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Although I agree with the outcome that Lord Phillips proposes, I have some reservations as to whether this is the primary issue in this case. Ratio |
It appears to me that the matter of critical importance is whether forfeiture of a sum of less than the full amount of the donation is possible. Ratio |
If it is, it seems to me to follow logically that the discretion should be wide; if it is not, for the reasons that I have given above, it is difficult to see how a broadly based discretion would be appropriate. Ratio |
If one approaches the question whether it is possible under the legislation to order forfeiture of a lesser sum than the actual donation by concentrating exclusively on the language of section 58(2) (and section 65(6)), the answer given by the Court of Appeal and powerfully endorsed by Lord Rodger and Lord Brown is dif... |
But, as a matter of general principle, the purpose of an item of legislation should inform ones approach to the interpretation of its constituent parts and I therefore believe that this is a case where it is clearly necessary to be guided in the construction of the relevant provisions not only by the language used but ... |
The central purpose of the legislation was to prohibit donations from those who did not have a stake in this country. Ratio |
I do not accept Mr Beloff QCs argument that its purpose evolved from a desire to ban foreign donors to one of denying the right to give donations to those who could not vote. Ratio |
The Act was the result of the governments commitment in its manifesto to ban foreign donors. Ratio |
An examination of the materials that preceded its enactment reveal, I believe, that this was always the driver for the legislation. Ratio |
Paras 4.5 and 4.6 of the White Paper (on which Mr Beloff relied to advance his evolution thesis) are concerned with devising a convenient and easy-to-apply means of enforcement. Ratio |
They do not represent a change of direction in government thinking on the target for the restriction. Ratio |
The means chosen to achieve the aim of banning foreign donors obviously has the potential to catch more than that category of persons. Ratio |
Individual permissible donors are confined under section 54 to those who are registered in an electoral register and quite clearly this can include persons who have a stake in the country and people such as Mr Bown who are not registered in an electoral register possibly because of an administrative error. Ratio |
A critical issue, therefore, is whether the fact that someone such as he is caught by the breadth of section 54 can affect the way in which section 58 is to be construed. Ratio |
At first sight it does not appear that this should influence the interpretation of section 58(2). Ratio |
The court is given the power to order the forfeiture of an amount equal to the value of the donation. Ratio |
It is not empowered at least not on the face of the subsection to order that an amount up to the value of the donation be forfeit. Ratio |
And Lord Brown has articulated a strong argument to the effect that if this was the intention of Parliament, it could easily have been achieved. Ratio |
One might also recognise that the notion of forfeiture is traditionally the deprivation of a specific amount or object. Ratio |
Forfeiture is defined in the Oxford English Dictionary as the fact of losing or becoming liable to deprivation of (an estate, goods, life, an office, right, etc) in consequence of a crime, offence, or breach of engagement or that which is forfeited; a pecuniary penalty, a fine. Ratio |
One of the definitions of forfeit is something to which the right is lost by the commission of a crime or fault. Ratio |
These definitions indicate, I think, that the use of the word forfeiture is commonly associated with the deprivation of a defined thing. Ratio |
There are strong policy reasons for interpreting section 58(2) in the manner that the appellant contends for, however. Ratio |
The culpability of the offender is more easily reflected in the penalty if one has a calibrated reaction to the gradations of impermissibility that will arise; the impact on the party of the proposed forfeiture order can be assessed; whether it is a foreign donation can be taken into account; and the inaction of the El... |
But the strongest and, ultimately, for me, the most convincing - argument in favour of the interpretation advanced by the appellant is that it was never intended that there be forfeiture in the true sense of that term where the donor was someone who was entitled to be on the electoral register but who was not registere... |
The sense that one gets from the Neill Report is that what was intended was the devising of a range of penalties to deal with the various types of impermissible donation and that the word forfeiture was not used in the report in its conventional connotation. Ratio |
This much is, I think, clear from para 5.42 of the report where it was proposed that a sum not less than the donation should be liable to forfeiture from the partys funds and that in significant cases a penalty of up to ten times the donation might be levied. Ratio |
Notably, this paragraph also contained the suggestion that, while a forfeiture power should also apply even if the receipt were innocent or inadvertent, the courts would clearly take into account the degree of culpability in setting the level of forfeiture (emphasis added). Ratio |
The use of the phrase level of forfeiture clearly contemplates, in my opinion, a sanction involving the payment of a sum less than the full amount of the donation. Ratio |
There is nothing in the White Paper that signals a movement by the government away from the essential purpose identified by the Neill Report and the reasoning that underlay its recommendations. Ratio |
The changes to the Neill proposals came about as a matter of administrative expediency rather than for reasons of principle. Ratio |
It is therefore possible to hold that, since the primary function of the Act was to ban foreign donors, the legislature must have intended that where others were caught because of the simplicity and breadth of the provision that was actually adopted to achieve that aim, they would not be subject to the same draconian p... |
Lord Diplock, in commenting on the decision of the House of Lords in Inland Revenue Comrs v Ayrshire Employers Mutual Insurance Association Ltd [1946] 1 All ER 637, said that if the courts can identify the target of legislation, their proper function is to see that it is hit; not merely to record that it has been misse... |
One might adapt that statement slightly to meet the circumstances of the present case by saying that courts should ensure that the target is not subject to greater fire than was intended. PRE |
Concluding, as I therefore do, that the court has power to make an order of forfeiture for less than the full amount of the donation, I am of the view that the discretion of the court as to the level at which to fix the sanction at less than full forfeiture must be wide. Ratio |
But I agree with Lord Phillips that where it is shown that a donation has come from an impermissible source it should be presumed that this is a foreign donation and that if the presumption is not rebutted, forfeiture should follow. Ratio |
If, however, it can be shown that the donation was not from a foreign donor but came from someone who was entitled to be in an electoral register, the level of forfeiture should reflect the particular circumstances of the case. Ratio |
I would therefore allow the appeal. RPC |
As to disposal, I agree with the order that Lord Phillips proposes should be made. RPC |
Both sides agree that the transactions before the Court on this appeal may give rise to taxable interest under three actual or notional loan transactions (the cautious may in the statement of facts and issues, paragraph 30, reflects the Revenues ultimate fall-back position that two of the transactions produce no debit ... |
The three loan transactions are as follows: (1) The actual loan transaction between the United Kingdom government and the holder of United Kingdom Government securities (gilts); (2) A loan transaction between DCC Holdings (UK) Ltd (DCC) as lender and Ulster Bank Ireland Ltd (the Bank) as borrower deemed to exist under ... |
Counsel on both sides put this analysis in the forefront of their written cases. Ratio |
The two sides have now been arguing for over six years about DCCs tax return for the relevant period (1 April 2001 to 31 March 2002), and they are now extremely familiar with the arguments. Ratio |
For them the arena is already well-trodden. Ratio |
But for those who are less familiar with the arguments it is unhelpful to be confronted at once with these three abstract relationships, two of which are statutory constructs. Ratio |
It is more helpful to start with the general nature of the problems which Parliament was trying to address, first in sections 730A and 737A of ICTA 1988 and then in Part IV, Chapter II of FA 1996, and the general nature of the solutions which Parliament adopted to deal with those problems. Ratio |
One source of taxable income is interest payable by a debtor to a creditor. Ratio |
Traditionally that was taxed under Schedule D, Case III under the simple rubric of interest of money, whether yearly or otherwise. Ratio |
The rule was that even though under the general law most interest accrues from day to day, that was not the right treatment for the purposes of Schedule D, Case III. Ratio |
The tax rule was (as the Special Commissioner observed in this case, echoing Rowlatt J in Leigh v Inland Revenue Commissioners [1928] 1 KB 73, 77 and Lord Hanworth MR in Dewar v Inland Revenue Commissioners [1935] 2 KB 351, 366) that receivability without receipt is nothing. Ratio |
Apart from anti-avoidance provisions the Revenue could not charge income tax on a holder of gilts who, by a well-timed sale just before payment of a half-yearly instalment of interest, in effect turned accrued income into a capital gain (Wigmore v Thomas Summerson & Sons Ltd [1926] 1 KB 131). Ratio |
Nor could a purchaser of short-dated gilts pregnant with interest escape liability to tax on the whole of the interest payment, even if he had paid an extra sum expressed to be for the accrued interest, as an aggrieved litigant in person discovered in Schaffer v Cattermole [1980] STC 650. Ratio |
The traditional rule opened up opportunities for tax avoidance. Ratio |
In Wigmore v Thomas Summerson & Sons Ltd [1926] 1 KB 131, 145, Rowlatt J observed, The result is that nobody on the super tax level, who has not more money than appreciation of income tax law, will ever buy a security that is full of dividend, because in doing so he is buying super tax; and that a man on the super tax ... |
Anti-avoidance provisions were in due course enacted. PRE |
They were supplemented and elaborated at frequent intervals in response to the development of increasingly sophisticated avoidance schemes, some of which were popularly called dividend stripping and bond washing. PRE |
When the law of income tax and corporation tax was consolidated in ICTA 1988, Part XVII (headed Tax Avoidance) comprised 85 sections, and Part XVII, Chapter II (headed Transfers of Securities) contained 29 sections. PRE |
That is the context of the first set of provisions with which this appeal is concerned, sections 730A and 737A of ICTA 1988. Ratio |
Those new sections were inserted into Part XVII, Chapter II by section 80(1) of the Finance Act 1995 and section 122 of the Finance Act 1994 respectively, to apply (in each case) to transactions entered into on or after 1 May 1995. Ratio |
(It is a little surprising that section 737A preceded section 730A in its enactment, but the former provision was initially intended to apply to section 730, a more general provision than section 730A.) It should also be mentioned in passing that section 736A, introducing Schedule 23A, was enacted by section 58 of the ... |
I draw attention to the different provenance of these provisions because it is relevant to the resolution of this appeal to see that it depends on the construction, not of a single set of statutory rules addressed to a single problem, but to a patchwork of legislation; and its difficulty lies not only in the language o... |
I respectfully disagree with the comment of Rix LJ [2010] STC 80, para 94 that the statutory provisions were always seeking one goal. Ratio |
In this context, the special provisions about repos in sections 730A, 730B, 737A, 737B and 737C can be seen as making a relatively modest extension in the existing battery of anti-avoidance provisions already contained in Part XVII, Chapter II of ICTA 1988. Ratio |
They were also intended to make the tax treatment of repos correspond to their economic substance, so as to be more in line with modern accounting theory and practice as set out in FRS 4 and FRS 5. Ratio |
In legal form a repo is a preordained sale and purchase at prices fixed in advance, but in economic substance it is a short-term secured loan, as was explained in the written evidence of the only expert witness, Mr Holgate. Ratio |
These sections were in force in their original form for only about a year before the introduction of the new loan relationships code, for corporation tax purposes, by FA 1996. Ratio |
With hindsight, it might have been better if Parliament had waited a year in order to produce a more integrated legislative scheme for the tax treatment of repos. Ratio |
Part IV Chapter II of FA 1996 effected a fundamental change in the taxation of loan interest for the purposes of corporation tax (but not for the purposes of income tax). Ratio |
The changes were aimed at bringing the tax treatment of all interest onto an authorised basis of accounting (in many cases, including this case an accruals basis), and went far beyond mere counteraction of tax avoidance. Ratio |
They involved a new head of charge for corporation tax purposes in section 18(3A) of ICTA 1988, as inserted by section 105 of, and para 5 of Schedule 14 to, FA 1996: profits and gains which, as profits and gains arising from loan relationships, are to be treated as chargeable under this Case by virtue of Chapter II of ... |
The provisions most relevant to this appeal are summarised below. Ratio |
But first it is necessary to give a brief account of repos and the way in which they were taxed under sections 730A and 737A of ICTA 1988. Ratio |
Repo transactions FAC |
Mr Holgate, a chartered accountant of the highest standing, gave written and oral evidence to the Special Commissioner. FAC |
He was careful to distinguish between matters of accounting theory and practice on which he could speak as an expert, and matters of statutory interpretation which were questions of law beyond his competence as an expert. FAC |
In his written report dated 18 December 2006 Mr Holgate set out the basic definition of a repo in the Stock Lending and Repo Committees Gilt Repo Code of Best Practice: A transaction, carried out under an agreement, in which one party sells securities to another, and at the same time and as part of the same transaction... |
He then continued (paragraphs 4.3, 4.4 and part of 4.5): By using the term fixed price repo, I am referring to a sale and repurchase agreement, whereby one party (the seller) sells securities to another party (the buyer) for an agreed amount of cash and simultaneously agrees to repurchase the same or an identical secur... |
Therefore, under such an arrangement, the cash flows and the timings of those cash flows are fixed in advance and hence the return under the arrangement for the repo buyer is fixed. FAC |
Although legally a sale and subsequent repurchase of securities, the seller retains the risks and benefits of market price fluctuations of the securities, rather than passing them to the buyer. FAC |
Hence, such arrangements are economically similar to a secured loan providing a fixed rate of return, with the security acting as collateral. FAC |
FRS 5 The relevant accounting standard under UK GAAP which was in force for the year ended 31 March 2002 is FRS 5 Reporting the substance of transactions, which was issued in April 1994. FAC |
The key requirement of FRS 5 is given in paragraph 14 as follows: A reporting entitys financial statements should report the substance of the transactions into which it has entered. FAC |
In determining the substance of a transaction, all its aspects and implications should be identified and greater weight given to those more likely to have a commercial effect in practice. FAC |
A group or series of transactions that achieves or is designed to achieve an overall commercial effect should be viewed as a whole. FAC |
FRS 5 therefore tells us to account for the repo transaction in accordance with its substance, rather than its legal form, if the two do not accord. FAC |
In paragraph 4.8 Mr Holgate explained (without actually using those terms) a gross paying repo and net paying repo: Under a fixed price repo, the seller has an unconditional commitment to repurchase the security from the buyer at the sale price plus interest, which represents a lenders return. FAC |
Furthermore, if during the term of the repo arrangement, a coupon or dividend is paid to the buyer (as the legal holder of the security) on the underlying security, then the buyer is often obliged to immediately pass an equivalent amount of cash back to the seller. FAC |
Alternatively, if, under the arrangement, the buyer is able to retain the cash coupon or dividend received under the security, then instead the repurchase price is reduced, in effect passing the benefit of the coupon or dividend back to the seller. FAC |
In either case, the substance of the repo transaction will be that of a secured loan, whereby the buyer lends cash to the seller. FAC |
Although the buyer has legal ownership of the security for the repo term, the seller retains all significant benefits and risks relating to the security (ie movements in market price and the benefits of any coupon or dividend payments on the security) over the term of the repo. FAC |
In this case there were five separate repos, effected under a single master repurchase agreement and a master custody agreement to which The Northern Trust Co was a party. FAC |
They were closely consecutive on each other, the purchase price on the second and subsequent transactions being set off against the repurchase sum receivable under the previous transaction. FAC |
Each transaction involved a different issue of gilts, and in each case a half-yearly interest payment was made on the last day of the repo period (the longest period was 42 days, and the shortest 11 days). FAC |
It was agreed that each of the repos would be a net paying repo. FAC |
It is common ground that the transactions were arms length transactions and that DCC entered into the transactions otherwise than for the purposes of a trade carried on by it. FAC |
In argument below, and in this Court, counsel have used a simplified version of the facts which aggregates the sums paid on the respective sales and repurchases under the five consecutive transactions, aggregates the half-yearly payments of interest made on the last day of each repo period, and takes an average length ... |
This process produces figures, when rounded, of 812.2m, 785.2m, 28.8m and 18 days, and it is convenient to use those figures. Ratio |
It will be seen that if 28.8m (the gilts interest retained by DCC) is added to 785.2m (the repurchase sum paid to DCC) it exceeds 812.2m (the sale price paid by DCC) by 1.8m. Ratio |
That figure of 1.8m is the only one agreed by both sides (and by the Special Commissioner and all the judges who have so far considered the matter) as an element in the tax computations. Ratio |
Sections 730A, 737A and 737C of ICTA 1988 STA |
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