TAA and the Overkill Defence
Best to be prudent and kill them all, God will know his own kind!
– The Bishop at the gates of Beziers
First, A Past Instance of Overkill
Sometimes in the course of his or her submissions, a barrister will employ the technique of reductio ad absurdum, such as that employed by Euclid in his proof that there are an infinite number of prime numbers. Sadly, one finds that the judges are sometimes skeptical of such techniques, viewing them as a rouse to obfuscate the analysis of the case at hand through the introduction of far-fetched hypothetical instances. However, a decision-maker would do well to remember the salutary lessons from Congreve, where a body no less distinguished than the supreme court of the land failed to take into account the wider ramifications of interpreting the law as it did. When presented with the deeply unjust but inevitable consequences of its decision in the case of Vestey thirty years later, the court had no choice but to depart from its previous decision, expressly conceding as it did so that a whole range of cases had been decided erroneously in the interim and that many hundreds of cases would have been wrongly settled without resistance.
There are two questions which had dogged the area of TAA for a number of years. First, the question as to who was liable under these provisions and, in particular, whether a non-transferor could be liable. Second, what the amount of liability is to be (assuming that the person is in fact liable). The case of Congreve required the answering of both these questions. Mrs. Congreve’s father had 93,000 of 1000,000 shares in Company A. He transferred 60,000 of these to International Gas Processes Corporation in return for shares in the latter. He then gifted these shares to Mrs. Congreve along with 5,000 shares in Company A. Company B was incorporated in Canada. It purchased shares from International Gas in Company A in return for 995 of its 1,000 shares. International Gas was then liquidated, so that the shares in Company B were distributed as dividends in specie to Mrs. Congreve. Company B then bought 5,000 shares in Company A from Mrs. Congreve and the father’s remaining shares in that company from him. So, Mrs. Congreve ended up owning the entirety of the share capital in Company B, which in turn owned the bulk of the share capital in Company A.
The question arose as to whether Mrs. Congreve could be assessed under the TAA provisions on the basis that her rights did not ‘wholly or mainly spring from a transfer of assets affected by her’ – it was not of course disputed that there had been a transfer by her at all. It was held by the House of Lords that there could be no objection to her being so assessed. Indeed, their Lordships went further and held that she could have been so assessed even if no transfer had been affected by her at all. Finally, they also held that Mrs. Congreve could be assessed on the entirety of the income of Company B. This was in 1948.
In 1980, the House of Lords was faced with an extraordinary set of facts in the form of Vestey. Two settlors had made a trust in 1942. Certain payments were made to discretionary beneficiaries from 1962 to 1966. HMRC assessed the recipients to income tax on the distributions under the TAA provisions. HMRC then did something remarkable. It went back six years and assessed these beneficiaries to tax on a proportion of the entirety of the income of trust in each of those six years, irrespective of the fact that the beneficiary had not received a payment in that particular year and irrespective of the fact that there was no correlation between the income arising to the trustee and the distribution to the beneficiaries (the exact basis adopted by them was the proportion which the distribution of a particular beneficiary bore to the income of the trustees in each year). One beneficiary was called Mrs. Baddeley. She received a distribution in 1966-67 of £100,000. HMRC went back each of the six years and assessed her (or rather, her husband) to £270,000. The Commissioners did not see any problem with this and insisted that Mr. Baddeley could in fact have been assessed many times this amount. The House of Lords could not allow this. But nor could they allow the particular get-out which HMRC put forward, which was for allocations to be made among the various beneficiaries on an extra-statutory basis. As per Lord Wilberforce (citing the judge in the court below him):
One should be taxed by law, and not be untaxed by concession.
(Though for a subsequent acceptance of concessions, see ex-parte Fulford Dobson). Their Lordships ultimately decided that the decision arrived at in Congreve had to be departed from, so that the various recipients in this case, being non-transferors, could not be assessed at all. In doing so, they acknowledged the huge cost which the taxpayer would have unjustly borne over the preceding thirty years by reason of that court’s earlier reluctance to consider the reductio ad absurdum argument and to interpret the legislation as a comprehensive matrix which would cater robustly to circumstances which were, after all, not that unforseeable. As per Lord Wilberforce:
We now have to face the fact that this House decided otherwise, unanimously, and affirming the Court of Appeal. That was 30 years ago, the decision has been followed in reported cases (Bambridge v. Inland Revenue Commissioners  1 W.L.R. 1329, Philippi v. Inland Revenue Commissioners  1 W.L.R. 1272) and no doubt many persons have been taxed on the basis of it, without resistance.
The exact number of victims may never be known.
However, my objective here is not to remonstrate – for just one instance among many in which legislative overkill has been adroitly tackled by the courts, one has to consider only the settlements code. It just so happened that in the case of Congreve the courts were fettered to largely unwieldy language. The question which interests me now is this: What was it about the HMRC assessments in Vestey which their Lordships found so objectionable? Was it the mere fact that non-transferors were being assessed? Or was it the fact that non-transferors were being assessed on income they had never received? In other words, was it the incidence of liability or was it more the unfettered extent of it? The question is relevant today because it might cast some light on how the courts would react to another instance in the tax system of ‘overkill’. The particular instance I have in mind is also within the context of TAA – and I discuss it below.
For Lord Wilberforce, it was more the question of incidence. He accepts that the TAA rules might be viewed as penal provisions as was held in Howard de Walden. However, this does not mean that they are intended to penalize non-transferors (including persons who may never in fact benefit from the income arising to the person abroad). In his words, ‘to visit the sins of the transferor on future generations’ was not permissible. For Viscount Dilhorne, the objection lay more on the unfettered liability that HMRC’s approach gave rise to. At page 1184:
I share Walton J.’s view that Parliament cannot have intended that a person, it might be unborn at the time of the transfer of assets, should be chargeable to tax on the whole of the income of the foreigner if he acquired rights giving him power to enjoy part of that income or received or was entitled to receive a capital sum coming within subsection (2) and without limit of time or that the revenue should be able to recover multiple tax if there were a number of such individuals.
(His Lordship goes one further and seems to discount the application of TAA contemporaneously to multiple persons in respect of the same income – something which Congreve or Vestey were not strictly concerned with). Lord Edmund-Davies was much influenced by the scope of the potential charge to which the beneficiaries would be exposed and so was Lord Keith of Kinkel. Their Lordships also took into account the textual argument which had been put forward on behalf of the taxpayers, though it appears to me that it was the policy consideration which was really determinative. The important point which emerges from all this is that even though in Vestey the court restricted the scope of the legislation on the basis of the fact that the assessed individuals were not transferors, what really riled them was the extent and number of the assessments which might be potentially unleashed should that bar not be raised. The overkill was, for them, over the top.
Under the TAA provisions as they are now, there appears to be a clear dichotomy between the original provisions which are accepted as applying to transferors and the subsequently added provisions which apply to non-transferors. The question of incidence has thus been made relatively clear (though as to who constitutes a transferor or a quasi-transferor still continues to involve a value judgment). However, the question of what the extent of liability of a transferor is still appears to be capable of causing confusion and raising dispute.
Let us take the case where (say) a hundred individuals pay £100 to a trust with non-resident trustees of a discretionary trust with a view to avoiding tax which be payable by him on the interest. The income of the trust is £10,000 arising from these contributions. The transferors are beneficiaries of the trust. In such circumstances, the apportionment provision at section 743 requires for an apportionment of the £10,000 on a just and reasonable basis. The provisions thus go some way towards addressing the problems which may arise where there are multiple transferors, as in the instance above, even though the HMRC official would have some discretion in the matter.
However, what the provisions do not appear to me to yet take into account is the circumstance where the person abroad has income arising from unrelated sources. The recent introduction of section 721(3B) ITA by FA 2013 provides:
(3B) The amount of the income treated as arising under subsection (1) is equal to the amount of the income of the person abroad (subject to sections 724 and 725).
Take the facts of Congreve for instance, where the taxpayer transferred shares to a person abroad who had income other than that arising from those shares. (Such an occurrence was in fact forseen by Lord Greene MR in Howard de Walden). In such circumstances, HMRC might argue that it is the entirety of the income of the person abroad which would be allocated to the transferor, notwithstanding the overkill. If a succession of such cases were to arise then it is possible that history would repeat itself, with HMRC first bringing a case which would illicit the sympathy of the courts and secure for them a precedent (as in Congreve) and then a taxpayer would appeal in a more unjust case and in which he may well persuade the courts to bless a get-out from the charge (as in Vestey).
In the event of an appeal being made by a taxpayer in such circumstances, it would at the very least be arguable that the legislation was not ‘punitive’. Indeed, it would appear to me, as it did to Walton J in Vestey, to be strange if the penalty were somehow contingent upon the extent of the income arising to the person abroad as there would, of course, be no correlation between the penalty and the particular ‘crime’ (to use the word of Walton J in Vestey). In my view, the rule is perhaps better described as ‘preventative’ or ‘restorative’, having as it does an intention to restore the position to what it would have been had the transfer not been made and, in doing so, to provide a disincentive in making such transfers in the first place. Rather fortuitously, the provisions themselves provide some insight into the objectives of the legislator:
(1) The charge under this section applies for the purpose of preventing the avoiding of liability to income tax by individuals who are . . . UK resident by means of relevant transfers.
Finally, the inclusion of the apportionment provisions at section 743 ITA in the case of multiple transferors indicates to me that even to the extent that the provisions may at some time have been punitive, they are no longer intended to be so. There can be no reason for relieving, in the case of multiple transferors, one transferor from tax on the income from transfers made by other transferors and, at the same time, charging a single transferor on unrelated income arising to the person abroad.
In addition to policy considerations, it would, but of course, be necessary for the courts to have some literal basis on which to provide a get-out. In Vestey, as seen above, the get-out came in the form of restricting the person liable to the transferor and there was indeed sufficient basis in the language on which this view might be founded. In the case of section 721(3B), the argument would have to lie in restricting the definition of ‘the income of the person abroad’. The approach would not be to restrict this expression by reference to the transferor’s power to enjoy (as was unsuccessfully attempted in Howard de Walden) but instead by reference to income which can be traced back to the transferred asset (such an approach was by no means ruled out in Howard de Walden – it just so happened that in that case all the income of the person abroad could in fact be traced back to the transferor’s assets – and the same is true of Lord Simonds leading speech in Congreve). It is at least arguable that section 721(3B) is amenable to such an interpretation – as the expression ‘the income’ there could be referred back to ‘relevant transfer’ and the income mentioned therein. Another opening in the text might be found in cases involving multiple transferors. In such circumstances, section 743 would give leeway not only as to who is to be charged but also the extent to which he is to be charged.
It is desirable that legislation is interpreted in a way which not only answers to the fact of the case at hand but goes further and provides a comprehensive matrix which caters to all forseeable scenarios and the possibility of gross overkill. The failure to do so in Congreve lead to the courts having to back-track thirty years later, with dire consequences for many hundreds of taxpayers in the interim.
Even today, the TAA legislation has facets which might result in reckless assessments. If such assessments were to be made, it is not inconceivable that further restrictions (or, depending on how one views it, clarifications) may be necessitated. In the meantime, in cases where a liability to the transferor may arise under TAA, it would be desirable to ensure that the person abroad did not have any other income arising to him from unrelated sources (unless that income is attributable to transfers made by other transferors).