Factual and Procedural Background
In 1923 the father of the Appellant transferred the entire share capital of a Canadian investment vehicle (“Company A”) to the Appellant, the legal title being held by another Canadian company (“Company B”) as trustee.
In 1934, on the eve of his marriage, the Appellant executed a deed settling 15,000 of the 25,000 shares in Company A. The deed directed that, during the joint lives of the Appellant and his father, all income from those shares be paid to the Appellant; on the death of either, the future spouse would receive a fixed annuity, rising on the death of the survivor, with contingent trusts for any children. No dividends were declared during the relevant years.
The Appellant directly controlled Company B, which in turn controlled Company A and six other foreign subsidiaries (“Companies C–H”) incorporated in Canada or Kenya. The Government Agency assessed the Appellant to United Kingdom Sur-tax for 1938-39 through 1941-42 on the footing that: (i) the 1934 deed was a “settlement” within sections 38 and 41 of the Finance Act 1938, and (ii) 15 ⁄ 25 of the undistributed income of Company A and 15 ⁄ 25 of the undistributed income of each of Companies C–H constituted “income arising under the settlement”.
The Special Commissioners upheld the Government Agency on point (i) but found for the Appellant on point (ii), limiting the assessable income to the proportion attributable to Company A alone. Judge Atkinson affirmed that view. The Court of Appeal reversed him, reinstating the wider assessments. The House of Lords (the ultimate court of appeal) allowed the Appellant’s further appeal and restored Judge Atkinson’s decision.
Legal Issues Presented
- Whether the 1934 deed constituted a “settlement” for the purposes of sections 38 and 41 of the Finance Act 1938 (ultimately not disputed in the higher courts).
- Whether, on the proper construction of section 41(4)(a)(ii) of the Finance Act 1938, as amended by section 13(3) of the Finance Act 1939, undistributed income of foreign subsidiary companies (Companies C–H) could be apportioned or sub-apportioned and thus treated as “income arising under the settlement”.
Arguments of the Parties
Appellant's Arguments
- The 1934 deed was indeed a settlement, but section 41(4)(a)(ii) did not extend to foreign companies because
a) only companies incorporated in the United Kingdom could be the subject of an “original apportionment” under section 21 of the Finance Act 1922; and
b) income attributed to a foreign company on any apportionment could not be further sub-apportioned.
- Section 13(3) of the Finance Act 1939 merely permits sub-apportionment where it is otherwise valid; it does not deem every foreign company in a chain to be incorporated in the United Kingdom.
- Consequently, only the proportionate income of Company A—if it had been UK-incorporated—could have been apportioned to the trustees, and no part of the income of Companies C–H was chargeable.
Government Agency's Arguments
- Section 13(3) of the Finance Act 1939 broadened section 41(4)(a)(ii) so that references to “the body corporate” must, by implication, include each company in a series of sub-apportionments; foreign status therefore became irrelevant.
- To give effect to the legislative purpose of preventing Sur-tax avoidance, the House should construe “body corporate” as “any relevant body corporate,” allowing hypothetical apportionment through the entire chain (Companies C–H → Company A → trustees).
- Alternatively, income notionally attributed to Company A formed part of Company A’s “actual income,” so the statutory machinery could capture it despite the foreign element.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Chamberlain v. Commissioners of Inland Revenue |
Meaning of “settlement” where settlor retains interests |
Referenced by Judge Atkinson; ultimately distinguished |
| Hood Barrs v. Commissioners of Inland Revenue |
Statutory interpretation of settlement provisions |
Cited to show broad approach but not decisive |
| Salomon v. Salomon & Co. |
Principle that legislative intent must be derived from enacted words |
Used in House of Lords to reject implied extension of statute |
| Crawford v. Spooner |
Courts may not fill statutory gaps by construction |
Relied on to refuse reading foreign companies into the Act |
| Van Grutten v. Foxwell |
Limits on judicial reconstruction of legislation |
Mentioned in Court of Appeal but not decisive at final stage |
Court's Reasoning and Analysis
The House of Lords observed that section 21 of the Finance Act 1922 permits original apportionment only of companies incorporated in the United Kingdom, and that section 32 of the Finance Act 1927 allows sub-apportionment only where both the original and recipient companies meet that same criterion. Those statutory limits, the Lords held, represent a deliberate legislative choice: a foreign company in the chain halts the flow of undistributed income for Sur-tax purposes.
Section 13(3) of the Finance Act 1939 does no more than ensure that where an original apportionment is possible, any resulting sub-apportionments count as apportionments “for the purposes of” subsequent legislation. It does not deem each foreign company in a chain to be UK-incorporated, nor does it modify the existing machinery of section 32 (1927). The phrase “the body corporate” in section 41(4)(a)(ii) therefore continues to refer to the single company whose income is being tested for possible apportionment, and cannot be read multiplicatively or collectively.
The Lords rejected the Government Agency’s alternative contention that income deemed to belong to a company after an apportionment becomes that company’s “actual income.” Such an interpretation would produce double counting, undermine the structure of the Acts and render the 1927 sub-apportionment provisions redundant.
Applying the correct construction, Company A’s income could be hypothetically apportioned (had it been a UK company) to the trustees, but no statutory route allowed any part of the income of Companies C–H to reach the trustees by sub-apportionment. Accordingly, the assessments were excessive to the extent they included those amounts.
Holding and Implications
HELD: The appeal was allowed. The decision of Judge Atkinson and the Special Commissioners was restored: only the proportion of Company A’s income falls within “income arising under the settlement.” The undistributed income of the six foreign subsidiaries (Companies C–H) is not chargeable to Sur-tax on the Appellant under the relevant Finance Acts.
Implications: The judgment confirms a strict, literal approach to the apportionment provisions in the Finance Acts of 1922, 1927, 1938 and 1939. A foreign company in the ownership chain remains a barrier to the attribution of undistributed profits for United Kingdom Sur-tax purposes unless and until Parliament legislates expressly to the contrary. No new doctrine was created, but the decision limits the Revenue’s ability to pierce international corporate structures under the existing statutory scheme.