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CH/2009/APP/0005
NEUTRAL CITATION NUMBER: [2009] EWHC 3287 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand
London WC2A 2LL
Monday, 16
th
November 2009
BEFORE:
MRS JUSTICE PROUDMAN
BETWEEN:
JE CHILCOTT & OTHERS
Appellants
-v-
THE COMMISSIONERS FOR HM REVENUE AND CUSTOMS
Respondent
----------
MR P YERBURY
(instructed by
Fasken Martineau LLP
) appeared on behalf of the Appellants.
MR A NAWBATT
(instructed by HMRC) appeared on behalf of the Respondent.
----------
A P P R O V E D J U D G M E N T
Crown CopyrightŠ
----------
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J U D G M E N T
1.
MRS JUSTICE PROUDMAN: This is an appeal in point of law by taxpayers, Mr Chilcott and Mr Griffiths and Evolution Group Services Limited ("EGS"), against the decision of the Special Commissioner Mr John Clark sitting in London on 22
nd
October 2008 upholding assessments on Mr Chilcott and Mr Griffiths to income tax under section 144A of the Income and Corporation Taxes Act 1988 ("the Taxes Act")
2.
The appeal concerns the construction and application of that section. Section 144A was inserted into the Taxes Act by the Finance Act 1994. The section has been replaced by section 222 of the Income Tax (Earnings and Pensions) Act 2003 in similar terms, save that for payments treated as made on or after 6
th
April 2003 a period of 90 days is substituted for the period of 30 days in section 144A.
3.
The agreed facts are set out at length in the decision. For present purposes I propose to summarise them.
4.
Mr Chilcott and Mr Griffiths were employees of EGS. They were granted and exercised options over EGS Group company shares and they respectively exercised those options in December and June 2001, making substantial unrealised gains.
5.
Mr Chilcott and Mr Griffiths advanced arguments that a notional gain had not arisen under section 135 of the Taxes Act, but they eventually dropped those arguments and accepted that there were notional gains chargeable to income tax under that section in the year ended 5
th
April 2002. They disclosed the chargeable amounts on their 2001/2003 self-assessment returns and paid the amount of income tax due.
6.
Section 135(1) of the Taxes Act provides as follows.
"…
where a person realises a gain by the exercise, or by the assignment or release, of a right to acquire shares in a body corporate obtained by that person as a director or employee of that or any other body corporate, he shall be chargeable to tax under Schedule E on an amount equal to the amount of his gain, as computed in accordance with this section ."
7.
The exercise of the share options constituted a notional payment by the employer, who was therefore required if possible to operate Pay As You Earn by virtue of section 203FB of the Taxes Act. However, EGS could not do so because it was making no payment from which tax could be deducted. In such circumstances section 203J of the Taxes Act prescribed how the employer should deduct and account for the tax in cases where section 203B to 203I applied. In summary, the employer should first deduct from any actual payments (such as salary) made at the same time or later in the income tax period as a notional payment occurred. However if the employer was unable to deduct a sufficient amount to cover the PAYE tax the employer was still required to account for the tax – see section 203J(1) and (3).
8.
The legislation made no provision for how the employer might recover any balance of tax from the employee which is left as a matter between them. However, it has been held that the employer can require the employee to repay the tax as money paid to his use: see
McCarthy v McCarthy & Stone plc [2006] EWHC 1851
at paragraphs 69 to 73.
9.
The legislation did, however, make provision for a charge on the employee where the employee did not make good, within 30 days of the notional payment, the amount required to account for under section 203J. That provision was section 144A of the Taxes Act which provided as follows:
"Payments etc. received free of tax.
(1) In any case where-
(a) an employer is treated, by virtue of any of sections 203B to 203I, as having made a payment of income of an employee which is assessable to income tax under Schedule E,
(b) the employer is required, by virtue of section 203J(3), to account for an amount of income tax ('the due amount') in respect of that payment, and
(c) the employee does not, before the end of the period of thirty days from the date on which the employer is treated as making that payment, make good the due amount to the employer,
the due amount shall be treated as income of the employee which arises on the date mentioned in paragraph (c) above and is assessable to income tax under Schedule E."
10.
Mr Chilcott and Mr Griffiths did not reimburse EGS for Schedule E tax payable on the notional gains within 30 days of the date that the notional gains arose. HMRC therefore contended that a tax charge applied under Section 144A of the Taxes Act and assessed Mr Chilcott and Mr Griffiths accordingly for the year 2001/2002. It was those assessments that were confirmed by the Special Commissioner.
11.
At the heart of Mr Yerbury's submissions on the appellants' behalf is the contention that section 144A of the Taxes Act falls to be construed as not applying in any situation where the PAYE tax has in fact been made good by reimbursement at any time.
12.
Mr Yerbury prays in aid a number of matters which he says lead to this interpretation. First, he says that a purposive construction should be applied and relies on the well-known decision in
MacNiven v Westmoreland Investments Limited [2006] STC 237
to that effect. He also relies on the heading to section 144A "Payments received free of tax" for guidance as to the purpose of the section. He says that section 144A of the Taxes Act applied to the whole bundle of provisions contained in section 203B to 203J, and that the Special Commissioner ignored the fact that all the other provisions, namely sections 203B to I, comprise anti-avoidance sections.
13.
Mr Nawbatt for HMRC disputes that this is the case, saying that section 203D and E are not so much anti-avoidance provisions as situations where it is difficult to collect tax on payments. Mr Yerbury also submitted that as the tax payable under section 144A was expressly said to be payable under Schedule E, it had the character of an emolument. In such circumstances he submitted that there could be no emolument where the employer was reimbursed the payment it had made. He placed heavy reliance on section 156(1) of the Taxes Act, which makes express provision for the situation where the taxpayer makes good the value of a benefit in kind provided by an employer, i.e. reimburses him. It is only the balance, if any, which is taxable under section 154. Mr Yerbury submitted that the construction placed on this section by the Special Commissioner involves tax upon tax and, in effect, double taxation. These were all factors which the Special Commissioner ignored or gave insufficient weight to when construing the statute.
14.
Peter Smith J commented on the successor provisions to section 144A of the Taxes Act in
McCarthy v McCarthy & Stone plc [2006] EWHC 1851
at paragraph 55 of his judgment as follows:
"…if an employee does not pay to the employer the sum due from the employer to the Inland Revenue pursuant to [the PAYE provisions] within 90 days the sum paid by the employer is to be treated as earnings from employment of the employee within the relevant year. In my view…this is a rough and ready clause designed to penalise the employee who does not account to his employer for the Revenue by raising an assessment on him to cover that 90 day period. It is an extra payment and in my view has nothing to do with the actual Income Tax deduction operated by virtue of section 710 ITEA. The liability arises out of consequence to pay the amount within the 90 days. If the Claimant is liable to pay the subject matter of the Counterclaim that does not involve a double deduction in my view; it merely involves the consequence of his delaying the payment because he is having the benefit of the use of money which he ought to have paid to the Company. It is designed to stop the Company making the payment and not obtaining reimbursement."
15.
There was some argument before me as to what Peter Smith J meant by "penalise" in this context. Mr Yerbury confirmed that he was not suggesting that the section imposed a penalty of the kind that required negligence. I agree that there is a penalty in the ordinary use of language to the extent that tax is not precisely calculated according to the loss suffered by the employer. The tax is the same whether the payment is made one day or five years outside the statutory period. It is, as Peter Smith J said, a rough and ready recognition of the fact that the employee has had the benefit of money expended for him by the employer. It is doubtless intended to encourage employees not merely to reimburse their employers but to reimburse them promptly.
16.
On any basis, the legislation is clearly expressed and highly prescriptive. The difficulty with Mr Yerbury's submissions on statutory construction is that the appellants concede that the meaning of the words used in section 144A is plain and that it contains no obscurity or ambiguity of language. In order to construe the section in the way that Mr Yerbury submits that it should be construed, it would be necessary to ignore, as though they were not there, all the words between the first two commas in section 144A(1)(c), namely the words "before the end of the period of thirty days from the date on which the employer is treated as making that payment".
17.
Mr Yerbury proffers two bases on which he says that the court can and should construe the section in such a way. The first is by reference to Hansard according to the principles enunciated in
Pepper v Hart [1993] AC 593
. Those principles were summarised by Lord Browne-Wilkinson at 640 as follows:
"I therefore reach the conclusion, subject to any question of Parliamentary privilege, that the exclusionary rule should be relaxed so as to permit reference to Parliamentary materials where (a) legislation is ambiguous or obscure, or leads to an absurdity; (b) the material relied upon consists of one or more statements by a Minister or other promoter of the Bill together if necessary with such other Parliamentary material as is necessary to understand such statements and their effect; (c) the statements relied upon are clear."
18.
The appellants concede that section 144A is neither ambiguous nor obscure. What is said, however, is that the literal reading of the section leads to an absurdity. Mr Yerbury says that it is wrong in principle to charge tax on tax in circumstances where reimbursement is one day late. It is unreasonable that the tax should be of the same amount whatever the length of time that has elapsed since the end of the 30-day period. It is illogical to charge tax on an emolument where the employee has not in fact received any benefit because he has reimbursed the employer for it. Section 156 recognises that tax should not be charged in similar circumstances, but section 144A does not. The section is plainly designed to form part of anti-avoidance provisions (which, says Mr Yerbury, is also evident from the section heading) and there is no anti-avoidance where the employer has been reimbursed. There is therefore inconsistency and manifest injustice which, submits Mr Yerbury, is the kind of absurdity which lets in evidence which would otherwise be inadmissible.
19.
However, it seems to me that Mr Yerbury is inviting the court to do more than construe the section. He is asking for it to be completely rewritten to reflect what he submits it ought to have said. This moreover is in the context where the words he is seeking in effect to delete have been re-enacted with an amendment to the period in question. In such circumstances it seems to me that Parliamentary material cannot aid interpretation. Just or unjust, the words of the section can bear only one meaning. In my judgment, the first limb of Lord Browne-Wilkinson's test is not satisfied.
20.
Assuming, however, that I am wrong and I ought to look at the Parliamentary material, the further question arises of what material would be admissible under limb (b) of the test. I have been taken to various statements made in Parliament, both in the House of Commons and the House of Lords. One at least of those statements is made by a shadow spokesman rather than a minister or promoter of the Bill and takes the matter no further in helping the court to understand the statements of the minister or others promoting the bill.
21. It is, however, unnecessary for me to decide what parts of the speeches in Parliament would be admissible in
Pepper v Hart
under limb (b) because of the conclusions I have reached under limb (c). For that limb to be satisfied the statements as to what Parliament intended have to be clear. The first set of excerpts relate to the Finance Bill 1994. The second set relate to the Finance Bill 1998. However, in both cases there are no comments directly relating to section 135J or to the meaning of section 144A. What comments there are relate to closing tax loopholes involving payments in coffee beans, gold bars platinum, sponges and the like; that is to say, i.e. the forerunner of section 203F. Thus, the only way in which Mr Yerbury can put his case under limb (c) is to say that Parliament believed that this part of the Finance Bills was about anti-avoidance and simply did not consider or address the question of reimbursement. As he put it, the passages indicate that the consequences of this section on section 203J were not explained to Parliament and "were not thought through properly". However,
Pepper v Hart
does not in my judgment permit statements about some parts of the legislation to be adduced in support of an allegation that other parts (the parts under interpretation by the co urt) were not considered. The purpose of limb (c) is to obtain from Parliament itself a clear expression of the meaning and intention of the provisions which have to be interpreted. These passages go nowhere near far enough to assist the court in that regard. I am therefore firmly of the view that this is not a
Pepper v Hart
case.
22.
However that is not an end of the matter. Mr Yerbury also relies on the decision of the Court of Appeal in
Marshall v Kerr [1993] STC 360
and in particular what Peter Gibson LJ (with whom the other members of the Court agreed) said at 366:
"…I take the correct approach in construing a deeming provision to be to give the words used their ordinary and natural meaning, consistent so far as possible with the policy of the Act and the purposes of the provisions so far as such policy and purposes can be ascertained; but if such construction would lead to injustice or absurdity, the application of the statutory fiction should be limited to the extent needed to avoid such injustice or absurdity, unless such application would clearly be within the purposes of the fiction. I further bear in mind that because one must treat as real that which is only deemed to be so, one must treat as real the consequences and incidents inevitably flowing from or accompanying that deemed state of affairs, unless prohibited from doing so."
23.
Mr Yerbury submitted that this means that if a literal interpretation of a tax statute would lead to an injustice, it is incumbent on the court to interpret the section in such a way as if the unjust provision were not incorporated. However, I do not believe that Peter Gibson LJ went anything like so far as that. His words must not be taken out of context. In
Marshall v Kerr
the Court of Appeal was dealing with the construction of a deeming provision. The court decided that there was nothing in the Act which required the words being construed to be given anything other than their ordinary and natural meaning. Peter Gibson LJ also said (at 366) that while it is of course permissible to take a purposive approach to construction, "there is a real danger that if a court in every case feels bound to commence its construction of a statutory provision by finding [its] purpose, it will make a self-fulfilling assumption of what the purpose is".
24.
Of course the court should attempt to resolve any ambiguity by rejecting the interpretation which gives rise to an injustice. Parliament must be deemed to have intended a result which was both logical and fair. However, I do not read the decision in that case or Peter Gibson LJ's words to mean that the court ought to rewrite a section or blue pencil clear words on the grounds that it may lead to an unfair result. In my view, that is the case even if (and I say nothing about whether that is so in this case) those words do not appear to fulfil the general purposes of the Part of the statute in question. If the words are there, and their meaning is prescriptive and clear, it is for Parliament, not the Court, to amend them. Such an amendment would in my judgment go well beyond the Court's role of interpretation.
25.
I find that the Special Commissioner's decision ought to be upheld for the reasons which he gave. I would merely add that I do not share his concerns that employees who choose not to reimburse their employer (having the benefit of a tax credit and paying only the section 144A tax) are put in a better position by the statute than those who do. It seems to me that his concern ignores the fact that the employer has a right of recovery against the employee for money paid to his use.
26.
I would dismiss the appeal.
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