R v Inland Revenue Commissioners, Ex parte Woolwich Equitable Building Society

The House of Lords considered whether regulations made under section 343(1A) of the Income and Corporation Taxes Act 1970, as amended by section 47(1) of the Finance Act 1986, authorised the Commissioners to require building societies to account for amounts representing investors' income tax by reference to sums paid or credited before the beginning of the relevant year of assessment (the "gap period"). The court held that the section 47(1) amendment did enable regulations to bring into account sums paid before the year of assessment provided those sums had not previously been brought into account, but that specific provisions of the Income Tax (Building Societies) Regulations 1986 were ultra vires.

In particular, Regulation 11(4) (which fixed rates at 1985–86 levels for certain transitional payments) was invalid and that invalidity infected Regulation 11 as a whole; Regulation 3 was also ultra vires so far as it purported to apply rates for the period after February and before 6 April 1986. The House therefore allowed the Woolwich's challenge to those parts of the 1986 Regulations while confirming the statutory power to make regulations under the amended s 343(1A).

This case concerned judicial review proceedings brought by Woolwich Equitable Building Society challenging the validity of the Income Tax (Building Societies) Regulations 1986 (S.I. 1986 No. 482). The core legal issue was the proper construction of s 343(1A) of the Income and Corporation Taxes Act 1970 as amended by the Finance Acts of 1984, 1985 and the retrospective words in s 47(1) of the Finance Act 1986, and whether the 1986 Regulations lawfully charged amounts representing investors' income tax in relation to sums paid or credited in the period between the society's accounting year end and the commencement of the new charging year (the "gap period").

• Nature of the claim: judicial review seeking declaration that the 1986 Regulations were ultra vires and therefore invalid in whole or in part; Woolwich sought relief against the Commissioners' demand for additional tax in respect of the gap period.
• Procedural history: Nolan J in the High Court granted the declaration for Woolwich; the Court of Appeal reversed and upheld the Regulations except for Regulation 11(4); the House of Lords heard the appeal from the Court of Appeal and gave judgment for Woolwich.
• Issues framed by the court: (i) whether s 343(1A), as originally enacted, permitted regulations to charge amounts representing investors' income tax by reference to sums paid or credited before the relevant year of assessment; (ii) the legal effect of the retrospective words in s 47(1) of the Finance Act 1986; (iii) whether specific provisions of the 1986 Regulations (notably Regulation 3 and Regulation 11(4)) were ultra vires; and (iv) whether severance could cure any invalid parts.
• Court's reasoning: The Lords analysed the statutory language and history. They concluded that the s 47(1) amendment, read in context, defined "such sums as may be determined" to include sums paid or credited before the beginning of the year of assessment but not previously brought into account. That meant regulations could bring omitted sums into charge for later years of assessment. However, the particular drafting of the 1986 Regulations was defective. Regulation 11(4), which fixed transitional rates at 1985–86 levels, was clearly ultra vires and, because it was integral to the transitional mechanism, its invalidity infected Regulation 11 as a whole. Regulation 3 was also ultra vires insofar as it attempted to apply rates to payments made after February and before 6 April 1986. The Court refused to rewrite the Regulations by severance where doing so would alter their substantive operation; it left reform to the Revenue/Parliament.

The House therefore allowed Woolwich's appeal in relation to the invalid parts of the Regulations and awarded costs to Woolwich. The court also commented on the rarity and significance of using retrospective amendments to validate delegated legislation and on the limits of severance where the remaining scheme would operate substantially differently from that intended by the draftsman.

Appeal allowed in part. The House held that the retrospective words in section 47(1) of the Finance Act 1986 can be read to include sums paid or credited before the beginning of the year of assessment but not previously brought into account, thereby supporting the power in s 343(1A) to make regulations bringing such sums into account; however, specific parts of the Income Tax (Building Societies) Regulations 1986 were ultra vires. Regulation 11(4) was invalid and its invalidity infected Regulation 11 as a whole, and Regulation 3 was ultra vires insofar as it related to the period after February and before 6 April 1986. The court declined to re-write the Regulations by severance and left it to the Revenue or Parliament to make appropriate provision.

High Court (Nolan J): judgment for the Woolwich, declaration that the Regulations were unlawful [1987] STC 654. Court of Appeal (Sir Nicolas Browne-Wilkinson V.-C. and others): reversed Nolan J and upheld the Regulations except that Regulation 11(4) was held ultra vires [1989] STC 463. House of Lords: allowed the Woolwich in part, holding Regulation 11 and parts of Regulation 3 ultra vires and void; appeal heard June 1990, judgment 25 October 1990 [1990] UKHL TC_63_589.