Howell & Anor v HM Inspector of Taxes [2004] EWCA Civ 885

Case No C3/2004/0103/OTTRF[2004] EWCA Civ 885
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE SPECIAL COMMISSIONERS
(Dr J F Avery-Jones CBE & Mr Richard Barlow)
Venue Royal Courts of JusticeDate Tuesday 13 th July 2004
Strand,
London, WC2A 2LL
Before
THE PRESIDENTLORD JUSTICE LATHAMLORD JUSTICE NEUBERGER
Between
(1) PAUL JONATHAN HOWELLAppellant(2) ALAN JAMES MORTONAppellantLINDA TRIPPIERRespondent
(Transcript of the Handed Down Judgment ofSmith Bernal Wordwave Limited, 190 Fleet StreetLondon EC4A 2AGTel No: 020 7421 4040, Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Robert Venables Esq, QC & Rory Mullan Esq(instructed by Messrs Addleshaw Goddard) for AppellantsLauncelot Henderson Esq, QC(instructed by Solicitor of Inland Revenue) for Respondent
Judgment

Introduction

[1]This is an appeal brought by Mr Paul Howell and Mr Alan Morton, in their capacity as Trustees of the Robin Settlement (“the Settlement”) against a decision of the Special Commissioners, (Dr J F Avery-Jones CBE and Mr Richard Barlow) dated 29th December 2003. The issue raised by the appeal concerns the interaction of two sections of the Income and Corporation Taxes Act 1988 (“the Taxes Act”), namely s249, entitled Stock Dividends treated as income, and s686, entitled Accumulation and Discretionary Trusts: special rates of tax. All references hereafter to sections are to sections of the Taxes Act for the year 1999-2000 unless the contrary is stated.[2]The basic facts are simple and uncontroversial. As at 28th July 1999, the Trustees of the Settlement (“the Trustees”) each held 35 ordinary £1 shares in a company (“the company”). On 28th July 1999, by special resolution, the company increased its authorised share capital of 1,000 ordinary £1 shares by a further 2,000,000 ordinary 1p shares. By a further special resolution on the same day, the company declared a dividend of £20 per ordinary £1 share, but authorised the directors to offer each shareholder, in the alternative to receiving the dividend, an appropriate number of fully paid-up additional 1p shares.[3]On 30th July 1999, a distribution was made to the Trustees, in their capacity as owners 35 £1 ordinary shares in the company, of 70,000 ordinary 1p shares in the company (“the Bonus Shares”). The Trustees had elected to receive the Bonus Shares in lieu of the cash dividend declared by the company, which would have amounted to £700. That election was commercially inevitable, because the Bonus Shares were worth enormously more than the £700 dividend, namely over £15m. The Trustees immediately realised the value of the Bonus Shares by selling them at their market value.[4]Owing to the provisions of s249 of the Taxes Act (“s249”), to which I will shortly turn, the parties are agreed that: i) the Trustees notionally were liable to income tax on an amount of deemed income calculated by reference to the market value of the Bonus Shares on the date of their issue; ii) the Trustees were so liable at the Schedule F ordinary rate; and iii) this liability for income tax was satisfied by an irrecoverable tax credit.[5]The issue between the parties is whether the deemed income was additionally chargeable at the higher Schedule F trust rate, with credit being given for the tax notionally paid at the Schedule F ordinary rate. If, as the Inspector of Taxes (“the Revenue”) contends, and the Special Commissioners accepted, the Trustees are liable to pay tax at the higher Schedule F trust rate, then it is common ground that that liability would be for a sum equal to 16.67% of the market value of the Bonus Shares at the date they were issued, which amounts to the sum of over £2.5m.[6]The trusts of the Settlement are in broad discretionary form, containing a wide power of appointment by the Trustees exercisable in favour of “the beneficiaries”. These are in a defined class (of descendants of the Settlor, and their spouses), to which additions can be made by the Trustees with the written consent of the settlor. The Settlement comprises discretionary trusts of income in default of appointment, and it includes a power to accumulate income during a defined Accumulation Period (which is still running). The terms of the Settlement are such that the Bonus Shares constituted capital, rather than income, in the hands of the Trustees, for the purpose of trust law.

The directly relevant statutory provisions

[7]As is not uncommon in the context of a tax case, the relevant statutory provisions appear complex and difficult to understand, but, on analysis (particularly with the assistance of competent and experienced counsel, as in this case), most of the purposes of the provisions can be seen to be relatively simple and uncontroversial. What is exceptional about the present case is that one of the two centrally relevant statutory provisions, namely s249, is peculiarly badly and convolutedly drafted, as both Mr Robert Venables QC, who appears with Mr Rory Mullan, for the Trustees, and Mr Launcelot Henderson QC, who appears for the Revenue, agree.[8]Section 249(1)(a) provides, so far as relevant:
“… this section applies to any of the following share capital, that is to say: (a) any share capital issued by a company resident in the United Kingdom in consequence of the exercise by any person of an option conferred on him to receive in respect of shares in the company … either a dividend in cash or additional share capital; and …”
It is common ground that the Bonus Shares issued to the Trustees in the instant case fall within s249(1)(a). (a) any share capital issued by a company resident in the United Kingdom in consequence of the exercise by any person of an option conferred on him to receive in respect of shares in the company … either a dividend in cash or additional share capital; and …”[9]Sub-sections (4), (5) and (6) of s249 deal with three categories of person who may become entitled to shares falling within sub-section (1), namely, individuals, personal representatives, and certain trustees, respectively. It is, I think, necessary only to refer to the provisions concerned with the first and third categories, namely to sub-sections (4) and (6).[10]Section 249(4) is in these terms:
“… where a company issues any share capital in a case in which an individual is beneficially entitled to that share capital, that individual shall be treated as having received on the due date of issue income of an amount which, if reduced by an amount equal to income tax on that income at the Schedule F ordinary rate for the year of assessment in which that date fell, would be equal to the appropriate amount in cash, and - (a) the individual shall be treated as having paid income tax at the Schedule F ordinary rate on that income …; (b) no repayment shall be made of income tax treated by virtue of paragraph (a) above as having been paid; and (c) that income shall be treated (without prejudice to paragraph (a) above) as if it were income to which s1A as it applies to income chargeable under Schedule F …”
[11]Section 20 provides:
“… income tax under [Schedule F] 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.”
[12]Section 1A provides for a “lower rate” of income tax, chargeable on income up to a specified amount. By virtue of sub-section (2)(b) it applies to “any income chargeable under Schedule F”, subject to certain exceptions. Through the medium of sub-section (1A)(a), it provides for a rate described as “the Schedule F ordinary rate”. That rate is, and was for the year 1999-2000, 10%.[13]Section 1(2) of the Taxes Act provides that: “income tax shall be charged” for a given year “at such higher rate as Parliament may determine” in respect of “so much of an individual’s total income as exceeds” the same specified amount as is referred to in s1A. That amount was £28,000 for the year 1999-2000.[14]The effect of s249(4) may be summarised as follows. First, an individual who receives bonus shares in circumstances falling within s249(1) is to be treated as having received “the appropriate amount in cash”, which is defined in s251. The appropriate amount, in a case such as this, where the market value of the bonus shares on the date of issue was substantially more than the relevant dividend, is that market value, grossed up by reference to the Schedule F ordinary rate. Secondly, such an individual is assumed to have paid income tax on that grossed-up amount, but only at the Schedule F ordinary rate. Thirdly, the individual receives a tax credit for the notional payment of Schedule F ordinary rate tax. Fourthly, that tax credit will be neither directly nor indirectly repayable. Fifthly, any liability to tax at a higher rate does not arise through the medium of s249(4), but as a result of s1(2)(b) which, it is common ground, is the charging section which imposes a higher rate of tax on individuals who fall within 249(4).[15]I turn to s249(6), which is in the following terms:
“Where a company issues any share capital to trustees in respect of any shares in the company held by them … in a case in which a dividend in cash paid to the trustees in respect of those shares would have been to any extent income to which s686 applies, then- (a) there shall be ascertained the amount of income which, if the case had been one in which an individual was beneficially entitled to that share capital, that individual would have been treated under sub-section (4) above as having received; and (b) income of that amount shall be treated as having arisen to the trustees on the due date of issue and as if it had been chargeable to income tax at the Schedule F ordinary rate; and (c) paragraphs (a) to (c) of sub-section (4) above shall, with the substitution of ‘income’ for ‘total income’ and with all other necessary modifications, apply to that income as they apply to income which an individual is treated as having received under that sub-section.”
[16]Although it will be necessary to consider s686 more fully below, it is common ground that the opening part of s249(6) is satisfied in the present case. Accordingly, s249(6)(a) requires one to “ascertain” the amount of income which, had the bonus shares been issued to an individual, that individual would have been deemed to have received pursuant to ss249(4) and 251. That sum would, in the present case, be the value of the Bonus Shares as at their date of issue, grossed up by reference to the Schedule F ordinary rate. By virtue of s249(6)(b), that grossed-up amount is “treated as having arisen to the Trustees” on the date of issue of the Bonus Shares.[17]I now turn to s686. Its first two sub-sections provide as follows:
“(1) So far as income arising to trustees is income to which this section applies, it shall be chargeable to income tax at the rate applicable in accordance with sub-section (1AA) below, instead of at the basic rate or in accordance with section 1A, at the lower rate or the Schedule F ordinary rate. (1AA) The rate applicable in accordance with this sub-section is- (a) in the case of so much of any income to which this section applies as is Schedule F type income, the Schedule F trust rate ….” (a) in the case of so much of any income to which this section applies as is Schedule F type income, the Schedule F trust rate ….”
[18]Section 686(1A)(a) states that the Schedule F trust rate is 25%. This is to be contrasted with the Schedule F ordinary rate of 10%.[19]I should refer to two other sub-sections of s686: “(2) This section applies to income arising to trustees in any year of assessment so far as it- (a) is income which is to be accumulated or which is payable at the discretion of the trustees or any other person (whether or not the trustees have power to accumulate it); … … (5A) In this section ‘Schedule F type income’, in relation to trustees, means- (a) income chargeable under Schedule F; … (e) income treated as arising to the trustees by virtue of s249(6)(b).” (a) is income which is to be accumulated or which is payable at the discretion of the trustees or any other person (whether or not the trustees have power to accumulate it); … … (5A) In this section ‘Schedule F type income’, in relation to trustees, means- (a) income chargeable under Schedule F; … (e) income treated as arising to the trustees by virtue of s249(6)(b).” …[20]As I have mentioned, it is common ground that, as a result of s249(1), (4) and (6) and s251, the effect of the issue of the Bonus Shares to the Trustees is, at least for the purpose of s249, that they are to be treated as having received income in an amount equal to the grossed-up value of the Bonus Shares on the date they were issued. It is also common ground that, although s249 deems the Trustees to have paid tax at the Schedule F ordinary rate on this grossed-up sum, there is nothing in s249(6) which, at least directly, imposes liability for the payment of any further tax on the Trustees, any more than there is anything in s249(4) which directly imposes any liability for any further tax on an individual who is issued with bonus shares.

The basic argument

[21]Section 686 is the only candidate advanced by the Revenue (and indeed by the Commissioners) as the statutory provision which gives rise to any charge to income tax in respect of the Bonus Shares, namely tax at the Schedule F trust rate (subject to credit being given for the notional payment of tax at the Schedule F ordinary rate). The Trustees’ case is that s686 cannot apply in the present case, because its application is limited, by sub-section (2)(a), “to income [which] is income which is to be accumulated or which is payable at the discretion of the trustees …”. The reason the Trustees so contend is that the Bonus Shares cannot be treated in their hands as “income which is to be accumulated or which is payable at the discretion of the trustees”. That is because, as is also common ground, the Bonus Shares in the hands of the Trustees are a capital receipt, and cannot therefore be said to be subject to being “accumulated” or “payable at [their] discretion”. It is only sums which are, as a matter of trust law, income receipts in their hands which could fall within that definition.[22]I accept that, as the Bonus Shares are capital receipts under the terms of the Settlement in the hands of the Trustees, they cannot, at least in the absence of a deeming or similar provision to the contrary, fall within s686(2)(a). The reference to “income which is to be accumulated or which is payable at the discretion of the trustees” naturally means, has always been treated by the Revenue as meaning, and is accepted by Mr Henderson as meaning, receipts which are treated as income under the terms of the relevant trust or settlement in the hands of the trustees.[23]The crucial feature of the Trustees’ case is, therefore, that s686(2)(a) limits the ambit of s686 to receipts in the hands of trustees of discretionary or accumulation settlements which are to be treated as income under the relevant settlement.[24]The Revenue’s argument in reply is that the issue of the Bonus Shares to the Trustees is deemed by virtue of s249(6)(b) to be the receipt of income by the Trustees, and that one must follow through that fiction into s686. As a result, in the case of an accumulation or discretionary trust, such as the Settlement, where the trustees have power to accumulate, or to pay out income at their discretion, this deemed or fictional income, like all income receivable by the trustees “is to be accumulated or … is payable at the discretion of the trustees”. Hence, the Revenue contends, s686 does indeed apply to charge tax at the Schedule F Trust Rate on the Bonus Shares, or, more accurately, on the notional income arising as a result of the issue of the Bonus Shares, by the operation of 249(6)(b).[25]As I have already mentioned, it seems clear that in s686(2)(a), the question whether a receipt is “income” must be decided by reference to trust law, rather than normal revenue law principles. On the other hand, the reference to “income” in s686(1) and the opening line of s686(2) must, it is agreed, be determined by reference to the normal concept of “income” under the Taxes Act. The fact that references to “income”, in one of the two sections with which this appeal is centrally concerned, can be a reference either to “income” as that term is normally used in the Taxes Act or to “income” by reference to trust law, can fairly be said to make it rather difficult to decide, merely by reference to the way in which the relevant parts of ss249 and 686 are worded, how the reference to “income of that amount” in s249(6)(b) is to be construed.[26]When first reading, and seeking to understand the import of, ss249 and 686, it seemed to me that the more natural interpretation of “income” in s249(6)(b) was by reference to the Taxes Act, which is the meaning for which Mr Venables contends on behalf of the Trustees. If that is right and the Bonus Shares are deemed to be income only for the purposes of the Taxes Act, then they are not, at least necessarily, deemed to be income for trust law purposes, in which case the Bonus Shares “cannot be accumulated or … payable at the discretion of the trustees”, so that s686 is not engaged.[27]This impression, that the reference to “income of that amount” in s249(6)(b) is to income in the Taxes Act sense, is supported by the fact that this is what is meant by the word “income” where that word is used elsewhere in s249, and especially in s249(6), and in s249(4), which is incorporated into s249(6) by s249(6)(c). Furthermore, it appears clear that, when construing the Taxes Act, “one should start with a disposition to interpret ‘income’ as that word is used in our tax legislation”: see per Lord Wilberforce in Chetwode -v- IRC [1977] 1 WLR 248 at 251G.[28]However, as Mr Henderson contends, given that, in s686, which is specifically referred to in s249(6) itself, the word “income” is used in both senses, it does not seem to me impermissible to construe “income” in s249(6)(b) as meaning income in the trust law sense as opposed to the Taxes Act sense. Indeed, given that the opening words of s249(6) refer to the dividend (in lieu of which the bonus shares are issued) as having to be “income to which s686 applies”, it may be said that, in the opening words of s249(6) itself, the word “income” is used to describe income which is both income in the sense of the Taxes Act, and income under trust law (as it would have to be the latter for s686 to apply to it). The force of the point that the Revenue’s case involves “income” being given a special meaning in one place in s249, whereas the word has its normal Taxes Act meaning elsewhere in the section, is blunted to a large extent, but by no means fatally weakened, by the fact that exactly the same point may be made about the agreed meaning attributed to “income” in s686(2)(a) when contrasted with the meaning of the word elsewhere in s686.[29]As to Chetwode, Lord Wilberforce’s observation does not suggest that the word “income” must be given the meaning for which the Trustees contend in the present case: merely that there is a presumption to that effect. Further, the unsuccessful argument in Chetwode involved giving the word “income” a meaning which accorded with “no principle … for taxation purposes” and was supported by “no common law, or common sense, or common practice” - see at 252H. The argument that “income” in s249(6)(b) means income as a matter of trust law cannot be criticised in that way.

A small excursus

[30]Mr Henderson, for the Revenue, also argues that close analysis of the wording of s249(6)(b) and s686(2)(a) demonstrates that, as a matter of language and internal logic, the Trustees’ argument proceeds on a false assumption. The assumption is that the applicability of s686 should be determined by reference to the question of whether the Bonus Shares fall within s686(2)(a) (and that they do not because they are capital). However, says Mr Henderson, s249(6)(b) requires one to assume that, if the opening words of s249(6) are satisfied (as they are conceded to be, in this case) then “income [is to be] treated as having arisen to the Trustees” and, for the purposes of the Taxes Act, it is that “income” on which one should fasten, and one should, as it were, forget the Bonus Shares. He then says that when considering s686, one simply asks whether that notional “income” satisfies s686(2)(a). At that juncture, one is faced with two alternatives. The first, suggested by Mr Venables (whose primary point is that this argument proceeds on a false basis) is that, as such income is notional, it cannot be “accumulated”, or “payable at the discretion of the trustees”, because the Settlement does not provide for notional income. The alternative favoured by Mr Henderson is that, as such notional “income” is deemed to be income as a matter of trust law, and as the Settlement provides for income to be accumulated or to be payable at the discretion of the Trustees, s686(2)(a) applies to the notional income.[31]In my view, if one has to choose between these two alternatives, it is clear that the latter must be favoured, unless it is impermissible as a matter of language, and I do not think that it is. The result favoured by the Trustees means that s249(6) would be a dead letter in every case. Even where the bonus shares were to be treated as income in trust law, they would be converted into notional “income” under s249(6)(b) and such income would, on Mr Venables’ argument, fall outwith s686(2)(a).[32]The fact that I favour the Revenue’s case on the treatment of the notional “income” under s686(2)(a) which is said to arise under s249(6)(b) is not, however, decisive of this appeal, in my view. That is because the point only arises if one accepts the proposition that, when considering the application of s686 in a case such as this, one concentrates on the notional “income” arising under s249(6)(b) rather than on the actual Bonus Shares. The correctness of that proposition involves accepting the logically anterior proposition that s249(6)(b) requires one to treat the Bonus Shares as income in the trust law sense.

Preliminary view

(b) Preliminary view

[33]Reverting to that question, it appears to me that the analysis so far, based essentially on the use of the word “income” in ss249 and 686, justifies the following preliminary conclusion. “Income” in s249(6)(b) most naturally means income in the normal Taxes Act sense, but, if there are sufficiently strong contextual or policy reasons for justifying such an alternative conclusion, it could mean “income” for trust law purposes. When deciding whether there are strong enough reasons, it is not irrelevant to have in mind the poor drafting of s249, on which both parties are agreed.[34]To my mind, the poor drafting of s249 serves to reinforce the view that, at least if one confines oneself to the wording of the two sections, it is impossible to reach a confident conclusion as to whether the rather inept draftsman intended the reference to “income” at the beginning of s249(6)(b) to be a reference to income in the normal Taxes Act sense, income in the trust law sense, or, indeed, income in both senses. In this connection, both parties are rightly agreed that the drafting of s249 is unsatisfactory. As an example, I quote from Mr Venables’s skeleton argument where, after referring to s249(1) he says this:
“Section 249 does not, as one might expect, simply deem the shareholder to be in receipt of taxable income, leaving the consequences specified in the rest of the income tax code to follow. Instead a rather erratic and unsatisfactory method is adopted of so treating certain categories of taxpayers and, in the case of trustees, only in certain circumstances.”
Mr Venables also argues that s249(6) is so drafted as to result in anomalies.[35]For the Trustees, it is argued that, if their construction in the present case produces an anomalous result, that should not be very surprising, both because poor drafting is more likely to produce anomalous results, and also because anomalies already exist. I accept that a provision which is badly drafted is, at least quite often, more likely to lead to an anomalous result than a well drafted provision. However, I do not accept that the fact that a particular provision, whether or not badly drafted, produces anomalies serves to justify another anomalous result.[36]For the Revenue, it is contended that the evident poor drafting of s249 assists the contention that, at least in the present instance, one cannot be at all confident, at least if one confines oneself to the language of the relevant provisions, that “income” is to be given its prima facie meaning, ie its normal meaning under the Taxes Act. I find that an attractive submission, although it cannot justify adopting an attitude to construction which was deprecated by Lord Atkin in his famous, if dissenting, speech in Liversedge -v- Anderson [1942] AC 206 at 244-245. However, in that connection, as already mentioned, it appears to me that, although it is not necessarily the meaning which the word “income” appears to have on first, or even second, reading, it cannot be said that it has “only one meaning”, namely income in the revenue law sense, and not in the trust law sense. And that proposition is not made out merely as a matter of general law, but also by reference to the very two sections around which this appeal centres. In other words, to quote again from Lord Atkin, to give the word “income” the meaning for which the Revenue contends does not involve saying that the word “means just what I choose it to mean, neither more nor less”.[37]Accordingly, I turn to consider the contextual and policy material which can properly be invoked in connection with this dispute, and what that material has to offer by way of assistance. Each party relies on what one might characterise as broad or policy points, but there are also some narrower points as well.

The wider factors

[38]The Trustees rely on the general principle that liability to tax should only arise if it is clear from the relevant statutory provisions. I accept that the court must be careful when construing a badly drafted or ambiguous statutory provision in such a way as to create a liability to tax. However, while that is a healthy principle which must be borne in mind, it does not seem to me that there can be any intellectual or legal justification for adopting a significantly different attitude to the construction of a taxing statute as opposed to any other statute giving rise to liability which is primarily civil in nature. Any question of statutory construction requires one to identify, or even, sometimes, to tease out, the intention of the legislature. In carrying out that exercise in relation to a taxing statute, one assumes that the intention of the legislature was not to render a citizen (or indeed a company) liable to tax without making that intention tolerably clear. However, such a proposition cannot be taken too far, at least in a case such as the present, because of the poor and convoluted drafting of the statutory provisions which we have to consider.[39]Mr Venables also points out that there is nothing surprising about s686 not applying in a case where bonus shares are capital receipts in the hands of the trustees, because the section is only intended to apply to income. I am not impressed with that point. Section 249 is concerned with treating the shares to which it applies as income, for instance in s249(4) in relation to individuals. The question which divides the parties is the extent, if any, to which it does so for trust law purposes, at least so far as s249(6) is concerned. Accordingly, it appears to me that this point rather begs the question.[40]Mr Venables also identifies a number of examples in the Taxes Act where the legislature has spelled out in clear terms that s686 is to be engaged in circumstances where the receipt is already deemed to be income. The examples he gave were in s547(9), ss714(2) and 720(5), ss761(1) and 764, and paragraph 7(1) of Schedule 5AA. He also identified such provisions in other statutes connected with the Taxes Act, such as ss38(2) and 43(1) of the Finance Act 1974, s68(2) of and paragraphs 5 and 11 of Schedule 11 to the Finance Act 1989, and paragraphs 12 and 19 of Schedule 10 to the Finance Act 1990. Thus, s761(1) deems certain gains, which would otherwise be capital gains, to be income for tax purposes; yet in s764 it is specifically provided that such deemed income arising to trustees “shall be chargeable to income tax at the rate applicable to trusts for that year”.[41]This is a point with some force. However, it is a long way from being conclusive. The structure of s249, and in particular that of sub-section (6), is exceptional, and the drafting is poor and convoluted. On any view, it does have (together with s686) the effect of subjecting a receipt, which would otherwise escape any charge to tax at the Schedule F trust rate, to such a charge, ie so that the receipt is treated as income for the purposes of s686. Indeed, I regard it as little short of essential to the Trustees’ case that that is so. If s249(6) did not apply to bonus shares in such circumstances, on the grounds that they were chargeable to tax at the Schedule F trust rate pursuant to s686 in any event, then, on the Trustees’ argument, s249(6) would be a dead letter. The notion that s249(6), with all its complicated provisions, merely serves to confer an irrecoverable tax credit at the Schedule F ordinary rate is extremely unattractive.[42]The broad point relied on by the Revenue is the unbalanced taxation consequence of the Trustees’ construction of s249(6)(b). This argument involves appreciating the inter-relationship of the Schedule F tax treatment of bonus shares in a case such as this, and the potential capital gains tax (“CGT”) liability on the sale of such bonus shares. Section 142 of the Taxation of Chargeable Gains Act 1992 (“the 1992 Act”) provides as follows: “(1) This section applies where any share capital to which s249 of the Taxes Act applies is issued as mentioned in sub-section (4), (5) or (6) of that section in respect of shares in the company held by any person … (3) The person who acquires the share capital by means of the issue shall … be treated for the purposes of section 38(1)(a) as having acquired that asset for a consideration equal to the appropriate amount in cash ….” …[43]As I have mentioned, this last expression is defined in s251, and, in a case such as this, it is a reference to the market value of the bonus shares at the date of issue. If the contention advanced on behalf of the Trustees is correct, their taxation treatment is remarkably generous. They pay no Schedule F ordinary rate tax on the issue of the Bonus Shares, because their liability for tax at that rate is only notional; they have no liability for tax at the Schedule F trust rate ex hypothesi; and, if (as happened in this case), they sell the Bonus Shares as soon as they are issued, they are not liable for any CGT. And, if they retain the Bonus Shares, the CGT liability when they sell will be calculated by reference to the market value at the date of issue.[44]This argument can be taken a little further. In the case of an individual, or a beneficiary under a trust, who is entitled to receive the bonus shares in question, there is a liability to charge on the value of the shares at a higher rate than the notional liability at the lower, 10% rate, by virtue of ss249(4) and s1(2). In the case of discretionary or accumulation trustees, who receive such shares as income in trust law, there is a liability to higher, Schedule F trust, rate tax than the notional liability at the 10%, Schedule F ordinary, rate, by virtue of ss249(6) and 686. At first sight, there is, as Mr Venables suggests, an anomaly in the case of trustees of a settlement, which is not an accumulation or discretionary trust, who receive such bonus shares. They are not within s249 at all.[45]However, as Mr Henderson points out, although there is a difference in the tax treatment of the bonus shares received by such trustees in lieu of a dividend, they do not escape liability for tax. They merely have their liability deferred to the time when they sell their bonus shares, at which point they become liable for CGT. That is because they cannot take advantage of s142 of the 1992 Act, as s249 will not have applied at all. They will be treated as having received the bonus shares for nothing, so that, at least in the normal case, they will have to pay CGT on the whole of the consideration they receive for the bonus shares, if and when they come to sell them.[46]Nonetheless, Mr Venables’s point does appear to me to have some force. It is surprising that one class of taxpayer, namely trustees of a settlement which is neither an accumulation nor a discretionary trust, have a different tax treatment from individuals, beneficiaries with an interest in possession, and trustees of an accumulation or discretionary trust (at least where the bonus shares are income in their hands). However, the force of the point is fairly limited. The fact that one class is treated differently from three other classes does not do much to justify a conclusion that a fifth class should not merely be treated differently from, but egregiously more generously than, any of the other four classes. Having said that, the mere fact that a particular construction produces a surprising conclusion, or results in the view that there is a casus omissus, is plainly not enough to justify an alternative, otherwise impermissible, construction.

The narrower factors

[47]I turn to the narrower, more textual arguments which have been raised. Logically, the first point focuses on s249(6)(b) itself. Its closing words, “and as if it had been chargeable to income tax at the Schedule F ordinary rate”, at least on the face of it, require some explaining. They appear to be surplusage, as their effect is apparently covered by s249(4)(a) - (c), which are incorporated in s249(6) through s249(6)(c). Mr Venables suggests that the closing words tend to support the Trustees’ case, as they emphasise that the Bonus Shares give rise to tax at the Schedule F ordinary rate, which suggests that there was no intention to charge them to tax at the Schedule F trust rate. Although initially attractive, I consider that that point proves too much. Where the bonus shares are income receipts in the hands of the discretionary or accumulation settlement trustees, and s249(6)(b) applies, there is, as Mr Venables accepts, a charge to tax at the Schedule F trust rate pursuant to s686.[48]I am more impressed with Mr Henderson’s explanation of the inclusion of the closing words of s249(6)(b). He suggests that they are included in order to make it clear that s686(1) is thereby engaged. He contends that the closing words ensure that the bonus shares are “chargeable to income tax at [the Schedule F trust] rate”, “instead of … at … the Schedule F ordinary rate” to quote from s686(1). This explanation derives a little support from the similarity of wording in the closing part of s249(6)(b) and the just quoted wording of s686(1). If the explanation is a good one (as I consider that it is) it assists the Revenue’s case, as it would apply in every case in which s249(6)(b) applies, which would include those cases where, as here, the bonus shares are capital receipts in the hands of the trustees.[49]Secondly, there is s687(3)(b) of the Taxes Act, to which I have not so far referred. The purpose of this section, in summary terms, is to avoid double taxation by giving a credit for any tax paid by discretionary trustees at the rate applicable to trusts or the Schedule F trust rate, when payments are subsequently made out of trust income to the beneficiaries.[50]It is, I think, unnecessary to set out the provisions of the section, save to refer to part of sub-section (3), which contains a large number of paragraphs. So far as relevant, s687(3) is in the following terms:
“The following amounts, so far as not previously allowed, shall be set against the amount assessable (apart from this sub-section) on the trustees …- (a) the amount of any tax on income arising to trustees which (not being income the tax on which falls within paragraphs (a1) to (bc) below), is charged in pursuance of section 686 at the rate applicable to trusts or the Schedule F trust rate; … (b) the amount of tax at a rate equal to the difference between the Schedule F ordinary rate and the Schedule F trust rate on any sum treated under section 249(6) as income of the trustees; …” … …”
[51]Mr Henderson points out that, at least if read literally, s687(3)(b) assumes that tax at “the Schedule F trust rate” will have been paid by the trustees “on any sum treated under s249(6) as income of the trustees”. In other words, once it has been determined that the value of the bonus shares in question should be treated for the purposes of s249(6)(b) as income, as is conceded by the Trustees to be the position here, it appears to be assumed in s687(3)(b) that tax will be chargeable thereon at the Schedule F trust rate. If that is a fair reading of s687(3)(b), it is consistent with the Revenue’s construction, and inconsistent with Trustees’ construction of s249(6)(b). That is because, on the Revenue’s case, it is sufficient for the shares to be deemed to be income under s249(6)(b) for their receipt to be chargeable to tax at the Schedule F trust rate pursuant to s686, whereas, on the Trustees’ case, there is the additional requirement that the bonus shares must, as a matter of reality, be treated as an income receipt in the hands of the trustees under trust law.[52]While, I think, accepting that that point has some force, Mr Venables contends that, to read s687(3)(b) as applying not to all cases which fall within s249(6), but only to those cases where there is an actual liability to tax at the Schedule F trust rate, does not involve doing much violence to the words, and such a reading is in any event supported by the bracketed words in s687(3)(a). I accept that reading s687(3)(b) as applying only to cases where tax at the Schedule F trust rate was actually chargeable would not involve an impossible strain on the language used, but it does represent a significant departure from the natural meaning of the provision. I do not consider that s687(3)(a) assists the Trustees: it appears to me to be neutral in its effect.[53]Thirdly, Mr Henderson also relies on the fact that s686(5A)(e) extends the expression “Schedule F type income” to “income treated as arising … under s249(6)(b)”. I accept that this confirms that the Bonus Shares would be treated as Schedule F type income for the purpose of s686(1AA)(a). However, I do not consider that s686 is thereby intended to charge to tax at the Schedule F trust rate all receipts which are deemed to be “Schedule F type income” under s249(6). As I see it, s686(1) is the charging provision, and it charges to tax “income arising to trustees [which] is income to which this section applies”, and such income is defined in s686(2), and that brings one straight back to the issue at hand. What s686(1AA), which is where the concept of “Schedule F type income” comes into play, is ultimately concerned with, is the applicable rate of tax, and not with the charge to the tax. This is reinforced by the words “so much of” in s686(1AA)(a). Accordingly, I do not think that s686(5A)(e) is of any real assistance.

Conclusion

[54]Bearing in mind all these factors, I have reached the conclusion that the Revenue’s construction is to be preferred. I accept that both the natural reading of the section, and the presumption which normally applies when construing the Taxes Act, both suggest that the word “income” at the beginning of s249(6)(b) should be given the meaning which it normally has in the Taxes Act. However, not least because it would involve giving the word the same meaning which it bears in one paragraph of s686, a section specifically and relevantly referred to in s249(6), I consider that it would be permissible to read it as meaning income under trust law, provided that there is a sufficiently strong body of permissible material to justify such a reading.[55]In would be wrong to pretend that there are no reasons for supporting the attribution of the natural and prima facie meaning of the words. There is the presumption that a person should not be liable for tax unless it is tolerably clear that the legislature intended to hold him so liable, and the existence of a number of other provisions in the Taxes Act (and in associated legislation) which suggest that, where the legislature intends to charge deemed income to tax at the Schedule F trust rate, it does so in clear terms. However, for the reasons I have given, those arguments do not appear to me to be of great weight.[56]On the other hand, it appears to me that the three arguments which can be relied on by the Revenue, particularly when taken together, are of much greater weight. The result of the Trustees’ construction of s249(6)(b) appears to me to produce an anomalous result in relation to the taxation of bonus shares to which s249 applies, where they are issued to trustees of an accumulation or discretionary settlement, and where the shares are capital receipts in their hands. Further, I consider that the Revenue’s construction, unlike that of the Trustees, does explain the closing words of s249(6)(b), and is consistent with the way in which s687(3)(b) is expressed.[57]Finally, it is right briefly to refer to the Special Commissioners’ reasoning. While I agree with their conclusion, it appears to me that the reasoning which got them to that conclusion was rather different from the reasoning which got me there. They appear to have placed substantial weight on the statutory predecessors of ss249, 686 and 687, namely s34 of the Finance (No 2) Act 1975 and ss16 and 17 of the Finance Act 1973, respectively. While I accept that, at least in some cases, it is appropriate, and even helpful, to construe current legislation by reference to its statutory predecessor, I do not consider that the earlier statutory provisions throw a significant light on the issue in the present case, over and above such light as is thrown by the current provisions. Indeed, the Special Commissioners appear to have devoted more time to construing these repealed statutory predecessors than they did to construing the present statutory provisions. However, there is one point which I should perhaps mention, namely that the statutory predecessor to s142 of the 1992 Act was, like the statutory predecessor of s249, to be found in the 1975 Act: see paragraph 5 of Schedule 8 to the Finance (No 2) Act 1975.[58]In all these circumstances, I would dismiss this appeal.[59]I agree.

Dame Elizabeth Butler-Sloss, P:

[60]I also agree.

Cited in 5 later judgments