Congreve and Congreve v Inland Revenue

Factual and Procedural Background

The Appellant 1, an American citizen resident in the United Kingdom, was the sole child of a wealthy American businessman (“Relative”) who had built a substantial engineering enterprise in the UK. In 1927 the Relative held 93,000 of the 100,000 issued shares in that UK company (“Company A”).

Between 1932 and 1937 the Relative, Appellant 1, and a network of newly-created Canadian and UK investment companies entered into a series of intricate share and debenture transactions. The cumulative effect was to shift the economic benefits of the Relative’s 93,000 shares in Company A into a chain of foreign and then expatriated UK companies while leaving control, directly or indirectly, with Appellant 1. Appellant 2 (Appellant 1’s spouse) was also ordinarily resident in the UK throughout.

Assessments for Income Tax and Sur-tax were issued against both Appellants under section 18 Finance Act 1936 (as amended). The Appellants lost before the Special Commissioners, succeeded in part before Judge 1 in the High Court (King’s Bench Division), but the Court of Appeal reversed that decision and reinstated the assessments. The House of Lords, after hearings in April and May 1948, dismissed the further appeal.

Legal Issues Presented

1. Whether, for the purposes of section 18 Finance Act 1936, an individual “acquires rights by means of a transfer” only when he or she personally (or through an agent) executes the transfer, or whether transfers effected by third parties (including companies the individual controls) suffice.
2. Whether a transfer to a company resident in the UK falls within section 18 when, after the transfer, that company’s control is shifted abroad and the relevant income subsequently arises while the company is non-resident.
3. Whether, once section 18 applies, the charge extends to the whole income of the non-resident company or only to income traceable to the specific assets originally transferred.

Arguments of the Parties

Appellants’ Arguments

• The statutory phrase “by means of any such transfer” requires the transfer to have been executed by the taxpayer or the taxpayer’s agent; transfers by independent persons or companies could not engage section 18.
• A transfer is only caught if the transferee is already non-resident at the moment of transfer; subsequent expatriation of control is not an “associated operation.”
• Even if section 18 applied, tax could be charged only on income arising from the particular assets originally transferred, not on the transferee company’s entire income.

Respondent’s Arguments

• Section 18 targets the effect of transfers; it is enough that the individual acquires power to enjoy foreign income, regardless of who executed the transfer.
• Moving control of a company abroad after a transfer is an “associated operation,” so income arising thereafter is within the section.
• The statutory deeming provision attributes to the individual the whole of the non-resident company’s income once the statutory conditions are satisfied.

Table of Precedents Cited

Court's Reasoning and Analysis

1. Meaning of “by means of.” The House of Lords held that the phrase does not require personal execution of the transfer. It is sufficient that the transfer is the instrumentality through which the taxpayer acquires power to enjoy foreign income. A transfer executed by a company, even one only partly owned by the taxpayer, can therefore satisfy the condition.

2. Transfers to companies later expatriated. The statute is concerned with the point in time when the income becomes payable, not when the transfer is made. Consequently, income that arises after the company’s control has been removed abroad is caught even though the company was UK-resident at the date of transfer. Moreover, shifting control overseas is itself an “associated operation” under the inclusive definition in section 18(2).

3. Quantum of income. In the present appeals all of the income assessed was traceable to assets that had been transferred or to assets representing those transfers, so the question of “whole income v. traced income” did not alter the outcome. The Law Lords therefore declined to decide the abstract point but noted that the language of section 18 could, in a suitable case, attribute the whole income of the foreign entity.

4. Purpose test. The Special Commissioners’ unchallenged finding that tax avoidance was at least one purpose of the arrangements deprived the Appellants of the statutory “commercial purpose” defence now found in section 18(1B).

Holding and Implications

HOLDING – APPEAL DISMISSED. The House of Lords affirmed the Court of Appeal, reinstating the full Income Tax and Sur-tax assessments against the Appellants.

Implications. The judgment confirms that section 18 Finance Act 1936 applies broadly: transfers executed by third parties or controlled companies can give rise to taxpayer liability; later expatriation of a UK company is an “associated operation”; and, where appropriate, the entire income of the foreign company can be deemed to be that of the UK-resident individual. The decision significantly strengthens the UK tax authority’s ability to counteract sophisticated offshore avoidance structures.