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Petitioner: CLARK (INSPECTOR OF TAXES) VS Respondent: OCEANIC CONTRACTORS INC.
1992 P TD 1107
1992 P TD 1107
[House of Lords]
[(1983) 2 AC 130]
Before Lord Scarman, Lord Wilberforce, Lord Edmund-Davies, Lord Lowry and Lord Roskill
CLARK (INSPECTOR OF TAXES)
versus
OCEANIC CONTRACTORS INC.
Income-tax---
----P.A.Y.E.---Exploration work in designated areas of North Sea ---Non resident employer---Employees working in United Kingdom sector of North Sea subject to Schedule E income-tax---Whether employer liable to operate P.A.Y.E. system---Income and Corporation Taxes Act, 1970 (C.10), Ss.204(1) & 246---Finance Act, 1973 (C.51), S.38(4)(6).( Finance Act 1973, S.38(4): see post, S.38(6): "Any emoluments from an office or employment in respect of duties performed in a designated area in connection with exploration or exploitation activities shall be treated for the purposes of income-tax as emoluments in respect of duties performed in the United Kingdom.") ---[(1982) 1 WLR 22 reversed].
The taxpayer company, a wholly-owned subsidiary of an American company, was not resident in the United Kingdom for tax purposes, but it had certain trading establishments in the United Kingdom with an address for service. From an operating, base in Antwerp it carried on activities installing platforms and laying pipelines in inter alia, the United Kingdom sector of the North Sea. Since that sector- was a "designated area" for the purposes of the Continental Shelf Act, 1964, the company, by reason of carrying on trade by exploration or exploitation activities there; was deemed by section 38(4) of the Finance Act, 1973 to be trading in the United Kingdom through a branch or agency and was thereby brought into charge to United Kingdom corporation tax; under section 246 of the Income and Corporation Taxes Act, 1970, in respect of the profits from its North Sea operations. In 1977 the company employed about 400 men, both British and foreign, in its North Sea operations. Those employees were paid, under contracts not governed by United Kingdom law, in United States currency, by cheque from the company's office in Brussels. Their pay in respect of their duties performed in the United Kingdom sector of the North Sea was subject to Schedule E income tax, by virtue of section 38(6) of the Act of 1973 which treated the duties as performed in the United Kingdom. No P.A.Y.E. deductions in respect of such Schedule E tax were made by the company.
A determination was made by the inspector of taxes that L2,033,254 was payable by the company to the Collector of Taxes in respect of income tax that it was required by section 204 of the Act of 1970 to deduct from the payments it made to its North Sea employees during the fiscal year 1977-78. The special Commissioners allowed an appeal by the company against the determination, holding that the employment was not within the United Kingdom and section 204 therefore had no application. On appeal by the Crown, Dillon, J. reversed the commissioners' decision on the grounds that section 204(1) imposed the obligation on employers to operate the P.A.Y.E. system whenever the duties of the employment were carried on within the United Kingdom, regardless of the place of residence of the employer; and that the provisions of section 38 of the Act of 1973 were consistent with treating exploration activities in "designated areas" of the North Sea as trade carried on in the United Kingdom. The Court of Appeal allowed an appeal by the company on the ground that the requirement to deduct Schedule E tax under section 204(1) did not apply to employers who were not resident in the United Kingdom and did not make payments to employees in this country.
On appeal by the Crown:
Held, allowing the appeal (Lord Edmund-Davies and Lord Lowry dissenting), that, although it was necessary on practical grounds to imply some territorial limitations on the obligation imposed by section 204 of the Act of 1970 on employers to operate the P.A.Y.E. tax collection procedure, since the taxpayer company, although non-resident, was deemed by virtue of section 38(4) of the Act of 1973 to be trading in the United Kingdom and thereby liable to corporation tax under section 246 of the Act of 1970 and since its employees were subject to Schedule E income tax and it had an address for service in the United Kingdom, the company had a sufficient tax or trading presence in the United Kingdom for section 204 to apply to it so that it was bound to operate the P.A.Y.E. system in respect of its North Sea employees.
Ex parte Blain (1879) 12 Ch. D. 522, CA. considered.
(1982) 1 WLR 22 reve6ed.
Amalia, The (1863) 1 Moo. Nos.S. 471, P.C.; Attorney-General for Alberta v. Huggard Assets Ltd. (1953) A.C. 42a; (1953) 2 WLR 768; (1953) 2 All ER 951, P.C.; Blain, Ex parte (1879) 12 Ch. D. 522, CA.; Colquhoun v. Brooks (1889) 14 App. Cas. 493, H.L. (E); Colquhoun v. Heddon (1890) 25 Q.B.D. 129; 2 T.C. 621, CA.; Cooke v. Charles A. Vogeler Co. (1901) A.C. 102, H.L. (E).; De Beers Consolidated Mines Ltd. v. Howe (1906) A.C. 455; 5 T.C. 198, H.L. (E); India-Government of) v. Taylor (1955) A.C. 491; (1955) 2 WLR 303;. (1955) 1 All ER 292, H.L. (E); Tuck & Sons v. Priester (1887) 19 Q.B.D. 629, CA.; Vestey v.. Inland Revenue Commissioners (1980) A.C. 1148; (1979) 3 WLR 915; (1979) 3 All ER 976, H.L. (E); Westminster Bank Executor and Trustee Co. (Channel Island) Ltd. v. National Bank of Greece SA. (1971) A.C. 945; (1971) 2 WLR 105; (1971) 1 All, ER 233; 46 TC 472, H.L. (E.) ref.
Bray v. Colenbrander (1953) A.C. 503; (1953) 2 WLR 927; (1953) 1 All ER 1090, H.L. (E).; Brokaw v. Seatrain U.K. Ltd. (1971) 2 Q.B. 476; (1971) 2 );VLR 791; (1971) 2 All ER 98, CA.; Buchanam (Peter) Ltd. v. McVey (Note) (1955) A.C. 516; Debtors (No.836 of 1935), In re (1936) Ch. 622; (1936) 1 All ER 875, CA.; East End Dwellings Co. Ltd. v. Finsbury Borough Council (1952) A.C. 109; (1951) 2 All ER 587, H.L. (E); Inland Revenud-x, commissioner v. Associated Motorists Petrol Co. Ltd. (1971) A.C. 784; (1971) 2 WLR 74, P.C.; Stokes v. Bennett (1953) Ch. 566; (1953) 3 WLR 170; (1953) 2 All E.R. 313; Whitney v. Inland Revenue Commissioners (1926) A.C. 37 and 10 T.C. 88, H.L. (E.) cited.
Appeal from the Court of Appeal.
JUDGMENT
This was an appeal by the Crown from an order of the Court of Appeal (Lawton, Brightman and Fox L.JJ.) made on November 10, 1981, whereby the Court allowed an appeal by the respondents, Oceanic Contractors Inc. from a decision dated July 29, 1980, of Dillon, J. (1981) 1 W.L.R.59 allowing an appeal by case stated under section 56 of the Taxes Management Act, 1970 from a decision of the Commissioners for the Special Purposes of the Income Tax Acts quashing a determination by David Macdonald Clark, H.M. Inspector of Taxes, under Regulation 29 of the Income Tax (Employments) Regulations, 1973 that tax amounting to L2,033,254 was payable by the respondents to the Collector of Taxes under Regulation 26 of the Regulations.
The facts are stated in the opinions.
D.C.Potter Q.C. and Robert Carnwath for the Crown. It is common ground that Schedule E tax is payable if either the employees are resident in the United Kingdom or their duties are deemed to have been performed in the United Kingdom. The question is whether a non-resident company is liable to make deductions under P.A.Y.E. The Crown put their case in two ways. (1) The P.A.Y.E. liability applies whenever Schedule E tax is chargeable, and section 204 of the Income and Corporation Taxes Act, 1970 has no territorial limitation at all (the "universal" or logical approach). Alternatively (2) if Parliament did intend some restriction, the onus is on the respondents to show what it is. They cannot establish that non-residence is such a limitation.
The statutory provisions may be analysed by way of their concern with (1) the tax character of the employer, (2) the imposition of liability for Schedule E income tax, and (3) the tax collection machinery.
Any person resident in the United Kingdom and carrying on trade in the United Kingdom is taxable on all profits wherever they arise anywhere in the world: see sections 108 and 109 of the Act of 1970. If a company is not so resident, section 246 (1) of the Act makes it chargeable to corporation tax on "all Its chargeable profits wherever arising," if it carries on trade in the United Kingdom through a branch or agency. By virtue of section 246 (2), the respondents are clearly chargeable to corporation tax on any income arising through their branch or agency in the United Kingdom. Section 38 of the Finance Act, 1973 extends the charge to income, capital gains and corporation tax to exploration or exploitation activities carried on in a designated area. By `section 38 (4), profits or gains from such activities are treated as profits or gains of a trader carried on in the United Kingdom through a branch or agency. It is therefore reasonable to assume that in the case of branches carrying on activities in designated areas, Parliament intended Case 1 of Schedule D to apply. A company is not necessarily resident where its operations occur: De Beers Consolidated Mines Ltd. v. Howe (1906) A.C. 455, where it was held that the relevant criterion for determining residence of a company was where the head, seat and management of the company were, per Lord Loreburn L.C., at p.458. The case shows that residence is in a sense artificial; section 246 of the Act of 1970 would have been of crucial importance there.
It is common ground that the employees are subject to United Kingdom income tax under Schedule E, Case I or II: see sections 181 et seq. of the Income and Corporation Taxes Act, 1970 and section 21 of the Finance Act, 1974, amending section 181 (1). Both the original provision and the amendment refer to persons" resident and ordinarily resident in the United Kingdom" in Case I, and to persons" not resident or, if resident, then not ordinarily resident in the United Kingdom" in Case II.. Those Cases limit taxability to (i) where the taxpayer is resident in .the United Kingdom, or otherwise, (ii) where the duties are performed in (or the source of the income is in) the United Kingdom. Section 38(6) of the Finance Act, 1973 deems emoluments in respect of duties performed in a designated area in connection with exploration or exploitation activities as emoluments in respect of duties performed in the United Kingdom, and so brings Schedule E, Case II to bear. Section 38 (6) applies "for the purposes of income tax." That must mean for all the purposes of income tax, including collection, as well as liability. The statutory fiction enacted by the section must extend to the consequences and incidents of the deemed state of affairs: see per Lord Asquith in East End Dwellings Co. Ltd. v. Finsbury Borough Council (1952) A.C. 109, 132.
The collection obligations of the employer thus apply as if the duties had actually been performed in the United Kingdom. It is necessary to define (a) the source of the income and (b) the person paying the tax. The source of income is dealt with in section 1 of the Act of 1970, which provides for the charging of income tax on "property, profits or gains". The charge on persons is not provided for in the Act, but is left to regulations.
The collection of Schedule E tax by P.A.Y.E. is dealt with in section 204 of the Act of 1970. Section 204 itself is universal in its terms and has no express limitations as to declarations, repayment, recovery etc. The Crown's central contention is that Parliament, having specified the charge to Schedule E tax in section 181 of the Act of 1970, did not intend any territorial limitations on the ambit of section 204 other than those contained in Schedule E. (Reference was made to Government of India v. Taylor (1955) A.C.491, 504, per Viscount Simonds). By section 204 (1), income tax must be "deducted or repaid by the person making the payment..." The employer therefore does not have to pay the tax himself but must deduct it when he pays emoluments. That is part of the "universal" application. The deduction in section 204(1) is, by subsection (2) subject to Regulations. They are the Income Tax (Employments) Regulations, 1973 (S.I. 1973 No. 334). (Reference was made in particular to the definition of "emoluments" in Regulation 2(1), to Regulations 13, 26 to 28, 35 to 43 and 49 to 51; and to sections 65 to 68 of the Taxes Management Act 1970). Since it is only Regulations 26 (3) and (4) which enable the revenue to obtain tax from the employee himself, in some circumstances, it is clear that Parliament intended P.A.Y.E. to be a complete code, rather than a back-up to direct collection. It follows that P.A.Y.E. was intended to be congruent with, and to work with, Schedule E, and not to be additional to it. The wording of the regulations, as of section 204, is universal, and contains no justification for limiting their application, otherwise than as previously indicated. In particular, the Regulations have nothing to say about non-resident -companies, although they expressly state limitations in other difficult areas, such as seamen, servicemen and tips in restaurants. Whitney v. Inland Revenue Commissioners (1926) A.C. 37 vividly illustrates the universality of the charge to and collect ability of United Kingdom tax. It is significant that the subject-matter was the charge to surtax, which in 1925 increased substantially. Viscount Cave L.C., dissenting, emphasised the difficulty of collection and the Anglo-centric nature of the charge, but the other members of the House were not so concerned with such matters. The general proposition can be drawn from the case that Parliament is not to be presumed to limit the collect ability of tax further than is already limited in the substantive tax-law.
If there is some further limitation on the extent of section 204, the onus is on the respondents to show what it is. Peter Buchanan Ltd. v. McVey (Note) (1955) A.C. 516 shows that Parliament realises that even if it legislates in terms which appear to be universal, there will sometimes be practical limitations. It is accepted that in some circumstances English legislation is subject to the type of territorial limitation described by James L.J. in Ex parte Blain (1879) 12 Ch.D. 522, 526. However, the test there enunciated, couched in terms of foreigners coming to this country who are "within the allegiance of the sovereign" and "entitled to the protection of the sovereign." has no application to tax legislation, where questions of allegiance are almost wholly irrelevant and where only two matters fall to be considered, namely (1) residence in this country, or (2) income arising in this country: see Westminster Bank Executor and Trustee Co. (Channel Islands) Ltd. v. National Bank of Greece SA. (1971) A.C. 945, approving a statement of Lord Herschell in Colquhoun v. Brooks (1889) 14 App.Cas. 493, 504. See also Stokes v. Bennett (1953) Ch. 566, 575, per Upjohn, J. If the test in Ex parte Blain is applied, the respondents in any event come within it. Since they have a place of business in this country, and are registered here in accordance with section 407 of the Companies Act, 1948, they have brought themselves within United Kingdom jurisdiction and have a sufficient "presence" here. The fact that the employees were paid abroad should not affect the matter. That is simply a matter of internal organisation of the company. The important points are that the employees' emoluments are subject to Schedule E tax and that the company has a presence in the United Kingdom.
The special commissioners in their case stated sought a link with the United Kingdom, but they were looking for factors which "(connected) the transaction with this country sufficiently to bring it within the ambit of section 204". The Crown's approach is different: one must first look at the source of income, and then see if P.A.Y.E. is congruent with it. An important finding of the commissioners was that, if they had held the other way, the deduction of tax would not have been impracticable.
Dillon, J. held that the Crown failed on the broader ground but succeeded on a narrower ground. The Crown's stance on the latter is slightly different from the ground of Dillon, J.'s decision (1981) 1 WLR 59, 66-67. The judge said, at p.64B, that the primary question was how far section 204 was applicable in a case with a foreign element. The crown would say, "section 204 and the Regulations", since only the latter impose a duty on the employer to, pay the tax. In rejecting the "universal" approach, the Judge referred, at pp.64--65, to various difficulties that might arise in the practical application. He has taken examples which are admittedly difficult to police, but Courts have not in the past been deterred by similar difficulties from applying a principle when they thought it right to do so: see Whitney v. Inland Revenue Commissioners (1926) A.C.37 and Stokes v. Bennett (1953) Cb.566.
The Court of Appeal rejected both the broad and narrow arguments. They concentrated on the company's residence, and came to the wrong conclusion. Two points were not raised at all in that Court: section 246 of the Income and Corporation Taxes Act, 1970 and Lord Herschell's statement in Colquhoun v. Brooks, 14 App. Cas. 493, 504.
Carnwath following. The genesis of the P.A.Y.E. scheme is important because it shows (i) a close link throughout with the regulations, and (ii) that the scheme today is remarkably similar to when it was inaugurated. If there are now anomalies at the edges that might well be because circumstances have changed, but that is no reason for construing the scheme differently.
The first provision was section 11 of the Finance (No.2) Act 1940. For the first time, there was a power to make deductions, but there still had to be a previous assessment, and the previously arising basis of assessment was used. The Income Tax (Employments) Act, 1943 introduced (a) the current year basis and (b) a P.A.Y.E. regulation-making power, in substantially the same form as now, but limited to certain occupations (manual laborers and weekly earners). The Income Tax (Offices and Employments) Act, 1944 amended the Act of 1943 to apply to all emoluments chargeable under Schedule E except those of the armed forces. The first Regulations were made in 1944. Section 30(3) of the Finance Act, 1946 deleted the armed forces exception.
The law as it then stood was consolidated in sections 156 and 157 of the Income Tax Act, 1952. Section 156 brought in the Schedule E charge as it then was (it was reformulated in 1956). Section 157--now section 2.04 of the Income and Corporation Taxes Act, 1970--provided for P.A.Y.E. Subsection (6) applied the scheme to all Schedule E emoluments, and in subsection (2) a link was made with the regulation-making power. The pattern therefore was that emoluments were defined in Schedule E, with an inbuilt territorial limitation, and section 157 imposed a machinery for collecting those emoluments. Anyone who asserts that there must be a further limitation must point towards which import it.
Frank Heyworth Talbot Q.C., John Gardiner Q.C. and Roger C. Thomas for the respondents. The question is a very short one, viz., whether or not a provision in an Act of the United Kingdom Parliament can rightly be construed as imposing on a person who is neither resident in the United Kingdom nor a United Kingdom national an obligation (possibly onerous) to operate the P.A.Y.E. scheme in respect of payments of remuneration made (in U.S. dollars) elsewhere than in the United Kingdom. Two points need emphasis. (1). The case is in no way concerned with a determination of the tax liability of the respondents' employees. The question is whether the respondents are required to act as tax collectors in respect of whatever may be the employees' tax liability. (2) There is in the instant case no element of anything that could be regarded as an artifice for the avoidance of tax. It might be that the effect of upholding the Court of Appeal's decision would be to help employers to avoid tax; but it could not be right for the respondents to be damnified for fear that less scrupulous employers might behave otherwise.
All Acts of the United Kingdom Parliament must be construed as subject to territorial limitations, i.e., they operate only in regard to persons who are resident in the United Kingdom or have United Kingdom nationality, or to acts done within the jurisdiction: Ex parte Blain, 12 Ch.D. 522, and cases there cited. As the respondents are neither resident in the United Kingdom nor possessed of United Kingdom nationality, section 204 of the Income and Corporation Taxes Act, 1970 could apply to them only in so far as they performed some relevant act in the United Kingdom. section 204 itself specifies in the plainest terms the relevant act: it operates only "On the making of any payment of, or on account of, any income assessable to income tax under Schedule E.. " that is the crux of the whole matter. Since no such payments to employees at work in the north sea have been made in the United Kingdom, section 204 cannot rightly be construed as imposing any duty on the respondents.
It is trite law that in construing an Act, one must try to ascertain the intention of Parliament. Normally one looks at the words themselves alone, and their meaning in normal speech. But sometimes it is impossible to construe the Act in that way. Take, for example, sections 1, 108 (1) (b) ("all interest of money...") and 109, Case III (a) ("any interest of money..."), of the Act of 1970. Since there are no words of limitation at all, those provisions could apply to a Japanese citizen living in Japan, paying interest to another Japanese citizen. Obviously they cannot in practice apply thereto. Therefore one has to recognise throughout that there must be some limitation.
The Crown contend that the only limitation to which section 204 is subject is defined by the scope of the charge to Schedule E tax. If that is right, stark consequences would follow. Any person anywhere in the world employing an individual who is a United Kingdom resident would be under all the obligations prescribed by section 204 and the Regulations. That would include section 204 (2) (b) and Regulation 32 of the 1973 Regulations, so that all wage sheets and other documents would have to be available for inspection by the Inland Revenue "at the employer's premises"--anywhere in the world. The proposition that that is nothing more than a rough edge to the provisions of the law is unacceptable. That is not a unique or rare case, but a very common one. For example, a United States corporation having no place of business here and not resident here, engaging a young man resident, ordinarily resident and domiciled in the United Kingdom to work for a while in the New York office, would be subject to the whole paraphernalia of section 204 and the Regulations. It could not reasonably be supposed that Parliament intended the provisions to apply to such an employer, but it cannot have been beyond the contemplation of the legislature that such a situation would arise. The Crown's submissions involve consequences so inconceivable that the legislation should be regarded as subject to the well-recognised limits of territoriality expressed in Ex parte Blain, 12 Ch.D.522; Colquhoun v. Heddon (1890) 25 Q.B.D. 129, 134, 137-138,, per Lord Esher M.R., and Inland Revenue Commissioner v. Associated Motorists Petrol Co. Ltd. (1971) A.C. 784, 791, per Lord Wilberforce. Section 204 was obviously intended to facilitate the collection machinery. But that cannot be done by dint of regulations which are impossible to enforce.
The Crown's alternative case rests on what they call the "presence" of the respondents in the United Kingdom. Income-tax law knows nothing of "presence" as distinguished from residence. Nowhere in the Income Tax Acts does one find "presence" as determinative of liability; nor is there any judicial authority which ratifies the proposition. Presence does have significance in determining whether there is residence; unless it does so, it has no significance at all. If there is an intermediate stage, presence, between residence and non -residence, it is difficult to see what constitutes it. Will an office in the United Kingdom do, and if so, how big does it have to be, and how many employees? The mere fact that the respondents are liable to United Kingdom corporation tax is not enough for section 204, because the liability to account for Schedule E tax depends on the payment of remuneration. That in turn is based on the employees' contracts of employment, which were not made in this country and are not enforceable here.
The Court of Appeal decision was in all respects correct.
Gardiner Q.C. following. To say that the only difficulty with the "universal" approach is enforceability is not good enough. If the Crown are right, the revenue can in principle send…
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