Thorpe v HM Revenue & Customs

In this case the Appellant appealed against the following notices of assessment to tax on him by HM Revenue and Customs (“the Revenue”):-

The issues in this appeal arise from the actions of the Appellant in withdrawing the whole of the fund held by the trustees of an approved pension scheme (“the Scheme”), of which at the time he was the only surviving member, justifying that withdrawal on the ground that, as the only beneficiary of the trust which established the Scheme, he was entitled to require the trustees to deliver the fund to him under the rule in Saunders v Vautier (1841) Cr. & Ph 240. It was his contention, contrary to the Revenue’s view, that, in consequence, he should suffer no adverse tax consequences as a result of what he had done.

There is no dispute as to the background facts in this appeal. The Special Commissioner proceeded on the basis of a notice of agreed facts. He set out the material facts between paragraphs 5 and 25 inclusive of his decision. So that this judgment will be complete in itself, I will set out those paragraphs using the numbering used in the Decision as follows:

“5.

The Scheme was established on 15 March 1979 by a declaration of trust executed by Juriscommerce Securities Limited ('the Company'). The Manufacturers Life Insurance Company Limited ('ManuLife') was the original administrator of the Scheme. The Appellant and his late wife, Kathleen Mary Thorpe ('Mrs Thorpe’), were the only employees of the Company and the only members of the Scheme. The Appellant was also the sole director of the Company until his retirement in 1999.

6.

Mrs Thorpe died on 7 July 1991. The moneys due to Mrs Thorpe under the Scheme were duly paid to her personal representatives.

7.

By a supplemental trust deed dated 1 January 1994, the Scheme became a small self-administered scheme and adopted new rules. The Appellant's daughter, Alison Thorpe, and Hartley Pension Management Services Limited (‘the Pensioneer Trustee’) were appointed as additional trustees to act with the Appellant (who was described in the supplemental trust deed as ‘the continuing Trustee’).

8.

By clause 2 of the supplemental trust deed, it was agreed and declared that the Scheme would be operated as an exempt approved scheme for the purposes of the Finance Act 1970 (‘FA 1970’) and that the maximum benefits permitted by the legislation would be paid to each member of the Scheme upon the member's retirement from the Company. By clause 6(g), it was confirmed for the avoidance of doubt that the trustees had no duty, discretion or power to make any payment to any member which exceeded the maximum benefits authorised by the legislation.

9.

Clause 5 of the supplemental trust deed concerned the appointment and removal of trustees. The power of appointment and removal was vested in the Company. By clause 5(b), the Company was obliged to give not less than four weeks notice to any trustee that it required to remove from that office. Clause 5(d) provided that in the event of the death, resignation or removal of any trustee, the continuing trustees should not take any action to execute the trusts of the Scheme until the Company had exercised its power of appointment of a new trustee. By a further deed dated 21 August 1998, the Company was discharged from all obligations in connexion with the trust and the power of appointing and removing trustees was assigned to the Appellant.

10.

On 3 June 1994, the Board of Inland Revenue accepted that the Scheme was an exempt approved scheme for the purposes of section 592 ICTA. The approval related back to 10 April 1979. The Pensioneer Trustee was notified accordingly by a letter from the Inland Revenue Pension Schemes Office dated 10 June 1994.

11.

On 22 July 1994, the Company assigned to the trustees all its title in the ManuLife policy set up under the original scheme. On 4 April 1995, the trustees opened an account with the Chesham Building Society, into which they deposited on or about 19 September 1995 all the funds of the Scheme following the encashment of the ManuLife policy.

12.

By a letter dated 6 November 1998 and addressed to Hartley Pensions Administration Limited (a subsidiary of the Pensioneer Trustee), the Appellant stated that he had reached:

... the view that I should exercise my sole beneficial interest in the fund pursuant to the role [sic] in Saunders v. Vautier.

The letter enclosed a notice dated 5 November 1998 and addressed to the trustees of the Scheme (including the Pensioneer Trustee) in the following terms:

TAKE NOTICE that pursuant to the Trust Deed dated 15th March 1979 and the Supplemental Trust Deed dated the 1st day of January1994 the said HARRY THORPE is absolutely entitled to the whole beneficial interest declared by the said Trust Deeds AND FURTHER TAKE NOTICE that by virtue of the said Trust Deed and the Rule of Law known as the Rule in Saunders v. Vautier the said HARRY THORPE HEREBY DIRECTS you the said Trustees to transfer to him absolutely all property held by you as said Trustees aforesaid and in particular the Deposit of money held in Account Number 33.00.00428.05 and held in your names at Chesham Building Society, 12 Market Square, Chesham in the County of Buckingham and WE HEREBY inform the Society accordingly. THIS NOTICE shall take effect on the 2nd day of December I998

13.

On 12 November 1998, the Pensioneer Trustee wrote to the Appellant enclosing a copy of the undertaking that it had given to the Inland Revenue Pension Schemes Office. The letter informed the Appellant that the Pensioneer Trustee was unable to agree to the monies then held at the Chesham Building Society being paid to the Appellant as that would constitute a termination of the Scheme other than in accordance with the approved winding-up provisions.

14.

By a notice dated 16 November 1998 and addressed to the directors of the Pensioneer Trustee, the Appellant gave notice:

... that pursuant to the powers vested in my by Clause 5 (9) [sic] of the Supplemental Trust Deed of 1st January 1994 Clause (1) of the Deed of Discharge of 21st August 1998, and every other power me enabling I TERMINATE the Office held by your Company of Trustee howsoever called.

The Appellant also sent a covering letter of the same date explaining his actions.

15.

As at 1 December 1998, the sum of £255,768.97 was held in the account in question at the Chesham Building Society.

16.

The Appellant withdrew the sum of £200,000 on 2 December 1998, the sum of £12,000 on 30 December 1999 and the remaining balance of £60,499.19 on 21 July 2000.

17.

On 28 January 2000, the Appellant made a return for the year 1998/1999, in which he declared his income, save for the payment that the Respondents contend ought to have been included because it was made out of the Scheme on 2 December 1998.

18.

The Inland Revenue Pension Schemes Office wrote to the Appellant on 8 February 2000 informing him that a failure to provide an actuarial valuation report would result in approval of the Scheme being withdrawn. The Appellant replied by a letter dated 9 March 2000, in which he informed the Pension Schemes Office that he had become the sole beneficiary of the trusts of the Scheme on 7 July 1991 and that he had wound up the trust pursuant to the rule in Saunders v. Vautier.

19.

By a letter dated 5 June 2000, the Pension Schemes Office informed the Appellant that it was not satisfied that the Pensioneer Trustee had been correctly removed. It also stated that the Appellant was unable to wind up the Scheme under the rule in Saunders v. Vautier.

20.

The Company was dissolved on or about 19 September 2000.

21.

On 26 July 2001, the Appellant made a return for the year 1999/2000 in which he declared his income, save for the payment of £12,000 that the Respondents contend ought to have been included because it was made out of the Scheme on 30 December 1999. Similarly, on or before 31 January 2002, the Appellant made a return for the year 2000/2001, in which he declared his income, save for the payment of £60,499.19 that the Respondents contend ought to have been included because it was made out of the Scheme on 21 July 2000.

22.

On 22 August 2002, the Inland Revenue wrote to the Appellant in his capacity as administrator of the Scheme, informing him that an assessment would be issued under section 591C ICTA on the basis that approval of the Scheme had ceased automatically under section 591B(2) ICTA as there had been an alteration to the Scheme that had not been approved by the Inland Revenue. The following day, an assessment was issued against the Appellant under section 591 ICTA, charging him to tax under Case VI of Schedule D at the rate of 40 per cent on the sum of £240,000.

23.

By a letter dated 30 October 2002, the Inland Revenue informed the Appellant that he was chargeable to tax under Schedule E in relation to a payment made to him on 4 December 1998 (later discovered to be 2 December 1998). The assessment was to be issued on the estimated sum of £240,000. The assessment was issued on 28 November 2002 under section 600 ICTA.

24.

On 30 July 2004 Mr Martyn Rounding, an officer of the Inland Revenue, wrote to the Appellant (in his capacity as administrator of the Scheme) and informed him of his opinion that the facts concerning the Scheme ceased to warrant its continuing approval from 2 December 1998 and that, therefore, he was giving notice under section 591B(1) ICTA that approval was withdrawn. He also notified the Appellant that an assessment would be issued under section 591C ICTA in due course.

25.

On 22 September 2004 an assessment was issued under section 591 ICTA, charging tax under Case VI of Schedule D at the rate of 40 per cent on the sum of £240,000. This assessment was issued on the alternative basis that approval had not already automatically ceased. On 5 October 2004, assessments were issued under section 596A ICTA, charging tax under Schedule E on the sum of £200,000 in relation to 1998/1999, the sum of £12,000 in relation to 1999/2000 and the sum of £60,499 in relation to 2000/2001. These assessments were issued on the alternative basis that the Appellant had received payments from a non-approved, as opposed to an approved, retirement benefits scheme.”

The Special Commissioner made other findings of fact besides those in the paragraphs which I have set out above. These were:-

On 21^st December 2001 the Revenue wrote to Mr Thorpe:-

“Because of the serious effect of loss of approval [see s 591C, ICTA] our procedures ensure that a pension scheme cannot lose its approval inadvertently. Before withdrawal of tax approval takes place the scheme trustees are given a full and clear warning of what the tax consequences will be and an opportunity to put matters right. For matters to be rectified to our satisfaction we require all funds to be returned to the pension scheme together with interest at a commercial rate. Provided this is done we will not withdraw approval on account of the removal of scheme funds.”

In an earlier letter of 12^th July 2000 the Revenue had written to Mr Thorpe warning him that even if the rule in Saunders v Vautier applied, it was their view that if the Revenue withdrew approval “tax will be due under s 591C ICTA 1988 (40% rate) and also under s 596A ICTA 1988 (marginal rate)”. The letter continued:-

“If S v V is not applicable but the assets have been distributed, approval of the scheme will probably be withdrawn unless the matter can be rectified. The above two tax charges would then apply.

If the matter is capable of being rectified and this does in fact take place, any distribution of assets will probably be chargeable to tax by virtue of s 600 ICTA 1988 even though the assets are returned to the scheme.”

Since receiving the transfers out of the Scheme set out in paragraph 16 of the Decision, Mr Thorpe has retained those sums in a separate interest-bearing account. Because he has regarded himself as entitled to this fund, he has declared the interest as his income and paid income tax on it.

Under the heading “The Legislation and the Role of the Pensioneer Trustee” the Special Commissioner set out the relevant statutory provisions, and a survey of the ground which those sections cover, between paragraphs 26 and 33 of the Decision. I gratefully adopt what the Special Commissioner says as follows:-

“26.

The legislative framework relevant to this appeal was originally to be found in Chapter II of Part II of FA 1970. These provisions were repealed by section 844(4) and Schedule 31 ICTA and re-enacted in Chapter I of Part XIV ICTA. Subject to transitional provisions and savings, the provisions in ICTA have since been repealed with effect from 6 April 2006.

27.

An exempt approved pension scheme enjoyed exemption from income tax on income derived from investments and deposits: section 21(2 FA 1970, section 592(2) ICTA. Furthermore, sums paid by an employer by way of contributions to such a scheme were allowable as a deductible expense: section 21(3) FA 1970, section 592(4) ICTA.

28.

The conditions for approval of retirement benefit schemes were set out in section 590 ICTA. Where those conditions were satisfied, the Board of Inland Revenue was required to grant approval. In addition, by section 591 ICTA, the Board was given a discretion to approve (subject to such conditions, if any, as it thought proper to attach) certain other schemes that did not satisfy the requirements prescribed by section 590. No such discretionary approval could be given if to do so would be inconsistent with regulations made by the Board: section 590(5) ICTA.

29.

In the case of small self-administered schemes, such regulations restricted the Board’s discretion to approve a scheme unless its governing documentation contained provisions requiring one of the trustees to be a pensioneer trustee. A pensioneer trustee is described in the Practice Notes on Occupational Pension Schemes, IR 12 (1997), issued by the Pension Schemes Office, as an individual or body recognised by the Revenue as being widely involved with occupational pension schemes and having dealings with the Pension Schemes office, who has given an undertaking to that Office that he or she will not consent to any termination of a scheme of which he or she is a trustee otherwise than in accordance with the approved terms of the winding-up rule.

30.

Section 591B ICTA, which made provision for the cessation of approval, was in the following terms:

(1)

“If in the opinion of the board the facts concerning any approved scheme or its administration cease to warrant the continuation of their approval of the scheme, they may at any time by notice to the administrator, withdraw their approval on such grounds, and from such date (which shall not be earlier than the date when those facts first ceased to warrant the continuance or their approval of 17^th March 1987, whichever is the later), as may be specified in the notice.

(2)

Where an alteration has been made in a retirement benefits scheme, no approval given by the Board as regards the scheme before the alteration shall apply after the date of the alteration unless –

(a)

the alteration has been approved by the Board, or

(b)

the scheme is of a class specified in regulations made by the Board for the purposes of this paragraph and the alteration is of a description so specified in relation to schemes of that class.”

31.

Section 591C ICTA made provision for a charge to tax upon cessation of approval. Subsection (1) provided (at the relevant time) as follows:

“Where an approval of a scheme to which this section applies ceases to have effect otherwise than by virtue of paragraph 3(2)(a) of Schedule 23ZA, tax shall be charged in accordance with this section”

Subsection(2) provided that tax should be charged under Case VI of Schedule D at the rate of 40 per cent on an amount equal to the value of the assets which immediately before the date of the cessation of the approval of the scheme are held for the purposes of the scheme (taking that value as it stands immediately before that date). Subject to section 591D(4), the person liable for the tax was the administrator of the scheme: section 591C(3). Subsection (4) of section 591C then provided (at the relevant time) that:

“This section applies to a retirement benefits scheme in respect of which one or more of the conditions set out below is satisfied.”

Subsection (5) then provided that:

“The first condition is satisfied in respect of a scheme if, immediately before the date of the cessation of the approval of the scheme, the number of individuals who are members of the scheme is less than twelve.”

It is common ground that the Appellant was, at the material time, the only member of the Scheme. In the circumstances, therefore, it is not necessary to consider the second or third conditions. It is also common ground that Schedule 23ZA (to which reference is made in section 591C(1) ICTA) is not relevant.

32.

By section 596A ICTA, where a person received a benefit provided under a retirement benefit scheme which is not of a description mentioned in section 596(1)(a), (b) or (c) – in essence, a benefit provided under a non-approved scheme – tax was chargeable in accordance with the provisions of section 596A: see subsection (1). Where the benefit was received by an individual, he was charged to tax under Schedule E for that year: section 596A(2) ICTA.

33.

Section 600 ICTA applied to any payment to or for the benefit of an employee otherwise than in course of payment of a pension, being a payment made out of funds that were held for the purposes of an approved scheme. Subsection (2) of that section (insofar as is relevant) provided that:

“If the payment is not expressly authorised by the rules of the scheme… the employee… shall be chargeable to tax on the amount of the payment under Schedule E for the year of assessment in which the payment is made.””

The relevant sections of ICTA provide as follows:-

“Section 591C Cessation of approval: tax on certain schemes

(1)

Where an approval of a scheme to which this section applies ceases to have effect, tax shall be charged in accordance with this section.

(2)

The tax shall be charged under Case VI of Schedule D at the rate of 40 per cent on an amount equal to the value of the assets which immediately before the date of the cessation of the approval of the scheme are held for the purposes of the scheme (taking that value as it stands immediately before that date).

(3)

Subject to section 591D(4), the person liable for the tax shall be the administrator of the scheme in his capacity as such.

(4)

This section applies to a retirement benefits scheme in respect of which either of the conditions set out below is satisfied.

(5)

The first condition is satisfied in respect of a scheme if, immediately before the date of the cessation of the approval of the scheme, the number of individuals who are members of the scheme is less than twelve.

(6)

The second condition is satisfied in respect of a scheme if at any time within the period of one year ending with the date of the cessation of the approval of the scheme, a person who is or has been a controlling director of a company which has contributed to the scheme is a member of the scheme.

(7)

For the purposes of subsection (6) above a person is a controlling director of a company if he is a director of it and within section 417(5)(b) in relation to it.

Section 596A Charge to tax: benefits under non-approved schemes

(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 the 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 per cent or such other rate (whether higher or lower) as may for the time being be specified by the Treasury by order. …

Section 600 Charge to tax: unauthorised payments to or for employees

(1)

This section applies to any payment to or for the benefit of an employee, otherwise than in course of payment of a pension, being a payment made out of funds which are … held for the purposes of a scheme which is … approved for the purposes of –

(a)

this Chapter;

(b)

Chapter II of Part II of the Finance Act 1970; or

(c)

section 208 or Chapter II of Part IX of the 1970 Act.

(2)

If the payment [is not expressly authorised by the rules of the scheme or by virtue of paragraph 33 of Schedule 6 to the Finance Act 1989] the employee (whether or not he is the recipient of the payment) shall be chargeable to tax on the amount of the payment under Schedule E for the year of assessment in which the payment is made. …”

There were two issues before the Special Commissioner:-

A further issue (“the Third Issue”) was raised before me by Mr Thorpe:

I will deal with each of those issues in turn.

Rule 4 of the rules of the Scheme dated 1^st January 1994 require that the Scheme shall provide any or all of the following benefits:-

The Special Commissioner decided this issue in favour of the Respondents, his reasons for doing so appearing between paragraphs 45 and 48 of the decisions as follows:-

“45.

The rule in Saunders v. Vautier is set out in the thirty-first edition of Snell’s Equity (London, 2005) at paragraph 27-25 in the following terms (emphasis is added):

Although the beneficiaries cannot, in general, control the trustees while the trust remains in being, or commit them to particular dealings with the trust property, they can, if sui juris and together entitled to the whole beneficial interest, put an end to the trust and direct the trustees to hand over the trust property as they direct; and this is so even if the trust deed contains express provisions for the determination of the trust.

I agree with the contention made on behalf of the Respondents that it is fundamental to the application of the rule that the beneficiaries must be together entitled to the whole of the beneficial interest. In my judgement, it is clear that the rule can have no application where there are potential beneficiaries not yet in existence, however remote their interests might be or however unlikely it might be that those beneficiaries should come into existence.

46.

The Appellant accepted that there was a theoretical possibility that he might remarry or that he might have dependants within the meaning of the rules of the Scheme. However, he argued that there was no practical possibility of any appointment being made in favour of such a person because any pension that he might take would exhaust the trust fund. In my judgement, that is not sufficient. There remained the possibility that persons other than the Appellant might be entitled to an interest under the trusts of the Scheme. In the circumstances, the Appellant was not entitled to the whole beneficial interest and, accordingly, was not entitled to call for a transfer of the trust property under the rule in Saunders v. Vautier.

47.

In any event, although the rule in Saunders v. Vautier entitles the beneficiaries to give directions to the trustees as to how they should deal with the trust property, the trust is still extant. Furthermore, the notice of termination given by the Appellant on 16 November 1998 to the Pensioneer Trustee was a notice to terminate its trusteeship. Under the terms of the supplemental trust deed, the actual termination was not effective for four weeks, i.e. until 14 December 1998. Therefore, as at the date of the first withdrawal, the Pensioneer Trustee was still in office. Indeed, the terms of the supplemental trust deed required that the power of removal be exercised by deed. The Appellant did not comply with this formality.

48.

In the circumstances, therefore, I reject the Appellant’s contention that the Scheme had ceased to exist on 6 November 1998. I also reject the contention that the moneys held in the Chesham Building Society belonged absolutely to the Appellant and the contention that, therefore, the payment of those moneys to him was not an unauthorised payment.”

I agree with the Special Commissioner’s conclusions on this point for the reasons that he gives. The rule in Saunders v Vautier did not operate to entitle Mr Thorpe to call upon the trustees of the Scheme to hand the fund over to him. It follows that his withdrawal of the fund by the three payments in question was unauthorised.

In Sieff v Fox [2005] 1WLR 3811 at 3848 Lord Justice Lloyd, sitting as a puisne judge, summarised the Hastings-Bass principle as follows:-

“Where trustees act under a discretion given to them by the terms of the trust in circumstances in which they are free to decide whether or not to exercise that discretion, but the effect of the exercise is different from that which they intended, the court will interfere with their action if it is clear that they would not have acted as they did had they not failed to take into account considerations which they ought to have taken into account, or taken into account considerations which they ought not to have taken into account.”

Later in the same paragraph 119, Lord Justice Lloyd said:-

“I am in no doubt that, as a general proposition, fiscal consequences are among the matters which may be relevant for the purposes of the principle.”

The Special Commissioner expressed his conclusion that the rule in Re Hastings-Bass was not applicable to the facts in this case at paragraphs 52 and 53 as follows:-

“52.

In any event, however, the principle in Re Hastings-Bass is not apposite to the facts with which I am concerned. Where the principle arises, it enables those interested under the trust to set aside the wrongful actions of the trustees. It is predicated upon the assumption that where the trustees have failed to take into account a relevant consideration when exercising a power vested in them, they have failed in their fiduciary duties towards those interested under the trust and, accordingly, the purported exercise of the power is vitiated. In view of this theoretical basis for the principle, it is clear to me that the principle does not provide relief from the consequences of the act of a beneficiary.

53.

In the present case, the payment in question was not brought about through the exercise by the trustees of their powers. On the contrary, the payment was brought about through the request – indeed, in fact, through the positive action of – a beneficiary who sought to apply the rule in Saunders v. Vautier against the trustees. I have not been directed to any authority indicating that, in such circumstances, the beneficiary is entitled to rely upon Re Hastings-Bass. Furthermore, in my judgement, the application of Re Hastings-Bass in such circumstances would be wrong as a matter of principle. Finally, it seems to me that the availability of such relief in these circumstances would render section 596A ICTA a mere waste of ink. Parliament intended that the section should give rise to a charge to tax upon the recipient of unauthorised payments. It cannot have been the intention of Parliament that upon such an assessment being raised, the taxpayer can rely on the unauthorised nature of the payment to render it a nullity and, hence, avoid the charge to tax.”

I agree with the Special Commissioner’s conclusion that the rule in Re Hastings-Bass is not applicable in the present case. For my part, I would give as the reason for this conclusion that Mr Thorpe, in requiring the fund to be handed over to him, was not acting exclusively as a beneficiary but was indeed acting as a trustee because only a trustee could give instructions to the Chesham Building Society to transfer the fund to him. However, when acting as such trustee Mr Thorpe was not acting under a discretion given to the trustees of the Scheme. He was, by sanctioning an unauthorised payment, committing a breach of trust. Accordingly, when he received the three payments from the building society, he received those payments with notice of his own breach of trust and has held the sum received as a constructive trustee for the fund ever since. It seems to me that the proper analysis of the facts is that, notwithstanding that at the direction of a trustee the entirety of the fund has been paid out to a private account in the name of Mr Thorpe, a trustee, with the intention, at the time, that it should become his property absolutely, property in the money comprising the fund never left the trusts of the Scheme. If this conclusion is correct, neither section 596(A) nor 600(1) of ICTA applies to the three payments.

This conclusion arises from an argument which came to my mind after the close of the argument and when I was considering my judgment. Accordingly, I notified counsel that I wished them to address me about it and I have heard further submissions which extended over an afternoon and have had the benefit of written submissions. The next following paragraphs of this judgment address this point.

The position of Mr Thorpe is similar to that which confronted Mr Justice Lawrence Collins, as he then was, in the case of Venables & ors v Hornby [2001] EWHC 408. That was a case where the main issue was whether a senior director of a company had “retired” under the provisions of his company’s pension scheme of which he was a member. The director had retired from his position of acting managing director but thereafter remained an unpaid non-executive director of the company. On that change in his status he started receiving pension payments. The Revenue contended that because the taxpayer remained a director, he had not retired for the purposes of the scheme and that, accordingly, the payments made to him were unauthorised. He was assessed to tax under s 600 ICTA. He appealed the assessments, but his appeal was rejected by the Special Commissioner. Mr Justice Lawrence Collins allowed an appeal from the Special Commissioner on the basis that he had retired for the purposes of the scheme. He went on to consider what would have been the position if he had been wrong in his conclusion as to whether the director had retired. He held that in those circumstances the payments to the director would have been unauthorised and so breaches of trust. Accordingly, the director could not receive the payments free from the trusts of the scheme. He received nothing and therefore there was no payment to him triggering a charge to tax.

In arriving at that conclusion Mr Justice Collins relied on the decision of Mrs Justice Arden, as she then was, in the case of Hillsdown Holdings plc v IRC [1999] STC 561. In that case taxpayers were suing the Inland Revenue for the return of tax paid under s 601 ICTA which they claimed was not due. Section 601 imposes a tax equal to 40% of the payment where “a payment is made to an employer out of funds which are or have been held for the purposes of” an exempt approved pension scheme. In giving his judgment in the Venables case, Mr Justice Collins said this about the Hillsdown case:-

“That was a case on section 601 (1) and (2) of the 1988 Act, the effect of which was that, subject to important exceptions, where a payment is made to an employer out of an exempt approved scheme, an amount equal to 40% of the payment is chargeable to tax. Such a payment was made by the trustees of the pension fund of FMC Limited to the trustees of the pension fund of Hillsdown plc (FMC Limited’s parent), the tax was paid but the Pensions Ombudsman decided that the payment of the surplus assets of the scheme to the Hillsdown scheme was in breach of trust and invalid. His decision was upheld, and Hillsdown plc and its pension fund trustees sought to recover the tax which had been paid pursuant to section 601. Arden J held that the tax was recoverable because (a) the payment in the events which had occurred had not been effectively made (b) it did not have the effect of changing the ownership of the funds and was in fact reversed; (c) the employer had merely received the money as a trustee for the fund under a trust arising under operation of law.”

At page 571 of her judgment Mrs Justice Arden said this:-

“In my judgment there is no reason in the present case why parliament should seek in section 601 to tax a payment which was not effectively made and indeed the policy of the section would, as Mr Oliver submitted, suggest otherwise. So I turn to the wording of the section to see if there is anything in that section or the group of sections of which it forms part to indicate when parliament used the term payment in section 601 it was intending to catch not merely effective payments but also a payment which, to use Lord Macmillan’s words in Paton 1938 AC 341 at 356…was a fiction and not a fact. That construction is not dictated by the term “payment” on its own; as a matter of the ordinary use of language Hillsdown did not receive “payment” from the pension fund. But even apart from that, there are in my judgment indications in the section that the payment had to be a real payment. For instance, tax is calculated on the amount of the payment if it is in cash. If the payment is in kind it is paid on the value of the asset transferred. There is no reason to suppose that save for some possible exceptions, the two types of payments are to bear different rates of tax, and on that basis the payment, if in cash, would have to be a real payment.”

In concluding this part of her judgment at page 572, Mrs Justice Arden said:-

“I do not consider that the court should attempt to find a comprehensive definition of “payment” for this purpose. It is enough to say that purported payments were, on the facts of this case, without substance. No beneficial interest passed and they had to be returned to the HF trustee. In those circumstances applying the principle in Paton and similar cases, they were not really payments at all in the eyes of the law.”

Sub-sections (3) to (5) of s 596A contain similar provisions to those in s 601 which indicate that the tax is chargeable on the value of the benefit received.

Section 600(1) provides that tax is payable on a “payment made out of funds which are held for the purposes of a scheme.” Sub-section (2) imposes Schedule E tax “on the amount of the payment”. Both these phrases are reflected in the provisions of s 601.

In his judgment in the Venables case Mr Justice Collins expressed his conclusion in paragraph 37 of his judgment as follows:-

“37.

In this case, if the taxpayer, who was not only a member of the scheme, but also a trustee, had known or should have known, that the payment was unauthorised by the terms of the trust, then he would have been accountable as a trustee. In such circumstances, the funds would have been recoverable by the trustees, and if they had been recovered, there would have been no effective payment to the taxpayer. I am of the view that if each and every one of the following conditions is fulfilled, then there is no taxable payment for the purposes of section 600: that the payment is in breach of trust, that the recipient is accountable to the trustees as an actual or constructive trustee, and that the recipient is able and prepared to account to the trustees. In those circumstances, I would accept that the rationale of the Hillsdown case applies, and I would follow it.”

The matter went to the Court of Appeal where Mr Justice Collins’ conclusions on whether the director had retired were reversed. On further appeal to the House of Lords Mr Justice Collins’ judgment on the issue of retirement was, by a majority, Lord Walker dissenting, restored. In the Court of Appeal, Mr Justice Collins’ secondary conclusion on the director’s liability to tax under s 600 on the basis that he had received nothing was also reversed, but the majority of the House of Lords expressly did not think it necessary to deal with the secondary issue, having regard to their conclusion on the “retirement” issue.

In the report of the decision of the Court of Appeal, the “secondary issue” is dealt with between paragraphs 26 and 36 of the report. The lead judgment was given by Lord Justice Chadwick. At paragraph 27, having described the Judge’s “argument” as “plainly untenable”, he continues:-

“Section 600 of the 1988 Act imposes a charge in circumstances where (i) a payment to and for the benefit of an employee “otherwise than in course of payment of a pension” is made out of funds which are held for the purposes of an approved scheme and (ii) the payment is not expressly authorised by the rules of the scheme. In those circumstances the employee is chargeable to tax on the amount of the payment (whether or not he was the recipient of the payment). It is axiomatic that monies or property transferred in breach of trust out of funds subject to a trust will, for so long as they are identifiable, continue to be subject to that trust until they come into the hands of a bona fide purchaser for value without notice of the equity to trace… To hold that there had been no payment because the monies paid remained subject to the trusts of the scheme would be to defeat the obvious purpose of the taxing provision. It could not have been the intention of the legislature that the question whether or not a charge to tax arose under section 600 (2) of the 1988 Act would turn upon an investigation whether or not there remained out of the monies or property transferred some monies or property which (into whoever’s hands they might have come) was still subject to the trusts of the scheme.

28.

The Judge did not, I think, accept the argument in the stark terms in which it was advanced. But he would have been prepared to hold (had the point arisen) that there was no payment for the purposes of section 600 of the 1988 Act if three conditions were fulfilled: (i) that the payment was in breach of trust, (ii) that the recipient is accountable to the trustees as an actual or constructive trustee, and (iii) that the recipient is able and prepared to account to the trustees.”

Later in his judgment Lord Justice Chadwick, having distinguished the decision of Mrs Justice Arden in the Hillsdown case, relied on by the Judge to support his conclusions, continues at paragraph 33:-

“If an unauthorised payment is to be treated as no payment at all, the section is self-defeating. That cannot have been Parliament’s intention. The Judge in the present case sought to avoid the difficulty by identifying the three conditions which I have set out but, to my mind, those conditions do not meet the difficulty. The first of those conditions (i) that the payment was in breach of trust is a restatement of the premise upon which a charge to tax under section 600 arises. The second condition (ii) that the recipient is accountable to the trustees as an actual constructive trustee is likely to be satisfied in any case in which the recipient has not disposed of all the monies paid to him before the breach of trust is brought to his knowledge and it leads to the conclusion that he is not taxable in respect of the monies of which he had disposed. But (potentially) is taxable in respect of those which he had retained. The third condition (iii) that the recipient is able and prepared to account to the trustees – leads to the conclusion that the question whether or not a payment has been made depends on the state of mind (and the financial position) of the recipient after the event.”

In the House of Lords Lord Walker, in a two-sentence passage in his speech, approved the judgment of the Court of Appeal on the secondary issue. The only member of the majority in the House of Lords to comment on the secondary issue was Lord Millett. At paragraph 34 of the report he is recorded as saying this:-

“This makes it unnecessary to express a concluded view on the second question, whether the payments were “made out of” the trust funds if they were paid in breach of trust to a trustee of the scheme in circumstances in which he came under an obligation enforceable in equity to repay them. It depends on whether it is sufficient that the payments were made to the recipient for his own use and benefit and were valid to pass the legal title to the money, or whether they must have been received free from any legal or equitable obligation on the part of the recipient to make restitution. In short it may depend on whether the determining factor is the payment or the receipt.”

It seems to me that in this passage Lord Millett is saying that the question, which he does not answer, is decided upon whether there has been a payment in the sense that legal title to the money has passed to the recipient or whether there has been a receipt of the money by him in circumstances where there is an equitable obligation on the part of the recipient to make restitution.

If I am bound by the judgment of Lord Justice Chadwick, with which Lord Justices Potter and Peter Gibson agreed, in the Venables case as to the meaning of the words of s 600(1) “this section applies to any payment to or for the benefit of an employee… out of funds which are held for the purposes of a scheme…”, I must construe the words “receives a benefit” in s 596A to include the transfer of money, which, because it was paid in breach of trust, does not transfer any beneficial interest in that money notwithstanding that the money in question remains identifiable in the hands of the transferee. In the context of this case there can be no difference in the effect of the words “any payment to or for the benefit of an employee” in s 600(1) and “ Where… a person receives a benefit” in s 596A(1).

For my part, and with great respect, I do not think that such a construction is necessary in order to comply with the demonstrable intention of Parliament in enacting s 596A and s 600. It seems to me consistent with the legislative intention that where a payee has not disposed of the proceeds of the unauthorised payments to him and has indicated his willingness to return them to the scheme, or, better still, has actually done so by the time the issue falls to be dealt with in a court, that he should escape tax under those sections but should be taxed on the proceeds of unauthorised payments which he is not in a position to return. With great respect I do not think that this construction of s 600 leads to the conclusion that the recipient is “not taxable in respect of the monies of which he had disposed” but potentially “taxable in respect of those he had retained”. The reverse is the construction which was favoured by Mr Justice Lawrence Collins and that with which I respectfully agree. It seems to me that the purpose of the group of sections of ICTA with which this appeal is concerned is to ensure that income, which, once consigned to a pension scheme has the benefit thereafter of very favourable tax treatment, should surrender those benefits where funds are removed from the Scheme other than for its approved purpose. In my view both sections 596A and 600 have this purpose.

That purpose is achieved where the funds wrongfully removed can be returned to the Scheme with interest, but to the extent that they cannot be so returned, the recipient is charged to tax as if the funds received were part of his income. In the present case Mr Thorpe intended to extract the assets of the Scheme for his own benefit and not for the purpose of providing himself with an annuity by way of pension under rule 4(ii) of the Scheme. On the construction of s 596A favoured by the Revenue, he is liable to tax under Schedule E but at the same time bound to account to the Scheme Trustees for the fund which he holds but with no right of recourse to it to recoup himself for the tax he must pay. On this view, the result would have been the same if the Building Society had paid over the fund to Mr Thorpe, not at his request, but as a result of a mistake for which he was not responsible.

I have come to the conclusion that because in the Venables case the judgment of the Court of Appeal was reversed on the “retirement point” and the majority of the House of Lords went on expressly to say that it was unnecessary for them to deal with the point under s 600 because it did not in those circumstances arise, the judgment of Lord Justice Chadwick directed to the latter point, though of powerful persuasive influence, particularly when backed by the approval of Lord Walker, does not bind me.

The question of the authority of a judgment of the Court of Appeal reversed by the House of Lords in these circumstances is dealt with in the judgment of Lord Justice Taylor in Al-Mehdawi v Secretary of State for the Home Department [1991] AC 876 at page 880. This was an immigration case where the Court of Appeal were dealing with an argument that they were bound by an earlier decision of the Court of Appeal in another immigration case REG v Diggines, ex parte Rahmani [1985] QB 1109. In the Rahmani case the Court of Appeal had dealt with a point of principle which the House of Lords found it was not necessary for the Court of Appeal to decide in disposing of the appeal. The question was whether the Court of Appeal’s judgment on the point of principle bound the Court of Appeal in the Al-Mehdawi case. Mr Laws’ submission for the Appellant, as described in the judgment of Lord Justice Taylor at page 880, was as follows:-

“On this appeal, Mr Laws’ first submission is that this court is not bound by its decision in ex parte Rahmani in view of the ultimate ruling when the case went to the House of Lords… There it was held that the issue determined by me at first instance and by the Court of Appeal thereafter did not arise on a true view of the relevant facts and law.”

Lord Justice Taylor then summarises the facts in the Rahmani case and continues:-

“In these circumstances, Mr Laws contends that the true ratio of the case was the simple one propounded in the House of Lords. The more general point of principle decided below did not arise for decision in ex parte Rahmani. He submits the case must considered as one continuous piece of litigation. Therefore, although the views expressed on the issue of principle in this court are of high persuasive value, they cannot be regarded as the ratio of the case and thus binding, since they were unnecessary to its decision.”

Lord Justice Taylor then refers to the principles of stare decisis as summarised in the judgment of Lord Green in Young v Bristol Aeroplane Company Limited and the exceptions to the rule that the Court of Appeal is bound to follow previous decisions of its own and then continues:-

“Mr Laws submits that those exceptions are not exhaustive. In particular it would seem that Lord Green’s principles were related to decisions of the Court of Appeal. They may well be inapt where the House of Lords, in giving the final decision of the case, expressly indicates that on the true facts, the issue resolved by the Court of Appeal did not require to be decided.”

Lord Justice Taylor later in his judgment at page 883 dealt with an article by Sir Arthur Goodheart written in 1931 entitled “Determining the Ratio Decidendi of a Case” and his having been referred to a number of passages in the article “suggesting that the ratio of a court’s decision remained binding even if the facts upon which the court based it subsequently turned out to be wrong”. He continues:-

“But here, it is not merely that knowledge subsequent and extraneous to the proceedings shows the facts to be wrong; the House of Lords in the very case giving its final opinion, has ruled that the issue determined below did not arise for decision. In these circumstances I consider that although the reasoning of the Court of Appeal in ex parte Rahmani is of powerful persuasive influence, this court is not bound by it.”

It seems to me that in arriving at this conclusion Lord Justice Taylor was accepting the submission of Mr Laws at page 881 that the case had to be considered as one continuous piece of litigation notwithstanding that it was divided into hearings at first instance, in the Court of Appeal and in the House of Lords. Thus in the Venables case the House of Lords has determined that the section 600 issue did not fall to be determined because, in allowing the appeal from the Court of Appeal, they had found that the relevant director appellant had retired with the result that the payments to him were not unauthorised and thus there was no room for the application of section 600. It follows that the judgment of Lord Justice Chadwick on the section 600 point is not to be treated as part of the ratio decidendi of the Venables case and though of great persuasive value, is not binding.

After anxious consideration and no little hesitation, I have come to the conclusion that I should not follow the approach of the Court of Appeal in the Venables case but should follow the approach of Mr Justice Lawrence Collins, as he then was, in that case. The Venables case was concerned with s 600. I have held that the same considerations as arose in the Venables case in relation to s 600 apply where the section in issue is s 596A. It follows that I must allow Mr Thorpe’s appeal against the dismissal by the Special Commissioner of his appeal against the Revenue’s assessment under s 596A subject to being able to satisfy myself by means of undertakings or otherwise, that the fund held by Mr Thorpe has been returned into the control of the original trustees of the Scheme including the pensioneer trustee. I will hear submissions as to how I can be satisfied on that question.

This is not an unalloyed success for Mr Thorpe. The Scheme remains unapproved. In order to receive a pension pursuant to the Scheme, which would not be taxable under Schedule E pursuant to s 596A, the Revenue must be persuaded to restore their approval to the Scheme.

If my conclusion at paragraph 42 above is correct, this point does not arise but, in case the matter goes further, I will deal with it relatively quickly. No objection was raised by the Revenue to this point being taken before me for the first time.

I accept the submissions of Miss Simler that the facts in this case do not support the suggestion that the charges to tax, in this case under ss 591C and 596A of ICTA result in “double taxation”. The charge to tax under s 591C on Mr Thorpe is upon him as administrator of the Scheme, therefore with control of the fund, in circumstances where the Revenue, as an administrative act, have retrospectively withdrawn their approval of a pension scheme in order to recover from the fund the benefit of the tax privileges which the fund received while it was approved. I agree with the conclusion of the Special Commissioner that the decision of the Revenue to withdraw approval is not one which can be appealed to the Special Commissioners but must be challenged, if at all, on judicial review. It follows that the Special Commissioner was correct in taking the view that, as the matter was before him, there could be no challenge to the Revenue’s assessment on Mr Thorpe to tax under s 591C. That assessment to tax was not an assessment on Mr Thorpe’s income but rather an assessment on the fund itself to achieve the purpose which I have described. By contrast, the assessment under s 596A was an assessment to tax under Schedule E on income of Mr Thorpe received as a result of payments from an unapproved scheme. Given the wide margin of appreciation which is allowed by the Convention to national governments in respect of the imposition of tax, it seems to me that no separate challenge under the Convention can be made to assessments under either of those two sections of ICTA, indeed no separate challenge was made to them by Mr McDonald.

In the result I dismiss the appeals in respect of the assessments under s 591C but allow the appeals under s 596A subject to being satisfied as to the matters I have already mentioned and discharge the assessments accordingly.