118 / 322
GAZETTE
APRIL. 1984
purposes, which would not have been the case had he (the
Duke) paid his gardener wages in the ordinary way.
The Revenue, not unnaturally, contended that the
annual payments were in substance wages and sought to
disallow them as deductions when assessing the Duke to
surtax. This approach drew a stinging rebuke from the
House of Lords of the day. "Every man is entitled, if he
can, to order his affairs so that the tax attaching under the
appropriate Acts is less than it otherwise would be. If he
succeeds in ordering them so as to secure this result, then,
however unappreciative the Commissioners of Inland
Revenue or his fellow taxpayers may be of his ingenuity,
he cannot be compelled to pay an increased tax. This so-
called doctrine of 'the substance'-seems to me to be
nothing more than an attempt to make a man pay not-
withstanding that he has so ordered his affairs that the
amount of tax sought from him is not legally claimable":
520 per Lord Tomlin.
In
O'Sullivan -v- P. Ltd.
3 ITC 355 the doctrine of'the
substance' was considered and decisively rejected by
Kenny J. who based his decision squarely on the principle
laid down (or rather reaffirmed) by Lord Tomlin in
CIR -
-v-
Westminster
19 TC 490. "Prior to the decision in
IRC
-v-
Duke of Westminster
[1936] AC 1 there was some
judicial support for the view that in determining liability
to tax, the substance of the transaction was to be looked
at: this was assumed to mean the financial results and not
the legal effects of a transaction determining liability for
tax purposes. This view was rejected in the
Duke of
Westminster's
case": 360 per Kenny J. So far as the High
Court (and also the Appeal Commissioners and Circuit
Court) is concerned, at any rate, the principle reaffirmed
in
CIR
-v-
Westminster
19 TC 490 and adopted by
Kenny J. in
O'Sullivan
-v-
P. Ltd.
3 ITC 355 represents the
law of Ireland at the time of writing.
3. Will the Supreme Court follow
Furniss -v- Dawson?
While what may, for the sake of brevity, be referred to
as the
Westminster
approach represents the law of Ireland
at the time of writing so far as the High Court and inferior
tribunals are concerned the matter is
res integra
so far as
the Supreme Court is concerned. The Supreme Court
could, if it saw fit to do so, overrule existing authority and
adopt the
Furniss
-v-
Dawson
approach in construing tax
legislation. Whether it would be acting in accordance with
the Constitution in so doing is another matter.
Lord Scarman admitted frankly in
Furniss -v- Dawson
that the approach therein formulated was "judge-made
law". While there is no way under the British Constitu-
tion (short of express statutory prohibition) of preventing
the highest tribunal in the land from crossing "the line
where interpretation ceases and legislation begins"
referred to by Lord Donovan in
Mangin
-v-
CIR
[1971] 1
All ER 179, 185 and thereby assuming legislative powers
which it does not possess, the same is not necessarily so in
Ireland, where the supreme authority is a written consti-
tution to which the legislature and the judiciary alike are
subject. Whether the Constitution would permit the
judiciary to follow the example of their British colleagues
and to arrogate to themselves extra statutory powers of
levying tax otherwise than in accordance with the legal
relations created by the taxpayer is debateable.
To what extend the
Furniss
-v-
Dawson
approach is
open to question may be gauged by considering the facts
of the decision itself. The taxpayer A was the beneficial
owner of the entire issued share capital of a private limited
110
company A Ltd., the acquisition cost of which to him for
capital gains tax purposes was £y. Being advised that on
selling his shareholding in A Ltd. to a purchasr C for £x he
would incur capital gains tax on a chargeable gain of £(x-
y) A sold his shareholding in A Ltd. to B Ltd. for £x, in
exchange for the issue to him, credited as fully paid up, of
x ordinary shares of £1 in the capital of B Ltd. A Ltd.,
thus, became a wholly owned subsidiary of B Ltd. B Ltd.
then sold its shareholding in A Ltd. to C for £x. The sale
by A to C of A's shareholding in A Ltd. thus took place in
two steps instead of one, but had the following important
consequences under the then capital gains tax legislation.
The first step, the exchange by A of his shareholding in A
Ltd. for shares in B Ltd., would have been treated under
the then capital gains tax. legislation (construed in
accordance with the
Westminster
approach) as a "re-
organisation" of the share capital of A Ltd. and B Ltd.
within the meaning of the U.K. equivalent to paras 2 and 4
in Schedule 2 of the Capital Gains Tax Act 1975,
involving no disposal by A of his shareholding in A Ltd. B
Ltd., on the other hand, would have been treated under
the U.K. equivalent to s.9(2) (a) Capital Gains Tax Act
1975 as having acquired its shareholding in B Ltd. at the
"market value" thereof. Since B Ltd. would shortly
afterwards have disposed of its shareholding in A Ltd. to
an arm's length third party C for £x, £x would have been
an accurate indication of the "market value" of A's share-
holding in A Ltd. at the date of its acquisition by B Ltd. In
the result, B Ltd. would have been treated as having
acquired its shareholding in A Ltd. for £x and as having
disposed of it to C at the same price, thus realising a
chargeable gain of £ nil. A would therefore be treated
under the capital gains tax legislation, construed
according to the
Westminster
approach, as having made
no disposal, B Ltd. being treated as having made a
disposal the chargeable gain accruing in respect of which
would have been £ nil. A chargeable gain would, of
course, have accrued to A on disposing of his share-
holding in B Ltd. but this was not in issue.
The House of Lords unanimously decided that the
intermediate disposal of A to B Ltd. was to be ignored for
capital gains tax purposes, capital gains tax being levied
on the assumption that A had disposed of his share-
holding in A Ltd. directly to C, without the intervention of
B Ltd. The practical consequence of this approach was to
fix A with liability for the capital gains tax payable in
respect of a sale by B Ltd. to C, the proceeds of sale of
which had factually accrued to B Ltd. Whatever may be
the position in the U.K. the constitutionality in Ireland of
levying a tax on A in respect of a gain accruing to B is open
to question.
Apart altogether from the constitutional issue the
decision of
Furniss
-v-
Dawson
has little to recommend it
from any other standpoint. The
Westminster
approach,
reaffirmed in that decision and adopted in Ireland in
O'Sullivan
-v-
P. Ltd.
3 ITC 355 is at least just in that it
requires the Revenue to levy tax in accordance with the
legal relations which the taxpayer has created on the
person to whom the profit or gain chargeable actually
accrues. The
Furniss
-v-
Dawson
approach on the other
hand does neither.
To borrow an example put forward by the late A. P.
Herbert, while the State can undoubtedly levy an annual
tax on the taxpayer's motor car it is equally open to the
taxpayer to say 'I do not wish to pay this tax. Therefore, I
will sell my car' and to do so. The
Westminster
approach,