Irving v HM Revenue & Customs [2008] EWCA Civ 6

[2008] EWCA Civ 6

Case No C3/2007/0432

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

[2007] EWHC 147 (Ch)

ON APPEAL FROM THE CHANCERY DIVISION

(Mr Justice Blackburne)

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 25/01/2008

Before

LORD JUSTICE SEDLEY

LORD JUSTICE MAURICE KAY

LORD JUSTICE RIMER

Between

JOHN LESLIE IRVINGAppellant

THE COMMISSIONERS OF HER MAJESTY’S REVENUE AND CUSTOMSRespondent

(Transcript of the Handed Down Judgment of

WordWave International Limited

A Merrill Communications Company

190 Fleet Street, London EC4A 2AG

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Official Shorthand Writers to the Court)

Mr David Goy QC and Mr Michael Sherry (instructed by DMH Stallard) for Appellant

Mr Philip Jones QC (instructed by HMRC’s Solicitor’s Office) for Respondent

Hearing Hearing date : 5 November 2007

Judgment

Lord Justice Rimer :

Introduction

[1]This appeal is by John Leslie Irving. It is against an order of Blackburne J dated 8 February 2007 by which he dismissed Mr Irving’s appeal against a decision of the Special Commissioners (John Walters QC and Howard Nolan) dated 23 March 2006. That decision was one dismissing Mr Irving’s appeal against an amendment to his self-assessment to income tax for the year 1996/97 increasing his Schedule E income by £145,051.

[2]The appeal raises a question of law arising under section 595(1) of the Income and Corporation Taxes Act 1988 (“ICTA”). That subsection raises a charge to tax where an employer “pays a sum” into an unapproved retirement benefit scheme with a view to the provision of relevant benefits for an employee. Any sum so paid, if not otherwise chargeable to income tax as the income of the employee, is deemed to be his income for the year of payment and assessable to tax under Schedule E. The question is whether that provision has a like taxing effect in relation to a transfer by the employer to the scheme of assets other than a sum of cash. In this case, the employer made a transfer of shares. Was that the “payment of a sum” for the purposes of section 595(1)? The Special Commissioners and Blackburne J held that it was. Mr Irving’s contention, advanced by Mr David Goy QC and Mr Michael Sherry, is that they were wrong. The Commissioners of HM Revenue and Customs, represented by Mr Philip Jones QC, have contended that they were right.

[3]Section 595 was repealed by the Income Tax (Earnings and Pensions) Act 2003 with effect from 2003/04, although the language of the replacement provision (section 386) gave rise to the like point as arises under section 595(1). Section 386 has itself since been repealed, the Finance Act 2004 introducing a new regime as from 6 April 2006. The point the appeal raises is not material to that regime, but it remains of importance not just to the resolution of the dispute between Mr Irving and the Commissioners but also to that of more than fifty other cases raising a like issue. The appeal is a second one for which Arden LJ gave permission on the ground that it has a real prospect of success and raises an important question of principle.

The facts

[4]These can be stated shortly. Mr Irving’s employer, Lonsdale Business Forms Limited (now Lonsdale Print Solutions Limited), of which Mr Irving was and is a director, established an unapproved retirement benefits scheme on 16 September 1996. Mr Irving was admitted to membership of it on the same day. He was also a trustee and administrator of the scheme. Before that date, Lonsdale had paid £200,000 in cash to Murray Johnston Personal Asset Management Limited, which Murray applied in the acquisition of shares in various companies on behalf of Lonsdale. On 24 September 1996 Lonsdale’s directors recommended a contribution into the scheme of £5,000 cash plus the transfer of certain shares so acquired. The shares were in 16 quoted companies and were valued at some £145,000. On 25 September 1996 a shareholders’ meeting resolved to make the recommended contribution, which was then made on the same day.

[5]Mr Irving disclosed the transfer of shares in his tax return for the year 1996/97, but on the basis that it did not create a charge to tax. The Revenue disagreed and on 7 January 2003 they amended his self-assessment, increasing his Schedule E income by £145,051 to take account of the value of the shares transferred. The issue is whether they were entitled to do so.

The legislation

[6]Part XIV of ICTA is headed “Pension Schemes, Social Security Benefits, Life Annuities etc”. Chapter I is headed “Retirement Benefit Schemes” and comprises sections 590 to 612. Section 611 defines a “retirement benefits scheme” as meaning “… subject to the provisions of this section, a scheme for the provision of benefits consisting of or including relevant benefits, but does not include any national scheme providing such benefits.” Section 612 defines “relevant benefits” as meaning, so far as material, “… any pension, lump sum, gratuity or other like benefit given to or to be given on retirement or on death ….” Section 590 specifies the conditions which must be satisfied if Revenue approval of a retirement benefits scheme is to be obtained. Section 591 enables the Revenue to give discretionary approval to a scheme that does not satisfy all of them. Section 592 (headed “Exempt approved schemes” and in a section of Chapter I sub-headed “Tax Reliefs”) explains the circumstances in which (inter alia) a deduction as an expense from income chargeable to tax will or may be available in respect of contributions to an approved scheme. A phrase in section 592(4) - “any sum paid” - is similar to the key phrase in section 595 – “pays a sum” - and it played some part in the argument and in the reasoning of both the Special Commissioners and Blackburne J. The relevant provisions of section 592 are, so far as material:

“(4) Any sum paid by an employer by way of contribution under the scheme shall, for the purposes of Case I or II of Schedule D and of sections 75 and 76, be allowed to be deducted as an expense, or expense of management, incurred in the chargeable period in which the sum is paid … (5) The amount of an employer’s contributions which may be deducted under subsection (4) above shall not exceed the amount contributed by him under the scheme in respect of employees in a trade or undertaking in respect of the profits of which the employer is assessable to tax (that is to say, to United Kingdom income tax or corporation tax). (6) A sum not paid by way of ordinary annual contribution shall for the purposes of subsection (4) above be treated, as the Board may direct, either as an expense incurred in the chargeable period in which the sum is paid, or as an expense to be spread over such period of years as the Board think proper. …”

[7]Section 594 deals with “relevant statutory schemes”, in particular with the allowance as a deductible expense of “any contribution paid” to them by an officer or employee. Sections 595 to 603 are in a part of Chapter I headed “Charge to tax in certain cases”. Section 595, the key section for present purposes, is headed “Charge to tax in respect of certain sums paid by employer etc”. It provides (ignoring provisions repealed by the Finance Act 1989): “(1) Subject to the provisions of this Chapter, where, pursuant to a retirement benefits scheme, the employer in any year of assessment pays a sum with a view to the provision of any relevant benefits for any employee of that employer, then (whether or not the accrual of the benefits is dependent on any contingency) –(a) the sum paid, if not otherwise chargeable to income tax as income of the employee, shall be deemed for all purposes of the Income Tax Acts to be income of that employee for that year of assessment and assessable to tax under Schedule E; and

(b) where the payment is made under such an insurance or contract as is mentioned in section 266, relief, if not otherwise allowable, shall be given to that employee under that section in respect of the payment to the extent, if any, to which such relief would have been allowable to him if the payment had been made by him and the insurance or contract under which the payment is made had been made with him. … (4) Where the employer pays any sum as mentioned in subsection (1) above in relation to more than one employee, the sum so paid shall, for the purpose of that subsection, be apportioned among those employees by reference to the separate sums which would have had to be paid to secure the separate benefits to be provided for them respectively, and the part of the sum apportioned to each of them shall be deemed for that purpose to have been paid separately in relation to that one of them. (5) Any reference in this section to the provision for an employee of relevant benefits includes a reference to the provision of benefits payable to that employee’s wife or widow, children, dependants or personal representatives.” (a) the sum paid, if not otherwise chargeable to income tax as income of the employee, shall be deemed for all purposes of the Income Tax Acts to be income of that employee for that year of assessment and assessable to tax under Schedule E; and (b) where the payment is made under such an insurance or contract as is mentioned in section 266, relief, if not otherwise allowable, shall be given to that employee under that section in respect of the payment to the extent, if any, to which such relief would have been allowable to him if the payment had been made by him and the insurance or contract under which the payment is made had been made with him. …

[8]Section 596 (headed “Exceptions from section 595”) excludes approved schemes, relevant statutory schemes and certain government schemes from the operation of section 595(1) (see section 596(1)(a), (b) and (c)). Section 595 therefore applies exclusively to unapproved schemes. Section 596(2) and (3) are relevant to the argument and provide: “(2) Section 595(1) shall not apply for any year of assessment –(a) where the employee performs the duties of his employment in such circumstances that no tax is chargeable under Case I or II of Schedule E in respect of the emoluments of his employment (or would be so chargeable were there such emoluments), or

(b) where the emoluments from the employment are foreign emoluments within the meaning of section 192 and the Board are satisfied, on a claim made by the employee, that the retirement benefits scheme in question corresponds to such a scheme as is mentioned in paragraph (a), (b) or (c) of subsection (1) above. (3) Where, in respect of the provision for an employee of any relevant benefits – (a) a sum has been deemed to be income of his by virtue … of subsection (1) of section 595, and (b) subsequently, the employee proves to the satisfaction of the Board that – (i) no payment in respect of, or in substitution for, the benefits has been made, and (ii) some event has occurred by reason of which no such payment will be made, and makes application for relief under this subsection within six years from the time when that event occurred, the Board shall give relief in respect of tax on that sum by repayment or otherwise as may be appropriate; and if the employee satisfies the Board as mentioned above in relation to some particular part, but not the whole, of the benefits, the Board may give such relief as may seem to them just and reasonable.” (a) where the employee performs the duties of his employment in such circumstances that no tax is chargeable under Case I or II of Schedule E in respect of the emoluments of his employment (or would be so chargeable were there such emoluments), or (b) where the emoluments from the employment are foreign emoluments within the meaning of section 192 and the Board are satisfied, on a claim made by the employee, that the retirement benefits scheme in question corresponds to such a scheme as is mentioned in paragraph (a), (b) or (c) of subsection (1) above. (a) a sum has been deemed to be income of his by virtue … of subsection (1) of section 595, and (b) subsequently, the employee proves to the satisfaction of the Board that – (i) no payment in respect of, or in substitution for, the benefits has been made, and (ii) some event has occurred by reason of which no such payment will be made, and makes application for relief under this subsection within six years from the time when that event occurred,

[9]Section 596A (headed “Charges to tax: benefits under non-approved schemes”) is directly applicable to unapproved schemes and is also central to the argument. It provides, so far as material: “(1) Where in any year of assessment a person receives a benefit provided under a retirement benefits scheme which is not of a description mentioned in section 596(1)(a), (b) or (c), tax shall be charged in accordance with the provisions of this section. (2) Where the benefit is received by an individual, he shall be charged to tax under Schedule E for that year. (3) Where the benefit is received by a person other than an individual, the administrator of the scheme shall be charged to tax under Case VI of Schedule D for that year. (4) Subject to subsection (9) below the amount to be charged to tax is –(a) in the case of a cash benefit, the amount received, and

(b) in the case of a benefit in kind, an amount equal to whatever is the cash equivalent of the benefit. (5) In the case of the charge under Case VI of Schedule D, the rate of tax is 40% or such other rate (whether higher or lower) as may for the time being be specified by the Treasury by order. (6) Tax shall not be charged under this section in the case of – (a) any pension or annuity which is chargeable to tax under Schedule E by virtue of section 19(1); or (b) any pension or other benefit chargeable to tax under section 58. (7) But where the amount chargeable to tax as mentioned in subsection (6)(a) above is less than the amount which would be chargeable to tax under this section – (a) subsection (6)(a) above shall not apply, and (b) the amount chargeable to tax under this section shall be reduced by the amount chargeable to tax by virtue of section 19(1). (8) Subject to subsection (9) below, tax shall not be charged under this section (or section 19(1) or 148) in the case of a lump sum where – (a) the employer has paid any sum or sums with a view to the provision of any relevant benefits under a retirement benefits scheme; (b) an employee has been assessed to tax in respect of the sum or sums by virtue of section 595(1); and

(c) the lump sum is provided under the scheme to the employee, any person falling within section 595(5) in relation to the employer or any other individual designated by the employee. (9) Where any of the income or gains accruing to the scheme under which the lump sum is provided is not brought into charge to tax, tax shall be charged under this section on the amount of the lump sum received less any deduction applicable under subsection (10) or (11) below. (10) Subject to subsection (11) below, the deduction applicable is the aggregate of – (a) any sum or sums in respect of which the employee has been assessed as mentioned in subsection (8)(b) above, and (b) any sum or sums paid by the employee, which in either case were paid by way of contribution to the provision of the lump sum. …” (a) in the case of a cash benefit, the amount received, and (b) in the case of a benefit in kind, an amount equal to whatever is the cash equivalent of the benefit. (a) any pension or annuity which is chargeable to tax under Schedule E by virtue of section 19(1); or (b) any pension or other benefit chargeable to tax under section 58. (a) subsection (6)(a) above shall not apply, and (b) the amount chargeable to tax under this section shall be reduced by the amount chargeable to tax by virtue of section 19(1). (a) the employer has paid any sum or sums with a view to the provision of any relevant benefits under a retirement benefits scheme; (b) an employee has been assessed to tax in respect of the sum or sums by virtue of section 595(1); and (c) the lump sum is provided under the scheme to the employee, any person falling within section 595(5) in relation to the employer or any other individual designated by the employee.

(b) above, and (b) any sum or sums paid by the employee,

[10]Section 596B (supplementary to section 596A) deals with the determination of the cash equivalent of a benefit in kind of the nature referred to in section 596A(4).

The decisions below of the Special Commissioners and of Blackburne J

[11]The primary argument advanced to the Special Commissioners by Mr Sherry, for Mr Irving, was that the natural meaning of “pays a sum” in section 595(1) is to pay a sum of money and that those words do not embrace contributions in kind, for example a transfer of shares as in this case. Therefore, he submitted, no tax charge under section 595(1) arose. He contrasted the language of section 595(1) with that of section 195 of the Finance Act 2004, which spelt out that “contributions paid” included the transfer of “eligible shares in a company”. He also pointed out that the definition provisions of other sections in Part XIV of ICTA provide that references in the body of the sections to “any payment” include references to “any transfer of assets or other transfer of money’s worth” (for example, sections 599A, “Charge to tax: payments out of surplus funds”; 600, “Charge to tax: unauthorised payments to or for employees; and 601, “Charge to tax: payment to employers”). The argument was that, as section 595(1) includes no like definition, the phrase “pays a sum” should be read as bearing only its natural meaning.

[12]The contrary argument, advanced by Mr Jones for the Commissioners, was that the phrase was capable in the context of including a transfer of assets such as shares; and that to draw the distinction advanced by Mr Irving would be to attribute an illogical statutory purpose to section 595(1), since it could so easily be side-stepped by funding the scheme not with cash, but with non-cash assets acquired with the cash that would otherwise have been paid to it. Mr Jones relied on Barclays Mercantile Business Finance Ltd. v. Mawson

[2005] 1 AC 684

for a recent endorsement by the House of Lords (per Lord Nicholls of Birkenhead delivering the opinion of the committee, at [28]) of the view that “the modern approach to statutory construction is to have regard to the purpose of a particular provision and interpret its language, so far as possible, in a way which best gives effect to that purpose.”

[13]Mr Jones also referred the Special Commissioners to the decision of this court in Lowe (HM Inspector of Taxes) v. Peter Walker (Warrington) and Robert Cain & Sons, Ltd (1935) 20 TC 25, upon which they placed reliance in their decision. The facts were that in 1923 the respondent company settled shares in itself upon trustees to be held as the nucleus of a benefit fund for its employees and those of associated companies. The fund so established was, however, incapable of being approved by the Revenue as a “superannuation fund” within the meaning of section 32 of the Finance Act 1921. The company later wished to establish an approved fund and so in 1928 it exercised a power to revoke the trusts of the 1923 settlement as regards the greater part of the assets held by the trustees. The company then transferred those assets to the trustees of a new fund, which was approved by the Revenue as a superannuation fund under section 32. The assets so transferred were in the nature of investments with a market value at the time of transfer of £78,303. The issue was whether (as the company contended) the transfer of those assets(i) constituted “any sum paid by an employer … by way of contribution towards a superannuation fund” within the meaning of section 32, and

(ii) was therefore a contribution in respect of which a deduction should be allowed in computing the company’s liability to income tax under Case I of Schedule D. The language quoted from section 32 mirrors the like language to be found in section 592(4) of ICTA (earlier quoted), of which section 32 was the predecessor. The Revenue argued to the contrary effect on both points.

[14]The Commissioners found in favour of the company. The Revenue appealed to the High Court and was represented on the appeal by The Solicitor-General (Sir Donald Somervell KC), Mr J.H. Stamp and Mr Reginald P. Hills. The company was represented by Mr A.M. Latter QC and Mr F. Heyworth Talbot. The appeal was heard by Finlay J, who (at page 35) identified the critical question as to whether “this sum of £78,303 is a sum paid by an employer by way of contribution towards a superannuation fund.” His judgment shows (at page 37) that he was aware that that sum represented the value of non-cash assets that had been transferred to the fund, comprising (in part) investments purchased with the proceeds of sale of the shares originally settled in 1923 and (in part) investments purchased with cash contributions that had since been made by the company. It is unnecessary to recite the precise issue argued before Finlay J, which is irrelevant for present purposes. Suffice it to say that he resolved it in favour of the company, dismissed the Revenue’s appeal and upheld the company’s claim that the transferred assets represented a “sum paid” by the employer by way of a contribution to the fund, which was an allowable deduction for income tax purposes. The Revenue appealed to this court (Lord Wright MR, Romer LJ and Greene LJ), with both sides being represented by the same counsel. The appeal was dismissed.

[15]The outcome of the litigation was, therefore, that the transfer of assets in specie to the scheme was regarded as a “sum paid” within the meaning of section 32 and thus allowable as a deduction for income tax purposes. It is important to recognise, however, that that particular point – that is, whether a transfer of non-cash assets was a “sum paid” within section 32 -was not itself the subject of argument or decision. It was apparently simply assumed by all counsel and judges that such a transfer was such a sum. Mr Jones of course recognised that the Peter Walker case was not authority for the purposes of the current issue: it reflected at most a supporting assumption in relation to a different statutory provision. But his submission was that the assumption reflected a correct interpretation of what became section 592(4) and ought to be regarded as providing compelling guidance to the interpretation of the like words in section 595(1). Put the other way, if Mr Irving is correct in his argument as to the meaning of “pays a sum” in section 595(1), it might be thought that the words “sum paid” in section 592(4) ought to be construed in a like narrow way. Yet that construction did not apparently occur to any of the five counsel and four judges in the Peter Walker case.

[16]The conclusion of the Special Commissioners was to prefer Mr Jones’s submission. They recognised the force of Mr Sherry’s submission as to the natural meaning of the words “pays a sum” in section 595(1), but did not regard that as obviously the only meaning. They regarded the clear purpose of section 595(1) as being to impose an income tax charge on contributions to unapproved schemes and could see no reason why that purpose should be interpreted as confining such a charge to contributions in money. In interpreting section 595(1), they derived no assistance from the Finance Act 2004, and as Mr Goy placed no reliance before us on that Act I will say no more about their reasons in this respect. They regarded the assumption in the Peter Walker case as supporting the Commissioners’ argument that the like words in section 595(1) had the wider meaning for which they contended. They did not accept that the express provisions of other sections in Part XIV extending references to “payment” to include any transfers of assets provided a conclusive indication that the absence of a like provision in section 595(1) required the phrase “pays a sum” to be construed more narrowly.

[17]On the appeal to Blackburne J, Mr Goy advanced more elaborate arguments than those addressed to the Special Commissioners, certain of which were repeated before us and I will come to them. Blackburne J dismissed the appeal. Like the Special Commissioners, he accepted that the phrase “pays a sum” refers most usually to a payment in cash. But he recorded that Mr Goy accepted that the context in which it is used may justify a wider interpretation. He was not convinced by the Special Commissioners’ approach to the perception of the legislative purpose underlying section 595(1). His opinion was, however, that whilst Chapter 1 was probably drafted on the basis that contributions into and benefits out of a scheme would normally be in monetary form, the particular words used could not be taken as an indication by Parliament that they could not extend to non-cash contributions; and, like the Special Commissioners, he did not regard the absence of any provision in section 595(1) equivalent to those referred to in sections 599A, 600 and 601 as disposing conclusively of the Commissioners’ argument. He was impressed for two reasons in particular that the Commissioners’ submissions were to be preferred. First, that if the contrary argument were right, it would mean that, as the tax could be so easily avoided, it was in effect a voluntary tax, an argument that he did not regard as answered by the point that, were the tax to be so avoided, there would anyway be a charge to tax under section 596A on all benefits coming out of the scheme, so that the issue was merely one of timing (a point to which I shall revert). Secondly, he was impressed by Mr Goy’s acceptance, consistently with the assumption in the Peter Walker case, that any “sum paid” in section 592(4) extended to non-cash assets, an acceptance with which he agreed; and he considered it odd that, within three sections within the same Chapter, Parliament could have intended to attach a different meaning to the like phrase.

The appeal

[18]In explaining the practical consequences of Mr Irving’s argument, Mr Goy said there would be no charge to tax on Mr Irving under section 595(1) upon the transfer of the non-cash assets to the scheme, and nor would the employer be entitled to a deduction of the value of those assets in the computation of its own liability to corporation tax. There would, however, be a charge to tax on Mr Irving (either under section 596A or under other provisions of ICTA) in respect of all benefits (both cash and non-cash) later paid or transferred to him out of the scheme.

[19]If, however, the Commissioners were right, there would be a charge to tax on Mr Irving under section 595(1) upon the transfer of the assets into the scheme and also a right on the part of the employer to deduct the value of the assets transferred in its own tax computation; and there would also be a second charge to tax upon Mr Irving in respect of all benefits (both cash and non-cash) later paid or transferred to him out of the scheme, with the sole exception of any benefit in the nature of a “lump sum”, in relation to which Mr Irving would enjoy an exemption from tax under section 596A(8). The appeal is of course only concerned with whether or not there is a tax charge on Mr Irving in respect of the value of the shares transferred to the scheme.

[20]Mr Goy reminded us that the exercise of statutory interpretation upon which the court is engaged required it to ascertain the intention of Parliament by reference to an objective assessment of the statutory language (Regina v. Secretary of State for the Environment, Transport and the Regions, Ex parte Spath Holme Ltd

[2001] 2 AC 349

, at 396, per Lord Nicholls of Birkenhead). He also pointed out, as Lord Wilberforce explained in W.T. Ramsay Ltd v. Inland Revenue Commissioners

[1982] AC 300

, at 323, that a subject is only to be taxed “upon clear words”, although in the same paragraph Lord Wilberforce also explained that “[w]hat are ‘clear words’ is to be ascertained upon normal principles: these do not confine the courts to literal interpretation.” Mr Goy’s point was that if we were in any doubt as to the width of the relevant words in section 595(1), we should interpret them in a sense favourable to the taxpayer. He emphasised that the charge to tax admittedly imposed by section 595(1) (on the payment of a cash sum into the scheme) was an onerous one as regards the employee, since at the time of payment he receives no cash or other asset out of which to meet the tax charged upon him. That, he said, was relevant to whether section 595(1) should be interpreted in the wider sense for which the Commissioners contended. It can perhaps be countered that the taxpayer is no better off under the narrower construction than the wider one: in neither case is he provided with the means with which to pay the tax.

[21]Against that introductory background, Mr Goy’s first and principal point, as below, was that the natural sense of the phrase “pays a sum” in section 595(1) is that it most obviously refers to a payment of money, and to that alone, and not to a transfer of assets. He accepted that “payment” by itself can refer to a payment of cash or kind, and that the word “sum” can mean an “amount”. But when the two words are found together, as here, he said they can only refer to a payment of a sum of money. Mr Goy conceded that that was not necessarily the onlysense of the phrase “pays a sum” in any context in which it may be used, but he said that if a wider sense is to be attached to its use in section 595(1), there must be something in the context to justify it, which he said there is not. He accepted that any charge to tax under section 595(1) arises by virtue of a deemed charge to tax upon the employee under Schedule E, and that the word “emoluments” as used in section 131 of ICTA encompasses benefits in kind convertible into money. But he said that it cannot easily be inferred from section 595(1) that there was any intention to replicate in it the general basis of the charge under Schedule E. Had that been the intention, Parliament would have used more appropriate language. He said that if the wider sense of the relevant phrase was intended, then one might expect to find some valuation provisions in section 595, which there are not, in contrast with the position under sections 596A and 596B. There might be no valuation difficulty in, say, the case of a transfer of quoted shares into the scheme; but there would or might be a difficulty in the case, say, of the transfer of a minority shareholding in a unquoted private company. He also said that section 595 cannot impose a charge to tax in all cases in which value goes into a scheme. He instanced a case in which an employer puts value into the scheme by making an interest free loan to it, repayable on demand. He said that such a loan would not be a “payment of a sum”, the benefit to the scheme being the employer’s forbearance in demanding repayment. He said this example pointed away from there being any code in section 595 applying to all cases of value going into a scheme.

[22]Mr Goy took us into the archaeology of section 595(1). It started life as section 19(1) of the Finance Act 1947, which included the same phrase “pays a sum”. Section 19 applied, however, only to payments to schemes when made by corporate bodies and unincorporated societies (see, as to the latter, section 23(6)). In this respect it is to be compared with the wider scope of section 595(1), which applies to payments by employers of whatever nature, a feature which Mr Goy relied upon as showing that the relevant legislation had included some odd limitations. Section 19(2), which has no equivalent in Part XIV of ICTA, is of some interest. It provided: “(2) Subject to the exemptions and provisions contained in the next succeeding section, where –(a) an agreement is in force between a body corporate and a director or employee thereof for the provision for him of any future retirement or other benefits afforded by a retirement benefits scheme, or a person is serving as a director or employee of a body corporate in connection wherewith there is a retirement benefits scheme relating to persons of the class within which he falls under which any such benefits will be provided for him; and

(b) the body corporate does not, or does not fully, secure the provision of the benefits by the payment of such sums as are mentioned in the preceding subsection; and

(c) the circumstances in which the benefits are to accrue are not such as will render the benefits assessable to income tax under Schedule E as emoluments of his office as a director or of his employment, then (whether or not the accrual of the benefits is dependent on any contingency), in each year of assessment in which the agreement is in force or the director or employee is serving as aforesaid, up to and including the year of assessment in which the benefits accrue or there ceases to be any possibility of the accrual thereof, a sum equal to the annual sum which the body corporate would have had to pay in that year under a contract with a third person which secured the provision by that third person of those benefits or, as the case may be, of those benefits so far as not already secured by the payment of such sums as are mentioned in the preceding subsection, shall be deemed for all the purposes of the Income Tax Acts to be income of the director or employee for that year and assessable to income tax under Schedule E.” (a) an agreement is in force between a body corporate and a director or employee thereof for the provision for him of any future retirement or other benefits afforded by a retirement benefits scheme, or a person is serving as a director or employee of a body corporate in connection wherewith there is a retirement benefits scheme relating to persons of the class within which he falls under which any such benefits will be provided for him; and (b) the body corporate does not, or does not fully, secure the provision of the benefits by the payment of such sums as are mentioned in the preceding subsection; and (c) the circumstances in which the benefits are to accrue are not such as will render the benefits assessable to income tax under Schedule E as emoluments of his office as a director or of his employment,

[23]Mr Goy said that section 19(2) showed that, in the legislation originally in force, and if his argument as to the sense of “pays a sum” was correct, the fact that no such sum was paid under section 19(1) did not mean that that was the end of the matter as regards taxing the employee. That was because a scheme that was not funded (or fully funded) by such payments was an unfunded scheme for the purposes of section 19(2), with the consequence that under it the employee could face the prospect of an annual charge to tax under Schedule E on a notional sum equal to the annual sum that the employer would have to pay to a third party in order fully to secure the employee’s benefits. The same result would presumably follow, on Mr Goy’s argument, if the employer had fully secured the benefits by making transfers of shares or other non-cash assets to the scheme. A scheme so funded would, he would say, still be an unfunded one for the purposes of section 19(2), since the sense of section 19 is that a scheme is only regarded as fully funded if it has been so funded by cash payments by the employer.

[24]Reverting to the legislation current in 1996, major changes to the legislation occurred as a result of the Finance Act 1989, when two things happened:(i) section 19(2) was removed, and

(ii) sections 596, 596A and 596B were introduced. The general effect (subject to exceptions) of section 596A (quoted earlier) is to impose a charge to tax on the employee when a benefit is received under an unapproved scheme: see section 596A(1) and (4), which latter refers both to cash benefits and benefits in kind. Section 596B provides for the determination of the value of benefits in kind.

[25]Mr Goy submitted that the way section 596A works is as follows. Assume that cash is paid into the scheme. There will then be a tax charge on the employee under section 595(1). If a benefit is later paid out of the scheme to the employee, there will prima facie be a charge to tax upon him under section 596A(1) and (4). There will, however, be no such charge if the benefit is in the nature of a pension, annuity or other benefit referred to in section 596A(6), being benefits separately taxed under other provisions of ICTA (subject to the qualification in section 596A(7)). These provisions apart, if a lump sum is paid out by way of a benefit, it will be taxed under section 596A, unless only it is exempted by section 596A(8). That subsection will exempt it in a case to which its three conditions apply, which include the prior assessment of the employee to tax under section 595(1) on “the sum or sums” paid by the employer to the scheme with a view to provisions of relevant benefits under it. In this case, Mr Goy’s submission was that, since (as he claims) the share transfers to the scheme would not have amounted to the payment of a “sum” giving rising to a tax charge under section 595(1), Mr Irving would notenjoy any section 596A(8) exemption in respect of the payment of any lump sum benefit that may be made to him. As regards other benefits paid out – apart from those referred to in section 596A(6) - they will all be taxable under section 596A(1) and (4), and can enjoy no exemption under section 596A(8).

[26]Mr Goy submitted that the franking effect of section 596A(8) was therefore only a limited one. He said the point of section 596A was to make up the perceived shortcomings of section 595(1) as regards the collection of tax: it is a section that recognises that value may have gone into the scheme without a tax charge under section 595(1) and which therefore seeks to ensure that in any such a case there will be a charge to tax on the benefits later paid out. The exemption from a tax charge on the payment out of a “lump sum” only arises in a case in which tax was earlier charged under section 595(1) on a payment of cash intothe scheme: in this way, a double tax charge is avoided. All that is said to be consistent with the phrase “pays a sum” in section 595(1) bearing only the narrower meaning for which Mr Goy contends.

[27]Mr Goy said that his interpretation of section 595(1) is supported by section 76 of the Finance Act 1989. That is headed “Non-approved retirement benefits schemes” and applies exclusively to unapproved schemes such as the present. It reads, so far as material: “(1) In computing the amount of the profits or gains to be charged under Case I or Case II of Schedule D, no sum shall be deducted in respect of any expenses falling within subsection (2) or (3) below; and no expenses falling within either of those subsections shall be treated for the purposes of section 75 of the Taxes Act 1988 (investment companies) as expenses of management. (2) Subject to subsection (6A) below, expenses fall within this subsection if –(a) they are expenses of providing benefits pursuant to a relevant retirement benefits scheme, and

(b) the benefits are not ones in respect of which a person is on receipt chargeable to income tax. (3) Subject to subsection (6A) below, expenses fall within this subsection if – (a) they are expenses of paying any sum pursuant to a relevant retirement benefits scheme with a view to the provision of any benefits, and (b) the sum is not one which when paid is treated as the income of a person by virtue of section 595(1) of the Taxes Act 1988 (a sum paid with a view to the provision of any relevant benefits for an employee). (a) they are expenses of providing benefits pursuant to a relevant retirement benefits scheme, and (b) the benefits are not ones in respect of which a person is on receipt chargeable to income tax. (a) they are expenses of paying any sum pursuant to a relevant retirement benefits scheme with a view to the provision of any benefits, and (b) the sum is not one which when paid is treated as the income of a person by virtue of section 595(1) of the Taxes Act 1988 (a sum paid with a view to the provision of any relevant benefits for an employee).

[28]Mr Goy said this shows that value can be transferred into a scheme without a charge to tax being incurred under section 595(1) at the time of the transfer. He referred to section 76(3)(b), which in terms accepts that possibility, and provides that such a transfer of value will not be deductible as an expense. He said that makes complete sense: if there is no section 595(1) tax charge, there ought to be no right of deduction. In this particular context, one concerned with the deduction of expenses, he accepted that the references to “sum” in section 76(3) can include a transfer of assets other than cash, and he asserted that it does so in the present case. He said that, in the context of what may or may not be allowed as an expense of any contribution to a scheme, it was irrelevant whether it was cash or kind: that would be determined by accounting principles, which would not distinguish between them. It is this provision that is the source of Mr Goy’s point that, if his argument is right, the employer was not entitled to deduct the value of the transferred shares in computing its corporation tax liability. The logic of the submission was that whilst a transfer of shares into the scheme is not the “payment of a sum” for the purpose of section 595(1), it is the “payment of a sum” for the purpose of section 76(3).

[29]As for section 592(4), Mr Goy pointed out that it did not derive from the Finance Act 1947 but from section 32 of the Finance Act 1921. He again emphasised its different context, namely the allowance as an expense of any contribution to a scheme. He similarly did not question the correctness, in this different context, of the assumption in the Peter Walker case that “any sum paid” could include non-cash assets transferred (an acceptance consistent with his interpretation of section 76(3) of the Finance Act 1989). He recognised that section 592(4) features in the same group of sections as section 595, but emphasised its different origin and context. Section 592 is of course concerned only with approved schemes and has no direct application to the present case.

[30]Finally, Mr Goy also relied on those various provisions in Part XIV whose definitions expressly extend the meaning of “payment” to include transfers of assets and other transfers of money’s worth, and he repeated the same point as was made below.

[31]Mr Jones opened his submissions by disputing that the phrase “pays a sum” naturally means only the payment of a sum of money. He said it can naturally also include, for example, a reference to a transfer of a holding of shares of a known value. At least one difficulty with that is that it involves the use of the word “sum” as meaning a quantity of goods regarded as worth so much, which was ranked fifth and described as obsolete in the Oxford English Dictionary definitions put before us. But Mr Jones also submitted that even if the natural meaning of the phrase was “pays a sum of money”, it was anyway illogical in the context of section 595(1) to interpret it so narrowly. He said it was difficult to conceive why there should be a different tax treatment between, on the one hand, the payment of cash to the scheme and, on the other, the transfer to it of an asset convertible into cash. He declined to accept that the use of the key phrase might simply be an anomaly. He developed his argument by reference to authorities on the meaning of “emoluments” (Tennant v. Smith

[1892] AC 150

and Heaton v. Bell

[1970] AC 728

), although for myself I derived no assistance from them in relation to the interpretation of section 595(1).

[32]Moving to section 19(1) of the Finance Act 1947, the origin of section 595(1) of ICTA, Mr Jones submitted that it was enacted in the wake of section 32 of the Finance Act 1921 and in light of the assumption in Peter Walker that “any sum paid” in section 32 included non-cash assets transferred. He said the starting point was, therefore, that the legislative assumption in section 19(1) must have been that “pays a sum” included the transfer of non-cash assets capable of being turned into cash. He also said that the key distinction drawn by section 19 (and by section 595) was between funded and unfunded schemes. He said that, on Mr Goy’s argument, a scheme which had been fully funded by the transfer by the employer of non-cash assets such as shares would nevertheless not be a funded (or fully funded) scheme for the purposes of section 19(2), because that argument asserts that the respective references in sections 19(1)(a) and 19(2)(b) to “pays a sum” and “payment of such sums” are exclusively to payments of sums of money. It would follow that, in such a case, there would still be an annual charge to tax on the employee on the sum payable each year to a third person under a contract with that person to secure the provision of the relevant benefits. Mr Jones submitted that the oddity of that consequence pointed to the inference that the true sense of “pays a sum” in section 19(1)(a) included the transfer of non-cash assets such as shares.

[33]Moving to section 596A of ICTA, subsections (1) to (5) impose a tax charge on benefits coming out of the scheme, subject to the exception in section 596A(8). Mr Jones submitted that the effect of that provision was to mirror the same distinction underlying section 595, namely that between funded and unfunded schemes. He said the reference in section 596A(8)(a) was again exclusively to funded schemes, whether by cash payments or transfers of non-cash assets; and in such a case, provided that the employer has been assessed to tax on such payments or transfers, a benefit coming out of the scheme in the nature of a “lump sum” will be exempt from a section 596A tax charge. He also said that “lump sum” in that context could include, for example, a one-off benefit in the nature of a distribution of shares. In short, on Mr Jones’s submission, the respective references to “any sum or sums” and to “the sum or sums” in section 596A(8)(a) and (b) embraced both cash and non-cash assets paid or transferred under section 595(1), and bore the same meaning as “a sum” in section 595(1).

[34]In developing that submission, Mr Jones made the point that the contrary argument advanced by Mr Goy rendered section 596A(8) close to unworkable. Take a case in which(i) over several years the scheme is funded in part by cash (subject to a tax charge under section 595(1)) and in part by transfers of shares (not so subject) and

(ii) the trustees then pay out a “lump sum” benefit to the employee. To the extent that the lump sum could be said to be referable to the value of the fund represented by the shares transferred, it can make no sense on Mr Goy’s argument that it should enjoy a tax exemption under section 596A(8), nor did Mr Goy suggest otherwise: logically, only that part of the lump sum referable to the cash element of the injections into the scheme could do so. How in practice could such an apportionment be carried out? More to the point, does the legislation even contemplate that this sort of question could or might arise? On the Commissioners’ case, it does not.

[35]Mr Jones next placed reliance on section 596(3), earlier quoted. He said that a retirement benefits scheme within the meaning of section 611 may, for example, legitimately provide for the transfer to the employee of assets out of the scheme, including shares. Assume that on the payments of cash into the scheme by way of funding, tax was charged on the employee under section 595(1). Assume next that a benefit was provided to him under the scheme by way of the distribution of a holding of shares, being the entire assets of the fund. Turning to section 593(3)(b)(i), if “payment” in that paragraph means the payment of a sum of money, and that alone then it follows that the employee could contend that(i) no “payment” in respect of any benefits had been made to him,

(ii) as the whole fund had been distributed to him, no such “payment” could thereafter ever be made to him, so that

(iii) he is entitled to a repayment of the tax earlier charged under section 595(1). Mr Jones submitted that such an argument would be absurd; and that the answer to it is that, at least in the context of section 596(3), the word “payment” must include the transfer of non-cash assets. If so, he said that provides a pointer to the phrase “pays a sum” in section 595(1) as falling within a context supporting the wider meaning for which the Commissioners contend.

[36]As regards section 76(3) of the Finance Act 1989, Mr Jones said that Mr Goy was in error in regarding this subsection as recognising that, for example, a transfer of shares to a scheme would not give rise to a tax charge under section 595(1). Whilst he accepted that section 76(3) did recognise that there could be payments to the scheme which did not give rise to such a charge, he pointed out that section 596(2)(a) identified at least one case in which a sum paid to the scheme would not do so and that it therefore did not follow that section 76 provided any tacit assumption for Mr Goy’s submission as to the meaning of “pays a sum” in section 595(1). Mr Goy accepted in response the point based on section 596(2)(a), but said that it could not be assumed that Parliament went to the trouble of enacting section 76(3) merely to meet that particular situation. The inference was, he said, that section 76(3) played a wider role, and that the facts of this case provide a further example of its application.

[37]As for the various sections in Part XIV which expressly extended the meaning of “payment” to include all transfers of assets, Mr Jones submitted that they did not automatically condemn the phrase “pays a sum” in section 595 – which has no like expanding definition – to the narrow sense for which Mr Goy contended. It is all a matter of context, and Mr Jones’s submission was that there is a sufficient context in section 595(1) to justify the wider interpretation for which he contended.

Discussion

[38]In common with the Special Commissioners and Blackburne J, I am of the view that – subject always to a consideration of the particular context in which it is used - the more natural meaning of the phrase “pays a sum” is “pays a sum of money”. I was not persuaded by Mr Jones that it can as naturally refer, for example, to the transfer of a holding of shares. If A transfers to B 1,000 shares worth £1,750, he is unlikely to describe himself as having “paid B £1,750”. He would say that he had sold, given or transferred (whatever the appropriate verb) 1,000 shares to B, perhaps (if relevant) adding their precise value (if known) or their approximate value. If he had owed B £1,750 and B had agreed to take the 1,000 shares in satisfaction of the debt then, to the question whether he had paid B the debt, he might legitimately say yes: only a pedant would reply that he had not actually paid the debt, but that B had agreed to accept a transfer of the shares in discharge of it. But that example does not assist the present argument, which is as to the meaning of a familiar English phrase as used in a section in an Act of Parliament. In my view, its more natural meaning is that it means “pays a sum of money”.

[39]That, however, is not the end of the case since, as Mr Jones urged and Mr Goy rightly accepted, the context in which the phrase is used may compel the conclusion that Parliament intended it to have a wider meaning, including the transfer of non-cash assets. That may be because the context is sufficient to show that, to limit the meaning of the phrase to its more natural sense, would lead to an absurdity in the operation of the legislation; or because, viewed objectively, the context of the legislation points towards the conclusion that the wider meaning must have been intended.

[40]As regards context, I consider it relevant to start with section 19(1) of the Finance Act 1947, the origin of section 595(1): neither counsel suggested that anything had happened in the meantime to indicate that, whatever may have been the meaning of “pays a sum” in the former section, there had been a change in its meaning by the time it became enacted as section 595(1) of ICTA. As regards section 19(1), I first of all respectfully disagree with Mr Jones that it is legitimate to infer that, in using in it the phrase “pays a sum”, Parliament must be taken to have had in mind the assumption apparently made by this court in the Peter Walker case that a “sum paid” in section 32 of the Finance Act 1921 embraced not just a monetary sum paid but also the transfer of a holding of shares. That assumption was no more than that and it anyway related to a statutory provision focused on a different point. There might perhaps have been more force in Mr Jones’s point if that point had been the subject of a decision of this court. But it was not.

[41]On the other hand, I consider there is force in Mr Jones’s point that the focus of section 19 is on funded schemes. Mr Goy recognises that, but his position is that the only method of funding recognised by section 19 is by cash payments to the scheme. Any such payments would then give rise to a tax charge on the employee under section 19(1); and, if there are no (or insufficient) such payments, the employee will or may be subjected to annual tax charges under section 19(2). His position is that this will be so even if the scheme has been fully funded by the transfer of assets to the scheme other than cash. Since any such assets will have a monetary value at the moment of transfer and will thus be the equivalent of cash, I find it difficult to discern any reason why Parliament should have intended to limit the type of funding that section 19(1) had in mind to funding by cash payments. No practical reason for the drawing of any such distinction was suggested to us.

[42]I am inclined, therefore, to consider that there probably is a sufficient context in section 19 to require a broader interpretation to be attached to the phrase “pays a sum”, although I would, without more, hesitate so to interpret section 19. When, however, attention is focused on section 595(1) in the context in which it appears in Part XIV, I consider that there are further factors supporting this broader interpretation of “pays a sum”. I accept, first, that the inclusion in sections 599A, 600 and 601 of definitions extending the sense of “payment” to include “any transfer of assets or other transfer of money’s worth” tells against that interpretation, there being no like expanding definition in section 595(1). But whilst that consideration cannot be ignored, I do not regard it as conclusive against the Commissioners’ argument, any more than did the Special Commissioners and Blackburne J. The three provisions referred to are concerned with different considerations and cannot answer the question raised by section 595(1).

[43]Focusing more closely on section 595(1), I have indicated that whilst Mr Goy submitted that an employer’s transfer of shares to a scheme will not be a transaction by which the employer “pays a sum” to the scheme within section 595(1), he accepted that it will nevertheless be a “sum paid” within section 76(3) of the Finance Act 1989, with the consequence that the employer will not be entitled to deduct it as an expense in its own tax computations. Mr Goy made a similar concession in relation to “sum paid” in section 592(4) (in line with this court’s apparent assumption in Peter Walker). He asserted, however, that the consideration of whether or not a payment or transfer is a “sum paid” that the employer is entitled to deduct in his tax computations arises in a context quite different from that which arises in the consideration of whether or not the same payment or transfer is a “sum paid” for the purposes of a charge to tax under section 595(1). Mr Goy did not develop that assertion and I was unconvinced by it. When an employer “pays a sum” under section 595(1), it must also be a “sum paid” for the purposes of section 76(3). Those phrases must have the same meaning, and if (as Mr Goy accepted and asserted) the latter phrase includes a transfer of shares, so must the former. Further support for the same interpretation of section 595(1) is to be found in section 596(3). The example given to us by Mr Jones showed that “payment” in section 596(3)(b)(ii) must bear a wider meaning than “payment of money”. Unless it also embraces the transfer of assets then, in that example, the result would be absurd. That supports the view that at least the word “pays” in section 595(1) may not be being used in any narrow sense.

[44]Then there is section 596A. The rival arguments ultimately came down to whether the references to “sum or sums” in section 596A(8)(a) and (b) mean(i) sums of cash payments alone, or

(ii) sums of money and any other non-cash assets transferred to the scheme with a view to funding it. If Mr Goy is right, and the scheme has been funded over several years by a mixture of cash and shares, then the practical problems which would arise on a bid to tax (or claim exemption in respect of) a “lump sum” paid out to the employee would be considerable. The subsection does not reflect any recognition that such problems could arise. On the Commissioners’ interpretation, at any rate those particular problems would not arise.

[45]These considerations have satisfied me that the overall context in which section 595(1) uses the phrase “pays a sum” points away from the conclusion that it should be construed narrowly as meaning “pays a sum of money”. Mr Goy’s concessions as to the wider meaning of “sum paid” in sections 592(4) and in section 76(3) of the Finance Act 1989, the unlikelihood of “payment” in section 596(3)(b)(ii) bearing the narrow meaning of “payment of a sum of money” and the practical difficulties of Mr Goy’s interpretation for the operation of section 596A(8) have collectively satisfied me that, objectively interpreted in its proper context, the phrase “pays a sum” in section 595(1) includes not just the payment of money but also the transfer of non-cash assets. It appears to me that the suggested distinction between these two funding methods is one that in practice makes no commercial sense and cannot reflect any legislative policy intended to underlie section 595(1).

[46]More generally, whether the scheme is funded by cash payments or by non-cash assets, the funding will in both cases have to be recorded in the books of the employer and of the trustees by reference to a particular monetary figure; and the substance of the matter will be that the scheme will have been funded by assets of that value, whatever their nature. If cash has been paid, it might well the next day be invested in shares; and if shares have been transferred, they might well the next day be converted into cash. The form of the funding can make no rational difference to the taxing policy underlying section 595(1). Further, if the distinction is in fact relevant, there could in some cases be a real uncertainty as to the side of the line on which the method of funding lay. In most cases the contribution proposed to be made by the employer for a particular year will be the subject of prior agreement with the scheme trustees. If, for example, an employer agrees to pay £100,000 and later agrees with the trustees that he will satisfy that commitment by transferring £100,000 worth of shares, will he be regarded as having “paid” £100,000 pursuant to his commitment? Or will he be regarded as having simply made a transfer of non-cash assets? Whatever the answer, why should Parliament be interpreted as having intended such an inquiry to be embarked upon? What possible difference can it or should it be regarded as making?

[47]Mr Goy’s submission was that the distinction was specifically part of Parliament’s intention, which must be regarded as having been to give the employer the easy option of escaping a charge to tax under section 595(1), on the basis that tax will anyway later (perhaps years later) be charged under section 596A, with no possibility of an exemption being available under section 596A(8). In my judgment that involves a misinterpretation of the point of section 596A(8). The scheme of section 596A is that prima facie all benefits coming out of the scheme will be chargeable to tax, and as regards income benefits in the nature of pension or annuity payments there is nothing very surprising about that. The reason the “lump sum” exemption is available is because such a lump sum is regarded as a one-off payment representing the realisation for the benefit of the employee of an earlier payment into the fund (whether by a payment of cash or a transfer of a non-cash asset) whose value was at that stage treated as his income and in respect of which he has already been taxed. To tax him twice on it would seem unfair and section 596A recognises that. That being the scheme of section 596A, I recognise the force of Mr Jones’s submission that the words “lump sum” should be interpreted as including, for example, a one-off distribution of shares to the employee in lieu of their cash equivalent. I would not, however, express any view on that suggested interpretation. It is not a question arising on this appeal; and it is within the power of those administering funded unapproved schemes such as this one to ensure that it does not arise as a question at all.

[48]For these reasons, I consider that the Special Commissioners and Blackburne J came to the correct conclusion. I would dismiss the appeal. Lord Justice Maurice Kay

[49]I agree. Lord Justice Sedley

[50]I too agree with the reasoning and conclusion of Rimer LJ. It is nevertheless lamentable that assets which, properly understood, must include both money and money’s worth are described in the legislation as “a sum” (and their delivery described as payment), leaving taxpayers and their advisers, and eventually this court, to reason their way to a meaning which is not the natural meaning of the words. Not for the first time, we have had to go to Bannockburn by way of Brighton Pier. This is not how legislation should be written.