Walker v. Centaur Clothes Group Ltd

The House of Lords held that a company which becomes liable to pay corporation tax by reason of an event (for example, a distribution) is "within the charge to corporation tax" for the purposes of section 12 of the Income and Corporation Taxes Act 1988 and so has an accounting period. That construction enabled Centaur to treat surplus advance corporation tax paid in 1993 as capable of being carried back under section 239(3) and to obtain recovery. The court rejected a narrow, source-based reading of the definition in section 832(1) which would require a continuing source of income before a company could be regarded as within the charge.

The decision turned on statutory interpretation of: section 14 (liability to advance corporation tax); section 239(1) and (3) (carry-back and repayment of surplus ACT); section 12 (when accounting periods begin and end); and the definition provision in section 832(1). The Lords concluded that the phrase "within the charge to corporation tax" includes cases where liability to tax arises independently of a continuing source of income.

Background and relief sought. Centaur Clothes Group Ltd ceased trading on 6 January 1992 and transferred its business within a group. In 1993 Centaur paid advance corporation tax (ACT) on dividends. Centaur claimed under section 239(3) of the Income and Corporation Taxes Act 1988 that the ACT payments were "surplus" and should be carried back and repaid against earlier years' corporation tax liabilities. The Revenue accepted the claim in respect of the second dividend but refused the claim in respect of the first, on the ground that Centaur was not then "within the charge to corporation tax" and so had no accounting period in which the ACT payment could arise.

Procedural history. The special commissioner decided in favour of Centaur. On appeal Sir John Vinelott allowed the Revenue's appeal ([1997] S.T.C. 72). The Court of Appeal ([1998] S.T.C. 814) affirmed. The House of Lords allowed Centaur's appeal and restored the decision of the special commissioner.

Issues framed by the court. (i) What is the correct meaning of "within the charge to corporation tax" in section 832(1) and its application to a company with no continuing source of income? (ii) Whether a company coming to be liable to pay corporation tax as a result of an event (such as a distribution) without having a contemporaneous source of income is "within the charge" and therefore has an accounting period under section 12 enabling the operation of section 239(3).

Reasoning and disposition. The House of Lords rejected the Revenue's narrow, source-based construction of the definition in section 832(1). The Lords held that "within the charge to corporation tax" should be read to include income or companies which are liable to corporation tax by reason of provisions which do not depend on the existence of a contemporaneous source, or when some event gives rise to liability. When Centaur paid the first dividend it thereby became liable to tax and so came within the charge; under section 12(2)(a) an accounting period began at that time. Consequently the ACT paid on the first dividend could be surplus ACT within the meaning of section 239 and carried back under section 239(3). The House of Lords allowed the appeal and restored the special commissioner's decision.

Appeal allowed. The House of Lords construed "within the charge to corporation tax" (section 832(1)) broadly to include a company which becomes liable to pay corporation tax by reason of an event (for example, a distribution) even if it has no contemporaneous source of income; such a company thereby has an accounting period under section 12 and may rely on section 239(3) to carry back and recover surplus ACT.

Special Commissioner decision in favour of Centaur (reported [1996] S.T.C. (S.C.D.) 222). On appeal Sir John Vinelott allowed the Revenue's appeal ([1997] S.T.C. 72). The Court of Appeal affirmed ([1998] S.T.C. 814). The House of Lords allowed the taxpayer's appeal ([2000] UKHL 23).