Howell & Anor v HM Inspector of Taxes

For the purposes of Income and Corporation Taxes Act 1988 s249(6)(b), “income” may bear its trust-law meaning where the statutory context requires it. Bonus shares issued to trustees of an accumulation or discretionary settlement were therefore treated as income arising to them for s686, even though they were capital receipts under the settlement. Section 686 consequently imposed the Schedule F trust rate, with credit for the notional Schedule F ordinary-rate tax. The court accepted that tax liability must be made tolerably clear by the statute, but held that this principle does not justify an impermissible construction or an anomalously generous result. The closing words of s249(6)(b) and s687(3)(b) supported the Revenue’s construction.

The appellants were trustees of the Robin Settlement. The company declared a cash dividend but offered shareholders fully paid bonus shares instead. The trustees elected to receive bonus shares worth over £15 million in lieu of a £700 dividend and immediately sold them.

The parties agreed that s249 deemed income to have arisen and that tax at the Schedule F ordinary rate was notionally paid through an irrecoverable credit. The Special Commissioners accepted the Revenue’s case that the deemed income was also chargeable at the Schedule F trust rate under s686. The appeal concerned whether “income” in s249(6)(b) meant income for tax purposes only or also income under trust law.

The appeal was dismissed unanimously. Lord Justice Neuberger gave the leading judgment, with the President, Dame Elizabeth Butler-Sloss, and Lord Justice Latham agreeing.

1. Statutory construction. A taxing statute must be construed by identifying legislative intention, with the assumption that Parliament does not impose tax unless that intention is tolerably clear. This does not require a materially different approach from the construction of other civil-liability statutes. Poor drafting and surprising consequences may inform construction, but cannot justify an interpretation which the statutory language cannot bear.
2. Meaning of income. The natural reading of “income” in s249(6)(b), and the usual tax-law presumption, pointed towards income in the Taxes Act sense. However, the surrounding provisions, particularly the reference to s686, permitted “income” to bear its trust-law meaning. The statutory scheme used the word in both senses, and the Revenue’s construction had sufficient contextual support.
3. Application of s686. Although the bonus shares were capital receipts under the Settlement, s249(6)(b) deemed income of the relevant amount to have arisen to the trustees. That deeming was effective for trust-law purposes. In an accumulation or discretionary settlement, the deemed income was therefore income to be accumulated or payable at the trustees’ discretion within s686(2)(a). The Schedule F trust rate applied, subject to credit for the tax notionally paid at the Schedule F ordinary rate.
4. Statutory context. The closing words of s249(6)(b) were best understood as ensuring that s686(1) was engaged. Section 687(3)(b) also assumed that trust-rate tax would be charged on sums treated as income under s249(6). Section 686(5A)(e) confirmed the classification of the deemed income as Schedule F type income, but did not itself create the charge.
5. The Trustees’ construction would produce an exceptionally favourable and anomalous tax result, including the avoidance of both trust-rate income tax and capital gains tax on an immediate sale. That consequence was not decisive alone, but reinforced the Revenue’s construction when combined with the statutory wording and scheme. The appeal was accordingly dismissed.

• Court of Appeal (Civil Division): In [2004] EWCA Civ 885, the appeal was dismissed.
• Special Commissioners: By a decision dated 29 December 2003, the Commissioners accepted that the deemed income was chargeable at the Schedule F trust rate.