B e f o r e :
LORD JUSTICE PETER GIBSON
LORD JUSTICE POTTER
and
LORD JUSTICE CHADWICK
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| | VENABLES
| Respondents
|
| | - and -
|
|
| | HORNBY (HMIT)
| Appellant
|
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(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
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Mr C McDonnell (instructed by Messrs Warner & Richardson, Winchester for the Respondents)
Mr T Brennan QC (instructed by the Solicitor of Inland Revenue for the Appellant)
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HTML VERSION OF JUDGMENT
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Lord Justice Chadwick:
- This is an appeal from an order made on 14 June 2001 by Mr Justice Lawrence Collins allowing appeals under section 56A(1) of the Taxes Management Act 1970 by the taxpayers, Mr David John Venables and the trustees of the Fussell Pension Scheme, against the decision of the Special Commissioners given on 13 November 2000. The commissioner (Mr Malachy Cornwell-Kelly, sitting alone) had upheld an assessment on Mr Venables to income tax under Schedule E made on 5 March 1997. The assessment was made under section 600 of the Income and Corporation Taxes Act 1988 in respect of three payments made to Mr Venables in the year of assessment 1994/95 out of funds held for the purposes of the pension scheme. The commissioner upheld, also, a related determination of tax payable made against the trustees of the scheme under regulation 49 of the Income Tax (Employments) Regulations 1993 (SI 1993/744) on 1 March 1999. It has been common ground that the assessment and the determination stand or fall together.
- Section 600 of the 1988 Act, as amended by the Finance Act 1989, is in these terms, so far as material:
“(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 - . . . (b) Chapter II of Part II of the Finance Act 1970; . . .
(2) 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.”
In that context “employee”, in relation to a company, includes “any officer of the company, any director of the company and any other person taking part in the management of the affairs of the company” – see section 612(1) of the 1988 Act.
- It is not in dispute (i) that payments of funds held for the purposes of the Fussell Pension Scheme were made to Mr Venables in July and August 1994, or (ii) that, at the time when the payments were made, Mr Venables was a director of Ven Holdings Limited, one of the participating employers under the scheme. The principal issue raised by the appeal is whether the payments were “expressly authorised by the rules of the scheme”. A secondary issue is whether, if not authorised by the scheme, the payments – which, it is said, were (on that hypothesis) held by Mr Venables on trust from the moment that he received them – should be treated for tax purposes as if they had not been made. It is common ground that, if the payments were not authorised, it must follow that (unless they are to be treated as not having been made or, at least, not having been made ‘out of’ scheme funds) Mr Venables was chargeable to tax on the amount of the payments under the provisions of section 600 of the 1988 Act and a determination under regulation 49 of the 1993 Regulations was properly made against the trustees in respect of basic rate tax deductible from those payments.
- The Fussell Pension Scheme was established by a trust deed dated 25 September 1980. Its purpose was described in the deed as the provision of “relevant benefits as defined in Section 26(1) of the Finance Act 1970” for directors and employees of the companies who were to be or become participating employers. The benefits payable under the scheme are set out in schedule F to the deed. Paragraph 2 in schedule F provides that:
“With the consent of the Founder the Trustees have discretion to award an immediate pension to a Member who retires in normal health at or after age 50. . . .”
It was in the exercise, or purported exercise of that power that payments totalling £580,591 were made to Mr Venables out of the funds subject to the scheme.
The underlying facts
- The underlying facts are conveniently set out the following paragraphs of a statement of agreed facts put before the special commissioner:
“8. On 26th May 1989 the terms of the Trust Deed were amended so that thereafter Ven Holdings Limited was treated as the Founder of the Scheme in place of Fussell Estates Limited. With effect from that date the participating employers under the Scheme were (1) Ven Holdings Limited (“the Company”) and (2) Fussell Management Limited. With effect from 1st April 1993 the trustees of the Scheme were (1) David John Venables and (2) Denton & Co Trustees Limited.
9. At all material times Mr Venables held approximately 20% of the shares in the Company. The Family Discretionary Trust, of which Mr Venables was settlor and a trustee, held the remaining 80% of the shares in the Company.
10. On 23rd June 1994 a Board meeting of the Company took place at which it was resolved:
‘that D.J. Venables will be retiring as an executive director on 30th June 1994 to pursue other interests but will continue as an unpaid non-executive director. L. G. Singleton is to be elected to serve as managing Director for a trial period of six months with Miss P.J. Venables appointed as Company Secretary.’
11. In a letter of 23rd June 1994 to Denton & Co. Mr Venables said that he would be retiring from service as managing director of the Company on 30th June 1994.
12. Mr Venables remained as a director of the Company at all relevant times during 1994/95 and continued as a director after 5th April 1995.
13. The Scheme paid to Mr Venables £580,591 as follows :-
7th July 1994 £225,000
18th July 1994 £250,000
4th August 1994 £105,591”
- I should add (a) that, as at 30 June 1994, Mr Venables was 53 years of age and (b) that, as the special commissioner found, Mr Venables had not, himself, ever been appointed as managing director of the company. The position is described by the special commissioner in paragraph 4 of his decision:
“Mr Venables was a carpenter by trade and in the early days had worked on the sites, though he has not done so for many years. Overall, Mr Venables worked in Ven Holdings for upwards of thirty years, and had for some time been an executive director and the chairman of the company, in which capacity he worked about 30 hours a week. On 31 March 1993, the group’s managing director retired and Mr Venables’s workload increased so that he then worked nearly 50 hours a week. Before that, he had been occupied for the most part in making strategic decisions for the activities of the group, but now he became responsible for its day to day running, arranging the finances, costing work and recruiting staff.”
The principal issue: were the payments authorised?
- The principal issue turns on the meaning to be given to the word “retires” in that paragraph. The question before the special commissioner was whether Mr Venables had “retired in normal health” for the purposes of the scheme when, on 30 June 1994, he ceased to have an executive role in Ven Holdings Limited; notwithstanding that he continued thereafter to be a director of that company. The special commissioner held that Mr Venables did retire on 30 June 1994; but that, because he was not then in normal health, the power to pay an immediate pension under paragraph 2 in schedule F was not exercisable. It is a curious feature of the scheme – although nothing now turns on it – that the power to pay a pension on early retirement, conferred by paragraph 2 of schedule F, is not exercisable unless the member is in normal health on retirement; rather than, as might be expected, being exercisable if the member retires by reason of ill-health.
- The judge agreed with the conclusion that Mr Venables had retired – or, at the least, accepted that it was a conclusion of fact which the special commissioner had been entitled to reach - but reversed his finding that Mr Venables was not then in normal health. He thought that that was a finding which could not reasonably be made on the evidence. The Revenue have not sought to challenge the judge’s conclusion on that point. The only question for this Court, in relation to the principal issue, is whether Mr Venables “retired” on 30 June 1994.
- Although treated by the judge as “a matter of fact and degree”, it seems to me that the question whether or not Mr Venables “retired” on 30 June 1994 turns on a short point of construction: does a member of the scheme who is a director of an employer company with an executive role “retire” for the purposes of paragraph 2 of schedule F when he gives up his executive role but continues in office as a director? In order to explain why I take that view it is necessary to describe the relevant provisions of the scheme and to set them in the context of the legislation which provided the tax benefits which the scheme was intended to enjoy.
The legislative setting
- It is not in dispute that those who established the scheme under the trust deed of 25 November 1980 must be taken to have intended that it would be approved by the Inland Revenue for the purposes of Chapter II in Part II of the Finance Act 1970. If confirmation of that be needed it can be found in paragraph 2 of schedule F itself, which limits the amount of pension which can be paid under the power which it confers to a amount “in no case greater than an amount which would prejudice the Scheme as an exempt approved scheme under Chapter II of Part II of [the 1970 Act].” The reason is obvious: an exempt approved scheme then enjoyed exemption from income tax on income derived from investments or deposits – see section 21(2) of the 1970 Act – and sums paid by an employer by way of contributions to the scheme were allowable as a deductible expense – see section 21(3) of that Act. The relevant provisions were re-enacted as section 592(2) and (4) of the 1988 Act.
- The Revenue was required to grant approval if the scheme satisfied the prescribed conditions – that is to say, the conditions set out in section 19(2) of the 1970 Act and Part I of Schedule 5 to that Act. The prescribed conditions included, at paragraph (a) of section 19(2), a condition that the scheme was bona fide established for the sole purpose of providing “relevant benefits in respect of service as an employee” and, at paragraph 1 of Schedule 5, a condition that the benefits payable to the employee must consist only of benefits payable on or after a specified age not earlier than 60 or later than 70, or on earlier retirement through incapacity. In that context:
“‘relevant benefits’ means any pension, lump sum, gratuity or other like benefit given or to be given on retirement or on death, or in anticipation of retirement, or, in connection with past service, after retirement or death, or to be given in anticipation of or in connection with any change in the nature of the service of the employee in question . . .”
and
“‘service’ means service as an employee of the employer in question and other expressions, including ‘retirement’, shall be construed accordingly;”
Those definitions were found in section 26(1) of the 1970 Act. They have been re-enacted in section 612(1) of the 1988 Act.
- Approval was mandatory if the scheme satisfied the prescribed conditions. But discretionary approval could be granted notwithstanding one or more of the prescribed conditions were not satisfied – see section 20(1) of the 1970 Act. The scheme established under the 1980 trust deed did not satisfy the prescribed conditions – if only because the power to pay benefits on early retirement in normal health, conferred by paragraph 2 of schedule F to the deed, did not meet the condition in paragraph 1 of Schedule 5 of the 1970 Act. Nevertheless, discretionary approval was given, under section 20(1) of the 1970 Act, with effect from 25 September 1980 – see paragraph 2 of the statement of agreed facts. Approval was withdrawn, with effect from 5 August 1994, under section 591B(1) of the 1988 Act. That followed a decision not to amend the rules of the scheme so as to meet the requirements introduced by the Retirement Benefits Schemes (Restrictions on Discretion to Approve) (Small Self-administered Schemes) Regulations 1991 (SI 1991/1614). But nothing turns on that: the third of the three payments had been made on the previous day, 4 August 1994.
- Chapter II of Part II of the 1970 Act was repealed by the 1988 Act – see section 844(4) of, and Schedule 31 to, that Act. The provisions formerly contained in 1970 Act were re-enacted as provisions in Chapter I of Part XIV of the 1988 Act. Section 600 of the 1988 Act (which had been introduced by section 21 of, and paragraph 9 of Schedule 3 to, the Finance Act 1971) is amongst those provisions. It is relevant to have in mind that other provisions in the 1988 Act have the effect that a lump sum paid to a person on retirement is not chargeable to income tax under Schedule E if paid pursuant to an approved scheme, unless it is a payment by way of compensation for loss of office – see sections 148(1), 188(1)(d) and 188(2), 189(a) and 596(1) of the 1988 Act (prior to the Finance Act 1998 amendments). The purpose of section 600(2) of the Act is to bring into the charge to tax under Schedule E lump sum payments, not expressly authorised by the rules of an approved scheme, which might otherwise have been thought not to be taxable as emoluments because received after the office or employment had determined.
The scheme
- Clause 3 of the 1980 trust deed is in these terms, so far as material:
“The Fund shall be held by the Trustees upon IRREVOCABLE TRUST . . . to apply the income and if and so far as necessary the capital of the Fund in or towards providing relevant benefits as defined in Section 26(1) of the Finance Act 1970 for such Employees of the Employers who become eligible to participate in the Scheme in accordance with the Trust Deed and the Rules.”
“Employee” is defined in schedule A to the trust deed:
“‘Employee’ means a person in the service of the Employer and includes a director”.
“Rules” takes its meaning from paragraph 2 of schedule D to the trust deed – see the definition in schedule A. The paragraph is in these terms, so far as material:
“Upon an Employee being offered membership of the Scheme a letter with an appendix attached setting out the terms conditions contributions to be made by the Employer and the Employee respectively and benefits to be provided will be drawn up in a form acceptable by the Commissioners of Inland Revenue and signed so as to indicate acceptance by the Employee and by an authorised signatory of the Employer. Upon acceptance the said letter with the appendix attached will be the Rules applicable to such Member . . .”
- Membership was offered to Mr Venables by a letter dated 25 September 1980. That letter, and the appendix attached to that letter, constituted the Rules applicable to him. The following provisions in the appendix are material:
“1. Contributions
The whole cost of the Scheme will be met by the Company. Each year the Company will pay contributions into the Scheme to build up a capital sum in order to provide your retirement and other benefits (“Your Capital Sum”). The amount of each year’s contributions will be determined by the Company.
2. Normal Retirement
You will normally retire from the Company’s service on 13 December, 2000, your Normal Retirement Date, when you will be aged 60 years and you will have been a member of the Company for more than 20 years.
On your Normal Retirement Date Your Capital Sum will be realised to provide your retirement benefits. Shortly before that date you will be advised of the amount of Your Capital Sum and the pension it will purchase. You may elect to take part of Your Capital Sum in the form of a tax free cash sum of up to a maximum of 150% of your Final Remuneration as defined in the Trust Deed. . . .
. . .
5. General Conditions
The following paragraphs describe the general conditions relating to the payment of your benefits. However it is the Trust Deed which governs these conditions and it will always take precedence over this Rule.
(a) Retirement before Normal retirement Date
With the Company’s consent you may retire at any time after age 50. At the date of actual retirement, Your Capital Sum in the Scheme would be realised to provide reduced benefits. . . . . .
(d) Limit on Benefits
The Scheme is designed to be approved by the Inland Revenue as an exempt approved scheme under the 1970 Finance Act. One of the conditions of approval is that your total benefits from this or any other pension arrangement must not exceed the maximum benefits specified by the Inland Revenue. Those maximum benefits are defined in the Trust Deed”.
- As I have said, the benefits payable under the scheme are set out in schedule F to the trust deed. Paragraph 1 of schedule F provides that, subject to paragraphs 4 and 5, the benefits which a member shall be entitled to receive on retirement at Normal Retirement Date are “such benefits as are stated in the Member’s Rules”. In the case of Mr Venables, that means whatever benefits can be provided out of the capital sum built up by such contributions as the company might, from year to year, decide to make; but subject to the restriction that the total benefits from the scheme and any other pension arrangements must not exceed the maximum benefits specified by the Inland Revenue. Paragraph 2 of schedule F gives the power to pay an immediate pension to a member who retires in normal health at or after age 50 which I have already set out. The paragraph continues:
“The amount of pension will be calculated as for deferred pensions (see Clause 4 of Schedule G) and will then be reduced by such a proportion as the Actuary determines having regard to the Member’s age at actual retirement but in no case greater than the amount which would prejudice the Scheme as an exempt approved scheme under Chapter II of Part II of the Finance Act 1970 . . .”
- Schedule G to the Trust Deed sets out the entitlement of a member to “Short Service Benefits”. Short Service Benefits are payable, at Normal Retirement Date, in respect of a member “who leaves Service before his Normal Retirement Date”; and they take the form of a deferred pension or a transfer into another scheme – see paragraphs 3 and 9 of schedule G and (as to transfers) schedule I. The benefits paid to Mr Venables in the present case were not Short Service Benefits under schedule G. But, under the provisions in paragraph 2 of schedule F which I have set out, paragraph 4 of Schedule G was of relevance to the calculation of his retirement benefits on early retirement. Paragraph 4 of schedule G provides, so far as material, that where the benefits at Normal Retirement Date prescribed in the Rules applicable to the member are expressed in the form of a capital sum (as they were in the Rules applicable to Mr Venables) the deferred pension payable under the scheme is to be equal to the member’s interest in the Fund. The effect was that (as Rule 5(a) of the Rules applicable to him had indicated) the benefits payable to him under paragraph 2 of schedule F on early retirement were the benefits that could be provided under the capital sum which had built up out of the company’s contributions. But, again, that was subject to the maximum benefits restriction.
- Paragraph 4 of schedule F defines the maximum benefits. The basic rule is that the pension of a member at Normal Retirement Date shall not exceed two-thirds of his Final Remuneration. Part of that pension may be taken as a commuted lump sum – see paragraph 5 of schedule F – but subject to a maximum (after 20 years service) of 120/80ths of Final Remuneration. Final Remuneration, therefore, is an important concept. It controls both the amount of the pension that can be provided and the amount that can be commuted and taken as a tax free lump sum. It is defined in section 612(1) of the 1988 Act to mean the average annual remuneration of the last three years’ service. But, in the context of the scheme, it has a different and more extensive meaning – see the definition in schedule A to the trust deed:
“ ‘Final Remuneration’ means the greater of (i) . . . or (ii) the average of Increased Total Emoluments for any three or more consecutive years ending not earlier than ten years before the date of retirement leaving Service or death . . .”
In the case of a member who is a director of the employer company and who, in conjunction with any settlement to which he has transferred shares, can exercise more than 20% of the votes exercisable by shareholders in that company (which Mr Venables was in June 1994) Final Remuneration is to be measured by sub-paragraph (ii) of the definition which I have just set out – see paragraph 4B in schedule F to the trust deed. Increased Total Emoluments in respect of any year means the total emoluments received in that year increased by indexation.
The approach to construction
- I have set out the provisions of the scheme in some detail because they demonstrate – as clearly as may be – the need to read the scheme in conjunction with the provisions in Chapter II of Part II of the 1970 Act. The object of the scheme is to provide “relevant benefits” within the meaning of those provisions; that is to say, benefits given or to be given “on retirement . . . or in anticipation of retirement . . . or . . . in connection with any change in the nature of the service of the employee in question” - see section 26(1) of the 1970 Act (now section 612(1) of the 1988 Act). The amount of the benefits is capped by paragraph 4 of Schedule F of the trust deed so as not to prejudice “the approval of the scheme as an exempt approved scheme under Chapter II Part II of [the 1970 Act]”. The Rules applicable to Mr Venables, at Rule 5(d), refer to the restriction on benefits as “one of the conditions of approval” as an exempt approved scheme. With those provisions in mind, it seems to me that – in the absence of some strong contra-indication – the parties to the trust deed must be taken to have intended that words and expressions in the trust deed should be construed in the same sense as that in which the same words and expressions would be understood in the context of the legislative provisions under which approval of the scheme established by the trust deed was to be sought. It must be kept in mind that the trust deed was executed with the intention that the scheme which it established would be put before the Inland Revenue for approval under section 20(1) of the 1970 Act. As Mr Justice Warner observed, in Mettoy Pension Trustees Ltd v Evans and others [1990] 1 WLR 1587, at page 1610H:
“. . . as was common ground, pension scheme documents have to be construed in the light of the requirements of the Inland Revenue Commissioners from time to time for their approval of a scheme . . .”
The Revenue, at least, could be expected to decide whether or not to approve the scheme on the basis that words and expressions in the trust deed were intended to be construed in the context of the legislative provisions unless it was made clear that that was not the parties’ intention. If the parties intended otherwise, it was for them to say so.
- It is relevant, therefore, to ask what meaning should be given to the word “retire” in the context of the legislative provisions contained in Chapter II of Part II of the 1970 Act. The meaning to be given to the word in the context of the legislative provisions is relevant, although not necessarily determinative, because (as I have said) in the absence of some strong indication to the contrary, the parties must be taken to have intended a word which describes a concept of such obvious importance in relation to the payment of benefits under approved schemes to bear the same meaning in the context of the scheme.
The meaning of “retire” in the legislation and the scheme
- The starting point, as it seems to me, is the direction, in the definition of “service” in section 26(1) of the 1970 Act, that “other expressions, including ‘retirement’, shall be construed accordingly”. “Service” means service as an employee of the employer in question”. It must follow that “retirement” means “retirement from service as an employee of the employer in question”. It does not mean or include “change in the nature of service as an employee of the employer in question”. That is confirmed by the distinction, in the definition of “relevant benefits”, between benefits “given on retirement” or “in anticipation of retirement” and benefits given “on or in anticipation of or in connection with any change in the nature of service”. The definition of “relevant benefits” in section 26(1) of the 1970 Act makes it clear that, although “benefits given on retirement” and “benefits given on any change in the nature of service” are both within it, the two concepts are not the same. If “retirement from service” does not mean or include “change in the nature of service” then – as it seems to me – the only meaning which can be given to that expression is “cessation of service”. I would hold that, in the context of the legislative provisions, “retirement” means cessation of service as an employee of the employer in question; and “retire” must be construed accordingly.
- The next step is to ask what is meant by “service as an employee of the employer in question”. Again, the answer is provided by section 26(1) of the 1970 Act. “Employee”, in relation to a company, includes any director of the company. So service as an employee of the company in question must include the holding of the office of director of that company. And it must follow that there is no cessation of service as an employee of the company in question for so long as the director continues to hold that office. That does not lead to the conclusion that relevant benefits under an approved scheme cannot be provided to a managing director or chief executive who, on ceasing to have an executive role, continues as a non-executive director. But it does lead to the conclusion that, if a managing director or chief executive is to be awarded a pension or lump sum in those circumstances, that is a benefit given in connection with a change in the nature of his service, not on his retirement from his service with the employer in question.
- The third step is to ask whether the concept of “retirement” under the scheme is be understood in a different sense from “cessation of service”: in particular, whether, in the context of the scheme, that concept was intended to include a change in the nature of the employee’s service. The definitions in schedule A to the trust deed do not suggest an affirmative answer. “Service”, in the context of the scheme, means “service with an employer for the purposes of the Trust Deed and the Rules”. “Employee” means “a person in the service of the Employer and includes a director”. “Relevant Employment” means “the employment in respect of which an individual is a Member of this Scheme”. The important concept of “Final Remuneration” is defined in terms which recognise a distinction between “retirement” and “leaving Service”; but that is explained by the distinction between benefits payable on retirement under schedule F and Short Service Benefits payable under schedule G. “Leaving Service” is, plainly, synonymous with “cessation of service”; but that does not lead to the conclusion that “retirement” is not also to be understood in that sense. An employee whose service ceases before Normal Retirement Date will, in the ordinary case, be treated as “leaving Service” for the purposes of an entitlement to “Short Service Benefits” under schedule G; but he may, exceptionally (as in the case of Mr Venables), be treated as having “retired” for the purposes of an entitlement to an immediate pension on early retirement under schedule F. The apparent distinction between “retirement” and “leaving Service” – recognised in the definition of “Final Remuneration” and incorporated in the respective provisions of schedules F and G – provides no support for a conclusion that “retirement” is to be understood, in the context of the scheme, in any sense other than “cessation of service”.
- For my part, I would not exclude the possibility that the Rules applicable to a particular employee might define his “Relevant Employment” – that is to say, the employment in respect of which that employee is admitted to membership of the scheme - in such a way as to confine his service with the employer in question to service in a particular role. So, for example, the Rules applicable to him might have the effect that his service, for the purposes of the scheme, was service as an executive under a contract of service. In such a case, service would cease on termination of his contract of service; notwithstanding that he continued as a non-executive director. But that is not this case. There is nothing in the letter of 25 September 1980, or its attachment, which has the effect of confining Mr Venables’ service with the company to service in a particular role. Indeed, there is nothing in the commissioner’s findings to suggest that Mr Venables ever had a contract of service under which he was employed in an executive role.
- It follows that I would decide the principal issue against the taxpayers. In my view the payments were not authorised by the Rules because they were not made to a member who retired within the meaning of paragraph 2 of schedule F to the trust deed or paragraph 5(a) of the attachment to the letter of 25 September 1980.
The secondary issue: were the payments made at all?
- This issue, as the judge recognised, did not arise on the appeals before him in the circumstances that he had held that the payments were authorised by the rules of the scheme. Nevertheless the issue had been argued before him and he addressed it in his judgment. He summarised the argument advanced on behalf of the taxpayers in four propositions: (a) if the payment to Mr Venables was not authorised by the trust deed or the rules, then he was not beneficially entitled to it; (b) Mr Venables was a trustee of the scheme, and if he was not entitled to the payment, he could not have taken it free from the trusts of the scheme; (c) consequently, the money remained subject to the trusts of the scheme, and nothing accrued to Mr Venables; (d) accordingly he received nothing and there was therefore no payment to him.
- In my view, that argument was plainly untenable. Section 600 of the 1988 Act imposes a charge to tax in circumstances where (i) a payment to or 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 – see Snell’s Equity (30th edition, 2000) at paragraph 13-41, pages 340-1. 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) were still subject to the trusts of the scheme.
- 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 – see paragraph 37 of the judgment which he handed down on 14 June 2001. He found support for that formulation in the decision of Mrs Justice Arden in Hillsdown Holdings plc v Inland Revenue Commissioners [1999] STC 561.
- In the Hillsdown Holdings case, the company and the trustees of its pension scheme sought repayment of tax charged and paid under section 601 of the 1988 Act. The section is in these terms, so far as material:
“(1) Subsection (2) below applies where a payment is made to an employer out of funds which are or have been held for the purposes of a scheme which is or has at any time been an exempt approved scheme and whether or not the payment is made in pursuance of Schedule 22 [reduction of pension fund surpluses].
(2) An amount equal to 40 per cent of the payment shall be recoverable by the Board from the employer.”
- The relevant facts may be stated shortly. Following the acquisition by Hillsdown of the FMC group of companies, surplus assets in the FMC pensions scheme were transferred to the HF pensions scheme in respect of which Hillsdown was the employer. As a result of that transfer the HF scheme was found to be in surplus. The revenue approved a reduction of that surplus, under schedule 22 to the 1988 Act, and a payment was made to Hillsdown. Tax was charged and paid under section 601 of the Act. There was no power, under the FMC scheme, to transfer surplus assets to an employer on winding up and no power to introduce such a power by amendment; but a power to that effect had been introduced into the HF scheme. It was subsequently held, on a complaint by a member of the FMC scheme, that the FMC trustees had been in breach of trust in transferring surplus assets to the HF trustees in the knowledge that those assets would, indirectly, be returned to the employer. Hillsdown was ordered to repay to the HF trustees the monies which it had received. It did so, after deduction of the tax already paid under section 601 of the Act. The issue before Mrs Justice Arden was whether the Revenue were liable to repay the tax. That turned on whether the payment which had been (but which ought not to have been) made by the HF trustees to Hillsdown was a payment for the purposes of section 601 of the Act. She held that it was not.
- The kernel of Mrs Justice Arden’s reasoning in the Hillsdown Holdings case – at least for present purposes - is to be found, I think, in a passage at [1999] STC 561, 571h-j. After expressing the view (ibid, at a-b) that “there is no reason in the present case why Parliament should seek in s 601 to tax a payment which was not effectively made” and that the policy of the sections would suggest otherwise, she said this:
“Further support .... is to be found in section 601(1) itself: the payment must be ‘out of’ the fund. In my judgment, these words indicate that the payment must result in funds effectively leaving the fund as intended by the transaction (whether absolutely or for a period, as in the case of a loan). The words ‘out of’ are not apt to describe a payment which, contrary to the stated effect of the transaction, does not have the effect of changing the ownership of the monies paid and is in fact reversed. Likewise, under s 601, the payment must be made ‘to an employer’ and this must mean in the employer’s capacity as such and exclude the case where the employer merely receives the moneys as a trustee under a trust arising under operation of law for the fund.”
- If it were necessary to do so, the revenue would contend that the Hillsdown Holdings case was wrongly decided and invite this Court to overrule that decision. But their primary submission is that that is not necessary; the present case can be distinguished. In my view they are correct in that submission. The charge to tax under section 601 of the 1988 Act arises whenever a payment is made to an employer out of funds which are or have been held for the purposes of an exempt approved scheme. The object of that taxing provision – as counsel for Hillsdown had submitted and Mrs Justice Arden, I think, accepted - was “in a rough-and-ready way” to reverse the tax advantage which an employer would otherwise obtain if there were repaid to it, free of tax, monies derived from contributions which it had made into an exempt approved scheme – see [1999] STC 561, 567a-b. It must be kept in mind that that the employer will have obtained tax relief in respect of its contributions; and that (as the law then stood) the investment income generated in the pension fund would be exempt from tax. So, if surplus assets are repaid to the employer, there must be a tax charge. It is also necessary to keep in mind that an employer’s scheme may be expected to contain provision for the return of surplus assets (after actuarial certification) and that section 603 of the 1988 Act, and schedule 22, provide for the making of regulations in relation to the reduction or repayment of surpluses. It is to be expected that payments which attract tax under section 601 of the Act will be payments which are authorised by the scheme rules and comply with schedule 22 and the regulations. The unauthorised payment is likely to be the exception. Effect can be given to section 601 of the 1988 Act on the basis that unauthorised payments are not to be treated as payments at all – as Mrs Justice Arden decided.
- By contrast, the charge to tax under section 600 of the 1988 Act arises only where the payment is unauthorised and in breach of trust. 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 that 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 or 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.
- The point can be illustrated by an example. Suppose A receives a lump sum out of the scheme funds on 1 January. On 1 July it is discovered that that sum was paid in breach of the rules. A is not willing to accept there has been a breach of the rules, and wishes to take legal advice. At that stage, applying the judge’s third condition, the payment is treated as a payment for the purposes of section 600 of the Act. On 1 October, after taking advice, A accepts that he should repay the monies; but is not then in a position to do so. Again, applying the judge’s third condition, the payment made on 1 January is still treated as a payment for the purposes of section 600 of the Act. On 1 December the revenue make an assessment on A in respect of the monies received in the previous year of assessment. Applying the judge’s third condition, that assessment is properly made at the time. Six months later, on 1 June in the following calendar year, A receives a windfall and is then in a position to make repayment. He remains willing to do so. The effect of the judge’s third condition is that what has been, for the previous eighteen months, properly treated as a payment for the purposes of section 600 of the 1988 Act (and has given rise to a valid assessment to tax under that section) has ceased to be a payment for those purposes. And the position is the more bizarre if it is supposed that, on 1 September in the second year, before A has actually made any repayment, he falls on hard times (or finds some other pressing need for the money) and is no longer in a position to do so. Is the payment of 1 January once again to be treated as a payment for the purposes of section 600 of the Act? The judge’s third condition requires an affirmative answer. I cannot believe that Parliament intended that the question whether a charge to tax has arisen should depend on the state of mind and financial position of the taxpayer after the event.
- Further, there is, of course, the evidential difficulty, in the present case, that the special commissioner has made no finding whether Mr Venables is willing and able to repay to the trustees the monies paid to him in 1994. In the circumstances that the scheme has ceased to be an exempt approved scheme, it cannot be assumed that he would be. What the position would have been if Mr Venables had repaid to the trustees the monies paid to him before any assessment had been made does not arise for decision in the present case.
- I would decide the secondary issue against the taxpayers. In my view the payments made to Mr Venables in July and August 1994 were payments “made out of funds held the purposes of [the scheme]” to which section 600 of the 1988 Act applied.
Conclusion
- I would allow this appeal.
Lord Justice Potter:
- I agree
Lord Justice Peter Gibson:
- Although we are differing from the conclusions of the judge and from the reasoning of the Special Commissioner, there is nothing which I would wish to add to Chadwick L.J.’s comprehensive judgment with which I am in entire agreement.
Order: Appeal allowed; Respondents do pay Appellant’s costs in the Court of Appeal and in the High Court; such costs to be subject of a detailed assessment unless otherwise agreed.
(Order does not form part of the approved judgment)
