Lonsdale v HM Inspector of Taxes [2004] EWHC 1811 (Ch)

Case No CH/2003/APP/0887[2004] EWHC 1811 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 23rd July 2004
Before
THE HONOURABLE MR JUSTICE LEWISON
Between
MARION LONSDALEClaimantROSEMARY F. BRAISBY (HMIT)Defendant
The Claimant Marion Lonsdale in person for in personKate Selway (instructed by Solicitor of Inland Revenue) for DefendantHearing Hearing date: 14 th July 2004
Judgment

Introduction

[1]This is an appeal by way of case stated from a decision of the General Commissioners for Income Tax for the division of Cavendish in London given on 18 February 2003. The appellant, Ms Marion Lonsdale, is a practising barrister, and she appeared in person on her own behalf. Ms Kate Selway appeared on behalf of the Revenue.[2]The appeal concerns tax relief on premiums paid for different kinds of retirement pensions. Until 1988 the principal way in which taxpayers saved for their retirement in a tax-efficient way was by making contributions under retirement annuity contracts. In 1988 a new form of investment scheme, called a personal pension scheme, was introduced. This, too, was a tax-efficient way of saving for retirement. Following the introduction of personal pension schemes, no new retirement annuity contracts could be made after 30 June 1988 (or, at least, if one was made it would not attract any tax relief). Many people had, of course, already made retirement annuity contracts before 30 June 1988 which would continue in force until they retired. It would clearly be unfair if their continued contributions under those contracts were to cease to attract tax relief. But often such people subscribed to personal pension schemes as well, under additional arrangements made after 30 June 1988. It would be equally unfair if, as a result of subscribing both to retirement annuity contracts and personal pension schemes, such people could double the tax relief to which they were entitled. So the legislation had to deal with how to treat people who subscribed to both kinds of saving arrangement.[3]The legislation also provided for flexibility in making contributions. This was particularly valuable for the self-employed, whose earnings might fluctuate considerably from year to year. If you did not use up all your available tax relief in one tax year, you could carry it forward to a later year. This ability to carry forward applied to contributions to both kinds of arrangement. Again the legislation had to deal with the position of a person who subscribed to both.[4]How the legislation deals with this is at the heart of this appeal.[5]The case stated raises two questions. One relates to the interpretation of the legislation. The other relates to the particular circumstances of Ms Lonsdale’s case. I shall deal with each in turn.

The legislation

[6]The relevant Act of Parliament is the Income and Corporation Taxes Act 1988 (as amended). I set out the relevant sections. “619 Exemption from tax in respect of qualifying premiums(1) Where in any year of assessment an individual is (or would but for an insufficiency of profits or gains be) chargeable to income tax in respect of relevant earnings from any trade, profession, vocation, office or employment carried on or held by him, and pays a qualifying premium, then— (a) relief from income tax shall be given under this section in respect of that qualifying premium, but only on a claim made for the purpose, and where relief is to be so given, the amount of that premium shall, subject to the provisions of this section, be deducted from or set off against his relevant earnings for the year of assessment in which the premium is paid; and (b) any annuity payable to the same or another individual shall be treated as earned income of the annuitant to the extent to which it is payable in return for any amount on which relief is so given. Paragraph (b) above applies only in relation to the annuitant to whom the annuity is made payable by the terms of the annuity contract under which it is paid.(2) Subject to the provisions of this section and section 626, the amount which may be deducted or set off in any year of assessment (whether in respect of one or more qualifying premiums, and whether or not including premiums in respect of a contract approved under section 621) shall not be more than 17.5 per cent of the individual’s net relevant earnings for that year.”[7]A “qualifying premium” is defined as a premium paid under an approved retirement annuity contract: section 620 (1). The limit of 17.5 per cent of net relevant earnings is increased for people who are 51 or more at the beginning of a year of assessment: section 626. “625 Carry-forward of unused relief under section 619(1) Where— (a) in any year of assessment an individual is (or would but for an insufficiency of profits or gains be) chargeable to income tax in respect of relevant earnings from any trade, profession, vocation, office or employment carried on or held by him, but (b) there is unused relief for that year, that is to say, an amount which would have been deducted from or set off against the individual’s relevant earnings for that year under subsection (1) of section 619 if— (i) he had paid a qualifying premium in that year; or (ii) the qualifying premium or premiums paid by him in that year had been greater; then, subject to section 655(1)(b), relief may be given under that section, up to the amount of the unused relief, in respect of so much of any qualifying premium or premiums paid by the individual in any of the next six years of assessment as exceeds the maximum applying for that year under subsection (2) of that section.(2) Relief by virtue of this section shall be given for an earlier year rather than a later year, the unused relief taken into account in giving relief for any year being deducted from that available for giving relief in subsequent years and unused relief derived from an earlier year being exhausted before unused relief derived from a later year.”[8]Although this is slightly confusing drafting, it is common ground that in section 625 (1) “that section” in the phrase “relief may be given under that section” is a reference to section 619, and not to section 655 (1)(b), which is its immediate grammatical antecedent.[9]The provisions relating to tax relief on contributions to personal pension schemes have been amended by the Finance Act 2000, but those amendments were not in force during the years of assessment with which I am concerned. I therefore quote the relevant sections before they were amended. “639 Members’ contributions(1) A contribution paid by an individual under approved personal pension arrangements made by him shall, subject to the provisions of this Chapter, be deducted from or set off against any relevant earnings of his for the year of assessment in which the payment is made. Except where subsections (2) to (4) below apply, relief under this subsection in respect of a contribution shall be given only on a claim made for the purpose.(2) In such cases and subject to such conditions as the Board may prescribe in regulations, relief under subsection (1) above shall be given in accordance with subsections (3) and (4) below.(3) An individual who is entitled to such relief in respect of a contribution may deduct from the contribution when he pays it, and may retain, an amount equal to income tax at the basic rate on the contribution.”[10]As with retirement annuity contracts, the maximum amount on which tax relief could be claimed was 17.5 per cent of net relevant earnings: section 640 (1). Again, as with retirement annuity contracts, this percentage was increased for people within certain age groups. But unlike retirement annuity contracts, the increased percentages started at the age of 36 rather than 51: section 640 (2). The percentages are also more generous to the taxpayer as the following table of percentages illustrates: Age Retirement annuity Personal pension Up to 36 17.5 17.5 36 to 45 17.5 20 46 to 50 17.5 25 51 to 55 20 30 56 to 60 22.5 35 61 or more 27.5 40[11]As with retirement annuity contracts, the legislation also provided for carry forward relief. “642 Carry-forward of relief(1) Where— (a) for any year of assessment an individual has relevant earnings from any trade, profession, vocation, office or employment carried on or held by him, and (b) there is an amount of unused relief for that year, relief may be given under section 639(1), up to the amount of the unused relief, in respect of so much of any contributions paid by him under approved personal pension arrangements in any of the next six years of assessment as exceeds the maximum applying for that year under section 640.(2) In this section, references to an amount of unused relief for any year are to an amount which could have been deducted from or set off against the individual's relevant earnings for that year under section 639(1) if— (a) the individual had paid contributions under approved personal pension arrangements in that year; or (b) any such contributions paid by him in that year had been greater.(3) Relief by virtue of this section shall be given for an earlier year rather than a later year, the unused relief taken into account in giving relief for any year being deducted from that available for giving relief in subsequent years and unused relief derived from an earlier year being exhausted before unused relief derived from a later year.”[12]Finally I come to the transitional provisions, designed for those people who had both retirement annuity contracts and personal pension schemes. This section, too, has been amended and again I quote it in its unamended form. It is the meaning of this section that is principally in dispute. “655 Transitional provisions (1) Where approved personal pension arrangements are made by an individual who pays qualifying premiums within the meaning of section 620(1)— (a) the amount that may be deducted or set off by virtue of section 639(1) in any year of assessment shall be reduced by the amount of any qualifying premiums which are paid in the year by the individual and in respect of which relief is given for the year under section 619(1)(a); and (b) the relief which, by virtue of section 625, may be given under section 619 by reference to the individual’s unused relief for any year shall be reduced by the amount of any contributions paid by him in that year under the approved personal pension arrangements.”[13]Section 655 (3) says, in effect, that “unused relief” has the same meaning as in section 625.

The first question

[14]The first question posed by the case stated is as follows:
“Whether the unused relief for retirement annuity premiums in a year when both retirement annuity premiums and personal pension contributions are paid or treated as paid, includes unused relief for earlier years and whether similar treatment arises under section 655 (1).”

Discussion of the sections

[15]The basic relieving section for premiums paid under retirement annuity contracts is section 619. In order to fall within the literal wording of that section, two things must coincide in a single year of assessment. First the taxpayer must be chargeable to income tax. (I ignore the possibility that the taxpayer does not have enough income for tax actually to be payable). Second, the taxpayer must pay a qualifying premium. If both those things happen in the same year of assessment, then the taxpayer is entitled to claim relief. As I have said, the maximum amount that the taxpayer can claim is 17.5 per cent of net relevant earnings. What if the taxpayer has net relevant earnings in a particular year, but does not make a claim, or makes a claim for less than the maximum?[16]At this point section 625 comes into play. Section 625 (1) begins with two conditions. The first is that in any year of assessment the taxpayer is chargeable to income tax. (Again, I ignore the possibility that the taxpayer does not have enough income for tax actually to be payable). I will call the year in question “year 1”. The second is that there is unused relief for that year. The phrase “that year” must refer back to the year of assessment referred to in the first condition; that is year 1. So the taxpayer must have been chargeable to income tax in year 1; and there must be unused relief for year 1. The second condition then goes on to define what it means by “unused relief for that year”. The definition is introduced by the words “that is to say”. The definition is that there is an amount that could have been deducted from net relevant earnings “in that year” if the taxpayer had paid a premium or a bigger premium. Again “that year” means year 1. So to take an example: if in year 1 the taxpayer had net relevant earnings of £100,000, he would have been entitled to claim tax relief on premiums up to £17,500. (In this, and the examples which follow, I ignore any earnings cap). If, in year 1, he had only paid premiums of £7,500, his unused relief for year 1 is £10,000. If these two conditions are satisfied, then the statutory consequences follow. The statutory consequences are expressed as follows:
“then, subject to section 655(1)(b), relief may be given under that section [i.e. section 619], up to the amount of the unused relief, in respect of so much of any qualifying premium or premiums paid by the individual in any of the next six years of assessment as exceeds the maximum applying for that year under subsection (2) of that section.”
[17]For the moment, I ignore the phrase “subject to section 655 (1)(b)”. The first thing that the section tells us is that relief may be given on qualifying premiums paid during the next six years of assessment. I will call these “years 2, 3, 4, 5, 6 and 7”. The second thing that the section tells us is that relief can only be given up to the amount of the unused relief. On the face of it “the unused relief” must be the unused relief for year 1, even though the phrase used is simply “the unused relief” rather than “the unused relief for that year”. The third thing that the section tells us is what part of a premium paid in years 2 to 7 can be relieved under section 619. It is “so much of any qualifying premium or premiums paid by the individual in any of the next six years of assessment as exceeds the maximum applying for that year.” This time it seems to me that “that year” refers to the subsequent year in which the premium is paid. Thus “the maximum applying for that year” under section 619 (2), is the amount of net relevant earnings for the subsequent tax year in question. So what the section is dealing with is an excess payment in any of years 2 to 7. It is telling us that unused relief in year 1 can be carried forward to years 2 to 7, if there is an excess payment in any of those years. Again an example may help. I start with the example I have already given about year 1. The taxpayer has unused relief of £10,000. Suppose that in year 2 his net relevant earnings are £150,000. So he is entitled to claim tax relief on premiums up to 17.5 per cent of that: £26,250. Suppose that he in fact pays premiums in year 2 amounting to £30,000. The excess premium (£3,750) cannot be claimed under the strict wording of section 619 alone as a deduction in year 2, because it is over the maximum. But £3,750-worth of the unused relief for year 1 can be carried forward under section 625, and therefore enlarges the scope of the relief that can be given under section 619. By this means the taxpayer gets full tax relief in year 2, and still has £6,250-worth of unused relief left because of the underpayment in year 1. That unused relief is “derived from” year 1.[18]Suppose that the taxpayer makes an underpayment in year 3 and excess payments in years 4 and 5. Suppose that the underpayment in year 3 is £5,000; and the overpayments in years 4 and 5 are £4,000 and £6,000 respectively. What happens then? Section 625 (2) gives us the answer. Because we need to pay close attention to the text, I quote it again:
“Relief by virtue of this section shall be given for an earlier year rather than a later year, the unused relief taken into account in giving relief for any year being deducted from that available for giving relief in subsequent years and unused relief derived from an earlier year being exhausted before unused relief derived from a later year.”
[19]There are three things wrapped up in this sub-section. First, relief is given for an earlier year rather than a later year. So relief is given for the overpayment in year 4 before any relief is given for the overpayment in year 5. Second, the unused relief taken into account in giving relief for any year must be deducted from the unused relief available for giving relief in subsequent years. Thus the unused relief applied to the overpayment in year 4 must be deducted from the unused relief available for giving relief in year 5. Third, unused relief derived from an earlier year must be exhausted before unused relief is carried forward from a later year. At the beginning of year 4 there is £11,250-worth of unused relief (£6,250 still left from year 1 and £5,000 derived from year 3). The overpayment in year 4 is £4,000. Relief on the excess payment in year 4 is given. So £4,000 must be deducted from the unused relief available for giving relief in year 5 and subsequently. So you deduct £4,000 from £11,250. What is left for giving relief in year 5 and subsequently is therefore £7,250. Within this aggregate there is £2,250-worth of unused relief derived from year 1, and £5,000 derived from year 3. Now we come to the overpayment in year 5, which is £6,000. We must first exhaust the unused relief derived from year 1: £2,250. This leaves £5,000 worth of unused relief derived from year 3. £3,750-worth of that is used in relieving the remainder of the excess payment in year 5. The balance of unused relief of £1,250 remains available for carrying forward to subsequent years.[20]There is a slight linguistic tension between section 625 (2) which refers to relief “by virtue of this section” (i.e. section 625) and section 625 (1), which refers to relief being given “under that section” (i.e. section 619). However, since the only provision which actually entitles the taxpayer to relief from tax is section 619 itself, it is section 619 which, in my judgment, is the relieving provision.[21]The equivalent carry forward mechanism for personal pension contributions is contained in section 642, which I have already quoted. I do not think that it needs separate analysis, since its essential features are the same. However, it will be recalled that the percentage of earnings that can be paid under this regime is higher than the percentage that can be paid under retirement annuity contracts.[22]The extension of relief under section 619, given by section 625, was said to be “subject to section 655 (1)(b)”. So one approaches section 655 with the expectation that it will do something to curtail the operation of section 625. I can now come to section 655 itself. It is common ground that the purpose of section 655 is to prevent double tax relief. It is the manner in which and the extent to which it does that which is in issue. Section 655 (1) starts with a double condition. The first part of the condition is that an individual has made personal pension arrangements. The second part is that he has paid qualifying premiums. It is common ground that “qualifying premiums” are premiums paid under a retirement annuity contract. The first part of the condition (in contrast to the second part) does not require the taxpayer to have actually paid anything under the personal pension arrangements; he merely needs to have entered into them. If these two parts of the condition are satisfied, then the consequences in section 655 (1)(a) and section 655 (1)(b) follow. The two paragraphs are linked by the word “and”; so it is clear that both paragraphs can apply to the same year of assessment.[23]Section 655 (1)(a) deals with tax relief on personal pension contributions. It says: “the amount that may be deducted or set off by virtue of section 639(1) in any year of assessment shall be reduced by the amount of any qualifying premiums which are paid in the year by the individual and in respect of which relief is given for the year under section 619(1)(a)”.[24]The basic thrust of this is reasonably clear. You start with the amount “that may be” deducted or set off by virtue of section 639 (1) in any year of assessment. In my judgment the words “that may be” refer to the amount that you are permitted to deduct or set off. You must then reduce that amount. You reduce it by the amount of premiums paid under a retirement annuity contract in the same year of assessment, but only if the taxpayer has had tax relief on those premiums.[25]Section 655 (1)(b) is the corresponding mechanism for reducing tax relief on premiums paid under retirement annuity contracts, and it is this paragraph on which the dispute has focussed. It says: “the relief which, by virtue of section 625, may be given under section 619 by reference to the individual’s unused relief for any year shall be reduced by the amount of any contributions paid by him in that year under the approved personal pension arrangements”.[26]This provision recognises that tax relief is given under section 619 itself, even though that section is brought into operation by virtue of section 625. Again the broad thrust is reasonably clear. You start with “the relief which … may be given under section 619 by reference to the individual’s unused relief for any year”. You then reduce it by the amount of personal pension contributions paid by the taxpayer in that year. This is the amount of personal pension contributions paid in the current year. There is no dispute about the amount of the reduction. The question is: what is it that you reduce?[27]I think that I can now encapsulate the dispute between Ms Lonsdale and the Revenue. It turns on the meaning of the phrase “unused relief for any year” in section 655 (1)(b) and “unused relief for that year” in section 625 (1)(b). (As I have mentioned, section 655 (3) assimilates the meanings of the two phrases). Ms Lonsdale says that this means that each year’s unused relief must be kept separate and accounted for separately, year by year. She summarised her argument as follows; “Unused relief from earlier years (either RAR or PPR) is not reduced by contributions to a personal pension plan in the current year provided that the combined effect of contributions to retirement annuities and personal pensions are within the year’s allowances (having proper regard to PPR age related allowance). She says that unused relief from earlier years is only utilised when payments in the year exceed the maximum available for the year: and that payment of excessive retirement annuity premium in the year only utilises carry forward relief (RAR and PPR) on a claim being made and does not simultaneously and automatically utilise the personal pension age related relief for the year: that remains intact if and to the extent that no personal pension payments are made ”[28]Ms Lonsdale says that if the Revenue are right, the consequence is that if she makes contributions to a retirement annuity contract in reliance on the carry forward relief, she loses the more generous allowances available to a person who pays into a personal pension plan. This means that she is worse off by using the carry forward provisions than she would have been if she had made contributions year by year up to the full amount of her allowances.[29]I go back to section 625. Section 625(1) tells us that relief may be given under section 619. Again, it seems to me that the phrase the relief that “may be” given means the amount that is permitted to be given. The amount of relief that is in fact given will depend on how much is actually contributed by way of premium under a retirement annuity contract. Section 625(2) tells us how to calculate the relief. The second instruction contained in section 625 (2) (“the unused relief taken into account in giving relief for any year being deducted from that available for giving relief in subsequent years”) seems to me to contemplate one aggregate amount (or one “pot”) of unused relief. All of it is potentially “available” for giving relief in subsequent years. If Ms Lonsdale is right that unused relief derived from each year must be kept separate and accounted for separately, there would be no need to make the deduction required by the second instruction. In addition, the third instruction speaks of unused relief “derived from” a particular year. This, in my view, contrasts with unused relief “for” a particular year. Unused relief “derived from” a particular year is, in my view, narrower than unused relief “for” a particular year. If you ask: from what year is unused relief derived, you are looking backwards to a particular year of assessment. If you ask: what is the unused relief “for” a particular year, you are asking how much tax relief is available for that year. If you ask, in relation to any particular year: how much could the taxpayer have claimed as tax relief on premiums paid under a retirement annuity contract, I think that the answer is that he could have claimed tax relief using both his percentage of net relevant earnings arising in that year, plus any accrued unused relief available for that year. The whole of that would have been permitted as relief under section 619. In other words, section 655 (1)(b) operates by reference to what could have been claimed as tax relief under section 619. What could have been claimed as tax relief under section 619 includes all the unused relief that had accrued to date, as at that year of assessment. This is the same year of assessment as that in which the contributions to the personal pension plan are paid. So you ask: how much could the taxpayer have claimed by way of relief in relation to that year, under section 619? That amount includes unused relief accrued to date (although of course you must apply it in the manner set out in section 625 (2)). I consider, therefore, that the Revenue’s construction is to be preferred.[30]I take comfort from the fact that my construction coincides with that of the experienced Special Commissioner, Mr D.A. Shirley in Brock v. O’Connor (Inspector of Taxes) [1997] STC (SCD) 157.[31]Accordingly, I answer the first question “yes” and dismiss Ms Lonsdale’s appeal on that ground.

The second question

[32]The second question posed by the case stated is:
“whether on the facts found by us there was evidence on which we could properly arrive at our finding that there was no agreement binding the [Revenue] under section 54 Taxes Management Act 1970 in relation to the Appellant’s method of utilising the relief and whether on the facts found our determination of that question was correct in law.”

The findings of fact

[33]The evidence that the Commissioners on this question considered is contained in correspondence between Ms Lonsdale and the Revenue.

(b) Based on this evidence the Commissioners found as follows:

“In 1995 [Ms Lonsdale] corresponded with the Inland Revenue in respect of an assessment for 1994/95. She disagreed with the Inland Revenue’s computations of the carry forward of unused retirement annuity relief and maintained that she was entitled to carry forward the £321 from 1992/93 to 1994/95 on the basis of her interpretation of the statutory provisions of which she gave an explanation in her letters to the Inland Revenue dates 12 April 1995 and 8 June 1995. On 14 June 1995 a fax was sent to [Ms Lonsdale] by Miss G Campbell HMIT at Cavendish 1 district stating: “ Own affairs I refer to your letter dated 8 June 1995. I have reviewed your papers and I am very sorry for the number of errors made. The papers attached to your letter are now agreed, the 1994/95 assessment has been amended showing the RAR paid 5638. G Campbell Sched D Group leader Notwithstanding Miss Campbell’s acceptance of [Ms Lonsdale’s] figures for 1994/95 Inland Revenue challenged the basis of [Ms Lonsdale’s] figures in correspondence relating to subsequent years of assessment, which took place between 12 April 1996 and 29 June 2001. At no time in that course of correspondence did [Ms Lonsdale] allege any agreement under Section 54 Taxes Management Act 1970 in respect of the basis on which the carry forward of relief was to be allowed.”
G Campbell

Sched D Group leader

[34]Section 54 of the Taxes Management Act 1970 applies:
“where a person gives notice of appeal and, before the appeal is determined by the Commissioners, an inspector … and the appellant come to an agreement …”
[35]The Commissioners did not find that Ms Lonsdale had appealed against any assessment for 1994/1995 (and there was no evidence to support any such finding). The first condition in section 54 was not therefore fulfilled. On that basis, therefore, the Commissioners were correct in deciding that there was no agreement binding the Revenue under section 54.[36]Ms Lonsdale said, however, that the Commissioners had misunderstood the scope of her argument. She did not argue that the Revenue could not challenge her interpretation of the legislation. Her argument was that having agreed in respect of the year 1994/95 that she was entitled to a particular sum as carry forward relief, the Revenue could not reopen that very same figure even though the figure was being used for a subsequent year of assessment.[37]If section 54 had applied, and if an agreement had been made, it would have had the same effect as if the Commissioners had made a determination on the appeal in the terms of the agreement. Leaving aside the technicalities of when section 54 applies, a very similar argument was advanced by the taxpayer to Knox J in Tod (H.M.I.T) v. South Essex Motors (Basildon) Ltd (1987) 60 T.C. 598 and to Carnwath J in McNiven (H.M.I.T.) v. Westmoreland Investments Ltd (1997) 73 T.C. 1. In both cases it was rejected. The ground for the rejection is that unless there is formal machinery which would enable the Commissioners to determine a formal claim to carry forward a specific sum, a section 54 agreement cannot have that effect. The point is not that the legislation permits amounts to be carried forward. Rather, the point is whether the machinery for determining tax liability is limited to determining the amount of the taxpayer’s liability for a particular year of assessment, or whether it extends to determining an amount due in a future year. Only in the latter case could a section 54 agreement bind the Revenue for future years of assessment.[38]In Ms Lonsdale’s case what was in question was the amount of her tax liability for the year 1994/95. The amount of carry forward relief to which she was entitled was simply one step on the road to determining her liability for that year. In my judgment an agreement of that amount of relief was relevant only to that year of assessment. Consequently an agreement of that amount could not prevent the Revenue from reopening the question in relation to a subsequent year of assessment.[39]Ms Selway very properly drew my attention to the principle that in the exercise of its general powers, the Revenue may not abuse those powers; and to examples of cases in which the Revenue have been held to have abused (or not to have abused) them. I do not consider that this is a case which approaches abuse of power. The primary duty of the Inland Revenue is to collect tax in accordance with the law. That is what they have done.[40]Consequently, I conclude that the Commissioners were entitled to come to the finding that they did; and even if they misunderstood the true scope of Ms Lonsdale’s argument, it is not an argument that I accept. Accordingly, I dismiss the appeal on that ground also.