It's Criminal

SIMON MCKIE MA(Oxon), barrister, FCA, FTII, ASFA, TEP explains why he considers the decision in Dimsey is flawed.

ON 11 OCTOBER 2001, the House of Lords gave its judgment on the Appeal of Mr Dimsey against a conviction for conspiracy to cheat public revenue. The judgment was given on the same day as the judgment in Regina v Swiss Allen, an appeal against conviction of the offence arising in relation to the same transactions. Both cases raise important points of tax law in the unfamiliar environment of a criminal case.

This article considers the House of Lords' judgment in Regina v Dimsey which provides authority on a particularly draconian view of the application by section 739, Taxes Act 1988. In the House of Lords, Lord Scott of Foscott delivered the leading speech, all four other Law Lords, Buckingham, Nicholls, Steyn and Hutton, simply agreeing.

Grounds of appeal

Mr Dimsey provided financial services through a Jersey company, DFM Consultants Ltd. The company's services included setting up offshore companies and it set up three offshore companies for Mr Chipping. Mr Dimsey was convicted of conspiracy to cheat 'Her Majesty the Queen and the Commissioners of Inland Revenue of public revenue and failing to make full and complete disclosure' of four categories of information, one of which was the 'profits made by [certain] … offshore companies which [Mr Chipping] managed and controlled'. Because it was impossible to tell from the verdict which one or more of the categories of failure to disclose the jury considered had been proven, it was accepted in the House of Lords that if Mr Dimsey could show that he could not fairly have been convicted on any one of the categories, his appeal would succeed.

It was accepted on appeal that Mr Chipping managed and controlled the three companies, and thus that they were United Kingdom resident and subject to United Kingdom corporation tax. Thus the Crown argued that the failure to disclose that they were managed and controlled in the United Kingdom was a failure which cheated the public revenue of corporation tax.

Mr Dimsey argued that section 739 applied to Mr Chipping's transfer of assets to the three companies. Section 739 was able to apply to the companies although they were United Kingdom resident, because a non-United Kingdom incorporated company is treated for the purposes of section 739 as if it were non-resident even if it is not (section 742(8)). Where section 739(2) applies, the income which arises to the transferee and which the transferor has power to enjoy '… shall, whether it would or would not have been chargeable to income tax apart from the provisions of this section, be deemed to be income of that individual for all purposes of the Income Tax Acts'.

The defence therefore argued that because the income of the offshore companies was deemed to be the income of Mr Chipping, it could not also be the income of the offshore companies. Mr Dimsey had not therefore conspired to cheat the public revenue of corporation tax. He had, presumably, conspired to cheat the public revenue of income tax under section 739, but that had not formed part of the basis of the case upon which he was convicted. His defence depended upon the court accepting that if section 739 deemed the income of the offshore companies to be that of Mr Chipping, that income could not at the same time be that of the company. The defence also argued that if section 739 did apply as the Crown contended, the result would be that section 739 itself is contrary to Article 1 of Protocol 1 to the Convention for the Protection of Human Rights and Fundamental Freedoms (the human rights defence).

The defence, relying on Marshall v Kerr 67 TC 56, submitted that one must treat as real the statutory deeming required by section 739, so that if the income of the transferee is of the transferor, it could not remain the income of the transferee. The defence argued that this contention was fortified both by the presumption against double taxation and a presumption that Parliament imposes taxation according to the law and not according to administrative discretion.

Lord Scott agreed that there was a presumption against double taxation and that it was no answer to this that the Revenue in practice would only assess one taxpayer. He also agreed that there was a presumption against an interpretation of a statute conferring on the Revenue an administrative discretion as to which taxpayers to tax and in what amounts.

The Crown argued that the provision of section 739(2) applied only for 'all the purposes of the Income Tax Acts' and therefore on a literal reading of the legislation did not apply for corporation tax purposes. David Ewart made a persuasive case in an article which appeared in the Offshore and International Taxation Review Vol 9 Issue 1 that even on a common literal reading of the legislation the deeming provision in section 739(2) also applies for the purposes of corporation tax. These arguments are not referred to in the judgment.

Lord Scott refused to accept that there was a difference between a transferee which was subject to income tax and one which was subject to corporation tax, on the basis that Parliament could not have intended there to be such a distinction.

Lord Scott then went on to say that the defence's position requires that the deeming words read:

'shall … for all purposes of the Income Tax Acts be deemed to be the income of that individual and not the income of any other person'.

As an aside, that seems absolutely incorrect. The defence did not argue that words should be read in, but that when one applies the statutory words, a logical consequence of their application is that the income can no longer be that of the transferee.

By characterising the defence's position in this way, Lord Scott was able to regard the Crown's case simply leaving 'the words as enacted and [confining] the deeming provision to its literal meaning'. It would surely be more apt to characterise it as restricting the literal meaning to apply only for limited purposes.

Lord Scott then examines the history of section 739 noting that it was first enacted in section 18, Finance Act 1936 before the introduction of corporation tax, which he regards as supporting his view that no distinction between income tax and corporation tax is intended. He goes on to note that Finance Act 1936 also introduced the provisions relating to settlements made by a settlor on his children and that those provisions provided that income paid to or for the benefit of a minor child 'shall …. be treated for all the purposes of Income Tax Acts as income of the settlor … and not as the income of any other person'. He therefore argued that the omission of the words 'not as the income of any other person' from what became section 739 was deliberate concluding that:

'it seems … very difficult if not impossible to argue that those words or something similar which are notably absent from section 18(1) should be an implied addition to [that] section.'

He then examined various examples of other statutory provisions which, in words, provide that where income is deemed to be one person's it is not to be treated as income of the person to whom it actually arises.

From this he was able to conclude that the 'wording of these tax avoidance provisions strongly supports the Crown's approach to the deeming provision …in section 739(2)'.

Double taxation

In dealing with the issue of double taxation, Lord Scott stated as a fact that:

'Transferees are chosen by tax avoiders in order to avoid United Kingdom tax. Non-resident and foreign domiciled transferees are likely to be chosen. They do not submit tax returns to the Revenue. … Accordingly, the double taxation possibilities that the Revenue's case undoubtedly leaves theoretically open do not seem to [Lord Scott] to carry weight in considering the correct construction of section 739(2).'

The defence had argued that Vestey v Commissioners of Inland Revenue [1980] AC 1148 is authority for the presumption against double taxation. Lord Scott distinguished the case by explaining that the Revenue in Vestey contended for an administrative discretion which would enable it to assess one or more of the beneficiaries of a trust in such sums as the Revenue thought fit, subject only to the limitation that the total income of the trustees should not be taxed more than once. In Lord Scott's view, the 'situation for which the Revenue was contending in Vestey was not simply one of double taxation. It was one of multiple taxation'. Lord Scott's view is very difficult to understand. In Vestey, it was accepted that the total amount of income assessed could not exceed the actual income. In Dimsey, the prosecution's case was that the total amount of income assessed would be double the amount of actual income. How can Vestey be multiple taxation compared to the situation in Dimsey?

Lord Scott decided that the key question was whether Parliament, in imposing the section 739 tax liability on tax avoiders, intended thereby to relieve the transferees of their normal liability to tax on their income, the income which forms the basis of the tax liability imposed on the tax avoider. He answered this question by concluding that:

'Section 739(2) on its true construction does not, in my opinion, relieve transferees of their normal liability to pay tax on their income.'

The human rights question

In relation to the human rights question, Lord Scott accepted that the decision in Gasus Dosier-Und Fordertechnik Gmbh v Netherlands [1995] 20 EHRR 403 applied, so that section 739 must strike 'a fair balance between the demands of the general interest in community and the requirements of the protection of the individual's fundamental rights'.

He considered that this condition was satisfied, and justified his conclusion by arguing on the authority of Lord Howard de Walden v Commissioners of Inland Revenue [1942] 1 KB 389 that section 739 is a penal section:

'… In considering the implications of Article 1 in a section 739 case, it is necessary … to distinguish between the position of the tax avoider/transferor and that of the transferee. The tax avoider/transferor has a tax liability imposed upon him. Income of the transferee is deemed to be his for tax purposes. The tax avoider cannot, however, be taxed on income of the transferee which has already borne tax (see section 743(1) and paragraphs 48 to 51 above). There is no element to administrative discretion involved here.

'The tax liability being imposed on the tax avoider does not depend upon his having actually received any benefit from the income or assets of the transferee. The liability may be regarded as having a penal character and as intending to discourage United Kingdom residents from seeking to avoid tax by transferring assets abroad. '

Lord Scott concludes:

'In my opinion, section 739(2), construed so as to deem the transferee's income to be the income of the transferor, the tax avoider, for income tax purposes but so as to leave the liability of the transferee to pay tax, income tax and corporation tax as the case may be, on its income unaffected by the deeming provision is well within the margin of appreciation allowed to Member States in respect of tax legislation. The public interest requires that legislation designed to combat tax avoidance should be effective. The public interest outweighs, in my opinion, the objections, mainly theoretical, that Mr Venables has taken to the effect of section 739(2) construed as I would construe it.'

Mr Dimsey's appeal was therefore dismissed.

A criminal decision?

So there you have it. The purpose of section 739(2) is to 'discourage United Kingdom residents from seeking to avoid tax by transferring assets abroad' by imposing a penal tax liability on them. It is a trite law on the basis of Lord Howard de Walden which is cited by Lord Scott, that section 739 is a penal section (although some weight should have been given to the fact that the case was heard in the middle of a world war when the courts might have been expected to take a particularly robust attitude to individuals moving their assets offshore to avoid taxation). Lord Scott is surely suggesting, however, that section 739 is a very different form of discouragement.

Section 739 is headed 'Prevention of Avoidance of Income Tax'. A generally satisfactory definition of tax avoidance has never been formulated, but those who consider that it may be subject to a definition generally formulate it in terms of enjoying economic benefits which are normally subject to taxation in a form which does not bear tax. The justification of section 739 is that transferors have the power to enjoy the income arising from the assets which they have transferred, they should bear tax on it as the person who is able to benefit from it economically. In order to prevent such avoidance, all one has to do is to ensure that the income is as heavily taxed as it would be if a transfer were not made. Lord Scott, however, sees section 739 as a deterrent penalty designed to punish the transferor by imposing a taxation liability on him, even if it results in the income being taxed twice. Surely, that is a remarkable extension of a concept of an anti-avoidance provision. In the light of the decisions in King v Walden [2001] STC 822 and Commissioners of Customs and Excise v Han [2001] STC 1188, it is surely arguable that a taxing provision which imposes a liability on a person not because it reflects the true economic reality of the situation but rather so as to deter others undertaking a particular class of transaction, imposes a criminal and not an administrative or civil liability.

This is not quite the same argument as that advanced by the defence in Dimsey in the House of Lords. There the defence argued that if section 739 does apply as Lord Scott suggested, it would be in breach of the Convention. As it is not open to the European Convention of Human Rights to overrule the House of Lords on the construction of English law, the interesting question is now whether section 739, construed in accordance with the decision of the House of Lords in Dimsey, is a criminal provision within the terms of the European Convention.

It is still open for Mr Dimsey to appeal to the European Court. The argument I have advanced, however, does not seem to help him. Mr Dimsey has been convicted under an exhaustive criminal justice system. The procedure by which Mr Dimsey has been convicted presumably conforms to the requirements of the Convention in relation to criminal procedure. It is to be hoped, however, that the European Court of Human Rights does hear an appeal in this case which has far-reaching implications for taxpayers generally.

Simon McKie is a partner in McKie & Co, which specialises in private client consultancy to professional firms, tel: 020 7600 1147, e-mail: spmckie@mckieandco.com.

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