The Gazette 1984

GAZETTE

APRIL. 1984 The Uncertain and Crooked Cord of Discretion — Some Reflections on Furniss v. Dawson

by Charles Haccius, Barrister-at-Law

S O far, the recent House of Lords decision of Furniss -v- Dawson [1984] STC 153 HL has generated more heat than light. The purpose of this article is to endeavour to dispel some of the misconceptions which have grown up around the decision and set out what in the writer's submission it actually lays down, and, what is equally important, what it does not. 1. What does it actually decide? The decision follows three earlier decisions of the House of Lords, the first two of which were Eilbeck -v- Rawling and Ramsay -v- CIR (both of which were reported at 54TC101) and the third of which, delivered subse- quently and reported at 54TC200, was CIR -v- Burmah Oil Co. Furniss -v- Dawson is noteworthy as the first occasion upon which the approach adopted by the House of Lords in the three earlier decisions referred to above has been formulated with any degree of precision. The approach, and its consequences, are stated in unequivocal terms by Lord Brightman, with whom the other members of the House concurred. The approach is as follows:— If:— (i) There was a "pre-ordained series of transactions" (which "may or may not include the achievement of a legitimate commercial (i.e. business) end", and (ii) the series includes "steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax", these inserted steps "are to be disregarded for fiscal purposes. The Court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied": per Lord Brightman. This does not mean (as some financial journalists have assumed) that where the two conditions referred to above are both satisfied, the Revenue can simply brush aside the various steps taken and assess tax as if they had never happened. The effect of the Furniss -v- Dawson approach differs from that of the Australian and New Zealand anti- avoidance legislation considered by the Privy Council in Peate -v- C. ofT. [1966] 2 All ER 766 and Mangin -v- CIR [1971] 1 All ER 179 in that it authorises the Revenue to proceed directly from point A to point Z, and then assess tax by reference to what it finds at point Z. It does not authorise the Revenue (as under the Australian and New Zealand legislation) to assess tax on the assumption that the taxpayer never left point A. Whether the two conditions referred to above are both

present is a matter of fact to be determined in each case by the Appeal Commissioners (or in Ireland by the Circuit Court in the event of a re-hearing). The findings are "inferences to be drawn from the primary facts" with which an appellate court, whose jurisdiction is limited questions of law, can interfere only where the inference drawn by the Appeal Commissioners (or by the Circuit Court) is "insupportable on the basis of the primary facts so found": per Lord Brightman. It follows as a corollary from the principle that the inserted steps "are to be disregarded for fiscal purposes" that the Revenue can levy tax only on the "end result", and not on the "inserted steps". Where A sells to B, and B sells on to C, the Revenue can levy tax on the basis of a sale by A to C, but is precluded from endeavouring to levy tax also on the intermediate sales by A to B, and by B to C. "There could be no additional capital gains tax on the steps by which the disposal was achieved, namely, the sale first to (B) and then by (B) to (C), because it is the Crown's case that the fiscal consequences of the introduction of (B) are to be disregarded. The Revenue cannot, and does not claim to, have it both ways": per Lord Brightman. 2. Does it apply in Ireland? The traditional approach in construing tax legislation is that laid down over a hundred years ago in Partington - -v- A.G. LR 4 HL 100. "If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. In other words, if there be admissible in any statute, what is called an equitable construction, certainly such a construction is not admissible in a taxing statute, where you can simply adhere to the words of the statute": 122 per Lord Cairns LC. Some fifty years later the principle stated by Lord Cairns LC was reaffirmed in Cape Brandy Syndicate -v- CIR 12 TC 358 " . . . in a taxing act one has to look merely at what is said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used": 366 per Rowlatt J. Such was the state of the authorities when CIR -v- West- minster 19 TC 490 came before the House of Lords. The facts of the case were simple. The Duke of Westminster, instead of paying wages to his gardener, entered into a covenant to pay him a fixed annual sum, which was to be payable to him whether or not he remained in the Duke's employment. As such, the annual payment was deductible from the Duke's total income for surtax 109