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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
consequences of so doing.
4. Does it apply to trading?
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