Inspector of Taxes v Pumahaven Ltd.

Thursday, 8th May 2003

J U D G M E N T

1. LORD JUSTICE PETER GIBSON: This is an unusual appeal. It is an appeal by the Revenue from part of the order made by Park J on 4th October 2002. The judge had heard an appeal by the taxpayer, Pumahaven Ltd ("Pumahaven"), from the decision of a Special Commissioner, Dr Nuala Brice, refusing Pumahaven permission to postpone payment of Corporation Tax assessed on it pending the determination of its appeal. The judge allowed the appeal, set aside the decision of the Special Commissioner, remitted the matter to a different Special Commissioner for reconsideration at a further hearing and gave directions for that hearing. The only part of the judge's decision which is the subject of appeal is his decision to remit the matter to a Special Commissioner rather than determine the correctness of the underlying point himself. The appeal is brought with the permission of the single Lord Justice (Mummery LJ) on the basis that the appeal involved a point of law which this court should consider.

2. The facts can be stated shortly. Up until August 1996 Pumahaven owned many shop properties occupied by companies in the Burton Group from whom Pumahaven received rent. In August and September 1996 Pumahaven participated in a tax avoidance scheme. It is unnecessary to go into the scheme in any detail. The Special Commissioner describes the details in paragraphs 12-51 of her decision. It is sufficient for the purposes of this appeal to say that it involved the following steps:

(1) On 16th August 1996 Pumahaven agreed to let to another company in the group (BGI) all the properties occupied by other companies in the group for a rent payable annually on 31st August.

(2) On 30th August 1996 Pumahaven and BGI agreed to alter the 1996 rental date to 19th September 1996.

(3) On 18th September 1996 Pumahaven sold to a company outside the group all its assets, with the exception of the right to the rent due on 19th September 1996.

(4) Pumahaven drew up accounts to 18th September 1996, so that a new accounting period began on 19th September 1996, when it received the 1996 rent amounting to some £112 million.

(5) Other steps were then taken intended to create in Pumahaven a right to a tax deduction under the loan relationship provisions of the Finance Act 1996, balanced by a corresponding commercial gain intended to be outside the scope of Corporation Tax.

3. The Revenue challenged the scheme by assessing Pumahaven to Corporation Tax on the rent received on 19th September 1996. The tax assessed was over £36 million. Pumahaven appealed and asked the Revenue to agree to postponement of payment of the tax pending the appeal. The Revenue did not agree. Hence the application to the Special Commissioner.

4. By section 55 of the Tax Management Act 1970 the subject of an assessment under appeal is due and payable as if there had been no appeal unless payment is postponed: see section 55(1) and (2). But by section 55(3), if the taxpayer has grounds for believing that he is overcharged to tax by the assessment, he may, by a notice in writing given to the inspector:

" ... apply to the Commissioners for a determination of the amount of tax the payment of which should be postponed pending the determination of the appeal".

By section 55(5) an application under section 55(3) is to be heard and determined in the same way as the appeal. Section 55(6) provides so far as material:

"The amount of tax the payment of which shall be postponed pending the determination of the appeal shall be the amount (if any) in which it appears to the Commissioners, having regard to the representations made and any ... evidence adduced, that there are reasonable grounds for believing that the appellant is overcharged to tax."

5. Before the Special Commissioner Pumahaven submitted that there were reasonable grounds for believing that it had been overcharged to tax. It advanced two arguments. The first, which I shall call "the source argument", was, in summary, that taxpayers are only taxed on specified income from specified sources and that the taxpayer must possess that source in the year of assessment or accounting period in which the income is received, with the result that in the present case the rent received on 19th September 1996 was from a source no longer possessed by Pumahaven and so was not taxable. The second argument was what the judge called "the loan relationships argument".

6. The Special Commissioner, by her decision in writing on 10th July 2001, correctly directed herself when she said in paragraph 70:

"Although section 55(5) provides that this application is to be heard and determined in the same way as an appeal, I am not required to determine the appeal. Also, section 55(6) refers to 'reasonable grounds for believing that' the Appellant is overcharged. That means that the Appellant at this stage does not have to prove all the facts or succeed in all the legal arguments which will have to be proved or established at the hearing of the substantive appeal. Thus my limited task is to determine whether the Appellant has demonstrated reasonable grounds for believing that it is overcharged to tax. However, section 55(6) does require me to have some firm basis for believing that the Appellant has been overcharged by the assessment and here I must have regard to the evidence adduced."

7. In paragraph 65 she briefly referred to the source argument as having been advanced by Pumahaven. But, in the reasons which she gave for concluding that there were no reasonable grounds for believing that Pumahaven had been overcharged to tax (other than by a relatively small sum to which the inspector agreed), she did not deal with the source argument but concentrated on the loan relationships argument which she rejected.

8. Pumahaven on 8th August 2001 complained to the Special Commissioner that she had failed to deal with the source argument, and it invited a supplementary decision on that point. But she refused to express any view on the point arising out of the source argument.

9. On the appeal to the judge it was common ground that his responsibility and powers were governed by section 56A(4) of the 1970 Act. This provides:

"The High Court or, as the case may be, the Court of Appeal shall hear and determine any question of law arising on an appeal under subsection (1) or (2) above and may reverse, affirm or vary the decision appealed against, or remit the matter to the Special Commissioners with the Court's opinion on it, or make such other order in relation to the matter as the Court thinks fit."

10. The judge held that the Special Commissioner should have given a ruling on the source argument. Mr McKay, then appearing alone for the Revenue, did not, as the judge noted, submit to the judge that the source argument was so obviously hopeless that it could be ignored. But he did contend that the argument was wrong and he submitted that the judge should decide for himself that it was wrong to the extent that it did not afford reasonable grounds for believing that Pumahaven had been overcharged to tax and so that the judge should not remit the case for a Special Commissioner to decide whether the source argument afforded such reasonable grounds.

11. The judge said in paragraph 38 of his judgment:

"I do not agree with those submissions. Under the statute the evaluation of whether there are reasonable grounds for believing that Pumahaven was or may have been overcharged to tax is a responsibility allocated to the Commissioners. I do not think that it would be right for me to decide that question myself. I suppose that I might have been tempted otherwise if the argument had been such palpable nonsense that it was instantly obvious that it could not possibly be right. Such arguments do occasionally surface before the Commissioners or in the courts, usually put forward by taxpayers in person, but the source doctrine argument was not of that character."

12. The judge observed in paragraph 39 that what he said in paragraph 38 was not intended as some sort of steer towards a conclusion that the postponement application should be allowed. He added:

"There is scope for an argument not to be palpable nonsense but still to stop short of affording reasonable grounds for believing that the taxpayer may have been overcharged."

The judge said that, in declining to decide for himself whether the source argument was right or wrong, he was influenced by the case of R v Hastings and Bexhill General Commissioners ex parte Goodacre [1994] STC 799. In that case the General Commissioners had made a procedural error in wrongly refusing to grant an adjournment and, on an application for judicial review, Schiemann J quashed the refusal, adding that the fact that the taxpayer might not be successful was not a matter with which the court was concerned: what the court was concerned with was to ensure that the taxpayer had a fair opportunity of presenting his case. Park J said that had he been dealing with Pumahaven's case on an application for judicial review rather than on an appeal, the Goodacre case strongly suggested that he should quash the Special Commissioner's decision and leave the matter on the basis that a new decision was to be reached by the Special Commissioner and that the underlying issue should not be decided by him.

13. The judge therefore set aside the Special Commissioner's decision and ordered that the case be remitted to another Special Commissioner for reconsideration, taking account of the source argument and expressly dealing with it in the decision. He gave directions as to the way the remitted matter should be dealt with, including directing that no evidence should be adduced without the permission of the Special Commissioner.

14. On this appeal the Revenue in their skeleton argument point out that the usual reason why the High Court remits a matter back to commissioners is for them to find further facts. Reference was made to the statement by Scott J in Consolidated Goldfields Plc v Commissioners of Inland Revenue[1990] 63 TC 333 as to the principles appearing from the cases to be applied on an application for a remission back to the Commissioners to make further findings. Reference was also made to the observation of Lord Edmund-Davies in Yuill v Wilson[1980] 1 WLR 910 at 921H that, in the light of the authorities, it was clear that the exercise of the power of remitter called for a cautious approach. That was said in the context of a case where the Court of Appeal had remitted a case to the Commissioners to make further findings of fact.

15. Mr Launcelot Henderson QC, leading Mr McKay for the Revenue on this appeal, submits that the judge, having identified an error of law in the Special Commissioner's decision, exercised his discretion on a wrong basis. He says that the judge wrongly failed to take account of the full right of appeal on a question of law and that the judge wrongly treated the appeal before him as though it was a judicial review application, not recognising the distinction between the choice which he had under section 56A(4) and a case like Goodacre, where there is no right of appeal and the court exercises a supervisory jurisdiction. The judge, he says, confused the supervisory jurisdiction with the appellate jurisdiction. He argues that the formula used for applications for the postponement of tax in section 55(6), "it appears to the Commissioners", was plainly borrowed from section 50(6), relating to substantive appeals.

16. By section 50(6), it is provided: "If, on an appeal, it appears to the majority of the Commissioners present at the hearing, by examination of the appellant on oath, or affirmation, or by other evidence" that, amongst other things, the appellant is overcharged by an assessment, other than a self-assessment, the assessment should be reduced accordingly. Mr Henderson submits that the formula of it appearing to the Commissioners could not have been intended to make the Commissioners exclusive arbiters on points of law as well as fact and that, on an appeal on a point of law, an appellate court could deal with other points of law not determined by the Commissioners even if they were not points of law which could only be determined one way. He says that the judge's approach is productive of a multiplicity of hearings with further appeals and the judge should not have felt inhibited from deciding what Mr Henderson called the simple point of law on the source argument. He criticised the judge's approach as being over-restrictive. He dangled before us the possibility that this court might wish to hear submissions on the source argument with a view to deciding it.

17. Mr Kevin Prosser QC, appearing with Miss Elizabeth Wilson for Pumahaven, submits that the Revenue's appeal is misconceived because it rests upon a fundamental misunderstanding of the functions of the Commissioners, the High Court and this court in connection with a postponement application. He points out that by section 55(3) it is to the Commissioners that the taxpayer, who has grounds for believing that he is overcharged to tax by an assessment, must apply for a determination of the amount of tax the payment of which should be postponed pending the determination of the appeal. He further emphasises that by section 55(6) it is to the Commissioners to whom it must appear that there are reasonable grounds for believing that the taxpayer is overcharged to tax in the amount of the tax the payment of which is to be postponed, and that the Commissioners are the persons who are required to have regard to the representations made and the evidence adduced. He says that the Commissioners are not required to find facts or resolve issues of law: their function is to evaluate the taxpayer's grounds to decide whether they are reasonable. The appeal to the High Court, he argues, is not by way of a rehearing, the High Court's jurisdiction being merely to decide whether the Commissioners' determination is erroneous in law, and, if it is, the High Court has the power under section 56A(4) to remit the matter with the court's opinion on it to the Commissioners to make such other order as the court thinks fit. Mr Prosser submits that it is impossible to criticise the judge's decision. The issue, he says, was not a pure issue of law but a point of evaluation. Only if there was but one possible determination lawfully open to the Commissioners, such that a contrary determination would be an error of law, would there be a pure issue of law and it would be pointless to remit it. But the judge, he says, remitted the matter on the footing that the source argument was not that kind of argument. Further, he says that this court has no jurisdiction to determine whether or not the source argument is a "reasonable ground". He adds that it would be absurd for this court to determine whether the £36 million of tax should be postponed pending the determination of the appeal when that appeal is to be heard on 2nd June of this year.

18. I have no hesitation in rejecting Mr Henderson's arguments. The authorities on remitters to find further facts are not in point. Whilst it may be true that the purpose of most remitters is so that the Commissioners should find further facts, there is nothing in section 56A(4) to prevent a remitter for a different purpose, such as where there has been a failure by the Commissioners to perform some other function entrusted to them, for example, to deal with a substantial argument presented to them. A cautious approach is required when the Commissioners have found facts but one party wants further facts to be found by the Commissioners at a further hearing. That is not this case. Here the Special Commissioner, faced with the task of deciding whether there are reasonable grounds for believing that the taxpayer has been overcharged to tax, has not had regard to an argument put to her by the taxpayer as to why, in the view of the taxpayer, it was so overcharged. That procedural error was the relevant error of law. The Special Commissioner did not express any view on the source argument.

19. I accept that the formula "it appears to the Commissioners" is the same in section 55(6) as it is in section 50(6), but I do not accept that that in any way lessens the formula's significance. Parliament has entrusted to the Commissioners, and to no-one else, the functions specified in those sections, subject to the provisions for appeal and to what the appellate tribunal is authorised to do by section 56A(4). In relation to the postponement of tax, the Commissioners are the tribunal to which the taxpayer assessed to tax can apply, and they must have regard to the representations made to them and to the evidence adduced to them in reaching their decision whether it appears to them that there are reasonable grounds for believing that the taxpayer is overcharged to tax and in what amount. In Kelsall v Stipplechoice Ltd(1995) 67 TC 349 at 377I, in a judgment with which Sir Thomas Bingham MR and Saville LJ agreed, I called the language of the formula "familiarly subjective". Provided that the specified matter does appear to the designated person and provided that that is not a perverse conclusion, it is irrelevant that it might reasonably appear otherwise to another person. There is a significant difference between section 50(6) and section 55(6), in that what must appear to the Commissioners on a substantive appeal against an assessment is that the taxpayer is overcharged by the assessment, whereas under section 55(6) what must appear to the Commissioners is that there are reasonable grounds for believing that the taxpayer is overcharged to tax in some specified amount.

20. In the course of argument Tuckey LJ aptly described the latter test as not being hard-edged. It requires an evaluation exercise by the Commissioners, applying a less precise test; and it is a matter on which reasonable commissioners may reasonably differ. It is common ground that, faced with the error of law on the part of the Special Commissioner, the judge had the wide discretion conferred on him by section 56A(4) as to what to do. I do not accept that the judge could not properly find assistance in the Goodacre case, even though that was a case not on appeal from Commissioners but on a judicial review application reviewing what General Commissioners had done. I do not believe for one moment that Park J, with his knowledge, unrivalled on the Bench, of tax law, at that point overlooked section 56A(4) or confused the court's appellate jurisdiction with its supervisory jurisdiction. Both the Goodacre case and the present case involved errors not of substantive tax law but of procedure, and the judge cannot be criticised for taking note of how a judge in judicial review proceedings decided what should be done when faced with such error.

21. Park J recognised that he had a discretion. He might have decided the source argument himself if it was obviously palpable nonsense; but he took the view that it was not, and I did not understand Mr Henderson to argue that it was not open to the judge to take that view. The judge concluded that there should be a remitter to the person, or persons, to whom the responsibility for evaluating whether there were reasonable grounds for believing that the taxpayer had been overcharged to tax and in what amount has been allocated by Parliament. I cannot see how the judge can validly be criticised for doing that. The fact that there is an appeal validly brought to the judge on the ground of a procedural error by the Special Commissioner does not mean that he, in turn, commits an error of law in refusing to decide points of law not dealt with by the Special Commissioner. I am not impressed by the argument based on a possible multiplicity of hearings. There is an advantage in every level of tribunal performing the functions envisaged for it by Parliament, rather than having a point considered and determined for the first time at an appellate level. In any event, given the imminence of the hearing of the substantive appeal against the assessment, the point on multiplicity of hearings is more theoretical than real. So far from there being an error of law by the judge in deciding to remit, I think it plain that he was right not to usurp the functions of the Special Commissioner. Still less do I think it would be appropriate for this court to consider what the Special Commissioner has not considered and the judge has refused to consider.

22. For these reasons, I would dismiss this appeal.

23. LORD JUSTICE TUCKEY: I agree. The specialist Tribunal, in the shape of the Special Commissioners, is the obvious forum to consider the merits of a representation which had erroneously been overlooked first time round to enable them to evaluate it and decide whether there were reasonable grounds for believing that the taxpayer had been overcharged to tax. At very least, the judge's decision to remit the question to that Tribunal was an exercise of discretion which cannot be impugned.

24. LORD JUSTICE KEENE: I agree with both judgments.

Order: Appeal dismissed with costs summarily assessed in the sum specified in the schedule.