Burton (Her Majesty's Collector of Taxes) v. Mellham Ltd

This appeal concerned whether a taxpayer's right to have overpaid advance corporation tax repaid or set off as provided by Chapter VA of the Income and Corporation Taxes Act 1988 could operate as a discharge of the taxpayer's liability for advance corporation tax so as to stop interest running under section 87 of the Taxes Management Act 1970. The key statutory provisions were section 87 TMA 1970, sections 246A, 246N and 246Q and section 826 of ICTA 1988 and section 178 of the Finance Act 1989. The House held that the statutory word "payment" in section 87 could include other forms of discharge, such as the statutory set-off/repayment mechanism in Chapter VA, and that equitable set-off (or the statutory machinery for set-off/repayment) could extinguish the ACT liability so that interest would not continue to run indefinitely against the taxpayer. The court allowed Mellham's appeal in part, recognising set-off/repayment entitlements and adjusting the periods for which interest remained payable on admitted sums.

This case arose from Mellham Ltd's failure to pay advance corporation tax (ACT) of approximately £350,000 due after it paid a dividend to its holding company. Mellham admitted liability for about £100,000 but claimed that, because the dividend was a foreign income dividend derived from profits of a non-UK subsidiary and double taxation relief applied, a statutory repayment or set-off under Chapter VA (sections 246A, 246N-246Q of ICTA 1988) entitled it to discharge the ACT such that interest under section 87 TMA 1970 should not run after the date when the repayment/set-off entitlement crystallised.

Procedural history: proceedings were issued in the Nottingham County Court (Collector's claim for tax and interest). A deputy district judge gave summary judgment for the admitted £100,000. The case was transferred to the Birmingham Mercantile Court where Her Honour Judge Alton held for the Revenue on the main point (24 April 2002). Mellham appealed to the Court of Appeal which dismissed the appeal ([2003] STC 441; appeal from [2003] EWCA Civ 173). Mellham then appealed to the House of Lords.

Issues framed by the court:

• Whether "payment" in section 87 of the Taxes Management Act 1970 (and related references to "pays" in sections 246N and 239 of ICTA 1988) can encompass a set-off or other non-cash discharge of liability; and
• If so, whether Mellham in the present facts was entitled to rely on set-off/repayment (and, relatedly, the relevant material date from which repayment interest under section 826 ICTA 1988 would run).

Reasoning: Lord Walker reviewed the statutory scheme and the background to Chapter VA (foreign income dividend relief), and concluded that (i) the ordinary law principle of set-off is a general incident of liquidated cross-claims and should apply unless clearly excluded by statute; (ii) the language and scheme of Chapter VA and related TMA provisions do not exclude set-off as a means of discharging ACT for the purpose of interest liability; (iii) construing "payment" in s87 to require literal cash payment in all circumstances would produce a disproportionate and unlikely result (potentially perpetual interest liability) and was therefore to be avoided if statutory language permitted a broader construction; and (iv) Mellham's unexplained failure to pay did not amount to unlawful self-help disentitling it to set-off. The House allowed the appeal, subject to preservation of interest on the admitted £100,177 and interest on the balance (£250,833) only up to the material date (taken as 1 October 1998) at which repayment under the Chapter VA mechanism would have been due if ACT had been paid and the claim for relief had been processed.

Appeal allowed. The House held that statutory and equitable set-off (and the Chapter VA repayment/set-off machinery) can operate as a discharge of advance corporation tax such that the word "payment" in section 87 TMA 1970 is not confined to literal cash payment for the purposes of running interest; accordingly Mellham could rely on set-off/repayment entitlements and was not liable to pay interest indefinitely on the whole ACT figure. Interest remained payable on the admitted part and on the balance only until the material date when repayment would have arisen.

Proceedings began in the Nottingham County Court (claim issued 23 March 2001). Deputy district judge gave summary judgment for the admitted £100,000 on 23 July 2001. Action transferred to the Birmingham Mercantile Court; Her Honour Judge Alton gave judgment for the Revenue on 24 April 2002 (order of 23 May 2002 quantified interest). Mellham's appeal to the Court of Appeal was dismissed (reported [2003] STC 441; appeal from [2003] EWCA Civ 173). The House of Lords allowed the appeal on 15 February 2006 ([2006] UKHL 6).