Mellham Ltd. v Collector of Taxes

For statutory purposes, “payment” of advance corporation tax means actual payment, not a notional or equitable set-off, unless the legislation clearly provides otherwise. A repayment or set-off entitlement under the foreign-income-dividend provisions arises only after the advance corporation tax has been paid. Where it has not been paid, the taxpayer cannot use a contingent repayment claim to extinguish the tax liability or stop statutory interest running. The statutory distinction between payment and set-off, and the purpose of securing advance cash flow for the Revenue, reinforced that construction.

Mellham Limited appealed the decision of Her Honour Judge Alton in the Mercantile Court, Birmingham. It had made a foreign distribution but had not paid the resulting advance corporation tax or its corporation tax liability when due. After the corporation tax was later paid following judgment, the Revenue limited its claim to interest on the unpaid ACT balance. Mellham argued that the statutory balancing and repayment provisions treated the ACT as paid or set off, ending interest and generating a repayment debt. The central issue was whether “pays” and “payment” in the relevant provisions could encompass set-off where no ACT had been paid.

Disposition. Lord Justice Buxton gave the leading judgment. Mr Justice Morland and Lord Justice Brooke agreed. The appeal was dismissed with costs assessed at £3,848.

1. The word “pays” in section 246N(2) of the Income and Corporation Taxes Act 1988, and “payment” in section 87 of the Taxes Management Act 1970, required actual payment of advance corporation tax. It did not extend to set-off. The construction was supported by the ordinary meaning of the words, the statutory distinction between payment and set-off, the Revenue’s cash-flow purpose, and the uncertain and multifaceted nature of set-off. (para [16])
2. The balancing and repayment machinery under sections 246N(2) and 246Q(2) operated only after the ACT had been paid. Until then, both the ACT liability and the alleged repayment liability were owed by the company to the Revenue. They were not concurrent liabilities capable of set-off. (para [19])
3. The general authorities on set-off did not assist. Hanak v Green [1958] 2 QB 9 concerned set-off in legal proceedings. The self-help formulation discussed in Federal Commerce and Navigation Co Ltd v Molena Alpha [1978] QB 927 concerned a cross-claim directly impeaching the demand and did not apply to a repayment claim arising only after payment. Ralston v South Greta Colliery Co and Spargo’s case concerned materially different arrangements, including proceedings, agreement, or settled accounts. Aries Tanker Corporation v Total Transport Ltd [1997] 1 WLR 185 created difficulty for the appellant’s argument but required no final determination.
4. Because no ACT had been paid, interest under section 87 continued to run on the unpaid liability. Mellham could have protected itself by tendering the ACT. The Convention argument was not pursued and added nothing to the statutory analysis. (paras [20]–[22])

• Court of Appeal (Civil Division) dismissed Mellham Limited’s appeal and ordered costs assessed at £3,848.
• Mercantile Court, Birmingham Her Honour Judge Alton decided the underlying dispute concerning interest on unpaid advance corporation tax.