example by
applying the capital to the purchase of an annuity. The Finance Act 1991 amended
the Income and Corporation Taxes Act 1988 so as to provide for the cessation of
approval if a scheme ceased to qualify. A practice grew up by which small schemes
(typically for the controlling directors of private companies) would contrive a loss
of approval with a view to allowing the accumulated fund to be applied free of the
restrictions on the form of benefits. To deal with this practice, section 61 of the
Finance Act 1995 introduced a tax charge of 40% of the value of the assets of the
scheme immediately before the cessation of approval.
2. The question at issue on this appeal is whether, when approval is withdrawn
by a decision of Revenue, the tax charge falls to be assessed in the tax year with
effect from which the approval ceased or in the tax year when the Revenue’s
decision to withdraw approval was notified to the administrator of the scheme. The
John Mander Ltd Directors Pension Scheme was approved by the Revenue on 24
September 1987. Its beneficiaries were Mr Mander and his wife. On 5 November
1996 the funds of the scheme were transferred to a new scheme, whose rules were
subsequently changed so as to provide for the trustees to make advances to
beneficiaries which were not permitted for an approved scheme. On 19 April 2000
the Revenue notified the administrator of the scheme that approval was withdrawn
under section 591B(1) of the Income and Corporation Taxes Act 1988 with effect
from 5 November 1996. On 27 July 2000, the then administrator was assessed under
section 591C of the Act for the current tax year, 2000-2001. Following a change of
administrator, a fresh assessment in the same terms was raised against the new
administrator on 22 January 2007. The taxpayer appealed against both assessments
on the ground that the tax should have been assessed for the tax year 1996-1997
when the scheme ceased to be eligible and when the withdrawal of approval took
effect under the terms of the Revenue’s notice. This contention was rejected by the
First-tier Tribunal (Tax Chamber). Their decision was upheld by the Upper Tribunal
(Vos J) [2013] UKUT 51 (TCC); [2013] STC 1453 and subsequently by the Court
of Appeal (Moses, Patten and Beatson LJJ) [2013] EWCA Civ 1683; [2014] 1 WLR
2209. They all considered that the tax charge fell to be assessed for the year 2000-
2001 when the withdrawal was notified.
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3. The point is of greater significance than this rather technical statement of the
issue might suggest. If the taxpayer is right, it may now be too late for the Revenue
to raise a fresh assessment for 1996-1997. In some cases, although not this one, it
will already have been too late by the time that the revenue learn of the facts leading
to the withdrawal of approval. A substantial number of other schemes is affected.
This is the lead case of a number of appeals awaiting decision in the First-tier
Tribunal.
The statutory framework
4. Section 590 of the Income and Corporation Taxes Act 1988 laid down a
number of conditions for the approval of a pension scheme. Section 591 conferred
a discretion on the Revenue to approve schemes satisfying certain criteria even if it
did not qualify under section 590, but subject to regulations which the Board was
empowered to make by section 591(6).
5. At the relevant times, approval could cease in any of three ways:
(1) Section 591A was in effect a transitional provision relating to schemes
which had received discretionary approval under section 591 but
ceased to qualify as a result of restrictions subsequently introduced by
regulations under section 591(6). Their approval ceased automatically
36 months after the introduction of the regulations if the scheme still
failed to comply with them.
(2) Section 591B(1), which was the basis on which the approval of the
Mander scheme was withdrawn, provided:
“If in the opinion of the Board the facts concerning any
approved scheme or its administration cease to warrant
the continuance of their approval of the scheme, they
may at any time by notice to the administrator, withdraw
their approval on such grounds, and from such date
(which shall not be earlier than the date when those facts
first ceased to warrant the continuance of their approval
or 17 March 1987, whichever is the later), as maybe
specified in the notice.”
(3) Section 591B(2) provided that where an alteration had been made to a
scheme which was neither specifically approved by the Revenue nor
generally authorised by regulations, “no approval given by the Board
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as regards the scheme before the alteration shall apply after the date of
the alteration …”
6. It should be noted that in each case, the approval is lost with effect from a
date established by reference to the time when the scheme ceased to qualify for
approval. In cases (1) and (3), this is clear from the express terms of the relevant
provisions. Where approval is lost under section 591A, it ceases with effect from a
date 36 months after regulations came into force under which it no longer qualified
for discretionary approval. The period of grace is intended to allow the trustees to
modify the scheme so as to qualify under the new regime. Approval is lost only if
they fail to do so. Where approval ceases under section 591B(2), it ceases on the
date of the alteration to the scheme which caused it no longer to qualify for approval.
The relationship between the date when the scheme ceases to qualify and the date
when approval ceases is less clear in cases governed by section 591B(1). This is the
only case in which the cessation of approval requires any action on the part of the
Revenue, as opposed to occurring automatically when the statutory conditions for
cessation are satisfied. A notice of withdrawal is required, which will specify an
effective date for the withdrawal not earlier than the time when the facts cease to
warrant approval. It is, however, clear that the Revenue do not have an unfettered
choice of effective date. They must select one which bears a rational relationship to
the facts to which they are responding. That will normally be the date when the
scheme ceased to qualify for approval. But it may be after that date if in the judgment
of the Revenue the circumstances in which the scheme ceased to qualify justify an
interval before the withdrawal takes effect. This might happen, for example, if the
loss of approval was inadvertent on the part of the trustees or administrator and there
was a period of time during which they might reasonably have been expected to
rectify the position. Other examples could no doubt be cited.
7. When approval is lost in any of the three ways contemplated by sections
591A or 591B, a charge to tax is imposed by sections 591C. This provides, so far as
relevant:
“591C Cessation of approval: tax on certain schemes
(l) Where an approval of a scheme to which this section applies
ceases to have effect …, tax shall be charged in accordance with this
section.
(2) The tax shall be charged under Case VI of Schedule D at the
rate of 40% on an amount equal to the value of the assets which
immediately before the date of the cessation of the approval of the
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scheme are held for the purposes of the scheme (taking that value as it
stands immediately before that date).
(3) Subject to section 591D(4), the person liable for the tax shall
be the administrator of the scheme.”
Section 591D contains supplementary provisions. For present purposes, only
subsection (7) is relevant:
“(7) The reference in section 591C(l) to an approval of a scheme
ceasing to have effect is a reference to –
(a) the scheme ceasing to be an approved scheme by virtue
of section 591A(2);
(b) the approval of the scheme being withdrawn under
section 591B(l);
(c) the approval of the scheme no longer applying by virtue
of section 591B(2);
and any reference in section 591C to the date of the cessation of the
approval of the scheme shall be construed accordingly.”
In respect of what year does the charge to tax arise?
8. Section 591C does not in terms specify a date at which the tax is chargeable.
In principle, it is the date when approval is lost since that is the occasion for the tax
charge. But in a case where approval is withdrawn retrospectively, does that mean
the date on which it is withdrawn or the date with effect from which it is withdrawn?
The Revenue’s argument is, in substance, that until the moment when a notice of
withdrawal is issued, the scheme remains technically an approved scheme,
notwithstanding that it was not entitled to be, and notwithstanding that when
approval was withdrawn it was withdrawn retrospectively. In my opinion, however,
the correct answer is that the tax charge falls to be assessed for the chargeable period
in which the withdrawal of approval took effect in accordance with the terms of the
statutory notice.
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9. The starting point is to ask what the tax is being charged upon. That depends
on the charging provision. Before us there was an issue about which parts of section
591C should be regarded as the relevant charging provision. The Court of Appeal
considered that it was only subsection (1). I should myself have regarded at least the
first three sub-sections as constituting the charging provision, but the issue is a
sterile one, because even if subsection (1) is to be regarded as the charging provision,
its ambit and effect depend on the remaining sub-sections and indeed on the
supplementary provisions of section 591D. These provisions have to be read as a
whole. In those circumstances, the critical point is that although the charge is in
reality a levy on the capital value of the fund, section 591C(2) imposed it as a charge
to income tax under Case VI of Schedule D. That is therefore necessarily its legal
characterisation. Case VI of Schedule D charged tax “in respect of any annual profits
or gains not falling under any other Case of Schedule D and not charged by virtue
of Schedule A, B, C or E”. Under section 69(1) of the Income and Corporation Taxes
Act 1988, tax chargeable under Case VI of Schedule D was computed “on the full
amount of the profits or gains arising in the year of assessment”. For this purpose,
the relevant year of assessment is the year in which the relevant “profit of gain”
arose: see Income and Corporation Taxes Act 1988, section 832(1). Reading section
591C(2) together with Case VI of Schedule D, their combined effect is that the
administrator of the scheme is treated for tax purposes as having received an “annual
profit or gain” in an “amount equal to the value of the assets which immediately
before the cessation of the approval of the scheme are held for the purposes of the
scheme”. Income tax at 40% is then charged on that “profit or gain”. It follows that
the tax must be assessed on a notional profit or gain accruing immediately before
the “cessation of approval”.
10. Subject to section 591D(7), to which I shall return, the “cessation of
approval” in section 591C(2) must refer back to the opening words of subsection (1)
which identify the condition on which the charge to tax arises (“Where an approval
… ceases to have effect …”). As a matter of ordinary language, that means the time
with effect from which the previous approval of the scheme no longer had effect. As
I have pointed out, this is obvious in a case falling within section 591A or 591B(2).
In a case like the present one falling under section 591B(1), it means the date
specified in the Revenue’s notice from which approval is withdrawn, which is the
functional equivalent. Not only is this the natural result of the language of these
provisions, but on any other view the tax charge under section 591C would fall to
be assessed in a later tax year where approval was lost under section 591B(1) than
it would have been if approval had been lost under section 591A or 591B(2). Given
the common purpose of the three provisions, I can see no rational basis for such a
difference.
11. The same point may be made about the conditions for liability to the tax
charge in section 591C(4)-(6A). These conditions relate to the number of members
of the scheme “immediately before the date of the cessation of the approval of the
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scheme”, to their relationship with the company contributing to the scheme “within
the period of one year ending with the date of the cessation of the approval of the
scheme”, and to the contributions made by any person to the scheme “within the
period of three years ending with the date of the cessation of the approval of the
scheme”. These provisions make sense only on the footing that the “cessation of the
approval of the scheme” is the effective date of the withdrawal of approval, and not
the date of the Revenue’s notice of withdrawal.
12. This analysis derives support from the terms of section 61 of the Finance Act
1995, which introduced sections 591C and 591D into the Income and Corporation
Taxes Act 1988. Section 61(3) provided:
“(3) This section shall apply in relation to any approval of a retirement
benefits scheme which ceases to have effect on or after 2 November
1994 other than an approval ceasing to have effect by virtue of a notice
given before that day under section 591B(1)of the Taxes Act 1988.”
2 November 1994 was the date when the Revenue announced its intention to
promote legislation imposing a tax charge on the assets of schemes ceasing to
qualify for approval. The purpose of section 61(3) is to ensure that the tax charge
introduced by section 591C does not apply unless both the cessation of approval and
the giving of notice of withdrawal of approval under section 591B(1) occurred after
that date. It presupposes that the date when an approval “ceases to have effect” is
not the same as the date when notice is given to that effect.
13. I now return to section 591D(7), which I have already set out. The Revenue
argue that the effect of this subsection, as applied to schemes like this one whose
approval is withdrawn under section 591B(1), is that approval of the scheme is
treated as having been withdrawn when the Revenue gives notice of withdrawal: see
para (b). The Court of Appeal accepted this submission, but I do not think that
section 591D(7) will bear that construction. It does not refer to the Revenue’s notice
of withdrawal. It refers only to the “approval of the scheme being withdrawn under
section 591B(1)”. In themselves, these words beg the question whether approval is
“withdrawn” under section 591B(1) when notice of withdrawal of approval is given
or when it takes effect according to its terms. But read in the context of the subsection as a whole, the inference is that it is when the withdrawal of approval takes
effect. On the face of it, the draftsman is equating “approval of the scheme being
withdrawn” with its “ceasing to have effect” and with the “cessation of approval”.
What then was the purpose of section 591D(7)? In my view there were two purposes.
The first was to identify the three statutory bases on which an approval may “cease
to have effect” for the purpose of section 591C(1). This was evidently thought
necessary because none of the three provisions for the cessation of approval uses the
expression “ceases to have effect” which appears in section 591C(1). The second
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purpose of the provision was to stipulate the date as at which the assets fall to be
valued under section 591C(2) for the purpose of computing the charge. It is the date
when the scheme’s approval “ceases to have effect” under each of the three
provisions.
14. It follows that the tax falls to be assessed in the chargeable period with effect
from which the approval ceased to have effect in accordance with the notice of
withdrawal.
Alleged anomalies
15. As is traditional, each side pointed to a chamber of horrors which would be
opened up were the other side’s submissions to be accepted. In general, this
contributed little to the debate. But I should deal with two points made on behalf of
HMRC, partly because they influenced the Court of Appeal, and partly because they
raise questions of some wider legal significance. One was that Parliament cannot
have intended to empower the Revenue to impose a charge to tax retrospectively,
with the result that although the tax would not actually be payable until the
prescribed interval after the assessment (30 days), the taxpayer would be liable for
interest from a date well before the assessment. The other was that unless the
Revenue was entitled to assess the taxpayer under section 591C in the year of the
notice of withdrawal, they would in many cases be unable to do so at all because of
the long interval which can elapse before the facts justifying withdrawal come to
their attention.
Retroactivity
16. If the relevant chargeable period is the year of assessment with effect from
which the approval was withdrawn, it is undeniable that the result is to expose the
taxpayer to an assessment which is retrospective in the sense that it relates to a
charging period up to six years earlier. It is correct that this will generally have
adverse consequences for his liability to interest. However, I cannot regard this as
anomalous or share the Court of Appeal’s dismay at the prospect.
17. It is inherent in the process of assessment that a taxpayer may be assessed to
tax on profits or gains that arose in a charging period earlier than that in which the
assessment was raised. This occurs whenever tax is assessed in arrears. The period
of retrospectivity may be considerable if profits or gains for an earlier period were
previously overlooked or wrongly thought not to be chargeable to tax. But it may
also occur when something happens which makes it necessary to recharacterise the
taxpayer’s financial affairs in an earlier period. Before this state of affairs can be
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regarded as anomalous, we need to ask ourselves what the recharacterisation
involves. It would be surprising if the law allowed a tax to be charged in an earlier
period by reference to criteria which did not apply until a later one. On the other
hand, it may involve no more than a recognition of facts which always existed.
18. A good example of the latter situation is provided by the Scottish case of
Spence v Inland Revenue Comrs (1941) 24 TC 311. The facts were that the taxpayer
sold shares to a third party in 1933 under a contract which he subsequently alleged
to have been induced by fraud. In 1939 he obtained a judgment reducing the contract
(anglice setting it aside) with effect from the date that it was made, together with
orders that the shares be retransferred to him and a sum paid to him representing the
dividends which the purchaser had received while he was registered as the
shareholder. After the judgment, the Revenue repaid the surtax assessed on the
dividends in the hands of the fraudulent purchaser and assessed the taxpayer instead.
The years of assessment were those in which the dividends had been paid by the
company. The assessment was upheld in the Inner House of the Court of Session.
Lord President Normand said, at p 317:
“In this case the contract was not void; it was merely voidable on the
ground that it had been induced by fraudulent misrepresentations.
When a contract has been induced by fraudulent misrepresentations,
it is open to the party defrauded either to sue for rescission of the
contract or to sue for damages. In this case the party sued for rescission
and in the end of the day he obtained a decree of reduction. The effect
of that reduction was to restore things to their position at the date of
the transaction reduced, with the result that as at that date and
afterwards the successful pursuer in the action fell to be treated as
having been the person in titulo of the shares which he had sold to the
defender and therefore to have been in right of the dividends. No doubt
it is true that in the interval the dividends had to be paid and were paid
to the defender because his name stood in the register as the proprietor
of the shares and no doubt also they were for the time being treated by
the Inland Revenue as his income and while matters stood entire no
other person had any right to the shares or to the dividends except the
defender, Mr Crawford. But from the moment the reduction took place
Mr Spence fell to be treated as having been throughout the proprietor
of the shares and equally the person properly entitled to receive the
dividends. On the other hand the Inland Revenue repaid to Mr
Crawford the surtax attributable to the dividends actually paid to him
by the company on the footing that he had never been in titulo to
receive them.”
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The critical feature of this case was that although the assessment arose out of the
order for reduction, and operated ab initio, its effect was to restore the parties to the
situation in which they would have been in 1933 but for the fraud.
19. This may be contrasted with the decision in Morley-Clarke v Jones (Inspector
of Taxes) [1986] Ch 311. In 1969 an order had been made in divorce proceedings
for the payment by the husband to the wife of a sum by way of maintenance for their
child. In 1979 the order was varied with effect from the date of the original order,
so as to make the sum payable directly to the child, because this would be more tax
efficient. It was certainly more tax efficient for the future, because the child had no
other income. But the Revenue assessed the wife to income tax on maintenance
received by her between 1969 and 1979 without regard to the retrospective variation.
Upholding the assessments, the Court of Appeal distinguished Spence on the ground
that the 1979 order purported to alter the effect of what had gone before as opposed
to merely recognising it. Oliver LJ, delivering the leading judgment, observed at pp
331-332:
“A retrospective order cannot, any more than a retrospective agreement,
undo the past and convert something that has already happened, and to
which legal consequences have already attached, into something which
never in fact did happen. … [In Spence] the restitutio in integrum
represented by the court order obtained some years later did not so
much reconstruct history as recognise and declare that which had all
along been the legal position, although until the order the parties were
in a state of some uncertainty as to what their rights were.”
20. The Revenue can issue a notice of withdrawal of approval under section
591B(1) only if “the facts cease to warrant the continuance of approval”. Where the
effective date stated in the notice is the date when “those facts first ceased to warrant
the continuance of their approval”, as it generally will be, the relevant “facts” will
be those in existence in the earlier charging period. The retrospective character of
the withdrawal of approval simply recognises the facts as they were at the earlier
stage. If interest accrues on the tax assessed with effect from the earlier charging
period, that does no more than reflect the fact that throughout the intervening period
the scheme has enjoyed tax advantages to which it was not entitled and has deferred
a tax charge under section 591C which would have been assessed as soon as the
facts warranted if the Revenue had known them.
Difficulties of enforcement
21. At the relevant time the right to assess the taxpayer to income tax ordinarily
ceased six years after the end of the chargeable period when the relevant profit or
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gain arose: Taxes Management Act 1970, sections 34. The submission of HMRC is
that in many cases this will not be long enough to enable the Revenue to learn of the
facts and respond with a notice withdrawing approval from the scheme in time to
assess the charge under section 591C. Therefore, it is said, they must be entitled to
assess the tax in the chargeable period when they give the notice, if the tax charge
is to be effective. The information before us does not enable me to say how serious
a problem this is, but I shall proceed on the footing that it is significant. Even so, I
reject the argument. In the first place, the Revenue had ample powers to make
regulations requiring information relating to any approved scheme to be furnished
to them without prior request. At the relevant time, the powers were conferred by
section 605(1A)-(1D) of the Income and Corporation Taxes Act 1988 (inserted by
section 105 of the Finance Act 1994). The regulations in force at the relevant time
were the Retirement Benefits Schemes (Information Powers) Regulations (SI
1995/3103). These did not require the reporting of transactions of the kind which
caused the Mander pension scheme no longer to qualify for approval. But they could
have done, and in fact did with effect from 2003 when they were amended: see
Retirement Benefits Schemes (Information Powers) (Amendment) Regulations (SI
2002/3006). Secondly, there is an extended period of 20 years for assessment in
cases of fraud or negligence, under section 36 of the Taxes Management Act 1970
(as amended). The Revenue’s argument must therefore be tested by assuming a
taxpayer acting carefully and in good faith. On that assumption, there is no reason
in principle why the legislation should be interpreted in a way which exposes the
taxpayer to an assessment after the normal time limit has expired. Thirdly, the cure
which HMRC proposes for dealing with this problem, if it is one, seems to me to be
a great deal worse than the disease. If the charge to tax were to be treated as arising
at the date of assessment, it would follow that the chargeable period would be wholly
at the discretion of the Revenue. That result, surprising enough in itself, would lead
to the even more surprising conclusion that a charge to tax could be imposed without
limitation any number of years after the facts which justified it.
Conclusion
22. I would allow the appeal and declare that the Inland Revenue were not
entitled to assess the administrator of the John Mander Pension Scheme to tax under
section 591C of the Income and Corporation Taxes Act 1988 for the year 2000-
2001.
LORD NEUBERGER:
23. The relevant facts and applicable statutory provisions are set out in paras 56-
64 of Lord Hodge’s judgment and paras 1-7 of Lord Sumption’s judgment.
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24. In a nutshell, the issue on this appeal is whether, in a case where the
Revenue’s approval is withdrawn by a notice (a “Notice”) under section 591B(1) of
the Income and Corporation Taxes Act 1988, tax under section 591C is chargeable
by reference to the tax year which includes (i) the date with effect from which the
approval is specified to have been withdrawn (ie the date stated in the Notice), or
(ii) the date on which the approval is actually withdrawn (ie the date of the Notice).
The appellant taxpayer, John Mander Pension Trustees Ltd, contends that it is the
former date (“the earlier date”), whereas HM Commissioners for Revenue and
Customs (“HMRC”), with whom the First-tier Tribunal, the Upper Tribunal and the
Court of Appeal agreed, argues for the latter date (“the later date”).
25. As the judgments of Lord Hodge and Lord Sumption demonstrate, there are
powerful arguments both ways, and I will briefly explain why, in disagreement with
the courts below and with the minority in this court, I agree with Lord Sumption and
Lord Reed that the earlier date is the correct answer.
26. Section 591B(1) entitles HMRC, in certain circumstances (which it is
conceded for present purposes arise here), to withdraw by a Notice their approval,
given under section 590 to a pension scheme, “from such date … as may be specified
in the notice” (subject to certain restrictions).
27. Section 591C(1) provides that where “an approval … ceases to have effect
… tax shall be charged in accordance with this section”. Section 591C(2) states that
such tax is to be paid by reference to “the value of the assets … immediately before
the date of the cessation of the approval”.
28. Two points can be noted about those two consecutive subsections at this
stage. First, two different expressions are used in the two subsections – “an approval
[ceasing] to have effect” and “the cessation of the approval”. Those two expressions
could be synonyms or they could have different meanings. As a general proposition,
in the absence of any indication to the contrary, one would presume that different
expressions were intended to have different meanings. In this case in particular, one
expression could mean the earlier date and the other could mean the later date.
Secondly, it was common ground in the Court of Appeal, and accepted by Moses LJ
that the meaning of “the cessation of approval” is the earlier date – see [2013]
EWCA Civ 1683, [2014] 1 WLR 2209, para 17.
29. Next, there are subsections (5), (6) and (6A) of section 591C, which set out
certain conditions, one or more of which, according to subsection (3), must be
satisfied if the charge to tax under subsections (1) and (2) arises. These subsections
appear to me to make it clear that “the date of cessation of approval” means the
earlier date. Accordingly, they confirm the second point mentioned in para 28 above.
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30. One then turns to section 591D(7). This states that, for the purpose of section
591C(1), “an approval … ceasing to have effect” means, in a case such as the
present, “the approval of the scheme being withdrawn”, and it also states that “any
reference in section 591C to the date of the cessation of the approval … shall be
construed accordingly”. To my mind, the natural meaning of this provision is that,
for the purposes of these sections, (i) “approval ceases to have effect” in section
591C(1) when approval of the scheme is withdrawn, and (ii) “the date of cessation
of approval” in the other subsections of section 591C has the same meaning. Point
(i) is self-evident. As to point (ii), I find it hard to see how the closing words of
section 591D(7) could have any other meaning. If they do not state that the two
expressions used in section 591C(1) and in section 591C(2) have the same meaning,
they would be very curious. They would have no effect, because they would take
the question of what the expression “the date of cessation of approval” means no
further, and that would be particularly surprising given that they were plainly
included to give guidance as to what that expression means. Accordingly, the
presumption I refer to in para 28 above is rebutted by section 591D(7).
31. In the light of this analysis, it seems to me that the appeal should succeed,
and the relevant tax year is that which includes the earlier date, rather the later date.
In summary, it appears to me that (i) the expressions “an approval … [ceasing] to
have effect” and “the date of the cessation of the approval” have the same meaning,
in the light of section 591D(7), (ii) “the date of the cessation of the approval” means
the earlier date, in the light of section 591C(4)-(6A), so (iii) both subsections (1) and
(2) of section 591C are linked to the earlier date and not the later date, and therefore
(iv) it is the earlier date which governs the taxing year.
32. I accept that this conclusion is contrary to the presumption against
retroactivity, which is discussed in para 70 of Lord Hodge’s judgment. It also seems
to me that the force of that presumption is somewhat reinforced in the present case
by the fact that HMRC can, albeit within express and public law limits, choose the
date by reference to which tax would be charged. On the other hand, it is only a
presumption. In this case, it seems to me that the presumption against retroactivity
is rebutted for the reason I have given, and that in any event the presumption does
not have particularly compelling force. It is specifically contemplated in section
591B(1) that a Notice will normally have retroactive effect, so that retroactivity can
be said to be inherent in a case where a Notice is served under section 591B(1).
More specifically, the valuation exercise prescribed by section 591C(2) requires the
assets to be valued at the earlier date: not only is that an example of retroactivity,
but it seems to me that, if the assets are to be valued as at the earlier date, there is a
degree of consistency in assessing the tax as at that day too.
33. The conclusion which I favour receives significant support from section 61
of the Finance Act 1995, which introduced sections 591C and 591D into the 1988
Act. Section 61(3) is set out and explained in para 12 of Lord Sumption’s judgment
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and para 77 of Lord Hodge’s judgment. It is a transitional provision, which clearly
envisages that the date when “approval … ceases to have effect” is not the same as
the date on which Notice is given. In my view, it is clearly permissible, indeed
appropriate, when interpreting new sections inserted into an Act, to take into account
transitional provisions contained in the section of the later Act which introduced the
new sections. The transitional provisions are plainly in pari materia with the new
sections. It is true that section 61(3) is puzzling in that it assumes that a Notice under
section 591B(1) can be prospective, which is hard to understand, but that does not
undermine the centrally important point that the drafter of the statute plainly
considered that the date when “approval ceases to have effect” was not the same as
the date of the Notice.
34. I shall deal very briefly with the other arguments discussed by Lord Hodge
and Lord Sumption. The reference to Case VI of Schedule D in section 591C(2),
referred to by Lord Sumption at para 9 underlines the point he makes in his para 17
and which I make in para 32 above. I see some force in Lord Sumption’s point in
his para 10 that the conclusion which he and I have reached is consistent with the
other two circumstances dealt with in section 591D(7)(a) and (c), but the point is of
limited (but not negligible) force in my view for the reasons given by Lord Hodge
in para 77.
35. So far as the alleged anomalies are concerned, it seems to me that none of
them is particularly striking, and there is a degree of anomaly either way. On the
view I have formed, there would be a liability for interest retrospectively. While that
is inherently unattractive, it is consistent with the retroactive effect of a Notice, and
with the notion that the pension fund should have been taxed at the date specified in
the Notice. Also on the view I have formed, HMRC would lose the right to claim
tax pursuant to section 591B(1) after six years (absent fraud or wilful default), but
there is nothing particularly surprising about that, given that one is assuming a
taxpayer who has acted in good faith.
36. If I am wrong in my view, there would be no time limit on HMRC’s
entitlement to recover tax under section 591C, which would be a little surprising,
although there would be a limited degree of protection for a taxpayer in those
circumstances through public law if HMRC unreasonably delayed. Nonetheless, this
would be an anomaly if HMRC’s case was correct, and I am unimpressed with the
answer that the purpose of this tax was to discourage abusive arrangements, because
that can equally well be used to support the retrospective effect of the legislation if
the appellant’s case is correct.
37. For these reasons, I would allow this appeal.
Page 15
LORD REED:
38. During the period with which this appeal is concerned, taxpayers who paid
contributions into approved pension schemes received relief from income tax on
their contributions. Until 1997, the investments held in the fund administered by the
scheme also benefited from favourable tax treatment. The consequence of these tax
privileges was that, as the fund accumulated, a substantial proportion of it
represented tax which would otherwise have been paid, either by the contributors or
by the administrators.
39. These tax privileges were granted on the basis that benefits would be taken
from the scheme only in accordance with the rules governing approved pension
schemes. This normally meant that benefits would be taken only at retirement (or on
death, if earlier), when the fund would be used to purchase an annuity. The tax
privileges were therefore enjoyed in anticipation of the use to which the fund would
be put, usually many years later.
40. A practice however developed of small schemes obtaining approval, the
contributors benefiting from the consequent tax privileges (typically by saving
higher rate tax at 40%), and then the schemes being managed in such a way as to
lose their approval. The accumulated fund, including the tax savings made over the
years, could then be enjoyed free of restrictions. This abusive practice depended on
the scheme’s failure to fulfil the expectation on the basis of which the tax privileges
had been granted.
41. Before looking at how Parliament responded to this situation, it may be useful
to consider what one might reasonably expect it to have done. In the first place, one
might expect provision to be made for the Revenue to withdraw approval from a
scheme as from the date when it ceased to comply with the conditions for approval.
Contributions into the scheme would then cease to qualify for tax relief as from that
date, and the investments of the fund would cease to receive favourable treatment.
42. Turning to the legislation which was actually enacted by Parliament, it is
consistent with the approach which I have described. Sections 591A(2), 591B(1)
and 591B(2) of the Income and Corporation Taxes Act 1988 (“the Taxes Act”)
provide for approval to cease in three situations:
(1) where the scheme fails to comply with regulations, 36 months after
the introduction of the regulations (section 591A(2));
Page 16
(2) where the facts concerning the scheme cease to warrant the
continuance of approval (section 591B(1)); and
(3) where an unapproved and unauthorised alteration is made to the
scheme (section 591B(2)).
The first of these is a transitional provision, as Lord Sumption has explained. The
second and third address the type of problem which I have discussed.
43. In the first and third of these situations, approval is withdrawn automatically:
under section 591A, 36 months after the introduction of the regulations, and under
section 591B(2), with effect from the date of the alteration. In the second situation,
with which we are concerned in this appeal, section 591B(1) permits the Revenue
to withdraw their approval “from such date (which shall not be earlier than the date
when those facts first ceased to warrant the continuance of their approval …), as may
be specified in the notice [withdrawing their approval]”. Approval can therefore be
withdrawn retrospectively, as it was in the present case, and as it is likely to be in
most if not all cases.
44. The withdrawal of approval has the effect of exposing those who previously
benefited from the privileges flowing from approval to the ordinary tax regime
which applies in its absence. The latter regime inevitably applies from the date as
from which approval is withdrawn, since the scheme lacks approval as from that
date. In a case under section 591B(1), the date in question is the date specified in the
notice. In consequence, the issuing of a notice may trigger tax liabilities in respect
of income and capital gains arising between the date specified in the notice and the
date when the notice is issued.
45. The withdrawal of approval does not however deal with the tax savings
accumulated and invested since the inception of the scheme, which could be seen in
retrospect to have been unmerited. In order to address that issue, one might expect
provision to be made for the portion of the fund representing those benefits to be
paid as tax. Given the difficulty of calculating the precise proportion, a broad rule
of thumb might be adopted.
46. Turning to the legislation, one again finds that Parliament has acted as one
would have expected. Section 591C provides for a portion of the fund to be paid as
tax:
Page 17
“(l) Where an approval of a scheme to which this section applies
ceases to have effect … tax shall be charged in accordance with this
section.
(2) The tax shall be charged under Case VI of Schedule D at the
rate of 40% on an amount equal to the value of the assets which
immediately before the date of the cessation of the approval of the
scheme are held for the purposes of the scheme (taking that value as it
stands immediately before that date).
(3) Subject to section 591D(4), the person liable for the tax shall
be the administrator of the scheme.”
Tax is to therefore to be charged where an approval ceases to have effect. The
portion of the fund which is to be paid in tax is 40%: a figure corresponding to the
higher rate tax relief which will in most cases have been granted to the contributors
to the scheme.
47. Two questions remain. First, in a case where approval is withdrawn under
section 591B(1), is “the date of cessation of the approval of the scheme”,
immediately before which the fund is to be valued for the purpose of calculating the
tax due, the date specified in the notice, or the date when the notice is issued?
Secondly, is the year of assessment the year during which the date falls as at which
the fund is to be valued, or the year during which the notice is issued?
48. In relation to the first question, it is common ground that the relevant date is
the date with effect from which the approval is withdrawn, ie the date specified in
the notice. I am in no doubt that that is correct. In the first place, that is the date most
naturally described as the date of the cessation of the approval. Secondly, and more
importantly, the appropriate point in time as at which to calculate the tax payable is,
in principle, immediately before the date when the fund ceased to qualify for
approval. That is so for two reasons. First, the withdrawal of approval with effect
from that date, under section 591B(1), means that any tax savings which may have
been obtained subsequently are already recoverable by assessment on ordinary
principles. To require a proportion of the fund which included those post-withdrawal
tax savings to be paid to the Revenue under a further assessment would effectively
involve double taxation. Secondly, the fund will not necessarily remain intact after
it ceases to qualify for approval (particularly, it might be thought, if the amount of
the tax charge were to depend on the size of the fund when the Revenue discovered
the abuse and issued a notice).
Page 18
49. I have not so far referred to section 591D(7):
“(7) The reference in section 591C(1) to an approval of a scheme
ceasing to have effect is a reference to –
(a) the scheme ceasing to be an approved scheme by virtue of
section 591A(2);
(b) the approval of the scheme being withdrawn under section
591B(l);
(c) the approval of the scheme no longer applying by virtue of
section 591B(2);
and any reference in section 591C to the date of the cessation of the
approval of the scheme shall be construed accordingly.”
50. It appears from section 591D(7)(b) that, in a case where approval is
withdrawn under section 591B(1), the reference in section 591C(1) to an approval
ceasing to have effect is a reference to the approval being withdrawn. Considering
that provision in isolation, there might perhaps be room for argument as to whether
approval was withdrawn when the notice was sent or when the withdrawal of
approval took effect. It has however to be read in its context. Section 591D7(a) and
(c) make it clear that, in all other circumstances where approval is lost, the relevant
date is the date when the scheme ceases to qualify for approval. The functionally
equivalent date in a case where a notice was issued is the date specified in the notice.
Furthermore, the final words of section 591D(7) make it clear the date of “an
approval ceasing to have effect” is the same as “the date of the cessation of the
approval of the scheme”, as indeed one would expect as a matter of ordinary
language. As explained in para 48, there is no doubt (and no dispute) that the date
of the cessation of the approval is the date specified in the notice.
51. If, then, the tax charge is to be calculated as 40% of the value of the fund
immediately before the date specified in the notice, the question remains whether
the year of assessment is the year during which the date falls as at which the fund is
to be valued, or the year during which the notice is issued. The correct answer must
be the former. That is the year during which the occasion for the tax charge falls, in
terms of section 591C(1) (“where an approval of a scheme … ceases to have effect”),
as I have interpreted it. It is also the year during which the value of the fund, and
therefore the amount of the tax charge, is to be computed, as I have explained.
Page 19
52. If it is objected that an assessment on this basis is retrospective, the answer
is that it is only in retrospect that it can be seen that the scheme and its contributors
have benefited from unmerited tax savings. Securing the restoration of that benefit
does not in substance involve the imposition of retrospective taxation, but rather the
recovery of tax which was foregone at an earlier date in reliance upon an expectation
as to the future management of the scheme which was induced but not subsequently
fulfilled. An analogy can be drawn with restitution on the basis of a failure of
consideration. If it is objected that interest should not be payable to the Revenue on
tax which is assessed retrospectively, the answer is that the taxpayer has enjoyed the
unmerited use of the money, which in hindsight ought to have been in the hands of
the Revenue during the intervening period.
53. The correctness of this construction of the provisions is confirmed by section
239A of the Taxation of Chargeable Gains Act 1992. Under that provision, the assets
of the scheme are deemed to have been acquired immediately before the date
specified in the notice withdrawing approval, at their then value. The provision thus
resets the base cost of the assets for the purpose of calculating the gain or loss on
any disposal subsequent to the date specified in the notice. The reason why gains or
losses accruing prior to the date specified in the notice are not taken into account is
that the scheme is then liable to the 40% charge imposed by section 591C of the
Taxes Act.
54. For these reasons, and those given by Lord Sumption and Lord Neuberger, I
would allow the appeal.
LORD HODGE: (dissenting with whom Lord Carnwath agrees)
55. Revenue-approved pension schemes have had significant tax advantages. But
the misuse of those advantages by the diversion of funds, which had received tax
benefits, from the funding of pension income, which had justified those benefits,
gave rise to anti-avoidance legislation. This appeal concerns a tax avoidance scheme
and an attempt by the Inland Revenue, now HM Revenue and Customs (“HMRC”),
to impose a tax charge on the pension trustees as a result. It raises a question of
statutory interpretation about the correct year of assessment of the tax charge arising
from the withdrawal of Revenue approval. It is relevant to many other cases which
have arisen out of events which occurred before 2006, when the Finance Act 2004
changed the tax regime.
Page 20
The statutory framework
56. Section 590 of the Income and Corporation Taxes Act 1988 (“the TA”) set
out conditions for the approval by HMRC of retirement benefit schemes. The
Finance Act 1991 introduced sections into the TA to provide for Revenue approval
of pension schemes to be lost in three circumstances:
(i) Approval ceased automatically if, by the end of 36 months after
regulations made under section 591 had come into force, a retirement benefits
scheme contained a provision that the regulations prohibited or did not
contain a provision that the regulations required (section 591A(2)).
(ii) Section 591B(1), which is relevant in this appeal, provided:
“If in the opinion of the Board the facts concerning any
approved scheme or its administration cease to warrant the
continuance of their approval of the scheme, they may at any
time by notice to the administrator, withdraw their approval on
such grounds, and from such date (which shall not be earlier
than the date when those facts first ceased to warrant the
continuance of their approval or 17 March 1987, whichever is
the later), as may be specified in the notice.”
(iii) Approval also ceased automatically whenever the terms of a
retirement benefits scheme were altered without obtaining the approval of
HMRC (section 591B(2)).
57. Further measures followed. Section 61 of the Finance Act 1995 imposed a
tax charge where approval of a scheme ceased to have effect, in any of the three
circumstances which I have mentioned, by introducing sections 591C and 591D into
the TA. Section 591C(1) – (3) provided:
“(1) Where an approval of a scheme to which this section applies
ceases to have effect …, tax shall be charged in accordance with this
section.
(2) The tax shall be charged under Case VI of Schedule D at the rate
of 40% on an amount equal to the value of the assets which
immediately before the date of the cessation of the approval of the
Page 21
scheme are held for the purposes of the scheme (taking that value as it
stands immediately before that date).
(3) Subject to section 591D(4), the person liable for the tax shall be
the administrator of the scheme.”
58. Section 591D(7) provided further guidance on the meaning of section
591C(1) as follows:
“The reference in section 591C(1) to an approval of a scheme ceasing
to have effect is a reference to
(a) the scheme ceasing to be an approved scheme by virtue
of section 591A(2);
(b) the approval of the scheme being withdrawn under
section 591B(1); or
(c) the approval of the scheme no longer applying by virtue
of section 591B(2);
and any reference in section 591C to the date of the cessation of the
approval of the scheme shall be construed accordingly.”
The factual background
59. Mr and Mrs John Mander were the shareholders of John Mander Ltd. They
were also its directors. On 24 September 1987 they created the John Mander Ltd
Directors Pension Scheme (“the JM Scheme”). They were the beneficiaries of the
JM Scheme and they and a Mr Alexander Jackson, who was the Revenue-approved
pensioneer trustee, were its original trustees. On 9 September 1994 Mr Jackson
resigned as a trustee of the JM Scheme and DJT Trustees Ltd (“DJT”) were
appointed in his place.
60. On 5 November 1996 a series of events occurred which HMRC later treated
as amounting to a tax avoidance device. First, Mr and Mrs Mander resigned as
trustees of the JM Scheme and a Guernsey-based company, Louvre Trust Co Ltd
(“Louvre”), was appointed a trustee. Secondly the new trustee (Louvre) authorised
Page 22
the transfer of funds from the JM Scheme to the Vesuvius Shipping Ltd Pension
Scheme (“the Vesuvius Scheme”), an insured executive pension plan of which Mr
and Mrs Mander were also members. Mr Mander, as agent of the JM Scheme
trustees, signed a cheque for £1,188,000 in favour of the trustees of the Vesuvius
Scheme and the cheque was given to them. Thirdly, the trustee and administrator of
the Vesuvius Scheme were replaced by offshore trustees. At the time of the transfer
of funds the Vesuvius Scheme was a Revenue-approved scheme, but its rules were
subsequently changed to enable loans to be made which would not be permitted
under an approved scheme.
61. DJT, after discovering what had occurred, resigned as pensioneer trustee of
the JM Scheme on 18 March 1997. On 20 June 1997 TM Trustees Ltd and Mrs
Mander were appointed trustees of the JM Scheme and Louvre resigned as trustee.
On 26 February 1998 Louvre Trustees Ltd, a Guernsey-based company, was
appointed a trustee of JM Scheme and Mrs Mander resigned as trustee.
62. HMRC wrote to the administrators of the JM Scheme on 9 December 1997,
suggesting that there had been a tax avoidance scheme and proposing to withdraw
approval of the Scheme with effect from 5 November 1996. Lengthy
correspondence followed. On 19 April 2000 HMRC gave notice of withdrawal of
approval of the JM Scheme with effect from 5 November 1996, under section
591B(1) of the TA. On 27 July 2000, in the year of assessment 2000-2001, HMRC
made an assessment in the sum of £475,200 on Louvre Trustees Ltd as administrator
of the JM Scheme. On 11 April 2001 Sullivan J refused an application by Mr Mander
for permission to apply for judicial review of HMRC’s decision to withdraw
approval from the JM Scheme.
63. On 22 January 2007 HMRC issued an assessment for the year 2000-2001 for
£475,200 on the then current administrators of the JM Scheme. The administrators
appealed against the assessment, arguing that the tax should have been assessed in
the tax year 1996-1997. They claimed that the 2000-2001 assessment was invalid
and that HMRC were out of time to assess in the tax year 1996-1997.The appeal
gave rise to the legal proceedings of which this appeal is part.
The legal proceedings
64. The First-tier Tribunal (Tax Chamber) designated the appeal as the lead case
and in a decision (by Judge Mosedale and Mr N Collard) dated 28 October 2011
dismissed the appeal against the assessment, holding that the tax charge arose in the
year ending 5 April 2001. On 28 January 2013 Vos J sitting in the Upper Tribunal
(Tax and Chancery Chamber) upheld that decision and held that the current trustee
of the JM Scheme was liable for the tax assessed by the 27 July 2000 assessment.
Page 23
On 19 December 2013 the Court of Appeal (Moses, Patten and Beatson LJJ)
dismissed the trustee’s appeal. The trustee appeals with permission to this court.
Discussion
65. Which was the correct year of assessment? Was it 1996-1997 as the appellant
submits or 2000-2001 as HMRC submit? This is a question of statutory
interpretation and in particular of sections 591B(1), 591C(1) and (2) and 591D(7) of
the TA.
66. Section 591B(1) provided for the withdrawal of approval by notice. In that
respect it differed from the other methods of the cessation of approval which
happened automatically on the occurrence of events without any intervention by
HMRC. Under section 591B, until HMRC served a notice, the pension scheme
enjoyed Revenue approval. But the section allowed HMRC to specify in the notice
the date from which approval had ceased and that date could be earlier than the date
of the notice. It was thus retrospective at least in the sense that it looked to the past
and changed the future legal consequences of the transaction or transactions which
gave rise to the withdrawal of approval.
67. The appellants argue that the tax charge imposed by section 591C(1) was also
retrospective in the more radical sense that it was retroactive, coming into force not
at the date of the HMRC notice but at the earlier date of cessation of approval which
was specified in the notice. This would have the effect of exposing trustees to claims
for interest on unpaid tax from a date before they received notice of the withdrawal
of approval. HMRC on the other hand submit that the tax charge arises only in the
tax year in which the notice of withdrawal was served.
68. The interest incurred may be very substantial. While the tax charge was in
form a tax on income, using the residual charge to tax of Case VI of Schedule D
(section 18 of the TA), it was in substance a charge not on actual annual profits or
gains but of 40% of the capital value of the scheme assets. It was designed to recoup
the tax advantages that the funds conferred when contributed to and kept in an
approved scheme.
69. Both parties pray in aid of their cases the provisions of section 591D(7),
which is not a straightforward provision. The appellants submit that the first part of
the subsection merely identified the relevant statutory provisions in the three listed
provisions and that the second part of the section was directed to the timing of the
cessation of approval, including for the purposes of section 591C(1). In the case of
a section 591B(1) notice, that is the date from which the notice took effect.
Page 24
70. HMRC on the other hand submit that the reference in the first part of the
subsection to the three methods of cessation performed the substantive role of
distinguishing their effect. Thus on HMRC’s case, section 591D(7) had the effect
that the reference in section 591C(1) to the approval “ceasing to have effect” under
circumstances (a) and (c) (ie sections 591A(2) and 591B(2)) was a reference to the
automatic ending of the approval under those sections, whereas in circumstance (b)
it was a reference to the withdrawal by notice under section 591B(1). The tax charge
under section 591C(1) therefore occurred in the tax year in which the event occurred
under section 591A(2) and 591B(2) or in the tax year in which the section 591B(1)
notice is served. The “date of the cessation”, which is an expression used in section
591C(2), (5), (6) and (6A) but not in section 591C(1), was “construed accordingly”
by reference to the date specified in the three listed subsections, which in the case
of the section 591B(1) notice was the date specified in that notice. It is not disputed
that in all circumstances “the date of the cessation” was the date from which HMRC
approval ceased.
71. While in this case it suits the appellants to submit that the year of assessment
is 1996-1997 rather than 2000-2001, the effect of their submission would be that
section 591C imposed a retroactive tax, potentially giving rise to a liability for
substantial sums in interest on the charge from the date of the cessation of the
approval, during a period in which the trustees of a scheme might otherwise have
believed that they had a continuing HMRC approval.
72. There is a strong common law presumption against retrospective tax
legislation. In Greenberg v Inland Revenue Comrs [1972] AC 109, 143 Lord Morris
of Borth-y-Gest stated:
“Very clear words are … necessary to overturn the presumption
against the retroactive operation of a taxing provision. … A provision
designed to have retroactive operation would have to be enacted in
clear and positive terms.”
73. While legislation to counter tax avoidance strategies may as a matter of sound
policy involve retrospective provisions with retroactive effect, that policy does not
remove the requirement for clear words. This accords with the general principle
which Lord Wilberforce set out in W T Ramsay Ltd v Inland Revenue Comrs [1982]
AC 300, at p 323:
“A subject is only entitled to be taxed upon clear words, not upon
‘intendment’ or upon the ‘equity’ of an Act. Any taxing Act of
Parliament is to be construed in accordance with this principle. What
are ‘clear words’ is to be ascertained upon normal principles: these do
Page 25
not confine the courts to literal interpretation. There may, indeed
should, be considered the context and scheme of the relevant Act as a
whole, and its purpose may, indeed should, be regarded.”
74. Section 591B(1) is retrospective and has the potential for a limited retroactive
effect in that it allows the withdrawal of approval from a date earlier than the notice
of withdrawal. But, importantly, the retroactive withdrawal of approval does not of
itself give rise to any tax charge, retroactive or otherwise.
75. In this case section 591C(1) provided that tax “shall” be charged “where” an
approval of a scheme ceases to have effect. I agree with Judge Mosedale (para 121)
that synonyms of “where” are the word “whenever” or the phrase “if at any time”.
Where the approval did not cease automatically but required the service of a notice
by HMRC, the subsection did not deem tax to have been charged at a date earlier
than the date on which the notice was served. Like Lord Carnwath I interpret the
subsection as looking to the future, consistently with but independently of the
presumption that legislation “speaks only as to the future”: West v Gwynne [1911] 2
Ch 1, 12 per Buckley LJ. In my view, by itself section 591C(1) pointed to a charge
to tax in the tax year in which a section 591B(1) notice was issued. Subsection (2),
which imposed the capital charge, specified the rate of the charge by reference to
the value of the assets immediately before the cessation of the approval of the
scheme but made no statement as to the tax year in which that charge was to fall.
76. The other relevant provision is section 591D(7). While it is possible to
construe the subsection as the appellants urge, I am not persuaded by that
interpretation. In particular, I am not satisfied that the subsection contains clear and
positive words to give retroactive effect to the section 591C tax charge in the
circumstances of a section 591B(1) notice.
77. Like Moses LJ (at paras 18-22 of his judgment), I consider that it is no
accident that different wording was adopted in section 591D(7), defining on the one
hand “approval of a scheme ceasing to have effect” (the phrase used in section
591C(1)) and on the other “the date of the cessation of the approval”. In relation to
the former expression the subsection looked to the process by which withdrawal
occurred; in the context of section 591D(7)(b) it referred to the notice of withdrawal
of approval. The service of the notice withdrew the approval. I see no ambiguity
there. There is also no doubt that the latter expression referred to the date from which
approval ceased to have effect. That is the date which HMRC specified in its section
591B(1) notice, or the date when a scheme ceased to be an approved scheme
automatically either under section 591A(2) on the expiry of time after the
commencement of the section 591 Regulations or on an unauthorised alteration of a
scheme under section 591B(2). In each case the concluding phrase of section
591D(7) invited the reader to turn to whichever of the three enumerated statutory
Page 26
provisions was relevant to ascertain the date of cessation: the date was construed
according to sections 591A(2), 591B(1) or 591B(2) as the case may be. Where there
was a section 591B(1) notice, it is the date of cessation specified in that notice.
78. This interpretation of the relevant provisions avoids a retroactive tax charge
where there are no clear words imposing such a charge. It is consistent with that of
the First-tier Tribunal, which Vos J in the Upper Tribunal and the Court of Appeal
upheld. Their unanimity strongly suggests that the clarity needed for a retroactive
provision is lacking. The presumption against retrospective tax charges is an
important principle of statutory interpretation which in my view justifies the
dismissal of this appeal.
79. There is also a good reason why the tax charge arising from withdrawal of
approval under section 591B(1) is treated differently from the charge that arises out
of the automatic cessation of approval in sections 591A(2) and 591B(2). Parliament
has not enacted that any circumstance justifying cessation of approval automatically
results in that cessation, as in the latter provisions. It required HMRC to give notice
of withdrawal of approval when they were aware of facts which merited that
withdrawal. Where Parliament provided for automatic cessation of approval, the
trustees of a relevant scheme were in a position to inform themselves as to the
requirements of the regulations and to make sure that their scheme complied with
them (section 591A(2)) and they would also know if they altered the terms of the
scheme without HMRC approval (section 591B(2)). By contrast, the trustees of a
scheme might be unaware of circumstances which later caused HMRC to withdraw
the approval of their scheme, for example, as occurred in this case, where the
transactions which ultimately caused the removal of the approval were carried out
by trustees of another scheme into which funds had been transferred. To impose on
the trustees a liability in interest for unpaid tax arising from circumstances of which
they were unaware would be to tax retroactively.
80. Other arguments have been aired which I have not found persuasive. I
summarise them briefly.
81. First, the appellants derived support from section 61 of the Finance Act 1995,
which, as I have said, introduced sections 591C and 591D into the TA. Section 61(3)
provided:
“This section shall apply in relation to any approval of a retirement
benefits scheme which ceases to have effect on or after 2 November
1994 other than an approval ceasing to have effect by virtue of a notice
given before that day under section 591B(1) of the Taxes Act 1988.”
Page 27
This transitional provision was designed to make sure that the tax charge under
section 591C did not apply unless both the cessation of approval and the giving of
the section 591B(1) notice occurred after 2 November 1994. Mr Thornhill for the
appellants was correct in his submission that the draftsman of this provision must
have thought that the date of “an approval ceasing to have effect” was not the same
as the date of the section 591B notice. But, to my mind dubiously, the provision
appears to assume that a section 591B notice could be made prospectively. In my
view that understanding in a transitional provision, which did not become part of the
corpus of the TA, does not provide the needed clarity to construe the substantive tax
provision, section 591C, as a retroactive tax charge.
82. Secondly, I was initially impressed by the respondents’ argument that, if the
correct year of assessment when HMRC issued a section 591B(1) notice were the
year of the date of cessation, it might be impracticable for HMRC to obtain the
needed knowledge of offending transactions within the ordinary time limits under
sections 34 and 36 of the Taxes Management Act 1970. Those provisions require
HMRC to make an assessment to tax within six years after the end of the chargeable
period to which the assessment relates unless any form of fraud or wilful default has
been committed. But after the parties provided further information, at the court’s
request, on the matters which administrators have to report to HMRC, the argument
lost much of its force. The Retirement Benefits Schemes (Information Powers)
Regulations 1995 (SI 1995/3103) required the administrator to report certain
payments or transfers of scheme funds. At the time of the transfer to the Vesuvius
scheme the regulations did not require the reporting of a transfer from a small selfadministered scheme to an executive pension plan. The tax avoidance scheme in this
case exploited that loophole, which was later closed by the Retirement Benefits
Schemes (Information Powers) (Amendment) Regulations 2002 (SI 2002/3006). It
appears that the administrator of the Vesuvius Scheme had no statutory duty to
report and did not report the change of rules which permitted it to make loans. But
the relevant regulations could have been amended to require the reporting of events
which might lead to the withdrawal of approval.
83. Thirdly and conversely, I am not swayed by Mr Thornhill’s observation that
the interpretation that has found favour in the Court of Appeal and tribunals below
would enable HMRC to impose a tax charge under section 591C which
circumvented those ordinary time limits under sections 34 and 36 of the Taxes
Management Act 1970. He is correct. But the tax charge was enacted to discourage
abusive arrangements and thus differs from normal charges to tax. Further, I do not
accept his submission that HMRC could impose such a charge at any time: HMRC
would be subject to a judicial review challenge if they acted capriciously or delayed
unreasonably in their withdrawal of approval and imposition of the tax charge.
84. Finally, I do not derive assistance from the Scottish tax case of Spence v
Inland Revenue Comrs (1941) TC 311. It concerned an assessment to surtax which
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a taxpayer had to pay after he had rescinded a contract for the sale of shares on the
ground that it had been induced by fraudulent misrepresentation. The dividends had
been paid to the purchaser in the interim, but the taxpayer achieved restitutio in
integrum through the setting aside of the sale, the retransfer of the shares and the
payment of a sum representing the dividends. The Revenue repaid the surtax
assessed on the dividends to the fraudulent purchaser and assessed the taxpayer
instead. In my view it is unsurprising that the Inner House upheld the assessments
of the taxpayer in the years of assessment in which the dividends had been paid by
the company, as the setting aside of the sale of the shares restored the taxpayer to
the position that he had been in ab initio. The case involved no imposition of a
retroactive tax charge by parliamentary legislation but only the application of normal
tax rules to circumstances which the general law had reinstated.
Conclusion
85. I am with respect unable to agree with the majority as I consider that their
views give insufficient weight to the statutory language in the light of the important
presumption against retroactive taxation. I would dismiss the appeal.
LORD CARNWATH: (who agrees with Lord Hodge)
86. In respectful disagreement with the majority, I would have held that the
appeal should be dismissed for the reasons given by Lord Hodge.
87. The principal difficulty I see with the alternative view is that it is inconsistent
with the language of the statute, in particular of the charging provision. Section
591C(1) is expressed in unequivocal terms. It is directed to the future: “tax shall be
charged …”. Similarly, the occasion of the charge is fixed by reference to the future
not the past: “where an approval … ceases to have effect…”, defined (by section
591D(7)(b)) as “a reference to … the approval … being withdrawn under section
591B(1)”. That sub-section in turn makes clear that the approval is withdrawn “by
notice to the administrator”, although it will take effect from an earlier date
determined by the Board as specified in the notice. Taken together, to my mind,
those provisions indicate unambiguously that the charge arises in the year when the
notice is served, not some earlier year. I do not see how the majority’s interpretation
can be achieved without reading into section 591C(1) words which are not there.
That view is reinforced by the strong presumption against retroactivity, to which
Lord Hodge has referred.
88. The main argument to the contrary turns on the last words of section 591D(7),
which as all agree is not clearly drafted. At first sight, the words “shall be construed
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accordingly” might be thought to point to the date of “cessation of the approval”
being the same as the date of withdrawal under paragraph (b). That is not a problem
which we need to resolve, since it is common ground that it refers to the date from
which the withdrawal takes effect, as specified in the notice. This seems to me at
least a possible interpretation (on either view of the charging provision), and it is
one clearly justified by a purposive approach to the use of the expression “cessation
of the approval” where it occurs in section 591C. However, it has no direct relevance
to section 591C(1), which does not use that expression. I can see no principled basis
for using that possible difficulty as an excuse for rewriting the otherwise clear words
of the charging provision.
