Clarifying the Scope of Section 739(2) on Deeming Provisions in Tax Avoidance: R v Dimsey [2001] UKHL 46

Clarifying the Scope of Section 739(2) on Deeming Provisions in Tax Avoidance: R v Dimsey [2001] UKHL 46

Introduction

The case of R v Dimsey [2001] UKHL 46 represents a significant judicial examination of the United Kingdom's tax avoidance laws, particularly focusing on the interpretation of Section 739(2) of the Income and Corporation Taxes Act 1988. The appellants, Dermot Jeremy Dimsey and others, were convicted for conspiring to cheat the public revenue of corporation tax through the transfer of assets via offshore companies. The central issue on appeal was whether Section 739(2), which deems the income of a transferee to be the income of the transferor for income tax purposes, also implies that such income is not the income of the transferee for corporation tax purposes.

Summary of the Judgment

The House of Lords upheld the convictions of Dermot Jeremy Dimsey and his co-defendants, dismissing their appeal. The court reaffirmed that Section 739(2) does not exempt transferees from their corporate tax liabilities. The deeming provision strictly applies to income tax obligations of the transferor, without negating the transferee's obligation to pay corporation tax on its income. Consequently, the appellants' argument that the conviction was unsafe because Section 739(2) might render the transferees' income non-taxable was rejected.

Analysis

Precedents Cited

The judgment extensively referenced previous cases to interpret the scope and application of Section 739(2). Key among them were:

  • Vestey v Inland Revenue Commissioners [1980] AC 1148: This case limited the breadth of Section 739, specifying that it applies only to individuals attempting to avoid tax by transferring assets abroad.
  • Inland Revenue Commissioners v Garvin [1981] 1 WLR 793: Lord Wilberforce emphasized the principle against double taxation, suggesting that income should not be taxed twice.
  • Lord Howard de Walden v Inland Revenue Commissioners [1942] 1 KB 389: Highlighted that penal provisions should be interpreted to effectively deter tax avoidance practices.
  • National & Provincial Building Society v United Kingdom (1997) 25 EHRR 127: Addressed the proportionality of tax measures under human rights considerations.

These precedents collectively influenced the court's interpretation of the deeming provisions, ensuring that legislative intent and constitutional principles were upheld.

Legal Reasoning

The core of the court's legal reasoning centered on the proper interpretation of Section 739(2). The Lords examined whether the deeming provision should extend to exclude the transferee's income from being subject to corporation tax. Lord Bingham, delivering the opinion, concluded that the legislative history and the specific wording of the statute did not support such an extension. The provision was intended to address income tax liabilities of the transferor without affecting the transferee's corporate tax obligations.

Furthermore, the Lords considered the argument of potential double taxation. While acknowledging the existence of Section 743(1), which addresses the issue of double taxation for the transferor, they found no statutory provision that exempts transferees from corporation tax due to the deeming provision. However, the theoretical concerns of double taxation were deemed non-material in practice, as transferees are typically entities chosen to evade UK tax and thus are unlikely to be pursued effectively for corporation tax liabilities.

Additionally, the court addressed human rights considerations under the Human Rights Act 1998. It was determined that the section in question did not infringe upon the rights guaranteed under Article 1 of Protocol No. 1, as the legislative measures were within the permissible limits aimed at combating tax avoidance.

Impact

The judgment clarified the boundaries of Section 739(2), reaffirming that while it effectively targets the income tax liabilities of individuals involved in tax avoidance schemes, it does not absolve corporate transferees from their corporation tax responsibilities. This distinction ensures that the provision maintains its focus on deterring individuals from circumventing tax obligations without inadvertently shielding corporations from legitimate tax duties.

Moreover, the decision underscores the importance of statutory interpretation grounded in legislative intent and precedent. Future cases involving Section 739(2) will reference this judgment to reinforce the non-application of the deeming provision to corporate entities, thus maintaining consistency in the enforcement of tax laws.

In a broader context, the judgment serves as a deterrent against complex tax avoidance strategies that exploit statutory provisions, reinforcing the principle that legislative measures to prevent tax evasion are to be strictly interpreted and enforced.

Complex Concepts Simplified

Section 739(2) Explained

Section 739(2) of the Income and Corporation Taxes Act 1988 is a "deeming provision." This means it legally disregards the actual ownership of income and assigns it to another party—in this case, the transferor. If an individual transfers assets abroad to evade taxes, any income generated from those assets is considered as the individual's own income for income tax purposes in the UK.

Deeming Provision

A deeming provision is a legal mechanism that treats income or assets as belonging to a specific individual or entity, regardless of actual ownership. This is often used in tax law to prevent individuals from avoiding taxes by transferring assets to others.

Double Taxation

Double taxation occurs when the same income is taxed twice by different authorities or in different forms. In the context of this case, the concern was whether the income deemed to belong to the transferor would also be taxed in the transferee, leading to double taxation.

Human Rights Act 1998

The Human Rights Act 1998 incorporates the European Convention on Human Rights into UK law. In this case, Article 1 of Protocol No. 1, which concerns the protection of property, was considered to ensure that the tax provisions did not infringe upon fundamental rights.

Conclusion

The House of Lords' decision in R v Dimsey [2001] UKHL 46 serves as a pivotal clarification in the interpretation of tax avoidance statutes, specifically Section 739(2) of the Income and Corporation Taxes Act 1988. By affirming that the deeming provision applies solely to the income tax liabilities of the transferor and not to the corporation tax liabilities of the transferee, the judgment delineates the boundaries of tax enforcement measures aimed at curbing avoidance strategies.

This decision reinforces the principle that legislative intent and precise statutory language are paramount in judicial interpretations, ensuring that anti-avoidance provisions are applied as intended without overreach. Furthermore, the judgment underscores the judiciary's role in maintaining the balance between effective tax enforcement and the protection of individual rights, as envisaged by the Human Rights Act 1998.

Ultimately, R v Dimsey reinforces the UK's commitment to robust tax enforcement mechanisms, providing clear legal precedents that will guide future cases in the realm of tax avoidance and statutory interpretation.

Case Details

Year: 2001
Court: United Kingdom House of Lords

Judge(s)

LORDS DECISIONSLORDS DECISIONS >>LORDSLORD BINGHAM OF CORNHILL LORD NICHOLLS OF BIRKENHEAD LORD STEYN LORD HUTTON LORD SCOTT OF FOSCOTELORDS OF APPEAL FOR JUDGMENTLORD BINGHAM OF CORNHILLLORDS,LORD SCOTT OF FOSCOTE. FOR THE REASONS HE GIVES I WOULD ANSWER THE CERTIFIED QUESTION AS HE PROPOSES AND DISMISS THE APPEAL.LORD NICHOLLS OF BIRKENHEADLORDS,LORD SCOTT OF FOSCOTE. FOR THE REASONS HE GIVES I TOO WOULD DISMISS THIS APPEAL.LORD STEYNLORDS,LORD SCOTT OF FOSCOTE. FOR THE REASON HE GIVES I WOULD ALSO DISMISS THE APPEAL.LORD HUTTONLORDS,LORD SCOTT OF FOSCOTE WITH WHICH I AM IN FULL AGREEMENT. FOR THE REASONS HE GIVES I TOO WOULD DISMISS THIS APPEAL.LORD SCOTT OF FOSCOTELORDS,LORDSHIPS' HOUSE IN VESTEY V INLAND REVENUE COMMISSIONERS. IT WAS HELD THAT THE PROVISION (THEN SECTION 412 (1) OF THE INCOME TAX ACT 1952) APPLIED ONLY TO THE INDIVIDUAL OR INDIVIDUALS WHO HAD SOUGHT TO AVOID TAX BY TRANSFERRING ASSETS ABROAD AND DID NOT APPLY TO INDIVIDUALS SIMPLY BECAUSE THEY MIGHT BECOME THE RECIPIENTS OF INCOME OR CAPITAL DERIVED FROM THOSE ASSETS. A TAX LIABILITY WAS LATER IMPOSED BY SECTION 45 OF THE FINANCE ACT 1981 (NOW SECTION 740 OF THE 1988 ACT) ON THE ACTUAL RECIPIENTS OF INCOME OR CAPITAL DERIVED FROM THE TRANSFERRED ASSETS.LORDS, THE ISSUE ON THIS APPEAL IS A SHORT ONE. IT IS WHETHER SECTION 739 (2), DEEMING THE INCOME OF THE FOREIGN TRANSFEREE TO BE THE INCOME OF THE TAX AVOIDER/TRANSFEROR, IMPELS THE COROLLARY THAT THAT INCOME IS FOR TAX PURPOSES TO BE DEEMED NOT TO BE THE INCOME OF THE FOREIGN TRANSFEREE.COMMISSIONERS OF INLAND REVENUE, TO CHEAT HER MAJESTY THE QUEEN AND THE COMMISSIONERS OF INLAND REVENUE OF PUBLIC REVENUE BY FAILING TO MAKE FULL AND COMPLETE DISCLOSURE TO THE COMMISSIONERS OF INLAND REVENUE OF:LORDS, THIS SUBMISSION IS, IN MY OPINION, WELL-FOUNDED. PARTICULAR (I) HAS BEEN WITHDRAWN, PARTICULAR (IV) CANNOT SUFFICE ON ITS OWN AND PARTICULAR (II) CONCENTRATED ON MR CHIPPING'S PERSONAL TAX LIABILITY. THE APPELLANT'S EVIDENCE WAS THAT HE HAD HAD NOTHING TO DO WITH MR CHIPPING'S PERSONAL TAX RETURNS OR TAX LIABILITIES AND HAD ADVISED MR CHIPPING TO OBTAIN EXPERT TAX ADVICE. IT IS QUITE POSSIBLE THAT THE JURY ACCEPTED THIS EVIDENCE AND CONVICTED THE APPELLANT ON THE BASIS OF PARTICULAR (III) ALONE. IT MUST FOLLOW THAT IF A CONVICTION ON THE BASIS OF PARTICULAR (III) CANNOT BE UPHELD, THE APPELLANT'S CONVICTION CANNOT STAND.LORDSHIPS DECLINED, HOWEVER, TO ENTERTAIN AN APPEAL ON THIS POINT. AS IS POINTED OUT IN THE RESPONDENTS' CASE, THERE WAS NO DISPUTE BETWEEN THE PARTIES AS TO THE CORRECT TEST IN LAW OF CORPORATE RESIDENCE. THE ONLY QUESTION WAS WHETHER THAT TEST HAD BEEN ACCURATELY REFLECTED IN THE JUDGE'S SUMMING UP. THAT ISSUE HAD BEEN FULLY CONSIDERED IN THE COURT OF APPEAL.LORDSHIPS. THE FIRST IS WHETHER UNDER SECTION 739(2) OF THE 1988 ACT THE INCOME OF THE THREE OFF-SHORE COMPANIES, WHICH IS DEEMED TO BE THE INCOME FOR INCOME TAX PURPOSES OF MR CHIPPING, MUST ALSO BE DEEMED NOT TO BE THE INCOME OF THE COMPANIES. THE SECOND ISSUE ONLY ARISES IF THE COMPANIES' INCOME, NOTWITHSTANDING THAT UNDER SECTION 739(2) IT IS DEEMED TO BE THE INCOME OF MR CHIPPING FOR TAX PURPOSES, REMAINS FOR TAX PURPOSES THE INCOME OF THE COMPANIES. THE ISSUE IS WHETHER THIS STATE OF AFFAIRS IS INCONSISTENT WITH THE RIGHT TO PROPERTY GUARANTEED BY ARTICLE 1 OF PROTOCOL NO 1 TO THE CONVENTION.LORDSHIPS' HOUSE THE APPELLANT'S APPEAL HAS BEEN HEARD TOGETHER WITH AN APPEAL BROUGHT BY BRIAN ROGER ALLEN, ANOTHER OF THE APPELLANT'S CLIENTS. THE SECTION 739 POINT ARISES ON BOTH APPEALS. AND MR ALLEN, LIKE THE APPELLANT, HAS RAISED BEFORE THE HOUSE A CONVENTION POINT, ALBEIT A DIFFERENT CONVENTION POINT FROM THE APPELLANT'S PROTOCOL NO 1 POINT. I HAVE HAD THE ADVANTAGE OF READING IN DRAFT THE OPINION OF MY NOBLE AND LEARNED FRIEND LORD HUTTON IN ALLEN'S CASE. THE REMARKS ABOUT RETROSPECTIVITY AND R V LAMBERT [2001] 3 WLR 206 MADE BY MY NOBLE AND LEARNED FRIEND IN PARAGRAPH 20 OF HIS OPINION APPLY ALSO TO THE CONVENTION POINT RAISED BY THE APPELLANT. IF THE APPELLANT'S CONVICTION WAS SAFE BEFORE THE INCORPORATION OF THE CONVENTION INTO DOMESTIC LAW, IT HAS NOT CEASED TO BE SAFE BECAUSE OF THAT INCORPORATION.JUSTICE OR ABSURDITY, THE APPLICATION OF THE STATUTORY FICTION SHOULD BE LIMITED TO THE EXTENT NEEDED TO AVOID SUCH INJUSTICE OR ABSURDITY, UNLESS SUCH APPLICATION WOULD CLEARLY BE WITHIN THE PURPOSES OF THE FICTION. I FURTHER BEAR IN MIND THAT, BECAUSE ONE MUST TREAT AS REAL THAT WHICH IS ONLY DEEMED TO BE SO, ONE MUST TREAT AS REAL THE CONSEQUENCES AND INCIDENTS INEVITABLY FLOWING FROM OR ACCOMPANYING THAT DEEMED STATE OF AFFAIRS, UNLESS PROHIBITED FROM DOING SO."LORDSHIPS MR MILNE QC, COUNSEL FOR THE REVENUE, GAVE AN ASSURANCE ON BEHALF OF HIS CLIENTS THAT IN SEEKING TO RECOVER INCOME TAX AGAINST A TRANSFEROR UNDER SECTION 739(2) CREDIT WOULD ALWAYS BE GIVEN FOR ANY TAX THAT HAD BEEN PAID ON THE SAME INCOME BY THE TRANSFEREE, AND VICE VERSA. BUT, AS LORD WILBERFORCE REMARKED IN INLAND REVENUE COMMISSIONERS V GARVIN [1981] 1 WLR 793, 799, THE AVOIDANCE OF DOUBLE TAXATION "SHOULD BE A RIGHT AND NOT MERELY A PRIVILEGE".COMMISSIONERS [1980] AC 1148 REJECTED THE REVENUE'S CONTENTIONS THAT EVERY BENEFICIARY WAS TAXABLE ON THE WHOLE OF THE TRUST INCOME REGARDLESS OF WHETHER HE OR SHE HAD RECEIVED ANY, THAT "THERE IS NO DUTY UPON THE COMMISSIONERS TO COLLECT THE WHOLE OF THIS [TAX] FROM ANY ONE BENEFICIARY", AND THAT "[THE COMMISSIONERS] ARE ENTITLED, SO LONG AS THEY DO NOT EXCEED THE TOTAL, TO COLLECT FROM SELECTED BENEFICIARIES AN AMOUNT DECIDED UPON BY THEMSELVES." LORD WILBERFORCE SAID, AT P 1173:LORDSHIPS IS ONE OF CONSTRUCTION OF SECTION 739(2). IF THE SECTION ON ITS TRUE CONSTRUCTION DOES LEAVE THE TRANSFEREE LIABLE TO BE TAXED ON ITS ACTUAL INCOME NOTWITHSTANDING THAT THAT INCOME IS THE DEEMED INCOME ON WHICH THE TRANSFEROR IS LIABLE TO BE TAXED THEN, SUBJECT TO THE HUMAN RIGHTS ACT POINT, THAT IS THAT. THE ISSUE, OF COURSE, ONLY ARISES IN RELATION TO INCOME OF A TRANSFEREE ON WHICH THE TRANSFEREE IS LIABLE TO PAY UNITED KINGDOM TAX. BUT ON THE PREMISE THAT THE THREE OFF-SHORE COMPANIES WERE RESIDENT IN THE UNITED KINGDOM AT THE MATERIAL TIME, IT IS COMMON GROUND THAT, LEAVING ASIDE SECTION 739(2), THEY WOULD HAVE BEEN LIABLE TO PAY CORPORATION TAX ON THEIR PROFITS (SEE SECTION 6 OF THE 1988 ACT). AND THE INCOME EACH COMPANY RECEIVED IN THE TAX YEAR IN QUESTION WOULD HAVE HAD TO BE BROUGHT INTO THE COMPUTATION OF ITS TAXABLE PROFITS.LORD WILBERFORCE TO SAY, AT P 1172:LORD HOWARD DE WALDEN V INLAND REVENUE COMMISSIONERS [1942] 1 KB 389 IS IN POINT. THE TAXPAYER APPEALED AGAINST AN ASSESSMENT TO INCOME TAX AND SURTAX MADE AGAINST HIM IN RESPECT OF INCOME DEEMED TO BE HIS UNDER SECTION 18 OF THE 1936 ACT. THE TAXPAYER HAD POWER TO ENJOY ONLY A SMALL PART OF THE INCOME OF THE TRANSFEREE COMPANIES BUT HE WAS ASSESSED TO TAX IN RESPECT OF THE WHOLE OF THEIR INCOME. THE COURT OF APPEAL DECLINED TO ACCEPT THE INVITATION OF THE TAXPAYER'S COUNSEL TO CONSTRUE THE SECTION SO AS TO LIMIT THE CHARGE TO TAX TO THE BENEFIT WHICH THE TAXPAYER HAD ACTUALLY OBTAINED. LORD GREENE MR SAID THIS, AT P 397:

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