121 / 322
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