[CHANCERY DIVISION]

VESTEY AND OTHERS v. INLAND REVENUE COMMISSIONERS (No. 2)

Revenue - Tax avoidance - Overseas settlement - Discretionary beneficiaries resident in United Kingdom - Trust income accumulated - Payments to beneficiaries - Whether "income" - Tax liability of beneficiaries - Income Tax Act 1952 (15 & 16 Geo. 6 & Eliz. 2, c. 10), s. 412 (1) (2) (5) (as amended by Finance Act 1969 (c. 32), s. 33 )

In 1942 two members of the taxpayers' family resident in the United Kingdom settled on trustees resident abroad on discretionary trusts certain overseas property, including an annual rent of £960,000 payable under a lease. The settlement directed the trustees to accumulate and invest the rent so as to form a capital fund, the income on which was paid into a bank in Northern Ireland and was divided into two moieties corresponding with the two branches of the taxpayers' family, each having a manager. The income from each moiety was accumulated, added to the moiety and reinvested. The trustees' investments included investments in securities and shareholdings in overseas companies. Under the powers contained in the settlement the trustees made appointments between 1962 and 1966 of capital sums to the taxpayers, who were some of the discretionary beneficiaries, totalling £2,608,000. At the time one of the taxpayers was a minor and the sum appointed to him was paid to his mother as trustee. For the years 1963 to 1967 inclusive the taxpayers were assessed to income tax, totalling £3,185,000, and to surtax, totalling £1,995,472, under section 412 (1) and (2) of the Income Tax Act 1952 ¹ on those capital payments. On the

1 Income Tax Act 1952, s. 412: "For the purpose of preventing the avoiding by individuals ordinarily resident in the United Kingdom of liability to income tax by means of transfers of assets by virtue or in consequence whereof, either alone or in conjunction with associated operations, income becomes payable to persons resident or domiciled out of the United Kingdom, it is hereby enacted as follows: - (1) Where such an individual has by means of any such transfer, either

taxpayers' appeal the special commissioners, without dealing with subsection (1), decided that section 412 (2) of the Act applied to the capital payments so that the whole of the income of the trustees and of the investments settlement in the year of appointment and subsequently arising, while the taxpayers were resident in the United Kingdom, was deemed to be the income of each of the taxpayers and was chargeable to income tax and the commissioners upheld the assessments.

The taxpayers appealed. Walton J., ante, pp. 182G - 183B,184H - 185B, F-G, 196B-C, F-G, 197A-B, held that by section 412 (2) Parliament should be taken to mean that the capital sums, to the extent to which they comprised income, ought to be treated as the income of each taxpayer for the year in which he received it and the trustees income extended to what the taxpayer received and that, since payment of a capital sum to the mother of the minor taxpayer did not entitle him to receive those moneys at the time of payment, the taxpayer was to be assessed for tax on the sum in the year he attained his majority and not in the year the payment was made to his mother. He allowed the appeals and remitted the cases to the commissioners for them to consider the applicability of section 412 (1) and to receive further evidence in case of the minor taxpayer, and to adjust the assessments accordingly.

In the event the parties agreed matters relating to the minor's assessments and no evidence was adduced. After further hearing, the commissioners decided that under the terms of the 1942 settlement each of the taxpayers, as potential beneficiaries, had rights under which each of them had power to enjoy the income of the trustees and the investment of the capital fund under section 412 (5) (d) and that, as a result such income had to be separately deemed under section 412 (1) to be the income of each of the taxpayers for all the purposes of the Act of 1952, year by year as it arose, so long as each of them remained a potential beneficiary of the settlement.

On further appeal by the taxpayers: -

Held, allowing the appeal, (1) that, since the trustees had a mere power, as distinct from a trust power, to distribute among a class of beneficiaries at their discretion, no beneficiary had a right to enjoy income or any power over any part of the trust income and, therefore, before section 412 was amended by the Finance Act 1969, no beneficiary had the necessary right to enjoy income within the meaning of subsection (1); that, after the amendment to the section including the deletion of a "right" in subsection (1) under which a

alone or in conjunction with associated operations, acquired any rights by virtue of which. he has, within the meaning of this section, power to enjoy, whether forthwith or in the future, any income of a person resident or domiciled out of the United Kingdom which, if it were income of that individual received by him in the United Kingdom, would be chargeable to income tax by deduction or otherwise that income 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 the purposes of this Act. (2) Where, whether before or after any such transfer, such an individual receives or is entitled to receive any capital sum the payment whereof is in any way connected with the transfer or any associated operation, any income which, by virtue or in consequence of the transfer either alone or in conjunction with associated operations, has become the income of a person resident or domiciled out of the United Kingdom shall, whether it would or would not have been chargeable to income tax apart from the provisions of this section, be deemed to be the income of that individual for all the purposes of this Act."

beneficiary had power to enjoy income, the true construction of "income" in subsection (5) and especially paragraph (d) did not include accumulations of income which had been capitalised and, therefore, the payments to the taxpayers had to be treated as payments of capital chargeable under section 412 (2) and not as income chargeable under section 412 (1) of the Act (post, pp. 205H - 206C, 207A-C, 208C-E).

(2) That, although the court was bound by authority to construe "income" in section 412 as the income of the trustees and not merely the income that the taxpayer had power to enjoy, "income" was the income actually paid to the trustees from the trust investments and not the income of those investments and, therefore, the power to enjoy income of a foreign company was restricted to that of the dividends paid by that company to the trustees as shareholders and did not include the whole of the company's income before profits were deducted (post, pp. 215D-H, 216E-G).

Lord Howard de Walden v. Inland Revenue Commissioners [1942] 1 K.B. 389, C.A. applied.

The following cases are referred to in the judgment:

Absalom v. Talbot (1943) 26 T.C. 166; [1943] 1 All E.R. 589, C.A.

Bambridge v. Inland Revenue Commissioners [1955] 1 W.L.R. 1329; [1955] 3 All E.R. 812, 36 T.C. 313, H.L.(E.).

Canadian Eagle Oil Co. Ltd. v. The King [1946] A.C. 119; [1945] 2 All E.R. 499; 27 T.C. 205, H.L.(E.).

Congreve v. Inland Revenue Commissioners [1948] 1 All E.R. 948; 30 T.C. 163, H.L.(E.).

Corbett's Executrices v. Inland Revenue Commissioners [1943] 2 All E.R. 218; 25 T.C. 305, C.A.

Gartside v. Inland Revenue Commissioners [1968] A.C. 553; [1968] 2 W.L.R. 277; [1968] 1 All E.R. 121, H.L.(E.).

Howard de Walden (Lord) v. Inland Revenue Commissioners [1942] 1 K.B. 389; [1942] 1 All E.R. 287, C.A.

Inland Revenue Commissioners v. Bates [1968] A.C. 483; [1967] 2 W.L.R. 60; [1967] 1 All E.R. 84; 44 T.C. 225, H.L.(E.).

Inland Revenue Commissioners v. Clifforia Investments Ltd. [1963] 1 W.L.R. 396; [1963] 1 All E.R. 159, 40 T.C. 608.

Inland Revenue Commissioners v. Frere [1965] A.C. 402; [1964] 3 W.L.R. 1193; [1964] 3 All E.R. 796; 42 T.C. 125, H.L.(E.).

Nelson, In re (Note) [1928] Ch. 920, C.A.

Reg. v. Catagas [1978] 1 W.W.R. 282.

Smith, In re [1928] Ch. 915.

Vestey v. Inland Revenue Commissioners [1979] Ch. 177; [1978] 2 W.L.R. 136; [1977] 3 All E.R. 1073.

Vestey's (Lord) Executors v. Inland Revenue Commissioners (1949) 31 T.C. 1; [1949] 1 All E.R. 1108, H.L.(E.).

The following additional cases were cited in argument:

Astor v. Perry; Duncan v. Adamson [1935] A.C. 398, H.L.(E.).

Baden's Deed Trusts, In re [1971] A.C. 424; [1970] 2 W.L.R. 1110; [1970] 2 All E.R. 228, H.L.(E.).

Beatty's (Admiral Earl) Executors v. Inland Revenue Commissioners (1940) 23 T.C. 574.

Gulbenkian's Settlements, In re [1970] A.C. 508; [1968] 3 W.L.R. 1127; [1968] 3 All E.R. 785, H.L.(E.).

Herbert v. Inland Revenue Commissioners (1925) 9 T.C. 593.

Inland Revenue Commissioners v. Transport Economy Ltd. (1955) 35 T.C. 601.

Mangin v. Inland Revenue Commissioner [1971] A.C. 739; [1971] 2 W.L.R. 39; [1971] 1 All E.R. 179, P.C.

Norman v. Golder (1944) 26 T.C. 293.

Reg. v. Davison [1972] 1 W.L.R. 1540, [1972] 3 All E.R. 1121, C.A.

Scott v. Russell (1948) 30 T.C. 394.

Stock v. Frank Jones (Tipton) Ltd. [1978] 1 W.L.R. 231; [1978] I.C.R. 347; [1978] 1 All E.R. 948, H.L.(E.).

SUPPLEMENTAL CASES STATED by the Commissioners for the Special Purposes of the Income Tax Acts.

Following the decision of Walton J. in Vestey v. Inland Revenue Commissioners, ante, p. 177, the cases remitted to the commissioners for, inter alia, assessments to be adjusted and to consider the effect of section 412 (1).

The commissioners decided that although, bearing in mind the terms of the 1942 settlement, the taxpayers had no "right" to demand income from the trustees they acquired "rights" under which they had "power to enjoy" income, and that in view of the definition of the expression "power to enjoy" in section 412 (5) and its implification by section 412 (6), those rights fell to be assessed under section 412 (1). The commissioners decided further that under the settlement the taxpayers acquired the "right" to be considered as potential recipients of benefit and the "right" to have their interests protected by a court of equity. By section 412 (5) (d) an individual was deemed to have power to enjoy income if he might, in the event of the exercise of any power vested in any other person, become entitled to the beneficial enjoyment of the income. There was nothing to prevent the application of the Interpretation Act 1889 to that subsection and allow the word "power" to be construed as including separate exercises of separate fiduciary powers. Thus, the commissioners took the view that by the exercise of the powers vested in the managers of the settlement fund the taxpayers might become entitled to income of the trust property and that such income when received would be income to which the taxpayers had good title by virtue of their rights under the 1942 settlement. The taxpayers, accordingly, came within section 412 (1). A fortiori, after the section was amended by section 33 of the Finance Act 1969 the taxpayers had power to enjoy income of the 1942 settlement.

The taxpayers appealed.

D. C. Potter Q.C. and J. Holroyd Pearce for the taxpayers.

Peter Archer Q.C. S.-G., Michael Nolan Q.C., Brian Davenport and Peter Gibson for the Crown.

The main submissions of counsel are set out in the judgment. The argument for the taxpayers is at pp. 207D-E, 211H - 212D, F-213B. The argument for the Crown is at pp. 202D-F, 203A-F, 213E - 215A, 216B-C.

May 26.WALTON J. read the following judgment. This case is a sequel to the first Vestey v. Inland Revenue Commissioners, ante, p. 177. It is concerned with the same settlement and the same payments made thereout to the taxpayers. But whereas the Crown's attack was previously mounted under section 412 (2) of the Income Tax Act 1952, it is now mounted under subsection (1) of that section. I need not, I think, rehearse the facts, which I set out in my previous judgment; nor the terms of the section, which I likewise set out therein. I think I can plunge straightaway into the Crown's claim.

It is that, given the terms of the settlement of March 25, 1942, each of the taxpayers, as potential beneficiaries thereunder, has, within the meaning of the preamble and the combined effect of section 412 (1), (4) and (5), rights by virtue of which each of them has power to enjoy the income of the trustees of that settlement, and that in consequence thereof such income must be separately deemed to be the income of each of these individuals for all the purposes of the Act of 1952, year by year as it arises, at any rate so long as each of them remains a potential beneficiary of the settlement.

So that once again, the Crown is claiming the right to recover multiple tax from the unfortunate taxpayers, and to recover it year by year quite irrespective of the question whether the taxpayers do or do not receive anything further out of the settlement funds. If that is what the relevant subsections, on their true construction, do provide, then, of course, so be it. But this is a penal section, and accordingly falls to be construed extremely strictly, although of course this does not mean that the court is at liberty to distort its fair meaning, only that the person who is alleged to have incurred the penalty must be given the benefit of any real doubt or ambiguity. There can, however, be no possible burking the fact that the consequences of the construction which the Crown seeks to place upon the relevant subsections produce a monstrous injustice: an injustice so monstrous that the Crown itself in the present case has resiled from its logical consequence and, while claiming a wider right, has sought to attribute to each of the taxpayers only a fraction of the income of the trustees equivalent to the fraction of the total disbursements made to them collectively which each individual has himself received.

Since at the moment I am dealing only with matters of principle and not with precise figures (which, if required, remain to be agreed), I do not think it is necessary to refer to the precise figures at all. It suffices to say that, precisely as in Vestey v. Inland Revenue Commissioners, ante, p. 177, there are assessments to income tax and surtax upon all the relevant recipients for the years 1963-64, 1964-65, 1965-66 and 1966-67, which were the years which were previously in issue, and also for the year 1968-69. These last appeals were added by agreement between the parties, and are designed to elicit a decision as regards an amendment to section 412 which was effected by section 33 of the Finance Act 1969, the year 1968-69 being the first year in which such amendment took effect.

It is at this point that there arises what Mr. Potter, for the taxpayers, has denominated as a serious constitutional question; namely, what rights

the Inland Revenue Commissioners have to pick and choose when recovering tax. The Solicitor-General said, and doubtless rightly said, that the commissioners are under no duty to recover every halfpenny of tax which may be due. One may say "Amen" to that very readily, because the costs of recovery of extremely small amounts of tax would far outweigh the tax recovered. One expects the tax authorities to behave sensibly. In this connection I was referred to section 1 of the Inland Revenue Regulation Act 1890 and to section 1 of the Taxes Management Act 1970, but I do not think that either of these provisions has any real bearing on the matter. What the revenue authorities, through the Solicitor-General, are here claiming is a general dispensing power, no more and no less. He submitted that the system of extra-statutory concessions was well known and well recognised, and that what was happening in the present case was no more than the grant of an additional extra-statutory concession.

In the first place, I, in company with many other judges before me, am totally unable to understand upon what basis the Inland Revenue Commissioners are entitled to make extra-statutory concessions. To take a very simple example (since example is clearly called for), upon what basis have the commissioners taken it upon themselves to provide that income tax is not to be charged upon a miner's free coal and allowances in lieu thereof? That this should be the law is doubtless quite correct: I am not arguing the merits, or even suggesting that some other result, as a matter of equity, should be reached. But this, surely, ought to be a matter for Parliament, and not the commissioners. If this kind of concession can be made, where does it stop; and why are some groups favoured as against others?

As I have indicated, I am not alone in failing to understand how any such concessions can properly be made. I need refer only to Scott L.J. in Absalom v. Talbot (1943) 26 T.C. 166, 181, the second full paragraph (and may I here, in parenthesis, add that I fully concur in his tribute to the staff of the Inland Revenue); to Viscount Radcliffe in Inland Revenue Commissioners v. Frere [1965] A.C. 402, 429, and to Lord Upjohn in Inland Revenue Commissioners v. Bates [1968] A.C. 483, 516.

This is not a simple matter of tax law. What is happening is that, in effect, despite the words of Maitland, The Constitutional History of England (1909), p. 305, commenting on the Bill of Rights, "This is the last of the dispensing power," the Crown is now claiming just such a power. If I may, I would respectfully adopt the words of Freedman C.J.M. in the Court of Appeal in Manitoba in Reg. v. Catagas [1978] 1 W.W.R. 282, 287, a case which in terms decides that the Crown may not dispense with laws by executive action, where, after dealing with cases of prosecution for infraction of the criminal law in which in individual cases there was undoubtedly an element of discretion, he said:

"But in all these instances the prosecutorial discretion is exercised in relation to a specific case. It is the particular facts of a given case that call that discretion into play. But that is a far different thing from the granting of a blanket dispensation in favour of a particular group or race. Today the dispensing power may be

exercised in favour of Indians. Tomorrow it may be exercised in favour of Protestants, and the next day in favour of Jews. Our laws cannot be so treated. The Crown may not by executive action dispense with laws. The matter is as simple as that, and nearly three centuries of legal and constitutional history stand as the foundation for that principle."

But even if, contrary to my views, extra-statutory concessions are permissible and do form part of our tax code, nevertheless they do represent a published code, which applies indifferently to all those who fall, or who can bring themselves, within its scope. What is claimed by the Crown now is something radically different. There is no published code, and no necessity for the treatment of all those who are in consimili casu alike. In one case the Crown can remit one-third, in another one-half, and in yet another case the whole, of the tax properly payable, at its own sweet will and pleasure. If this is indeed so, we are back to the days of the Star Chamber. Again, I want to make it crystal clear that nobody is suggesting that the Crown has, or indeed ever would, so utilise the powers which it claims to bring about unjust results; or really, of course, which is not necessarily the same thing, results which it thought to be unjust. The root of the evil is that it claims that it has, in fact, the right to do so.

I turn next to the true construction of subsection (1) and associated subsections of section 412. It would, I think, have been very much easier to make rational sense of subsection (1) if the decision in Lord Howard de Walden v. Inland Revenue Commissioners [1942] 1 K.B. 389 had been cast in another mould, as I think it could have been without disturbing the actual result. For the effect of that case is to decide that the income which is to be deemed the income of the taxpayer is the whole of the income of the trustees, notwithstanding that (and at the moment I am putting the matter very loosely) he has only a right to enjoy a part of that income. Apart from that case (which received, of course, approval in the House of Lords in Congreve v. Inland Revenue Commissioners (1948) 30 T.C. 163) it would have been possible to make better sense of subsection (1) by reading the words "any income... that income" as being correlative to each other. So that, for example, if the taxpayer had the right to receive one-quarter of the income he would be taxable upon that one-quarter, and so forth. Indeed, I suspect that this is so obviously the sensible and natural interpretation of the subsection that it was adopted sub silentio in Corbett's Executrices v. Inland Revenue Commissioners (1943) 25 T.C. 305. I am certainly not prepared to regard this case as one in which the Crown simply exercised its dispensing power, as claimed by the Solicitor-General. I accept that the figures do appear odd, but I think the reason for the apparently low assessment is as I have indicated, and not otherwise.

However, I am bound, it appears to me, to hold that if a taxpayer has power to enjoy even a hundredth part of the income of the foreign trustees, the whole of their income is to be deemed to be his. I shall have to return to this point later in this judgment, but I see no escape from this position as the law now stands. I at one time thought that

there might be an escape via the provisions of subsection (6), which it will be convenient to recapitulate here:

"In determining whether an individual has power to enjoy income within the meaning of this section, regard shall be had to the substantial result and effect of the transfer and any associated operations, and all benefits which may at any time accrue to the individual as a result of the transfer and any associated operations shall be taken into account irrespective of the nature or form of the benefits."

But on reflection I have come to the conclusion that this is impossible. for this subsection does not deal with anything more than whether a person has power to enjoy income; there is nothing about quantum in it at all. Supposing it was a millionth part of the income that a person was clearly entitled to enjoy, subsection (6) could have no effect upon the consequence that the enjoyment of that modest fraction might entail - would entail - tax liability on a sum one million times as great. It therefore appears to me that the only effect which subsection (6) could possibly have as the law now stands is to enlarge - never to restrict - the circumstances under which the individual has power to enjoy income.

I next turn to the requirements which must be satisfied before subsection (1) bites as regards the entitlement to income of the person sought to be charged thereunder. That person must:

"by means of any such transfer, either alone or in conjunction with associated operations," have "acquired any rights by virtue of which he has, within the meaning of this section, power to enjoy... any income of a person resident or domiciled out of the United Kingdom..."

Shortening it for present purposes, that person must have acquired rights by virtue of which he has power to enjoy any income of a person resident or domiciled out of the United Kingdom. "Power to enjoy" is defined in subsection (5), but for the moment I do not pause to consider what that precisely means, for the first step is to see precisely what "rights" have been acquired under the settlement (for it has not been suggested on behalf of the Crown that there are any other relevant rights) by the taxpayers.

Now the appointments here in question were made by the taxpayer Ronald Arthur Vestey as Edmund's manager with the consent of Samuel's manager in his own favour, and as Edmund's manager in favour of Edmund Hoyle Vestey, Margaret Payne and Jane McLean Baddeley under the provisions of clause 4 (D) of the settlement; and by Edward Brown as Samuel's manager in favour of Lord Vestey and Mark William Vestey under clause 6 (D) of the settlement. In each case the power - and as matters stand they are the current relevant powers - is one to appoint capital among a class "in such shares (if more than one) and in such manner as" the appropriate "manager shall think proper." Ronald Arthur Vestey could not, as Edmund's manager, appoint in his own favour: the settlement required, in such an event, that the appointment had to be made jointly with Samuel's manager or the trustees themselves.

The position therefore is that in each case we are dealing with a mere

power (as distinct from a trust power) in the appropriate person enabling him to distribute among a class of beneficiaries as he thinks fit. What "rights" are by such a provision conferred upon any individual potential beneficiary? In my judgment, the only relevant rights which are conferred upon such a beneficiary are: (i) the right to be considered by the person exercising the power when he comes to exercise it; (ii) the right to prevent certain kinds of conduct on the part of the person so exercising the power - e.g., by distributing part of the assets to not within the class - and (iii) the right to retain any sums properly paid to him by the trustees in exercise of their discretionary powers. But beyond that he has no relevant "right" of any description: and none of those rights is a right under which he has power to enjoy the income. Indeed, no individual has any power over any part of the income whatsoever. The most relevant right is, indeed, the third; but a right to retain what is properly paid to you is simply the negative right of being afforded a complete defence to any claim for repayment, and no more. Prior to actual payment, to which there is no right whatsoever, the recipient has no right to the money at all.

One may, indeed, contrast the situation in the present case with a situation where trustees are obliged to distribute income year by year under the terms of their trust deed among a certain class in such shares and proportions as they may think fit - a case in which each potential beneficiary is very much more likely in ordinary parlance to have power to enjoy the income than the present case. Even in such a case no individual potential beneficiary has any relevant right whatsoever, although, collectively, they undoubtedly do have a right which, if they are all sui juris, they may collectively enforce: see In re Nelson decided in 1918, reported as a note in [1928] Ch. 920; In re Smith [1928] Ch. 915; and compare per Lord Reid in Gartside v. Inland Revenue Commissioners [1968] A.C. 553, 606. But a collectively enforceable "right" is one which does not fall within the ambit of the word "right" in subsection (1). For this there is direct House of Lords authority in Lord Vestey's Executors v. Inland Revenue Commissioners (1949) 31 T.C. 1: see per Lord Simonds, at p. 85, Lord Morton of Henryton (with whose opinion Lord Normand expressly agreed: see p. 92), at p. 110, and Lord Reid, at p. 119. The present case is clearly a fortiori to this case.

Therefore, it appears to me that none of these discretionary beneficiaries had any "right" to anything at all which could possibly bring the subsection into play prior to the Finance Act 1969. Section 33 of that Act effected two changes in section 412. First, in subsection (1) the words from "such an individual" to "he has" were deleted and replaced by the words "by virtue or in consequence of any such transfer, either alone or in conjunction with associated operations, such an individual has." The second was that in subsection (6) there were added, after the words "accrue to the individual," the words "(whether or not he has rights at law or in equity in or to those benefits)." Dealing first with this second amendment, no argument based on this addition has been advanced by counsel for the Crown. I need therefore only say that the addition of these words merely serves to confirm me in my opinion that this subsection was not intended by Parliament as a restricting subsection.

Turning back again to subsection (1), I think it desirable to set out the relevant wording as amended in full:

"Where by virtue or in consequence of any such transfer, either alone or in conjunction with associated operations, such an individual has, within the meaning of this section, power to enjoy, whether forthwith or in the future, any income of a person resident or domiciled out of the United Kingdom...."

The word "right" (upon which, in Lord Vestey's Executors v. Inland Revenue Commissioners, 31 T.C. 1, Lord Simonds laid great emphasis, at p. 85, stating that it could not be disregarded) has vanished; and the sole question is whether the individual in question has power to enjoy the relevant income, as defined by subsection (5). It is no longer necessary that he should have any right by virtue of which he has such power. And one can well understand the removal of that word, because in general no potential beneficiary has a right to income, having no entitlement beyond that of the usual discretionary beneficiary.

So I turn to consider the various paragraphs of subsection (5). The argument has in fact exclusively raged around the second half of paragraph (d), which was not an original part of the subsection when enacted for the first time in 1936, but was added by the Finance Act 1938. Now it appears to me that, as submitted by Mr. Potter, throughout subsection (5) "income" means income and nothing else. Thus one finds, in paragraph (a), the words "Income... so dealt with... as to be calculated... whether in the form of income or not, to enure for the benefit of the individual." There is no allotropic form of income known to me: the antithesis of income is capital, and income can, indeed, become capital by being accumulated. Hence it appears to me that the section is drawing a deliberate contrast between income and accumulations of income which have become capital, and is saying that it does not matter which enures for the benefit of the individual. The same argument is available as a result of paragraph (c). The words

"out of... income or out of moneys which are or will be available for the purpose by reason of the effect or successive effects of the associated operations on that income and on any assets which directly or indirectly represent that income"

once again show that the draftsman was perfectly well aware of the distinction between income and what income may, by direction of the trust instrument or by the exercise of powers conferred upon the trustees, become (for example, a policy of insurance).

Hence it appears to me that the inevitable conclusion is that in this subsection "income" means income and does not, save as expressly so provided, mean or include accumulations of income which have become capitalised. Moreover, it appears to me that this is fully consistent with the structure of the section. I appreciate that subsection (2) comes from a different source, but obviously Parliament now considers that the provisions properly fall to be read as a whole, and one then has basically the simple dichotomy between the receipt of a capital sum, dealt with under subsection (2) - and, if I am correct in Vestey v. Inland Revenue

Commissioners, ante, p. 177, dealt with to the extent to which it indeed represents income - and the receipt of income, dealt with under subsections (1) and (5).

As I have not had full argument on subsection (5) (a), (b) or (c), I do not propose to deal with them beyond saying that it was submitted to me that "calculated" in subsection (5) (a) meant "likely." This is, of course, one of its possible meanings, although a glance at the Shorter Oxford English Dictionary makes it quite clear that this is not a precise translation of the word "calculated." On the other hand, its primary meaning is "reckoned, estimated, thought out," and I would think that this is the meaning which is intended here. I hardly think that Parliament would have intended the "likely" interpretation. If it had wanted to use that word it could so easily have done so. The question would then be, how likely? - an almost insoluble problem. This being, as I have already noted, a penal section, I think a stricter interpretation than "likely" is undoubtedly called for.

I must here, however, note that the Solicitor-General expressly reserved the Crown's position with regard to paragraphs (a) and (b), which he outlined very briefly, although, as the special commissioners had not dealt with them, he otherwise, apart from such reservation, left alone. He accepted, at any rate for the purposes of the present case, that the argument turned on paragraph (d). I turn therefore to that paragraph. Here, the meaning is quite clear: "income" means income, and as, on the facts of the present case, it was capital - capitalised income - which was paid out to each of the taxpayers, the second half of paragraph (d) is inapplicable to the actual situation here in question.

My conclusion on construction in this matter would in fact be sufficient to decide the points at issue between the parties, but there are two more matters I must mention at this stage. That is the question of the possible operation of subsection (1) and subsection (2) together. One can imagine a case in which some paragraph of subsection (5) dealing with the receipt of a capital sum applies and in which subsection (2) also applies. It was, I think, the only point upon which the Crown and the taxpayers were both agreed: these subsections are, they both accept, concurrent and not cumulative. A person cannot be taxed in any one year on the same sum under both subsection (1) and also subsection (2). Like Warren Hastings, the Crown, in making this concession, doubtless stood amazed at its own moderation in view of its other claims in the two cases, but make it it did.

I now turn to the supplemental cases stated, in which the special commissioners give their reasons for coming to different conclusions, basically upon the construction of the section. I shall simply refer to that in the case of Ronald Arthur Vestey, since each of the other cases simply refers to the reasoning in his case. The special commissioners dealt first with what I may call the absence of any "rights" argument as follows:

"We deal first with section 412 (1) before its amendment in 1969. It was said on behalf of the [taxpayer] that his entitlement to income was subject to the exercise of divers powers and consents and he

acquired no 'rights' to income within section 412 (1). We accept that according to the terms of the 1942 settlement he had no right to demand income from the trustees but we prefer to pose the question in a different form. What we have to decide is, not whether he had 'rights,' but whether he acquired 'rights' by virtue of which he had within the meaning of section 412 'power to enjoy' income; and the expression 'power to enjoy' (which is a component of the sentence which we have to construe as a whole) is elaborately defined in subsection (5) and amplified by subsection (6). Under the 1942 settlement the [taxpayer] acquired the 'right' to be considered as a potential recipient of benefit and the 'right' to have his interest protected by a court of equity. It is those 'rights' in the context cited above which we have to consider. By subsection (5) (d) an individual is deemed to have power to enjoy income if he may, in the event of the exercise of any power vested in any other person, become entitled to the beneficial enjoyment of the income. Does the Interpretation Act 1889 permit 'power' - in the singular - being construed as including separate exercises of separate fiduciary powers? We see nothing to prevent the application of the Interpretation Act to subsection (5) (d) and we take the view that by the exercise of the powers vested in the managers the [taxpayer] may become entitled to income of the trust property and that such income when received would be income to which the [taxpayer] had a good title by virtue of his rights under the 1942 settlement in the sense referred to above. We do not think that directions to accumulate income... prevent income from being deemed to be income of the individual concerned. We feel fortified in this conclusion first by the declared purpose of section 412 as set out in the preamble thereto and, secondly, by subsection (6) thereof by which we are enjoined to have regard to the 'substantial result and effect' of the transfer and associated operations."

It will be observed that the special commissioners correctly appreciated that the rights which they had to consider were the rights acquired by the taxpayer under the 1942 settlement; but, having firmly grasped that point, they then allowed themselves to be diverted from the inevitable conclusion that no relevant right was conferred in this manner, chiefly because they posed an unreal question in relation to subsection (5) (d). I would entirely agree with them that in that subsection "power" includes powers; but one cannot disregard the presence of the word "right" in the way they have done.

As regards the position after the Finance Act 1969, the special commissioners say simply: "A fortiori, after the section was amended by section 33 of the Finance Act 1969 the [taxpayer] had power to enjoy income of the 1942 settlement." The special commissioners do not appear to have considered the argument, which has appealed to me, concerning the precise meaning of "income" as "income" in subsection (5) (d).

They then dealt with what I may term the "bad for duplicity" argument, and came to the conclusion (which I think on authorities binding on them and this court cannot be refuted) that if a beneficiary is

liable at all he is liable to be taxed on the whole of the income of the trustees, and not merely that part whereof he is the recipient, thus creating multiple liability.

Their treatment of the "discretion" point is more debatable. They say:

"Then it was said that by choosing to limit the total liability to the income of the trustees the Board of Inland Revenue are exercising a discretion. We do not think by so limiting the tax the board are exercising a discretion in a sense offensive to the law. There are many instances in the Taxes Acts where the board have express powers which affect the tax payable: for example, in section 115 (2) (b) of the Income and Corporation Taxes Act 1970. The existence of such powers is consistent with their duty under section 1 of the Inland Revenue Regulation Act 1890 and section 1 of the Taxes Management Act 1970 whereby they are to have all the necessary powers for carrying into execution every Act relating to Inland Revenue and the care and management of taxes. We can accept counsel's proposition that a person is not to be taxed by a discretion but by clear words charging him to tax, without construing section 412 (1) so as to avoid charging the individual at all. We do not think we can look at Hansard as an aid to construction. We must look at what was enacted."

The last observation is, of course, one which has since been forcibly made in the House of Lords, and is undeniably correct. But the suggestion that the discretions conferred upon the Crown by section 115 (2) (b) of the Act of 1970 are in any manner comparable with the discretions here in question is laughable. By that provision (and there are many other similar provisions in taxing statutes of this general nature) the board is entitled to choose which year is to be the relevant year for taxation purposes. A choice is the antithesis of a discretion. A provision that X is to be taxed on the profits of year 1 or year 2 results in X being taxed accordingly. What is here suggested is that the Crown may decide whether or not to tax X, and, if they do decide to tax him, upon what sum (not exceeding the income of the trustees) they choose. The one is reasoned and limited, the other is wholly arbitrary and despotic.

However, this is not in fact what the special commissioners thought was the result of their conclusion. They came to the conclusion that the manner in which the section worked was that the beneficiaries to be assessed in any one year could be assessed in total on the income of the trustees for that year, but no more. This conferred upon the board a discretion merely as to the distribution of the income among the beneficiaries, which they could do in any manner provided that the total amount did not exceed the trustees' income. They expressed themselves as follows:

"The construction which we favour above need not result in double, or multiple, taxation. If the income of A is deemed to be the income of B, it cannot also be deemed to be the income of C unless the enactment clearly so provides, which section 412 does not; nor, so far as we are aware, does any other section of the Taxes Acts. In

cases where income is deemed to be another individual's income there are instances where the words 'and not the income of any other person' appear; for example, in Part XVI of the Income and Corporation Taxes Act 1970 (Settlements). There are no such limiting words in section 412. When section 412 was originally enacted in 1936 the maximum rate of income tax and surtax was 65 per cent. Although the principle has been somewhat eroded in modern times Lord Macnaghten's dictum that income tax is a 'tax on income' then held good. It seems to us highly improbable that (with the caveat already mentioned) if income is deemed to be A's it can also be deemed to be the income of B. In Lord Herbert v. Inland Revenue Commissioners (1943) 25 T.C. 93 Macnaghten J. describes such a proposition as extravagant. We take the view that the deeming process, whereby income of the non-resident person is deemed to be income of an individual, operates once only and that such income cannot be taxed more than once. Apportionment of the 'deemed' income according to the quantum of the respective beneficial interests has much to commend it, but (as we noticed in paragraph 12 of our original decision) section 412 does not so provide. We recognise that apportionment may be impossible in the case of some of the discretionary beneficiaries whose expectancy may be insignificant. Various methods of apportionment were canvassed before us, the merits of each differing according to the circumstances. In our view, in default of a method prescribed by the section, and we can find none, it is for the board in exercise of their powers in the execution of the Acts to decide on the appropriate apportionment."

I regret that I do not follow the logic of the second paragraph of this reasoning; but, more importantly, it appears to contradict their own earlier reasoning as to the amount for which each beneficiary was liable - i.e., the whole income - following Lord Howard de Walden v. Inland Revenue Commissioners [1942] 1 K.B. 389. This is certainly not how the Crown now seeks to interpret the section.

There are two remaining points in the special commissioners' decision, one of which is a point on section 413 which is not now, I understand, pursued. I shall defer consideration of the other point (the position of the income of a company in which the trust moneys are invested) until later.

Finally, they pointed out, quite correctly, that there are no different considerations which affected any of the other taxpayers, save for Mark Vestey, ante, p. 177, and so they dismissed the appeals against all the assessments, including the 1968-69 assessments, and adjourned them for the figures to be agreed. The matter has, however, been brought before me as a matter of principle without waiting for the figures to be agreed. I am not concerned with the precise figures.

This being the state of the matter when the case came on for hearing, Mr. Potter, for the taxpayers, formally repeated some of the submissions which he made in Vestey v. Inland Revenue Commissioners, ante, p. 195, namely, Nos. I, IV and V, and then added the following new submissions: IX. That as regards the earlier four years prior to the year 1969, none of

the taxpayers had any relevant "rights." X. That on the true construction of the words "power to enjoy" as defined for the purpose of section 5 (d), neither in fact nor in law did any of the taxpayers have power to enjoy any income of any part of the trust property. XI. That the liability of any individual under subsections (1) and (2) was concurrent and not cumulative.

As regards Mr. Potter's first point, it is quite true, as he submitted, that there is no direct authority based on section 412 (1) as distinct from section 412 (2), and he therefore submitted that, notwithstanding the Congreve, 30 T.C. 163, and Bambridge [1955] 1 W.L.R. 1329, decisions, the matter was still open. I do not, however, feel able to accept this submission. I cannot think that the section poses different tests in this regard according to whether the payments made are income or capital.

Still under this same head, he submitted that if the special commissioners were correct in their views - namely, that the Crown has a discretion as to apportionment of the total liability among the beneficiaries - the Crown could not have fulfilled its duty as it has all along been arguing for a wider discretion than that of mere apportionment. If this submission had been accepted, then the assessments would, I suppose, have all been bad, notwithstanding that the Crown would have, if asked to start again in the light of the special commissioners' decision, arrived at precisely the same answer. The benefit to the taxpayers would be that it would by now be well out of time.

I am, however, unimpressed by this argument. I am unable to see, in a case where the subsection clearly applies and an individual has any right by virtue of which he has power to enjoy the income in question, he is not liable to tax upon the whole of that income. I am, of course, equally unable to see by virtue of what right the Crown sees fit to remit a portion of that liability, but that is an entirely different matter of which no assessed - that is to say, otherwise properly assessed - taxpayer is entitled to complain, whatever anguished howls his companions in misfortune, who do not have the luck to find the greater part of their tax bill remitted, may utter.

Mr. Potter's nos. IV and V were simply submitted to keep them open, since he could not properly (and of course did not) seek to persuade me to distinguish my own earlier decision against him on them.

So far as his ninth point is concerned, he expanded this in the following form, namely, that the Crown must be able to point to a single individual who had, as respects any year of assessment, an individual right by virtue of which he had power to enjoy any income of the trustees. In other words, subsection (1) did not bite where the power was collectively that of a group of individuals. As I have already indicated, I see no answer to Mr. Potter's submission under this head, more particularly in view of the fantastic - and I use the word advisedly - results which a contrary conclusion would entail, and which I shall consider in more detail when analysing the contentions of the Solicitor-General.

It was under his tenth point that Mr. Potter dealt with the fact that the settlement and associated directions direct accumulations of income until the year 2030. Although these directions could be revoked, so long as the income was being accumulated it was all being accumulated

in this manner, and there was just no income which could be enjoyed by any potential beneficiary. Of course, if they lived to the year 2030 the taxpayers, as matters stood, did indeed stand to collect the accumulated income. As, however, their ages would then range from 87 (in the case of Mark Vestey) to 132 (in the case of Ronald Arthur Vestey) this would be highly unlikely. And here Mr. Potter, like the Crown, sought to use the provisions of subsection (6) restrictively, pointing out that the "substantial effect" of the settlement was to give the taxpayers very remote interests indeed. I think the trouble with this submission is that, however theoretically remote their interests may be, these taxpayers have, each and every one, received sums out of the settlement of a not insubstantial amount.

I follow entirely Mr. Potter's analysis of the settlement, the division of the settled funds and so forth, with the result that there are now two funds with 16 (later 18) potential beneficiaries on the one side and 13 (later 14) on the other. One may well ask why they, too, have not been assessed if, as the Crown maintains, they are one and all theoretically liable to be assessed on the whole of the income of the trustees (and, indeed, more even than that, as I shall mention later), but this is no answer to the problem. I prefer to place the matter securely upon the footing that in subsection (5) (d) "income" means income, and the beneficiaries have had capital sums paid to them which fall to be assessed under subsection (2) and not subsection (1).

Again, apart from the question of the income derived from certain investments, consideration of which I once again postpone at this stage, Mr. Potter's last point was, indeed, conceded by the Crown, and that is that.

For the Crown, the Solicitor-General submitted, with evident enthusiasm, that if the conditions of the section were satisfied then the taxpayer was chargeable in respect of the whole of the income of the non-resident - in this case, of course, the trustees - and that none the less because there might also be somebody else who was in precisely the same situation. Moreover - and here he was able in part to cite the conclusions of the special commissioners in his favour - the relevant income included not only the income received by the trustees as the result of the transfer, but the whole of the income of the trustees. Thus, to take a simple example, if the settlors in the present case had been unwise enough to select as their foreign resident trustees, say, a New York bank which was trustee of many other settlements as well, the whole of the income of that New York bank, not only that derived from the actual settlement of which they were trustees but the income of all other settlements of which they were trustees, and the whole of the bank's ordinary trading income (not alone profits), was income upon which the beneficiary who fell within the scope of subsection (1) could be assessed.

Nay, further: if the foreign trustees were unwise enough to invest part of the trust assets in the shares of a foreign company, then, because there is no correlation between the amount of income actually enjoyed and the amount of the income of the foreign residents, the whole of that income also falls within the scope of the assessment. Thus, if the trustees invest in one share of, say, Standard Oil, the whole of the income (again,

not even profits) of that company falls to be taken into consideration when assessing the taxpayer, as Standard Oil would then become a foreign resident part of whose income the taxpayer had power to enjoy.

But the cream of the jest is still to come. It was wholly unnecessary for the purposes of Vestey v. Inland Revenue Commissioners, ante, p. 177, to set out the provisions of clause 14 of the settlement, but I must do so now. It provides:

"Lastly provided always that Edmund's manager and Samuel's manager jointly may in their discretion at any time or times within the specified period by deed revoke in respect of the whole or any part or parts of the trust premises (then subject to the trusts hereof) all the trusts powers and provisions hereinbefore contained and transfer in respect of the property concerned all or any of such trusts powers and provisions to and constitute the same (with any desired modifications) as trusts powers and provisions operating in respect of such property in and according to the law of any country or place in the world. But this power shall be exercisable only as a power of revocation and transfer combined (and not by way of mere revocation) and shall not be exercised so as to give to the settlors or either of them (or any wife or widow of either of them) or to enable them or either of them (or any wife or widow of either of them) to take by resulting trust or otherwise howsoever any property benefit right power or control whatsoever."

The Solicitor-General submitted or accepted that, having regard to the clear possibility envisaged of the settlor, or any wife or widow of the settlor (if not, as of course they are, expressly excluded), being constituted a beneficiary by any such re-settlement, this power must be in the widest possible terms, not only so far as the trusts but also so far as the beneficiaries are concerned: so that anybody in the United Kingdom - anybody whatsoever - might be included in the reconstituted settlement. I am not certain that I agree with this interpretation, and I must certainly not be taken as having decided that it is indeed the correct meaning of clause 14. But, given the meaning accepted by the Solicitor-General, he solemnly submitted that, unless subsection (6) came to the rescue, which he thought it did (but which, as I have already indicated, I do not think is a correct interpretation), anybody in the United Kingdom could be assessed for the entire income of the trustees, together with the not significant enlargements which I have already indicated, in every year that the settlement continued and the funds were undistributed: because, by virtue of the exercise of the powers conferred by clause 14, and possibly the exercise by the trustees of the reconstituted settlement of powers of selection among a group of discretionary beneficiaries, they might become entitled to the beneficial enjoyment of a part of the trust income.

Of course, he also submitted that the whole of this was tempered by the discretion of the Crown to select who was and who was not assessed, and for what amount. However, to this submission in total Mr. Potter made the acid but fully justified comment that, their powers clearly being fiduciary, to whomsoever else the Inland Revenue Commissioners were entitled to show discretionary mercy, they were certainly

not so entitled to show it to themselves. Nor do I think that they would be entitled to show it to Her Majesty's Ministers of State, who, by their inactivity in this regard, clearly show that they approve of the legislation as it stands. We are therefore doubtless in for an interesting crop of bankruptcies.

The whole submission, however, is so far removed from reality, from even the most rudimentary notions of justice and fair play, that one has no more than to state it for it to be abundantly obvious that it cannot be maintained. Yet here was the Solicitor-General, whom we all know as one of the most amiable of men, voluntarily casting himself in the role of Count Dracula. What has gone wrong? Of course, if the Solicitor-General's contentions are correct there is an even greater need to read the whole section strictly than if they are wrong; and, reading it strictly, I have already indicated that the appeals of the taxpayers fall to be allowed. But it would not be right to leave the matter there and to say that these submissions fall to be considered in a case where income is actually in question.

In my view, what has gone wrong is the failure by the courts to correlate the income upon which the taxpayer is to be taxed with the income which he has power to enjoy. In other words, I have persuaded myself that what is wrong is the decision of the Court of Appeal in Lord Howard de Walden v. Inland Revenue Commissioners [1942] 1 K.B. 389. If this decision were to be out of the way and "that income" in subsection (1) be taken to be "the income which the taxpayer has power to enjoy," then the whole section would be quite logical and straightforward. Moreover, in this case subsection (6) would have a much more logical place in the scheme of the section, and quantum would then become a material factor. However, standing this decision, I can see no answer to the Solicitor-General's main proposition that if a person receives the income of the settlement to an insubstantial degree he is nevertheless taxable upon the whole income of the trustees. Sitting in this court, I am bound to follow the decision of the Court of Appeal and give effect thereto, monstrous as the result may be. I do not see how I can escape the straitjacket.

However, the matter is otherwise in relation to two matters. The first is as regards what I may call the "other income" of the trustees - income which has not arisen as the result of the transfer and associated operations. I just refuse to believe that Parliament can ever have intended that other income to be brought into charge to tax, the results being so utterly unpredictable and unjust. So far as this submission is concerned, at any rate, I have no contrary authority to bind me, and I simply hold that the income with which section 412 is dealing throughout is the income which becomes payable to the foreign trustees as a result of the transfer and associated operations, and none other. It is quite ridiculous to think that the prevention of tax avoidance requires any operation of any description upon any other income than that which has, in effect, been transferred abroad.

Secondly, there is the income of any body in which the trustees have invested any of the trust moneys. In the present case this arises directly, because one of the trust investments made by the trustees by means of a

purchase is shares in Commercial Insurance Co. Ltd. This is a company incorporated and managed and controlled in Jersey. It carries on the business of fire, fidelity and marine insurance. As regards this company. the special commissioners said:

"The next matter is the income of Commercial Insurance Co. Ltd. It was said that the purchase of its shares broke the chain of transfers and associated operations. For the purposes of subsection (1) we can see no warrant for treating its income differently from that of the other offshore companies. So to do would, in our view, create a distinction between the subscribers' shares and purchased shares for which we can see no justification. In each case the individual has 'power to enjoy' the income of the offshore companies by virtue of the wide definition in subsection (3)."

And Mr. Nolan, for the Crown, said much the same thing in more felicitous language.

The answer to this fantastic suggestion - for, if those who subscribe to it will allow me to say so, it is utterly fantastic - is the very simple one that, as was pointed out by Mr. Potter in reply, the income of the company and the income derived from the company by the shareholders are two quite different incomes. Indeed, I know of no manner in which a shareholder can under any circumstances enjoy the income of a company in which he is interested. He may hope, and frequently if not invariably does hope, that a distribution by way of dividend will be made to him out of its profits; but income and profits are, in the case of commercial undertakings, often two vastly different things.

Once again, the fact that the section is a penal section would fully justify one in reading "income" as meaning income and not profits; but even were that solid rock to be swept away it would not avail the Crown in this instance, for in Canadian Eagle Oil Co. Ltd. v. The King (1945) 27 T.C. 205, 257, Lord Macmillan made it perfectly plain that

"for the purposes of income tax, the income of a foreign company and the income received from it in dividends by its British shareholders are not to any extent or effect one and the same income, but are two distinct incomes."

So here, the dividends received by the trustees from Commercial Insurance Co. Ltd. are part of the income of the trustees derived from the transfer of assets and associated operations, and it is upon that income, and no further component provided by that company, that section 412 fastens.

Accordingly, the more fantastic suggestions of the Solicitor-General fall to the ground. Enough remains, however, even when these excrescences are pared away, to be profoundly disturbing to anybody who cares about equity or equality in taxation, or, more importantly, the rule of law. I need not repeat what I said on this topic in Vestey v. Inland Revenue Commissioners, ante, p. 177, especially since on this particular aspect of the Crown's alleged discretion Ungoed-Thomas J. put it far better than I ever could when, in Inland Revenue Commissioners v. Clifforia Investments Ltd. [1963] 1 W.L.R. 396, 402, he said:

"It would to my mind be intolerable that exception taken to the

construction of a section on the ground that it leads to such a patently unjust result as double taxation should be overruled on the ground that the revenue would only apply it when it considered it equitable to do so. Such a discretion in the revenue would go far beyond that degree of discretion which is inevitably involved in applying and administering the statutes. It would be a wide and arbitrary discretion applied without publicly established principles and, of course, without legislative authority. It would imply that the revenue could exempt from, and was therefore entitled to disregard and overrule, the legislation. This offends our fundamental conception of the rule of law."

Standing Lord Howard de Walden v. Inland Revenue Commissioners [1942] 1 K.B. 389, my own fundamental conception of the rule of law is deeply offended. The only alternative is for the Crown to tax all who could possibly under any circumstances be recipients of any sliver of income upon the whole of that income - a suggestion equally as offensive. Being bound by that case I am, unhappily, in no position to right a clearly perceived wrong. Fortunately, so far as the individual taxpayers in the actual case before me are concerned, they, whether by accident or design, escape the charge under section 412 (1) as I have already explained, an escape well merited as they fall to be taxed, as I have already decided in Vestey v. Inland Revenue Commissioners, ante, p. 177, under section 412 (2). The final result, therefore, is that all the assessments upon the taxpayers are left standing to the extent, but only to the extent, indicated in my judgment in Vestey v. Inland Revenue Commissioners; any other assessments, and any assessments in excess of the figures thereby established, are discharged.

Solicitors: Speechly, Bircham; Solicitors of Inland Revenue.

A. R.