Walker v Centaur Clothes Group Ltd

A company is within the charge to corporation tax when it is liable to that tax. It need not possess a current source of income. Under section 12(2)(a) of the Income and Corporation Taxes Act 1988, the words “or otherwise” include an event which itself creates a corporation tax liability. An accounting period begins when that event occurs, although it may be very short.

Consequently, a distribution which creates an advance corporation tax liability brings the company within the charge and starts an accounting period. Surplus advance corporation tax may then qualify for carry-back under section 239(3). Machinery governing accounting periods should not extinguish a substantive statutory right to recover tax.

Walker v Centaur Clothes Group Ltd concerned a company which ceased trading, transferred its undertaking to another group company and retained no income-producing assets. It subsequently declared two dividends and incurred advance corporation tax under section 14 of the Income and Corporation Taxes Act 1988. The Revenue refused relief for the first payment because the company allegedly had no accounting period, but accepted relief for the second after the company had earned a small amount of bank interest.

The special commissioner found for the company: [1996] S.T.C. (S.C.D.) 222. Sir John Vinelott allowed the Revenue’s appeal: [1997] S.T.C. 72. The Court of Appeal affirmed that decision: [1998] S.T.C. 814. The central issue was whether the first distribution itself brought the company within the charge to corporation tax, thereby beginning an accounting period and permitting the advance corporation tax to be carried back.

1. Appeal allowed unanimously. Lord Hoffmann delivered the leading speech. Lord Slynn, Lord Nolan, Lord Nicholls and Lord Clyde expressly agreed with his reasons. The decision of the special commissioner was restored.

2. Per Lord Hoffmann, section 832(1) of the Income and Corporation Taxes Act 1988 did not require income or a person to be within the charge only when connected to a current source of income within the charge. Income was within the charge if it was liable to corporation tax. A person was within the charge if liable to pay that tax. The phrase “similarly construed” required the same simple principle to be applied to each statutory expression.

3. Modern tax legislation could impose liability without a source existing during the relevant period. Examples included post-cessation receipts, balancing charges, deemed income, chargeable gains and other taxable events. A company could therefore be within the charge through source-independent income, gains or another event creating liability.

4. Per Lord Hoffmann, section 12(2)(a), particularly the words “or otherwise”, contemplated that a company could come within the charge without acquiring a source of income. The provision covered any event which created a corporation tax liability. When the first distribution created liability to advance corporation tax under section 14, the company came within the charge and a new accounting period began. The period could be short, but it remained an accounting period.

5. Section 12(6) did not compel a narrower interpretation merely because some of its operation would otherwise appear redundant. Parliament could state expressly what a court might already infer, and the subsection also addressed allowable losses which created no immediate tax liability. The accounting-period provisions were machinery. They could not deprive the company of its substantive right to carry back surplus advance corporation tax under section 239(3).

1. House of Lords: In Walker v Centaur Clothes Group Ltd [2000] 1 WLR 799, the House unanimously allowed the company’s appeal and restored the special commissioner’s decision.
2. Court of Appeal: The court affirmed Sir John Vinelott’s decision: [1998] S.T.C. 814.
3. High Court: Sir John Vinelott allowed the Revenue’s appeal from the special commissioner: [1997] S.T.C. 72.
4. Special Commissioner: The special commissioner upheld the company’s claim, rejecting the Revenue’s construction as contrary to common sense: [1996] S.T.C. (S.C.D.) 222.