R v Inland Revenue Comrs, Ex parte Woolwich Equitable Building Society (Woolwich Equitable Building Society, Ex parte)

A power to make regulations requiring payments representing income tax for specified years may, where Parliament uses sufficiently clear retrospective language, extend to sums paid before those years and not previously brought into account.

Subordinate legislation remains invalid where it applies rates which the enabling Act does not authorise. An invalid provision may be severed only if the remainder preserves the instrument’s substantial purpose and effect. A court cannot cure the defect where severance would produce a materially different scheme or require it to legislate in place of the statutory rule-maker.

The building society challenged the Income Tax (Building Societies) Regulations, 1986. The regulations changed the system for accounting for tax on investors’ interest and dividends and sought to include payments made during a transitional “gap period” before 6 April 1986.

Nolan J held the relevant provisions unlawful: [1987] STC 654. The Court of Appeal reversed that decision, apart from the Revenue’s conceded objection to Regulation 11(4): [1989] STC 463.

The principal issue before the House was whether the retrospective amendment made by Section 47(1) of the Finance Act 1986 authorised regulations bringing the gap-period payments into account. A further issue was whether the invalid rate provision in Regulation 11(4) could be severed without invalidating the rest of Regulation 11, and whether Regulation 3 was independently invalid in its application to payments made before 6 April 1986.

1. Appeal allowed unanimously. Lord Oliver of Aylmerton delivered the leading speech. Lord Keith of Kinkel and Lord Brightman agreed with him, and Lord Goff of Chieveley agreed with his conclusions. Lord Lowry reached the same disposition on broader grounds.

2. Per Lord Oliver, with Lord Keith, Lord Brightman and Lord Goff agreeing, Section 343(1A) of the Income and Corporation Taxes Act 1970, as originally enacted, did not authorise taxation of sums paid or credited in 1985–86. The retrospective words inserted by Section 47(1) of the Finance Act 1986 altered that result. Their ordinary meaning authorised regulations requiring payment in respect of sums paid before the relevant year and not previously brought into account. Clear statutory words and the circumstances of the amendment displaced the usual presumptions against cumulative or more-than-annual taxation.

3. Lord Lowry dissented on that issue. In his view, the amendment merely identified sums which could be used to measure the amount representing investors’ income tax for a relevant year. It did not authorise an additional charge based on more than one year’s income. Legislative purpose could not enlarge words incapable of bearing the Revenue’s construction.

4. Per Lord Oliver and Lord Goff, Regulation 11(4) was outside the power conferred by Section 343(1A) because it prescribed the rates applicable in 1985–86 rather than rates for 1986–87 or a subsequent year. The defect could not be cured by deleting paragraph (4). Although deletion was grammatically possible, the remainder would impose rates for the artificial payment quarters in 1986–87 and 1987–88, contrary to the scheme which the Revenue had intended.

5. The governing severance inquiry concerns both form and substance. A court may declare subordinate legislation ineffective only to the extent of the excess of power, without being confined to a literal blue-pencil deletion. It must nevertheless preserve the instrument’s substantial purpose and effect. It cannot substitute new legislative provisions or leave a materially different scheme.

6. Regulation 3 was also invalid so far as it applied to payments made after February but before 6 April 1986. Its application of 1985–86 rates was unauthorised, and correction required rewriting rather than severance. Regulation 11 was therefore wholly void and ineffective, and Regulation 3 was ineffective to the stated extent.

1. House of Lords: Allowed the building society’s appeal unanimously. It declared Regulation 11 wholly void and Regulation 3 invalid so far as it concerned payments made after February and before 6 April 1986. The majority rejected the society’s broader challenge to the statutory power.

2. Court of Appeal: By [1989] STC 463, unanimously reversed Nolan J. It held that the retrospective amendment authorised the inclusion of gap-period payments and that Regulation 11 could remain effective after removal of Regulation 11(4).

3. High Court: Nolan J, in [1987] STC 654, granted the declaration sought by the society. He held that the regulations were outside Section 343(1A) so far as they imposed liability in respect of payments made during 1985–86.