England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
MR JUSTICE LEWISON
CH/2003/APP/0887

		Royal Courts of Justice Strand, London, WC2A 2LL
		17th June 2005

Lord Justice Mummery :

The Appeal

1. This is an appeal from an order of Lewison J dated 23 July 2004. He dismissed a tax appeal from the General Commissioners by a practising member of the Bar (the taxpayer). He ordered the taxpayer to pay costs summarily assessed in the sum of £5,000.
2. On this second appeal the taxpayer appeared in person. Very detailed revised written submissions, calculations and oral arguments were received on the hearing of the appeal. After the oral hearing the taxpayer wrote to the court in February with further written submissions and calculations in support of her contention that the approach of the Revenue to her claim for tax relief did not accord with the legislation. The additional submissions, as well as those advanced at the oral hearing, have been considered without the need for a further oral hearing. No further oral hearing was requested by either party.
3. Mr Grant Crawford appeared for the Crown. He submitted that the appeal should be dismissed, as there was no error of law in the decision of the General Commissioners rejecting the taxpayer's appeal from the Inspector of Taxes.

General Background

4. The dispute arises from the taxpayer's claim for relief from tax in respect of payments made by her under two different kinds of saving arrangement. Each arrangement is aimed at providing the taxpayer with income in her retirement. The payments were of two kinds: (a) premiums under retirement annuity contracts entered into by the taxpayer before 30 June 1988, but paid by the taxpayer after that date; and (b) contributions paid to the taxpayer's personal pension scheme under arrangements made after 30 June 1988.
5. Lewison J's judgment helpfully explained the general background to the legislation affecting the availability of tax relief for taxpayers making both kinds of payment after 30 June 1988.

"2. …Until 1988 the principal way in which taxpayers saved for their retirement in a tax-efficient way was by making contributions under retirement annuity contracts. In 1988 a new form of investment scheme, called a personal pension scheme, was introduced. This, too, was a tax-efficient way of saving for retirement. Following the introduction of personal pension schemes, no new retirement annuity contracts could be made after 30 June 1988 (or, at least, if one was made it would not attract any tax relief). Many people had, of course, already made retirement annuity contracts before 30 June 1988 which would continue in force until they retired. It would clearly be unfair if their continued contributions under those contracts were to cease to attract tax relief. But often such people subscribed to personal pension schemes as well, under additional arrangements made after 30 June 1988. It would be equally unfair if, as a result of subscribing both to retirement annuity contracts and personal pension schemes, such people could double the tax relief to which they were entitled. So the legislation had to deal with how to treat people who subscribed to both kinds of saving arrangement.

3. The legislation also provided for flexibility in making contributions. This was particularly valuable for the self-employed whose earnings might fluctuate considerably from year to year. If you did not use up all your valuable tax relief in one tax year, you could carry it forward to a later year. This ability to carry forward applied to contributions to both kinds of arrangement. Again the legislation had to deal with the position of a person who subscribed to both.

4. How the legislation deals with this is at the heart of this appeal."

6. The taxpayer made both kinds of payment, for which she claimed relief from tax in the tax year 1999/2000. She made an election to carry back the claim to relief for retirement annuity premiums and personal pension contributions for allocation to the previous tax year (1998/1999). The payments would then be treated as having actually been paid in the earlier year.
7. The taxpayer claimed relief for payments of (a) £9,465 in respect of retirement annuity premiums made by her and (b) £4,958 in respect of personal pension scheme contributions made by her in that year. The total amount for which relief was claimed was £14,423.
8. The taxpayer sought to carry forward "unused relief" from earlier tax years. The Income and Corporation Taxes Act 1988 (ICTA) contains provisions governing the right to carry forward "unused relief."
9. The Revenue's response to the taxpayer's claim for relief was that the amounts which the taxpayer had elected to carry back exceeded the maximum allowable for the year. This was because the maximum "unused relief" carried forward by the taxpayer from earlier years was insufficient to cover the amounts that she had elected to carry back. The taxpayer was advised to amend her claim accordingly. She disagreed with the Revenue's construction of the relevant legislation and its application to the facts of her case.
10. It is common ground that the claim to tax relief and the calculation of the relief to which the taxpayer is entitled turn on the construction and application of the transitional set off provisions in section 655(1) ICTA (the construction issue). The Revenue focuses on section 655(1)(b), which deals with "unused relief." Lewison J based his decision on that provision. In her most recent submissions the taxpayer focuses more on section 655(1)(a). As is sometimes the way with fiscal legislation, it can fairly be said that it is easier to understand the aim of the relevant provisions than it is to apply them to the circumstances of particular cases.
11. There was a second issue before Lewison J. The taxpayer alleged that an agreement was reached with the Revenue for the purposes of section 54 of the Taxes Management Act 1970 concerning the determination of the taxpayer's affairs for 1992/93. The taxpayer contended that the agreement prevented the Revenue from re-visiting the relevant statutory provisions. Lewison J found against the taxpayer on the agreement issue.
12. Permission to appeal on the agreement issue was refused by Jonathan Parker LJ. He limited the grant of permission to the construction issue.

Purpose of transitional set off provisions

13. Section 655 ICTA contains transitional provisions. They deal with the problem of double tax relief in the cases of individuals (as explained in paragraph 5 above), who straddle the two regimes for retirement saving. They are individual taxpayers who continue to pay qualifying retirement annuity premiums under existing approved annuity contracts and also pay contributions to personal pensions. The taxpayer is one such individual.
14. Section 655 is designed to prevent double relief in respect of the two regimes. It legislates in a relatively straightforward way for two methods of reducing the amount of relief that can be claimed: (a) the relief obtained by the taxpayer in respect of a qualifying annuity premium reduces the amount of the contribution to a personal pension for which relief can be claimed; and (b) the "unused relief" for qualifying annuity premiums is reduced by the contributions paid under a personal pension scheme. The actual text of the provisions is set out later in this judgment.

The Decisions and appeals

A. The Inspector

15. The Inspector refused the claim for the full amount of the tax relief advanced by the taxpayer. He disallowed a total of £1490. That left an amount of £12933, for which the taxpayer could claim relief. The details are as follows:

(a) in the case of qualifying annuity premiums, the claim under section 619 ICTA was amended by a reduction in the relief claimed by the taxpayer from £9,465 to £9,250 (a reduction of £215); and

(b) in the case of personal pension contributions the relief claimed under s639 ICTA was amended by a reduction from £4,958 to £3,683 (a reduction of £1275).

16. The amounts of "unused relief" up to 1993/94 were not in dispute. The dispute centres on the amount of "unused relief" arising in the years 1994/95 and 1996/97.
17. The taxpayer had sought to carry forward "unused relief" in the sum of £760 from the year 1994/95 and in the sum of £1,169 from the year 1996/97, making a total of £1929 "unused relief." The Inspector decided that the taxpayer was only entitled to carry forward £439 from 1994/95 and nil from 1996/97.
18. The total amount disallowed by way of reduction in respect of the taxpayer's claim for tax relief in respect of the retirement annuity premiums and personal pension contributions paid in 1999/2000 was accordingly £1929 less £439 = £1,490. The amount of tax at issue between the taxpayer and the Revenue is 40% of £1490=£596. As indicated earlier, the reason for the inspector's disallowance was that the maximum "unused relief", which the taxpayer was entitled to carry forward from previous years, was insufficient to cover the amounts of the pension payments that the taxpayer had elected to carry back.

B. The Appeal to the General Commissioners

19. The taxpayer appealed against the decision of the Inspector to disallow £1490 pension payments relief. She contended that the claim for £1,490 was wrongly disallowed by the inspector. The ground of appeal was based on the provisions for carrying forward "unused relief" from earlier years. The taxpayer complained of

"…a wrong in law application of the carry forward rules for relief for pension contributions.

The same relief should be available under carry forward as is available year on year, subject only to the 6 year cut off. Your figures give less relief on a carry forward basis than would have been available year on year and result in relief being said to be lost when it has not been."

20. On 18 February 2003 the taxpayer's appeal was dismissed by the General Commissioners for the London District of Cavendish. They upheld the contention of the Inspector that unused retirement annuity relief carried forward from earlier years was reduced by contributions made by the taxpayer to personal pensions in the current year. The General Commissioners rejected the taxpayer's contention that the retirement annuity relief carried forward from the earlier years is not reduced by the personal pension contributions in the current year. The General Commissioners confirmed the Inspector's amendment to the taxpayer's claim for carry back of retirement annuity premiums and personal pension contributions for the tax year 1999/2000.

C. The Appeal to the High Court

21. In the case stated by the General Commissioners for the opinion of the High Court on 4 November 2003 the relevant question for their determination (and the only question for which permission to this court was granted by Jonathan Parker LJ on 28 September 2004) is stated to be (paragraph 2.1)-

" Whether the Appellant is able in respect of her Tax Return for the year 1999/2000 to claim relief for retirement annuity premiums under Section 619 Income and Corporation Taxes Act 1988 and personal pension contributions under Section 639 Income and Corporation Taxes Act 1988. Her claim was for carrying back of retirement annuity premiums of £9,465 and personal pension contributions of £4,958 paid in the year 1999/2000. The Respondent disallowed £1,490 amending the claim for carrying back to £12,933 comprising £9,250 in respect of retirement annuity premiums and £3,683 in respect of personal pension contributions on the grounds that the maximum unused relief carried forward was insufficient to cover the amounts which the Appellant had elected to carry back."

22. The question of law for the opinion of the court was stated to be " whether the unused relief for retirement annuity premiums in a year when both retirement annuity premiums and personal pension contributions are paid or treated as paid, includes unused relief of earlier years and whether similar treatment arises under Section 655(1)….." (Paragraph 12 of the Case Stated).

The relevant legislation

23. The relevant provisions concerning retirement annuities in relation to contracts made before 1 July 1988 are found in Chapter III of Part XIV of ICTA ("Retirement Annuities"). They are set out in full in the judgment of Lewison J. For the purposes of this appeal a summary of the main features of the legislative scheme will suffice. Verbatim quotations will be confined to those provisions where the rival arguments on the construction issue relate directly to the structure and language of the sections.
24. Section 619 sets out the requirements for obtaining exemption from tax, on a claim made for the purpose, in respect of "qualifying premiums", as defined in section 620, paid in any year of assessment.
25. Section 625 deals with the carrying forward of "unused relief" under section 619 for a year of assessment. The "unused relief" is the amount which could have been deducted from or set off against the individual's relevant earnings for that year under section 619, if he had paid a qualifying premium in that year or the qualifying premium or premiums paid by him in that year had been greater. It is provided that, subject to section 655(1)(b),

" relief may be given under that section [i.e. section 619], up to the amount of the unused relief, in respect of so much of any qualifying premium or premiums paid by the individual in any of the next six years of assessment as exceeds the maximum applying for that year under subsection (2) of that section.

(2) Relief by virtue of this section shall be given for an earlier rather than a later year, the unused relief taken into account in giving relief for any year being deducted from that available for giving relief in subsequent years and unused relief derived from an earlier year being exhausted before unused relief derived from a later year.

26. Chapter IV of Part XIV of ICTA ("Personal Pension Schemes") contains the relevant provisions concerning personal pension schemes.
27. Section 639 deals with the requirements for obtaining tax relief for contributions paid by an individual member under approved personal pension arrangements.
28. Section 641 ("carry back of contributions") provides that an individual who pays a contribution under approved personal pension arrangements in a year of assessment may elect to carry back that contribution or part of it so that it shall be treated as paid in the year of assessment preceding that year, as was done by the taxpayer in this case.
29. Section 642 ("carry forward of relief") contains similar provisions to those in section 625 for the carrying forward of relief, where there is an amount of unused relief for that year, up to the amount of the unused relief for that year, in respect of so much of any contributions paid by him under approved personal pension arrangements in any of the next six years of assessment as exceeds the maximum applying for that year.
30. As already indicated, the transitional provisions in section 655 in Chapter IV are central to this appeal. They cover the case of an individual who, like the taxpayer, has made personal pension arrangements under which contributions are paid, but has also continued to pay and claim tax relief for qualifying premiums under approved retirement annuity contracts. The section provides-

"(1) Where approved personal pension arrangements are made by an individual who pays qualifying premiums within the meaning of s 620(1)-

(a) the amount that may be deducted or set off by virtue of section 639(1) in any year of assessment shall be reduced by the amount of any qualifying premiums which are paid in the year by the individual and in respect of which relief is given for the year under section 619(1)(a); and

(b) the relief which, by virtue of section 625, may be given under section 619 by reference to the individual's unused relief for any year shall be reduced by the amount of any contributions paid by him in that year under the approved personal pension arrangements."

31. Section 655(1)(a), which is particularly relied on by the taxpayer in her most recent written and oral submissions, deals with the reduction of the amount of personal pension contributions in respect of which relief may be given in any year of assessment by virtue of s639(1). It reduces the amount which the taxpayer is allowed to deduct or set off from earnings. The reduction is by the amount of any qualifying premiums paid in the year by the individual under a retirement annuity contract if the taxpayer has had tax relief for the year in respect of those premiums under section 619(1)(a).
32. Section 655(1)(b), which is particularly relied on by the Revenue and is the principal provision on which Lewison J based his judgment, is the corresponding mechanism in respect of the carrying forward of an individual's "unused relief" for any year by virtue of section 625. The section reduces the individual's unused tax relief given under section 619 for any year in respect of qualifying premiums paid under retirement annuity contracts. The reduction in the amount of the relief is by the amount of approved personal pension contributions paid by him in that year. The construction issue turns on what is meant by the individual's "unused relief for any year."

The issue

33. The point of difference between the taxpayer and the Revenue affecting the amount of unused relief is in the identification of the sum of unused relief arising in the years 1994/95 and 1996/97, which is carried forward and is to be reduced under the transitional provisions in section 655(1).

The taxpayer's case

34. I shall attempt to summarise the taxpayer's case, as I do not think that it is necessary, for the purposes of deciding this appeal, to include in this judgment all of the very detailed points contained in the grounds of appeal and in the skeleton submissions.
35. The essence of the taxpayer's submissions is that each year's unused tax relief must be kept separate. It must be accounted for separately, year by year. Relief arises and is utilised separately on a year by year basis. Relief is required to be given separately for retirement annuity premiums and for personal pension contributions, both for the same year relief and for the carry forward relief. Carry forward relief is only utilised to the extent that there is an excessive payment and a claim is made to carry forward and use relief. If the relief is utilised, the remaining relief is reduced by the provisions in section 625(2) regarding retirement annuity carry forward relief and by the provisions of section 642(3) regarding personal pension carry forward relief. Section 655(1) governs the reduction of the opposite relief by the opposite relief claimed and given.
36. The unused retirement annuity relief carried forward from the earlier years of 1992/93, in which both qualifying premiums and personal pension contributions were paid, and any of the subsequent 6 tax years under sections 619 and 655(1) and added to the maximum entitlement in any of those years, is not reduced by the personal pensions contribution paid in the current year. The unused personal pension relief arising in any year is the difference between the maximum amount of personal pension relief for that year and the maximum amount of retirement annuity relief given for that year.
37. The taxpayer submits that the payment of retirement annuity premiums given relief under sections 619 and 625 ICTA cannot reduce the additional personal pension age-related relief available to be given relief under section 639. Her case is that personal pension age-related relief is a "dedicated relief," which remains intact to carry forward: it can only be used to frank personal pension payments and is never affected by retirement annuity payments.
38. The taxpayer illustrated her submission by reference to the retirement annuity payments made by her in earlier years, the relief granted in respect of the premium payments, the amount of unused relief carried forward from previous years and the unused relief in respect of personal pension payments which she argued remained intact to carry forward.
39. The result of the taxpayer's approach to the calculation of the amount of unused relief arising in 1994/95, in which she made annuity payments making use of unused relief carried forward from earlier years, but no personal pension contributions, is that the unused personal pension relief is £6077 less £5317=£760 remained intact to carry forward.
40. The figure for the amount arising in 1996/97, in which she also made annuity payments making use of unused relief carried forward from previous years, but no personal pension contributions, is £9352 less £8183=£1169 remaining intact to carry forward.
41. When in 1998/99 the taxpayer came to use her unused personal pension relief carried forward from previous years, the Revenue wrongly computed the relief as a "composite pot" instead of keeping the reliefs separate for each type of relief and for the same year and carry forward relief. Acting on the "composite pot" basis, which was not justified by the legislation, the Revenue reduced the relief claimed by £321 for 1994/95 and the whole of it for 1996/97, so that a total of £1490 of her claim to relief was disallowed.

The Revenue's case

42. The Inland Revenue adopts a different construction of the legislation. It argues that the correct approach to the calculation of the amount of "unused relief" which may be carried forward is to aggregate the balance of unused relief for retirement annuity premiums that has accumulated from past years; to carry it forward to the years in which the taxpayer paid both retirement annuity premiums and personal pension contributions; and then to deduct from the aggregate the amount of the personal pensions contribution paid in the current year. It calculates the unused personal pension relief in any year as the difference between the maximum amount of the personal pension relief for that year and the total amount of contributions, both retirement annuity and personal pension, paid in that year.
43. This approach to the calculation of the amount of unused personal pension relief arising in any year means that in £1994/95 the amount is £6077 less £5368=£439. The figures for 1996/97 are £9352 less £11,727=nil.

Discussion and conclusion

44. Lewison J preferred the Revenue's contentions on the construction issue, as had Mr DA Shirley sitting as a Special Commissioner in Brock v. O'Connor (Inspector of Taxes) [1997] STC (SCD) 157.
45. The judge identified the dispute between the taxpayer and the Revenue as turning on section 655(1)(b) and the expression "unused relief for any year" in that section and the expression "unused relief for that year" in section 625(1)(b).

"27. …..Ms Lonsdale says that this means that each year's unused relief must be kept separate and accounted for separately, year by year. ……The Revenue say that in working out what is unused relief for any year, you must take into account and aggregate any unused relief that has accumulated from past years. You then deduct the amount of the personal pension contributions paid in the current year from the aggregate."

46. The judge noted the submission of the taxpayer, which was reiterated by her in this court, that the effect of the Revenue's construction is that, if she pays premiums on a retirement annuity contract in reliance on the carry forward relief, she loses the more generous allowances available to a person who pays contributions into a personal pension scheme. She is then worse off by using the carry forward provisions that she would have been if she had made contributions year by year up to the full amount of her allowances.
47. In his concluding paragraph (paragraph 29) on this point the judge explained his reasons for preferring the Revenue's construction. He reverted to section 625 (1). That section deals with the relief that may be given, depending on how much is contributed as premium under the retirement annuity contract. Section 625(2) contemplates an aggregate amount of unused relief available for giving relief in subsequent years, rather than, as the taxpayer contended, kept separate and accounted for separately, year by year: under section 625(2) the unused relief taken into account in giving relief in any year is deducted from that available for giving relief in subsequent years. This was in contrast to unused relief "for" a particular year.
48. The judge concluded (paragraph 29)-

" In other words section 655(1)(b) operates by reference to what could have been claimed as tax relief under section 619. What could have been claimed as tax relief under section 619 includes all the unused relief that had accrued to date, as at that year of assessment. This is the same year of assessment as that in which the contributions to the personal pension plan are paid. So you ask: how much could the taxpayer have claimed by way of relief in relation to that year, under section 619? That amount includes unused relief accrued to date (although of course you must apply it in the manner set out in section 625(2). I consider, therefore that the Revenue's construction is to be preferred"

Conclusion

49. I agree with Lewison J that the Revenue is right on the construction issue. He rightly held that there was no error of law in the determination of the General Commissioners, as recorded in paragraph 9 of the Case Stated.
50. I shall not deal in detail with the taxpayer's criticism of the judgment of Lewison J on the ground that it failed to set out the facts or the contentions of the parties sufficiently. The criticism is irrelevant to the issue whether the General Commissioners erred in law. The taxpayer may make the same criticism of this judgment, which I have attempted to keep short and to the point. The only point of law is whether the taxpayer or the Revenue's construction of section 655 (1) is the correct construction.
51. I can state my conclusion on that legal point quite shortly. The issue turns on the amount of "unused relief" which the taxpayer, who claims tax relief in respect of qualifying premiums and personal pension contributions, is entitled to carry forward from previous years.
52. The natural and ordinary reading of the language of section 655(1) is that the expression "the individual's unused relief for any year" in subsection (1)(b) [my emphasis added] includes both unused retirement annuity relief carried forward from the previous years and the unused relief arising in the current year. The unused retirement annuity relief is reduced by the amount of personal pension payments paid by the taxpayer in that year under the approved personal pension arrangements. The balance left after the deductions is the amount of relief which the taxpayer can carry forward to the next year, when the same calculation is made.
53. The Revenue's method of calculation produces consequences which the taxpayer finds fiscally less beneficial to her than her method of calculation based on her construction of the legislation.
54. The consequences of the Revenue's construction of section 655(1) may seem unfair to the taxpayer and the taxpayer's construction may be fairer and more beneficial to individual taxpayers in her position. Those are not, however, valid reasons for departing from the natural and ordinary meaning of the legislation. Perceived unfairness in fiscal legislation is a matter to be referred for the consideration of legislators. It is not a matter for judges, whose function is to interpret and apply the legislation. The aim of the relevant provisions is reasonably clear. The language and scheme of the legislation is consistent with the Revenue's construction. The construction contended for by the taxpayer does not, on my reading of the relevant provisions, reflect their natural and ordinary meaning.

Result

55. I would dismiss the appeal.

Lady Justice Arden:

56. I agree.

Mr Justice Munby:

57. I also agree.