Jersey Unreported Judgments

Taxation - appeal by the Comptroller against decision of Commissioners of Appeal dated 26 November 2014.

[2015]JRC114

Royal Court

(Samedi)

27 May 2015

Before     :

J. A. Clyde-Smith, Esq, Commissioner, sitting alone.

 

Advocate G. G. P. White for the Appellant.

Mr Stephen Atherley appeared on his own behalf.

judgment

the commissioner:

1.        This is an appeal by the Comptroller of Taxes ("the Comptroller") against a determination of the Commissioners of Appeal dated 26^th November, 2014, on appeal by the respondent ("Mr Atherley") against the assessment by the Comptroller of Mr Atherley's tax for the year of assessment 2011. 

2.        The appeal raises a point of construction of the provisions of the Income Tax (Jersey) Law 1961 ("the Income Tax Law") as they were in 2011 and, in essence, the stage at which Mr Atherley is to be given credit for tax paid on his UK income. 

3.        Under Part 12 of the Income Tax Law headed "Personal Allowances and Reliefs" Article 92A provides a threshold for exemption from income tax (the amount is not relevant for these purposes) and Article 92C, misleadingly entitled "Marginal rate of tax", provides marginal relief for those whose total income exceeds that threshold:-

"92C   Marginal rate of tax

(1)       An individual whose total income exceeds the threshold applicable in the individual's case by virtue of Article 92A shall be entitled, for any year of assessment, to have the amount of income tax payable in respect of his or her total income reduced so that it does not exceed an amount equal to 27% of the amount by which the individual's total income exceeds that threshold."

4.        Under Part 14 of the Income Tax Law headed "Relief from double taxation", Article 111 gives effect to arrangements made with foreign governments for the relief from double taxation, the States of Jersey having entered into such an arrangement with the UK in 1952 (see the Double Taxation Relief (Arrangement with the United Kingdom)(Jersey) Act 1952):-

"111    Double taxation arrangements

(1)       If the States by Act declare that arrangements specified in the Act have been made with the Government of any territory outside Jersey with a view to affording relief from double taxation in relation to income tax and any tax of a similar character imposed by the law of that territory, and that it is expedient that those arrangements should have effect, the arrangements shall have effect in relation to income tax notwithstanding anything in any enactment.

(2)       Where any arrangements have effect by virtue of this Article, the obligation as to secrecy imposed by virtue of this Law shall not prevent the disclosure to any authorized officer of the Government with which the arrangements are made of such information as is required to be disclosed under the arrangements."

5.        Article 112(1) and (2) then provide as follows:-

"112    Tax credits

(1)       The provisions of this Article shall have effect where, under arrangements having effect under Article 111, tax payable in respect of any income in the territory with the Government of which the arrangements are made is to be allowed as a credit against tax payable in respect of that income in Jersey, and in this Article "foreign tax" means any tax payable in that territory which under the arrangements is to be allowed and "income tax" means tax chargeable under this Law.

(2)       The amount of the income tax chargeable in respect of the income shall be reduced by the amount of the credit."

6.        In the case of a taxpayer who has both Jersey and UK income, the Comptroller would assess him in this way:-

(i)        Firstly by applying the standard rate of income tax (20%) to the whole of his taxable income (i.e. both Jersey and UK) which equates to Mr Atherley's taxable income less allowable deductions, and this pursuant to Article 22(1) of the Income Tax Law which is in these terms:-

"22     Assessment of Income

(1)       The Comptroller shall assess the income to be charged to tax under Schedules A and D in accordance with the provisions of this Law."

As part of that process, the Comptroller would give the taxpayer credit for UK tax paid on his UK income, pursuant to Article 112. 

(ii)       Secondly by applying the relief under Article 92C, so that if the threshold is met the income tax payable under the assessment would be reduced. 

7.        Mr Atherley's case is that there is no support under these provisions for a credit for double taxation to be given at the assessment stage.  In his view, it should be given after applying the relief under Article 92C because he says it is under that provision that the final liability for income tax is established. 

8.        Mr Atherley starts with the advantage that the Comptroller is unable to point to any express provision within the Income Tax Law which supports his approach.  Mr Atherley's contentions were summarised by the Commissioners as follows:-

"The Contentions of the Appellant

12       The position of the Appellant was that the Appeal actually revolved around the definition of the terms "credit", "income tax payable" and "income tax chargeable."

13       The Appellant submitted that Article 112(1) and (2) of the 1961 Law made provision for credits against both "tax payable" and "tax chargeable" and that, since the term "tax payable" is not defined within the provisions of the 1961 Law, the reference to "income tax payable" in Article 112(1) and "tax payable" in article 92C were references to the same tax.  Furthermore, he submitted that Article 112(1) clearly stated that "income tax means tax chargeable under this Law" and therefore this defined "income tax" as tax chargeable for the purposes of the Double Taxation credit and not as the rate of tax that is charged or the basis of that calculation.

14       The Appellant stated that it therefore followed that "income tax chargeable" was the final balance owed to the Comptroller and, having applied the Double Taxation credit, this was the final balance after the application of the credit envisaged under Article 112.  The Appellant submitted that the application of a credit should be consistent and should be recognised as a credit against "income tax payable" and "income tax chargeable".  He argued that the Comptroller's argument, that the credit was not a credit where Article 92A-C has been applied, was not supported by any of the provisions of the 1961 Law."

9.        The Commissioners agreed with Mr Atherley and I set out their determination and conclusion:-

"Determination

15       Whilst we were grateful for the broad written and oral submissions of the parties, we have reached the view that the issue was narrower in nature.  We have noted that the Comptroller, when directly asked to point to the provision of the 1961 Law that stated that Double Taxation credit should not be applied to the calculation for "Marginal Rate of Tax" under Article 92A-C, was unable to do so.  Instead he sought to rely on the submissions that:

(a)       Each of the recent Comptrollers had, as a matter of practice, declined to apply the Double Taxation credit to the application of Article 92A-C, and

(b)       When he recently gave instruction to the Law Draftsman to settle a new draft legislation in the form of the Finance (2015 Budget)(Jersey) Law 201-  which provided for tax paid on foreign income to individuals taxed at the "marginal rate for tax" - no representations had been made by the draftsman that such provision would be otiose.

16.      We did not find this line of argument to be convincing.  Instead we felt that the wording of Article 112(1) was both salient and compelling:

"(1)     The provisions of this Article shall have effect where, under arrangements having effect under Article 111, tax payable in respect of any income in the territory with the Government of which the arrangements are made is to be allowed as a credit against tax payable in respect of that income in Jersey and in this article "foreign tax" means any tax payable in that territory which under the arrangements is to be allowed and "income tax" means tax chargeable under this Law. (emphasis added)"

Conclusion

17.      We have concluded that under the provisions of Article 112(1), the "credit" is to be applied against both the "income tax payable" and the "income tax chargeable".  We find no reasons to conclude that the Double Taxation credit cannot and should not therefore be applied against the "income tax payable" as referred to in Article 92C.  As such we find in favour of the Appellant and his interpretation of the 1961 Law as it relates to the application of the Double Taxation credit (Article 112) under the "Marginal Rate of Tax" calculation (Article 92C).

18.      During the course of this Appeal, we heard submissions that there is only one rate of Income Tax under the 1961 Law and there can be confusion in the minds of the tax payer when reference is made to the "Marginal Rate of Tax" in Article 92C.  Whilst we remain sure that most tax payers are capable of understanding the purpose of Article 92C, we should add that we do not believe it to be helpful to entitle provision as the "Marginal Rate of Tax".  We are clear that Article 92C is a relief available to cap the level of income tax payable and of is not a "rate" of Income Tax."

10.      The actual question put to the Commissioners on Mr Atherley's appeal was whether or not his tax liability for the year of assessment 2011 was to be calculated under the provisions of Article 92A-C of the Income Tax Law-if it was then it would follow that the double taxation credit under Article 112 would be applied to the tax payable as reduced by the marginal relief that those provisions provide. 

11.      The Comptroller produced to the Commissioners and to me a most detailed analysis in which he examined the history of marginal relief (which came into effect after the double taxation provisions) from when it was first introduced in 1964 to what he described as the radical amendments brought in in 2007 (Income Tax (Amendment No 26)(Jersey) Law 2007 with which we are concerned and he referred to the consistent practice that he and his predecessors have taken following a decision of the Commissioners in 1989, which, whilst concerned with UK tax pension income, raised the same issue.  The history is of interest by way of background but relevant for the reasons I set out below.  I did not find the decision of the Commissioners in 1989 helpful in resolving the question put before me. 

12.      I asked Advocate White to address me on whether any presumptions arise in relation to the interpretation of a taxation statute.  He referred me to Whiteman & Sherry on Income Tax (2012) which at paragraph 1.107 sets out the general principles as a matter of English law, namely that the onus is on the Crown to show that a taxing statute imposes a charge on the person sought to be taxed but once this onus has been discharged, the taxing statute must be construed strictly by reference to its actual words without regard to what might be expected to be found in it.  Two passages are cited, the first from the judgment of Lord Cairns LC in Partington v Attorney General (1869-70) L.R. 4 H.L. 100:-

"As I understand the principle of all fiscal legislation, it is this: If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be.  On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.  In other words, if there be admissible, in any statute, what is called an equitable construction, certainly such a construction is not admissible in a taxing statute, where you can simply adhere to the words of the statute."

13.      The second passage cited is that of the judgment of Rowlatt J in Cape Brands Syndicate v IRC [1921] 1K.B.64:-

"It is urged by Sir William Finlay that in a taxing Act clear words are necessary in order to tax the subject.  Too wide and fanciful a construction is often sought to be given to that maxim, which does not mean that words are to be unduly restricted against the Crown, or that there is to be any discrimination against the Crown in those Acts.  It simply means that in a taxing Act one has to look merely at what is clearly said.  There is no room for any intendment.  There is no equity about a tax.  There is no presumption as to a tax.  Nothing is to be read in, nothing is to be implied.  One can only look fairly at the language used."

14.      If there is ambiguity within the taxing statute which relates to some provision which relieves the taxpayer, neither taxpayer nor the Crown is entitled to the benefit of any doubt (see Littman v Barron [1951] Ch 993 at 1003).  Advocate White submitted that the correct approach to statutory construction of a taxing statute is that stated by the House of Lords in Barclays Mercantile Business Finance v Mawson [2005] AC 684 where Lord Nicholls said this at paragraph 36:-

36       Cases such as these gave rise to a view that, in the application of any taxing statute, transactions or elements of transactions which had no commercial purpose were to be disregarded.  But that is going too far.  It elides the two steps which are necessary in the application of any statutory provision: first, to decide, on a purposive construction, exactly what transaction will answer to the statutory description and secondly, to decide whether the transaction in question does so.  As Ribeiro PJU said in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46, para 35:

'the driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts.  The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically."

15.      Applying these principles, which I regard as helpful in this jurisdiction, it is not in dispute that Mr Atherley comes within the charging provisions of the Income Tax Law.  We are concerned with the application of provisions which reduce his liability and it is therefore a question of construing Articles 92C and 112 purposefully with a view to ascertaining how they were intended to interact. 

16.      As the Commissioners and the Comptroller say Article 92C does not provide for an alternative rate of tax, although economically, when applied, it will have that effect.  Nor does it give rise to a liability to pay tax.  It provides relief from the amount of income tax assessed as being payable on a taxpayer's total income, irrespective of the source of that income.  "Total income" is a defined term:-

"4       Meaning of, and provisions as to, total income

(1)       References in this Law to the total income of an individual for any year of assessment shall be construed as references to the total of the sums for which the individual has been or is liable to be assessed for that year and the sums in respect of which the individual is liable to allow the deduction of tax, less so much as are allowed under this Law of the amounts of any interest of money and of any annuity or other annual payment to be made out of the property or profits or gains assessed on the individual."

17.      Turning to the double taxation provisions, Article 112(1) sets out where the article as a whole is to have effect, namely where tax payable in respect of foreign income is to be allowed "as a credit against tax payable in respect of that income in Jersey" (my emphasis).  A credit is therefore to be allowed against the tax payable on the foreign income only.  Article 112(2) provides the mechanism by which the credit is to be applied - "The amount of the income tax chargeable in respect of the income shall be reduced by the amount of the credit."  "The income" here means the foreign income and not the total income of the taxpayer so that this should be read as follows:-"The amount of the [Jersey] income tax chargeable in respect of the [foreign] income shall be reduced by the amount of the credit". 

18.      It is curious that Article 112(1) refers to the credit being allowed against the "tax payable" whereas Article 112(2) refers to the credit reducing the "income tax chargeable".  Neither term is defined.  By reference to the Shorter Oxford English Dictionary "payable" means "to be paid, due, falling due" and "chargeable" means "capable of being or liable to be charged".  It is difficult to discern why these two different terms were used and whether there is any real difference between them but what is clear is that at the time these double taxation provisions were introduced (with the Income Tax Law in 1961) the marginal relief provisions did not exist.  The draftsman can only have been referring to income tax either payable or chargeable under Article 22(1).  I can discern nothing in the marginal relief provisions that were subsequently introduced to suggest that it was intended that this should change. 

19.      The word "credit" is also not defined and again by reference to the Shorter Oxford English Dictionary it means "an acknowledgment of payment by entry into an account" or in terms of bookkeeping "to enter on the credit side of an account".  A credit can only be applied therefore to a sum due by one person to another, in this case to the sum due by the taxpayer to the Comptroller. 

20.      The key question therefore is under what provision does the taxpayer's liability arise, as it is only against that liability that the double taxation credit can be applied.  Does it arise under the marginal relief provisions as Mr Atherley and the Commissioners would contend or under the assessment provisions as the Comptroller would contend?

21.      On this key question I differ from the conclusions reached by Mr Atherley and the Commissioners.  Article 92A-C does not create a liability to tax.  Mr Atherley said that in practice you would apply the 20% rate of tax under Article 22 and the 27% rate of tax under Article 92A-C and whichever was the lower created the liability against which the double taxation credit would be applied.  There is, however, no such thing as the 27% rate of tax.  The only rate of tax is 20%, which is applied to the taxpayers taxable income under Article 22(1).  It is that provision and that alone which creates the liability to tax and against which the double taxation credit is to be applied, as must have been the intention when the Income Tax Law was enacted in 1961.  When subsequently introduced, Article 92A-C entitled the taxpayer to reduce that liability if the threshold was met. 

22.      Accordingly in addressing the question put to the Commissioners, I would say that that Mr Atherley's tax liability is not to be calculated under Article 92A-C.  His tax liability is assessed under Article 22(1) and it is against that liability that the double taxation credit is to be applied.  He is entitled under Article 92A-C to reduce the amount for which he is liable, should the threshold be reached. 

23.      I therefore allow the appeal and set aside the decision of the Commissioners. 

Authorities

Income Tax (Jersey) Law 1961.

Double Taxation Relief (Arrangement with the United Kingdom)(Jersey) Act 1952.

Income Tax (Amendment No 26)(Jersey) Law 2007.

Whiteman & Sherry on Income Tax (2012)

Partington v Attorney General (1869-70) L.R. 4 H.L. 100.

Cape Brands Syndicate v IRC [1921] 1K.B.64.

Littman v Barron [1951] Ch 993.

Barclays Mercantile Business Finance v Mawson [2005] AC 684.