The Gazette 1984

GAZETTE

APRIL. 1984

particularly interesting since, while expressly recognising the principle later formulated by Lord Brightman in Furniss -v- Dawson , he nevertheless concluded that the taxpayer was not assessable to income tax under Schedule E Case I. "My Lords, I have already said that I am willing for the purposes of those appeals to accept in full the findings of the Commissioners reflected above. Moreover, I accept that it is legitimate to consider 'the scheme as a whole' where there is evidence, as there is here, that each separate step is dependant on the others being carried out." "But the question remains whether this organisation or control by Mr. Higgs of a complex process, involving possibly or probably trading by others, can possibly constitute trading by himself. . . . How can a man who procures others to do acts which amount to trading by them with their own assets be said to trade within any conception, however wide, one may have of trading? So wide an extension of the concept of trading, to a set of facts which contains none of the normal ingredients of trade, is one I find unacceptable": 90 per Lord Wilberforce. In other words, a participant in a scheme for the avoidance of income tax or corporation tax on the profits or gains arising from trading in land can only be taxed under Schedule D Case I if he himself actually trades in land and realises a profit therefrom assessable to income tax and corporation tax under the statutory provisions applicable thereto. The doctrine of'the substance' has no place in the assessment of income tax or corporation tax under Schedule D Case I. What if the participants in a tax avoidance scheme are all traders in land to a greater or lesser degree? In such a case Ransom -v- Higgs 50 TC 1 is clearly not in point, it being up to the Revenue to assess income tax or corpora- tion tax under Schedule D Case I or each participant to the extent of the profits and gains "received" by it or to which it is "entitled" computed in accordance with the relevant statutory provisions, as directed by s. 105 Income Tax Act 1967. S.105, by providing in express terms that income tax under Schedule D is to be charged on the person "receiving or entitled to" the income taxable, appears to preclude application of the Furniss -v- Dawson principle. Authority for this view is to be found in Lord Wilber- force's dissenting opinion in Mangin -v- CIR [1971] 1 All ER 179, 186. The decision turned on express anti- avoidance legislation in New Zealand which provided that an "arrangement" was to be "void" insofar as it had the " purpose or effect" of "relieving" a person from his liability to pay income tax. The majority of the Judicial Committee of the Privy Council held that the legislation applied to an arrangement whereby a farmer had leased certain agricultural land to a discretionary trust, which he then proceeded to farm on behalf of the trustees, accounting to them for the profits realised. These were then distributed by the trustees to the taxpayer's wife and children, in whose hands they were taxed at rates which were substantially lower than the rate which would have been payable had the profits been derived by the taxpayer himself. Lord Wilberforce, on the other hand, pointed out that the legislation, while providing that an arrangement having the purpose or effect of relieving a person from his liability to pay income tax was void, did not go on to provide who, in consequence, was to be assessable. He

referred (on page 191) to the provision in the New Zealand legislation corresponding to s.105 Income Tax Act 1967 which provided that income tax was to be payable on all income "derived" by the taxpayer and pointed out that in this instance the farming profits were "derived" not by the taxpayer himself but by the trustees, and that it was not open to the Revenue to assess the taxpayer on income which he had not "derived". Such an opinion, if expressed in relation to actual legislation would appear to apply afortiori in the case of judge made law such as the approach formulated in Furniss -v- Dawson. Lord Donovan, delivering the majority opinion of the Judicial Committee, referred likewise to the provision requiring the taxpayer to have "derived" the income in respect of which he was assessed, but based his decision (on page 185) on the particular circumstance that the farming profit had passed through the taxpayer's hands en route to the trustees. Both Lord Donovan and Lord Wilberforce, therefore, recognised the relevance of the provisions in the New Zealand legislation corresponding to s.105 Income Tax Act 1967. It is to be hoped that the Supreme Court will do so likewise. In Ransom -v- Higgs 50 TC 1 Lord Wilberforce pointed out that the scheme then under review by the House would now be dealt with under the specific anti-avoidance legislation in the U.K. equivalent to ss.20, 21 and 22 Finance (Miscellaneous Provisions) Act 1968, as substituted by s.29(3) Finance Act 1981. It is submitted that it is to these provisions, and not to the Furniss -v- Dawson approach, that regard must be had by those seeking to avoid income tax and corporation tax on the profits arising from dealing in and developing land. 5. Conclusion In Furniss -v- Dawson Lord Scarman suggested that the principle therein laid down by the House was in no way incompatible with Lord Tomlin's famous vindication (in CIR -v- Westminster 19 TC 490, 520) of the taxpayer's right to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be, but merely defined the limits within which the taxpayer was to be so entitled. It is a pity that Lord Scarman did not see fit to refer at the same time to Lord Tomlin's warning (19 TC 520) against substituting the "incertain and crooked cord of discretion" for "the golden and straight mete wand of the law" (4 Inst. 41). Subsequent members of the House of Lords have been no less forthright in their criticism of the Furniss -v- Dawson approach. "Tax avoidance is an evil but it would be the beginning of much greater evils if the courts were to overstretch the language of the statute in order to subject to taxation people of whom they disapproved": Vesty's Executors -v- CIR 31 TC 1, 90 per Lord Normand. So also in Ransom -v- Higgs 50 TC 1 referred to above " . . . for the courts to try to stretch the law to meet hard cases (whether the hardship appears to bear on the individual taxpayer or on the general body of taxpayers as represented by the Inland Revenue) is not merely to make bad law but to run the risk of subverting the rule of law itself. Disagreeable as it may seem that some taxpayers should escape what might appear to be their fair share of the general burden of national expenditure, it would be (Continued on p. 116) 113