The Gazette 1984

GAZETTE

APRIL. 1984

adopted in Ireland by O'Sullivan -v- P. Ltd. 3 ITC 355 recognises the taxpayer's action and refrains from taxing him. The Furniss -v- Dawson approach, on the other hand, ignores what the taxpayer has done and seeks to levy tax as if the taxpayer still owns the car. An oversimplifica- tion? Possibly, but nevertheless one indistinguishable in its practical effect from that of Furniss -v- Dawson. Secondly, the Furniss -v- Dawson approach is unaccep- tably vague. Even as now defined it is impossible to predict where the principle therein laid down will end, Lord Scarman expressing the opinion that the determina- tion of the extent of the principle was a "subject suited to development by judicial process". However interesting this development may be to text book writers and academic lawyers generally it will do little to help a taxpayer to know where he stands, and still less his accountant when drawing up accounts reflecting a 'true and fair view' of a company's affairs. To take a simple example, A Ltd., a company which trades in land, owns a site which it holds as trading stock, and acquired a number of years previously for £100,000. The present market value of the site is £500,000. A Ltd. ceases trading and sells the site to an associated company B. Ltd. which likewise trades in land and has an accumulated loss, carried forward from previous accounting periods, of £400,000. B Ltd. purchases the site from A Ltd. and sells it to an arm's length third party C for £500,000. Construing the relevant legislation according to the Westminster approach, A Ltd. would be treated as having disposed of its trading stock to B Ltd. for £100,000: s.62(l) (a) Income Tax Act 1967. The acquisition cost to it of that trading stock being likewise £100,000 A Ltd. would have realised a profit of £ nil. B Ltd. would have realised a profit of £400,000 on the disposal of the site to C, against which it would be entitled to offset its accumulated trading loss of £400,000, thus likewise realising a taxable profit of £ nil. Under the Furniss -v- Dawson approach, on the other hand, A Ltd. must be taxed as if it, and not B Ltd., sold the site to C for £500,000, thus realising a taxable profit of £400,000 against which it would not be entitled to offset B Ltd.'s accumulated trading loss of £400,000. The auditors of A Ltd. in ascertaining whether the accounts of A Ltd. give a 'true and fair view' of its financial position would require that provision be made for the corporation tax payable by A Ltd. in the event of the Revenue applying the Furniss -v- Dawson approach and assessing A Ltd. on a notional profit of £400,000. How is the corporation tax so payable to be provided for when A Ltd. has in fact realised no profit and therefore lacks the means of paying the tax assessed on it? To take a further example, A Ltd. in the above example sells its site as before to B Ltd. for £100,000 (the price at which it purchased the site a number of years ago) B Ltd. in this instance has no accumulated trading loss and realises a taxable profit of £400,000 on its disposal of the site to C upon which it pays corporation tax in the ordinary way. It goes on to declare and pay a dividend out of its tax paid profit of £100,000. Application of the Furniss -v- Dawson approach suggests that A Ltd. is to be taxed as if it, and not B Ltd. realised the profit of £400,000, the intermediate sale by A Ltd. to B Ltd. being "disregarded for fiscal purposes". Bearing in mind that the Revenue "cannot, and does not claim to, have it both ways" does this mean that the declaration and payment by B Ltd. of the dividend of

£100,000 is to be disregarded likewise for the purpose of income tax assessable under Schedule F? Not only does the Furniss -v- Dawson approach create an unacceptable degree of uncertainty in a branch of the law which is not especially distinguished by either logic or clarity but it has alarming practical and commercial consequences. Should a prudent conveyancer seek an indemnity from his client's purchaser for the income tax or corporation tax which he may be required to pay as a result of the Revenue applying the Furniss -v- Dawson approach? Is it reasonable to expect a purchaser's solicitor to agree to his client giving such an indemnity? These questions are by no means academic. Nowhere in Furniss -v- Dawson does the House of Lords suggest that B (by whom the profit or gain has actually been realised and who therefore holds the proceeds of sale) should indemnify A (who is to be treated under the Furniss -v- Dawson approach as having realised the profit or gain although he has not actually done so and does not have the wherewithal to pay the tax assessed). Quite apart from the constitutionality of taxing A on a profit realised by B the practical consequences of such a departure from reality hardly bear thinking of. It is to be hoped, therefore, that the Supreme Court will not follow the unhappy precedent set by the House of Lords and cross the forbidden line referred to by Lord Donovan in Mangin -v- C1R [1971] 1 All ER 179, 185 "where interpretation ceases and legislation begins" without giving due consideration to the practical To what extend the Furniss -v- Dawson approach applies to income tax or corporation tax assessable under Schedule D Case I is a matter of some doubt. S.105 Income Tax Act 1967 provides specifically that "Tax under Schedule D shall be charged on and paid by the persons or bodies of persons receiving or entitled to the income in respect of when tax under that Schedule is in this Act directed to be charged". To what extent, if at all, is it open to the Revenue to disregard a statutory provision as clear and unequivocal as this? In Ransom -v- Higgs 50 TC 1 the Revenue endeavoured to the (then) discredited doctrine of'the substance'. The Revenue's attempt to do so was decisively rejected by the House of Lords, whose members included Lord Wilberforce (who was subsequently to be a member of the House which decided Eilbeck -v- Rawling and Ramsay -r- CIR 50 TC 1 therefore carry considerable weight). The facts of the matter, so far as they are relevant, were relatively straightforward. The taxpayer (Mr. Higgs) was the proprietor of a number of limited companies all of which traded in land. In 1961, a partnership was established between Mrs. Higgs (who held a 90% interest therein) and two of Mr. Higgs' companies (which each held a 5% interest therein), to which partnership the various companies sold land at cost. Mrs. Higgs thereupon sold her 90% interest in the partnership to yet another company "Harlox" for £170,000. Neither Mr. nor Mrs. Higgs had ever carried on the trade, personally, of dealing in and developing land, although this was admittedly the activity in which the various companies were engaged. The Revenue sought to assess the taxpayer to overcome tax under Schedule D case I on the proceeds of the sale by his wife of her interest in the partnership. Lord Wilberforce's reasoning (at 50 TC 90) is 111 consequences of so doing. 4. Does it apply to trading?