ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY)
Mr Justice Roth and Judge Charles Hellier
FTC/08/2009 AND FTC11/2009
Strand, London, WC2A 2LL
B e f o r e :
LADY JUSTICE ARDEN
LORD JUSTICE MOSES
| The Commissioners for HM Revenue and Customs
|- and -
|PA Holdings Ltd
Mr Malcolm Gammie QC (instructed by HM Revenue & Customs) for the Respondent
Hearing dates: 10th-11th October 2011
Crown Copyright ©
Lord Justice Moses :
"proper procedures by Ellastone as dividends through the nominee Juris to the award holders in the form of dividends to the beneficial owners of the shares." ( First Tier Tribunal)
"to benefit those individuals as employees rather than as shareholders." ( of the First Tier Tribunal decision)
In reaching that view, the First Tier Tribunal noted that as a consequence of the structure of PA, if it wished to benefit its staff as shareholders rather than employees, it had the option of paying a dividend on PA's shares rather than designating funds as employee costs before arriving at its gross profits .
The First Tier Tribunal and the Upper Tribunal
The Statutory Scheme
"(1) The Schedule referred to as schedule E is as follows-
1. Tax under this Schedule shall be charged in respect of any office or employment on emoluments therefrom under one or more of the following Cases- "
The source of the income to be charged under Schedule F is identified in section 20:
"(1) Subject to section [95(1A)(a)], income tax under this Schedule shall be chargeable for any year of assessment in respect of all dividends and other distributions in that year of a company resident in the United Kingdom which are not specially excluded from income tax, and for the purposes of income tax all such distributions shall be regarded as income however they fall to be dealt with in the hands of the recipient.
(2) Except as provided by [section 171 of the Finance Act 1993] [or section 219 of the Finance act 1994] (underwriters) no distribution which is chargeable under Schedule F shall be chargeable under any provision of the Income Tax Acts."
"209 Meaning of "distribution"
(2) In the corporation Tax Acts "distribution", in relation to any company, means –
(a) any dividend paid by the company, including a capital dividend;
(b) subject to subsections (50) and (6) below, any other distribution out of assets of the company (whether in cash or otherwise) in respect of shares in the company, except so much of the distribution, if any, as represents repayment of capital on the shares or is, when it is made, equal in amount or value to any new consideration received by the company for the distribution;"
i. income tax is only one tax, and the different Schedules do no more than to provide the method of computation charge and assessment peculiar to the Schedule to which the income is allocated;
ii. the Schedules are mutually exclusive, each Schedule is dominant over its own subject matter and provides a complete code for the class of income which falls within that Schedule;
iii. the same source of income cannot be taxed twice.
"Now, the cardinal consideration in my judgment is that the income tax is only one tax, a tax on the income of the person whom it is sought to assess, and that the different schedules are the modes in which the statute directs this to be levied. In other words, there are not five taxes which you might call income tax A,B,C,D and E, but only one tax. That tax is to be levied on the income of the individual whom it is proposed to assess, but then you have to consider the nature, the constituent parts, of his income to see which Schedule you are to apply" .(439 and see 441)"
The said last-mentioned duties shall extend to every description of property or profits which shall not be contained in either of the said Schedules (A.), (B.) , or (C.) and to every description of employment of profit not contained in Schedule E.
My Lords, nothing could be clearer to indicate that the schedules are mutually exclusive; that the specific income must be assessed under the specific schedule; and that D is a residual Schedule…
Moreover, the dominance of each Schedule A, B, C and E over its own subject-matter is confirmed by reference to the sections and rules which respectively regulate them in the Act of 1842 (455)"
"The subject-matter - namely, land in respect of its property quality - being necessarily taxed under schedule A cannot be brought again under any other schedule. To do so would offend the rule against double taxation…
I am therefore of the opinion that as between Schedule A and other Schedules the revenue authority has no option to select the Schedule to be applied" (463)
"Once it is determined that the annual value of all lands and houses must be assessed to income tax under schedule A it follows that this annual value cannot be assessed to income tax under any other Schedule, for it is elementary that the same source of income cannot be taxed twice" (467, my emphasis)
"It is common ground that in every case the question (was the payment in return for acting as or being an employee) must be answered having regard to all the circumstances which are connected with and precede the receipt in question " (608D).
"I think there is confusion here between the source of the payment, which is the testator's bounty as expressed in his will, and the quality of the payment as earned or not earned. There need be no incompatibility in saying that the income is the conditional gift of the testator but that it has to be earned by compliance with the testator's condition of serving as a trustee.
I would observe more generally that the question whether income is earned or not is a question which arises between the trustee and the Inland Revenue, and it has no relation either to the legal duty which a trustee owes to the trust and the beneficiaries, or to the legal conception that such a payment as that under consideration derives from a testator and can be regarded as a legacy. The source of the sum and its character as a receipt in the hands of the trustee are two separate and unconnected things" (27-28) (my emphasis)
"The question is one of substance and not form."
i) The purchase of the shares in Ellastone was funded in full by PA, the employer, the dividends and full value of the shares were transferred at no cost to the employees; 
ii) The intention was to motivate and encourage the employees, and payment was represented to them as payment of the bonus for that year; [ 69] and 
iii) Those who left, even after PA had funded funds to Mourant were not eligible; 
iv) That the employees had no right to the payments was irrelevant. 
Section 20: the Approach of the First Tier Tribunal and Upper Tribunal
"written widely to catch the products of human ingenuity designed to avoid a transaction being the payment of a dividend". 
"there is nothing in that provision (section 20(1)) which suggests that no enquiry is permitted into whether or not something is a distribution if that something is part of a composite transaction designed to deliver employment income or indeed any other form of income or benefit. For example, a composite transaction might be one which takes place in the course of a trade with no motive other than to make a profit : the language of section 20(1) does not suggest that if the resulting composite trading profit would be assessable under Schedule D, it is not to be assessed under this provision….It seems to us that the plain purpose of the section is to require a consideration of whether or not a dividend has been paid or a distribution made and, if it has been, to tax it." 
Construction of Section 20 in its Statutory Context
"Whether the statute is concerned with a single step or a broader view of the acts of the parties depends upon the construction of the language in its context". Carreras  (my emphasis)
The statutory scheme is to be found in the congeries of sections, consisting of section 1 and the six Schedules introduced by sections 15-20 (until B dropped out in FA 1988 and C in 1996). As I have already observed, those provisions classify the nature of the income in the hands of the recipient by reference to mutually exclusive Schedules for the purpose of identifying a particular mode of assessment. Schedule F was introduced by section 47 Finance Act 1965 (it was radically altered by Finance Act 1972). But it is inconceivable that the introduction of a new Schedule, let alone a sub-section (section 20(2)) dramatically changed the structure for charging income to tax. That structure remained unaltered and the analysis of that statutory scheme in cases such as Fry remained good. Each Schedule remains dominant over its own subject-matter; the Schedules are mutually exclusive.
"If, as we find, the sums paid to the employees are distributions, notwithstanding that they are also emoluments, then they are liable to income tax under Schedule F as well as under schedule E.
That cannot happen as a matter of income tax law. They can be taxed only as one of those two kinds of payment. Which is to prevail? In our view, the answer to that is unambiguously laid down by section 20(2)"  and 
The First Tier Tribunal thought that "the facts are such that both (Schedules E and F) are relevant" (see UT ). They then interpreted section 20(2) as a statutory exemplification of the fundamental principles expressed in Fry.
Viewed through Ramsay Eyes
"The essence of the new approach was to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description" 
She subsequently adopted the neat apothegm, often cited thereafter, of Ribeiro PJ in Collector of Stamp Revenue v Arrowtown Assets Ltd  HKCFA 46 at  :
"The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically." (cited by Arden LJ at ).
Lady Justice Arden:
Lord Justice Maurice Kay: