Burton (Her Majesty's Collector of Taxes) (Respondent) v. Mellham Limited (Appellants)

For the purpose of interest on unpaid tax under section 87(1) of the Taxes Management Act 1970, “payment” includes another form of discharge or satisfaction, including equitable set-off. Liquidated cross-claims may generally be set off unless statute or contract excludes that result.

A repayment claim may support set-off even though actual payment of the tax would formally precede the right to repayment, where payment and immediate repayment would be an absurd formality. Statutory interest therefore ceases when the tax liability is extinguished by set-off. A provision requiring a repayment claim may condition entitlement without postponing the date from which the relevant interest consequences arise.

Mellham Ltd failed to pay advance corporation tax of approximately £350,000 on a dividend paid to its holding company. Its mainstream corporation tax liability was ultimately limited to approximately £100,000 after the Revenue accepted its claim to double taxation relief. Mellham contended that its resulting entitlement to foreign income dividend relief of approximately £250,000 should be set off against the unpaid advance corporation tax.

A Mercantile Court judge held that the repayment entitlement was contingent upon prior payment of the advance corporation tax and awarded the Revenue interest. The Court of Appeal dismissed Mellham's appeal in [2003] EWCA Civ 173, reported at [2003] STC 441.

The central issue was whether “payment” in section 87(1) of the Taxes Management Act 1970 could encompass discharge by equitable set-off, notwithstanding the payment and repayment machinery in the Income and Corporation Taxes Act 1988.

1. Appeal allowed unanimously. Lord Walker of Gestingthorpe delivered the leading speech. Lord Nicholls, Lord Hoffmann, Lord Phillips and Lord Brown agreed with his reasons.

2. Per Lord Walker, “payment” in section 87(1) of the Taxes Management Act 1970 included other forms of discharge or satisfaction. A construction under which interest continued indefinitely after the principal liability had been discharged otherwise than by payment would impose a disproportionate penalty which Parliament could not sensibly have intended.

3. Per Lord Walker, set-off is a general principle founded on convenience and fairness. It applies generally to liquidated cross-claims unless excluded by statute or contract. The express references to payment, repayment and set-off in sections 246N to 246Q of the Income and Corporation Taxes Act 1988 did not exclude ordinary equitable set-off. Those provisions described the statutory machinery when advance corporation tax was duly paid and used “set off” for the distinct process of crediting advance corporation tax against mainstream corporation tax.

4. Per Lord Walker, Mellham's double taxation relief claim was definite and justiciable, although its amount was resolved only after investigation of past facts. Its repayment claim was not impermissible self-help. Safa Ltd v Banque du Caire [2000] 2 Lloyd's Rep 600 demonstrated that set-off could be available although the reciprocal reimbursement right formally depended upon payment. Requiring Mellham and the Revenue to exchange cheques for approximately £250,000 would have been an absurd formality.

5. Per Lord Walker, Mellham's unexplained failure to pay the tax was unattractive but fell well short of unlawful self-help of the kind discussed in Smith (Administrator of Cosslett (Contractors) Ltd) v Bridgend County Borough Council [2002] 1 AC 336. It did not disentitle Mellham to set-off.

6. The orders below were set aside except for interest on £100,177 from 14 January 1998 until payment, and interest on £250,833 from 14 January 1998 until 1 October 1998. Section 246N(7) merely imposed a condition that a claim be made; it did not regulate the date from which interest ran.

1. House of Lords: Allowed Mellham's appeal unanimously and set aside the Mercantile Court orders, subject to the specified liabilities for interest.
2. Court of Appeal: Brooke and Buxton LJJ and Morland J dismissed Mellham's appeal in [2003] EWCA Civ 173, reported at [2003] STC 441.
3. Birmingham Mercantile Court: Her Honour Judge Alton held that Mellham could not set off a repayment entitlement which depended upon prior discharge of its admitted tax liability. Orders dated 24 April and 23 May 2002 awarded the Revenue interest of approximately £82,000.
4. Nottingham County Court: A deputy district judge gave summary judgment on 23 July 2001 for the admitted principal sum of £100,000, without interest, and the remaining issues were transferred to the Birmingham Mercantile Court.