#2413 - Interpretation And Avoidance - Tax Law

Interpretation and Avoidance

The interpretation of taxing statutes

The traditional approach

Styles v Treasurer of Middle Temple

• Wills J

• I am rather disposed to repudiate the notion of there being any artificial distinction between the rules to be applied to a taxing Act and the rules to be applied to any other Act. I do not think such artificial distinctions can help anybody arrive at the plain meaning of words.

Mangin v IRC

• Lord Donovan

• The words are to be given their ordinary meaning. They are not to be given some other meaning simply because their object is to frustrate legitimate tax avoidance devices. Moral precepts are not applicable to the interpretation of revenue statutes.

Partington v AG

• Lord Cairns LC

• If the subject comes within the letter or the law he must be taxed, however great the hardship may appear to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. If there be admissible, in any statute, what is called an equitable construction, certainly such a construction is not admissible in a taxing statute, where you can simply adhere to the words of the statute.

Cape Brandy Syndicate

• Rowlatt J

• In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.

Ramsay v IRC

• Lord Wilberforce

• A subject is only to be taxed on clear words, not on ‘intendment’ or on the ‘equity’ of an Act. Any taxing Act of Parliament is to be construed in accordance with this principle. What are ‘clear words’ is to be ascertained on normal principles. There may, indeed should, be considered, the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded.

Wilcox v Smith

• If the Act is ambiguous, the subject is entitled to the benefit of the doubt.

R v Winstanely

• Lord Wynford

• If the legislature is not made to speak plain and intelligible language let not individuals suffer, but let the public… if there is any doubt about these words, the benefit of the doubt should be given to the subject.

Adamson v AG

• Lord Warrington of Clyffe

• It is incumbent upon the Crown to establish that its claim comes within the very word used… if there is any doubt or ambiguity, it can only be remedied by legislation.

Bladnoch Distillery v IRC

• Lord Thankerton

• If the provision is reasonably capable of two alternative meanings, the courts will prefer the meaning more favourable to the subject.

IRC v Ayrshire Employers Mutual Insurance Assoc

• Lord Simonds

• It follows that upon an initial assumption in favour of counsel (for the Revenue) the section became meaningless and the hypothetical profit or surplus indeterminable.

• Lord Thankerton

• The legislature has plainly missed fire.

Bladnoch Distillery v IRC

• If the provision is so wanting in clarity that no meaning is reasonably clear, the courts will be unable to regard it as of any effect.

Comrs of C & E v Top Ten

• The courts may find themselves so totally unable to draw the line as to decide nothing more than that the subject has not clearly enough been taxed.

Monroe, Intolerable Inquisition

• This appears to be the judge’s dilemma. In looking for the meaning of a taxing statute he must reject as indications the purpose of the Act. His eyes must be fixed on the words, and the words alone, which he is called on to construe. If the words are clear, his task is over. He takes them, he applies them; down tumbles the sky, but the rules have been observed. If, however, the words are blurred, if they are not clear, then he may, nay he must, look at the context in which they are found and construe the Act as a whole.

Craven v White

• The purpose does not appear to be of any assistance, for the elaborate provisions of the Act make it clear that the purpose was to tax some people and not others in respect of certain transactions and not others and one can only determine which people and which transactions by looking at the words of the section.

Dealing with tax avoidance

The traditional approach

Levene v IRC

• Lord Sumner

• It is trite law that His Majesty’s subjects are free, if they can, to make their own arrangements, so that their cases may fall outside the scope of the taxing Acts. They incur no legal penalties and, strictly speaking, no moral censure if, having considered the lines drawn by the legislature for the imposition of taxes, they make it their business to walk outside them.

• Flesch: recognises the moral right of the would-be tax avoider.

Ayrshire Pullman Motor Services v IRC

• Lord President Clyde

• No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property so as to enable the IR to put the largest poss shovel into his stores.

IRC v Duke of Westminster

• So long as the form of the transaction is in fact carried out, it cannot be disregarded by the Commissioners or the court in favour of some more normal and likely form which would attract greater tax.

• DoW entered into deeds of covenant to pay weekly sums to a number of his servants and thereafter reduced their wages by the same amount as was payable under the deeds.

• HL, by a majority of four to one, decided that the courts could not disregard the form of the transaction and substitute their own view of substance, unless it was alleged and proved that the form was a sham and was not intended to be given legal effect. As, in the case, the deeds of covenant were certainly intended to be given effect to and were, in fact, acted upon, HL held that they were valid to reduce the Duke’s surtax.

• Lord Tomlin

• every man is entitled, if he can, to order his affairs so as that the tax attaching under appropriate Acts is less than it would otherwise be. If he succeeds in ordering them so as to secure the result, then, however unappreciative the Commissioners or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.

• Lord Atkin

• I agree that you must not go beyond the legal effect of the agreements and conveyances made, construed in accordance with ordinary rules in reference to all the surrounding circumstances.

McFarlane and Simpson

• A part or parties wishing to organise their affairs to lessen the incidence of taxation can draw encouragement from the straightforward approach suggested by Lord Tomlin in the HL in Duke of Westminster. Of course, his statement leaves open precisely how it is that one determines whether a taxpayer has succeeded in so ordering his affairs, but the Westminster case makes clear that tax is to be levied by reference to a legal analysis of the taxpayer’s affairs not according to some underlying factual substance. Just as Street v Mountford emphasises that it is the legal rights of the parties to an occupation agreement that matter when it comes to the application of the Rent Acts, liability for tax is equally determined by the legal effects of a taxpayer’s action.

• Such a preference for a fully legal characterisation of the facts has in the past been accompanied by a cautious judicial approach to the construction of fiscal legislation. Article 4 of the Bill of Rights 1688 makes clear that taxation is a matter for Parliament and judges are consequently war of appearing to impose a tax themselves when applying statutory words.

• Therefore, prior to the development of the Ramsay principle in Furniss v Dawson, two crucial principles underpinned the application of taxing statutes to factual situations.

  • First, Parliament needs to speak particularly clearly if it wishes to exact a tax; and

  • secondly, the taxpayer is entitled to have the legal structure of his transactions respect rather than any underlying economic substance, unless of course the documentation were ‘used as a cloak to conceal a different transaction.’

The War Years

Lord Howard de Walden v IRC

• The Master of the Rolls

• For years a battle of manoeuvre has been waged between the legislature and those who are minded to throw the burden of taxation off their own shoulders on to those of fellow subjects. In that battle the legislature had often been worsted by the skill, determination and resourcefulness of its opponents of whom the present appellant has not been the least successful. It would not shock us in the least to find that the legislature has determined to put an end to the struggle by imposing the severest of penalties. It scarcely lies in the mouth of the taxpayer who plays with fire to complain of burnt fingers.

Latilla v IRC

• Lord Simon

• Of recent years much ingenuity has been expended in certain quarters in attempting to devise methods of disposition of income by which those who were prepared to adopt them might enjoy the benefits of residence in this country while receiving the equivalent of such income without sharing in the appropriate burden of British taxation (nb signs of social contract theory).

• Judicial dicta may be cited which point out that, however elaborate and artificial such methods may be, those who adopt them are "entitled" to do so. There is, of course, no doubt that they are within their legal rights, but that is no reason why their efforts, or those of the professional gentlemen who assist them in the matter, should be regarded as a commendable exercise of ingenuity or as a discharge of the duties of good...