Studies in the History of Tax Law, Volume 6 9781474200820, 9781849464802

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Preface These papers were given in July 2012 at the sixth Tax Law History Conference organised by the Centre for Tax Law, which is part of the Law Faculty of the University of Cambridge. We are very happy that they are being made available in this published form, maintaining the very high standards our publishers set themselves. At our final tea, those present pointed out that I would have to change the text of these prefaces. This year we were not blessed with wonderful summer sunshine but suffered two -and-a-bit days of rain, and even our group photograph had to be taken indoors. However, the buildings and grounds of Lucy Cavendish College still provided an ideal setting. As ever, the papers were followed by discussions in and out of the formal proceedings. It remains for me to thank those who gave papers or participated in other ways in what is becoming an important part of academic tax law life in the United Kingdom. Already this event is known as Tax Law History VI; Tax Law History VII is scheduled for July 2014. As the proofs were being delivered, we learnt of the sudden death of Pauline Sadler, Professor of Information Law at Curtin University, Perth, Western Australia, who had, with Lynne Oats, now of Exeter, contributed in volumes 1, 2 and 4 to our understanding of the history of stamp duties. Their final tax history collaboration appears in this volume. Pauline was a consummate scholar and will be sorely missed. Earlier in the year we learnt of the equally sudden death of Tim Vollans of Coventry University. Tim was not only a constant attender but that most wonderful of colleagues who had a topic—and a paper—ready in reserve in case someone should default. Tim and I had agreed that Tim was going to have a real paper in 2014. Once again, sincere thanks go also to Christine Houghton and all the staff of Lucy Cavendish College who made us so welcome, and to the President and Fellows of the college for allowing us to stay in their college. Finally, thanks go to Richard Hart and his editorial team for taking this publishing project on and, in particular, to Mel Hamill as the Managing Editor, for all the hard work. Cambridge April 2013

P U B L ISH E R’S N O TE It is with great sadness that the publisher records the death of John Tiley on 30 June 2013, days before this volume was sent to the printer. John had supervised the production of this volume and knew that its appearance was imminent. He was immensely proud of this series, which will remain a monument to his energy, vision and passion for tax law and scholarly enquiry more generally.

Professor John Tiley CBE LLD FBA 1941–2013 We, the authors of these papers, dedicate this volume to the memory of John Tiley, Emeritus Professor of the Law of Taxation at the University of Cambridge, who died as it was going to press. The Cambridge History of Tax conferences, of which this volume is the record of the sixth conference, were his idea and he was responsible for their planning. He also edited all six volumes. As he said in the preface to the first volume, ‘not least in order to prevent governments from trying to reinvent the wheel, there is also a need to record the history of our subject’. Others have written about his many pioneering achievements in the study of tax law, but we shall remember him for his inspiration and encouragement of the study of the history of tax law in organising these conferences and the volumes that record them.

List of Contributors Barbara Abraham, Chartered Tax Adviser, Low Incomes Tax Reform Group & Red Bee Media Ltd. Dr John Avery Jones CBE, Retired Judge of the Upper Tribunal Tax and Chancery Chamber, former Visiting Professor, London School of Economics. Joyce Chia, Former Research Fellow, Not-for-Profit Project, Melbourne Law School, Currently Senior Policy Officer, Australian Charities and Not-for-Profit Commission. Dominic de Cogan, Leverhulme Early Career Research Fellow, Birmingham Law School. Jane Frecknall-Hughes, Professor of Revenue Law, The Open University Business School, Milton Keynes. Malcolm Gammie CBE QC, Barrister at One Essex Court, Temple, and Research Director of the Tax Law Review Committee of the Institute for Fiscal Studies. Johann Hattingh, Advocate of the High Court of South Africa and PhD researcher, Centre for Tax Law, University of Cambridge. Marjorie E Kornhauser, John E Koerner Professor of Law, Tulane University Law School. Diane Kraal, Senior Lecturer, Department of Business Law and Taxation, Faculty of Business and Economics, Monash University, Australia. Margaret McKerchar, Professor of Taxation, School of Taxation and Business Law, UNSW, NSW 2052 Australia. Ann O’Connell, Professor, Melbourne Law School, University of Melbourne; Senior Fellow, Taxation Law and Policy Research Institute, Monash University; Visiting Fellow at the Centre for Tax Law at the University of Cambridge. Lynne Oats, Professor of Taxation and Accounting University of Exeter, Deputy Director Tax Administration Research Centre. John HN Pearce, ex HMRC, now University of Exeter. Philip Ridd, Law Reporter, formerly Solicitor of Inland Revenue. Pauline Sadler, formerly Professor of Information Law, Curtin University of Technology, Western Australia.

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List of Contributors

Chantal Stebbings, Professor of Law and Legal History at the University of Exeter. Richard Thomas, Retired Inspector of Taxes and now a member of the First Tier Tribunal (Tax). John Tiley, formerly a Life Fellow of Queens’ College, Cambridge, and Emeritus Professor of the Law of Taxation in the University of Cambridge. Henk Vording, Professor of Tax Law at Leiden University, the Netherlands. Onno Ydema, Professor of Tax History at Leiden University, the Netherlands. Yan Xu, Faculty of Law, The Chinese University of Hong Kong; Senior Research Fellow, Taxation Law and Policy Research Institute, Monash University.

1 Sir Josiah Stamp and Double Income Tax JOHN F AVERY JONES CBE*

A BSTR A C T In 1920 the UK provided no relief from double taxation, then generally called double income tax, which was caused by the source state and residence state both taxing the same income (apart from a temporary relief introduced in 1916, and except for deducting the foreign tax in computing the income). Tax rates everywhere had increased enormously during World War I and were set to stay at a high level, which meant that a solution to the problem was urgently required. The UK, as a major capital exporter, needed to design a relief starting from scratch with a blank sheet. Dr Josiah Stamp suggested a method to the Royal Commission of 1920 with the caveat that it was not suitable for immediate adoption. Shortly thereafter he was appointed a member of the Commission and, as such, was a member of the subcommittee which sat with delegates from the Dominions and came up with Dominion Income Tax Relief. In the following year, Sir Josiah Stamp, as he had become, was appointed by the League of Nations as one of the four economists to study the problem of double taxation internationally. They reported in 1923. The three solutions—Stamp’s evidence to the Royal Commission, Dominion Income Tax Relief, and the 1923 Report by the League of Nations’ economists— were all different. This paper considers why, and what led the UK to relieve double taxation in the way it did.

* I am most grateful to Sunita Jogarajan, Senior Lecturer, Melbourne Law School, University of Melbourne, for generously sharing with me a lot of source material she had obtained from the Seligman archive (see n 95), the League of Nations archives in Geneva, and other material in the UK National Archives that I had not found, which saved me from having to try to find this material myself, and for her comments on a draft of this article.

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2

INTR ODU C TION

I

N 1920 THE UK provided no relief from double taxation, then generally called double income tax, caused by the source state and residence state both taxing the same income. The only exceptions were a temporary relief within the Dominions introduced in 1916,1 and elsewhere the deduction of the foreign tax in computing the income.2 Tax rates everywhere had increased enormously during World War I3 and were set to stay at a much higher level than before the war.4 As Sir Josiah Stamp said, Taxation is now rapidly developing from a merely unpleasant incident into a dominating feature of daily life, and those features which hitherto have been of little interest, because they have been too small to matter, now become of great importance.5

Increases in the rate of tax in one country were bad enough, but that in two countries, together with no relief, was giving rise to excessively high

1 A description of it is contained in The Report of the Sub-committee on Double Income Tax within the Empire (Sub-committee Report) in Appendix 1 of the Report of the 1920 Royal Commission (Cmd 615, 1920) (1920 Report). 2 This was automatic for income taxed on the remittance basis (because one cannot remit what has been paid in foreign tax), and was specifically provided for in Cases IV and V for income taxed on the arising basis. 3 Income tax rates in the UK rose from 1s 2d (5.8%) plus 6d (2.5%) super-tax (on total income in excess of £5,000 but charged on the excess over £3,000) in 1911–12 to 6s (30%) plus a highest rate of super-tax (starting at £2,000) of 4s 6d (22.5%) (on the excess over £10,000) by 1918–19, an increase in the combined maximum tax rate from 8.3 to 52.5%. Evidence to the Royal Commission gave the following figures for the highest rates of tax at that time (converted from shillings and pence to decimal): Australia (Commonwealth), 40.625%; New South Wales, 9.025% (Appendix 12); Canada, 4% plus super-tax 50% plus surtax 35% of the income tax plus super-tax, equals 72.9% (Appendix 12); France, 20% (impôt global) plus impersonal (schedular) taxes (see n 118 for the meaning) on various types of income at rates between 3.75 and 5%, and a 6% dividend tax on foreign securities [14,225–27]; India, 6.25% (this rate was on given on an illustrated income of £10,000 and may not be the highest rate) [1,901]; Japan, 30% (Appendix 12); New Zealand, 37.5% (Appendix 12); Prussia, 8% (Appendix 12); South Africa, 10% income tax, excess profits duty of 25% and dividend tax of 5% [2,015] (Appendix 12 refers also to a super-tax of up to 15%); and US, 77% [7,427] (normal rate 12% plus surcharge rising to 65%). 4 UK government expenditure as a percentage of GDP increased substantially—1913, 11.0%; 1920, 20.5%; 1924, 23.6%—which required increased taxes, although much of the increase in expenditure was paid for by borrowing. M Daunton, Trusting Leviathan (Cambridge, Cambridge University Press, 2001) 23 (Table 1.1). At the same time, there was a shift in favour of direct, over indirect, tax from 57.5% of total tax in 1913–14 to 75.1% in 1919–20. M Daunton, Just Taxes (Cambridge, Cambridge University Press, 2002) 46 (Table 2.3). 5 J Stamp, The Fundamental Principles of Taxation (London, Macmillan, 1921, revised 1936) (‘Fundamental Principles’) 2, available at http://www.archive.org/stream/ fundamentalprin00stamgoog#page/n8/mode/2up). He added ‘There would probably have never been any society “for the abolition of double taxation within the Empire” [the correct name of the Association is in n 16 below] if income taxes had remained in the region of 8d [3.3%] in the £’. (This was the rate in 1899–90.)

Sir Josiah Stamp and Double Income Tax 3 combined rates of tax.6 The problem had been exacerbated by the removal of the remittance basis from foreign income from securities, stocks, shares and rents in 1914 because such income was now taxable even though not remitted.7 This meant that a solution to the problem of double taxation, which had been discussed many times before without any result,8 was urgently required, particularly in view of (i) the distortion of competition for UK residents when other countries were giving relief to their residents9 and (ii) the likely result of further capital not being invested in the Dominions (and to a lesser extent into the UK) if such investment suffered double taxation.10 The UK, as a major capital exporter, needed to design a relief starting with a blank sheet,11 and that was one of the tasks of the Royal Commission on Taxation that had been appointed in April 1919 and reported in 1920.12 Dr Josiah Stamp was at the centre of this debate on how to avoid double taxation. As a witness giving evidence to the Royal Commission, he suggested a principled approach but said that it was Utopian and not suitable for immediate adoption. Shortly thereafter he was appointed a member of the Commission and, as such, was a member of the subcommittee which sat with delegates from the Dominions and came up with a proposal that became Dominion Income Tax Relief. In the following 6 Two examples from the Minutes of Evidence (Evidence) to the 1920 Royal Commission demonstrate this. First, Sir Algernon Firth (see n 21 below) said that his US tax rate was 48.18% and his UK rate (on the balance, there being only a deduction for foreign tax) was 10s 6d (52.5%), giving a combined rate of 73.2% [8,037]. Secondly, two sons of Isaac Singer (the inventor of the Singer sewing machine), Washington and Mortimer Singer, whose income arose entirely from the US company, paid US tax at rates of over 34% (Mortimer) and 39% (Washington, which may reflect a timing difference in payment as the previous year’s figure was only 10.25%), then UK income tax and super-tax up to 10s 6d (52.5%) in the pound on the balance, which left them with only about 32% (taking Mortimer’s rates as more typical) after both countries’ taxes, a combined tax rate of 68% in 1918–19 onwards (5,174). Washington Singer’s tax figures are in the National Archives IR40/9870 (file 5). See D Parrott and J F Avery Jones ‘Seven Appeals and an Acquittal: the Singer Family and their Tax Cases’ [2008] British Tax Review 1. 7 With an exception for those not domiciled within the UK, and British subjects (later Commonwealth and Irish citizens) resident but not ordinarily resident in the UK: FA 1914, s 5. 8 App 7(b) of the Royal Commission’s evidence lists the occasions that double taxation had been previously discussed, starting with a petition debated in the House of Commons in 1861 following the introduction of income tax in India. For the history of its introduction see CL Jenkins, ‘India’s First Income Tax’ [2012] British Tax Review 87. For a summary of these discussions see P Harris, ‘An Historic View of the Principle and Options for Double Tax Relief’ [1999] British Tax Review 469. 9 Credit in the US from 1919; exemption in various counties, see below n 26. 10 See Evidence, above n 6, [789, 1,873, 2,016, 5,181, 5,846, 6,309 (by the Revenue), 7,657, 8,037 and 16,084]; alternatively, the foreign business might be sold [7,668] or evasion would be encouraged [780]. 11 The UK was well behind most other countries in introducing such a relief. For a contemporary article, see SE Minnis, ‘Double Taxation in Holland, Norway, Switzerland and Italy’ (1921) 3(1) Journal of Comparative Legislation and International Law 88. The US had introduced its foreign tax credit in 1919 by the Revenue Act 1918. 12 1920 Report, above n 1.

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year, Sir Josiah Stamp, as he had become, was appointed by the League of Nations as one of the four economists to study the problem of double taxation internationally. They reported in 1923. This paper considers why each of the solutions to which he contributed was different and what led the UK to relieve double taxation in the way it did.

T H E R O YA L C OMMISSION OF 1920

Double taxation was the subject of numerous representations to the Royal Commission which reported in 1920. Most, but not all, were directed to double taxation within the Empire, which was no doubt where most British investment was made: a member of the Commission put to a witness that before the War £2,000m of British money had been invested in the Colonies.13 The Report of the Sub-committee of the Royal Commission on Double Income Tax within the Empire14 (the Sub-committee) put the representations into the following four categories and attributed some of the representations to each, although it was far from comprehensive in doing so: 1. Credit for the source state’s tax against the residence state’s tax.15 This was attributed to two representations,16 though it was also proposed by several others.17 The Revenue, in its evidence, argued against regarding the US credit system as a precedent as it was attributable to a deliberate policy of encouraging the investment of American capital abroad’.18 The Revenue also argued against credit since the full cost would fall on the UK.19 13

Evidence, above n 6, [825]. 1920 Report, above n 1, Appendix 1. 15 The current term ‘credit’ will be adopted, although the expression was not then in use. There is no reference to credit in the 1920 Report or so far as the writer is aware in the evidence, it being referred to as deduction which caused confusion between deducting the foreign tax from the income and deducting it from the UK tax; see below n 86. 16 The Association to Protest against the Duplication of Income Tax within the Empire (the Protest Association) in Evidence, above n 6, suggested as an alternative to No 3 the same relief as for death duties, which was credit [844], and the Society of Incorporated Accountants and Auditors, although it is not clear that they were advocating credit but rather exemption [9,029–32]. 17 The Federation of British Industries, Evidence, above n 6, [16,084], the Institute of Chartered Accountants in Ireland [24,341] and Sir Archibald Williamson, a partner in both a UK and a US firm of merchants and merchant bankers [7,433]. The Institute of Chartered Accountants in England and Wales also appear to have proposed this [8,288]. This proposal appears to require payment of tax in the residence state (assumed to be the UK) initially, followed by the taxpayer reclaiming the amount of the credit on proof of payment of tax in the source state, rather than a proposal for revenue sharing which is how it was categorised by the Sub-committee. 18 Evidence, above n 6, [6,349]. US capital was actively seeking investment abroad for lack of opportunities at home. 19 Ibid, [6,358]. 14

Sir Josiah Stamp and Double Income Tax 5 2. Revenue sharing (that the state with the higher rate collects its tax and adjusts the loss of tax between the two states).20 This was attributed to, or proposed by, a number of representatives.21 It was also the excess profits duty solution of which Stamp was presumably the inventor.22 The Revenue, in its evidence, pointed to the difficulties of agreeing on the apportionment between the countries before legislation would be possible.23 These practical difficulties pointed towards the solution adopted by the Sub-committee of each country giving its own relief.24 3. Exemption of the income from tax in the residence state. This was attributed by the Sub-committee to only one representation but was made by a number of others.25 The Revenue, in its evidence, pointed to examples of exemption in New Zealand, Newfoundland, Austria and Hungary,26 and argued strongly against its adoption on cost grounds, a figure of £20m being suggested, because far more investment was from the UK to the Dominions than vice versa, and also because it breached the ability to pay principle.27

20 The net effect on the taxpayer is the same as credit. The difference seems to be that with credit the taxpayer may have to pay tax initially in both states and claim credit in the residence state later, whereas under revenue sharing the taxpayer pays the higher of the two rates initially. 21 This was attributed to the Protest Association (above n 16), in Evidence, above n 6, [821], [866], [880], although it was their fall-back position; to the Association of British Chambers of Commerce [7,666], one of whose representatives was Sir Algernon Firth; and to the Institute of Chartered Accountants, although their evidence seems to have been in favour of No 1 [8,288]. This was also proposed by Mosenthal, Sons & Co, a firm purchasing goods in the UK for sale in South Africa, as their third submission with tax payable at the higher rate of the two countries on the whole income with revenue sharing between the countries [2,022], Sir Archibald Williamson (see above n 17) [7,568], Mr Mortimer Singer (see above n 6), who suggested this to accompany credit [5,273], and the Rio Tinto Company [27,991] which also envisaged treaties [27,994]. And, although not the primary solution of the British Chamber of Commerce, Paris, their representative thought it would be acceptable [14,284–86]. The representative was Mr OE Bodington, who was also another of the UK representatives on the International Chamber of Commerce. It was also proposed by Stamp as a practical solution (see the text at n 63 below). 22 See text at n 64 below. 23 Evidence, above n 6, [6,328–33]. Enabling legislation could have given effect to future treaties, as eventually happened. 24 Ibid, [6,336]. 25 It was attributed to Mosenthal, Sons & Co, who had proposed it as their primary submission: Evidence, ibid, [2,021]. It was also proposed by the Protest Association (see above n 16); the Society of Incorporated Accountants and Auditors, who met the objection that the source state would tax only the income arising there at a lower rate than the residence state would have charged by suggesting in their oral evidence that the highest rate of tax in the source state should be paid [9,029] (the Protest Association also accepted paying the higher of the two countries’ rates to deal with this problem [945]); and by the British Chamber of Commerce, Paris [14,250]. 26 Evidence, above n 6, [6,345, 6,348]. New Zealand exempted income that had paid tax in another Dominion; Newfoundland on income that arose in the UK, Canada or the US; and Austria and Hungary on the basis of reciprocity. 27 Ibid, [6,351–55].

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4. The remittance basis in the residence state. As with the other categories, this had a number of proponents.28 Unless combined with another solution this results in double taxation of the amount remitted and so is not a complete solution on its own. The Revenue argued against this solution in their evidence on the ground that it violated the ability to pay principle.29 A member of the Commission put to the Revenue that one could tax remittances at the rate applicable to the total foreign income, to which the Revenue (rightly) saw practical difficulties.30 These four categories do not encompass all the evidence. For example, which will be relevant when we consider the League of Nations 1923 Report,31 some representations were in favour of there being no tax in the source state,32 which would have suited the UK but would not have gone down well in the Dominions because Australia (including the Australian states), and South Africa taxed only on a source basis.33 Presumably the Sub-committee thought it better not to refer to this. As will be seen, there was no unanimity in favour of any one category, and most representations put forward more than one category as alternatives and sometimes combinations of categories.34 No doubt they were more concerned with avoiding double taxation than how it was achieved. The Commission were more interested in the solutions: ‘I think I may say 28 This was attributed to Mosenthal, Sons & Co, for whom it was their secondary submission with tax payable at the higher rate in the two countries and divided by revenue sharing, Evidence, above n 6, [2,021], and to Sir Charles Campbell McLeod (see above n 10) [1,882], [1,913], who proposed paying the full standard rate on remittances if that rate would have been applicable to the whole foreign income [1,974] (which seems to relate to personal allowances as there were no lower rates of tax: for a variation on this see n 29 below) and who also proposed credit for the foreign tax on the amount remitted [1,917]. This solution was also mentioned by the Protest Association (see above n 16) [785]. 29 Evidence, above n 6, [6,360]. A variation was put to Mr ER Harrison of the Revenue by Commissioner EG Pretyman that the rate of tax on the amount remitted should be determined by the rate applicable to the total income, to which they replied that they had had it in mind, but their preference was for tax to be computed on the arising basis to prevent avoidance by leaving the income abroad [6,474]. This seems to be a variation on the suggestion of Sir Charles Campbell McLeod (see above n 10) but taking super-tax into account. It would also spoil one of the main advantages of the remittance basis that one did not need to compute the foreign income on UK tax principles. 30 Evidence, above n 6, [6,467–78]. 31 As we shall see, Stamp advocated this method strongly in his contribution to the League of Nations 1923 Report (see the section The League of Nations 1923 Report below). Sir Percy Thompson, Deputy Chairman of the Board, who attended the League of Nations meetings from 1923 onwards, was also vehemently against source tax. 32 The Federation of British Industries (below n 34) and Sir Charles Campbell McLeod (see above n 10) Evidence, above n 6, [1,981]. The representative of the Institute of Chartered Accountants also advocated this, subject to reciprocity, on a personal basis in oral evidence [8,489]. The Revenue was therefore not correct in saying in its evidence [6,356] that this system was ‘not known to be advocated by anyone’. 33 India, Canada, New Zealand, Tasmania, British Columbia and Newfoundland had similar scope to the UK, taxing on the basis of both source and residence [6,302]. 34 For examples, see above nn 21 (credit with revenue sharing) and 28 (credit for tax on the amount remitted, or remittance basis and revenue sharing).

Sir Josiah Stamp and Double Income Tax 7 that all of us are convinced as to the hardship; but the position we are now in is that we want practical suggestions for a remedy’.35 Any relief would naturally cost money, but a recurrent theme among the witnesses was that taxpayers, whether individuals or companies,36 facing double taxation would move abroad and the tax would be lost anyway; indeed, some had already done so.37 However, it is impossible to separate the twin effect of substituting tax solely in the other country for double taxation from that of substituting a lower rate of tax in the other country for the UK rate of tax. Most of the (non-Revenue) evidence was therefore that something should be done about double taxation, with the question of what should be done being secondary. The Revenue, unhelpfully, argued against all the possibilities put forward, concluding that ‘a perfect remedy for such hardship from Double Income Tax as exists is not likely to be found, and that a reasonably workable solution which removes any substantial hardship is the best that can be hoped for’.38

DR J OS I A H STA MP, TH E PER SON

Before turning to Dr Josiah Stamp’s39 evidence to the Royal Commission, his remarkable character and career should be mentioned.40 He was born in 1880, the son of a shopkeeper who was a committed Baptist. He attended a Baptist school and retained strong religious beliefs throughout his life.41 On leaving school at the age of 15, he entered the civil service 35

Evidence, above n 6, [14,280] (Commissioner HJ Mackinder). The prohibition on a resident company becoming non-resident without Treasury consent was not introduced until 1951 (FA 1951, s 36). 37 For examples, see Evidence, above n 6, [793, 908, 1,868, 2,029, 2,154, 5,846, 7,166, 7,496, 8,616, 13,052, 16,084, 27,975] (these references are restricted to the first mention of the point in the evidence of the particular witness); similar evidence was given that foreigners would leave the UK [5,177]. A well-known example of emigration is that Sir Willliam Vestey [9,425] and his brother, Mr Edmund Vestey had moved their residence in 1915 to Argentina, where there was no income tax [9,494] (although there was a turnover tax, see [11,904]), on account of competition from a US company, the American Beef Trust, with subsidiaries in various countries, that was importing meat into the UK in competition with the Vesteys without being taxed in the UK (or presumably in the US until dividends were paid by the subsidiaries, see Sir Sidney Young’s evidence at [11,937]). The Vesteys were not therefore concerned with double taxation but with deficiencies of taxation of non-residents trading in the UK. Sir Sidney Young, the chairman of a competitor company, made similar points [11,861]. 38 Evidence, ibid, [6,365]. 39 He was named Josiah after his father’s eldest brother and Charles after his father. 40 The standard biography is JH Jones, Josiah Stamp, Public Servant (London, Sir Isaac Pitman & Sons Ltd, 1964). See also the entry by Lord Beveridge in the Dictionary of National Biography (Oxford, Oxford University Press). 41 Jones, above n 40, 53 says this ‘From the first, Stamp was a strong individualist and a Puritan in the making. To him Christianity was a reality: religion was the heart of life’. Also ‘His religious observances were no mere formalities, but essential to his whole being. 36

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as a boy clerk.42 He took the examination for Second Division clerkship, passing first (out of 1061) just before he was 18. He joined the Inland Revenue and became an Assistant Surveyor of Taxes [now Inspector of Taxes43] and then Surveyor, taking over a new district at the age of 26. At this point in his career, he married Olive Marsh, whom he had known from the age of 17; they were to have four sons. Two years later, he was transferred to the Chief Inspector’s Department at head office in Somerset House, becoming personal assistant to the Chief Inspector. In the evenings, he studied for an external BSc degree at London University, which he passed with first class honours. He went on to study for a DSc degree at the London School of Economics, winning the Cobden Prize in his first year. He was awarded the DSc and won the Hutchinson Research Medal for his thesis, subsequently published as British Incomes and Property: The Application of Official Statistics to Economic Problems,44 which became a leading book on the subject. In 1914, at the age of 34, he transferred to the Secretary’s [ie policy] Division, where he was responsible for designing the wartime excess profits duty.45 He was promoted to Assistant Secretary46 in 1916 and appointed CBE in 1918. He had overcome the disadvantages of his origins through exceptional ability and hard work, and the Inland Revenue must take great credit for recognising his ability and for his rapid promotion.47 In 1919, he left the civil service and joined Nobel Industries Limited (out of which Imperial Chemical Industries developed as a result of a That is perhaps the real meaning of the statements that were made about him that he was a Puritan. The discipline of his Puritanism was self-discipline, not a form of intolerance with which it is so often confused. It was Puritanism at its best—not its worst’ (257). Although brought up as a Baptist, he later became a Methodist. Among the books he wrote were The Christian Ethic as an Economic Factor (Freeport, NY, Books for Libraries Press, 1926), Motive and Method in a Christian Order (Nashville, TN, Abingdon Press, 1936) and Christianity and Economics (London, Macmillan, 1938). 42 Although his mother and uncle, who was a Customs and Excise officer, wanted him to stay on at school, he was keen to take the civil service clerkship exams, and (surprisingly) this was supported by his headmaster (Jones, above n 40, 101–02). 43 Inspectors were originally the overseers of the surveyors, and surveyors became inspectors through grade inflation. For an article about surveyors at this time, which includes references to Stamp, see D Williams ‘Masters of all they Surveyed: 1900–14’ [2005] British Tax Review 142; ‘Surveying Taxes, 1900–14’ [2005] British Tax Review 222. 44 Published by PS King & Sons Ltd, London (1916, re-issued 1920, reprinted 1922). It is available at http://www.archive.org/stream/fundamentalprin00stamgoog#page/n8/mode/2up. 45 This duty is of historic interest as being the first tax that was assessed by the Surveyor (later Inspector) rather than the General Commissioners. At the time it was of great importance. It raised £415m in 1919–20 (Board of Inland Revenue’s Report) or £300m (Stamp’s later estimate in Taxation During the War, (London, Oxford University Press, 1932) ch 2), the difference possibly being because of subsequent repayments, which was greater than the yield from income tax (£317m income tax, £42m super-tax). 46 Later Grade 5, now Director or Assistant Director. 47 Another recent example shows that this is still possible: Dame Lesley Strathie, chief executive of HMRC from 2008 until ill health forced her retirement in November 2011, had joined the civil service at the age of 16 (The Times obituary, 25 January 2012).

Sir Josiah Stamp and Double Income Tax 9 further merger). It was shortly after this change that he gave evidence to the Royal Commission. His stated reason for leaving the civil service was so as to have the means to provide a better education for his children. But perhaps more importantly, as his biographer, Harry Jones, said, ‘he had reached the stage at which he needed a wider world to give full expression to his own personality . . . He was not temperamentally a back-room boy, which he was bound to remain so long as he stayed in the public service’.48 He subsequently left his full-time position at Nobel in 1926 to become First President of the Executive [chief executive] of the London, Midland and Scottish Railway,49 the largest of the railway companies,50 and shortly thereafter Chairman on the retirement of the previous Chairman in 1927, while remaining as a non-executive director of Nobel and subsequently of ICI.51 His numerous later appointments included Director of the Bank of England, Member of the Economic Advisory Council, President of the Abbey Road Permanent Building Society and Chairman of the Court of Governors of the London School of Economics.

DR J O S I A H STA MP’S EVIDENC E

At the time of his giving evidence to the Royal Commission in August 1919, he was therefore no longer a civil servant and his evidence reflects his personal views, which suited him better temperamentally. His evidence stands out refreshingly, compared to all the other evidence, as a principled approach, and is worth setting out: The tax that a man is called upon to pay to the State may be said to be divisible into two parts, that which is due for the specific protection and maintenance of particular sources of income, and that which is due for the privileges which the citizen himself enjoys in his person and residence. I think no one would contend that the Australian Government has no right to make any charge in respect of a farm there merely because its net produce goes to an English resident; similarly, no one would admit that the English resident should be free from all obligations to the British Government merely because his income is derived from abroad. It is often serviceable to remember that our Income Tax is a combination of these two separate 48 Jones, above n 40, 102. He even consulted the Chancellor of the Exchequer (Reginald McKenna), with whom he had worked closely when excess profits duty was going through Parliament, before deciding to leave the civil service (94–96, 101). 49 The railways had been taken into state control during World War I until 1921 but were not nationalised. The London, Midland and Scottish Railway was formed in 1923 by the Railways Act 1921, which merged over 120 companies into four, one being the LMS. 50 As Jones, above n 40, says at 283, ‘Stamp was fond of saying that his was the largest privately owned organisation and the largest private employer of labour in the whole of Europe’. 51 Jones, above n 40, 179.

John F Avery Jones CBE

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taxes, and the Commission may recall that the confusion that has arisen in the past on the subject of the taxable capacity of Ireland had its origin in the failure to distinguish these elements. It would seem to me that the origin tax, taken separately, might fairly be levied on the benefit principle, and be a flat-rate, ie proportionate to the magnitude of the interests protected—a sort of fee or charge. The Australian Government would charge the same amount for their services to the farm, whether the English resident were a millionaire or a poorer man. There are, of course, considerations which would make the rate of the tax diminish with increasing magnitude in the object protected, but I think on the whole, they are not important. The resident’s tax, however, must necessarily be according to ability, and therefore, in my judgment, progressive. Speaking generally upon incomes considerable amount, it would be much the larger tax. Where origin and residence are in the same country, we can well afford to blend the two into one composite tax, and even admit the principle of degression,52 remitting part of the fee applicable to origin chargeable upon poorer people. As soon, however, as origin and residence are distinct, there would appear to be no theoretical reason why the distinction should not make itself effective. In the application of this principle, therefore, each country would charge a combined tax upon its residents for their income derived within the country, a resident’s tax for the income derived from abroad, and an origin tax for all income going out, the net result being that there would, apart from slight differences in rates, be no problem of double taxation.53

He envisaged a state would charge a flat-rate origin (or source) tax on the income of non-residents and a progressive resident’s tax on the foreign income of residents, with both taxes being charged on the domestic income of residents. Because he said that his proposal would eliminate double taxation apart from slight differences in rates,54 he must have envisaged that the same proportions of source and resident’s tax would apply to all countries.55 Elimination of double income tax was, by means of partial exemption, the residence state giving up its source tax when its residents received foreign income. Accordingly, he rejected full exemption by the residence state, and there was no need for any credit by the residence state for the source state tax. One point which comes over clearly is that Stamp accepted that the result of giving relief from double taxation was the retention of at least some source tax, going as far as saying that ‘no one would contend that the Australian Government has no right to make any charge in respect of a farm there merely because its net produce goes

52

The opposite of progression: reduction of tax for smaller incomes. Evidence, above n 6, [9,573]. 54 The ‘slight’ difference in rates is something of an exaggeration given the differences shown in the evidence to the Royal Commission, see above n 3. 55 See below n 73, where the Sub-committee points out that this would be impracticable, so he must have accepted that this was a necessary part of his proposal, although he made clear that his proposal was a theoretical one only. 53

Sir Josiah Stamp and Double Income Tax 11 to an English resident’.56 In the light of future events,57 it would be interesting to have known whether this was just an assumption he made or whether he saw a reasoned basis for it. He made it clear that this solution was a theoretical one only because tax systems varied; it could not be adopted piecemeal because only countries that benefited from it would join; and the loss of revenue to the UK would be very large.58 He said in his oral evidence that the pure theory was Utopian in the present state of the world, needing international commissions of a quite unthinkable kind to carry it out effectively:59 ‘I have brought out this abstract principle in order to throw it over for the most part, but it may be of use in distinguishing between the empirical and quite conventional methods that you may be considering at the present moment’.60 For example, for a company managed and controlled in the UK but manufacturing abroad and owned entirely by foreign shareholders, the origin was divided and one might impose half the origin tax, say 7.5% or 10%, on the profit applicable to the foreign shareholders61 rather than the extremes of the standard rate of 30% or no origin tax at all, which some others were advocating. This seems typical of Stamp’s approach, which was academic in that it required a principle but only as an end to achieve a thoroughly practical solution.62 For the profits applicable to UK resident shareholders, in oral evidence he advocated the excess profits duty solution (of which he was no doubt the architect) of relieving double taxation so that only the higher of the two taxes should be paid, and that such solution should be confined to the Dominions at first.63 Excess profits duty contained an enabling 56 He later said the same of Irish income: ‘Would [the Irish government] refrain from taxing a property in Sligo merely because the income from it went abroad? One imagines that they would feel it was specially chargeable’ (Stamp, above n 5, 118). On this, Stamp turned out to be wrong. The agreement with the Irish Free State of 1926 (to which legislative effect was given by FA 1926, Sch 2, para 8) charged tax in the residence state only, which may have been due to the superior bargaining power of the UK. The UK never managed to achieve this result with any other country. 57 See the section The League of Nations 1923 Report below. 58 Evidence, above n 6, [9,573–74]. 59 Ibid, [9,645]. 60 Ibid, [9,648]. 61 Ibid, [9,574]. It is interesting that he regarded the management and control of a company (residence in law) as part of the origin of the profit so far as the shareholders are concerned. This may be because at the time the company was essentially transparent for income tax, with the standard rate of income tax paid by the company being treated as having been paid by the shareholders on their dividends. He made the point about the difficulty of determining origin in a later book: ‘Take the case of a company with orchards in Canada, packing establishments, box-making, etc, in Chicago, jam-making in the United Kingdom, and retail sales in India, Australia, and Japan—where do the profits arise?’ (Stamp, above n 5, 140; original emphasis). 62 The Commission did not agree with Stamp’s suggestion but said that, if they had, they would have been inclined to choose the relief for profits distributed to foreign shareholders (1920 Report, above n 1, 39). 63 Evidence, above n 6, [9,576].

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provision for giving effect in domestic law to Orders in Council providing that only the higher of the two countries’ duties was payable and that duty apportioned according to the duty that would have been payable in each country.64 The relief was not to be less favourable than deducting the excess profits duty or similar duty imposed in any country outside the UK, which was the existing rule.65 Stamp’s evidence to the Royal Commission on this and other topics66 on 1 August 1919 so impressed the Chairman that he wrote to the Chancellor on 7 August 1919 saying of Stamp that ‘a man of these rare qualifications—of practical experience, official training and scientific knowledge, and who is now in the business world, and untrammelled by merely official ideas; would be an extremely valuable member of this Commission’.67 Stamp was immediately appointed as an additional member on 30 August 1919 by Royal Warrant,68 which must be a unique achievement.69 He soon attended in his new capacity on the next day of evidence (10 September 1919) after the one on which he had given evidence, which must have surprised the Revenue, whose evidence that day included commenting on his views on taxation of dividends paid to non-resident shareholders of UK companies.70

T H E R E P ORT OF T H E SU B-C OMMIT T EE ON DOU B L E I N C OME TA X WITH IN T H E EMPIR E 71

Stamp also joined the Sub-committee that had been appointed on 3 July 1919 ‘to confer with representatives of the Dominions on the subject of 64 FA 1917, s 23, extended to protectorates by FA 1919, s 34. The following Orders in Council were made: Southern Rhodesian Protectorate [1920] SR&O No 456, Island of Grenada [1921] SR&O No 2004, British Guiana [1922] SR&O No 247, and Malta [1925] SR&O No 101. An undated note by the Inland Revenue referred to in a letter of 3 February 1921 from WH (later Sir William) Coates (Stamp’s successor at the Revenue on statistics) to BP (later Sir Basil) Blackett at the Treasury (who was the British member of the Financial Committee of the League of Nations) (the National Archives IR74/179) states that New Zealand had reciprocal legislation but that it repealed the tax before any arrangements could be made; and that Australia were still considering whether enter into reciprocal arrangements (they never did). 65 F(No 2) A 1915, Sch 4, Pt 1, para 4. 66 His evidence also dealt with control of companies, agency, simplification, wasting assets and depreciation, mineral properties, and graduation. 67 The National Archives T172/985. 68 Issued in Balmoral, where King George V was on holiday. 69 Jones, above n 40, 125. 70 Evidence, above n 6, [10,148] by his former fellow Assistant Secretary CG Spry. 71 1920 Report, above n 1, Appendix 1. The Sub-committee Report, above n 1, [38] explains that ‘Dominion’ was used to include not only the self-governing Dominions, but also India and British possessions generally. The expression is used in the same sense in this article except where a distinction between Dominions and Colonies is made (text around n 80 below).

Sir Josiah Stamp and Double Income Tax 13 double income tax within the Empire’, but which had not yet met pending the arrival of the Australian representative. The Sub-committee concluded early on that the ‘inequity in requiring a taxpayer to make two contributions of Income Tax towards what must certainly in part be a common purpose, viz, the well-being of the British Empire; and that this inequity should be remedied’. This should be done by charging only the higher of the two countries’ rates of tax. Note that the argument is stated in terms of the purpose being the well-being of the Empire so that it could, and would be, argued that no relief was necessary elsewhere, even though all the conclusions set out were equally applicable to foreign investment anywhere. Having dismissed exemption in the residence state for which Australia was arguing, as contravening capital export neutrality and because most of the cost would fall on the UK, there being far more investment from the UK to the Dominions than the reverse, the Sub-committee also saw problems with credit. It would be necessary to determine the proper level of source tax: Dr Stamp, in his evidence before the Royal Commission,72 dealt with this subject at length, and said: ‘It would seem to me that the origin tax taken separately might fairly be levied on the benefit principle, and be a flat rate, ie proportionate to the magnitude of the interests protected, a sort of fee or charge . . . The resident’s tax, however, must necessarily be according to ability, and therefore, in my judgment, progressive. Speaking generally, upon income of considerable amount it would be much the larger tax.’ Unless it were practicable, as clearly it is not, to establish a ratio between the tax to be levied on the ground of origin, and that to be levied on the ground of residence, it would be possible for any State in which income arises to increase its rate of taxation, either generally on all incomes arising therein, or in particular on the incomes of non-residents, solely at the expense of the State of residence, whose tax would automatically be diminished by the amount by which the State of origin chose to increase its own tax.73

We have categorised Stamp’s evidence as directed to partial exemption, where a resident pays only the resident’s portion of tax on foreign income and is exempt from the source portion of tax in the residence state, so that the actual level of foreign tax is irrelevant to the tax in the residence state, although this does not achieve paying the higher of the two rates of tax. The Sub-committee’s comment is based on the impracticability of agreeing a constant proportion between source and residence tax, but they seem to have regarded his proposal as one involving credit rather than exemption, because only under credit would the residence state’s tax be diminished by the amount of any increase in the source state’s tax. It is strange that, as a member (one suspects the leading member) of the 72 73

See the section Dr Josiah Stamp’s Evidence above. Sub-committee Report, above n 1, 24.

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Sub-committee, Stamp allowed this argument to stand; it is not likely that at this time he was having second thoughts about his proposal.74 But leaving this point aside, as the context here was the determination of the level of source tax (far more important for a partial credit regime which the Sub-committee were proposing), the Sub-committee were surely giving up too easily. They were designing a ‘uniform plan’75 by which each state gave relief, so why should the level of tax in the source state not be part of the plan? First, the plan could have included a maximum rate of source tax, as tax treaties later did for dividends, interest and royalties. Perhaps the difficulty was that they were thinking in terms of a single rate of source tax to be applied to all income. This was in contrast to the League of Nations’ approach (described below) and that in mainland European treaties of the time, which categorised the types of income to be treated differently by the source state. Secondly, the uniform plan could also have included a provision giving no relief for a discriminatory higher rate of tax charged on non-residents. Having dismissed both exemption and credit in their pure forms, the Sub-committee initially came up with a variation on credit, but this did not satisfy the Australian representative, GH Knibbs,76 and involved complexity in claims for repayment. The second, more generous, proposal was, by way of example, that if the rate of tax in the UK was 25% and in the Dominion was 15%, the UK gave relief at 12.5%, leaving the Dominion to relieve the remaining 2.5%. The maximum limit on relief dealt with the UK’s objection to credit that any increase in the Dominion rate of tax reduced the UK tax by the same amount; however, the UK was at risk over increases in the Dominion tax rate, which did occur. One oddity should be mentioned: credit was given not only by the UK

74 Although it is repeated in Stamp, above n 5, revised 1936 edn, 137, by 1936 it seems unlikely that he would have supported it in the light of his work on the League of Nations Report of 1923; see the section The League of Nations 1923 Report below. 75 Sub-committee Report, above n 1, 19. 76 George H Knibbs, who was the Commonwealth Statistician, rather than a tax expert. J Taylor, ‘“Capacity to Put up a Fight More Important than Intimate Knowledge of Income Tax Acts and Practice”: Australia and the Development of the Dominion Income Tax Relief System of 1920’ (unpublished conference paper) gives these details about him: ‘George Handley Knibbs had been a licensed surveyor, had taught geodesy, astronomy, hydraulics and physics at the University of Sydney and had been New South Wales superintendent of technical education. He had been appointed first Commonwealth statistician in 1906 a position he was to hold until 1921 when he became director of the newly established Commonwealth Institute of Science and Industry. By 1919 Knibbs had represented Australia and many international statistical, scientific and insurance conferences . . .’ The title of Taylor’s article referring to capacity to put up a fight being more important than tax expertise is a quotation from the Australian Prime Minister’s reasons for appointing Knibbs rather than a tax expert. It is interesting that with his background as a statistician he would have had much in common with Stamp and they would no doubt have known each other by reputation (and later Stamp would emulate Knibbs as a man who sat on many government committees, but at the time the Royal Commission was his first one).

Sir Josiah Stamp and Double Income Tax 15 as residence state but also where the UK was the source state and the credit was for the Dominion residence state tax. The Sub-committee hoped that the proposal would form the basis for complete reciprocal action by the Dominions. The majority of the Sub-committee considered that ‘it is inexpedient to make the relief conditional upon such reciprocity’, although some thought that the UK should only give the relief on the basis of reciprocity.77 In the light of history, that only India and Australia (Federal tax only78) of the Dominions79 gave relief but most of the colonies did so, it is difficult to see why the Sub-committee was so lenient on the Dominions when the principle was that ‘each state would remit a portion of its tax’80 according to a uniform plan, although the legislation did cater for the Dominions not giving relief.81 When the Dominions gave relief, they would normally be giving credit as source state for the UK residence state tax. All the representatives of the Dominions (except one who was awaiting instruction from his government82) agreed with the proposal, and said they would recommend it to their respective governments and apply it as between themselves as well as between each of them and the UK.

OU T S I D E T H E DOMINIONS

Whilst most of the evidence to the Royal Commission related to the Dominions, there was certainly some evidence about other countries.83 The cases of Sir Algernon Firth, with a combined US and UK tax rate of 73.2%, and that of the two sons of Isaac Singer, the inventor of the 77

The identities of the supporters of each faction are not disclosed. The Sub-committee’s proposal was considered by an Australian Royal Commission, the Warren Kerr Commission, which recommended that the Australian States (which had not been represented on the Sub-committee) give the same relief. They never did so, considering that as they did not tax foreign income they should not give relief for UK tax caused by the fact that the UK did tax foreign income. See Taylor (above n 76), Pts 4 and 5. 79 Ireland did so as well. 80 Sub-committee Report, above n 1, 18. 81 By FA 1920, s 27(4) proviso (b), under which the UK allowed a deduction for the difference between the Dominion tax and the relief granted by the UK, which involved difficulties in calculation. This applied to Australia in view of the states not giving any relief even though relief was given in relation to the Federal tax. 82 This was likely to have been the Australian representative, Knibbs, according to Taylor (above n 76), because the Australian Treasury commented on the draft proposals only after the Sub-committee had reported. 83 These included: Mr OE Bodington on behalf of the British Chamber of Commerce, Paris, [14,223 onwards], who thought it would be necessary to have a worldwide uniform tax [14,255]; the Federation of British Industries [16,084] (see their proposal referred to in n 34 above, which makes no distinction between the Dominions and other countries); Sir Archibald Williamson [7,422]; Sir Sidney Young, an importer of meat from Argentina [587]; the London Chamber of Commerce [285]; and Sir Arthur Steel-Maitland MP, a director of the Rio Tinto Company [27,953]. 78

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Singer sewing machine, whose income arose entirely from the US business, with a total tax rate of about 68%, have already been mentioned.84 The Commission’s questions to the Singers’ counsel, George Edwardes Jones, who was advocating adoption of the US credit system, were rather disappointing and it seems that they were thinking only in terms of loss of UK tax and were more concerned about the appearance of the rich not paying any UK tax if relief were granted.85 Even the distinction between a deduction of the foreign tax in computing income and credit for the foreign tax did not seem to be understood, perhaps because the expression ‘credit’ was not then used; ‘deduction’ was used to describe both, thus obscuring the difference.86 Stamp’s evidence87 recommended that his excess profits duty method of avoiding double taxation should be limited initially to the Dominions, and the Sub-committee had based its argument on the UK making sacrifices for the well-being of the Empire, so it is not surprising that the Commission agreed. The only hope they held out was that any relief for other countries’ tax should be reciprocal and ‘that it would only be practicable to arrive at such arrangements by means of a series of conferences, possibly under the auspices of the League of Nations’.88 That is exactly what happened, and it will come as no surprise that Stamp was to play a leading role in that arena.

T H E L E A GU E OF NATIONS 1923 R EPORT

The Royal Commission’s 1920 Report was dated 11 March 1920. Eighteen months later, in September 1921, the Financial Committee of the League of Nations decided to ask four economists to report on the topic of double taxation, although the terms of reference were not finalised until 10 March 1922.89 The four economists were Professor Edwin Seligman (US), Sir Josiah Stamp (as he had then become90), Professor GWJ Bruins

84

See above n 6. See in particular the questions by Mr William Brace (a trade unionist) at [5,335] and [5,345]. 86 See (surprisingly) the question of the distinguished accountant Commissioner William McLintock at [5,393], who suggested that we gave the same relief as the US already, to which Mr Edwardes Jones had to explain the difference between deduction and credit; and Commissioner William Graham’s question at [7,572] asking whether in practice the two were equivalent. 87 See text at n 63 above. 88 1920 Report, above n 1, 83. 89 Stamp had some input into the terms of reference. The circumstances of finalising the terms of reference are described in a forthcoming article by S Jogarajan, ‘Report by the Experts on Double Taxation’. 90 He was appointed KBE in 1920 following the Royal Commission, and GBE in 1924. He was created Baron Stamp of Shortlands in 1938 and sat on the cross-benches. 85

Sir Josiah Stamp and Double Income Tax 17 (the Netherlands) and Professor Senator91 Luigi Einaudi (Italy). This is a tribute to Stamp’s by then international reputation; he was aged 41 when he was appointed.92 Stamp and Seligman already knew each other; Stamp had written to Seligman commenting on a book by the latter in 1912.93 They were different in their approach. It was said that94 ‘Seligman—a lifelong academic—was a grand systematic thinker. Seligman did not ignore political and administrative constraints, but he preferred to focus on the big picture and avoid problems for which theory seemed inadequate.’ By contrast, Stamp, as we have seen, preferred applied economics. He found practical solutions more important than theory, something he probably learnt in the Revenue. Stamp started off the correspondence with Seligman by a letter of 31 October 192195 before their terms of reference were finalised, referring to a note,96 which had already been circulated, prepared by WH Coates (later Sir William Coates), Stamp’s successor at the Revenue as Director of Statistics and Intelligence.97 Stamp told Seligman that the note was

91

Subsequently he was (the second) President of the Italian Republic from 1948 to 1955. Although Professor Bruins was three years younger than Stamp. Professor Einaudi was then aged 47 and Professor Seligman aged 60. 93 Jones, above n 40, 179, 314. Stamp had a high regard for Seligman. It was mutual, as Seligman wrote to Stamp in 1925 asking him to finish his two-volume work on the public revenue if he did not live to do so (in fact, Seligman lived until 1939, about 9 months before Stamp was killed by an enemy bomb on his home in April 1941): Jones, above n 40, 315. 94 MJ Graetz and MM O’Hear, ‘The “Original Intent” of US International Taxation’ (1997) 46 Duke Law Journal 1021, 1075. See also A Mumford, ‘ERA Seligman’ in J Tiley (ed), Studies in the History of Tax Law, vol 5 (Hart Publishing, 2012) ch 10, 281. 95 Edwin Robert Anderson Seligman Papers; Box 44, Folder Box 118, League of Nations—Committee on Double Taxation, Correspondence & Notes, 1921–23; Rare Book and Manuscript Library, Columbia University Library (Seligman archive). It is interesting that Stamp puts the expression ‘double taxation’, the term used by the League of Nations in their terms of reference, in quotes in this letter, indicating that this was not the term he generally used, which was ‘double income tax’, as in the 1920 Report. Perhaps the latter term was restricted to the UK. The League of Nations 1923 Report (below n 99) uses the expression ‘double taxation’. 96 The note is dated 3 March 1921 in the attachment to the letter to BP Blackett (above n 64) and the same document is dated 31 May 1921 as League of Nations document E.F.S.16a,A.16a (a copy is in the National Archives IR40/4680) referred to in footnote 1 of the 1923 Report (below n 99), of US Tax Conventions, Vol 4 (‘Legislative History’) at 4011, the 1923 Report and later Reports are available at http://setis.library.usyd.edu.au/ oztexts/parsons.html (where it is described as by an anonymous author; Coates’s identity is disclosed in the League of Nations 1925 Report of Technical Experts, F.212 (Legislative History, 4,057, 4,069), which states that ‘This masterly report has been of inestimable value to us’). Coates’s note is also the source of the mythical foreign state, Morania, referred to in the 1923 Report, below n 99. 97 Coates would later also effectively be Stamp’s successor as Treasurer of Imperial Chemical Industries Limited on its formation in 1927 out of Nobel Industries Limited on a further merger, Stamp having performed the duties of treasurer, although the title of Treasurer did not exist at Nobel. As has been mentioned, Stamp had left Nobel to become chairman of the London, Midland and Scottish Railway in 1926 while remaining as a non-executive director of Nobel and subsequently of ICI (text at n 51 above). 92

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written with his (Stamp’s) constant collaboration.98 That note is specifically referred to in the 1923 Report of the four economists (the 1923 Report).99 The analysis in Coates’s note starts from fixed-interest securities, where the lender transfers to the borrower the burden of source state tax because the lender wants a fixed return equivalent to what he can earn at home and without which the loan will not be made. This is clearly the case where, as in the UK, the foreign tax is a deduction in computing income; it is less clear in the US credit system.100 Coates argued that the Moranian government should be indifferent to whether it exempts from tax the interest it pays on a loan from abroad or pays a higher rate of interest to compensate for the tax. But because investors will wish to have an even higher rate of interest as insurance against the risk of tax increases, Morania would be better off exempting the interest from tax. This had occurred with loans raised in the UK by the Dominions. The same applied to foreign loans to the private sector because the state would gain the same amount that it lost in tax by taxing their increased profits if the borrower paid a lower rate of interest. His conclusion was that any attempt to tax interest on foreign loans is self-defeating. The imposition of tax results in the marginal quantity of capital being invested elsewhere. If double taxation relief is given to attract this marginal capital, it will have to be given in respect of capital that had already been invested in spite of the lack of relief. The question is whether the gain in capital is worth the loss of tax. If it is, then the gain is made by the borrowing country which should give the relief. In relation to loans to profit-making enterprises, foreign capital is attracted by the yield in spite of the lack of relief, so no relief should be given in respect of it, except at the margin. Relief should be given to attract the marginal investment, again by the borrowing country. Investments not at a fixed return also required relief only to attract the marginal investment. Unexpected increases in source taxation on fixed-interest investments, as occurred as a result of World War I, hit the existing investor and do 98 In his letter to BP Blackett (above n 64), Coates attributed a rather less significant role to Stamp’s contribution: ‘Stamp was good enough to read my note, as originally drafted, and made certain criticisms, which I have given effect to, so far as I agreed with them. On the whole, I think I may say that he agrees with its main conclusions, although he might modify their expression here and there.’ But on any basis Stamp contributed to the note and agreed with its conclusions. 99 Report on double taxation submitted to the Financial Committee by Professors Bruins, Einaudi, Seligman and Sir Josiah Stamp, League of Nations, 5 April 1923, Document E.F.S.73.F19 Legislative History (see above n 96), 4009. 100 Stamp’s draft Report (see below n 105) states that the US bears the whole relief. The final Report also says that the cost of relieving double taxation under the US system is on the home state’s exchequer. Having given figures to show the UK system requiring a higher yield to compensate for the Moranian tax, the Report says: ‘This will necessitate a modification of the above figures, without, however, altering the practical conclusions’.

Sir Josiah Stamp and Double Income Tax 19 result in double taxation because the investor is locked-in. Again, this should be relieved by the borrowing country, which has probably gained more by the investment than the interest paid, if it wants to attract future capital. Investments in profit-making enterprises may or may not suffer in the same way as the increase in taxation may be compensated by increased profits, in which case there is no claim for relief except at the margin, again to be provided by the borrowing country if it wishes to continue to attract further capital. Stamp and Seligman corresponded on general economic principles concerning foreign investment over the following nine months,101 by which time the League of Nations were pressing for them to finish their report. This correspondence did not argue the merits of the best way to give double taxation relief. Bruins had not taken part in the correspondence but wrote to Stamp on 13 July 1922,102 making several points, one of which was to point not only to Dominion Income Tax Relief but also to the Dutch method of avoiding double taxation with the ‘Netherlands-Indies’, and that of the cantons of Switzerland103 and the German states,104 all of which used exemption by the residence state (although he did not point this out), as indicating that the problem was not only one of preventing rates of interest adjusting themselves to the new conditions. Unfortunately the opportunity to consider exemption was not pursued. Seligman suggested in his last letter that Stamp make a first draft of the report, and that it should deal with whether the source or residence state should give relief. His draft was in two parts, sent on 20 February 1923 and 1 March 1923. Coates’s analysis is repeated in Stamp’s draft Report,105 which is similar to Part I of the final 1923 Report. This emphasises that 101 Seligman commenting on 23 November 1921, Stamp replying on 2 February 1922, Seligman on 31 March 1922, Stamp on 30 May 1922 and Seligman on 20 June 1922 (Seligman archive, above n 95). 102 The National Archives IR74/179. Stamp’s reply of 25 July 1922 merely referred to ‘the importance of finding a true principle . . . and trusting entirely to economic conditions and individual economic knowledge to carry out a full process of adjustment’. 103 Swiss inter-cantonal case law from 1848 applied exemption with progression to various classes of income: See JF Avery Jones et al, ‘The Origins of Concepts and Expressions Used in the OECD Model and their Adoption by States’ [2006] British Tax Review 695, 761; (2006) 60(6) Bulletin for International Taxation 220, 253. 104 Starting with the German Imperial Double Taxation Law 1870, see the chapter by J Hattingh ‘On the Origins of Model Tax Conventions: Nineteenth-Century German Tax Treaties and Laws Concerned with the Avoidance of Double Tax’, this volume, Chapter 2. See also P Harris, Corporate/Shareholder Income Taxation (Amsterdam, IBFD, 1996) 288–91, citing E Seligman, The Income Tax a Study of the History, Theory, and Practice of Income Taxation at Home and Abroad (New York, Macmillan, 1911), available at http:// archive.org/details/cu31924021092733. 105 Drafts dated 20 February 1923 and 1 March 1923 in the Seligman archive (above n 95) containing what became Pt 1 (Economic consequences of international double taxation), part of Pt II (General principles which govern international competence in taxation), s I (General observations) and Pt III, s I (The general methods of avoiding double taxation) of the 1923 Report. The remainder of Pt II derives from Seligman’s draft sent to Stamp on 8 March 1923.

John F Avery Jones CBE

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the only need for relief is for investment made before the imposition of, or increase in, the source tax; investment made later took into account the source tax and was made on the basis that there was no relief. Source tax prevents new investment unless the burden of tax is thrown back on the taxing country. The second part of Stamp’s draft Report, which became Section I of Part III of the 1923 Report, contains a passage foreshadowed in Stamp’s letter to Seligman of 30 May 1922, arguing against source taxation as the means of avoiding double taxation in remarkably strong language. This survived in the final 1923 Report:106 This preference for origin as the prime principle is of a piece with the common instinct that taxes are paid by things rather than by persons. But if we recognised facts and were not prevented by historical accidents and administrative cowardice or frailty from taxing every man in one sum upon his total resources instead of getting at him piecemeal, the ‘origin’ idea would be far less instinctive. It leads direct to the consequence that countries’ creditor on balance should bear the main cost of relieving double taxation, and countries debtor on balance should contribute nothing to that cost. Although countries hold so instinctively to this origin principle in theory (and actually apply it when the foreigner has made investments already and is helpless), they drop the principle at once as soon as the practical question of new investment arises. Can, origin then, be so sacred a principle?

This approach is in stark contrast to Stamp’s evidence to the Royal Commission,107 in which he suggested avoiding double taxation by allowing the source state to impose only a source rate of tax and the residence state to impose only a residence rate of tax.108 What had made him change his mind? The most likely explanation is that Coates’s note, drafted with Stamp’s ‘constant collaboration’, took the economic analysis further than Stamp had previously considered, and that in his evidence to the Royal Commission he relied instinctively on source taxation particularly as it was central to the UK system domestically. With the zeal of a convert, he adopted the new view by being extra-critical of the old one.109 The point made in the quotation above—that if full source state 106

Part III, s 1, 4th para. See ibid for Stamp’s draft Report. We can discount Dominion Income Tax Relief for this purpose because source taxation was inevitable for the reasons given in the text at n 33 above. Stamp was, however, a free agent in giving his evidence to the Royal Commission and also (subject to the views of the other economists) in the 1923 Report, above n 99. 108 Ignoring that Dominion Income Tax Relief would have applied to Australia. 109 I have sympathy with Stamp’s biographer, JH Jones, saying that ‘Nevertheless, anyone who read all that Stamp wrote upon the subject [of double taxation] might still find difficulty in deciding what Stamp’s own views were. Perhaps he wrote too much and in attempting to express the same ideas in different ways was apt to confuse himself as well as the reader. It has already been suggested that he had been and was still passing through a period in which abstract thought seemed to be in conflict with economic realities’ (Jones, above n 40, 144). My own view is that on this occasion his views certainly changed and the reason 107

Sir Josiah Stamp and Double Income Tax 21 tax remains, any relief has to be given by the residence state, and therefore by capital exporting states—probably influenced his thinking.110 Stamp’s draft report lists four ways of preventing double taxation that are also contained in the final 1923 Report in materially the same form (except where changes are noted).111 In short, these were112 (1) credit, (2) no tax in the source state, (3) splitting the tax, which is similar to revenue sharing, and (4) allocation of types of income by treaty, interestingly with the assumption that there would be credit113 by the residence state where the source state was permitted to tax. Exemption by the residence state, which was one of the systems advocated in evidence to the Royal Commission, was conspicuous by its absence. This is particularly strange not only because it was the method used by the Netherlands from the beginning of its income tax in 1893114 which Bruins might have been expected to promote,115 but also given that the conclusion of Part II (‘General Principles which Govern International Competence in Taxation’) was to allocate various types of income for taxation by one or other country, the consequence of which is exemption by the residence state for income allocated to the source state; Part III, which contains the four methods, is headed ‘Application of the Foregoing Principles’. The first three methods are applicable to all types of income without differentiation; was that his abstract thought process had moved on as a result of the analysis in Coates’s paper, which might have been Stamp’s or Coates’s work. 110 See the reference in the quotation above to the consequence of the primacy of source taxation being that the cost of relief would be borne by countries that were creditor on balance (like the US and the UK). 111 In the 1923 Report, above n 99, this is contained in Part III, s I, 41–42; Legislative History, above n 96, 4,045. 112 The 1923 Report’s methods (1) and (3) mirror two that had been advocated to the Royal Commission (see the text at nn 15–32 above for the Royal Commission’s four possible methods), method (2) had also been advocated by two witnesses to the Royal Commission but was dismissed by the Sub-committee (see above n 32) and method (4) is one that the Royal Commission had not considered, presumably because their approach was to treat all foreign income in the same way and they were not considering separate treaties with each of the Dominions; unsurprisingly, no consideration was given to the uniquely British remittance basis by the four economists. 113 Mainland European treaties of the time used method (4), but with the automatic consequence of exemption by the state that was not permitted to tax. 114 Taxation of Foreign and National Enterprises, vol 2 (League of Nations, 1933) 347. This was a type of exemption that left some residence state tax by exempting the tax on the assumption that the foreign income was the only income, which seems to be an encouragement to foreign investment. Much earlier, the Netherlands exempted shipping on a reciprocal basis from a license tax (droit de patente) under an Act of 1819, which might be the earliest legislation concerning double taxation: JG Herndon, Relief from International Income Taxation. The Development of International Reciprocity for the Prevention of Double Income Taxation, Chicago, Callaghan and Co, 1932) 11. 115 Bruins’s letter to Stamp (see text at nn 104 and 105 above) may have been intended as an argument for exemption as the guiding principle, but he did not spell this out and Stamp clearly did not appreciate it. Prior to the meeting in Geneva from 14 to 16 March 1923 (see below n 119), Bruins had also written to Seligman (on 8 March 1923), making some general comments and enclosing some observations (Seligman archive, above n 95). None of these raised the question of exemption.

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hence the stated objection to credit that it puts the residence state at the mercy of the source state’s increases in tax. Only the fourth, which was already the model for European tax treaties116 and would continue to be, differentiated between types of income. Seligman commented at the end of his draft of 8 March 1923 that method (2), which Stamp preferred, ‘would seem to be equally inadmissible in many countries’.117 He was presumably thinking of impersonal taxes.118 Seligman also said that method (4) ‘seems to me [to be] the logical one’, hence the deletion of Stamp’s words in italics above that ‘It cannot be said that the distinction is wholly logical’. The final section of the 1923 Report which deals with the conclusion for income tax seems to have been written while Stamp, Seligman and Bruins were in Geneva from 14 to 16 March 1923,119 so no correspondence or separate drafts are available to show how they resolved these differences. Stamp then left Geneva while Seligman and Bruins continued their discussions, with Seligman writing to Stamp on 22 March 1923120 saying ‘we have toned down a little your advocacy of Method 2, and have attempted to show that in some respects it really does not differ much from Method 4’.121 Stamp accepted the changes,122 but what these were has to be deduced from the final 1923 Report. 116 Particularly Germany–Czechoslovakia (1921), of which Mitchell Carroll said ‘introduced the motif for the handling of mutual tax problems in Central Europe’: MB Carroll, Prevention of International Double Taxation and Fiscal Evasion: Two Decades of Progress under the League of Nations (Geneva, League of Nations, 1939) II.A.8. This provided for tax to be charged only in the residence state except for source taxation on land, including mortgage interest, permanent establishments, including for professions, salaries and pensions from public funds, and income from capital where tax was deducted at source. Relief by exemption was a consequence. 117 Seligman archive, above n 95. 118 Most mainland European countries at the time had impersonal taxes (impôts réels: taxes in rem for which the attributes of the owner were irrelevant, ie source based taxes on separate types of income), in contrast to personal taxes (income tax), for which the attributes of the owner were relevant. It is customary to make this distinction between personal and impersonal taxes, although Seligman points out in Double Taxation and International Fiscal Cooperation (New York, Macmillan, 1928), available at http://www.ssef.it/sites/ssef/files/ Documenti/Documenti%20storici/ Testi%20rari/Seligman_%20Double_Taxation_and_International_Fiscal_Cooperation.pdf, that impôts réels had attributes of personal taxes, such as taking mortgage interest into account when taxing land and taking the taxpayer’s total income into account. Coates reviewed Seligman’s book in WH Coates, ‘Double Taxation and Tax Evasion’ (1929) 92(4) Journal of the Royal Statistical Society 585, 593 somewhat critically, saying ‘He has indeed lost sight of the wood of greater productivity in concentrating his gaze on the trees of taxation’. The later League of Nations 1927 and 1928 (1a) drafts had different provisions applying to personal and impersonal taxes, but the 1928 (1c) draft, which was already the system in use for mainland European tax treaties, as was the case with Germany–Czechoslovakia (1921) (see above n 116), treated both in the same way. 119 Seligman was in Geneva from January to June 1923; Stamp and Bruins met with him there from 14 to 16 March 1923 (League of Nations Archive, Geneva, Box No R362, document EFS 74 R18). 120 League of Nations Archive, Geneva, Box No R362, document 26735. 121 See 1923 Report, above n 99, 48; Legislative History, above n 96, 4052. 122 Above n 120.

Sir Josiah Stamp and Double Income Tax 23 The 1923 Report makes a distinction between different types of taxes. It applies method (4) in the section headed ‘Application of these Principles to Death Duties and Property Taxes’, the last paragraph of which states that this is applicable to impersonal taxes, which gives surprisingly little prominence to the only type of tax that most of the European countries had.123 This was what existing treaties provided. In relation to income taxes, which did not then exist in most mainland European countries,124 the 1923 Report dealt with the four methods of avoiding double taxation by process of elimination, although this clearly does not represent Stamp’s thought process. Method (1) (credit) was rejected out of hand as providing ‘no complete and proper solution of the matter’125 in the view of both Seligman and Stamp. Their reason must lie in their doubt that creditor countries ‘would ever agree permanently to put their exchequers at the mercy of all the unknown increases of taxation of foreign Governments’.126 Professor Thomas Adams, who had introduced the US foreign tax credit system in 1919, must have been surprised to read this.127 But since the economists’ terms of reference included treaties which they specifically envisaged in relation to methods (3) and (4), these could limit the source state tax (as indeed they recommended in relation to method (4), and as treaties would in future do for dividends, interest and royalties), the objection does not seem to be wholly valid. The 1923 Report says of method (4) (different treatment of different types of income by treaty) that ‘In theory we should, of course, consider that the fourth method would be the soundest’.128 Seligman must have written this because Stamp’s draft in the words in italics above had described this method as illogical and very complicated in practice but ‘nevertheless it may do something in theory to meet the present state of opinion on the right to taxation’. The 1923 Report goes on to accept that a major problem was that the taxpayer could affect the nature of the income by interposing (or removing) a company. It concludes with Stamp’s view that ‘it will be seen that simplicity only exists in a minority of cases 123

See text at n 137 below. The 1923 Report mentions that income taxes existed in the UK, the US, the German Empire and the part of the French tax called impôt global, and it had been proposed but not implemented in Italy (it did not take effect until 1925). The Netherlands also had an income tax alongside its impersonal taxes. 125 1923 Report, above n 99, 48; Legislative History, above n 96, 4,052. 126 See 1923 Report, ibid, 42; Legislative History, ibid, 4,046. They meet this objection in method (4) by saying that it might be desirable to impose a limit on the source state tax by treaty. In Seligman, above n 118, he says at 135: ‘it means that the United States is making a present of the revenues to other countries . . . It is an over-generous and one-sided arrangement’. 127 He wrote to Seligman on 9 March 1925 commenting on newspaper reports of the 1925 Report, saying that ‘It impresses me on the whole as very wise’, the Seligman archive, above n 95, suggesting that he did not see credit as a general solution (or the newspaper reports did not deal with credit). 128 1923 Report, above n 99, 45; Legislative History, above n 96, 4,049. 124

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involving income tax and that we soon get into the region of impracticability if we attempt to apply method 4 with precision’.129 Stamp seems to have succeeded in qualifying Seligman’s view considerably. Method (3) (splitting the tax between the two states) suffered from the fact that economic theory did not indicate what proportions should be adopted.130 The rate would need to be ‘redetermined piecemeal for each separate country with which it had relations’.131 But since treaties were being considered, which are likely to differ between different states, it is not clear why this was an argument against this method. By process of elimination, this left method (2) (no source country tax), which, of course, was not politic for the Royal Commission to have suggested as several of the Dominions taxed only on a source basis. As impersonal taxes had already been dealt with, this problem may not have been so serious for mainland European countries, with minor additional personal taxes. If the two states were fairly equal to each other in relation to capital exporting or capital importing,132 the economists said this would be the simplest method. In addition, this is the method already used when governments borrow; it accords with the true economic interests of the investments of the country; and it avoids the complications of the other methods. Stamp seems to have achieved most of what he wanted. The remaining problem was that of a treaty between a capital-importing and capital-exporting country, for which their preferred solution was to adopt method (2) administratively but to make the result equivalent to method (4) by means of revenue sharing. Thus, no tax would be levied at source (or the source tax would be repaid to non-residents), which results in the capital-importing state giving up more initially. This imbalance would be compensated by a payment by the other state to equate the result to the capital-importing state retaining tax on items that it would have been permitted to tax at source if a treaty had adopted method (4). This suggestion seems surprisingly complicated in practice for it to have been advocated: it would require excellent statistics by a state of the amount and type of income going to the other state. The economists warned that, while taxpayers had an incentive to claim double taxation relief, governments would have to obtain the facts from the individuals who no longer had the same incentive to give it. It might have worked in the UK, since, although deduction at source applied to most types of income equally to residents and non-residents, the effect of operating 129

1923 Report, ibid, 45; Legislative History ibid, 4,049. These must be Stamp’s words because Seligman’s draft of Part II gave proportions for each of the categories of wealth in the table at 39 (Legislative History, above n 96, 4,043); for example, land 5/6 origin and 1/6 domicile, and factories ¾ and ¼ respectively, which must be arbitrary. In the final 1923 Report only the preponderant element is shown. 131 1923 Report, above n 99, 46; Legislative History, above n 96, 4,050. 132 Presumably they had in mind that, say, two capital importing states might have equal flows of income between them. 130

Sir Josiah Stamp and Double Income Tax 25 method (2) meant that non-residents would have to reclaim it and so the Revenue would have the required information. If states did not want to adopt the proposal, they would have to adopt method (4) coupled with payments between the states, but they warned that there were many practical and theoretical difficulties involved. It is not clear why method (4) would require further payments between the states. The economists summarised their conclusions: (1) On the subject of income taxation in its developed form, the reciprocal exemption of the non-resident under method 2 is the most desirable practical method of avoiding the evils of double taxation and should be adopted wherever countries feel in a position to do so. (2) Where method 2 is repugnant owing to a reluctance to abandon the principle of origin, method 4 as modified by method 3 may be the subject of mutual conventions; but even then it is best carried out by an administrative system similar to method 2, supplemented by a collective settlement on agreed lines between the two Governments. (3) Where countries desire method 4, but do not care to have it carried out by combining method 2 with such an overhead government settlement, they must make the best arrangement they can under method 4, perhaps modified by method 3. But we hold out no hopes of this proving to be a smooth and practicable arrangement. It can be only approximate and not an instrument of that degree of sensitiveness and accuracy which developed communities expect. Looking forward to the future, the influence of example by others and the spirit encouraged by the operations of the League of Nations indicate the possibility of a development away from localised ideas and from the earlier stages of economic thought typified by strict adherence to the principle of origin. Moreover, as semi-developed countries become more industrialised, with the resulting attenuation of the distinctions between debtor and creditor countries, the principle of personal faculty at the place of residence will become more widely understood and appreciated and the disparity between the two principles will become less obvious, so that we may look forward to an ultimate development of national ideas on uniform lines toward method 2, if not as a more logical and theoretically defensible economic view of the principles of income taxation, at least as the most practicable solution of the difficulties of double taxation.133

This represents a victory for Stamp’s new views in favour of method (2) over Seligman’s in favour of method (4).134 Typically for Stamp, as the 133

1923 Report, above n 99, 51; Legislative History, above n 96, 4,055. For this reason I am doubtful about Graetz and O’Hear’s (above n 94) conclusion in their footnote 215 that ‘the relative contributions of each of the “four economists” to the 1923 Report may be ranked, in descending order of importance: Seligman, Stamp, Bruins, and Einaudi’. I would reverse the order of the first two to reflect their contribution to the conclusion, while acknowledging that Seligman’s contribution to Part II is the longest part of the Report, and that Seligman’s view prevailed in practice in the long term. 134

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first and last sentences of the quotation show, practicality prevailed over theory. The 1923 Report was obviously written from the point of view of creditor (capital exporting) countries, the US,135 the UK and the Netherlands, with unfortunately Professor Einaudi from Italy (a debtor country) taking a less active part and signing the 1923 Report without being able to attend their only meeting.136 Seligman said later that: the report, perhaps unconsciously, voiced the desires and principles of what may be called the Teutonic type of fiscal system. On the other hand, inadequate attention was paid to what may be termed the Romanic type as found in countries like France, Italy and Belgium, none of which was represented at the committee meetings.137

So far as the writer is aware, Stamp hardly ever pursued double taxation any further after the 1923 Report—or even taxation generally. The two exceptions were, first, the 1924 Committee on National Debt and Taxation, also under the chairmanship of Lord Colwyn, though the emphasis of that committee was more on the post-War debt than on the detail of taxation. The main taxation issue was whether there should be a capital levy, which the majority report of the committee (including Stamp) decided against and even the minority report did not support strongly. Secondly, Stamp played an important part in the Dawes Committee in 1924 on German reparations, chairing the Sub-committee on the German budget, for which taxation in Germany was an important aspect. His official contact with the Revenue had ceased before the 1923 Report was finalised.138 Contrary to his earlier views, Stamp was now advocating no source state tax as the preferred method of avoiding double taxation both immediately and as the ultimate goal for the future. What conclusion can one draw about his original evidence to the 1920 Royal Commission? Even that evidence was regarded by him as theoretical and Utopian, but, more importantly, he had effectively disowned it in the 1923 Report. The 1923 Report therefore reflected his considered view.

135 Before World War I the US was a debtor country but, through its exports during the war, it repaid its borrowings from and became a lender to Europe: Jones, above n 40, 235. 136 Seligman did include some amendments suggested by Einaudi, who deliberately decided to put his name to the 1923 Report. The other three met from 14 to 19 March 1923 in Geneva and finalised the 1923 Report (subject to the correspondence noted in above nn 121 and 123) (Minute of the Financial Committee, containing a summary of the 1923 Report, 5 April 1923, E.F.S.74.N.18). 137 Seligman, above n 118, 141. 138 His letter to Seligman of 21 October 1921 (above n 95) mentions that he had a three-year retainer in an advisory capacity from the Revenue, presumably from when he left in 1919 and ending in 1922.

Sir Josiah Stamp and Double Income Tax 27 S U B S EQU ENT H ISTORY

One would like to have been able to say that the 1923 Report was the economic foundation for the future of double taxation relief, or even of tax treaties, but that is not the case.139 The 1923 Report shows signs of different parts being written by different authors and not being coordinated properly, which may be because the bulk of it was finalised during March 1923. Coates was particularly critical of Seligman’s part.140 Subsequently, at the League of Nations in 1925, a small committee of technical experts141 took the next steps. They paid tribute to the 1923 Report and followed it in proposing that method (4) be applied for impersonal taxes and method (2) for personal taxes (although they accepted that with personal taxation there might be source taxation of immovable property and business establishments142), which required separate treaty provisions for each type of tax. However, the 1925 Report was more influenced by the practice than the theory;143 they considered all the treaties that had 139 A letter from Stamp to Seligman of 8 November 1923 about the Government Experts’ meeting says that Sir Percy Thompson (the UK Technical Expert) had a very successful time at the meeting in June, but at the meeting in October ‘France and the rest of them went “scudding back” to origin even in the clear case of public loans and at present nothing will shift them’ (Seligman archive, above n 95). Sir Percy wrote in a memorandum to the Chancellor of the Exchequer that he had been in a minority of one in advocating no source tax on government and municipal bonds at the Fiscal Committee meetings from 8 to 13 October 1923: the National Archives IR40/3419, Pt I. 140 WH Coates, ‘League of Nations Report on Double Taxation Submitted to the Financial Committee by Professors Bruins, Einaudi Seligman and Sir Josiah Stamp’ (1924) 87(1) Journal of the Royal Statistical Society 99 points out that the two parts do not fit together well, and he is highly critical of Seligman’s Pt II conclusion that ‘The ideal solution is that the individual’s whole faculty should be taxed only once, and that the liability should be divided among the tax districts according to his relative interests in each’ on the basis that ‘No economic or other arguments are adduced in support of this dogma, nor is there any reconciliation of it with the doctrines expounded in Part I of the Report. In short, it begs the whole question, and the subsequent analysis of economic allegiance into the four elements of origin or economic location, physical situs, enforceability and domicile, together with their detailed application to various kinds of property and income, rest upon no appeal to economic reasoning such as distinguishes Part I of the Report.’ 141 The countries represented were Belgium, Czechoslovakia, France, Great Britain, Italy, the Netherlands and Switzerland. All except Great Britain and the Netherlands were net importers of capital; and all except Great Britain (with the possible exception of local rates, as Seligman pointed out, above n 118, 72) had impersonal taxes (although Sir Percy Thompson is later recorded as saying at the Fiscal Committee 3rd Session (1930) that the British tax was personal when applied to a resident, and impersonal when applied to a non-resident: the National Archives IR40/3419 (Part 5); and Stamp had said in 1919 that up to 14 years earlier the UK tax had been a tax in rem (Stamp, above n 5, 1921 edn, 17)). Note the absence on the committee of the US (which was not represented until 1926 leading to the 1927 report) and Germany, the other countries with personal taxes, so that Great Britain was the sole country with only personal taxes (the Netherlands had both personal and impersonal taxes). 142 1925 Report, above n 96, 32; Legislative History, above n 96, 4092. 143 Coates was also critical of the 1925 Report in ‘Double Taxation and Tax Evasion’above n 118, 403. He stresses that the experts had ‘no clear guide’ from the four economists in their 1923 Report; that the seven countries represented had diverse interests; that

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recently been made, mainly between the newly independent states arising after the First World War from the break-up of the Austro-Hungarian Empire: Austria, Czechoslovakia, Hungary, Romania, Poland, and the Kingdom of the Serbs, Croats and Slovenes. Only two of these treaties had separate provisions for personal and impersonal taxes, and even they permitted even more source taxation for personal taxes than the Report envisaged.144 Although the Italian chairman of the committee of technical experts, Mr d’Aroma, loyally managed to make a number of further Italian treaties on these lines, the idea was not taken up by countries generally. Other treaties made no distinction between these two types of taxes but treated both the same way. The volume of such treaties meant that the 1925 Report’s approach of having separate provisions for personal and impersonal taxes had no real chance of success. The consequence of treating both types of taxes in the same way was bound to be that source taxation would apply to a considerable extent for personal tax, completely contrary to Stamp’s idea. These treaties followed the 1923 Report’s method (4)145 in treating different types of income differently in spite of the economists’ warning that it was impractical. The impracticality of it has increased through the dividing lines between different types of income becoming blurred by the use of derivatives and by easy options in some countries for entities to be treated as transparent or opaque. This approach has continued to be the pattern for tax treaties to this day, so in the long run Seligman’s view prevailed. The 1923 Report was more influential in the UK which argued strongly against any source tax, contrary to the domestic rule of taxing virtually everything at source. It was for this reason that the effect of the Royal Commission’s refusal to deal with double taxation outside the Dominions (except for deduction of foreign tax from the tax base) lasted for such a surprisingly long time. It took another 25 years and another World War before anything was done. In 1944, by which time the combination of tax rates in both countries had become even more serious,146 the US the representatives were not economists; and the difficulties of working in international committees when they wanted a solution in a unanimous report but each had their own outlooks (at 404–05). He points out that the principles that impersonal taxes should be imposed by the source state and personal income taxes by the residence state ‘have well-nigh disappeared’ by the numerous exceptions. 144 Italy–Austria–Hungary–Poland–Romania–Kingdom of the Serbs, Croats and Slovenes (1921 and 1922 (only ever in force between Italy and Austria), which did not make the distinction between personal and impersonal tax provisions by name but did so in effect) and Czechoslovakia–Italy (1924), both of which provided for source taxation for personal tax on immovable property, mortgages, industry or trade, and work. 145 This was also the method adopted in the League of Nations’ 1928 draft 1c. 146 Companies paid the UK standard rate of 50% plus 5% national defence contribution (later called profits tax), and the US corporate rate of 40%. Individual rates in the US were 6% plus surtaxes of 13–82%; in the UK the standard rate was 50% plus surtax rising to 9s 6d (47.5%).

Sir Josiah Stamp and Double Income Tax 29 asked for a tax treaty, and it was clear to the UK Revenue even before negotiations started that the only way to have a treaty was to adopt a similar credit relief to that in the US. Since the US credit system was more favourable than Dominion Income Tax Relief because it gave credit up to the full rate of tax rather than half the rate, if it were given to the US it would consequently have to be extended to the Dominions and probably everyone else.147 Having conceded the US credit system in the treaty with the US, the UK then had to make a large number of treaties in a short time with the Dominions so as to give them the benefit of the better relief that the US enjoyed. It made about 50 treaties with Dominions and Colonies between 1945 and 1955, as well as treaties with 11 other countries with which it had been unable to conclude treaties in the past because of its attitude to not allowing source state tax.148 Probably because of the slow progress in concluding treaties with some countries (India in particular), unilateral credit relief was introduced in 1950. Unfortunately Lord Stamp (as he had then become) did not live to see these post-war developments. He, together with Lady Stamp and their eldest son, died in the war when an enemy bomb fell on his London house in April 1941.

147 Inland Revenue memorandum, 4 April 1944: the National Archives IR63/167, 482; Note to the Chancellor, 19 May 1944, 489. The Revenue’s earlier internal Report of the Double Taxation Relief Committee (1930), which had been instructed to start from the League of Nations 1928 draft 1b, which had been negotiated by the US and UK representatives for use between states with only income taxes (and not impersonal taxes), had come to the same conclusion in favour of credit (para 24), which was included in that draft (the National Archives IR40/4680), as had Mr GB Canny, a member of the Board of Inland Revenue, who had deputised for Sir Percy in the 1927 Report, in ‘Musings on Double Taxation’ (29 July 1932) in the National Archives IR40/4156. 148 The UK made treaties with: Canada (1946), France (1947), South Africa (1947), Australia (1947), New Zealand (1947), Sweden (1949), Israel (1950), Denmark (1950), the Netherlands (1950), Norway (1951), Finland (1953), Greece (1954), Belgium (1954), Switzerland (1955), and Germany (1955) (plus about 45 treaties with other dependencies) up to 1955.

2 On the Origins of Model Tax Conventions: NineteenthCentury German Tax Treaties and Laws Concerned with the Avoidance of Double Tax JOHANN HATTINGH

A BSTR A C T This chapter suggests that nineteenth-century tax treaties and federal laws of the German states that concerned double taxation established the basis from which tax treaties and model conventions developed in the following centuries. The content of these German tax treaties and laws was initially inspired and influenced by general legal concepts such as equality and the freedom of establishment, which were aimed at the unification of the German states. It fell mainly to the German courts to develop autonomous tax-specific interpretations of these treaties and laws that served the effort to eliminate double taxation. The body of knowledge that accumulated in this manner had a considerable influence on domestic tax reform in the federal German states towards the end of the nineteenth century. The result was a significant alignment of domestic income tax regimes with an existing allocation of taxing rights along the source and residence dichotomy established by the first tax treaty of 1869. The cases and domestic tax reforms led to a refinement of concepts; for example, a taxpayer’s place of residence and a permanent establishment of a trading entity. The further result of this convergence of ideas was that the federal German states were able to conclude uniform tax treaties with other continental European countries at the start of the twentieth century. In this manner, the proliferation of similarly worded bilateral tax treaties began.

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H

ISTORICAL RESEARCH PERFORMED for the purposes of this chapter suggests that the tax treaties and federal laws of the German states that concerned double taxation in the nineteenth century established the basis from which tax treaties and model conventions have developed since then. The historical research is also used to illustrate that the content of these German tax treaties and laws was initially inspired and influenced by general ideas and concepts encountered in other branches of German law. The catalyst for the development and refinement of autonomous tax-specific interpretations that served the effort to eliminate double taxation was the jurisprudence of the federal German courts. The body of knowledge that accumulated in this manner had a considerable influence on domestic tax reform in the federal German states towards the end of the nineteenth century. The result was a significant alignment of domestic income tax regimes with an existing allocation of taxing rights along the source and residence dichotomy established by a tax treaty of 1869. The further result of this convergence was that the federal German states were able to conclude uniform tax treaties with other continental European countries at the start of the twentieth century. In this manner, the proliferation of similarly worded bilateral tax treaties began. This chapter does not do several things. It is not comprehensive. The history described by this chapter is not the complete history of model tax conventions; it only deals with the beginning—and it only deals with the beginning in the federal German states. The positions in Switzerland and Austria-Hungary, where legal solutions to double taxation were also developed from about 1870 onwards, are not dealt with. The chapter thus serves to introduce only selected nineteenth-century German source materials. Tax treaties played a particular role in the nineteenth-century German unification effort. That fusion was based on economic union and harmonisation of laws pursuant to the constitutional ideals of freedom of movement and establishment. The chapter does not, however, deal with EU tax law, even though the parallel is noticeable.

The Rise of Fiscal Centralism among the German States of the Nineteenth Century The history of the German states during the nineteenth century is centred on the theme of unification. When the Holy Roman Empire was abolished in 1806, it encompassed nearly all the German states, which included hundreds of small counties, duchies, free cities and kingdoms. It had

On the Origins of Model Tax Conventions 33 preserved for nearly a thousand years the disunity of the German speaking territories. The Napoleonic Wars of the early nineteenth century reduced the number of German states to 39 members of the German Confederation, established pursuant to the Congress of Vienna of 1815. It was only a selection of these states that much later (in 1871) became the unified German Empire. This empire did not follow the borders of the former Holy Roman Empire or the borders of Großdeutschland (Great Germany), a concept that envisioned the unification of all German-speaking region; instead, in the main it followed the borders of the Prussian-led Zollverein (the customs union), established in 1834. The reason why this happened has engaged many historians; the most important factors appear to have been unification for a rational idea (trade) and Prussia’s capacity to lead an international institution.1 Austria, never a member of the customs union, left the German Confederation after the war with Prussia in 1866. Prussian efforts for deeper integration thenceforth redoubled. It is at this point in history that concerns about double taxation become a feature of a new political and legal imperative for harmonisation of direct taxes. As will be seen below, legal mechanisms to avoid double taxation, whether in the form of bilateral tax treaties or federal legislation, were originally conceived as a political tool to achieve a fiscal centralism that would enhance the unification of the German territories.

The North German Confederation and the Prussian Drive for Integration, 1867–71 The formation of the North German Confederation in July 1867 marked the beginning of a period of intensive economic integration. For the first time, a legally required obligation for Member States to harmonise their fiscal laws was established. In this regard, Article 3(1) of the 1867 Constitution of the North German Confederation was a key provision that set out the legal aspiration of equality before the law and the freedom of movement and establishment within the unified German states. It determined that:2 There shall be a common citizenship for the entire federal territory, and the nationals (subjects or citizens) of each State of the Confederation shall be treated in every other State as natives, and shall accordingly have the right of becoming permanent residents; of carrying on business; of filling public offices; 1 C Clark, Iron Kingdom: The Rise and Downfall of Prussia, 1600–1947 (London, 2006) 393–94. 2 Verfassung des Norddeutschen Bundes 1867. Translation based on that by EH Zeydel, Constitutions of the German Empire and German states (Washington, 1919), of the identical provision in the 1871 Constitution of the German Empire.

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Johann Hattingh of acquiring real estate; of obtaining citizenship, and of enjoying all other civil rights under the same conditions as those enjoyed in their native State, and they shall also have the same treatment as regards judicial remedies and the protection of the laws.

As will be seen below, the constitutional rights granted by Article 3(1) were in many ways the basis for further efforts to achieve unification of the German states. The occurrence of double taxation within the North German Confederation caused an obstacle to the realisation of these constitutional aspirations. The creation of a common citizenship and guaranteed constitutional rights of equality and freedom of movement and establishment is the origin of the German effort to eliminate double taxation. The 1867 Constitution did not, however, take away the fiscal sovereignty of the Member States.3 Instead, the various taxes imposed throughout the Federation had to be reconciled and harmonised with the positive constitutional affirmation of the individual rights of equality, freedom of movement and establishment. When these taxes presented a barrier to the realisation of these rights, legislative intervention was required. Petitioning the Federal Parliament was a direct way in which federal citizens could realise their new constitutional rights. As will be described below, legislative intervention to remove barriers presented by the simultaneous imposition of direct taxes by the Member States of the North German Confederation initially took the form of a bilateral tax treaty, and later federal legislation. Prussia played a dominant role in the realisation of the 1867 Constitutional provisions. The period after 1867 is marked by a number of customs and trade treaties concluded by Prussia with the other states of the North German Confederation as a means to achieve harmonisation. It is in this context that, in 1869, Prussia concluded a treaty with Saxony ‘for the Elimination of Double Taxation of State Nationals of both Sides’. The treaty was reported to the Prussian House of Representatives for approval on 16 December 1869. The treaty’s provisions have a remarkable modern familiarity. One needs to question why that is so.

T H E 1 8 69 TA X T R EATY BETWEEN P RU SSIA A ND SA XONY

The 1869 tax treaty concluded by Prussia and Saxony has a remarkable resemblance to current bilateral tax treaties. To understand why this is so, a description will follow of the way in which the treaty came about, which in turn requires some understanding of the domestic tax legislation in force 3 Each individual State’s Parliament retained the exclusive right to enact new tax laws, provided these laws did not breach the provisions of the 1867 Constitution.

On the Origins of Model Tax Conventions 35 at the time in both Prussia and Saxony. In addition, the process that gave birth to the conclusion of the treaty will be discussed. The author’s translation of the 1869 tax treaty is attached as Appendix 1.

Domestic Background By the beginning of the nineteenth century, tax was typically imposed on the constituent elements of property (eg taxes on land, buildings and some cases on business). These taxes aimed to reach what Seligman terms ‘the various elements of product’.4 The story of taxation in the German states during the nineteenth century is one about the reduction of excises and the gradual modification of the taxes on product by a return to a method of personal taxation that would reach the wealthy in terms of their ability to pay in accordance with their means.5 In states such as Prussia, land ownership was closely tied to political and economic power and influence. The vested interests of the Prussian landed nobility meant that tax reform was a slow, drawn-out process. For example, significant exemptions from the land tax for large landowners required that the tax base had to be supplemented by a system of taxes on expenditure such as a general excise tax. All these taxes, however, responded badly to the then strengthened idea of ability-to-pay. In addition, these taxes—and particularly excises—posed an obstacle to attempts to integrate the German states in an economic sense. For these reasons, the introduction of a personal tax in the form of income tax could not be immediate. In 1820, the whole of Prussia, except for certain larger towns, became liable for a class tax in addition to the land tax. For purposes of the class tax, the whole population was divided into a number of classes, differentiated according to external criteria (eg social standing, occupation) that did not require any private information. In the towns where the class tax did not apply, certain taxes on products (eg tax on slaughtered animals or on grist) and a stamp tax applied. In addition to the imposition of the class tax, 1820 also saw the remodelling of the Prussian business tax. Businesses were divided into various classes, some of which were taxed in terms of external criteria

4 ERA Seligman, The Income Tax: A Study of the History, Theory and Practice of Income Taxation at Home and Abroad, 2nd edn (New York, 1914) 223. 5 Ibid.

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such as inputs that were common in an industry (eg number of workers, machinery, etc).6 The three main direct taxes that applied in Prussia in 1821 were, in order of the greatest to the smallest yield, the land tax, the class tax and the business tax.7 From 1847 to 1851, efforst were made to introduce a proper income tax, but this was met with strong opposition. As a result, a watered-down ‘class and classified income tax’ was enacted (Die Klassedund klassifizierte Einkommensteuer). The new classified income tax was charged in terms of 30 classes, subject to an upper limit that provided an effective exemption to wealthy taxpayers. It would only be in 1891 that Prussia would finally impose income tax on a general basis on the net receipts at progressive rates under a system where real income had to be declared. The position in Saxony during the first part of the nineteenth century was not too dissimilar from that in Prussia. As in Prussia, at the outset of the century the various taxes found were continuations of older, impersonal taxes. The main tax was the land tax, which was supplemented by a business tax and a poll tax. The poll tax became less important with the rise of excise and the imposition of tax on products (eg a grist tax). All these taxes were subject to reform when Saxony adopted a new Constitution in 1831 and joined the customs union (Zollverein), with the aim to introduce a more equitable system. In 1834, a new business and personal tax (Gewerbe und Personalsteuer) was enacted to form the main source of revenue alongside the land tax. Both the business and personal tax were levied in terms of external criteria, and the legislative machinery was designed in such a way as ‘to avoid as completely as possible all inquisitorial procedure’.8 Seligman classifies the direct taxes imposed by Prussia and Saxony by the end of the 1860s, despite the various attempts at reform, as ‘in reality nothing but a part of a conglomerate system of taxes on product’.9 It is against the backdrop of these domestic fiscal regimes, when the transformation from real taxes to proper income taxes was not yet achieved, as well as the Constitutional establishment of the North German Confederation in 1867, that the treaty concluded between Prussia and Saxony on 16 April 1869 ‘for the Elimination of Double Taxation of State Nationals of both Sides’ ought to be appreciated. The process whereby this treaty was negotiated is now discussed.

6 Ibid, 227; H Hemetsberger-Koller and E Kolm, ‘Globalisation and International Taxation in the XIXth Century: Double Taxation Agreements with Special Reference to the “State of the Fund” Principle’ (2006) 35 The Journal of European Economic History 85, 91. 7 Seligman, ibid, 229. 8 Ibid, 233. 9 Ibid, 245.

On the Origins of Model Tax Conventions 37 The Formation of the 1869 Tax Treaty Shortly after the establishment of the North German Confederation in June 1867, legislation was prepared to give effect to the constitutional norms of freedom of movement and establishment. A special parliamentary commission was tasked with the preparation of a draft law that would set out the consequences of these constitutional rights in more detail. The commission deliberated on the matter during four sessions and published a report on 17 October 1867.10 During its meetings, the commission dealt with a petition by Prussian citizens that owned land in Saxony where they resided more or less continuously. These citizens felt that the imposition of various direct taxes simultaneously both in Prussia and Saxony was ‘incompatible’ with the concept of a common citizenship introduced by the Constitution of the North German Confederation.11 Effectively, they pleaded that this form of double taxation came down to a violation of their rights to equality and freedom of establishment under the 1867 Constitution.12 They accordingly requested the insertion of a clause in the law on freedom of movement that would deal with double taxation, which essentially would amount to a system of exemption in the home state when tax at source was charged.13 The petitioners’ proposed clause on double taxation was not accepted, but their complaint carried sufficient merit for the matter to be escalated to the Federal Government.14 In 1871 a law was enacted to deal with the issue throughout the entire federal territory (discussed under the next heading). The petition’s impact was also of such magnitude that representatives of Prussia and Saxony took note of the possibility to address the problem in a more expedient way through a treaty.15 Thus the process was begun for the conclusion of the tax treaty between Prussia and Saxony. The treaty that eventuated was seen from its inception as only a temporary measure because of the commission’s request for specific federal legislation. The commission recommended the contents of the petition by the Prussian landowners to the federal legislator as ‘material to assess’ and as ‘material for this law’.16 In this way, the reasoning contained in the

10

Anlage Nr 109, ‘Verhandlung des Reichstags des Norddeutschen Bundes 1867’. Ibid. T Clauss, ‘Das Reichsgesetz vom 13. Mai 1870 wegen Beseitigung der Doppelbesteuerung unter vergleichender Berücksichtigung des schweizer Bundesrechts’ (1888) V Finanz-archiv: Zeitschrift für das Gesamte Finanzwesen 147, 148. 13 Anlage Nr 109, above n 10. 14 Ibid. 15 Ibid. 16 Ibid. 11 12

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petition had an impact on the design of the tax treaty between Prussia and Saxony. The following extract from the petition illustrates this point:17 should a national of the North German Confederation move freely within the federal territory and choose his domicile at will, he should not be penalised for this change of location by a double imposed personal tax at the same time; according to § 8 of the Saxon law of 23 April 1850 strangers not even established were subjected to Saxon personal tax, albeit to a lesser extent than residents, who may as foreigners also be subject to income tax in Prussia, according to § 18 of the Law of 1 May; such rules and principles can, however, not be applied to nationals of the North German Federation in accordance with the spirit and purpose of the Constitution of the latter; for they could not possibly be regarded on the same footing as foreigners. The correctness of this view had already been recognized elsewhere because . . . property taxes are only imposed at the place where the land is located. Business taxes are found only in the place of the business operation, municipal taxes are payable only in the municipality where one stays; apart from business and property ownership, the tax can only be paid by the person from their income, whether it be class, income, or personal tax, and consequently they only have to succumb to it once, be it in the home State or in the place where they stay.

From this reasoning, a few key principles that are encountered in the tax treaty between Prussia and Saxony may be extrapolated. First, ‘double personal taxation’ was seen as an impediment to the constitutionally guaranteed freedom of movement and establishment. The petitioners were quite specific in what they meant by ‘double personal taxation’: they provided an example of suffering tax under section 16 of the Prussian Income Tax Act of 1 May 1851 (although they did not reside in Prussia) as well as under section 9 of the Royal Saxon Law of 23 April 1850 regarding additional business and personal tax, which applied to them because they resided in Saxony. One should remember, however, that all these taxes were impersonal and that they were not levied on any measure of actual income. Nonetheless, their complaint appears to be that the same person was settled with two similar sorts of tax simultaneously, even though it taxes on the ‘same income’ were an objective impossibility. Furthermore, it seems that their complaint was not directed at the other taxes (eg land tax) that could be imposed at the same time as the income taxes mentioned. This can be seen in the argument about property tax that, by 1867, was imposed in the German federal states solely at the place where the property was located, which appears to have led to the supposition that all the various direct taxes must be imposed in terms of a uniform connecting factor that was capable of being located in one state only. Such connecting factors were elaborated as the place of a business operation for purposes of business taxes, the 17

Ibid.

On the Origins of Model Tax Conventions 39 place where a person stayed for purposes of municipal taxes and, in the case of taxes imposed on the person, either the state where the person was staying or in his or her home state. This scheme is familiar and can be found back in the OECD Model Tax Convention on Income and Capital. A further impact of this scheme envisaged by the petitioners was the idea that there cannot be one single solution to resolve double taxation in respect of all the different taxes encountered in the North German Federation. From this was borne the idea that each tax should have its own solution. This clearly influenced the draftsmen of the Saxony-Prussia tax treaty. It can be particularly seen in the fact that different rules were drafted in respect of the different direct taxes imposed in Prussia and Saxony. Yet, importantly, there was an attempt to integrate these various rules in a scheme (more on this below). In this way, despite the treaty dealing strictly speaking with several distinct and unrelated direct taxes, it attempted to lay down a single scheme to resolve double taxation. Article 1 of the 1869 Prussia/Saxony tax treaty determined that nationals of Prussia or Saxony were to be subjected to direct state tax only in the federal state to which they belonged as subjects. In other words, taxation on the basis of citizenship was the general rule that had to resolve the ‘double personal taxation’ of which the Prussian petitioner’s complained. Article 2 of the treaty, as an exception to Article 1, was mainly aimed at land and business taxes, as it reiterated the connecting factors used to impose taxes on land and on business under domestic law: Taxes on property as well as on the operation of a fixed trade (on industrial or commercial facilities) and on the income arising from these sources will be paid only in the State in which the property is situated, or in which the business is exercised.

Article 2 was clearly directed to apply to the land taxes and business taxes. Moreover, it also covered taxes on income from property and the operation of a fixed trade, which presumably meant that taxes that took account of, or were paid out of, income from land or business were also covered (eg the Saxon personal tax). Such taxes were primarily and generally dealt with under Article 1, but a sub-rule of Article 2 regulated the interaction: The income from these sources [ie land and business] is exempt from the taxation of the whole of the income assigned to a State under Article 1 insofar as it was already accordingly taxed in the other State [ie where the land was situated or the business exercised] and provided that the tax demonstrably imposed in the other State is deducted from the whole balance of the taxable income amount removed from the State authorised under Article 1.

The sub-rule of Article 2 appears to require that income from land or the operation of a fixed trade had to be actually charged and subtracted

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before the relief of Article 2 could apply (ie exemption in the state of citizenship). The construction of Articles 1 and 2 of the treaty shows that the suggestions by the petitioning Prussian landowners were in effect adopted by the draftsmen. Income from property and from a fixed trade was to be taxed only in the state of situs, thereby allowing for exemption in any other state. What was not suggested by the petitioners, however, was that this should be the exception to a more general rule, namely that all other income of a national was to be taxed solely in the state of which they were a citizen, thereby putting a bar on any source-based tax. This scheme still holds true for most modern model-based double tax treaties, except for the fact that residence replaced citizenship as the main basis.18 The 1869 tax treaty between Prussia and Saxony contained further important exceptions to the general rule of taxation on the basis of citizenship. For example, under Article 3 of the treaty the income items of military persons and civil officials were to be taxed only in the state ‘from whose coffers these receipts flow’. This rule embodied the ‘state of the fund’ or ‘paying state’ principle (Kassenstaatsprinzip).19 Article 19 of the OECD Model Tax Convention concerning the taxation of income from government services still maintains this principle. Article 4 of the treaty contained a specific rule for the income of business assistants, workers and servants, who were to be taxed only in the state where such a person’s place of residence was situated. This rule, however, did not apply to income from real property, which was to be taxed at situs under Article 2 of the tax treaty. These provisions, too, have now evolved into what may be described as principles established in the OECD Model. The right to tax income from employment is in the main allocated to the state of residence of the employee and the right to tax income from immovable property is allocated in all circumstances to the state of situs.20 Article 5 of the treaty addressed the case of taxpayers who were nationals of both Prussia and Saxony. They were to be taxed ‘in both countries in terms of local legislation’. Strange as it may seem in the twenty-first century, the treaty thus expressly allowed such persons to be subject to double taxation. Yet, in the nineteenth century it was not unknown to encounter opinions which held that the payment of tax twice to two sovereign states was justified since the taxpayer enjoyed twice as much security.21 The treaty therefore resolved double taxation only for aliens in either contracting state; it expressly allowed dual-nationals to be subject to double taxation. 18 19 20 21

Compare Arts 6, 7 and 21 of the OECD Model Tax Convention on Income and Capital. Hemetsberger-Koller and Kolm, above n 6, 87. Compare Arts 15 and 6 of the OECD Model. Hemetsberger-Koller and Kolm, above n 6, 89.

On the Origins of Model Tax Conventions 41 The scheme of the 1869 tax treaty between Prussia and Saxony has a remarkable modern familiarity. As already mentioned, the respective domestic tax regimes in Prussia and Saxony in 1869 influenced the design of the allocation rules under the treaty: a general rule based on citizenship applied mainly to income and class tax, with some exceptions for specific categories of persons. For the land tax, the rule was taxation solely at situs. Business tax was to be charged where the business was exercised; the owner of land or of a fixed trade was exempted from residence-based tax on income from these sources. This scheme and these allocation rules to a great degree still form the spine of the OECD Model. The profound connection between the 1869 tax treaty and the base structure of the OECD Model shows a deep seated rigidity in model-based tax treaties.22 Modern income tax systems are very unlike those of Prussia and Saxony in 1869. OECD Model-based tax treaties largely operate in the context of two domestic income tax regimes that in many instances do not charge to tax those income categories that fall along the same lines as those drawn from the domestic tax regimes in the German states of the nineteenth century. At the extreme are income tax regimes that are global in their approach, which is to say that all payments that are linked to an income-earning activity are generally charged to tax in one computation regardless of their individual legal or economic character.23 The idea of double taxation in the nineteenth century is also different from the mainstream understanding today. Settled dogma defines juridical double taxation as the imposition of comparable taxes by two (or more) tax jurisdictions on the same taxpayer in respect of the same taxable income or capital. The treaty between Prussia and Saxony did not state which of the different Prussian or Saxon taxes it actually covered; it referred only, for example in Article 1, to ‘direct State tax’. The Prussian direct taxes at the time were the land, class and classified income taxes, and the Saxon ones the land, business and personal taxes. These were real taxes, so it is questionable whether indeed juridical double taxation in the strict modern sense could have actually occurred in 1869. As mentioned, these various direct taxes were not imposed on the basis of actual income, which is a prerequisite for our current understanding of double taxation. The very conception of double taxation must thus have been different among the German states of the nineteenth century.24 What should not be lost sight of is that the question in 1869 was not whether double taxation according to some theoretical description 22 Commentators refer to this as the ‘schedular nature’ of the OECD Model, eg PA Harris, Income Tax in Common Law Jurisdictions: From Origins to 1820 (Cambridge, 2006) 19. 23 For example, the Australian, Mexican and South African income tax regimes. 24 Much later, the German Imperial Court gave its view on the type of double taxation that arose under the 1870 Imperial Double Taxation Law, which was a copy of the 1869 tax treaty. These cases, dated 7 November 1885 and 18 December 1884, are discussed at 53.

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was present; rather, the issue then was whether simultaneous taxes levied among the German states on the same person infringed that person’s new-found freedoms of movement and establishment (much like contemporary questions under EU tax law). The provisions of the 1869 tax treaty were designed to give effect to those constitutional rights of the individual. As mentioned above, from its inception the tax treaty between Prussia and Saxony was considered a temporary measure whilst the federal government of the North German Confederation prepared federal legislation on the matter. The treaty was accordingly short lived, and ceased to have effect in May 1870. The legislation that took effect thenceforth is discussed next.

T H E 1 8 7 0 I M PER IA L DOU BLE TA XAT ION LAW

On 19 May 1870, an Imperial Law for the Elimination of Double Taxation in the North German Confederation was gazetted. It dealt with the direct state tax liability of persons residing in the Confederation and was aimed at realising the freedom of movement and establishment of citizens of the Confederation. Many, but not all, of the provisions of the 1869 tax treaty between Prussia and Saxony were transplanted into this law. Under the earlier discussion of the 1869 Prussia–Saxony tax treaty, it was recounted that the Federal Parliamentary Commission that dealt with the draft law on freedom of movement recommended on 17 October 1867 that the Federal Government should deal with the petition by Prussian landowners about double taxation by way of new federal legislation. This recommendation was unanimously accepted by the Federal Parliament (Reichstag) of the North German Confederation on 21 October 1867.25 In the debate leading up to this decision, an honourable member for Prussia, the Count de Bethusy-Huc, emphasised that the problem of double taxation was an obstacle to the attainment of the objectives of the law on freedom of movement. The Count proposed a scheme of taxation that would generally result in personal taxation at the place of permanent residence, the taxation of pension capital where the taxpayer lived and the taxation of income from employment at the place where it was earned.26 This position proved to be influential on the design of the 1870 law (and probably also for the tax treaty between Prussia and Saxony, negotiations for which commenced a year later). It is regrettably not quite clear from the historical materials what the source for the Count’s views was.27 He 25

Clauss, above n 12, 148. Ibid. Graf de Eduard Georg Bethusy-Huc (1829–93) was a senior member of the Prussian political establishment. He was a member of an Upper Silesian noble family (one of the so-called Magnatenfamilies) and was heir to vast estates in Upper Silesia and Poland (then 26 27

On the Origins of Model Tax Conventions 43 was a member of the Sixth Commission, which at that point in time was drafting a federal law on the freedom of movement before which the first petition about double taxation served. Early in 1868 three new petitions were brought before the Federal Parliament, partly again by land owners and also by workers who were taxed in their residence state and the state of their employment. In response to these petitions, on 10 June 1868 the Federal Parliament again decided to remedy these matters by way of federal legislation. Later that year, a representative of Saxony informed the Federal Parliament about the treaty negotiations with Prussia that would soon lead to a satisfactory resolution of the problem of double taxation between those two states. On 19 December 1868, the Council of the Federal Parliament decided to leave the matter at bay for the time being, in light of the prospect of the bilateral solution that Prussia and Saxony were developing.28 However, early in 1869 four more petitions about unresolved double taxation reached the Federal Parliament. The Chancellor’s representative again drew the Federal Parliament’s attention to the treaty negotiations between Prussia and Saxony, and expressed the hope that principles would be arrived at in that treaty that could be transplanted, once established, to the whole federal territory.29 Soon thereafter, on 5 May 1869, a Federal Commissioner proposed to the Federal Parliament that the guiding principle should be taxation by the state of which the taxpayer is a subject with an exception for the ‘working classes’ that ought to be taxed on the basis of residence. This scheme in part reflects what was ultimately the position adopted in the 1869 Prussia Saxony tax treaty. On the same date, the Federal Parliament, by a large majority, again tasked the Chancellor to urgently prepare legislation to deal with the problem of double taxation.30 On 14 February 1870 the Chancellor submitted a draft law for the elimination of double taxation to the Council of the North German Federal Parliament. In an accompanying statement, the Chancellor explained the motives for the law as follows:31 Because permission to do business within the federal territory has increased considerably after the adoption of the law on freedom of movement of 1 November 1867 concerning the right of establishment as well as pursuant to the Commercial Code of 21 June 1869, it has become necessary and it will part of Prussia) covering an area in excess of 4000 ha: see H Heffter, Bethusy-Huc, Eduard Graf’ in Neue Deutsche Biographie (Berlin, 1955) vol 2, 193–94). He was also active in the German Customs Parliament: see H von Sybel, The Founding of the German Empire by William I (Boston, 1897) 72. 28 29 30 31

Clauss, above n 12, 148. Ibid. Ibid. As quoted by Clauss, ibid, 150, and freely translated by the author.

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be consistent with the principles sanctioned under the Constitution and these federal laws to eliminate those obstacles such as existing double taxation that oppose the full realisation of these principles. The current draft is intended to achieve this purpose by restricting the right to tax of individual federal states so as to make the multiple taxation of the same object impossible.

The draft law was first considered by the Council Committee on customs and taxation, after which the Federal Council approved it during a meeting on 31 March 1870 on the basis of a detailed report of this committee dated 21 March 1870. Only one change of editorial importance (to § 5) was made by the Federal Council. On the same date, the draft law together with its unchanged motivation was submitted to the Federal Parliament. The Federal Parliament adopted the draft law after readings on 4 and 8 April and 12 May 1870.32 The law was thus proclaimed on 13 May 1870 as the Act for the Elimination of Double Taxation, signed by Chancellor von Bismarck personally on behalf of Kaizer Wilhelm I.33 The Act is referred to hereinafter as the 1870 Imperial Double Taxation Law. It was one of the final but rich legislative activities of the North German Confederation, which was transferred shortly thereafter to the German Empire after its proclamation on 18 January 1871. A new Imperial Constitution (Reichsverfassung) for the German Empire was passed on 16 April 1871. It was based largely on the constitution of the North German Confederation from 1867 and, like that constitution, contained a mixture of monarchical and democratic elements, balancing centralising and federalist features. As before, tax sovereignty remained with each Member State of the Empire. Certain powers regarding taxation were, however, created at the empire level, but these were not exercised until much later.34 As under the 1867 Constitution, the Federal Parliament (Reichstag) of the German Empire had full legislative power to give effect to the rights to freedom of movement and establishment.35 When the original text of the 1870 Imperial Double Taxation Law is considered, it refers to the North German Confederation, but these references should be read as referring to the German Empire after 18 January 1871. The author’s translation of the original Act is attached as Appendix 2. 32

Clauss, ibid. Bundes-Gesetzblatt des Norddeutschen Bundes, No 14, Berlin, 19 May 1870, reprinted in ‘Bundes-Gesetzblatt des Norddeutschen Bundes, No 14, Berlin 19 Mai 1870’ (1997) 24 Internationales Steuerrecht III, III. 34 EM Hucko, The Democratic Tradition: Four German Constitutions (Oxford, 1987), 120. 35 Art 3 of the Constitution of the German Empire, 16 April 1871. 33

On the Origins of Model Tax Conventions 45 The provisions of the 1870 Imperial Double Taxation Law are, as the legislative history recounted earlier indicates, based on the tax treaty concluded between Prussia and Saxony on 16 April 1869. It follows the same structure: section 1 contains the general rule of exclusive taxation by the state of residence of all income, which precluded the state of source to exercise any taxing rights. This main rule is subject to exclusions for the taxation of land, trade and remuneration of civil servants, which had to be exempted by the state of residence.36 Land and the operation of a trade, as well as income therefrom, were to be taxed exclusively by the state of source under section 3, whilst the paying state had taxing rights over the remuneration and pension income of civil and military persons in terms of section 4. The biggest difference between the 1870 Imperial Double Taxation Law and the 1869 Prussia–Saxony tax treaty was the change from citizenship to residence as the main basis for exclusive taxation in a particular federal state. The hierarchy of rules was as clear: residence-based taxation was the main rule for the taxation of all income. Section 2 established a subordinate set of rules that replaced residence-based taxation in specific circumstances. For example, if a taxpayer did not have a place of residence within the German Empire, the state where the person stayed obtained sole taxing rights. In situations where a taxpayer had more than one place of residence within the Empire and provided one of those was located in the person’s native state, this state had the sole taxing right. Taxpayers employed in the federal or state services were subject to a special rule of being taxed only in the state where their ‘official place of residence’ was located regardless of any other places(s) of residence. The reasons why residence-based taxation was definitively adopted is not quite clear. During the North German Federal Parliament’s readings in 1870 of the draft of the 1870 Imperial Double Taxation Law, Finance Minister Camphausen is reported to have stated that the term Wohnsitz (place of residence) coincides with ‘the state where the taxpayer mainly enjoys public protection and where he participates in public non-profit institutions’.37 Taxation based on a person’s place of residence was thus viewed as the appropriate proxy to establish the state in which a taxpayer enjoyed the most public goods and services (the benefits theory of taxation). On the same occasion, the Finance Minister mentioned that under civil law the possibility of multiple places of residence existed.38 This obser36 G Antoni, ‘Die Steuersubjekte im Zusammenhalte mit der Durchführung der Allgemeinheit der Besteuerung nach den in Deutschland geltenden Staatssteuergesetzen’ (1888) V Finanz-archiv: Zeitschrift für das Gesamte Finanzwesen 382, 441 described it in the same terms. 37 Clauss, above n 12, 160. 38 Ibid.

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vation explains why section 2 of the 1870 Imperial Double Taxation Law contains a hierarchy of additional rules that allocate taxing rights on strength of alternative criteria in situations where a taxpayer had no or multiple places of residence. It is an early precursor to the struggle to find appropriate norms to allocate taxing rights between competing states with which a taxpayer shares divided allegiances.39 Looking back, one may now conclude that taxation based on citizenship would have been an ill-fitting norm in the federal context: the constitutional ideals of a new overarching German citizenship that guaranteed freedom of movement and establishment within the Empire implied that a federal citizen could take up residence anywhere in the Empire without restriction and without the need to either relinquish his or her existing citizenship or take up the citizenship of the state of residence. Citizenship was therefore no longer indicative of the federal state that actually provided protection and services to a taxpayer. It therefore made sense that taxation in the federal context should follow a norm other than citizenship. The 1870 Imperial Double Taxation Law applied for four decades until it was subject to substantial review and amendment in 1909. It applied during a period of accelerated integration of the German federal states that coincided with the great economic prosperity brought about by industrialisation within Europe. Its relatively simply worded provisions had to be applied to the internal tax laws of the federal German states, most of which were subject to fundamental reform at some point towards the end of the nineteenth century. It also had to cope with an ever increasing variety of economic activity brought about by industrial advancement and expansion of the railway network within the German Empire. Numerous application issues therefore arose in practice. This inevitably resulted in disputes between taxpayers and tax authorities, so it was left to the German courts to develop the meaning of the 1870 Imperial Double Taxation Law. The discussion under the next heading concentrates on a selected sample of the issues that arose in practice and the disputes that played out in the German courts. These issues and cases have been grouped into categories that will aid comparison with the current Model-based treaty network.

39

Compare Art 4(2) of the OECD Model.

On the Origins of Model Tax Conventions 47 T H E 1 8 7 0 IMPER IA L DOU BLE TA XAT I ON LAW IN PR A C T IC E

The author is not aware of any publication in English that comprehensively documents case law or practical issues in the application of the 1870 Imperial Double Taxation Law. The source material that is relevant for this period was collected on the basis of sporadic and random references by German authors dealing with a variety of topics.40 Relevant materials may have been overlooked. The source material indicates that difficulty in the practical application of the 1870 Imperial Double Taxation Law arose in the following areas. The 1870 Imperial Double Taxation Law hardly contained any definitions for the terms employed in its provisions. These provisions were novel and did not benefit from any significant heritage. The meaning of all the undefined terms in the 1870 law were further complicated by the existence of similar concepts in other areas of the law of the German federal states. Some examples of this will be described below. Secondly, the scheme of the 1870 Imperial Double Taxation Law distinguished between various types of income. This led to problems in classifying income, which made it difficult to identify which of the provisions of the law applied to specific federal taxes. The scheme of the 1870 law further led to problems in identifying the relevant tax subject that could invoke the benefit of the law. The greatest area of difficulty, however, arose in respect of the rule that allowed the taxation of a trade and income derived from it in the federal state where the trade was operated. Numerous court cases resulted and dealt with questions such as what constitutes the operation of a trade. A further related difficulty arose when multiple trades were operated throughout the Empire and a division of income had to be made to each of these.

40 In this regard, articles by the two German scholars Antoni (above n 36) and Clauss (above n 12) contain the most relevant references. Further source materials are contained in W. Burkhard, ‘Finanzrechtsprechung’ (1886) III Finanz-archiv: Zeitschrift für das Gesamte Finanzwesen 295; L Herrfurth, ‘Das preussiche Kommunalsteuer-Notgesetz vom 27. Juli 1885’ (1886) III Finanz-archiv: Zeitschrift für das Gesamte Finanzwesen 168; A Emminghaus, ‘Die Belegung der auswärtigen Versicherungsanstalten auf Gegenseitigkeit mit direkten Steuern im Grossherzogtum Baden’ (1887) IV Finanz-archiv: Zeitschrift für das Gesamte Finanzwesen 81; M von Oesfeld, ‘Entscheidungen des Reichsgerichts in Finanzfragen’ (1892) IX Finanz-archiv: Zeitschrift für das Gesamte Finanzwesen 263. Contemporary English language sources that deal with the 1870 Imperial Double Taxation Law are T Ecker and G Ressler (eds), History of Tax Treaties—The Relevance of the OECD Documents for the Interpretation of Tax Treaties (Vienna 2011); S Jogarajan, ‘Prelude to the International Tax Treaty Network: 1815–1914 Early Tax Treaties and Conditions for Action’ (2011) 31 Oxford Journal for Legal Studies 679–707; Hemetsberger-Koller and Kolm, above n 6; PA Harris, Corporate/Shareholder Income Taxation and Allocating Taxing Rights between Countries: A Comparison of Imputation Systems (Amsterdam, 1996).

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In what follows below, examples will be given for each of these three broad areas of definitional, structural and attribution difficulties.

Definitional Issues Tax Residence The key concept employed in the main rule in section 1 of the 1870 Imperial Double Taxation Law was a person’s ‘place of residence’ (Wohnsitz). The law stipulated that it was situated ‘at the place occupied as a dwelling in circumstances that indicate an intention of permanently maintaining an abode there’. This definition of a place of residence appears to have been influenced by German civil law, especially the intention test (ie to maintain a permanent abode). Clauss points out that it was identical to the test for residence under civil law, and that a civil law judgment of the Supreme Imperial Court of 17 June 1884 had a profound impact on the tax law understanding.41 In this case it was held that, even though a person may intend to stay permanently for a period at a dwelling, that place will not constitute his place of residence if from the outset the person’s will was directed at the definite cessation of his or her stay at the dwelling. The length of the period of permanent presence was thus not determinative. For tax purposes, the concept of a person’s dwelling maintained as an abode was thought to be a relative concept that turned on whether it could be viewed as the ‘centre of their living conditions’ (Mittelpunkt ihrer Lebensverhältnisse).42 This led to disputes arising when wealthy persons maintained more than one dwelling that were located in different federal states. The Administrative Court of Baden held, in a judgment of 21 April 1886, that a landowner who settled in a city and maintained a dwelling that was equipped to make it possible for him and his family to live there also had a second place of residence in the countryside in another federal state even though the landlord’s family did not in fact set foot in this second dwelling for a number of years.43 The case led Clauss to argue that actual occupation of a dwelling was not always necessary to establish a place of residence; what was important was the requisite intention.44 The situation was inevitably exploited by opportunistic taxpayers who, for example, took advantage of the difference in tax rates that applied in

41 Clauss, above n 12, 162. He points out that the concept of an official place of residence (dienstlichen Wohnsitz) that is encountered in s 2 of the 1870 Imperial Double Taxation Law was also taken from civil law (at 166). 42 Clauss, above n 12, 160. 43 Ibid, 161. 44 Ibid.

On the Origins of Model Tax Conventions 49 the various federal states. Antoni45 provides the example of the situation that prevailed in Saxony after the tax reforms of 1878. Under section 6 (provision 9) of the Saxon Income Tax Law of 1878, nationals from other federal German states who had a residence in Saxony but who stayed at some other place in the German Empire were subject to the tax rate applicable to the lowest class.46 In other words, federal citizens from outside Saxony could be subject to tax alone in Saxony at the minimum rate of tax, regardless of their level of income, if they maintained their sole place of residence in Saxony but actually stayed elsewhere in the Empire. This arbitrage was the result of the rule under the 1870 Imperial Double Taxation Law that assigned the exclusive taxing right over a resident to the federal state where a place of residence was maintained. The interpretation of the residence concept after 1870, which placed a premium on intention and not actual presence, thus provided an opportunity to federal states to exploit the scheme for the assignment of taxing rights. The concept of a person’s tax residence was thus initially understood on the basis of civil law, which opened up possibilities for tax planning and even tax competition between the federal German states. It was only much later, when the 1870 Imperial Double Taxation Law was considered for amendment, that an autonomous concept of tax residence started to emerge. The Taxation of a Trade and Income Earned from It Another key definitional element of the 1870 Imperial Double Taxation Law that led to numerous court cases was the rule in section 3 that a trade and the income earned from it was only taxable in the federal state where the trade was operated (Betrieb eines Gewerbe). The cases broadly deal with three themes. The first concerned the question of what constitutes the operation of a trade. Then there is a line of cases about the question of whether a trade may be operated at the same time in more than one federal state, with the added complication of how income ought to be divided between them (the latter was mainly addressed through administrative practice). The last category concerns the connection between income and the taxable subject that was entitled to the benefit of section 3 of the 1870 Imperial Double Taxation Law. In 1885, the Higher Regional Court of Hamburg dealt with a case in which the buying function and sales transactions for a manufacturing business were located in one federal state while the factory was operated in another federal state. The court interpreted section 3 of the 1870 Imperial Double Taxation Law to mean that only the first state where the 45 46

Antoni, above n 36. Ibid, 441.

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buying and selling took place had the sole taxing right over the income derived from the business. In a decision reported on 7 November 1885, the Imperial Court reversed this judgment and held that:47 The application of § 3 concerns the location that is the source of the income from an individual business and . . . not the place where such income is realised. In answering the question where the trade of a factory in the sense of § 3 is operated, both technical (product generation) as well as commercial (product sales) activities must be considered. In case of the taxation of income from a trade in circumstances where operations extend over several states of the Empire, any of the States involved shall have the right to tax but only as far as the operations of the trade take place in their territories.

This judgment established an important principle for cross-border business taxation, namely that the taxation of business income was based on the location of the source of the income and not on any other principle such as the place of realisation of income.48 The case established another principle of enduring nature, namely that no single characteristic, such as the production or sales characteristic of a specific place of business, is determinative to locate the source.49 All these aspects must be viewed in their totality. The decision of the Imperial Court of 7 November 1885 also added to a growing number of judgments that confirmed that business income which had its source in several federal states could be subjected to tax in all those states in terms of section 3 of the 1870 law (more about these cases later below). A good illustration of the difficulty that was experienced with the requirements for business income to be solely taxed in the state of source under the 1870 Imperial Double Taxation Law is provided by a case that dealt with a trade that was exclusively carried on through agents. It will be recalled that the requirement was that the ‘operation of a trade’ (Betrieb eines Gewerbe) could only be taxed in the federal state where ‘the business is operated’ (das Gewerbe betrieben wird). The specific meaning that the well-known concept of a permanent establishment (Betriebsstätte) carries today came into being as a result of the courts of the federal German states interpreting these two aforementioned key phrases used by the 1870 law. Returning to the case about agents, the Administrative Court of the Grand Duchy of Baden (Verwaltungsgerichtshof), in a judgment of 7 April 1886, seems to have been the first to have dealt with the question of whether a business could be operated solely through agents in a foreign 47

Reported by von Oesfeld, above n 40, 263. Own free translation. Similar comments are made by Clauss, above n 12, 175. This is still the position adopted in respect of the permanent establishment concept in the OECD Model Tax Convention on Income and Capital. See the Commentary on Art 5, para 3 of the OECD Model. 48 49

On the Origins of Model Tax Conventions 51 state for purposes of the 1870 Imperial Double Taxation Law.50 The impact of the case is enduring and significant, hence it is discussed in full below. The taxpayer in the matter was the Life Insurance Bank for Germany in Gotha. Its income consisted of insurance premiums, interest from capital used to advance loans and incidental income. All income remaining after expenses and dividends was transferred to a bank fund that was used to make interest-bearing loans to debtors in the states from which money in the form of premiums and interest was received. The bank’s statutes allowed any part of the business to be carried out by representatives. A special committee managed the business of making loans. This committee controlled intermediaries between the bank fund and the public, and made use of specialists, which included agents, to obtain advice in respect of individual applications for loans. The life insurance bank did not own any property in Baden; its only presence in Baden was appointed agents, who were more or less permanently engaged in carrying out the bank’s business of insurance and money lending. The presence of these agents was considered a commercial enterprise in terms of newly enacted tax legislation of 1884 in Baden. This consequently provided a sufficient base to make the life insurance bank subject to the Trade and Income Taxes in Baden. The bank argued that the agents’ activities were not aimed at profit but merely amounted to the carrying out of an employment, and therefore these activities could not fall within the meaning of a trade (Gewerbe). Therefore, the argument went, the effect of section 3 of the Imperial Double Taxation Law of 1870 was to prevent Baden from imposing Trade and Income Tax on the bank because no business was operated in Baden. The tax authority in Baden argued that the 1870 law did not apply to legal entities such as the bank because of the absence of an express provision in the law that affirmed its application to such persons. The court rejected both these arguments. On the question of application to legal persons, it held that the absence in the law to indicate specific categories of taxpayers that was dealt with in the rule for the taxation of business income implied that all possible tax subjects fell within its scope, provided that the connection between the business income and the relevant tax subject ‘without regard to their legal structure’ is considered by the state ‘to amount to legal possession of the object of taxation’.51 This is still a valid, if somewhat controversial, assumption that underscores a number of the provisions of the current OECD Model, for example, those without the ‘beneficial owner’ requirements.

50 Reproduced in Emminghaus, above n 40, 96–100; discussed by Clauss, above n 12, 170–71. 51 Emminghaus, ibid, 97.

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In respect of the question of whether the use of permanent agents in Baden constituted the operation of a trade for purposes of the 1870 law, the court held that the factual information was sufficient to show that the bank obtained very substantial acquisitions from its permanent facilities for purposes of lending money at interest. Its activities were correctly considered as a trade in the sense of the Imperial Law.52 On the basis of the factual analysis, the only question remaining before the court was whether the bank operated its business in the Grand Duchy of Baden. In this regard the court held as follows:53 The Baden tax law assumes this to be the case without any further requirement . . . This legal assumption is in this case undoubtedly also confirmed by the facts. Consideration of the statutes of the company and the obligations of the agents contained therein indicate that the agents form a permanent organ of the company that not only on its behalf and for its benefit collect and furnish periodic premiums from its business clients, but that they must also cooperate commercially in the interest lending activities in respect of the acquired capital, so that there is in reality an operational business of the company in the Grand Duchy.

The importance of this finding is that it did not matter whether business activities were carried out by the taxpayer or by representatives for the rule under section 3 of the 1870 law to be applicable. The impact of these early cases was significant for the development of a threshold for the taxation of business income in the state of source. The guidance established by these cases can be clearly seen in later domestic tax law reforms and subsequent tax treaties concluded by the German Empire (these aspects are all addressed under following headings). The judgment of the Administrative Court of the Grand Duchy of Baden of 7 April 1886 was arguably the first case, as far as the elimination of double taxation is concerned, in which the exclusive taxation of business income in the state of source became associated with the activities of a taxpayer’s permanent agents. This ultimately led to the inclusion of specific provisions in tax treaties concluded by Member States of the German Empire that prescribed the circumstances when the activities of an agent gave rise to a taxable presence through the creation of a permanent establishment for a principal. These treaty clauses served as the basis from which model tax treaty clauses were developed in the twentieth century and in this sense, have had an enduring effect. It is therefore perhaps not surprising that the German cases have a remarkable modern resonance.54 52

Ibid, 99. Ibid, 100. 54 Compare cases such as Knights of Columbus v The Queen, Tax Court of Canada (2008) 10 ITLR 827; Société Zimmer Ltd v Ministre de l’Économie, des Finances et de l’Industrie, Conseil d’État (2010) 12 ITLR 739; Dell Products (NUF) v Tax East, Supreme Court of Norway (2011) 14 ITLR 371. 53

On the Origins of Model Tax Conventions 53 Issues Concerning the Allocation of Business Income to the State of Source: Emergence of the Separate Entity Approach The next series of cases deal with situations where business operations of the same person were located simultaneously in more than one federal state. As was discussed earlier above, the decision of the Imperial Court of 7 November 1885 confirmed that business income which had its source in several federal states could be subjected to tax in all those states in terms of section 3 of the 1870 Imperial Double Taxation Law. This decision built on an earlier judgment by the Imperial Court of 18 December 1884 in a criminal matter, in which it was held that:55 § 3 of the Imperial Law of 13 May 1870 does not say that the business is only operated in that State in which the business premises is located or in which the trader has his place of residence; also not that if it is taxed there, it may be operated tax-free in another federal State. Rather, this section can only be understood as meaning that the State in which the property is not situated and in which the business is not operated is not entitled to the assessment of property and business tax or to the taxation of income arising from these sources.

As justification for this conclusion, the Imperial Court offered an explanation based on the parliamentary history of the 1870 law and the contemporaneous domestic tax law position:56 At the time of the creation of the Imperial Law the right of every federal State to tax ownership of land and the operation of a trade in its territory was recognized everywhere in Germany according to the motivation for this Law and they wanted to eliminate in this regard any possibility of modifying the already applicable principle. The situation was different when the income from these sources under the laws of most federal States was taxed both in the State in which these are located as well as in the State where the income of the landowner or the tradesman was taxed in its totality regardless of the location of its source. And that is precisely the innovation of the Law, namely that henceforth only the first of these states is entitled to tax the income in question.

This explanation indicates that the Imperial Court acknowledged the exemption from residence-based taxation as the method (‘the innovation’) for the avoidance of double taxation of land and business income. The more difficult issue for the taxation of business income at source arose because not all federal states followed the same set of rules for attributing income to that part of a business that was operated within their territory. Many of the German states did not have any specific rules 55 56

Reported by Burkhard, above n 40, 296. Ibid.

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to attribute income for purposes of section 3 of the 1870 Imperial Double Taxation Law (nor did the law itself contain any guideline). The question of income attribution to business operations in the state of source engaged the courts, commentators and tax administrators alike. The first consideration of the issue by a court appears to be a judgment by the Prussian Higher Regional Court of 11 December 1879. The court dealt with a manufacturing business where the factory was located in one federal state while the commercial selling and other activities were exclusively conducted in another. It is reported to have decided that the income from this business had to be divided equally between the two sources. The court felt that, in the circumstances of the case, each aspect of the business had an ‘equally important influence on the achievement of profit’.57 Commentators took the judgment to mean that the tax authorities of the respective federal states had to determine the attribution of income to business establishments ‘according to the facts and circumstances of each case’. It was felt that this was an ‘unsuitable’ and ‘vague standard’.58 Herrfurth pleaded for ‘an exact criterion which is the main requirement for any tax law’.59 The situation prompted a legislative and/or administrative response by some of the federal states. The Income Tax Law of 20 June 1884 in Baden declared limited companies taxable in Baden on that part of their income ‘which corresponds to the size of the business operation within the Grand Duchy’.60 An Implementation Directive of 17 February 1885 explained this provision to mean that, out of the total income, the income attributable to the domestic business operations must be ‘established in the proportion that the working capital applied in the Grand Duchy has in respect of total working capital’.61 In Prussia in 1885, the municipal tax was reformed. Although the municipal tax was not a state tax and so was not a tax subject to the 1870 Imperial Double Taxation Law, the latter nonetheless had a profound impact on these reforms (this will be dealt with more fully under the next heading). Under section 7 of the Prussian Municipal Tax—Emergency Law of 27 July 1885, measures based on section 3 of the 1870 law were adopted to unilaterally avoid double taxation insofar 57

Clauss, above n 12, 179 note 1. Clauss, ibid, 180. Herrfurth, above n 40, 184. This remark was made reforms of 1885, which included terms for the unilateral The unilateral reliefs were influenced by the 1870 law and and apportionment problems. 60 Badische Einkommensteuergesetz vom 20 Juni 1884, 12, 180. 61 Clauss, ibid. 58 59

in respect of the Prussian tax avoidance of double taxation. gave rise to similar attribution Art 5, Lit B. Clauss, above n

On the Origins of Model Tax Conventions 55 as the municipal tax was levied on businesses situated in more than one municipality. In this regard, somewhat detailed rules were laid down for the apportionment of income to the various parts of a business that were located in more than one municipality. In general, income had to be attributed in accordance with the size of that part of the business located within a municipality, not only with reference of the extent of capital employed, but also with reference to other factors, such as turnover and payroll costs. It is self-evident that the adoption of domestic laws after 1870 that did not contain identical rules for the apportionment and attribution of the same business income could lead to problems where several states claimed taxing rights to such income under section 3 of the 1870 Imperial Double Taxation Law. The result could either be that too much income is attributed in each state, thus leading to unresolved double taxation of the excess amount, or, conversely, that double non-taxation could occur when both states do not attribute enough income to the business operation situated within their territory. It is not clear from the available sources whether any of the German courts ever dealt with this problem. Antoni made a perceptive observation in 1888 in respect of the case law and domestic tax reforms which interpreted section 3 of the 1870 Imperial Double Taxation Law as requiring a division of business income between, for example, manufacturing and selling operations located in different federal states. He stated that these developments caused ‘a new difficulty to arise, namely, how profit should be allocated to individual transactions, in particular at what price goods supplied by manufacturing to trading operations should be accounted for’. 62 As an example, he cited a ruling by the Saxon Ministry of Finance of 12 January 1885.63 A free translation of the Ruling is as follows: [T]he fact that both trading operations belong to the same person must be disregarded and the matter should be treated as if they belong to different persons. The trade transactions must then be accounted for as if the goods produced by the manufacturing business were delivered for the price that they would customarily be delivered to independent commercial businesses or the price at which it could be delivered without damage to the manufacturer, and the same applies to the production costs which equals the difference between the wholesale selling price and the basic price. A lower calculation of the price of goods delivered to branch operations is harmless as far as the tradesperson is concerned but it reduces taxable income in the State in which manufacturing takes place and consequently violates the taxing right of that State and therefore such a calculation should be ignored.

62 63

Antoni, above n 36, 444. Ibid.

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Antoni’s observation and the Saxon Ruling of January 1885 probably represent the earliest articulation of what is nowadays known in OECD Model parlance as the separate entity approach to attributing profit to a permanent establishment on the basis of the arm’s length principle. The scheme of the 1870 Imperial Double Taxation Law was that it bestowed taxing rights over business income on the basis of the source or territoriality principle in a multilateral or federal context. The above materials show the impossibility of laying down precise rules to measure the amount of income that had to be taxed in each state. Several approaches were developed. The most striking is the framework articulated in the Ruling of the Saxon Ministry of Finance of 12 January 1885 (above). In terms of this framework, the single legal person’s scattered business activities had to be treated counterfactually: transactions for the supply of goods and services had to be construed when the business activities took place in different federal states; these putative transactions then had to be priced as if they were entered into by independent parties. Profit allocation to permanent establishments has remained an area of great difficulty ever since a solution to double taxation of this sort of income had to be developed. In the period 1920–63, when various model tax treaties were designed and tested in practice, a few normative frameworks were mooted. The League of Nations did much work in this area, and produced a specific model convention solely dedicated to this topic in 1933. The influence of the German experience under the 1870 Imperial Double Taxation Law had an influence on the output of the League. With the adoption of the 1963 OECD Model, the so-called separate enterprise approach to profit allocation based on the arm’s length principle was adopted. In 2010, this approach has been subject to further refinement and amendment after nearly a decade’s work by the OECD. What the above material shows is that a refinement of the means to eliminate double taxation in the German Empire after 1870 took place through incremental developments in a variety of forms on the domestic level. Uncertainty as to the meaning of the provisions of the 1870 Imperial Double Taxation Law was mainly dealt with in court cases, at both the local and federal levels. Piecemeal rulings were reactions to the vague standards formulated by courts, and the standards developed through this process served as the basis for domestic tax law reforms. As will be shown under the following headings, the incremental refinement in the domestic sphere influenced future international treaties concluded by the German Empire. This circular effect is a phenomenon that still occurs within the international tax system today.

On the Origins of Model Tax Conventions 57 Issues Regarding Income Allocation to Taxable Entities and Persons: The Corporation–Shareholder Relationship It will be recalled that section 3 of the Imperial Double Taxation Law did not expressly mention the taxable person who may claim the benefit of exemption in the state of residence. The judgment of the Administrative Court of the Grand Duchy of Baden of 7 April 1886 (discussed earlier) established that any person who was the legally recognised possessor of business income that was subject to section 3 of the 1870 law was entitled to claim the benefit of that provision. The decision, however, did not deal with the corporation–shareholder relationship, and the question arose whether dividends were within the scope of the phrase ‘income arising’ from the operation of a trade. This question was dealt with in a series of cases, starting with a decision in a criminal matter by the Imperial Court on 26 February 1883.64 The case focused on the strict legal position of the separate nature of a company’s personality from that of its shareholders under German civil law. The judgment asserted that a shareholder does not generally hold any direct right to the assets of a limited company. In principle, there is no legal entitlement for a shareholder to income derived from a company’s assets. The court furthermore looked at section 3 of the 1870 law in a broad context and concluded that it dealt with income from the operation of a business only in its relationship with the person that operated the trade. On the strength of these conclusions, the court held that dividend income of shareholders was not business income within the meaning of section 3 of the law; rather, it was to be taxed in terms of section 1 of the law by the state of the shareholder’s residence.65 Another judgment of the Imperial Court in a criminal matter, dated 18 December 1884, reaffirmed much of the court’s reasoning summarised above.66 However, the court went further and addressed the question of whether the 1870 Imperial Double Taxation Law dealt with what is nowadays termed economic double taxation of dividend income:67 The Imperial Law of 13 May 1870 did not alter the position when in terms of domestic legislation a limited company itself and in addition its shareholders are taxed on the income from the shares; this may present double taxation, although it should be noted that the limited company and the shareholder are different persons. But this double taxation would not be abolished because the Imperial Law only affects the exercise of taxing powers of the individual federal

64

Burkhard, above n 40, 296. Ibid. Ibid, 296. A decision by the Imperial Court in a civil matter dated 2 June 1886 also reaffirmed the position adopted (see von Oesfeld, above n 40). 67 Burkhard, above n 40, 296. 65 66

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States concerning the same tax object. The fiscal autonomy of the individual federal States remains unlimited as before . . . The Federal Court of Switzerland has also refused to order the creation of a federal legal principle that would make the simultaneous taxation of a limited company and its shareholders a case of inadmissible inter-cantonal double taxation so long as such a prohibition was not given under federal legislation.

Earlier in its judgment, the Imperial Court formulated the type of double taxation which the 1870 Imperial Double Taxation Law sought to eliminate:68 [It] is directed against double taxation that arises from the fact that the same person in respect of the same object is assessed for direct State tax by more than one federal State for the same period. Otherwise the freedom of movement would be affected . . . For limited companies the right of taxation belongs to the state in which the limited company operates its business, the taxation of the income of shareholders from share ownership belongs to the state in which they reside, while the latter cannot assess the operators of the limited company for business tax.

At first blush, one may be tempted to extract the two main types of international double taxation that have become commonplace in the current literature, namely, juridical and economic double taxation, from the two above-quoted declarations by the Imperial Court. The outcome of the case implied that the 1870 Imperial Double Taxation Law dealt only with juridical double taxation (so called because it focuses on the simultaneous taxation of the same juridical person). However, one must question what the Court meant by taxation of the ‘same object’ in the context of the domestic impersonal tax regimes prevailing at the time in most of the federal German states.

Income Qualification Issues The last area where the 1870 Imperial Double Taxation Law gave rise to practical difficulties concerns the classification of income into the categories established by its structure. Clauss discusses issues that arose in this regard at length.69 He considered the example of a director of a company resident in one federal state who was responsible for a manufacturing plant of the company that was operated in another federal state. The director’s employment income was subjected to tax in his state of residence pursuant to section 1 of the 1870 Imperial Double Taxation Law and at the same time was 68 69

Ibid. Clauss, above n 12, 172 to 175.

On the Origins of Model Tax Conventions 59 subjected to a different sort of tax in the other federal state on the basis that it was business income that fell within the ambit of section 3 of that law. The result was that both federal states considered that the 1870 law assigned the exclusive taxing right over the income of the director to them. Instead of resolving the double taxation of that income, the proposed application of the law resulted in double taxation. A situation of this nature provides an example of what may nowadays be termed a ‘conflict of qualification’. Treaties patterned on the OECD Model are also prone to this phenomenon.70 Returning to the case of the director and the conflicting qualification of his income, the Federal Council of the German Empire decided in a ruling of 16 October 1874 that section 3 of the 1870 law could not be applied to his employment income. It reasoned that, as far as section 3 was concerned, there was no relevant difference between an ordinary worker and a director of the commercial operations, that the latter was not even the owner of the business enterprise and that his income was not income from the commercial operation but stemmed from a service relationship.71 As a consequence, his employment income was to be taxed exclusively by his state of residence. Clauss argued that this analysis could also be applied to the liberal professions. His suggestion was that the assessment for a business tax and a tax on professional income of physicians, lawyers, artists or private tutors that worked for their own account could probably only be justified at the place of their residence where they exercised their professional work.72 Clauss’s solution by no means proposed a clear application of either section 1 or section 3 of the 1870 Imperial Double Taxation Law (it rather suggested a combination of these provisions). The 1870 Imperial Double Taxation Law had relatively few categories of income. In fact, it had only two general categories, one dealing with income from land and business and the other covering all other income (there was only one special category for military and civil personnel). The federal German states had fairly homogeneous general legal systems and the only area where real divergences occurred was in their domestic tax regimes. It was these divergences that mainly led to qualification conflicts.

70 JF Avery Jones et al, ‘Treaty Conflicts in Categorizing Income as Business Profits Caused by Differences in Approach between Common Law and Civil Law’ (2003) 57 Bulletin for International Fiscal Documentation 237, 237, defines a conflict of qualification under bilateral tax treaties based on the OECD Model as ‘different categorization of income by the two states concerned’ and states that ‘[t]hese differences are particularly likely to arise in relation to whether income is categorized as business profits’. 71 Clauss, above n 12, 172. 72 Ibid, 173–74.

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Johann Hattingh T H E I M PA C T OF T H E 1870 IMPER IA L DOU BLE TA XAT I ON L AW WITH IN T H E GER MA N EMPIR E

The discussion under the previous heading dealt with the practical issues that arose from the implementation of the 1870 Imperial Double Taxation Law. These issues were addressed in a number of different ways by the courts, legislators, tax administrators and commentators. An incomparable body of knowledge about the elimination of cross-border double taxation was thus accumulated in the German Empire in the period after 1870 to roughly the start of the twentieth century. The discussion that will be presented under this heading aims to show that the aforementioned body of knowledge ultimately also had an impact on efforts to address double taxation beyond the borders of the German Empire. This is most vividly illustrated by the conclusion in 1899 of the first tax treaty between a Member State of the German Empire and another sovereign state, namely between Prussia and Austria-Hungary. The impact of this development was profound on the bilateral tax treaties that followed between other continental European countries. At first, the 1870 Imperial Double Taxation Law had an impact within the German Empire on the domestic laws of federal Member States. It will be recalled that these states retained their fiscal sovereignty within the federal system. Harmonisation with the constitutional ideals of the German Empire acted as the only limitation on the exercise of their legislative prerogative. The 1870 Imperial Double Taxation Law was principally a realisation of the constitutional rights to equality and freedom of establishment and movement. From this perspective, it is hardly surprising that the 1870 law influenced domestic tax law reforms because it was in effect an extension of the Empire’s constitution. Some of the domestic tax reforms, such as those in Prussia, influenced the conclusion of the 1899 tax treaty between Prussia and Austria-Hungary and will therefore be discussed before the conclusion of that treaty is dealt with.

The Impact on Domestic Tax Law Reforms In 1885, the Prussian municipal tax was subject to extensive reforms. The Prussian municipal tax law had to deal with double taxation (ie between municipalities). Although this tax was not one of the state taxes within the scope of the 1870 Imperial Double Taxation Law, the allocation model of taxing rights under the 1870 law influenced the domestic reform of Prussia’s municipal taxes. Moreover, the combination of the structure provided by the 1870 law and the court guidance in respect thereof gave rise to a refinement in the Prussian municipal tax law that used some key concepts for the first

On the Origins of Model Tax Conventions 61 time (ie permanent establishment). In later domestic tax reforms that were indeed covered by the 1870 law, as well as in the amendment of that law in 1909, these concepts were ‘borrowed back’. A closer look at the various domestic tax reforms will show the detail of this process. The Prussian municipal tax applied to a variety of juristic persons. The charging provision of the relevant statute determined that:73 A rental, trade or mining operation is only liable for the tax in the municipality in which a head office, branch, permanent establishment, workshop or sales outlet is located, or where an agency of the company is located that is authorized to independently conclude transactions in the name of and for the account of the owners of the company. A railway operation is liable to the tax only in the municipality where the seat of the relevant government . . . a station or where an existing permanent establishment or workshop or any other commercial facility is located.

A number of aspects of the 1870 Imperial Double Taxation Law, as well as developments arising from its implementation, can be traced in the above formulation of the scope of the municipal tax. First, the principle that the taxing right over business income should be exclusively assigned to the state of source is adopted (compare section 2 of the 1869 tax treaty concluded between Prussia and Saxony and section 3 of the 1870 Imperial Double Taxation Law). Herrfurth, in a discussion of the above-quoted statutory provision, indicates that a practice arose to tax insurance companies in federal states in which they had permanent representative agents who had the authority to conclude contracts in the name and for the benefit of the insurance companies, and that this practice was codified in the municipal tax reforms.74 This practice had its origin in a judgment by the Administrative Court of Baden of 7 April 1886, which dealt with section 3 of the 1870 Imperial Double Taxation Law (see ‘The Taxation of a Trade and Income Earned from It’ above). A further noticeable point is that the statutory provision quoted above used the term ‘permanent establishment’ (Betriebsstätte) in a sense that it was one of a number of possible locations that would justify the taxation of business income at source. A head office or a branch was another possible location that was on equal footing to a permanent establishment for this purpose. The term permanent establishment was therefore part of the definition or description of the locations of the source of business income. It is only later, in the 1899 tax treaty concluded by Prussia and Austria-Hungary, that the term was no longer used just as a part of a definition but became the concept that had to be defined as the sole 73 Own free translation of s 2 of the Supplementary and Amendment Law regarding certain provisions concerning the imposition of direct municipal taxes on income of 27 July 1885. Reproduced in Herrfurth, above n 40, 174 et seq. 74 Herrfurth, above n 40, 176.

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proxy to establish the source of business income. The meaning of the concept of a permanent establishment grew organically as a tax-specific concept; its meaning for purposes of the 1899 tax treaty between Prussia and Austria-Hungary was not simply transplanted from another branch of German law. The reformed municipal tax law of 1885 contained unilateral measures for the avoidance of double taxation. As far as the author was able to establish, this was the first time that one of the federal German states had enacted unilateral measures to address double taxation. As has been pointed out earlier, these measures became necessary precisely because the 1870 Imperial Double Taxation Law did not apply to the municipal tax and all tax law enacted after 1870 had to be harmonised with the constitutional rights of equality and freedom of establishment and movement. The scheme of the unilateral double tax relief measures in respect of the Prussian municipal tax was briefly as follows. In situations where the municipal tax was imposed by two municipalities in respect of the same trading company (eg when two permanent establishments or branches etc. were maintained within the two respective municipalities), the municipalities and the taxpayer could agree a method for the attribution of income to each permanent establishment, branch, etc, that would avoid double taxation.75 If such an agreement was not reached, income had to be attributed according to criteria that were determined by the type of business concerned. For example, insurance, bank and credit enterprises had to apportion income according to gross income.76 For other industries, income had to be attributed to each municipality in accordance to relative spending on salaries and wages, including bonuses of the management and operating personnel employed at the head office, branch, permanent establishment, workshop, sales outlet, etc.77 The unilateral relief measures determined that, when a person who had their place of residence within a municipality was assessed on their income for the municipal tax, the portion of their total income that arose from land situated outside the territory of the municipality, as well as any income from a rental, commercial, mining or railway enterprise, had to be ‘left out of the calculation’, which is to say it was exempt.78 This provision adopted the scheme of taxation of land and business income that originated in section 2 of the 1869 tax treaty between Prussia and Saxony and section 3 of the 1870 Imperial Double Taxation Law. The 1885 municipal tax reforms in Prussia marked the start of a series of Prussian tax reforms that culminated in 1891. These reforms entailed 75 Supplementary and Amendment Law regarding certain provisions concerning the imposition of direct municipal taxes on income of 27 July 1885, s 7. 76 Ibid, s 7(a). 77 Ibid, s 7(b). 78 Ibid, s 9.

On the Origins of Model Tax Conventions 63 the introduction of a general income tax, tax administration procedures based on compulsory declaration of actual income and expenditure, a reconstruction of business taxation and a remodelling of property and local taxes.79 The charging provisions of the Prussian Income Tax Act of 24 June 1891 were modelled on the scheme of allocating taxing rights embodied in the 1870 Imperial Double Taxation Law. The author’s translation of the relevant provisions of this Act is attached as Appendix 3. For example, section 1 of the Prussian Income Tax Act of 24 June 1891 determined that nationals of other German federal states who did not have a place of residence in their native state were only subject to income tax in Prussia when they resided in Prussia, or, when they did not have a place of residence anywhere in the German Empire, only when they stayed in Prussia. Furthermore, when they had their official place of residence within Prussia, they also fell within the scope of the law.80 These provisions followed sections 1 and 2 of the 1870 Imperial Double Taxation Law. Prussian nationals who (i) did not have a place of residence in Prussia and who resided in another German federal state or (ii) had a place of residence in Prussia but had an official place of residence in another German federal state were exempt from income tax.81 These exemptions too were in line with the provisions of sections 1 and 2 of the 1870 Imperial Double Taxation Law. Foreigners from outside the German Empire were subject to the income tax when they had a place of residence within Prussia.82 These above-mentioned provisions clearly enveloped income taxation primarily based on a person’s place of residence. The 1891 Prussian Income Tax Act also embodied the exception to residence-based taxation found in the 1870 Imperial Double Taxation Law. It determined that ‘without regard to nationality, place of residence or presence’ all persons were subject to the income tax in respect of income from:83 1. salaries, pensions and attendance fees paid by the treasury of Prussia; and 2. ownership of land situated in Prussia, as well as industrial or commercial facilities or similar commercial permanent establishments. These exceptions are consistent with those contained in sections 3 and 4 of the 1870 Imperial Double Taxation Law. 79 80 81 82 83

Seligman, above n 4, 250 et seq provides an overview. Prussian Income Tax Law of 24 June 1891 (Appendix 3), s 1(1)(a)–(c). Ibid, s 1(2)(a)–(c). Ibid, s 1(3). Ibid, s 2.

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There is a subtle but important difference in the wording used to describe the exception from residence-based taxation for source-based taxation of business income. For the first time, the concept of a permanent establishment (Betriebsstätte) was used in connection with the federal taxation of business income.84 The use of the permanent establishment concept to locate business income in the state of source has endured ever since in an international tax treaty context. It is firmly embedded in tax treaty practice, and many countries have internalised it in their domestic income tax and other tax regimes. The last observation on the Prussian income tax reform of 1891 concerns the structure that the general income tax took. The tax base consisted of actual annual net receipts (as opposed to presumptive receipts under the old class and income tax) from four categories: capital; immovable property; trade and industry, including mining; and employment income. There existed a general set of rules for the computation of income and expenditure that applied across all these categories but was supplemented with specific rules for each of them. For example, the net annual income from trade and industry was supplemented by the rule that it had to be calculated, as an extra measure, on the basis of the principles prescribed for the computation of inventory and the balance sheet by the General German Commercial Code, or otherwise had to comply with the practice of a prudent businessmen.85 By 1895, Prussia discontinued all the old impersonal taxes as state taxes; these taxes became local municipal taxes and were consolidated into three categories (land, buildings and businesses). Here one witnesses a fundamental change in the domestic tax law of Prussia, and the question is how it was to be reconciled with the continued application of the 1870 Imperial Double Taxation Law. It will be recalled that the latter was designed on the basis of the various independent impersonal direct taxes that applied in Saxony and Prussia in the 1860s. First, as has been indicated above, the allocation of taxing rights according to the residence of a taxpayer and the source of income from land and businesses was reflected in the scope of provisions of the new Prussian domestic income tax regime. In other words, the domestic regime was specifically designed not to conflict with the allocation of taxing rights according to the terms of the Imperial Double Taxation Law. Further, the 84 An original translation of the term Betriebsstätte is not straightforward. An English rendition in 1905 of the Prussian Income Tax Act of 1891 by UK government officials translated the word as meaning ‘industrial working premises’—see House of Commons Parliamentary Papers, Reports from His Majesty’s Representatives Abroad Respecting Graduated Income Taxes in Foreign States (Cd 2587, 1905), 71. The same translators thought that the concept of Wohnsitz (place of residence) referred to ‘domicile’ (Domizil), which is not the equivalent of that word’s ordinary meaning. These matters show that original translation can be a controversial affair. 85 Prussian Income Tax Act of 24 June 1891, s 14.

On the Origins of Model Tax Conventions 65 Prussian income tax regime took on, in its own structure, the divisions between the categories of income found in the Imperial Double Taxation Law. The Prussian income tax of 1891 in this sense also fitted with the structure of the 1870 Imperial Double Taxation Law. The general income tax became the main direct state tax in Prussia after the abolition of impersonal taxes as state taxes in 1895. This development was a significant waypoint because it provided the momentum for the shift towards the widescale introduction of a general income tax in the federal states of the German Empire. Given Prussia’s leading role in the German Empire, most other German states followed suit in reforming their domestic tax regimes.86 By 1914, the Prussian system for income taxation was adopted by 25 of the 28 German federal states.87 The reform of the Prussian income tax in 1891 and its influence on the tax reforms in other German federal states therefore to a large extent integrated the Imperial Double Taxation Law in the domestic income tax laws found among many of these states. This congruity between domestic income tax regimes greatly reduced the potential for double taxation to arise. One detects that the internalisation of the 1870 law in many of the domestic tax regimes of the federal German states left a sense that the 1870 law became superfluous—nowadays that sensation is maybe also true for OECD Model-based tax treaties. Disputes in respect of the 1870 law that led to court decisions appear to have diminished after the domestic tax law reforms that started in 1891. The writings of commentators also paid less attention to practical issues arising under the 1870 law. In the 1890s, the concern of commentators shifted to the policy level.88 In one article, Schanz89 developed a general theory of income taxation and paid particular attention to an ideal solution to double taxation that may occur both within the federal set-up of the German Empire and as regards true international double taxation. Schanz’s theory for income taxation was based on a person’s ‘economic affiliation’ (Wirtschaftliche Zugehörigkeit), with which he wanted to express a person’s ‘economic relationship or ties to a community’. He critically reviewed a great number of actual tax regimes within the German Empire, including the 1870 Imperial Double Taxation Law, and found most to be wanting in terms of his theory of taxation based on economic affiliation. As far as international double taxation was concerned, he 86 Saxony and Baden had actually preceded Prussia in introducing a general income tax, but the administrative machinery of the Prussian regime was superior and a dominant contributing factor in the successful raising of revenue from the income tax in Prussia. See Seligman, above n 4, 257. 87 Seligman, above n 4, 259–61. 88 G Schanz, ‘Zur Frage der Steuerpflicht’ (1892) IX Finanz-archiv: Zeitschrift für das Gesamte Finanzwesen 1. 89 Ibid, 4.

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proposed, in short, a division of taxing rights between residence and source-based tax claims in the ratio of 3:1.90 His proposal does not appear to have had an impact within the German Empire if one considers the tax treaties concluded with third countries from 1899 onwards and the 1909 amendment of the 1870 law.

The Impact on the 1899 Tax Treaty between Prussia and AustriaHungary In 1896 Austria introduced significant tax reforms. The system of taxation for most part of the nineteenth century was based on taxes on product in Austria and in Hungary. The Austrian reforms of 1896 introduced for the first time a general income tax that adjusted the liability of taxpayers to their individual capacity to pay.91 The situation in the Hungarian part of the AustroHungarian Empire, however, continued to be based on the separate taxes on product (real taxes) until reforms in 1909 and 1912 introduced a general personal income tax. The tax reforms in Austria, which was more industrialised and economically prosperous than Hungary, was therefore the essential precondition for the conclusion of a double tax treaty with Prussia in 1899. The idea of eliminating double taxation was not new to the AustroHungarian Empire. A Trade and Tariff Agreement concluded in 1871 between the various parts of the Austro-Hungarian Empire granted equality and the freedom of movement and establishment as regards taxes that applied in these territories.92 Similar to the position in the German Empire, the existing real taxes had to be harmonised with these guarantees. In the period after 1871 a number of specific legislative measures were enacted to address double taxation between Austria and Hungary. Hemetsberger-Koller and Kolm mention, for example, an ‘Agreement between the Imperial Royal Austrian and Hungarian Ministers of Finance regarding the division of taxes on enterprises that operate in both territories’.93 This agreement was limited to insurance and manufacturing companies, the state railways and banks. There were apparently many further regulations and laws that were specific in scope, eg a law of 1873 that regulated the taxation of the First Danube Steamboat Company’s operations in both territories. These Austro-Hungarian measures to eliminate double taxation were clearly more piecemeal in nature than the contemporaneous measures that operated within the German Empire. They were therefore less capable 90 91 92 93

Ibid, 31, 39, 43 and 51. Hemetsberger-Koller and Kolm, above n 6, 106. Reichsgesetzblatt 89/1871. Hemetsberger-Koller and Kolm, above n 6, 107 n.103.

On the Origins of Model Tax Conventions 67 of being transplanted outside of the Austro-Hungarian Empire. Austrian experts who advised their government in the period before the conclusion of the tax treaty with Prussia thought that the 1870 Imperial Double Taxation Law was superior as a basis for the treaty because in their view it could form the foundation ‘for establishing an international tax law following unitary principles for the whole Central European web of states’.94 These were prophetic words. This appraisal by the Austrians also finds resonance in the general political climate of the time, for it was a weakened Austro-Hungarian Empire that sought closer relations with the German Empire at the turn of the century. As will be discussed below, it was clearly Austria that wanted the treaty, even though it stood little to gain in terms of additional revenue. On 21 June 1899 Prussia concluded a tax treaty with the Imperial Austrian government, and on 18 April 1900, the treaty was approved by the Prussian Parliament.95 The author’s translation of the law incorporating the tax treaty, as well as the treaty itself, appears as Appendix 4. The tax treaty was expressly based on the 1870 Imperial Double Taxation Law. In the justification note for the law that gave effect to the tax treaty in Prussia, the statement was made that:96 The contents of the agreement are in the main a reproduction of the provisions of the generally highly regarded Imperial Law of 13 May 1870, which has the elimination of double taxation within the German federal States as its goal. The close following of the provisions of this law, insofar as they can be transferred to the relations with Austria, had been limited by the consideration that it would not be appropriate to limit the Prussian tax jurisdiction abroad any further as compared to the German federal States.

Effectively, from the Prussian perspective, Austria-Hungary was thus to be treated no more favourably than any of the other federal Member States of the German Empire. As was shown earlier, in 1891 Prussia reformed its income tax law in such a way that it attracted no more taxing rights than what were awarded to it under the 1870 Imperial Double Taxation Law. From this perspective, the 1899 tax treaty with Austria-Hungary would not have had a major impact on Prussia because after the 1891 reforms it would not exercise any more taxing rights over foreign nationals than it already enjoyed under the 1870 dispensation. As indicated, the provisions of the 1899 tax treaty follow the structure and design of the 1870 Imperial Double Taxation Law. These provisions 94 Österreich Staatsarchiv/FHKA, GZ 4334, FM 1897. Quoted by Hemetsberger-Koller and Kolm, above n 6, 112–13. 95 Preußisches Gesetz, Betreffend die Vermeidung von Doppelbesteuerungen, 18 April 1900. Reproduced in G Schanz, ‘Badisches Gesetz, die Abänderung des Einkommen-, Gewerb-, Wandergewerbe- und Kapitalrentensteuergesetzes betreffend. Vom 9 August 1900’ (1901) XVIII Finanz-archiv: Zeitschrift für das Gesamte Finanzwesen 455, 285. 96 Begründung des Gesetzentwurfs vom 9 Januar 1900, ibid.

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were, however, refined in light of the experience gained with the implementation of the 1870 law in practice. A few specific provisions addressing particular issues were also included. The most notable refinement that took place in the 1899 tax treaty concerns the taxation of business income by the state of source. The 1899 tax treaty maintained the principle that land and businesses, and income from them, were exclusively taxable in the state of source in terms substantially identical to the 1869 tax treaty between Prussia and Saxony and the 1870 Imperial Double Taxation Law. However, the wording that articulated this notion was richer in meaning, as the expressions used were taken from the case law developments that took place in the period 1870–99 (discussed under previous headings). Article 2 of the 1899 tax treaty determined that: The ownership of land and buildings, and the operation of a fixed trade, as well as the income arising from these sources are only to be assessed for direct State tax in the State in which the land and buildings are situated or where a permanent establishment for the exercise of trade is maintained. Branches, factories, depots, counting houses, places of buying and selling, and other business facilities maintained for the exercise of a fixed trade by a proprietor himself, business partners, attorneys or other permanent representatives are to be regarded as permanent establishments.

In this formulation, the concept of a ‘permanent establishment’ is used to establish the threshold for source state taxation and, indeed, to locate that state. In this sense, it is used in the same way that it was used in the 1885 Prussian municipal tax law reforms. The definition of a permanent establishment is mostly born out of the various court cases that were decided in the German Empire in respect of the 1870 Imperial Double Taxation Law. For example, one can see how cases that held that both manufacturing as well as buying and selling activities of a company may amount to a presence sufficient for sourcebased taxation influenced the definition. So, too, can the influence of the case that held that the activities of permanent representative agents may amount to a taxable presence for their principals be detected. The fact that the permanent establishment definition was derived from practice was indeed expressly stated in the justification note that accompanied the law that made the 1899 tax treaty effective in Prussia:97 ‘The relevant wording of this provision corresponds to the interpretation that the same type of provision of the Imperial Law has received in practice’. Article 2 of the 1899 tax treaty furthermore contained a rule that addressed the issue of income attribution to permanent establishments: ‘When permanent establishments of the same commercial enterprise are located in both areas, the assessment for direct State tax in each area 97

Zu Artikel 2 Abs 1, 2 und Schlussprotokoll I und I, ibid.

On the Origins of Model Tax Conventions 69 must only be in accordance with the actual operations of the domestic permanent establishment’. This rule can be traced directly to a series of court decisions that established the territorial reach of source-based taxation of income allocable to the operation of a business. The guidance regarding profit attribution based on the separate entity approach that was articulated by the Saxon Ministry of Finance in a Ruling of January 1885 was, however, not reflected in the 1899 tax treaty. It was only much later, after work done by the League of Nations in the 1930s, that the separate enterprise approach was taken up in tax treaties. Article 4 of the 1899 tax treaty maintained the exceptional rule for the taxation of civil servants in terms of the ‘payment state’ or ‘state of the fund’ principle. As before, double taxation of dual nationals (who also maintained places of residence in both territories) was dealt with. Double taxation of these persons was still expressly allowed, similar to the position adopted under Article 5 of the 1869 tax treaty between Prussia and Saxony. However, a slight development took place in that the contracting States committed themselves under Article 7 of the 1899 tax treaty to make ‘appropriate arrangements’ to address such situations. The precedent that the 1899 tax treaty between Prussia and AustriaHungary created had a profound impact on the establishment of a network of similarly worded bilateral tax treaties during the first half of the twentieth century. Saxony, for example, reformed its income tax law in 1900 and substantially adopted the Prussian Income Tax Act of 1893; similar to the latter, the new Saxon Income Tax Act of 24 July 1900 aligned its scope to the scheme of allocation of taxing rights under the 1870 Imperial Double Taxation Law.98 Unsurprisingly, the 1903 tax treaty between Saxony and Austria-Hungary was based in nearly identical terms on the 1899 tax treaty of Prussia and Austria-Hungary.99 Like Prussia, Saxony gave up little taxing rights under the tax treaty with Austria-Hungary because it already exercised taxing rights on the domestic sphere in line with the taxing rights afforded to it under the precedent of 1870 Imperial Double Taxation Law (and thus the tax treaty). Similar tax reforms to that of the 1891 Prussian reforms took place in Hesse (1899), Baden (1900) and Württemberg (1903); these regimes were

98 Sachsisches Einkommensteuergesetz vom 24 Juli 1900, ss 2 and 5. Reproduced in G Schanz, ‘Sächsisches Einkommensteuergesetz. Vom 24 Juli 1900’ (1903) XX Finanz-archiv: Zeitschrift für das Gesamte Finanzwesen 258, 258. 99 Reproduced in C Perry (ed), The Consolidated Treaty Series (New York, 1969–), vol 192, 321.

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similarly aligned with the 1870 Imperial Double Taxation Law.100 The reforms paved the way for the conclusion of tax treaties between these federal German states and Austria-Hungary. Württemberg (1905), Baden (1908) and Hesse (1912) thus concluded tax treaties with Austria-Hungary that were substantially identical to the 1899 treaty between Prussia and Austria-Hungary.101 Further tax treaties patterned on the 1899 tax treaty between Prussia and Austria-Hungary were concluded between Austria and Liechtenstein (1901), Prussia and Luxembourg (1909), and Hesse and Luxembourg (1913).102 In this way, a network of similarly worded bilateral tax treaties started to arise among continental European countries.

C ONC LU DING R EMA R K S

The adoption in the domestic tax law reforms of Prussia during 1885–91 of the scheme of allocation of taxing rights developed from 1869 onwards within the German Empire was arguably the single greatest catalyst for the ultimate adoption of these principles in the network of similarly worded bilateral tax treaties that was established among the states of continental Europe before World War I. If Prussia had never reformed its domestic tax regime along these lines, it seems less likely that it would have been willing to conclude a treaty with the Austro-Hungarian Empire in 1899. The strategy of Prussia to align its internal tax law with the allocation of taxing rights between residence- and source-based tax claims under the 1870 Imperial Double Taxation Law so as not to create a constitutional conflict had the advantage that Prussia did not need to relinquish taxing rights when a tax treaty based on the 1870 law was concluded with a third state. This advantage, coupled with the political desire of the Austro-Hungarian Empire to seek closer allegiance with the states of federal Germany, provided the platform for convergence of tax treaties. 100 Arts 1, 3 and 4 of the Hessisches Gesetz, die allgemeine Einkommensteuer betreffend. Vom 12 August 1899, reproduced in G Schanz, ‘Hessisches Gesetz, die allgemeine Einkommensteuer betreffend. Vom 12 August 1899’ (1900) XVII Finanz-archiv: Zeitschrift für das Gesamte Finanzwesen 36; Art 4 of the Badisches Gesetz, die Abänderung des Einkommen-, Gewerb-, Wandergewerbe- und Kapitalrentensteuergesetzes betreffend. Vom 9 August 1900, reproduced in Schanz, above n 95; Arts 1 and 3 of the Württembergisches Gesetz, betreffend die Einkommensteuer. Vom 8 August 1903, reproduced in G Schanz, ‘Württembergisches Gesetz, betreffend die Einkommensteuer. Vom 8 August 1903’ (1904) XXI Finanz-archiv: Zeitschrift für das Gesamte Finanzwesen 115. 101 These tax treaties are reproduced in Perry, above n 99, vols 198, 111; 208, 15 and 215, 153, respectively. 102 The treaty between Austria and Liechtenstein (1901) is reproduced in Tax Analyst, Worldwide Tax Treaties (Washington, 2012–); the remainder of the tax treaties are reproduced in Perry, above n 99, vols 209, 268 and 218, 76.

On the Origins of Model Tax Conventions 71 Paradoxically, the conclusion of tax treaties by the Member States of the German Empire with third states transformed their character, as, unlike the 1869 tax treaty between Prussia and Saxony or the 1870 law, they would not serve as instruments to attain the German federal goals of freedom of establishment or movement. The high degree of influence of judgments about the 1870 Imperial Double Taxation Law on tax law reforms, at both the domestic and federal levels, is remarkable. The continued refinement of provisions that dealt with source-based taxation of business income represents the high point of the German courts’ influence on the design of the international tax treaty order as we know it today. Many aspects of the proxy used to establish the threshold for source-based taxation, namely the permanent establishment concept, can be directly traced to the jurisprudence of the German courts. The history described in this paper illustrates how some very fundamental features of the structure of OECD Model-based bilateral tax treaties are in the grip of a scheme devised in 1869 and refined in the following half century. The drive for deep economic integration based on superior constitutional norms of freedom of movement and establishment ensured the continuity of the 1869 scheme within the German Empire. Bilateral tax treaties concluded outside of a framework based on these norms deal with other aims. The intellectual context has shifted considerably from the one prevailing in nineteenth-century Germany, yet the parallel with the current intellectual climate in the world of EU tax law is more than apparent.

APPENDIX 1 C ONVENTION BETWEEN P R U S S I A A N D S A X ONY, F OR TH E ELIMINAT ION OF DO U B L E TA XATION OF STATE NATIONA LS OF BOT H SIDES 1 6 A PR IL 1869

His Majesty the King of Prussia On the one hand and His Majesty the King of Saxony on the other hand, Desiring to avoid double taxation of their subjects have decided to conclude a treaty to determine those principles which are to be applied in regard to the assessment of nationals of one part for direct taxes

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in the other State, and for this purpose authorised representatives were appointed as follows: His Majesty the King of Prussia Your Majesty’s Privy Counsellor Bernhard Woldemar König and your Majesty’s Privy-Counsellor of Finance Otto Victor Ambronn, and His Majesty the King of Saxony Your Majesty’s Ministerial Director Dr. Christian Albert Weinlig, which have agreed to your notification in good and due form, having powers over the following articles.

Article 1 Nationals of both sides are, subject to the provisions of Articles 2–4, only subject to direct State tax in the State to which they belong as subjects. When a subject of the one State has in the other State his permanent place of residence and stays there without acquiring nationality, the justification for taxing the subject to the full extent shall pass to such other State after the expiry of five years since taking up a place of residence in that State.

Article 2 Taxes on property as well as on the operation of a fixed trade (on industrial or commercial facilities) and on the income arising from these sources will be paid only in the State in which the property is situated, or in which the business is exercised. In respect of the taxation of the whole of the income assigned to a State under Article 1, the income from these sources is exempt insofar as it was already accordingly taxed in the other state, provided that the tax demonstrably imposed in the other State is deducted by the State authorised under Article 1 from the whole balance of taxable income from such sources.

Article 3 The income from salaries of military persons and civil officials, as well as from pensions will be taxed only in the State from whose coffers these receipts flow. In this regard the existing federal statutory provisions govern the taxation of federal officials.

On the Origins of Model Tax Conventions 73 Article 4 The income of business assistants, workers and servants, as far as it does not flow from real property, is taxed only at the place of residence of the taxpayer.

Article 5 Taxpayers who are nationals of both countries will be taxed in both countries in terms of local legislation.

Article 6 In respect of tax claims of one State against taxpayers staying in the other State, the high contracting parties mutually commit themselves to request the relevant authorities to recover these from the asset’s of such taxpayers according to the existing requirements for the collection of direct taxes from own nationals and to deliver the amounts collected to the relevant State coffers.

Article 7 This Convention shall enter into force on the 1st of January 1870 and is valid for ten years. After the expiration of this period each of the high contracting parties may give notice of termination six months in advance.

Article 8 Accession to this convention is always open to all states of the North German Confederation. Such accession must be effected between the States concerned by the exchange of declarations, which must be brought to the public’s knowledge by publication in the form prescribed for laws.

Article 9 This Treaty shall be ratified and the ratifications shall be exchanged in Berlin. In witness whereof the plenipotentiaries have sealed and signed this Convention.

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Done at Berlin, 16 April 1869. Signed.

König (LS)

Ambronn (LS)

Dr Weinlig (LS)

[Source: IStR 24/2006, II, also reproduced in Clauss, above n 12, 195.] Translated by PJ Hattingh, Cambridge 2012.

A PPENDIX 2 (NO. 4 7 5 ) A C T F OR T H E ELIMINATION OF DOU B L E TA XAT ION OF 13 MAY 1870 F E DE R A L LAW GA Z ETTE OF T H E NORTH GE R M A N C ONF EDER AT ION. NO 14 ISSU ED AT B E R L I N ON T H E 19TH OF MAY 1870. (GO V E R N MENT GA Z ETTE EDITION)

Our Wilhelm, King of Prussia by the grace of God etc. Decrees in the name of the North German Confederation, with the consent of the Federal Council and the Reichstag, the following:

§ 1 Subject to the provisions in §§ 3 and 4, a North German person may be assessed for direct State taxes only in that federal state in which he has his place of residence. A North German person has a place of residence within the meaning of this Act at the place occupied as a dwelling in circumstances that indicate an intention of permanently maintaining an abode there.

§ 2 A North German person who does not have a place of residence in any of the federal states may be assessed for direct State taxes only in that State where he is staying. If a North German person has a place of residence in his native State and also in another federal state, he may only be assessed for direct State taxes in the first-mentioned State. North German persons in the Federal or State services shall be taxable only in that federal state in which they have their official place of residence.

On the Origins of Model Tax Conventions 75 § 3 Ownership of land and the operation of a trade, and the income arising from these sources may be taxed only by those federal states in which the property is located or the business is operated.

§ 4 Salary, pension and attendance fees paid to North German military and civil officers, as well as to their dependents from the treasury of any federal State shall be taxable only in that State that makes the payment.

§ 5 The current law does not affect the taxation of North German persons in respect of a place of residence or a period of stay outside of the federal territory.

§ 6 The present law will come into effect on 1 January 1871: Documented under signature of our highest hand and accompanying federal seal. Given at Berlin, 13 May 1870. (LS) Wilhelm Gr von Bismarck-Schönhausen [Source: Clauss, above n 12, 195.] Translated by PJ Hattingh, Cambridge 2012.

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Johann Hattingh A PPENDIX 3 P R U S S I A N I N COME TA X A C T OF 24 J U NE 1891 (GE S -S A MML 1891 NR 19 S 175) I. TA X LIA BILITY 1 . S U BJ EC T IVE TA X LIA BILITY

§ 1 Liable for income tax are: 1. Prussian nationals, other than those: a) who do not have a place of residence in Prussia (§ 1 paragraph 2 of the Imperial Law for the Elimination of Double Taxation, May 13, 1870—BGBS 119) and who live or stay in another federal state or German protected area; b) who in addition to a place of residence in Prussia have an official place of residence in another federal state or German protected area (§ 2 para 3 op cit); c) who do not have a place of residence in Prussia and have permanently stayed in a foreign country for more than 2-years. The exception under c shall not apply to Imperial and State officials who have their official places of residence in a foreign country where they are not subject to direct State taxes; 2. those nationals of other States, a) who do not have a place of residence in their native State and live in Prussia or who do not have a place of residence in the German Empire but stay in Prussia; b) who have their official place of residence in Prussia (§ 2 para 3 op cit); 3. those foreigners who have a place of residence in Prussia or who acquire one or who stay in Prussia for longer than 1-year; . . . § 2 Regardless of nationality, place of residence or stay, all persons are liable for income tax in respect of income a) from salaries, pensions and attendance fees paid by the Prussian Treasury; b) from land situated in Prussia or from trade or industrial facilities or other commercial permanent establishments in Prussia.

On the Origins of Model Tax Conventions 77 [Source: G Schanz, ‘Preussisches Einkommensteuergesetz vom 24 Juni 1891’ (1891) VIII Finanz-archiv: Zeitschrift für das Gesamte Finanzwesen 331, 331.] Translated by PJ Hattingh, Cambridge 2012.

APPENDIX 4 P R U S S I A N L AW, C ONC ER NING TH E AVOIDA NC E OF DO U B L E TA X ATION. OF 18 A PR IL 1900

§ 1 The Treaty with the Imperial Austrian Government of 21 June 1899 for the elimination of double taxation, which results from the application of the existing tax laws in the Kingdoms and States represented in the Imperial Council and the enclosed final protocols are approved. . . .

A PPENDIX A

His Majesty the German Emperor, King of Prussia, and His Majesty the Emperor of Austria, King of Bohemia etc. and Apostolic King of Hungary, desiring to eliminate double taxation, which results from the application in the Kingdom of Prussia of existing tax laws in the Kingdoms and States represented in the Imperial Council, decided to conclude for this purpose a convention and have appointed as their plenipotentiaries . . . who . . . have agreed on the following:

Article 1 Subject to the provisions in Articles 2 to 4, Prussian and Austrian nationals, respectively, shall be assessed for direct State taxes only in the State in which they have their place of residence, or in the absence of such a place of residence, only in the State in which they are staying. Prussian or Austrian nationals who have a place of residence in both States shall only be assessed for direct State taxes in their native State.

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A place of residence within the meaning of this agreement is the place occupied as a dwelling in circumstances that indicate an intention of permanently maintaining an abode there.

Article 2 The ownership of land and buildings, and the operation of a fixed trade, as well as the income arising from these sources are only to be assessed for direct State tax in the State in which the land and buildings are situated or where a permanent establishment for the exercise of trade is maintained. Branches, factories, depots, counting houses, places of buying and selling, and other business facilities maintained for the exercise of a fixed trade by a proprietor himself, business partners, attorneys or other permanent representatives are to be regarded as permanent establishments. When permanent establishments of the same commercial enterprise are located in both areas, the assessment for direct State tax in each area must only be in accordance with the actual operations of the domestic permanent establishment. The unrestricted application of existing legal requirements in Prussia and in Austria, respectively, as regards the tax treatment of mortgages and income from it, remains in place.

Article 3 Insofar as according to the Austrian law of 25 October 1896 (ReichsGesetzbl. No. 220) the taxation of interest and pension benefits had to be made by deduction, it remains the same for any purpose without restriction. This does not, however, affect in any way the Prussian tax administration or the Prussian laws concerning taxation.

Article 4 Salaries, pensions and attendance fees payable from a State treasury (Kronkasse, Hofkasse) are to be assessed for direct States taxes only in the State that makes the payment.

Article 5 It is understood between the Contracting Parties that additional tax to be paid on the basis of the Prussian law of 14 July 1893 shall be regarded

On the Origins of Model Tax Conventions 79 from 25 October 1896 as similar to, respectively, general profit tax and a particular direct tax within the meaning of § 9 para 2 and § 127 para 1 of the Austrian Act, regarding direct personal taxes.

Article 6 The provisions in Art 19 of the Trade and Customs Agreement of 6 December 1891 remain unaffected.

Article 7 Regarding the practical elimination of double taxation of such persons who are both Prussian and Austrian nationals, and who at the same time have their places of residence in both areas, the Contracting Parties will agree special provisions as is required for the cases in which this occur and make appropriate arrangements.

Article 8 If the termination of this Treaty, to which each of the two Contracting Parties shall be entitled, takes place before 1 October of a year, its binding force ceases in the tax year next to the calendar year of termination. If termination takes place after the mentioned notice date, the Treaty is only to be considered as dissolved as from the second following tax year.

Article 9 The reciprocal Treaty should be submitted by both sides for the highest approval and the exchange of the instruments of ratification should be made as soon as possible in Berlin. The respective Plenipotentiaries to the present Convention have signed this volume in their own seal in duplicate for certification purposes. Berlin, 21 June 1899. (LS) Richthofen. Szögyeny [Source: Schanz 1901, above n 95, 285.] Translated by PJ Hattingh, Cambridge 2012.

3 The Relationship of Situs and Source Rules for Tax Purposes MALCOLM GAMMIE

A BSTR A C T During the nineteenth and early twentieth centuries, the courts were called upon in various contexts to resolve the scope of taxing powers in the case of both death taxes and the income tax. In the case of death taxes, the competing claims of Canterbury and York to administer the personal estates of deceased persons and to grant probate of their wills played an important part in the development of the situs rules for personal property, including their application to choses in action, and in determining the scope of the different taxes that were imposed on death. Over the same period, the courts were called upon on occasion to consider whether income should be regarded as derived from a UK or foreign source. Given that income tax (as the later tax) was imposed by reference to the source of income and that the source might comprise property of one sort or another, it might be anticipated that the courts would resort to established situs rules to determine whether income was UK or foreign. In fact, the cases offer little support for the idea that the situs rules played a significant role in the development of the income tax rules.

I NTR ODU C TION

I

N TWO PREVIOUS papers,1 I considered particular aspects of the concept of ‘source’ in UK income tax. In each paper, I concluded that the ‘source’ rules for income tax differ from the ‘situs’ rules of private international law that are usually adopted in the case of property taxes such as stamp, inheritance and wealth taxes. Baldly stated in this way,

1 M Gammie, ‘The Origins of Fiscal Transparency in UK Income Tax’ in J Tiley (ed), Studies in the History of Tax Law, vol 4 (Hart Publishing, 2010); M Gammie, ‘An Older Tale of Default on Greek Bonds’ in J Tiley (ed), Studies in the History of Tax Law, vol 5 (Hart Publishing, 2012).

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this proposition seems quite straightforward and to an extent obvious. The jurisdiction to levy the latter taxes as property taxes frequently imposed by reference to a particular event at a particular time (such as transfer or death) may necessarily rest on the situs at that time of the property that forms the basis of the charge to tax. The measurement of a person’s income over a particular period of time, usually a tax year, is somewhat different in concept. Nevertheless, the origins of the source principle in the UK income tax, associated as it is with the deduction of tax at the source under a tax organised into schedules that aimed to describe the particular types of property from which a person derives income, does not seem so fundamentally different as to require the exclusion or disregard, or to label as irrelevant, the ordinary situs rules where location of property or income is relevant to liability. In this paper I examine the two sets of rules and consider their relationship in more detail to see to what extent in an historical context my baldly stated opening proposition holds water.2

T H E SI T US R U LES OF PR IVAT E I N TER NATIONA L LAW

Introduction The appropriate starting point is with the rules of private international law under which the situs of particular property is determined. Against that background, I can move on to consider to what extent the situs rules are relevant to the concept of source under the income tax. Rule 128 in Dicey, Morris & Collins3 states that the law of a country where a thing is situate (lex situs) determines whether (1) the thing itself is to be considered an immovable or a movable, or (2) any right, obligation or document connected with the thing is to be considered an interest in an immovable or in a movable. As to where a thing is situated, Rule 129 of DMC states that: 1. Choses in action generally are situate in the country where they are properly recoverable or can be enforced. 2. Land is situate in the country where it lies. 3. Subject to two exceptions,4 a chattel is situate in the country where it is at any given time. 2 This paper does not attempt to examine the relationship between the source and situs rules under current taxing Acts or to deal with the specific statutory source or situs rules found in those Acts or in tax treaties. The paper is framed entirely in its historical context as reflected in the relevant cases, many of which are found in the 19th or early 20th centuries. 3 Lord Collins of Mapesbury et al, Dicey, Morris & Collins on The Conflict of Laws, 15th edn (London, Sweet & Maxwell, 2012) (hereafter DMC(. 4 A merchant ship may at some times be deemed to be situate at her port of registry and a civil aircraft may at some times be deemed to be situate in its country of registration;

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On the face of it, Rule 128 appears to make little sense. A ‘thing’ is where it is because it is immovable or because it has been moved there. As DMC put it, ‘Whether a given thing is in its nature a movable or an immovable, ie whether it can in fact be moved or not, is manifestly a matter quite independent of any legal rule’. As DMC point out, however, a law may determine that a thing in its nature immovable shall, for some or all legal purposes, be subject to the rules applicable to movables, or that a thing in its nature movable shall, for some or all legal purposes, be subject to the rules applicable to immovables.5 When it becomes necessary to decide which of two systems of law should apply to determine rights and obligations and entitlement to property, the English courts (and their Scottish counterparts) accordingly adopt the distinction of movable and immovable property, even though this is a distinction that is not otherwise known to the courts of those jurisdictions.6 Broadly speaking, the distinction is based on the practical proposition that it is the court within whose jurisdiction the property can be found that matters, because that is the court which has and can exercise effective control over the property. The situs of a thing is ascertained by reference to the rules of the lex fori because all concepts signifying connecting factors must be interpreted by reference to that system.7 Foreign law, however, can also be relevant if the rules of the lex fori require reference to it. For the most part, the situs of land and chattels will be evident and require little comment. Rule 128(2) means, however, that issues can arise when the point that requires resolution does not concern the immediate right to ownership or possession of the land or chattel but is concerned with some legal right or obligation that is in some way derived from or related to ownership or possession of the land or chattel. In this respect, see DMC, ibid, 22E-057 and 22E-061. In The Attorney-General v Hope 1 C M & R 530, 8 Bligh 44, probate duty was evidently paid in respect of the deceased’s personal estate to the extent that it was at the time of death situate in England or upon the high seas. Part of the Crown’s (unsuccessful) argument in The Attorney-General v Dimond 1 C & J 356 was that the probate duty was chargeable in respect of French securities because the grant of probate had enabled the executor to obtain possession of the securities, just as probate would enable the executor to obtain possession of the deceased’s goods on board a ship that docked in England after his death. I have not investigated further the issue of liability to probate duty in respect of property on the high seas at the time of death. 5 Thus, when slavery existed in Jamaica, Jamaican law regarded the slaves on an estate as appurtenant to the land so that in ex parte Rucker (1834) 3 Dea & Ch 704 ownership of the slaves passed under a devise of realty in Jamaica. See DMC, above n 3, 22-003 and 22-009. 6 In Re Hoyles [1911] 1 Ch 179 per Farwell LJ, 185; Macdonald v Macdonald’s Executrix 1932 SC (HL) 79 per Lord Tomlin, 84–85. In the first of these Farwell LJ appears to suggest that if the domestic law of both jurisdictions is the same it is unnecessary to apply the rule. In practical terms that may be right, in the sense that the answer to the particular issue may be the same given the same domestic law. Strictly, however, the movable/immovable distinction is applied first to determine the applicable law and then the domestic rules of the applicable law. 7 DMC, para 22-024.

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the courts have regarded a variety of legal interests derived from land as immovable property: leaseholds,8 a testatrix’s share of a rentcharge,9 Scottish heritable bonds10 and a mortgage debt secured by land.11 Whether a mortgage debt is movable or immovable (and therefore the applicable law) may be determined by the situs of the land over which it is secured, but the precise nature of the person’s claim to the mortgage debt may still require consideration. In Lord Sudeley v Attorney-General,12 Algernon Tollemache died domiciled in England, leaving the residue of his estate in trust for his wife in part absolutely and in part for life. His estate included mortgages on land in New Zealand. Unfortunately, his wife died before Algernon’s estate had been fully administered and any appropriation of the New Zealand mortgages had been made. His wife’s executors sought to exclude the value of the New Zealand mortgages in estimating probate duty. They based their claim on the fact that the husband’s executors would have to resort to the New Zealand courts to enforce their rights against the New Zealand mortgagees. The House of Lords noted, however, that, while in a general sense his wife might be regarded as having an interest in the New Zealand mortgages, until her husband’s residuary estate had been ascertained it could not be said with certainty what it would contain. A legatee has no right to specific assets until they are appropriated so that there was nothing to prevent her husband’s executors realising the New Zealand mortgages and paying cash to the wife’s estate. It could not be said, therefore, that the legatee’s right had any specific locality attributable to particular property. The locality was fixed by the locality of the obligors—whether called executors, debtors or trustees—against whom the obligation to administer the estate could be enforced.13 As such, the value of her interest was subject to probate duty. On the other hand, the English doctrine of conversion, under which land directed to be sold and turned into money is regarded as money, does not apply when determining whether the interest in land is movable

8

Freke v Lord Carbery L R 16 Eq 461; Duncan v Lawson 41 Ch D 394. The rentcharge was personal estate and chargeable with duty as personal estate under the Legacy Duty Act, 1796. It was not exempt from legacy duty by reason of the testatrix’s foreign domicile because the property was as much land as if land to the annual value of the rentcharge had been given. It was accordingly immovable property: Chatfield v Berchtoldt L R 7 Ch 192. 10 In re Fitzgerald [1904] 1 Ch 573. 11 In re Hoyles, above n 6; see further below. 12 [1897] AC 11. For further analysis of this case, see Gammie, ‘Fiscal Transparency’, above n 1, at 60–62. 13 Thus, in In the Goods of William Ewing (1881) 6 PD 19, an application by a legatee for a grant of administration in England was refused where the legacy comprised the deceased’s share of his uncle’s estate which was being administered in Scotland. Even though the Scottish estate included English assets, the legatee’s right was to require the uncle’s executors to complete the administration, which was Scottish property. 9

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or immovable property.14 ‘Conversion’ operates to determine whether, under the applicable law (in this case, English law), ‘land’ is part of personal or real estate, not to determine whether in the circumstances the property in question (in this case, land in Birmingham held on trust for sale) is movable or immovable. On a similar basis, personal property with an English situs, such as English registered securities, acquired with the proceeds of sale of settled land were deemed to be land (as a matter of English law) and devolved accordingly.15 As these examples illustrate, the characterisation of property as movable or immovable is irrespective of its character as personal or real property under English law. The latter characterisation follows once English law is found to be the proper law. In In re Hoyles,16 a testator purported to leave one-third of his property, which included mortgages of land in Ontario, to charity. The problem was that, under the Mortmain Act 1736,17 the gift was void if the mortgage debt counted as ‘impure personalty’. The law of Ontario was to the same effect, but it was argued that the mortgage debts as debts ranked as personalty, so that the gift was valid. As the Attorney General, Sir Rufus Isaacs, put the matter:18 As a debt, a mortgage debt secured on land is clearly personal; as a charge on the land, it clearly savours of realty, and the question is which of these two characteristics ought to prevail. That depends on whether the debt or the charge is the principal characteristic. A mortgage though in form a conveyance of land has always been treated as personal property, and it is submitted that the debt and not the security is the principal characteristic and determines the character of the property.

As appears from above, however, the distinction between real and personal property is an irrelevant distinction in this context, given that not all

14

In re Berchtold, Berchtold v Capron [1923] 1 Ch 192. In re Cutcliffe’s Will Trusts [1940] Ch 565. In re Middleton’s Settlement, Cottesloe and Loyd v AG [1947] Ch 583 illustrates the limits of this doctrine. The Irish Revenue required proof that UK estate duty was properly charged on the death of the tenant for life under a strict settlement in respect of English registered securities acquired with the proceeds of Irish settled land. The settlement was made in 1909 and the contention was that the securities should be regarded as Irish land and outside the scope of UK estate duty by virtue of the Settled Land Act 1882 (SLA), which, it was said, continued to apply following the creation of the Irish Free State (IFS). If the SLA had been an Irish Act it clearly could not have had extra-territorial effect to defeat the UK’s claim for duty on UK property. It was said, however, that the SLA had effect as an Imperial Act of the UK Parliament. The Court decided, however, that the Act creating the IFS constitution, which preserved the SLA, had effect only within the IFS and not extra-territorially. Furthermore, the SLA operated only to preserve the rights of beneficiaries to the proceeds of sale of land which were reinvested in other assets. The SLA was not directed to determining the situs of property and therefore could not be regarded as giving an Irish situs to English property. 16 Above n 6. 17 9 Geo 2, c 36. 18 In re Hoyles, above n 6, 181–82. 15

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systems of law make it.19 The report records that Lord Justice Farwell interrupted the Attorney-General’s submissions to refer to the rule in the second edition of DMC that now comprises Rule 128(2). The AttorneyGeneral’s answer to his intervention included reference to Lawson v Commissioners of Inland Revenue,20 in which the Court of Exchequer in Ireland had decided that a mortgage held by an Irish testatrix on land in Switzerland was a movable. It was said in that case, unsuccessfully, that the mortgages were immovable property situated out of the UK and that no legacy or succession duty would have been payable in respect of them before the passing of the Finance Act 1894. Lord Justice Farwell’s response is instructive:21 ‘That may be so for some purposes but revenue cases have much less reference to actual facts than to the exigencies of the Treasury’. Indeed, as has already appeared, revenue cases have provided a regular test bed for the development of the situs rules and illustrate that an essential question is to know for what legal purposes the proprietary rights have to be ascertained. As DMC note,22 The determination of the lex situs depends on [the ascription of a situation to things] and this in turn is necessary for the solution of problems of the conflict of laws in such areas as succession, inter vivos transfers of property and the recognition of foreign governmental acts affecting property. Moreover, certain questions concerned with the administration of estates and much revenue legislation rest upon the ascription of a local situation to things.

If property is situated in a particular jurisdiction, that jurisdiction will ordinarily be able to assert taxing rights in respect of it even if the persons entitled to it may be abroad and even if rights in the property may have to be determined by reference to a different legal system, given its characterisation as movable or immovable.

19 In fact, the Attorney-General’s argument was not based solely on the distinction between real and personal property but on the distinction between movable and immovables. His point was that the debt, as personal property, was movable property and that the validity of a testamentary disposition of movables depends upon the law of the testator’s domicile (ie England). As the English Mortmain Act 1736 only applied to English land, it did not render invalid a gift of a debt secured over land in Ontario. Although the Court of Appeal may have thought that it was unnecessary to apply the distinction between movable and immovable property because the law in Ontario was the same as English law on this matter, the Court was clear that a mortgage debt secured by land was regarded as an immovable and not a movable (citing what is now Rule 128(2) of DMC); see Cozens-Hardy MR at 183. 20 [1896] 2 IR 418, [1896] WN 145. 21 In re Hoyles, above n 6, 182. 22 Para 22-024, footnotes omitted.

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The Ecclesiastical Jurisdiction in Probate Matters Historically, the most common situation that has required the application of situs rules is that occurring on a person’s death, when it has had to be ascertained who is entitled to administer the deceased’s property and who is entitled to succeed to it, as a matter of the applicable law or under the deceased’s will.23 The origins of these rules in England owe much to ecclesiastical law and the jurisdictions of the Archbishops of Canterbury and York. Although this is not the occasion on which to undertake a detailed examination of the ecclesiastical influence on the development of the rules, some brief introduction is appropriate. The development of the ecclesiastical jurisdiction over the estates of deceased persons appears to have been a long and involved process.24 Once ecclesiastical jurisdiction had been established to the exclusion of the temporal courts, however, the administration of a deceased’s personal property depended largely upon the diocese in which the property was found. Initially the ‘ordinary’ or spiritual judge had a right to administer the deceased’s chattels in the case of intestacy. This then extended to probate, because ‘it was thought just and natural that the will of the deceased should be proved to the satisfaction of the prelate whose rights of distributing his chattels for the good of his soul was superseded thereby’.25 The jurisdiction to grant probate was regulated by the place of the testator’s death and the local situation of his personal effects at that time. No particular issue would arise if the deceased’s property was in a single diocese, but the situation became more complicated when more than one diocese was involved. The practice therefore grew up that, where a deceased person had bona notabilia in a diocese or dioceses other than the one in which he died, his will had to be proved before the Archbishop of the province in which the diocese lay.26 Swinburne gives some explanation for this development, as follows27

23 The four current rules in DMC derived from the past are: (1) Rule 147: the courts of a foreign country have jurisdiction to determine the succession of all movables wherever situated of a testator or intestate dying domiciled in such country. Such determination will be followed in England; (2) Rule 148: the courts of a foreign country have jurisdiction to determine the succession of all property of a deceased person which is situate in such country. This jurisdiction is unaffected by the domicile of the deceased. Such determination will be followed in England; (3) Rule 149: the succession to the movables of an intestate is governed by the law of his domicile at the time of his death; and (4) Rule 150: the succession to the immovables of an intestate is governed by the law of the country where the immovables are situated (lex situs). 24 Swinburne on Wills, 7th edn, vol II, 772–87. 25 Blackstone 2 Com 494. 26 If a deceased had bona notabilia on his person while travelling across dioceses, this would not ordinarily trigger the jurisdiction of the archbishop. 27 Swinburne on Wills, above n 24, 791.

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Malcolm Gammie As to the jurisdiction of the archbishop to grant administration where there are bona notabilia in several dioceses, it was not always so, for anciently the ordinaries granted administrations in respect of the several goods of which persons died possessed in their several dioceses; but this was found inconvenient, because the creditors of the intestate were compelled to bring actions severally against the respective administrators; and therefore by composition, or by some other agreement which is now brought into a prescription, the prerogative of granting administration in such cases is vested in the archbishop.

Bona notabilia were assets forming part of a deceased’s estate which, generally, had a value of £5 or more.28 The scope for jurisdictional disputes and the need to regulate matters between the different dioceses and provinces was obvious. If a deceased person did not have bona notabilia in different dioceses but his will was proved before the archbishop of the province, the archbishop’s action was voidable. However, if a deceased person did have bona notabilia in different dioceses but his will was proved by the bishop of a particular diocese, the bishop’s action was void. This was because the bishop could have no jurisdiction of a cause that belonged to his superior. If the deceased had goods in both the province of Canterbury and the province of York, and if in each jurisdiction the goods amounted to bona notabilia, the will would have to be proved before each archbishop. On the other hand, if in one province the deceased had bona notabilia in several dioceses but in the other it was confined to one diocese, in the former province his executors would have to prove his will before the archbishop and in the latter they would have to prove the will before the bishop of the diocese.29 A number of points can be drawn from this briefest outline. The jurisdiction to administer or grant probate was local in nature to the diocese or province concerned, and extended only to property that was situated within the jurisdiction at the time of the death. It might be that the grant of probate within a particular province would facilitate the executors getting possession of or dealing with the deceased’s assets elsewhere, but that was a separate matter which did not imply that the jurisdiction extended to property outside the geographic limitations of the diocese or province.30 Furthermore, probate effectively confirmed or validated the will and the executor derived his power from the will rather than the probate as such. Although the jurisdiction to administer a deceased’s property and to grant probate recognised the locality of personal property, for which situs rules were needed, the general legal principle remained that personal 28 Some dioceses set a higher minimum value for bona notabilia, eg the qualifying amount in London was £10. 29 If in neither jurisdiction the goods amounted to bona notabilia, the will had to be proved before the particular bishop of each diocese in which the deceased had goods. The archbishop’s jurisdiction depended upon the dual requirements of value and geography. 30 See in particular AG v Dimond, above n 4; AG v Hope, above n 4.

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property was regarded as having no locality and that the distribution of personal property on death was governed by the deceased’s country of domicile at the time of his death. As we shall see, it was against the background of these basic rules that the situs rules and scope of the various duties charged on a person’s death were developed. Unsurprisingly, when we come to the late nineteenth and early twentieth centuries, two of the principal contributors to the case law are Australia and Canada, where in each country jurisdictional issues similar to those of the church in earlier times were at play between the states and provinces of those countries.

The Scope of Probate and Related Duties Prior to the introduction of estate duty in the Finance Act 1894, there were five death duties in existence in England—probate duty, account duty, temporary estate duty (which was imposed for a period of seven years expiring in 1896), legacy duty and succession duty.31 Probate duty started out as a stamp duty in 1694 and was only payable on such part of the assets as the executors or administrators could recover by virtue of the probate or letters of administration.32 It was not payable in respect of property which was not situate within the jurisdiction of the Court of Probate.33 Account duty was first imposed in 1881 and was a stamp duty intended to cover certain lifetime gifts of personal and movable property, which, if it had passed on death, would have been liable to probate duty. As such, it operated to protect probate duty from avoidance by gifts inter vivos.34 Temporary estate duty was a duty of 1%, introduced in 1889 and levied by reference to the affidavit or inventory lodged for probate, or letters of administration in the case of estates in excess of £10,000. It was charged on both real and personal property, but was not to be payable on deaths after 1 June 1896.

31 The position is summarised in the speeches of the Law Lords in Winans v AG [1910] AC 27, in particular Lord Gorrell at 39–40. There was also Corporation duty, which was imposed in lieu of death duties on corporate and unincorporated bodies and classified with death duties by the Inland Revenue: see CT Sandford, ‘Estate Duty versus Inheritance Taxation 1894’ [1968] British Tax Review 10. See also J Tiley, ‘Death and Taxes’ in J Tiley (ed), Studies in the History of Tax Law, vol 3 (Hart Publishing, 2009). 32 Originally it was purely a duty on the document and, notionally at least, it remained a documentary duty on probate and letters of administration until 1881, then on the Inland Revenue affidavit from 1881 until 1894. It was in effect an ad valorem duty on the property covered by the grant of representation from 1815 onwards. In the case of intestacy the duty was called Administration Duty; see Greene’s Death Duties, 7th edn (Butterworth, 1971), ch 24. 33 For the position in Scotland, see further below. 34 In 1881 it applied to gifts within three months of death but this was extended to 12 months in 1889. Duty was imposed at the same rate as probate duty.

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The jurisdictional limitations associated with the grant of probate meant that probate duty was not charged in respect of the value of property situated outside the jurisdiction of the province that granted probate. Foreign property would therefore usually escape charge. The basis for this exclusion of foreign property came under scrutiny, however, in AG v Bouwens,35 which concerned the liability to probate duty of bonds of foreign governments. The deceased’s estate included Russian, Danish and Dutch bearer bonds, which could be dealt in as bearer securities within the UK without restriction. The bonds were in the UK at the date of death and the executors took possession of them and sold them. They argued that the debts represented by the bonds were simple debts and that, on general principles, they were therefore situate where the debtor was found, ie abroad, and outside the scope of probate duty. The Inland Revenue accepted that probate duty was limited to property in respect of which probate was granted and that this could only encompass property within the jurisdiction of the court granting probate.36 They asserted, however, that it was irrelevant that the obligation evidenced by the bonds could only be enforced in a foreign jurisdiction because the bonds could be (and had been) freely dealt with in the UK without the need to prove title abroad, outside the jurisdiction of the probate court. Lord Abinger CB noted that probate duty was granted ‘in proportion to the value of the estate and effects for and in respect of which such probate shall be granted’, and that Dimond and Hope established that the duty applied only by reference to the value of such part of the estate as is at the death within the jurisdiction of the spiritual judge by whom the probate or letters of administration were granted. Dimond and Hope, however, concerned French and American stock that were part of the national debt of those countries and were only transferable by registration abroad. Lord Abinger summarised the conventional position as follows:37 Whatever may have been the origin of the jurisdiction of the ordinary to grant probate, it is clear that it is a limited jurisdiction, and can be exercised in respect of those effects only, which he would have had himself to administer in case of intestacy, and which must therefore have been so situated as that he could have disposed of them in pios usus. As to the locality of many descriptions of effects, household and moveable goods, for instance, there never could be any dispute; but to prevent conflicting jurisdictions between different ordinaries, with respect to choses in action and titles to property, it was established as law, that judgment debts were assets, for the purposes of jurisdiction, where the judgment is recorded; leases, where the land lies; specialty debts, where the instrument happens to be; and simple contract debts, where the debtor resides at the time of the testator’s death; and it was also decided, that as bills of 35 36 37

(1838) 4 M & W 171. See AG v Dimond, above n 4; AG v Hope, above n 4. AG v Bouwens, above n 35, 191.

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exchange and promissory notes do not alter the nature of the simple contract debts, but were merely evidences of title, the debts due on these instruments were assets where the debtor lived, and not where the instrument was found. In truth, with respect to simple contract debts, the only act of administration that could be performed by the ordinary would be to recover or to receive payment of the debt, and that would be done by him within whose jurisdiction the debtor happened to be.

The bonds in this case, however, were different because they were marketable securities that could be dealt with effectively as valuable chattels where they were found. Accordingly their value fell to be included in the estate and liable to duty.

Legacy and Succession Duties The other two duties imposed by reference to death were legacy duty and succession duty. The former was first introduced by Lord North in 1780;38 the latter by Gladstone under the Succession Duty Act 1853.39 Legacy duty (as with probate and account duties) was limited largely to personal property. Succession duty applied to real property, settlements taking effect on the death of the settlor and leaseholds, which were technically personal property but which were placed with and taxed as land. Thus, succession duty was subjected to duty dispositions and property not ordinarily touched by the Legacy Duty Acts. While probate and account duties and the temporary estate duty applied to the amount of property passing, whatever its destination, legacy and succession duty applied to the value of the interests taken, and the duty varied with the relationship of the person taking to the person from whom the interest was derived or the predecessor. In this case, reflecting the general legal rule, the situs of the property was not regarded as important to the scope of the duty, notwithstanding the width of the language of the statutes imposing the duties. Instead, the principle of mobilia sequuntur personam applied.40 As a result, legacy duty was not payable on a legacy of personal property situated within the UK where it was left by the will of a testator domiciled abroad.41 Conversely, legacy duty was payable on a legacy of personal 38

See 30 Geo 3, c 52; 55 Geo 3, c 184; 43 Vict, c 14; 44 and 45 Vict, c 12. 16 and 17 Vict, c 51. See Attorney-General v Campbell LR 5 HL 524, per Lord Westbury at 529: ‘If a man dies domiciled abroad possessed of personal property, the question whether he has died testate or intestate, and also all questions relating to the distribution and administration of his personal estate belong to the judge of his domicil, and that on the principle of mobilia sequuntur personam. His domicil sets up the forum of administration.’ 41 Thomson v Advocate-General 12 Cl & F 1. The Act imposed duties on, ‘every legacy given by any will of any person’. The Crown claimed legacy duty on money locally situate 39 40

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property situated abroad left by the will of a person domiciled in the UK.42 The same was true for succession duty.43 The reason for this was that legacy and succession duties depended upon succession to property. The Acts imposing them operated on and had regard to the persons on whom, on the testator’s death, his property devolved. Given that personal property devolves according to the place of the testator’s domicile at death, the property would devolve in the case of a non-domiciliary according to the law of a foreign country, which might be entirely different from the applicable English law. Lord Cranworth, in speaking of section 2 of the Succession Duty Act 1853 in Wallace v Attorney-General,44 explained his reasoning as follows: Any wider construction would give rise to difficulties hardly to be surmounted. In collecting duties the officers of the revenue will, in general, find no difficulty, supposing the duties to be imposed only on persons entitled under our own laws. The officers know, or must be supposed to know, what these laws are with regard to the persons liable by our laws to the duties to be levied. But who the parties entitled under a foreign will are is a question which no knowledge of our laws will enable them to solve. It can only be ascertained by evidence in every case shewing what the foreign law is, and who is entitled under it. In some cases this may admit of little or no doubt, but in others it may be a matter of great difficulty. And in no case can the officers safely act until the rights of the parties have been ascertained litigiously. But even when it is ascertained who the parties entitled are, it by no means follows that the amount of duty payable would be known.

The application of the principle of mobilia sequuntur personam to legacy and succession duties was therefore based on convenience, and springs from the necessity of avoiding the practical difficulties of the time in seeking to levy the duties on any other basis. Those difficulties did not arise, however, for probate duty, which had to be paid by the executor before probate was granted. In that case the ultimate devolution of the property was irrelevant. The legacy and succession duty principle was carried over, however, to Queensland—one assumes inadvertently—where the Queensland Succession and Probate Duties Act 1892 reproduced section 2 of the in Scotland owned by a man domiciled in Demerara. The House of Lords decided that the words should be construed narrowly so that the statute did not extend to the will of any person domiciled out of Great Britain, whether the assets were locally situate there or not. 42

In re Ewin 1 C & J 151; Attorney-General v Napier 6 Ex 217. Wallace v Attorney-General LR 1 Ch 1 in relation to s 2 Succession Duty Act 1853. A French domiciliary owned personal property (Consols) in England. The Crown claimed succession duty and Lord Cranworth held that the same limitation which had been put on the words, ‘every legacy given by any will of any person’ must be put on the words, ‘every disposition whereby any person becomes entitled’, and that the person intended is a person who becomes entitled by the laws of England. 44 Ibid, 7. In re Haig, Harris v Drayton (1922) 13 ATC 635 Russell J said (at 640–41) that this reasoning had no real application to estate duty. 43

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English Succession Duty Act 1853.45 In Harding v The Commissioner of Stamps for Queensland,46 the Commissioner claimed succession duty in respect of the deceased’s estate which included debts secured over land in Queensland and shares in the Royal Bank of Queensland. The deceased died in 1894, and in 1895 Queensland passed an Act declaring that the 1892 Act applied to any Queensland property irrespective of the law under which it was distributed. This recognised the taxing rights that Queensland was able to assert in respect of locally situated property. Nevertheless, the Privy Council considered that the Queensland legislature must have known the accepted meaning of the words that it was enacting in 1892, and the 1895 amendment was unable to alter the position in the case of estates of persons who had died before the amendment was made.

Estate Duty Estate duty was introduced by the Finance Act 1894, which was designed to rationalise the chaotic mixture of charges that existed at that time. Probate and account duties and the temporary estate duty were in effect superseded by the Finance Act 1894 in the case of persons dying after 1 August 1894. Legacy duty was left very much where it was, and succession duty was amended in certain respects.47 The question then arose as to the scope of the estate duty having regard to the different bases of liability under the earlier charges. In Winans v AG (No 2),48 Mr Winans was domiciled in the USA but at the time of his death he owned certain bearer bonds, marketable on the London Stock Exchange and passing by delivery. They were physically situated in England when he died.49 None of the debtors on the bonds were UK entities and it was said that the bonds were not subject to estate duty, being property not situate in the UK. Given the decision in Attorney-General v Bouwens, such a claim seemed bound to fail, but the contention was that the Finance Act 1894 should be limited in a similar 45 ‘Every disposition of property by reason of which any person shall become beneficially entitled to any property upon the death of any person shall be deemed to confer on the person entitled by reason of such disposition a succession.’ 46 [1898] AC 769. 47 See eg FA 1894, s 18. The mode of valuation and rates of legacy and succession duties were largely assimilated so that they became virtually identical in their effect, see Sandford, above n 31. 48 Above n 31. 49 It appears from the report of the Court of Appeal’s decision ([1908] 1 KB 1022) that the bonds were held at the Bank of England for safe custody and were worth some £1.5 million. They were a mixture of foreign government bonds and bonds issued by US railroad companies. Interest paid in respect of them would been foreign source interest within Case IV or Case V (and therefore not taxable on Mr Winans if non-resident or not remitted), even though for estate duty purposes they were dutiable.

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way to the Acts imposing legacy and succession duties. The Law Lords were clear, however, that estate duty fell upon the property passing upon a death, irrespective of its destination, and in this respect was analogous to probate duty, which it superseded.50 Both proceeded upon the value of the property which passed upon the death of the deceased rather than upon any assessment of benefit arising upon the death to this or that particular person. In asserting jurisdiction to tax property physically situated within its borders, wherever its owner may have been domiciled at the time of his death, the UK was doing nothing contrary to the principles of international law.

Debts The basic rule, as DMC Rule 129(1) indicates, is that a chose in action is generally situate in the country in which it is properly recoverable or can be enforced.51 A debt is situate in the country where the debtor resides, on the basis that the country of the debtor’s residence is normally the place where the creditor can enforce payment.52 ‘Residence’ in this context refers to residence for the purposes of jurisdiction, which is not the same as residence for tax purposes. Furthermore, as DMC note: enforceability and situs do not fully coincide: a debt will not normally be situate in a country if it is not enforceable there, but the fact that it is enforceable in a particular country does not necessarily mean that it is situate there.

Debts owing to the deceased were capable of being bona notabilia and a simple contract debt of an appropriate amount represented bona notabilia in the diocese in which the debtor resided, on the basis that that was where the debt could be enforced.53 The ecclesiastical authority in the diocese 50 Similarly, jewellery and other personal property owned by foreign trustees but held and used in the UK by the life tenant at her death was within the scope of the duty. There was no limitation to be implied (by analogy to Wallace v The Attorney-General) that the charge only applied to such property as could be recovered by the person inheriting it under a title given by English law: In re Haig, Harris v Drayton, above n 44, per Srutton LJ at 648–49. 51 This states the matter accurately. The obligor’s residence, as such, is irrelevant save for the point that in many cases (notably simple contract debts) the debt can be enforced where the debtor can be found. 52 See DMC, above n 3, para 22-026, and the cases cited at n 59 below. 53 See Byron v Byron 1 Cro Eliz 472. Anderson J said: ‘The debt [namely, that in question in that case] is where the bond is, being upon a specialty; but debt upon a contract follows the person of the debtor; and this difference hath been oftentimes agreed’. See Royal Trust Co v AG for Alberta [1930] AC 144 per Lord Merrivale (at 150): ‘The local situation proper to be attributed to the various assets of a deceased person has long been governed under our law by rules, no doubt somewhat artificial in character, which were evolved when the lawful jurisdiction to direct the administration of such assets depended upon the locality in which the assets were found. Many of the Courts concerned had authority within small provincial areas only. A simple contract debt due from a debtor resident outside the jurisdiction within which the testator resided was not assets within that jurisdiction.’

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in which the creditor died would have had no jurisdiction to recover the debt. The position was different in the case of a debt represented by a specialty.54 However, a bill of exchange remained bona notabilia where the debtor resided, not where the bill was to be found. A reason for this appears to be that if the debt represented by the bill was paid, payment could be pleaded to bar an action on the bill itself.55 The continuing relevance of these principles in a more modern tax context is illustrated by Kwok Chi Leung Karl v Commissioner of Estate Duty56 in relation to Hong Kong estate duty. The duty was not levied on property situate outside the colony and, to escape liability in respect of certain Hong Kong shares, the deceased’s family took steps before his death to convert his shares into foreign property. To that end, some two months before his death, a company (Tolu) was incorporated in Liberia. The day before his death, his attorney sold his Hong Kong shares to Tolu for a price represented by a promissory note. It was conceded that Tolu was managed and controlled in Hong Kong, where all its directors resided, but the question was whether the debt represented by the promissory note was situated there. The note was non-negotiable and was payable on demand in 60 days in Monrovia, Liberia. The Hong Kong Court of Appeal took the view that, as the note was not immediately payable, the ordinary rule for the situs of simple contract debts did not apply. Instead, the property represented by the note was the individual’s present right to assign the right to receive payment on the note.57 As the individual died in Hong Kong and the note was in his possession there at the time, the Court concluded that it was property in Hong Kong. The Privy Council disagreed. As Lord Oliver noted:58 A chose in action is no less a chose in action because it is not immediately recoverable by action and their Lordships know of no authority for the view that the situs of a chose in action recoverable in futuro is to be determined either by the residence of the person to whom the obligation is owed or by the physical whereabouts of the document evidencing the right (not being a specialty debt) . . . The matter falls, in their Lordships’ opinion, to be determined by reference to first principles . . . It is clearly established that a simple contract debt is locally situate where the debtor resides—the reason being that that is, prima facie, the place where he can be sued: New York Life Insurance Co v Public Trustee [1924] 2 Ch 101, 114, per Warrington LJ. A debt which is payable in futuro is no less a debt and there is no logical reason why it should, as regard its locality, be subject to any different rule. 54

See further below. See Yeoman v Bradshaw 3 Salk 165. 56 [1988] 1 WLR 1035. 57 The note was non-negotiable so it could not have been dealt with in a manner similar to a bearer instrument; see AG v Bouwens, above n 35. 58 Kwok Chi Leung Karl, above n 56, 1040. 55

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Malcolm Gammie It is simply a chose in action and like any chose in action is subject to the general rule which is conveniently stated in rule 115 in Dicey and Morris on The Conflict of Laws, 11th ed (1987), vol 2, p 907 as follows: ‘(1) Choses in action generally are situate in the country where they are properly recoverable or can be enforced’. That will normally be where the debtor resides, although there are exceptions. For instance, a specialty debt is situate where the deed is physically situate. Similarly a negotiable instrument will be situate where the instrument is, at any rate where there is an available market for its negotiation. In the instant case, however, where the instrument evidencing or creating the obligation is non-negotiable and where it is in any event payable only on presentment abroad, there can be no reason for departing from the general rule that the chose is situate where it can be enforced, and that can only be in the place in which the debtor resides and can be sued.

Lord Oliver then noted that the authorities dealing with the residence of a company for income tax purposes were of no relevance to the question of the residence of the company for the purposes of determining the situs of a debt due from the company. That latter question usually depended upon the whereabouts of the company for purposes of service: where it carries on its business or where it is incorporated and has its registered office. In the present case, it was uncertain whether service of process against Tolu could be effected in Hong Kong. Its sole activities were the holding of directors’ meetings, all of which had taken place outside Hong Kong. Even assuming that service could be made there, however, the debt on the promissory note was due at its registered office in Liberia, which constituted its place of residence for these purposes.59

Specialty Debts As Byron v Byron60 indicates, the particular position of specialty debts was well established by the sixteenth century. The origins appear to relate to the action of covenant that was brought upon instruments which were enforceable by virtue of their form. By Edward I’s reign, it was settled that this involved writing which was sealed. The reason suggested for this was that the sealed writing provided conclusive evidence that the person concerned had come under the obligation in question. The deed became the obligation and this transformation was adopted relatively quickly for many obligations, though it took longer in the case of debt obligations. In the case of debt, the deed remained no more than conclusive proof that money had been handed over so as to create a debt. Starting in 1585, 59 See New York Life Insurance Co v Public Trustee [1924] 2 Ch 101; In re RussoAsiatic Bank [1934] Ch 720, 738; F & K Jabbour v Custodian of Israeli Absentee Property [1954] 1 WLR 139, 146. 60 Above n 53.

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however, an action in covenant was allowed by the Queen’s Bench as an alternative to an action in debt and this spread to Common Pleas in the seventeenth century, so that the deed itself became the debt (the original debt, if any, being merged) rather than just being evidence of it.61 The power of this transformation from evidence to obligation has been referred to in the following terms:62 A claim in debt for money . . . never required a document under seal in the King’s courts as did a claim in covenant. But if the plaintiff had one it was even more effective. What the defendant acknowledged under seal was not just the terms of an agreement: he acknowledged that he owed the money. Effectively, therefore, there was no law-suit. Against his own deed he could not deny that he owed, could not plead non debet. The only thing he could deny was the genuineness of the plaintiff’s otherwise conclusive proof, non est factum suum.

This indicates why, in probate, the debt attached to the deed rather than to the debtor: the actual contract between the parties was rendered irrelevant: the defendant could not even claim that he had already performed unless he had written evidence signed by the plaintiff to that effect. On the other hand, if the plaintiff lost the deed, he could not bring an action even if the money was owing. Since all rights and liabilities were contained within the deed, specialty debts were treated as bona notabilia (provided they were of an appropriate amount63) in the diocese where the deed was found at the time of the testator’s death.64 Lord Field explained the advantage of this in Commissioner of Stamps v Hope,65 when he pointed out that a problem with simple contract debts as bona notabilia wherever the debtor resided was that residence could be changeable and fleeting, and depended upon the movements of the debtor. A specialty had a species of corporeal

61 See WS Holdsworth, A History of English Law, 3rd edn, vol III (London, Methuen, 1922), 417–18. 62 SFC Milsom, Historical Foundations of the Common Law, 2nd edn, 250. 63 This usually required that the debt represented by the deed should be for £5 or more. If the debt on the contract underlying the bond was for less than £5, it was not regarded as bona notabilia in that diocese even if the amount due on the bond was £5 or more. This was evidently because the ‘conscience’ of the spiritual court would not permit it. See Wentworth on the Office of Executors, 1774 edition, 46. 64 Lord Field in Commissioner of Stamps v Hope [1891] AC 476, 482 refers to it being ‘settled in very early days that such a debt was bona notabilia where it was ‘conspicuous’, ie, within the jurisdiction within which the specialty was found at the time of death’. He cites as authority Wentworth on the Office of Executors, 1763 edn, 45, 47, 60(1). There does not appear to have been such an edition; presumably he intended to refer to either the 1720 edition (see Viscount Cave in Toronto General Trust Corporation v The King [1919] AC 679, 683) or the 1774 edition. Where the debt was represented by a specialty, it was unnecessary to seek approval of a will by the Archbishop solely because the debtors resided in a different dioscese; Wentworth, ibid. 65 Stamps v Hope, ibid.

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existence by which its locality might be reduced to a certainty, and was a debt of a higher nature than one by contract.66 The position of specialty debts may, however, be complicated if the debt is secured by way of a mortgage over land. Mortgage debts are frequently under seal, as Commissioner of Stamps v Hope67 illustrates. In that case the individual concerned was resident and domiciled in the state of Victoria. He had owned a station in New South Wales which he had sold in 1882 for £138,950, part of which was paid immediately in cash with the balance to be paid in 12 instalments. Each instalment was represented by a promissory note and the debt as a whole was secured by mortgage over the station. The mortgage deed was under seal and contained the following proviso: No simple contract shall be considered as having merged in the specialty created by and contained in these presents, and that in any action upon any simple contract the defence that such simple contract was merged in or extinguished in any specialty created by or contained in these presents shall not be available or be used, and that no negotiable security or securities taken for or in respect of any monies for the time being owing on the security of these presents shall in any way postpone or affect this security, or all or any of the powers or provisions hereof or hereby created.

The latter part of this proviso was designed to ensure that if there was default on any one of the promissory notes the whole debt could be enforced under the mortgage. The testator died before the instalments had been fully paid and probate duty was assessed under the Stamp Duty Acts in New South Wales on the outstanding balance of the debt on the basis that the debtors were resident there. The mortgage deed and the outstanding promissory notes were both held in Victoria. The statute permitted duty to be assessed in respect of ‘all estates, whether real or personal, which belonged to any testator’, but this was limited to such estate as the grant of probate confers jurisdiction to administer, ie ‘money, goods, chattels and effects as the deceased person shall be entitled to within that part of the said Colony within the Island of New Holland’. The Commissioner argued that in this case the debt was represented by the promissory notes and that the mortgage was no more than collateral security. For the deceased it was argued that the simple debt represented by the promissory notes had merged in the specialty debt, notwithstanding the proviso to the contrary. This latter argument was rejected by the Privy Council. Nevertheless, it went on to decide that there was only one debt (not several) and that that debt was still a specialty debt, notwithstanding 66 Specialty debts used to rank in the administration of the estate of a deceased person in priority to simple contract debts; and, unlike such debts, were enforceable against the real estate; see The King v Williams [1942] AC 541. 67 Above n 64.

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the separate existence of the promissory notes. Accordingly, the NSW stamp duty did not apply. In Payne v The King,68 the deceased’s executors paid probate duty in the state of Victoria on three debts owed by persons in Victoria but secured on statutory mortgages of land in New South Wales.69 The debts were regarded as specialties in New South Wales but simple contract debts in Victoria. As regards the ability of Victoria to impose its probate duty in respect of the principal amount of the debts as assets within Victoria, the Privy Council concluded as follows: The debt, though a specialty debt in New South Wales, was a simple contract debt in Victoria. That being so, it seems to their Lordships that the Chief Justice and Hood J., who dissented on this point from his colleagues, were right in holding that the debt was an asset in Victoria and recoverable under a Victorian probate, although it may well be that in order to discharge the mortgage probate duty would also have to be paid in New South Wales, and the debt, if recovered in Victoria, might be retained in Court until the mortgagees were in a position to discharge the mortgage. This result seems to their Lordships consistent with the practice as established in England, and their Lordships see no reason why a similar rule of practice should not be held to apply in an analogous case in the States of the Australian Commonwealth.

In Toronto General Trusts Corporation v The King,70 the mortgage debt was secured over land in Alberta and the mortgage was executed in duplicate, one of which was kept in Alberta and the other retained by the mortgagee in Ontario, where he later died. Alberta sought to recover tax under its Succession Duties Act and the Privy Council had to resolve the problem that the specialty existed in two places. Viscount Cave gave the Privy Council’s decision: In the present case the circumstances, other than the single fact of the presence of a duplicate deed in the province of Ontario, are all in favour of the conclusion that the mortgages were situate in Alberta. It is established by formal admissions made in the course of the proceedings that at the date of the execution of the mortgages the mortgagors were resident in the province of Alberta, and that the place of payment of the debt was in each case in the province of Alberta. The debts were secured, not only by the personal obligation of the mortgagors, but also by mortgages which created interests in lands in Alberta . . . The mortgages are executed in a form prescribed by the Land Titles Act of Alberta, and derive their force and effect from the terms of that statute, and this is not less the case because a seal has been voluntarily 68

[1902] AC 552. The contention in respect of two of the debts was that the money had been transferred with the intent to evade payment of probate duty. They had been transferred to the deceased’s eldest son for no consideration within one year of his death. The Privy Council held that ‘intent to evade’ only struck at ‘colourable transactions’ and not gifts in anticipation of death where one of the considerations was the reduction in probate duty. 70 Above n 64. 69

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affixed to each mortgage. The administrator cannot enforce any of his securities without procuring registration of his succession in the Alberta registry and relying on documents registered in that province; and though the debtors may be prepared to pay the debts secured without putting the administrator to the trouble of suing or of realizing his securities, it is plain that they would not do so except on the terms of the mortgaged lands being released in accordance with Alberta law. In short the administrator cannot recover the debts or have the benefit of his securities without claiming the protection and assistance of the Alberta law . . . When all these circumstances are taken into account, the only possible conclusion appears to be that the mortgages in question in this case were at the testator’s death situate in Alberta.

The same importance does not attach to share certificates merely because they are issued under the seal of the company concerned. In The King v Williams71 it was suggested that the fact that the certificates were under seal established that the shares of the testator should be regarded as situate where the certificates were found at the death of the testator. The Privy Council rejected this argument on the basis that the certificates were plainly not specialty debts: they did not contain any express obligation or promise and were no more than evidence of the title to the shares. Being little more than pieces of paper evidencing the right to shares in the company, it was impossible to regard them as taking the modern place of ‘notable goods’.

Shares The basic rule is that shares are situated where the company’s register is kept. This derives from The Attorney-General v Higgins,72 concerning the failure by the executors of William Higgins to exhibit a duly stamped inventory in respect of certain Scottish railway company shares in the Commissary Court in Scotland.73 William Higgins was domiciled at Broughton, within the province of York, and his executors applied for and were granted probate, with probate duty being duly paid, by the Prerogative Court of York. He also owned goods and chattels in the province of Canterbury in respect of which the executors obtained a second grant of probate from the Prerogative Court there, with probate duty being paid. If the Scottish railway company shares were part of the property in York, no further duty would have been payable.74 The Revenue claimed, however, that duty should be paid in Scotland. 71

Above n 66. 2 H & N 339. 73 The Commissary Courts were relics of the old ecclesiastical courts that existed before the Reformation. Originally wills in Scotland had to be confirmed in these courts but following 4 Geo 4, s 97 confirmation took place in the Sheriffs’ Courts. 74 The personal property within the Province of York excluding the shares was valued at £93,221. Probate duty appears to have been paid at a specific amount for estates valued 72

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It was unnecessary to obtain a further grant of probate in Scotland and by special provision a transfer of the shares in Scottish public companies could be obtained by producing the English probate. Probate duty was a stamp duty originally introduced in 1694 but, due to the different procedure for confirming wills in Scotland without probate, there was no document to stamp. Accordingly, probate duty was only introduced in Scotland in 1804,75 and in 1808 an amendment was made to adopt the practice of affixing a stamp by requiring that the stamp be affixed to the inventory. The inventory had to be exhibited duly stamped before the proper commissary court within a specified time.76 The executors argued that the provision77 allowing them to secure a transfer of the shares in Scotland based on the English grant of probate absolved them from the obligation to exhibit any inventory and pay probate duty in Scotland.78 In effect, the English probate enabled the executors to obtain title to the shares and on that basis any probate duty was payable in England. The court decided, however, that the only effect of the provision for transfer was to dispense with the need to produce the original will in Scotland if the only personal property there was shares in Scottish public companies. The production of an inventory was an entirely separate matter and, given that the evidence of title to the shares is the register in Scotland, the property in the shares was located there. The Privy Council adopted and applied the decision in Higgins in Brassard v Smith,79 where the deceased (who was domiciled and resident in Halifax, Nova Scotia) owned shares in the Royal Bank of Canada. The bank’s head office was in Montreal and the collector for succession duties in the Province of Quebec sought to recover duty on the basis that the shares were property situated within that province.80 The Royal Bank, however, was permitted to maintain a register in any province in which it had an office and in which between £90,000 and £100,000, and the value of the Scottish railway shares did not take the value in the Province of York above £100,000 to create an additional liability. Accordingly, any duty payable in Scotland would represent a further liability that would not be recouped by a reduction in the value of the estates in Canterbury or York. 75

44 Geo 3, c 98. 48 Geo 3, c 149, s 38. 77 8 & 9 Vict, c 17, s 20. 78 At first sight that may seem similar to AG v Dimond (above n 4) and AG v Hope (above n 4). However, those cases were authority for the proposition that English probate duty could not be charged in respect of foreign property even if the grant of an English probate facilitated the recovery of that property. They do not answer the question whether tax is payable in the foreign jurisdiction, in this case effectively Scotland, by reference to the foreign property. 79 [1925] AC 371. 80 The Treasurer for the Province of Nova Scotia had already recovered judgment for succession duty in respect of the same shares. In effect, therefore, it was a contest between the authorities of the two provinces, each of which could only levy ‘direct taxation within the province in order to the raising of a revenue for provincial purposes’: British North America Act 1867, s 92, sub-s 2. See The King v Williams, above n 66 per Viscount Maugham at 549. 76

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shareholders were resident. The bank had opened an office in Halifax and maintained a register there, in which the shares in question were recorded. The Privy Council, basing itself on Higgins, accordingly concluded that the situs of the shares was in Nova Scotia, on the basis that the correct test for probate jurisdiction was that ‘the subjects in question could be effectively dealt with within the jurisdiction’. In The King v Williams, the Privy Council elaborated on the meaning of this expression:81 The first observation is that the phrase used in laying down the principle clearly means ‘where the shares can be effectively dealt with as between the shareholder and the company, so that the transferee will become legally entitled to all the rights of a member’, eg, the right of attending meetings and voting and of receiving dividends. If the phrase only meant ‘effectively dealt with as between transferor and transferee of shares’, the test would obviously be almost completely useless, since the rights of a shareholder as between himself and a transferee can, speaking generally, effectively be transferred in any part of the world. The second observation is that the test, where applicable, is concerned merely with the place where the shares are to be taken to be situate. The late owner in the normal case was absolutely entitled to the shares as the registered owner of them in the books of the company, and, if resident in a country or province different from that in which the shares can be effectively dealt with, could nevertheless have sold the shares and completed the transaction by an attorney or otherwise. That, however, does not touch the question of situs.82

In Erie Beach Co Ltd v AG for Ontario,83 the company sought a declaration allowing it to register a transfer and an allotment of shares without being liable to pay succession duty in Ontario in respect of them.84 The deceased had been resident and domiciled in the State of New York, and 81

Ibid, 558; see further below. The Canadian cases also involve issues of taxing competence and the relationship between different provincial taxes. The Privy Council went on to refer to the decision of the Canadian Supreme Court in Rex v National Trust Co [1933] SCR 670 involving succession duty that had been paid in Ontario but was also claimed in Quebec. The Privy Council endorsed the propositions formulated by Duff CJ that (1) property, whether movable or immovable, can, for the purposes of determining situs as among the different provinces of Canada in relation to the incidence of a tax imposed by a provincial law upon property transmitted owing to death, have only one local situation; (2) situs in respect of intangible property must be determined by reference to some principle or coherent system of principles, and the courts appear to have acted on the assumption that the legislature in defining in part at all events by reference to the local situation of such property the authority of the province in relation to taxation, must be supposed to have had in view the principles deducible from the common law; and (3) a provincial legislature is not competent to prescribe the conditions fixing the situs of intangible property for the purpose of defining the subjects in respect of which its powers of taxation under s 92, sub-s 2, of the British North America Act may be put into effect. 83 [1930] AC 161. 84 The two issues in the case were (1) whether the shares were ‘property situate in Ontario’ and, if so, (2) whether the provision imposing liability on the company if it allowed a transfer was ultra vires the British North America Act 1867. 82

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all the company and board meetings were held in Buffalo. The company books and records were maintained in Buffalo, where the contract of allotment was made and the transfers recorded. The company sought to rely on the principle of mobilia sequuntur personam as applicable in the case of the old legacy and succession duties to establish that the value attributable to the shares was properly taxable in the deceased’s place of domicile. The Privy Council, however, rejected that argument and applied the principle established in Higgins and Brassard. In particular, the circumstance that the members of the company chose to transact its business in Buffalo—insofar as they were able—could not alter the fact that the shares in question can be effectually dealt with in Ontario only. They were therefore property situate in Ontario and subject to succession duty there.85 The company in Erie Beach had passed a by-law allowing it to appoint transfer agents and for transfers to be effected at their offices rather than at the head office of the company. The company, however, had never appointed a transfer agent in Buffalo. The shares could, therefore, only effectively be dealt with at the head office in Toronto.86 In The King v Williams,87 however, another company incorporated in Ontario had appointed transfer agents, first in Toronto in 1916 and 1925, and then in 1927 in Buffalo.88 The deceased, a US citizen domiciled in the State of New York, owned shares in a company. The share certificates were physically located in New York, were under seal and endorsed in blank in favour of unnamed transferees.89 The company’s head office was in Ontario but shares could be transferred either there or in Buffalo. That being so, the shares could effectively be dealt with in both Toronto and Buffalo. Inevitably, the Higgins test did not answer conclusively the question whether Ontario could claim its succession duty in respect of the shares. 85 The Privy Council also concluded that the provisions of the Ontario succession duty enabling tax to be collected from the company was not ultra vires the 1867 Act. 86 The case did not represent any authority for the proposition that the Ontario Companies Act precluded a company from establishing a transfer office outside the Province or elsewhere than at the Head Office. 87 Above n 66. 88 The Privy Council concluded that the company had power to appoint transfer agents outside Ontario and that a requirement to keep its books in Ontario did not prevent this, the requirement being mainly to allow inspection and not to prevent transfer books being kept elsewhere. It would depend on provisions of the applicable company Law and the company’s constitution whether the property could be effectively dealt in only there or also abroad. 89 Because the share certificates had been endorsed in blank in the usual way for both Canada and the US, the effect was to make delivery of the certificates as so endorsed a good assignment of the shares passing title to the shares in law and equity with a right against the company to obtain registration and new certificates; see The King v Williams, above n 66, 557. See also Colonial Bank v Cady and Williams (1890) 15 App Case 267; Secretary of State of Canada and Custodian v Alien Property Custodian for the United States [1931] S C R (Can) 170.

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In resolving the issue, however, the Privy Council concluded that the same principles had to be applied between Ontario and New York as would have been applied if the issue had arisen between two Canadian provinces. The Privy Council therefore concluded as follows:90 the existence in Buffalo at the date of the death of certificates in the name of the testator endorsed by him in blank must be decisive in the present case. They must reject the notion that the domicile of the deceased has anything to do with the situs of the property, or that the maxim ‘mobilia sequuntur personam’ has any relevance . . . The certificates endorsed and signed as they were cannot be regarded as mere evidence of title. They were valuable documents situate in Buffalo and marketable there, and a transferee was capable of being registered as holder there without leaving the State of New York or performing any act in Ontario. On the testator’s death his legal personal representatives in the State of New York became the lawful holders of the certificates, entitled to deal with them there. Any sale by them would be ‘in order’, and the purchaser could obtain registration in the Buffalo registry. If we contrast the position in Ontario the difference is obvious. Nothing effective could lawfully be done there without producing the certificates, and the legal personal representatives in Buffalo could not be compelled to part with them to enable the transfers to be effected in Ontario rather than at Buffalo. In a business sense the shares at the date of the death could effectively be dealt with in Buffalo and not in Ontario.

The Privy Council declined to say what the position would have been if the certificates had not been endorsed in blank. In Treasurer of Ontario v Blonde; Treasurer of Ontario v Aberdein,91 the principle laid down and applied in Williams was said to be that if it were possible on rational grounds to prefer one place to another (where more than one satisfied the Higgins test), the selection should be made accordingly. Thus: A just estimation is, in their Lordships’ opinion, first to be made of all matters which relate to the transfer of the shares under consideration. If sufficient reason for a choice of one place then appears, the problem is solved. It is only where a solution on these lines is not possible that the need for resort to some other principle for determining situs arises. The adoption of place of transfer as the leading consideration in determining locality involves, in their Lordships’ view, the corollary that, if there be, outside the jurisdiction in which it is suggested the shares are situate, several places where transfers can be effectively carried through in the ordinary course of business, and there is no place within the jurisdiction where a transfer can be carried through, the shares cannot be situate within the jurisdiction. The inquiry at the outset is ‘Are the shares situate in the jurisdiction or not?’ The 90 The King v Williams, ibid, 554. The Privy Council expressly refused to apply or develop some entirely different principle to that established in Higgins and Brassard. As to the rule embodied in the maxim ‘mobilia sequuntur personam’, see Provincial Treasurer of Alberta v Kerr [1933] AC 710 (below). 91 [1947] AC 24.

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inability of the jurisdiction to satisfy the test removes it from the arena. The circumstance that alternative places of transfer exist in what happen to be two different states outside the jurisdiction is for the purpose in hand no more relevant than the circumstance that two places of transfer exist in one state outside the jurisdiction.

In Blonde the deceased was domiciled and resident in Ontario, where he held share certificates in two companies incorporated and with head offices in Michigan. The shares could be dealt with in Michigan and New York, and the certificates were not endorsed in blank. Accordingly, the shares could not be transferred in Ontario, so that disposed of the question whether they were property situated in Ontario under section 6(1) of the Succession Duty Act 1934. In Aberdein, the deceased was domiciled and resident in the Commonwealth of Massachusetts and owned shares in a company incorporated in Ontario and in a company incorporated under the Companies Act of Canada, both with their head office in Ontario and allowing transfers in Toronto and New York. The certificates were in Massachusetts but were not endorsed in blank. The fact that the shares were not situate in New York under New York law was regarded as irrelevant: the question was situs under Ontario law. Similarly, the fact that in the case of one company the register was required to be kept in Ontario, was also regarded as irrelevant. Otherwise:92 The other features that bear on transfer are that the shares were freely marketable both in New York and in Ontario; that the registered owners were domiciled and resident in Massachusetts; that the share certificates were in Massachusetts; that probate in Ontario was not necessary in order to enable Aberdein’s executors to be registered on the New York register, and that there were clear advantages to executors in choosing New York rather than Ontario as the place of transfer (see Rex v Globe Indemnity Company of Canada, Ld93). The common feature of these matters is that none of them points to Ontario, and all point to New York, as the place at which in the ordinary course of affairs the shares would be dealt with by the registered owner. That owner, domiciled and living in Massachusetts and with alternative markets open to him, would be little likely when desiring to deal with his shares to choose a market and place of transfer which subjected him to the necessity of transferring the share certificates to a place outside the U.S.A. and of receiving Canadian dollars on a sale. On transmission on death both as regards shares held jointly as well as the shares held by Aberdein solely, New York and not Ontario would in the ordinary course be selected as the place for completing the formalities incident to the new ownership. In substance for transfer purposes New York occupied the field so far as these shares were concerned. Without leaving the region of transfer there is, in their Lordships’ view, sufficient ground here

92 93

[1947] AC 24 at 32. [1945] O R 190.

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(though there is not present, as in Rex v Williams (2), any blank endorsement of the certificate) to enable a selection to be made between New York and Ontario.

The shares were therefore not situate in Ontario. Finally, of these Canadian cases, one can note Provincial Treasurer of Alberta v Kerr.94 There, the Privy Council pointed out that Alberta could not use the rule embodied in the maxim ‘mobilia sequunter personam’ to treat shares situated outside a province as property ‘within the province’ so as to impose death taxes on such property.95 The shares concerned were in companies that had their head offices outside Alberta and no transfer offices within the province. The deceased held the certificates representing the shares within the province, but that did not mean that the shares were within Alberta. In distinguishing between a tax on transmission within the province and a tax on personal property without the province, the Privy Council rejected the idea that, although legally situated outside the province, the personal property of someone dying domiciled in the province can be treated as ‘within the province’ for the purposes of the British North America Act, by reason of that rule. Lord Thankerton point out that:96 This argument appears to proceed on a misunderstanding of the meaning and effect of that rule. If A dies domiciled in the United States of America, leaving moveable property locally situate in England, the latter country has complete jurisdiction over the property, but the law of England, in order to decide on whom the property devolves on the death of A, will not apply the English law of succession, but will ascertain and apply the American law. In other words, it is the law of England—not the law of America—that applies the principle of mobilia sequuntur personam in exercising its jurisdiction over the moveable property in England, the locus of the latter remains unchanged; in no sense could the property be described as ‘within America’.

Partnership Interests The precise legal and beneficial nature of a partner’s interest in the firm’s assets raises a number of difficult issues.97 With reference to the present context, Lord Lindley observed that:98

94

Above n 90. The British North America Act 1867, s 92 debarred a province from imposing tax on the death of a domiciled person in respect of personal property outside the province. It allowed it in respect of the transmission under provincial law to a domiciled or resident person of personal property within the province. 96 Ibid, 721–22. 97 See Lindley & Banks on Partnership, 19th edn (Sweet & Maxwell, 2010), para 19-04. 98 Ibid, para 1905. 95

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What is meant by the share of a partner is his proportion of the partnership assets after they have been all realized and converted into money, and all the debts and liabilities have been paid and discharged. That it is, and this only, which on death of a partner passes to his representatives, or to a legatee of his share; which under the old law was considered as bona notabilia . . .

In Forbes v Steven,99 Indian land was acquired in 1829 in the name of three individuals, including Sir Charles Forbes, as joint tenants. The land was used for partnership purposes and on Sir Charles’s death in 1849 he was in partnership with another individual, Mackenzie. The partnership had paid rent in respect of the use of the land but, on a dispute in relation to the winding up of the partnership’s affairs following the deaths of both Sir Charles and Mackenzie, a compromise was reached to the effect that the property was partnership property.100 The question then arose as to whether legacy duty should be paid in respect of Sir Charles’s interest in the land on the basis that he had an English domicile and his partnership interest was personal property. His executors argued that the property should be treated as foreign land not liable to legacy duty and that the doctrine of conversion did not operate in favour of the Crown for fiscal purposes. The Vice-Chancellor rejected that idea: no partner is entitled to any particular part or item of partnership property in specie but only to his share, as described by Lord Lindley above. In this respect, there was a difference between a situation in which the deceased’s interest at death is represented by a partnership share or is under a contract of sale of land already entered into and a case in which the deceased continues to own the land, albeit being in use by the partnership or held jointly on trust for sale, or a case in which the individual’s own deed or will directs its sale. In the latter cases, the interest remains an interest in land notwithstanding the trust for sale or the direction.101

99 (1870) L R 10 Eq 178; followed in Re Stokes (1890) 62 LTR 176, where the partnership property included land in New Zealand, which had been agreed to be sold. No sale had been made by the time of the testator’s death but legacy duty had to be paid because the interest passing under the testator’s will was his interest in the proceeds of sale of the partnership property and not the New Zealand land as such. 100 As the Vice-Chancellor noted, his decision in the case might have been different had the property not been partnership property but belonged to the partners as tenants in common subject to a partnership claim for the price paid for the land in 1829; see Forbes v Steven, ibid, 188. 101 Matson v Swift 8 Beav 368 and Custance v Bradshaw 4 Hare 315 as explained in Attorney-General v Brunning 4 H & N 94; see Forbes v Steven, ibid, 189–92. As Russell J notes in In re Berchtold [1923] 1 Ch 192, 206–07, these cases turn upon the point that legacy duty depended upon whether the property was personal estate or not, and not whether the interest is movable or immovable property. If the proper law of the partnership confers on partners a direct interest in the partnership assets, it will be necessary to consider each item of property separately to determine the situs of the partner’s interest in it.

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The situs of a partnership share will usually be where the business is carried on.102 In Laidlay v The Lord Advocate,103 a partnership was formed to continue the work ‘of indigo and silk concerns and zemindaries for the production or manufacture or working of indigo and silk and other produce, and for the sale in Calcutta or shipment for realization in Europe of such produce’. One of the partners died and the question arose as to whether the value of his partnership interest was subject to probate duty, which depended upon whether the partnership interest should be regarded as situated in England or India. As Lord Herschell put it, ‘what is the locality in which the business which was the property of this partnership was situate’? He then drew attention to the fact that the business was entirely carried on in India through Indian managing agents and the partnership books were kept in Calcutta. On the other hand, of the 16 partners, seven resided in Scotland and seven in England, with only two in India. It was therefore said that control of the business was vested in the UK resident partners even though the persons carrying it on in India were the managing agents. Having reviewed various provisions of the partnership deed on this issue, Lord Herschell concluded as follows:104 when the whole of this deed is looked at I cannot doubt that although it was intended that Messrs Jardine, Skinner & Co should defer to the wishes of the partners, and that the partners should decide upon matters which might be suggested affecting the interests of the partnership, yet that the management of the business proper was to be vested in Jardine, Skinner & Co, and not in the partners generally.

He continued: even if it were the case that these partners, residing some in England, some in Scotland, and some in India, could have controlled as they pleased the action of Jardine, Skinner & Co, to my mind that would not in the slightest degree diminish the importance of the facts to which I have called attention as shewing that the seat of this business was India. I cannot recognise the view as sound that the fact that an individual (to put a simple case for the moment) who, owning a business carried on in India, resides out of India, resides, it may be, from time to time in different countries, and can from any of those countries control the action of the agents who are carrying on his business for him, transfers the locality of that business from time to time to the particular country in which he happens to reside, and from which his orders to his agents would emanate. And, therefore, for my part I do not consider it necessary to enter into any minute criticism as to the relations of these partners to Jardine, Skinner & Co—that is to say, to what extent they could control or regulate 102 In the Goods of William Ewing (1881) 6 P D 19, 23, citing Hanson on Probate Acts, 161. 103 (1890) L R 15 App Cas 468. 104 Ibid, 486.

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the action of that firm, because it seems to me that, whatever that extent was, having regard to the terms of the deed, the fact that that power of control existed did not in any way prevent this business, carried on as it was and intended to be carried on as it was, from being a business situate in India.

For his part, Lord Watson thought that there never was a plainer case for fixing the locus of the business abroad.105 The assets, management, employees and books were in India: everything, in short, that is necessary to the conduct of the business down to the ascertainment of profits, and the apportionment of those profits amongst the partners . . . These partners seem to have renounced the power to do almost every act which usually distinguishes a partner. They cannot sign their own firm name, they cannot effectively interfere in the conduct of the business. Their function seems to be limited principally, if not wholly, to two matters: the first is, to determine whether the limits of the business shall be expanded or contracted, because upon that point they are to judge, whereas the moment the limits are fixed, then, so far as regards conduct and management, the managing agents in India have the sole power. The second matter is the important privilege of taking their profits when they have been apportioned and handed over to their agents in London. In this case it can hardly be said that the partners had any office or place of business; but even if they had that fact would not, in my opinion, be sufficient to qualify the circumstances to which I have already referred as leading to the inference that the place where this business was carried on, and the only place which can be predicated as the locus of the asset, is India.

Lord Macnaghten was of the same view.106 Lords Watson and Macnaghten were also in attendance when the Privy Council considered Beaver v The Master in Equity of the Supreme Court of Victoria.107 A father and his sons were partners trading as merchants in London, Adelaide and Melbourne. The partners were domiciled and resident in England. The Melbourne and Adelaide branches were locally managed. The local managers transmitted their orders to London and the partners in London (to the extent that they approved the orders) acquired and shipped the goods to Australia. Separate books were maintained in Melbourne and Adelaide. On the father’s death, probate was taken out in England and duty paid on the value of his partnership share. Probate duty was also claimed, however, in Victoria in respect of the Melbourne business. This was upheld by the Privy Council on the basis that the Melbourne business was locally situate there on the following basis:108 [The Melbourne business] was entirely distinct from the London business, which was carried on under a different name. The London partners purchased, 105 106 107 108

Ibid, 492. Ibid, 493. [1895] AC 251. Ibid, 256.

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indeed, some of the goods sold in Australia in this country, but they purchased some of them on the Continent of Europe. The money to pay for these goods was in all cases remitted from Australia, and they were sold there. The materials necessary for making up a balance-sheet were to be found only in the books kept at Melbourne. The balance-sheet was made out there, and the interest and share of profits appearing therein as due to the partners respectively was remitted direct to each individual partner. These are the leading facts which establish in their Lordships’ opinion that the interest of the testator in the business carried on at Melbourne was locally situate in the Colony of Victoria. That the several businesses carried on were regarded by the testator himself as distinct is clear from the provisions of his will.

This decision was followed in Commissioner of Stamp Duties v Salting,109 where New South Wales imposed its probate duty on a deceased partner’s share in a sheep farming station, the partners being brothers resident in England. The executors argued that on the partner’s death his interest was represented by the right against the surviving partner to demand an account and, if necessary, a sale of the partnership assets. As such, the property in question was akin to a simple debt and situate in England and not New South Wales. Lord Macnaghten for the Privy Council reaffirmed the principles of Ewin, Laidlay and Beaver to conclude that the partnership interest was situated in New South Wales.

T H E I N C OME TA X SOU R C E R U LES

Partnership Interests Laidlay v The Lord Advocate was decided on 7 August 1890, a year almost to the day after the House of Lords’ decision in Colquhoun v Brooks110 on 9 August 1889. Lords Herschell and Macnaghten delivered the main speeches in Colquhoun v Brooks, as also in Laidlay. That aside, surprisingly little explicitly links the decisions. As I have noted in a previous paper,111 Mr Brooks was a ‘sleeping’ partner in a Melbourne firm carrying on the business there of window-glass, oil and colour merchants and storekeepers. The Crown’s case to support the assessment of Mr Brooks on his entire share of partnership profits (rather than on the amount that he remitted to the UK) rested largely on the fact of Mr Brook’s residence in the UK. As the Attorney-General put it:112 The essence is residence; whether the person residing be a foreigner or an English subject . . . British Nationality and the situation of the property or 109 110 111 112

[1907] AC 449. (1889) 14 App Cas 493. Gammie, ‘Greek Bonds’, above n 1, 361–63. Ibid, 497.

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business have nothing to do with it. The test is residence: he who takes the benefit of that must take the fiscal liability.

The reply for Mr Brooks noted113 the existing line of authority in Cesena Sulphur Co v Nicholson and Calcutta Jute Mills Co v Nicholson:114 the principals were in England; the agency alone abroad: the profits abroad were dealt with by resolutions passed in England; the direction and management were in England and the profits were treated as having constructively flowed into England.

Counsel for Mr Brooks made the general point that legislation should be construed on the presumption that Parliament did not intend to exceed its jurisdiction, for example by taxing extra-territorially, or to interfere with the rights of foreigners. In that context, he referred to decisions under the Legacy and Succession Duties Acts as authority for imposing a jurisdictional limitation on taxing Acts.115 In the income tax context, a similar point arose from the assessment machinery, which envisaged that the assessment had to be levied by the commissioners of the parish or place where the trade was carried on, of which there were none in Melbourne. The reply for the Crown was conducted by junior counsel, a certain AV Dicey.116 Lord Herschell dealt with the issue of legacy duty in the following terms:117 it was necessary to put some limit upon these general terms in order to bring the matters dealt with within our territorial jurisdiction; without such a limitation, the Legacy Duty Act, for example, would have been applicable, although neither the testator nor the legatee nor the property devised or bequeathed was within or had any relation to the British dominions. A construction leading to this result was obviously inadmissible. The Income Tax Acts, however, themselves impose a territorial limit; either that from which the taxable income is derived must be situate in the United Kingdom or the person whose income is to be taxed must be resident there.

This final sentence must be among the best known and most frequently cited dictums from any tax case, yet it can be seen that it did not conclude the matter in Mr Brooks’ favour because from that point Lord Herschell could equally well have concluded that the Attorney-General’s argument was correct. Lord Herschell was noting that the Income Tax Acts drew 113

Ibid, 499. 1 Ex D 428. These were among the first cases on corporate residence and the liability of companies to pay tax on their trading profits under Case I of Schedule D irrespective of remittance. The Law Lords did not find these cases of any particular assistance. See also Baelz v Public Trustee [1926] Ch 863 per Eve J at 868. 115 Eg A-G v Jackson 8 Bli (N S) 15; Arnold v Arnold 2 My & Cr 256, 270; Thomson v A-G 12 Cl & F 1. 116 The first edition of his book on The Conflict of Laws was published in 1896. 117 Colquhoun v Brooks, above n 110, 503–04. 114

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their own territorial boundaries and it was therefore unnecessary for the courts to imply one as a matter of construction, as they had done for legacy and succession duties.118 As he continued, ‘if the latter condition be correct [ie that the person be resident], I think it is competent for the legislature to determine the measure of taxation to be applied in the case of a person so resident’. The considerations that had led the courts to adopt a particular construction of the Legacy and Succession Duty Acts did not, therefore, suffice in the case of the income tax, for which the jurisdictional basis included residence as well as the location of property. Lord Macnaghten was more direct about the matter, stating that, ‘it does not appear to me that any light is thrown upon the question by considering the Legacy Duty Acts or the Succession Duty Act, or the decisions on those statutes’.119 Lord Herschell’s conclusion in favour of Mr Brooks rested on three primary considerations: first, the different scope of taxation that would emerge in respect of foreign trade conducted by resident persons directly as compared to income derived ‘indirectly’ via foreign securities within Case IV and foreign possessions (including shares in foreign companies) within Case V; the absence of appropriate assessing machinery for foreign trades, in particular when carried on in partnership; and, finally, the scope of the exemption from tax for temporary residents (ie persons resident in the UK for less than six months), which would only extend to the profits of a foreign trade if it was encompassed within the expression ‘foreign possessions’. Analytically, the first of these reasons has a particular resonance in an era in which the return on capital lent to a business at interest or invested as equity capital was regarded as a return derived from the underlying business activities. To tax the return on such capital on a remittance basis while taxing the return on partnership or a sole proprietor’s capital120 on an arising basis made little sense. The second of his reasons comes closest to the practical considerations that led to the Legacy and Succession Duty Acts being construed as they were.121 The third reason appears at the outset of his speech to carry less weight for Lord Macnaghten, who acknowledged the startling results in the case of a foreigner temporarily resident within the UK, but who did not think the result so at variance with the comity of nations as to compel a contrary construction. Lord Macnaghten, however, focuses in particular on the meaning of ‘foreign possessions’, looking back to what was encompassed by that expression 118

See In re Haig, Harris v Drayton, above n 44, per Scrutton LJ at 640–41. Ibid, 511. 120 Lord Macnaghten says (ibid, 511) explicitly that ‘The business was a partnership business; but I apprehend the question would have been the same if no one but the respondent had been interested in the concern’. 121 See Wallace v Attorney-General, above n 43, per Lord Cranworth at 7. 119

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under Pitt’s original tax of 1799, and concluding (in part by reference to Lord Herschell’s third reason) that it must have been intended to include foreign trades. Consideration of where the business is carried on as a means of identifying the situs of a partnership share bears some similarity to the question whether a trade is a foreign trade within Case V or is carried on partly in the UK within Case I.122 The existence of UK control and oversight of the business has ordinarily sufficed to bring the trade within Case I, even though Laidlay, Beaver and Salting appear to lay more emphasis on day-to-day conduct and clearly suggest that there may be UK involvement in the business without that necessarily affecting the situs of a partnership share, even if as matters developed its effect might have been to ensure Case I taxation of the profits. More fundamentally, however, one should recognise that the court is performing a different function in the Laidlay case when considering where the business was carried on. The purpose of that exercise was to identify the situs of the partner’s rights and interest constituting his or her share in the business and its assets, as a separate species of intangible property in respect of which probate duty was charged. As I demonstrated in my first paper,123 however, for income tax purposes, a partnership is transparent: a partnership share is not property that is brought into charge under any schedule or case. The foreign possession is the trade itself: as Lord Macnaghten concluded his speech,124 ‘However much you narrow the meaning of the word “possessions”, you cannot narrow it so far as to exclude all trades or concerns in the nature of trade’. The partner’s share represents the basis of assessment but is not the source of the partner’s income that is charged to tax.

Shares A similar point arises for shares as emerges from Canadian case law.125 In Braun v The Custodian,126 Mr Braun, an American citizen, bought 122 In Bradbury v English Sewing Cotton Company Ltd [1923] AC 744, Viscount Cave at 753 refers to the test propounded in In the Goods of Ewing 6 P D 19 that shares in a company are locally situated where the head office is, and then adds, ‘I think this means that they are locally situate where the company’s principal place of business is to be found’. The decision in Bradbury is considered below in relation to shares but it can be noted that Ewing propounds a very similar situs test (where the business is carried on) for a partnership share (see above). The similarity is unsurprising given the origins of the joint stock company in the partnership form. 123 Gammie, ‘Fiscal Transparency’, above n 1. 124 Colquhoun v Brooks, above n 110, 518. 125 Although, as I note later, there is a 1924 UK case to similar effect: Baelz v Public Trustee, above n 114. 126 [1944] 3 DLR 412.

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shares certificates in the Canadian Pacific Railway Company from a German national in 1919. The share certificates were endorsed in blank127 and were transferable only on the company’s New York register. From a US perspective, he was entitled to trade with the former enemy, and presumably he thought there would be no problem with his acquisition. When he sought to be registered, however, registration was refused because under Canadian law the shares had been vested in the custodian of enemy alien property. Accordingly, Mr Braun sought a declaration in the Canadian courts that he, rather than the custodian, was the owner of the shares. He contended that the situs of the shares was in New York, where they were registerable,128 and that the Canadian legislation was ineffective to deprive him of ownership because they were not Canadian property. In the Exchequer Court129 Thorson J reviewed the law governing situs of shares. His starting point was Colonial Bank v Cady,130 in which the House of Lords had considered the nature of the property represented by share certificates. Lord Watson had noted that, as between transferor and transferee, delivery of a share certificate endorsed in blank operated to transmit the holder’s legal and equitable title in the shares. As between the transferee and the company, however, it was a qualified transfer because, until the transferee sought to insert his name and present the certificates for registration, the original issuer of the certificates remained the only person recognised by the company as the holder entitled to vote and to receive dividends. Thus Lord Watson had concluded131 that it would be more accurate to say that such delivery passes, not the property of the shares, but a title, legal and equitable, which will enable the holder to vest himself with the shares without risk of his right being defeated by any other person deriving title from the registered owner.

A share certificate is only evidence of ownership, but it can become marketable property in its own right once it incorporates a transfer endorsed in blank. Its value derives from the endorsed transfer, not from the certificate itself, but the certificate is still not the same as the share. Thus, ownership of the certificate is a jus ad rem—a right to a thing or a right to obtain property—whereas the share is a jus in re—a right 127 The shares had been issued specifically to be traded in Europe as bearer securities but were registerable in New York, where dividends were also payable. 128 As bearer securities designed to be traded in Europe, their situs could also be regarded as wherever they were so marketable, presumably Germany in any event. On the basis, however, that registration would ‘perfect’ Mr Braun’s title vis-à-vis the company, New York represented a higher situs. US law at the time had permitted the acquisition. Canada, however, provided a higher situs still. 129 Thorson J’s decision was upheld in the Supreme Court of Canada without adding or detracting from the matters that I discuss here: see [1944] 4 DLR 209. 130 (1890) 15 App Cas 267. 131 Ibid, 277–78.

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in the thing itself or the property of the share. Endorsed certificates are therefore property of a particular kind, being a right to obtain other property. Endorsed certificates can exist in one place—which would be important to the imposition of a transfer tax—but the share itself, as the property represented by the certificate, can exist in another place, which may be important to a tax on property.132 In this sense shares and bearer shares have a dual situs. Thorson J went on to note:133 In considering decisions as to the situs of shares it is necessary to observe certain cautions. A share is intangible property, a chose in action, a relationship between the shareholder and the company involving rights and duties. In that sense, shares have no fixed and certain physical locality such as land or a chattel would have, but for certain purposes a situs must be found for them’. [He then referred to Viscount Maugham in The King v Williams, before continuing:] ‘A further caution to be observed was stated by Duff J, in Secretary of State of Canada v Alien Property Custodian for United States, [1931], 1 DLR 890 at p 900, SCR 170 at p 195 in these terms: ‘True it is, that the considerations determining the situs of an intangible item of property for one purpose may not be conclusive where it may be necessary to ascribe to it a constructive situs in some other connection or for some other purpose’. The situs of shares for taxation purposes may, therefore, not be the same as their situs for other purposes. Indeed, even for taxation purposes different tests have been applied in income tax cases from those which have governed in succession duty ones. The purpose for which the situs is fixed must always be kept in mind.

In fact, a similar point had been made in the High Court in London in a comparable context some years previously. Baelz v Public Trustee134 had concerned shares in Arnold J Van den Bergh Ltd, an English incorporated company but one for which there remained no real UK connection after 1909 beyond the fact of its incorporation there and the maintenance of the share register and a bank account through which dividends were paid. The whole of its business and management was conducted in the Netherlands, and it was not liable to UK income tax on any of its profits. Mr Baelz, a German national, died in 1918 and, following his wife’s death a short time after, their children claimed the benefit of the shares and dividends on them. The children argued that the shares were not subject to a charge under the Treaty of Peace Act 1919 because they were not property situated within His Majesty’s dominions. They based this on the fact that the company was domiciled in Holland, relying on rule 19 of the second edition of DMC, which stated that ‘the domicile of a trading corporation 132 It is the company that owns the capital and accordingly the ‘share’ in that capital is located with the company and not with the shareholder; see n 141 below. 133 Braun v The Custodian, above n 126, 421–2 (emphasis added). 134 Above n 114.

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is its principal place of business, that is the place where the administrative business of the corporation is carried on’. They also relied on the statement of Lord Loreburn in De Beers Consolidated Mines Ltd v Howe, that a company is resident ‘where it really keeps house and does business’.135 As Eve J pointed out in Baelz, however, the statement in De Beers was explicitly ‘for purposes of income tax’, which ‘indicates the limits to be imposed on the application of the principle’.136 He then went on to apply the decisions in Attorney-General v Higgins and Brassard v Smith to hold that the children’s entitlement to the shares (which were transferable only by registration and not delivery) depended for these purposes upon the locality of the register and was unaffected by the movement of the business to Holland. It is true that in an income tax context we may think of the share in a foreign company as the foreign possession. This contrasts with Mr Brook’s partnership share, where we recognise that the partnership trade was the foreign possession as the source of his income. Nevertheless, when we consider the relevance of the foreign company share for different tax purposes, we can also recognise that in the case of a death or transfer tax, the focus is on the property (and the value) represented by the share, and in particular where it can be dealt with. It is in that context that we have to ascertain the situs of the property represented by the share, as determined under rules that start with Attorney-General v Higgins.137 For income tax purposes, however, we are not concerned with the share as such (and certainly not with the share certificate as a species of property) because, as I noted in my first paper,138 company shares were not a species of property that the Act charged to tax.139 The ‘share’ represents the capital that has been contributed to the company and which is being used by the company to invest in its trade or other assets to generate the income that is charged to tax. The source of income is therefore the underlying trading activities and property of the company itself. Colquhoun v Brooks illustrates that, because a partnership is transparent, one looks through to the underlying activities and property to identify whether the partner’s income is domestic or foreign. A company is not transparent in that sense, but presents the same issue when one comes to consider whether the income that a shareholder derives from the company is domestic or foreign, because company shares are not a species of property that the Act charges to tax. 135 [1906] AC 455, 458. Lord Loreburn also referred to the Calcutta Jute Mills and Cesena Sulphur cases, and ‘the principle that a company resides for the purposes of income tax where its real business is carried on’. 136 Above n 114, 868. 137 2 H & N 339, 157 ER 140; see above n 72. 138 Gammie, ‘Fiscal Transparency’, above n 1. 139 See also JF Avery Jones, ‘Defining and Taxing Companies 1799 to 1965’ in J Tiley (ed), Studies in the History of Tax Law, vol 5 (Hart Publishing, 2012).

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In Braun, Thorson conducted a careful analysis of the previous case law on the situs of shares.140 He noted in particular that the test adopted by the Privy Council in Brassard was for succession duty purposes and was therefore not intended as a universal test.141 As Thorson then noted:142 In other taxation cases, the situs of shares has been fixed without regard either to the place of incorporation of the company or the place of register. In Bradbury v English Sewing Cotton Co, [1923] AC 744, for example, the House of Lords held that for the purpose of the Income Tax Acts the locality of shares of stock of a company was to be determined not by its place of incorporation or registration but by its place of residence and trading. For income tax purposes, the test is not where the shares can effectively be dealt with as between the shareholder and the company but where are the shares to be regarded as a source of income for income tax purposes. Swedish Central R Co v Thompson, [1925] AC 495 at p 504.

The decision in Braun was followed in Brown, Gow, Wilson et al v Beleggings-Societeit NV,143 where the High Court in Ontario concluded that the situs of shares in a company, as distinct from the share certificates evidencing ownership of the shares, was determined by the domicile of the company. This is the jurisdiction in which the company is incorpo140

Above n 126, 422–25. Brassard v Smith, above n 79. Thorson noted that in The King v Williams, above n 66, the Privy Council had to choose between Buffalo and Toronto because for the purposes of provincial succession duty the shares could only have one situs. In other words, for those purposes shares could not be situated in and subject to tax in more than one Canadian province and the Privy Council had concluded that the same consideration had to apply as between Canada and the USA. The issue was therefore a practical one of finding the relevant criteria to select one or other place. This did not mean, however, that the same rule had to be applied in other legal circumstances or that a share could only have one situs. Thus, the situs of a share when determining its ownership under Canadian law, as the law under which the Canadian Pacific Railway company was incorporated and had its existence, and the situs of the share as a species of property that could effectively be dealt with through bearer share certificates for succession duty purposes could be different. As Thorson concluded in Braun, above n 126, 418: ‘In this case the issuing company, the CPR, is incorporated under Canadian law and subject to the paramount legislative authority of Canada. Canada may, therefore, validly legislate on such subjects as the validity or otherwise of the transfers of its shares wherever made, and prohibit it from recognizing any specified persons as having any rights or remedies in respect of such shares . . . Under this state of the law it is clear that Jacob G. Braun did not become the owner of the shares in dispute when he acquired the share certificates. The share certificates were not the shares and his acquisition of them from an enemy gave him no rights at all in respect of the shares.’ 142 Above n 126, 425. 143 (1961) 29 DLR (2d) 673. The Dutch government, to secure reparations, had passed decrees during the Second World War declaring that property belonging to German nationals belonged to the state. As a result, the ownership of shares in a company incorporated in the Netherlands which were held in trust for German nationals passed to the Dutch Government. The shares were represented by bearer certificates held by the trustees in Ontario. The High Court in Ontario nevertheless concluded that the Netherlands, as the place where the company was domiciled, was the jurisdiction to determine ownership of the shares. The validity of the decree was therefore recognised. In the circumstances the decree was neither penal or revenue in nature nor contrary to public policy in Canada, given that Canada had similar laws designed to secure reparations following the war. 141

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rated and where it has its seat.144 It is the domicile of the company that establishes jurisdiction to control its corporate acts, direct its management and determine disputes concerning the ownership of its shares. In the case in question, although the shares were bearer shares, ownership could ultimately only be established in the Netherlands, where the company was registered and domiciled. As regards the situs of the shares, having reached the same conclusion as Thorson J in Braun and noted the need to pay close attention the purpose of the particular legislation in question to determine the correct test,145 McRuer CJHC observed that, ‘When one comes to decide what the situs of shares in a company is for income tax purposes, quite different principles apply, with very different results’.146 He went on to cite from Lord Wrenbury’s speech in Bradbury v English Sewing Cotton Co, set out below. When it comes to taxation, therefore, it is not that the same situs rule operates for every tax on property in the same way. The situs rule depends upon the subject matter of charge—transmission, succession or income. Bradbury v English Sewing Cotton Co147 involved a UK incorporated and resident company, The English Sewing Cotton Co Ltd (ESC), which in each year received dividends from which income tax had been deducted. Up to and including the year ending 5 April 1917, the dividends included dividends paid by the American Thread Company (ATC). ATC was incorporated and registered in the State of New Jersey, and in American Thread Company v Joyce148 it had been concluded that control and management of ATC’s affairs was exercised by directors resident in England. Accordingly, it was regarded as resident and carrying on business in the UK even though all its business operations were in the USA. As a resident company it was liable to tax on the profits of its trade under Case I of Schedule,149 and it had been so assessed up to and including the year ending 5 April 1917. Shortly before 5 April 1917, control and management of ATC’s affairs was transferred to the USA. Accordingly, for the year ended 5 April 1918 144

Gasque v IRC [1940] KB 80. The Judge considered Brassard v Smith, above n 79; The King v Williams, above n 66, Treasurer of Ontario v Blonde [1947] AC 24 and the related cases of Royal Trust Co v The King (Brookfield Estate) [1949] 2 DLR 329 and Smith v Levesque [1923] 3 DLR 1057 (from which the Brassard case was the appeal to the Privy Council). In relation to the latter he noted that the Quebec Civil Code dealing with succession duty was designed to exclude the ‘fiction’ that personal property was deemed to be situate wherever the owner was domiciled and to ensure that tax was charged by reference to the place where the administrator could actually deal with the property—a situation in which the situs was not fictional but the property was actually situate. 146 Brown et al v Beleggings-Societeit NV, above n 143, 693. 147 Above n 122. 148 6 TC 1 and 163. 149 On the basis that its trade was carried on partly in the UK and not wholly abroad. 145

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and later years, ATC was no longer assessed under Case I of Schedule D but ESC was assessed under Case V of Schedule D in respect ATC’s dividends. Liability under Case V at the time was based on a three-year average of income from foreign possessions. In calculating the average, ESC excluded the ATC dividends for years in which ATC had been resident in the UK (pre-1917/18 dividends) on the basis that they were not income from a foreign possession. The Revenue said that ATC was a foreign company, incorporated and at all material times resident in the USA, notwithstanding that until 1917 it had been controlled and managed in the UK and in that sense also resident in the UK. Accordingly, it said that ATC’s dividends, both before and after the transfer of ATC’s control and management to America, were income from a foreign possession. As such, they were legally assessable under Case V, even though pre-1917/18 dividends had not actually been so assessed following the principle recognised in Gilbertson v Fergusson150 because the profits had been wholly paid out of profits already taxed under Case 1 of Schedule D. The Commissioners concluded that pre-1917/18 dividends were not income from a foreign possession, and this was upheld on appeal by Sankey J.151 The Court of Appeal thought differently. Broadly speaking, Lord Sterndale MR thought that the ATC shares were foreign possessions but that, once the Revenue had elected to tax ATC’s trading profits under Schedule D Case I rather than taxing the dividends as Case V income, it could not treat the pre-1917/18 dividends differently in later years. Lord Justice Scrutton also regarded ATC’s shares as foreign possessions but did not think that the Revenue’s choice in earlier years precluded it treating the pre-1917/18 dividends as income from foreign possessions for the purposes of the three-year average in later years.152 Lord Justice Younger was more of the view that the ATC shares were not foreign possessions in the years in which ATC had been resident in the UK. In the House of Lords, the essential point of the case was stated by Viscount Cave, as follows:153 150 (1881) 7 QBD 562, 1 TC 501; see JDB Oliver, ‘The Rule in Gilbertson v Fergusson: 140 Years of Relief for Underlying Tax’ in J Tiley (ed), Studies in the History of Tax Law, vol 3 (Hart Publishing, 2009). 151 Somewhat unusually, this seems to have been on the basis that the issue was a question of fact and that the Commissioners had not misdirected themselves on the law. 152 Following the decision in Singer v Williams [1921] AC 41, as alluded to by Viscount Cave. 153 Bradbury, above n 122, 752–53. In Swedish Central Railway Ltd v Thompson [1925] AC 495 Viscount Cave explained that in Bradbury he was not suggesting that a company could have only one residence but was indicating that the source of ATC’s income was the same before and after 1917. The Crown, having established in Joyce’s case that ATC’s profits during the period in question were to be treated as earned in the UK could not be heard to say that for the purpose of taxing the shareholders they were earned abroad. His observations were not directed to residence but to the position of the shares as a source of income for Income Tax purposes (see Lord Wrenbury in Bradbury, ibid, 767).

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My Lords, I think it important to point out that there is here no question of a claim to double taxation. The Respondents’ dividends for the first three years have already paid tax by deduction, and could not now be taxed again; nor does the [Revenue] allege that they could. His claim is, not to tax those dividends over again, but to tax the Respondents’ income from foreign possessions for the second three years, and for that purpose, and for that purpose only, to take account of the dividends received in the first three years, and to compute the tax for the later years upon the average so obtained. As was pointed out in Singer v Williams ([1921] AC 41), the fact that the income of a previous year is not taxable, does not prevent it from being brought into computation for the purpose of assessing the tax payable in a later year, and so being treated as a measure, though not as a ground, of taxation. If the dividends for the first three years were in truth income from foreign possessions, the Crown is entitled (I think) to bring them into the computation; and, as the case presents itself to me, the real question to be determined is whether they were in fact such income. Then, were the dividends received in the first three years income from foreign possessions, or (in other words) was the Common Stock during the first three years a foreign possession of the Respondents? This appears to me to be a question of some difficulty. On the one hand, the stock was stock in a company incorporated according to the law of New Jersey, and having its registered office there, and so American by birth and status. But, on the other hand, it was decided in Joyce’s case, and must be taken to be the fact, that this American Company was, during the three years in question, resident in England, where (to use the language of Lord Loreburn in De Beers Consolidated Mines v Howe ([1906] AC 455)) the seat and directing power of the affairs of the Company were located, and its chief operations both in the United Kingdom and elsewhere were controlled, managed and directed. And the question, therefore, arises whether the locality of the shares or stock of a company is to be determined by its place of incorporation and registration or by its place of residence and trading. After some doubt, I have come to the conclusion that the latter is the true view. ‘Shares in a Company,’ said Sir James Hannen in re Ewing ([1881] 6 PD at page 23), ‘are locally situate where the head office is’; and I think this means that they are locally situate where the company’s principal place of business is to be found. A share or a parcel of stock is an incorporeal thing, carrying the right to a share in the profits of a company; and where the company is, there the share is also, and there is the source of any dividend paid upon it. It was decided in Joyce’s case that during the first three years the American Company was here for all the purposes of Income Tax; and the Company being here I find it impossible to hold that its stock was abroad. In any case I am unable to understand how the Crown, having in 1913 successfully maintained that the American Company was then resident and trading in England, can now be heard to say that the profits of that trading when divided among the stockholders were income from foreign possessions. The fact that the dividends were declared in America and remitted by American cheque cannot, in my opinion, displace the inference to be drawn from the fact that the Company resided and traded in England. The result may be unfortunate for the Crown, which will lose duty on some part

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of the later dividends; but the Crown succeeded in 1913 in establishing that for Income Tax purposes the American Company was here, and must accept the consequences of its victory.

Lord Wrenbury explained the matter as follows:154 The English Companies Acts contain provisions under which a company limited by shares is to have ‘a capital divided into shares’. The American law, I believe, is similar. A share is, therefore, a fractional part of the capital. It confers upon the holder a certain right to a proportionate part of the assets of the corporation, whether by way of dividend or of distribution of assets in winding-up. It forms, however, a separate right of property. The capital is the property of the corporation. The share, although it is a fraction of the capital, is the property of the corporator. The aggregate of all the fractions if collected in two or three hands does not constitute the corporators the owners of the capital—that remains the property of the corporation. But, nevertheless, the share is a property in a fractional part of the capital. The Crown has argued that the share is necessarily possession in the place where the corporation is incorporated. For the purposes of the Income Tax Acts and in a case where the foreign corporation is resident here, the proposition is, I think, unsound. For all purposes of the Income Tax Acts the company when resident here is not foreign. It is taxable by reason of residence and for that purpose and all purposes of liability to Income Tax the company and its capital and the members’ interest in the capital is not foreign when the company is resident here. It is not possible that for determining the liability of the corporation to Income Tax it is here and for determining that of its members it shall be at the same moment foreign. The share is a right of property in a fraction of property of which the company resident here is the owner. Further, during the first three years, the English Company had not a possession in any part of the profits of the American Company in America. The possession of the English Company was of shares which (if a dividend was declared) entitled them to receive from a company resident here a dividend whose source was the differential sum remaining in the hands of the company resident here after that company resident here had paid Income Tax upon all its profits. The source was not in America, but here. The English Company could not, during the first three years, have been assessed upon their shares as a foreign possession, and in the fourth year they cannot be assessed upon an average of the first three years on the footing that during those three years the shares were a foreign possession. To ascertain whether a possession is a foreign possession or not I must look to see what is the ‘source of income’ from which the profits of the possession arise. It is a ‘source of income’ which the Act contemplates in all the Schedules. Section 52 of the Act of 1842 speaks of ‘the sources chargeable under this Act’ and ‘the sources contained in the several schedules’. A profit arising from a foreign possession—a possession out of Great Britain—must be a profit coming from a source out of Great Britain. During the first three years the American Company received profits arising from a source out of Great Britain, and being 154

Bradbury, ibid, 767–69.

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resident here it was liable to pay, and did pay, tax upon them, although they came from such a source. But the English Company did not receive profits from a source out of Great Britain. By virtue of action taken by a person resident here (viz., by a declaration of dividend made by a corporation resident here) the English Company became entitled to receive money from the company resident here. The source, so far as the English Company was concerned, was the company resident here, and none the less if the dividends were remitted by cheque from America. The Appellant referred to the words ‘shares of any foreign company’, which are found in the Income Tax Acts, eg, in Section 10 of the Income Tax Act, 1853, and Section 36 of the Revenue (No. 2) Act, 1861, and sought to use them as an indication that a share in a company incorporated abroad is necessarily a foreign possession. My Lords, the Acts contain no definition in that sense, and the words, I think, indicate nothing of the kind. If a Company, is foreign by incorporation and foreign by residence, no doubt shares in the company are foreign possessions (Gramophone Company v Stanley [1908] 2 KB 23, 89; Singer v Williams, [1921] 1 AC 41). But for the purposes of the Income Tax Acts, having regard to the provisions which render a person resident here taxable in respect of all his foreign profits, the company ceases to be a foreign company so soon as by residence it becomes amenable to all the provisions of the Acts. It cannot be foreign for one purpose of the Acts and not for another. For this reason I am of opinion, as I said at the outset, that the whole of this case is covered by the consideration that residence, not nationality, is the test relevant to liability to Income Tax.

Debt and Interest What is true of equity capital might be expected to be true of debt, on the basis that it is what the debt funds that determines the character of the interest as domestic or foreign. Debt and equity are different, however, in that equity capital represents an interest in the corporate entity itself155 whereas debt is no more than a particular obligation undertaken by the corporate entity. Furthermore, while equity capital is associated with corporate and other legal entities, any natural person can create a debt obligation. Thus, while the source of any dividend is the company itself, as the owner of the contributed capital, the source of interest is the debt obligation, whether represented by a security, bond or other instrument. Knowing the source helps but does not answer the question whether the particular source is domestic or foreign and therefore whether the interest if UK or foreign source interest. The source of the income is represented by the rights that are found in whatever instrument creates the obligation

155

As explained by Lord Wrenbury in Bradbury, ibid.

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but which is not the instrument itself, in contrast to the position for estate and transfer taxes.156 Surprisingly, there is little authority on the criteria to determine whether interest has a UK or foreign source. The principal authority is regarded as the National Bank of Greece case,157 about which I wrote at length in my second paper.158 As I explained there, the case is in fact authority for the proposition that the source of a payment of interest under a guarantee is in fact the original debt obligation in respect of which the guarantee obligation arose, not the guarantee obligation itself.159 As it had been conceded in the House of Lords that the interest payable under original debt obligation was foreign source interest, the case is not strictly authority for the criteria that determine whether interest is UK or foreign. Nevertheless, it is possible to draw upon the case to suggest a number of factors that do not conclude the matter: • the fact that the payment is made in the UK; • the fact that the obligation is governed by English law and is only enforceable in the UK; • the fact that payment is in sterling; • the fact that the obligor is UK resident;160 and • the fact that the debt obligation has a UK situs. Both residence and situs were once suggested to be determinative. In a consultative document issued in 1982, the Inland Revenue asserted the following:161 The requirement to deduct tax at source depends on the interest having a UK rather than a foreign source.162 In the case of a simple contract debt it is settled law that the source is where the debtor is resident. Before the ending of exchange control, the Revenue was normally able to accept that interest paid abroad in a foreign currency under a foreign specialty contract (ie a contract under seal governed by foreign law) to a non-resident could have a foreign source, even though the payer was a UK resident company.

This statement was plainly wrong or misleading in a number of material respects. First, as we have seen, the concept of corporate residence for

156

As eg in AG v Bouwens, above n 35. [1971] AC 945. 158 See Gammie, ‘Greek Bonds’, above n 1. 159 Ibid, 377. 160 If the obligor’s residence had been a determinative factor there would have been nothing to contest in the National Bank of Greece case because both the original and successor debt obligors and guarantors were non-resident companies. 161 Inland Revenue, Tax Treatment of Interest Paid by Companies to Non-residents (Inland Revenue, 1983) para 2. 162 This is one of the points for which the National Bank of Greece case is authority, ie that Case III of Schedule D only charges UK source interest. 157

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situs purposes is different from that for tax purposes.163 Secondly, situs is not a determinative factor or possibly of any relevance at all, as the National Bank of Greece case illustrates.164 Thirdly, foreign systems of law frequently do not recognise the distinction that English law has drawn between a debt under seal and a simple contract debt. Fourthly, if the debt is governed by foreign law rather than English (or Scottish) law, the UK obligation to deduct tax at source will not be recognised by a foreign court enforcing the obligation unless the agreement specifically recognises and allows the deduction.165 Fifthly, UK statutory provision recognised the possibility that a UK resident person may pay foreign source interest. As regards the last point, section 23 of the Finance Act 1949 provided that annual interest could be deducted in computing the profits of a Case I trade if payment was secured on non-UK trade assets, the interest was payable and paid outside the UK, and was paid to a non-resident without any deduction of UK income tax.166 The equivalent corporation tax provision was found in section 52 of the Finance Act 1965.167 Apart from National Bank of Greece, the only decision of note appears to be a decision of Mr Justice Finlay in IRC v Viscount Broome’s Executors.168 Earl Kitchener of Khartoum lent Viscount Broome £19,600 under a memorandum of agreement made on 19 November 1921 in England to acquire shares and debentures in Kitchener’s African Estates Ltd, an English company. Security for the loan was provided in the form of the shares in the company and the title deeds to a farm in Kenya. The documents were held in Kenya and interest was paid in sterling in Nairobi. The loan was non-recourse to Viscount Broome. Earl Kitchener was resident in Kenya while Viscount Broome was resident in the UK. Viscount Broome died on 13 June 1928 and his executors were resident 163

See New York Life Insurance Co v Public Trustee, above n 59. See Gammie, ‘Greek Bonds’, above n 1 at 379. Or, indeed, a UK court enforcing a foreign obligation, see Keiner v Keiner (1952) 34 TC 346. 166 The necessary implication of this is that a UK resident person can pay interest abroad gross. It does not appear that this section was inserted to deal with payment gross under a double taxation treaty as the UK had only a few treaties at that time and they did not ordinarily contemplate gross payment. The provision was consolidated as s 138 ITA 1952 and (for income tax purposes only) became s 131 ICTA 1970. Specific provision was required because at the time a deduction for interest was given as a charge on income and this required that the interest had a UK source. 167 Becoming on consolidation s 248(4)(c) ICTA 1970, which provided that a UK resident company was entitled to deduct interest not paid under deduction of tax but where the interest was payable out of foreign source income liable to tax under Case IV or Case V of Schedule D. It was not necessary to show that the interest had actually be paid out of the Case IV or V income but that the fund of Case IV and V income was large enough to cover the interest paid. Another basis of deduction was where the interest was payable and paid abroad on a loan raised for the purposes of activities of the borrower’s overseas trade, which would be a Case I trade unless carried on wholly abroad (s 249(1)(c)(i)). 168 (1935) 19 TC 667. The case does not appear to have been cited in National Bank of Greece. 164 165

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in England but appointed attorneys in Kenya to obtain letters of administration to manage Viscount Broome’s affairs there, including the farm and the company. The executors paid interest under the loan and the question arose as to whether they should deduct tax at source. Initially, on enquiry, the Inland Revenue indicated that tax need not be deducted at source. They then changed their mind and assessed tax. On appeal, they contended that the right to interest arose under an agreement made in the UK that the executors were UK resident and that the interest was therefore within the charge to tax. The Special Commissioners considered that during Viscount Broome’s lifetime the interest was primarily recoverable in Kenya and, as such, the income arose there. Following his death, however, they recognised that it was arguable that the debt became locally situate in the UK. They concluded as follows: It is admitted by both sides that the question we have now to decide is whether the interest payable under the contract is interest arising in the United Kingdom or interest arising in Kenya. Lord Broome in his lifetime resided mainly in Kenya (though he was also resident in the United Kingdom), and if the payment of interest was enforceable by action in the Courts, it was primarily recoverable and could have been enforced in Kenya. The debt would, therefore, be regarded as situate in Kenya, and the income would be held to arise there. On Lord Broome’s death, however, the executors, who were in the United Kingdom, became the debtors for the interest, and it may be argued that the debt became thereby locally situate in the United Kingdom, the debtors being resident there, and the case being the converse of Chamney v Lewis (17 TC 318). Against this it may be argued that the debt for interest is still payable in Nairobi, that it can be enforced there as well as in the United Kingdom, and that the locality of the debt and the incidence of Income Tax cannot be altered in a case of this kind by the mere fact of death. No authority appears to exist to guide us in the matter. The case referred to shows that the place of payment does not by itself determine the locality of the debt so that we cannot attach importance to that feature of the present appeal. We are driven to a simple choice between the two places where the debt can be enforced, and we have decided that the mere accident of the residence of the executors should not be allowed to determine the matter and change what was foreign into British property. We accordingly allow the appeal on this point also.

Finlay J reached the opposite conclusion on appeal. His reasons were as follows:169 I am not satisfied, as I say, that the principle as to looking for the situs of the debt can be applied in the case of an individual as it can in the case of a corporation. But so far as this case is concerned, I should be willing, without deciding it, to assume that during the lifetime of Lord Broome the situs of this debt was abroad, and if the payments were made abroad then no duty would be attracted. But one has got to deal, not with Lord Broome but with 169

19 TC, 679–80.

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the executors, and the ground upon which I desire to base my decision—a narrow ground but one, as I think, sufficient to decide the case—is this, that here the executors are resident in this country and they pay the debt out of a source arising in this country. I will say just a word with regard to both of these, and that will conclude my judgment. . . . it appears to me that, the executors being resident here, the business of administering the estate and so forth was carried on here. I do not forget, of course, in saying that, that there was a supplemental carrying on, so to speak, of the executorship under a power of attorney in Kenya, but here were the executors and here at least the main business of administering this estate must have been carried out. Therefore I think that this truly was payment by persons resident here. Then I think it was payment out of a source here. The first two payments are perhaps a little more clear, because there the payment was actually made to Earl Kitchener personally in this country. He happened to be here; he was resident abroad, but he happened to be here, and he was actually paid by the executors in London; and equally (though the facts are not quite so clear with regard to these payments made by Mr. Lund) there seems to be no doubt that, with regard to the payments made by him, they were made in London, were sent to a bank in London, and were remitted by the bank in London to Kenya to be paid there. In these circumstances I am of opinion that this was a payment made by persons resident in London out of sources in London.

This seems to imply that a debt obligation which originally gave rise to foreign source interest could become one giving rise to UK source interest. This may appear at odds with National Bank of Greece, where the debt obligation remain a foreign source obligation throughout, notwithstanding that the obligation became an English obligation, given the action by the Greek Parliament. In National Bank, however, it could always be said that the ultimate fund from which the interest would be met was always outside the UK even if the only place where creditors could enforce payment was in the UK.170 By contrast, Mr Justice Finlay may have had in mind, when referring to the residence of the executors, that they would have to call upon the UK funds under administration to meet the interest obligation.171 It is worth observing that Finlay J was not satisfied that the situs rule for company debts emerging from the New York life Insurance case172 could apply to individuals, on the basis that companies can be in more 170 See National Bank of Greece, above n 157, per Lord Hailsham at 957C when, referring to Pickles v Foulsham (see below), he said this about the situation in National Bank of Greece: ‘In the instant case both the principal debtor and the original guarantor were wholly resident abroad, and the source from which the income was contemplated to be paid was certainly intended to be remitted from abroad and was partly secured by property situated abroad’. 171 It does not appear to have been cited, but the point would have some similarity to that in Lord Sudely v AG, above n 12. 172 New York Life Insurance Co v Public Trustee, above n 59.

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than one place at any one time whereas individuals cannot, even if in a single tax year they are resident for tax purposes in two countries (as Viscount Broome had been). He recognised that an individual’s tax ‘residence’ in more than one country is a different conception from a company’s residence for situs purposes.173 In the end, the case is not especially enlightening and does not appear to have been cited in any other case. What does seem to appear from Mr Justice Finlay’s ex tempore judgment, however, is that it was counsel for the executors who were arguing for the application of the ordinary situs rules for debts derived from the cases such as New York Life Insurance. It is this that may lie behind the judge’s statement that he did not exactly understand what Mr Latter meant ‘by the residence of the executorship’.174 One assumes that Mr Latter was arguing that, under ordinary situs rules, by analogy with the reasoning of the Court of Appeal in New York Life Insurance, the debt obligation should be regarded as situated in Kenya and not in the UK. The judge disagreed, presumably considering that the situs rules did not enter into the matter, and appears to have been more inclined to look to the fund from which the executors would have to meet the obligation to pay interest.175 One other case may be noted here, dealing with payment obligations. The first is Chamney v Lewis,176 in which Mrs Chamney (who had returned to the UK) was being paid maintenance by her husband in India under a deed of separation that had been executed there. The deed appears to have been under seal and Mrs Chamney had presumably brought her original with her to the UK. The obligation would therefore have had a UK situs.177 Her husband paid gross via his bankers in London out of remittances from India and from taxed dividends received by the bank as his agent, and Mrs Chamney was assessed to tax on it under Schedule D Case V. She contended, however, that she was not so assessable because 173

19 TC, 678–79. Ibid, 679. 175 In Keiner v Keiner, above n 165, a husband undertook through a deed that was executed in the USA and governed by the law of the State of New Jersey to pay maintenance to his estranged wife. He subsequently became a UK resident and the bulk of his assets were in the UK. She sought to recover arrears in the English High Court and he claimed to be able to pay the arrears under deduction of UK income tax. No deduction was, however, permitted under the proper law of the contract. Donovan J noted (at 348) that ‘It may well be that if Rule 21 applies to this payment—as to which I say nothing— Mr Keiner may find himself bound, vis-à-vis the Revenue here, to deduct and pay over tax on the payment, and yet have to pay Mrs Keiner in full. That is not her fault; it arises, if at all, because Mr Keiner has chosen to come and live here.’ 176 (1932) 17 TC 318. 177 Although there may have been two copies of the deed, one of which remained with her husband in India. From that perspective, the case may have had similarities with Toronto General Trust Corporation v The King, above n 64. The nature of the obligation as a specialty and its situs as a matter of the conflict of laws, however, do not enter Finlay J’s reasoning. 174

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tax should have been deducted at source. The judge, Mr Justice Finlay again, concluded that the deed was the source and that it was a foreign possession:178 I cannot doubt that that was a possession and that if income was derived from it, it was income from a possession. Now, was it income from a foreign possession? I think it was . . . there is this deed made in India, and if I am right in thinking that there is created by the deed a possession, I see no ground upon which it can be said that it is not a foreign possession. The deed provides for the remittance of sums from abroad and, as I said earlier, I think it is really very material and it is quite clear that large sums, more than enough to meet the annuity, were in fact, during the material years, remitted from India.

Employment Income The final group of cases with which I shall deal are those concerned with income from employment. Pickles v Foulsham179 concerned an agent of a British company who worked entirely in West Africa. He was assessed to income tax in respect of his earnings for the year 1919–20 under Case V of Schedule D. Under his agreement with the company, the commission which formed the bulk of his remuneration was paid by the company in the UK into a banking account in England on which his wife had the power to draw. He rented a house in the UK in which his wife and family resided, and in the year in question he spent a few days there. There was an issue as to whether he was UK resident, but, once that had been concluded against him, the question arose as to whether he had correctly been assessed under Case V.180 178 Chamney v Lewis, above n 176, 324. In IRC v Anderstrom (1928) 13 TC 482, the taxpayer (the Scottish wife of a Swedish resident man) was entitled to maintenance under a Swedish court order. The Court of Session concluded that the Court order was a foreign possession within Case V. 179 [1925] AC 458, 9 TC 261. 180 In Chamney v Lewis, above n 176, 323, Finlay J said that Pickles v Foulsham, ‘is an authority which is of value because the learned Lords in the House of Lords all adopted what I may call the large and unrestricted view of the meaning of the word “possession” . . . it was held that [the Inland Revenue] did succeed in showing that the employment was a possession, but they failed to show that it was a foreign possession, and the grounds of that may be put, I think, as being that, in the first place, the contract was made in this country and also, what was considered an important point, that the payment was to be made in this country and made by a firm or a company—I forget which and it does not matter—resident in this country. The place of payment was in Liverpool, not by remittance from abroad to Liverpool, but by actual payment by people in Liverpool. In that state of affairs it was held that this employment, though a possession, could not be regarded as a foreign possession.’ In the National Bank of Greece case, above n 157, 957, Lord Hailsham suggested that Pickles v Foulsham may have gone too far and agreed with Finlay J in Chamney v Lewis that it was more an authority for the wide meaning of the term ‘possession’ for the purposes of Case V than a reliable guide to the situation of a source of income. It does not appear, however, that Lord Hailsham’s attention was drawn to the subsequent consideration of Pickles v Foulsham by the House of Lords (see below).

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As to whether an employment could be a possession within Case V, Viscount Cave concluded:181 My Lords, the greater part of the arguments on behalf of the Crown was directed to establishing the proposition that an employment could be a ‘possession’ within the meaning of Case V of Schedule D to the Income Tax Act, 1918; and for myself I assent to that proposition. It was decided by this House in Colquhoun v Brooks, (1889) 14 AC 493, that a trade carried on wholly in Australia was such a possession, and accordingly that a person resident in the United Kingdom was assessable to tax in respect of so much of his share of the profits of the trade as had been remitted to this country; and it appears to me that the reasoning which led the learned Lords who heard that case to their decision applies not only to a trade but to each of the other sources of income which in paragraph 1(a) of Schedule D are coupled with trades, that is to say, to a profession, employment or vocation.

He continued: But, assuming this to be so, it does not follow that the [Inland Revenue] is entitled to succeed in his appeal. For that purpose it is necessary for him to show that the Respondent’s employment was wholly out of the United Kingdom, and that (to use Lord Macnaghten’s expression) the whole source of his income was overseas; and this, in my opinion, he has not shown. I will assume—although I feel some doubt on the point—that the Respondent’s services to the Company were to be rendered in West Africa only, and that he had no duties to his employers while he was in England; but it remains true that the commission, which was the principal remuneration for his services, was, under the terms of his employment, payable in England only, and that he was precluded by the express terms of his agreement from drawing or claiming payment of that commission in the Colony. In other words, while the burdens incidental to his employment were to be borne wholly or mainly abroad, the principal benefit which he was to derive from it could only be claimed in the United Kingdom. In these circumstances I do not think it can be said that his source of income was wholly outside this country, so as to bring him within Case V.

Lord Buckmaster, having agreed that employment could be a possession, said of that source:182 In the present case I do not think that the source of income was the employment of the Respondent in West Africa. The source of his income was the money paid by an English company into an English bank in pursuance of an agreement for service made in this country.

Pickles v Foulsham was considered by the Court of Appeal in Bennet v Marshall.183 Mr Marshall was UK resident and held the appointment of 181 182 183

[1925] AC, 462–64. Ibid, 468. (1937) 22 TC 73.

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vice-president of an American company with the duty of supervising the sale of the company’s products throughout the world (except in the US and Canada), whether sold directly or through subsidiary companies. He was offered and accepted this appointment while on a visit to the US, but he had no written service agreement. His headquarters and administrative base were at the company’s office in the US, where he had a number of employees and spent some eight weeks each year, but he also had employees at the office of a subsidiary company in London whom he supervised. At his request, his salary was paid by the company to a bank account in Canada, on which he drew from time to time. He argued that his employment was wholly outside the UK and that he fell to be assessed under Schedule D, Case V, Rule 2, on remittances actually received in the UK, and not under Schedule E. In particular, his contention, by reference to Pickles v Foulsham, was that an office or employment was not the same as a trade or profession, where the source of the income is the trade or the profession. In the case of an office or employment, the source of income was, ‘not the performance of the work in the office or employment but the contract with the corporation from which the income springs, of which the taxpayer is the officer’.184 In particular, he drew attention to Lord Dunedin in Pickles v Foulsham when he said:185 Two propositions are here involved; this income must be income from a possession, and the possession must be out of the United Kingdom . . . When, however, I come to the second proposition I find myself unable to affirm that this is income arising from a possession out of the United Kingdom. This income comes from the contract of employment made in the United Kingdom. When I say ‘made in the United Kingdom’, I am not referring to the place where the signing of the contract took place. I am referring to the source of the profit, which is the payment which the employers covenanted to make. This was payable and paid in Liverpool.

In agreeing with Mr Marshall, Sir Wilfred Greene noted that:186 there is an inherent difference between a trade and a profession on the one hand and an employment on the other when one is considering the essential question which is to be looked at, namely, what is the source of the income. Trades and professions are, so to speak, based on activity, either by the persons carrying on the trades or by the persons carrying on the professions. A trade or profession is not attached to some specific contract, and, accordingly, in such 184 Ibid, 80. The Law Lords in Pickles v Foulsham had assumed that the employee did all his work in West Africa but nevertheless concluded that the source of the income was a UK source (as to which see Lord Greene’s detailed analysis of the case, subsequently approved by the House of Lords). In Mr Marshall’s case, therefore, it was said that the source of his income was his contract with the American company under which his remuneration was paid outside the UK. 185 [1925] AC, 465–66. 186 Bennet v Marshall, above n 183, 86.

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a case it is impossible to put a finger on a particular contract as the source of the income. The profits of the profession and the profits of the trade come from the general state of activity of the trader or the professional man, and having regard to the fact that trades and professions are not to be divided up, if a doctor carries on his profession in England and abroad, you cannot treat that as being two professions; he is carrying on the one profession; similarly, a trader who carries on a trade in England and also abroad is carrying on one trade, assuming that it is the same trade and not a distinct trade. The fact that part of his trade is carried on abroad does not make it a distinct trade any more than the fact that a profession is carried on partly abroad makes it a distinct profession, with the result that, when once it is found that the trader or the professional man is carrying on a trade or profession in this country, it is impossible to predicate of that trader or professional man that the source of his income is a source out of the United Kingdom. But in the case of employment different considerations arise. Employment arises from a contract of employment and, therefore, there is what there is not in the other cases, some definite contract to which to look when inquiring into the source of the income which it is sought to charge. I should have thought, therefore, that in the case of employment the contract is the first thing that must be looked at to find out the answer to the question raised in any particular case of employment: is it or is it not income derived from a source out of the United Kingdom? As I have said, I am quite unable to find in Colquhoun v Brooks any rule laid down or anything in the reasoning which compels us to say, as the Crown here would have us say, that in no case where part of the activities of the employment take place in this country can the income be said to be derived from a source out of the United Kingdom.

For his part, Lord Romer would have expected, consistently with the authorities on trades and professions, that in the case of an employment, the locality of the source of income was the place where the employment was actually carried on by the employee, that is, the place where the activities of the employee were exercised. He acknowledged, though, that in one sense the source of his employment income is his employment contract or, alternatively, his employer, so that the locality of the source of income is the locality—‘which, I suppose, means the usual place of residence’—of the employer. The House of Lords in Pickles v Foulsham, however, had decided that, in the case of an employment, the locality of the source of income is ‘the place either where the contract for payment is deemed to have a locality or where the payments for the employment are made, which may mean the same thing’.187 The decision in Bennet v Marshall was later confirmed in Bray v Colenbrander and Harvey v Breyfogle.188 In the first of these, Mr Colenbrander, a Dutch national resident in the UK, held the appointment as London 187 This may suggest that the answer in any case is a matter of impression depending upon all the factors. There is no suggestion, however, that it is just a matter of applying the relevant situs rules that are used for the conflict of laws. 188 (1953) 34 TC 138.

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correspondent of a Dutch newspaper. He had no written contract for his appointment, which had been made in Holland. He performed his duties mainly in the UK but his remuneration was paid in Holland, part only being remitted to London. Mr Breyfogle was an American citizen resident in the UK, who was the manager of the London branch of an American bank. His appointment had been made orally in New York and his salary was paid into his bank account there, as it had been before he came to the UK. His duties in London were to advise the bank on economic matters in Europe, but he also transacted general overseas business for the bank. He visited the US at intervals in the course of his duties, but maintained no home there; and, as occasion demanded, he visited other countries in Europe. The Revenue contended that Mr Colenbrander held a public office or employment of profit within the UK and was assessable under Schedule E or, alternatively, that he was so assessable as a UK resident person; and, in Mr Breyfogle’s case, that, because his duties were carried out mainly in London, the case could be distinguished from Bennet v Marshall. The House of Lords, however, unanimously affirmed the analysis of Pickles v Foulsham given by Sir Wildred Greene in Bennet v Marshall and held that both individuals were assessable under Case V and not Schedule E.189 Finally, there is Alloway v Phillips,190 in which the appellant was the wife of one of the ‘Great Train Robbers’, Charlie Wilson. She was resident in Canada and had contracted with the News of the World to write an article on her life and experiences on an exclusive basis, dealing with how the robbery was planned, financed and executed, and what happened thereafter. The article was in fact to be ghost-written with her co-operation. She received payment and the Inland Revenue sought tax on the basis that it was UK source miscellaneous income within Schedule D Case VI. Among the many contentions put forward on her behalf in her appeal against any UK tax liability was the suggestion that income under the contract was foreign source income.191 The Commissioners concluded that the proper law of the contract was English law and that the contract was property situated in the UK and chargeable under Case VI. Mrs Wilson’s argument was that the payment was derived from her services under the contract and that contract merely regulated the payment of her remuneration. It appears to be the only case in which it has been suggested explicitly that the situs rules developed for the purposes of the conflict of laws apply to determine the locality of a source of income as domestic or 189

As a result, Schedule E was recast by the Finance Act 1956. [1980] 1 WLR 888. 191 Surprisingly, perhaps, her inventive counsel, Marcus Jones, did not appear to find any treaty point to argue in the case. 190

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foreign.192 As I noted in my previous paper, one reason for this might have been Lord Denning’s recollections of the National Bank of Greece case, in which he had participated in the Court of Appeal.193 While the Court of Appeal’s reasoning in Alloway v Phillips can be regarded as out of line with the other authorities cited in this paper, its conclusion that her income had a UK source is entirely within the mainstream of that authority and, in particular, the employment law authorities derived from Pickles v Foulsham.

C ONC LU SION

Two points can be made in concluding. First, the cases illustrate that for income tax purposes the analysis has two stages: to identify the source of the income and then, where needed, to determine whether the source is a UK source or a foreign possession. The majority of cases have presented little difficulty in determining the source and, in this respect, the distinction that I have previously drawn between property and activities that are ‘income producing’ and ‘participatory’ rights in such income comes into play. The more difficult aspect has been to identify the criteria by which to determine, where relevant, whether the source is a UK source or a foreign possession. What seems clear is that the situs rules of international law have played no real role in the matter. A more significant contributor has been the concept of ‘participatory’ rights and the need to look through to the underlying property, activity or fund that is charged to tax as a means of determining whether income is UK or foreign.

192 [1980] 1 WLR, 893, where Lord Denning relied explicitly on what is now DMC Rule 129(1) as the basis for deciding that the contract was UK situated property giving rise to UK source income (which income he surmised Canada would not seek to tax if it adopted the same situs rule). Waller LJ agreed at 894, citing the New York Life Insurance case in support. Dunn LJ also agreed at 897, citing English Scottish and Australian Bank Ltd v IRC [1932] AC 238 (which established that bank overdrafts owed by Australian individuals were property outside the UK and exempt from stamp duty). 193 Gammie, ‘Greek Bonds’, above n 1, 379, note 69.

4 The Income Tax Law Rewrite Projects: 1907–56 JOHN HN PEARCE

A BSTR A C T Between 1907 and 1956, there were three projects for rewriting the UK’s income tax law. The first project, under discussion by 1914, envisaged that an independent body would make recommendations for the operation of the tax; that the law would be amended in accordance with those recommendations; and that it would then be restated accordingly. As a preliminary, the income tax legislation was consolidated in 1918. The Royal Commission on the Income Tax reported in 1920, but the Revenue Bill of 1921, giving effect to many of the Commission’s recommendations, was abandoned. The second project, begun in the mid-1920s, envisaged that income tax law would be codified as part of a project for simplifying income tax; and a draft Bill was produced in 1936. That Bill was unacceptable to the Inland Revenue as it stood; and attempts to modify the Bill had already been abandoned before the Second World War. The third project, begun after that war, envisaged that a consolidation of income tax law would be followed by its codification. The income tax legislation was again consolidated in 1952, but the subsequent codification was abandoned.

I NTR ODU C TION

T

AX PRACTITIONERS ACTIVE during the last 20 years will be well aware of the existence and activities of the Tax Law Rewrite project.1 What is much less well known, however, is that the rewriting of the income tax legislation had received fairly consistent

1 The Tax Law Rewrite project was set up following recommendations made in the report required under s 160 of the Finance Act 1995 c 4, and was brought to an end in 2010. Information relating to the project may be found (for example) in D Salter, ‘The Tax Law Rewrite in the United Kingdom; plus Ca Change Plus C’est La Meme Chose?’ [2010] British Tax Review 671.

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attention somewhat earlier, during the first half of the twentieth century. This paper describes what happened. Three different initiatives involving the rewriting of the income tax legislation were undertaken during the period from 1907 to 1956. All three were failures rather than successes. The second initiative, which led to the production of the draft Income Tax Codification Bill published in 1936,2 was a total failure so far as the rewriting of the income tax legislation was concerned, although other aspects of that initiative were successful. The first and third initiatives, on the other hand, each included an important element of success in relation to the rewriting of the income tax legislation, for they led to the successive consolidations of the income tax legislation in the Income Tax Act 19183 and the Income Tax Act 1952.4 In each case, however, the consolidation was only the initial step in a larger project—and those larger projects were later abandoned.

TH E F IR ST INIT IAT IVE

It was the official view of Peel, at the time of his reintroduction of income tax in 1842,5 and of Gladstone after him, that the existence of income tax was temporary only: and, for as long as that official view prevailed, the income tax legislation was unlikely to be rewritten. At its best, the task constituted a highly questionable use of finite government resources. At its worst, the task was pernicious—for it could only strengthen a suspicion that the existence of income tax might indeed be permanent. The contrary view—that the existence of income tax should indeed be viewed as permanent—was only unequivocally articulated in 1907. In his budget speech, Asquith started from the proposition that income tax ‘must now be regarded as an integral and permanent part of our financial system’; and he considered that such a proposition, if admitted, made it impossible to justify the incidence of income tax as it then existed.6 From that year onwards, there were major developments which increased the complexity of the tax. Before 1914, there was the introduction of differentiation (in the Finance Act 1907);7 of graduation (in

2

Cmd 5132. 8 & 9 Geo 5 c 40. 15 & 16 Geo 6 & 1 Eliz 2 c 10. 5 In the Income Tax Act 1842 (5 & 6 Vict c 35). 6 Hansard, Fourth Series, vol 172, col 1199 (18 April 1907). Sir John Clapham commented that ‘A foreigner might have admired the swift English resolve to make permanent a tax which had existed continuously for sixty-five years’. Sir JH Clapham, An Economic History of Modern Britain (Cambridge, Cambridge University Press, 1938) vol iii, 404. 7 7 Edw 7 c 13. 3 4

The Income Tax Law Rewrite Projects: 1907–56 137 the Finance (1909–10) Act 1910);8 and of a number of personal reliefs. During the First World War, income tax had to produce much larger sums of money for government; and many different tax rates came into existence.9 It was the Inland Revenue’s view that developments since 1907 had had the overall result of ‘transforming the old and comparatively simple structure into a financial instrument of extraordinary complexity, subtlety and power’;10 but this achievement was only accomplished at the cost of making already complicated legislation more complicated still. By 1918, according to the Lord Chancellor, Lord Finlay, ‘grumbling as to the confusion and incoherence of Income Tax legislation has become chronic, with occasional paroxysms’.11 The unsatisfactory condition of income tax legislation could be tackled in two different ways. The first, and more cautious, way was to enact a consolidating statute, restating the existing legislation in a single statute. Those who favoured proceeding in this way could derive support from the opening words of the judgment of Cozens-Hardy MR in Brooks v Commissioners of Inland Revenue.12 The second, and bolder, way began with a demand that the entire structure of income tax law and practice should be examined. Any such examination was likely to lead to amending legislation. Beyond that, it could be hoped that the entirety of income tax legislation could be restated in a codifying Act.13 On 14 April 1914, the government admitted that the appointment of a commission to inquire into the laws relating to income tax was under consideration;14 and, on 8 July, Asquith was willing to provide more detail. The government intended to appoint a tribunal of investigation to examine income tax law from its very foundations, with the object, not only of codifying that law in a simple and intelligible form, but of reducing to something like scientific simplicity and practical convenience the network, ‘I might call it the jumble’, which had grown up over the whole ground connected with 8

10 Edw 7 c 8. For further details on these matters see JHN Pearce, ‘The Rise and Development of the Concept of “Total Income” in United Kingdom Income Tax Law: 1842–1952’ in J Tiley (ed), Studies in the History of Tax Law, vol 2 (Oxford, Hart Publishing, 2007) 99–104. 10 IR 75/89, fos 1–9, ‘Brief History of the Income Tax’. This document was produced in 1917 or 1918. The Royal Commission on the Income Tax, which reported in 1920, considered that ‘It is from 1907 that the modern Income Tax counts the years of its life’. Report of the Royal Commission on the Income Tax (Cmd 615, 1920) 2, para 9. This Report is subsequently cited as RC. 11 Hansard, Fifth Series, Lords, vol 29, col 179 (28 February 1918). 12 [1914] 1 KB 579, 584; 7 TC 236, 243. 13 These themes appear in the speech made by Henry Terrell MP in the House of Commons on 2 June 1913. Terrell described income tax law as ‘absolutely chaotic’; thought that the whole question of the law relating to income tax and the administration of the income tax should be overhauled by some competent body; and was ‘perfectly certain that the result would be that you would be able to have a codification of the law, so that it could be put before the public in a clear and simple manner’. Hansard, Fifth Series, vol 53, cols 633–38 (2 June 1913). 14 Hansard, Fifth Series, vol 61, col 8 (14 April 1914). 9

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exemptions, abatements and relaxations.15 The position at the outbreak of the First World War, therefore, was that a decision had been taken that there should be a major investigation into income tax law. On the other hand, neither the form of that investigation nor the individuals who would be undertaking it had been decided: and, once hostilities began, the investigation was postponed.16 But while, during the First World War, the plans for a major examination of income tax were shelved, the consolidation of the income tax legislation made progress; and that development may be traced to an initiative taken within the Inland Revenue, not by the Commissioners themselves, but by H Bertram Cox, who had become Solicitor of Inland Revenue in 1911. On succeeding to this office, Cox, according to his own account, was greatly impressed by the urgent necessity for consolidation and soon began to devote any spare time he could find to preparing a draft Bill.17 The fact that Cox’s initiative made progress, however, did not depend upon actions taken within the Inland Revenue. Cox mentioned what he was doing to Finlay;18 Finlay mentioned it to Carson (then the Attorney-General); Carson mentioned it to Montagu, the Financial Secretary to the Treasury; and Montagu announced in the House of Commons that the consolidation of the Income Tax law was proceeding.19 As Nott-Bower, the Chairman of the Board of Inland Revenue, observed to Montagu a few months later, ‘you surprised the official gallery by your intimate acquaintance with our Solicitor’s activities!’20 It seems permissible to conjecture, however, that 15

Hansard, Fifth Series, vol 64, col 1128 (8 July 1914). Thus McKenna (then Chancellor of the Exchequer) told a correspondent that ‘A Royal Commission to enquire into the whole system of Income Tax is to be set up, but I am afraid it must wait till the war is over’. T 172/975. Letter, McKenna to Harold Cox, 11 April 1916. During the following year, the Chancellor of the Exchequer (Bonar Law) stated in his reply to a Parliamentary Question that ‘it is not possible during the War to conduct an inquiry into so large and intricate subject as the Income Tax’. Hansard, Fifth Series, vol 98, col 258 (18 October 1917). 17 IR 75/91. Letter, Cox to Loreburn, 6 March 1916. ‘The original draft was prepared by Mr. Bertram Cox, the Solicitor of Inland Revenue, personally, not under official instructions but as a voluntary piece of work’. Consolidation Bills, 1918. Report from the Joint Select Committee of the House of Lords and the House of Commons on the Income Tax Bill [HL] with the proceedings of the Committee. House of Commons Sessional Papers 1918 (95), iii. This Report is subsequently cited as JC. 18 The Finlay in question was William Finlay KC, the son of the Lord Finlay who was Lord Chancellor from 1916 to 1918. The younger Finlay had been Junior Counsel to the Board of Inland Revenue from 1905 to 1914; and the material in IR 75/91 permits the inference that Finlay and Cox were on good terms. Finlay went on to become a Judge of the High Court of Justice (King’s Bench Division) from 1924 to 1938 and a Lord Justice of Appeal from 1938 to 1945. 19 ‘The Department are already at work, and their preliminary work will be reviewed, with a view to presentation to Parliament, by a Committee . . . which . . . will be under the charge of the Attorney-General, who has interested himself very much in this most important work’. Hansard, Fifth Series, vol 74, col 1103 (30 September 1915). 20 IR 75/91. Letter, Nott-Bower to Montagu, 6 March 1916. Nott-Bower’s letter is also the source for how information about Cox’s preparation of a draft Bill became more generally known. 16

The Income Tax Law Rewrite Projects: 1907–56 139 Cox’s initiative only fared as well as it did because it was boosted by the parliamentary announcement. If Cox had applied internally to the Board of the Inland Revenue for help in developing his draft Bill with a view to its ultimate enactment by Parliament, he might have been given the reply that, at a time when a war of unprecedented scale was being waged, the resources of the Inland Revenue were already fully committed.21 Cox’s initiative for a consolidation Bill made progress, but there nevertheless seems to be room for the conjecture that the enactment of this important consolidating statute was the result not of intelligent planning, but of gossip among members of the establishment. The Board of Inland Revenue set up a departmental committee to examine Cox’s draft Bill.22 Cox’s original draft had followed the provisions of the Income Tax Act 1842 closely,23 but the departmental committee made fundamental changes. Its report stated that it had placed the charging sections and schedules at the beginning of the Bill, followed by the provisions as to exemptions, abatements and relief, ‘these being, from the point of view of the taxpayer, the most important provisions of the Acts relating to Income Tax’.24 ‘My original draft has been recast and greatly improved by the departmental committee here,’ Cox told a correspondent a little later.25 The consolidation Bill, as so reworked, was introduced into the House of Lords in February 1918.26 The Bill, accordingly, was one that had received much consideration within the Inland Revenue, but it had not been considered in any other government department. After receiving its second reading in the House of Lords on 28 February 1918,27 the Income Tax Bill was referred to a joint committee of both houses. Lord Loreburn, who had been Lord Chancellor from 1905 to 1912, became the chairman of the Committee, whose members also included Lord Muir-Mackenzie, the retired Permanent Secretary of the Lord Chancellor’s Department.28 21 The Lord Chancellor (Finlay) saw Cox on 13 November 1917. Cox’s record of this meeting was that ‘He [ie the Lord Chancellor] asked if the Board were very anxious for the immediate introduction of the Bill, and I replied that the Board had prepared and completed a Bill the demand for which came not from them, (for their staff thoroughly understood and worked with complete efficiency the existing acts) but from the Judges and the public; that they now left the Bill in the hands of minsters who would judge when it was most expedient to pass it consequently the Board had no wishes to express in the matter’. IR 75/87. Memorandum by Cox, 14 November 1917. 22 IR 75/88. Minute by the Board of Inland Revenue, 13 March 1916. 23 IR 75/82 may be identified as the draft Bill in its original form. 24 IR 75/88. Report of the Departmental Committee, 17 June 1917. 25 IR 75/91. Letter, Cox to Loreburn, 28 August 1917. 26 The Income Tax Bill had its First Reading on 19 February 1918. (See Hansard, Fifth Series, Lords, vol 29, col 38 (19 February 1918).) A copy of the Bill, as printed at this time, is at IR 75/84. 27 Hansard, Fifth Series, Lords, vol 29, cols 177–86 (28 February 1918). 28 Born in 1845, Muir-Mackenzie had been appointed principal secretary to Lord Selborne, the Lord Chancellor in the Gladstone Ministry of 1880; but, before that Ministry fell in 1885, had been appointed as the first Permanent Secretary of the Lord Chancellor’s

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Muir-Mackenzie asked Cox what assistance the Joint Committee might have ‘in the way of expert drafting assistance’ and talked to Loreburn about the Bill.29 Loreburn, in his turn, told Cox ‘that it was necessary to have some outside authority to give an “imprimatur” to the Bill and that he would propose that the draft should be referred to the Parliamentary Counsel for examination and report’.30 Documents were accordingly sent to Liddell at the Office of the Parliamentary Counsel. ‘It is with the greatest reluctance that I have been dragged into the matter,’ he wrote to Cox, ‘but we could not very well refuse the L[ord] C[hancellor].’31 The draft Income Tax Bill, as prepared by the Inland Revenue, was accordingly now subject to the views of the views of the Joint Parliamentary Committee and of Parliamentary Counsel. At the first meeting of the Committee, held on 20 March 1918, and according to a note prepared within the Inland Revenue, Muir-Mackenzie is recorded as saying ‘that he rather thought that questions of re-arrangement were likely to be brought forward’; but proposals for rearrangement were deferred until the Committee had dealt with the contents of the Bill in the form presented.32 It is clear that Muir-Mackenzie, starting from the fact that the charge to income tax was expressed in the form of a charge to tax under Schedules A to E, believed that the material relating to the charge should be placed in a schedule to the consolidating statute.33 At the eighth meeting of the Joint Committee, on 19 June 1918, the arrangement of the Bill was finally addressed, with the Committee deciding ‘that the charging sections of the Bill be placed at the end instead of the beginning of the Bill’. It was at this meeting, therefore, that the decision was taken to abandon the arrangement devised by the Inland Revenue Departmental Committee in favour of a different arrangement: the arrangement to be found in the legislation as enacted.34 The Committee also decided that it would meet Department—a post he held until he retired in 1915. After he became a peer, he joined the small group of Liberal peers in the House of Lords, where he took an active interest in Consolidation Bills. In this connection it was recorded that ‘neither bulk nor complexity had for him any terrors’. It was also recorded that ‘Muir Mackenzie was a difficult man to know and a dangerous man to thwart or under-estimate’. These details relating to Muir-Mackenzie have been taken from his obituary notice in The Times, 23 May 1930, 21, cols a–b. 29

IR 75/91. Letters, Muir-Mackenzie to Cox, 2 and 4 March 1918. IR 75/87. Note by Cox, 7 March 1918. IR 75/91. Letters, Cox to Liddell and Liddell to Cox, both dated 8 March 1918. Cox also told Liddell that ‘Lord Loreburn was insistent that the Committee should have the help of your independent criticism & of course from my point of view nothing could have been better’. IR 75/91. Letter, Cox to Liddell, 9 March 1918. 32 IR 75/91. Note initialled by Cox, 21 March 1918. 33 IR 75/91. Letter, Muir-Mackenzie to Cox, 17 May 1918. 34 It may be assumed that Muir-Mackenzie favoured the ‘new’ arrangement (see his letter to Cox dated 17 May 1918). Cox favoured the ‘old’ arrangement. This was his evidence to the Royal Commission on the Income Tax: and he handed in a copy of the Bill as originally presented in general support of his opinion (Royal Commission on the Income Tax, Minutes of Evidence (Cmd 288, 1919–20) Q 26,631. This document is subsequently 30 31

The Income Tax Law Rewrite Projects: 1907–56 141 again in a fortnight’s time—and directed its legal advisers to meet with a view to sorting everything out.35 Following this meeting, Cox was faced with a work crisis. On 20 June 1918, in a letter marked ‘private’, Muir-Mackenzie wrote to him: I am very anxious that we should not lose the Bill. It is in danger. The proposal to suspend operations until October is fatuous. God only knows what turmoil may not be raging then. If we can settle clearly on July 3 the reserved questions and clauses, I think you ought to be in a position to be in a position to complete a revised draft which would need very36 little examination and might be treated as an agreed Bill. There ought surely to be no difficulty in reporting the Bill to the House at the end of the month, so that the House of Commons might receive the Bill before the recess (if any).37

Cox replied the following day indicating the action that would be taken. He ended by saying: Personally I have no particular feeling in the matter. I am too old a Civil servant to feel the least chagrin at seeing any work of mine scrapped, and I feel too that if I was such a fool as to leave my path to hunt this hare I have no right to complain if the animal gets away. But I am very grateful to you for all the interest you have so kindly shown and the great help you have given us.38

The work crisis, however, was successfully surmounted, and the Joint Committee completed its consideration of the draft Bill at two further meetings, on 3 and 24 July 1918.39 Cox was then faced with another development that caused his spirits to droop temporarily. On 11 July 1918, the Chancellor of the Exchequer (Bonar Law) stated in his answer to a parliamentary question that it was not anticipated that the Income Tax Bill could reach the House of Commons until the end of that month.40 Cox took this reply as a cue to say in a letter to Muir-Mackenzie that the Chancellor of the Exchequer could not take up the Bill before the adjournment, and that

cited as ‘Minutes’). It may be conjectured that the evidence given at the meeting on 19 June 1918 by Percy Thompson, one of the Commissioners of Inland Revenue, was to the same general effect. AM Bremner, a barrister who was also assisting the Joint Committee, later gave evidence to the Royal Commission that the arrangement in the Bill as originally presented ‘was the same arrangement as I should have made’. ‘Then a long contest arose because the Parliamentary draughtsman thought that you could have a schedule only in a schedule, and it was impossible to persuade him to the contrary.’ Minutes Q 16,027. The evidence, such as it is, accordingly permits the inference that, in reaching the conclusion decided upon, Liddell was highly influential. 35 36 37 38 39 40

JC, above n 17, xii. Probable reading. At this point, a hole has been punched through the letter. IR 75/91. Letter, Muir-Mackenzie to Cox, 20 June 1918. IR 75/91. Letter, Cox to Muir-Mackenzie, 21 June 1918. JC, above n 17, xiii–xvi. Hansard, Fifth Series, vol 108, col 496 (11 July 1918).

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if there is to be a general election in November I do not feel very hopeful of passing the Bill during the present Parliament. I think that would be a pity but personally as my work is practically over I don’t care whether the Bill ever becomes an Act or not.41

On this occasion, however, Muir-Mackenzie could offer comfort, telling Cox that, if the Joint Committee finished its work on 24 July, he did not believe that ‘anything could prevent the Bill from passing both Houses if there is any sitting at all in October’.42 In the events that happened, the Income Tax Bill was enacted quickly. On 30 July 1918, the House of Lords suspended a standing order in order to permit all the stages of the Bill to be taken on that day; completed their consideration of the Bill;43 and sent it to the House of Commons, where it was promptly given its first reading.44 In the Commons, there were further proceedings on 6 August, when, late at night and in a poorly attended House, the Income Tax Bill went through all its stages.45 On 8 August 1918, royal assent was given to the Bill, which accordingly became the Income Tax Act 1918.46 Once the First World War was over, work on the examination of income tax could resume. A Royal Commission was constituted on 4 April 1919.47 One of the last witnesses to give evidence was Cox, who began the statement which he handed in as his evidence-in-chief by saying: The Income Tax Act, 1918, is purely a consolidating Act. It embodied in a single Statute the provisions of the numerous Acts since 1842. One of the principal objects of the consolidation Bill was to facilitate that general consideration of Income Tax law by the Royal Commission which is at present taking place. It was never expected that the Act would be enduring; on the contrary, it was expected that the deliberations of the Royal Commission would lead to recommendations which would be followed by considerable reforms to be embodied in an amending Act. It was further anticipated that later still the Income Tax Act, 1918, and its amendments would be embodied in a single new Statute, which Statute might also, as far as practicable, contain the effect of the existing case law.48

This passage constitutes an excellent statement of the entirety of the first initiative for the rewriting of the income tax legislation—an initiative 41

IR 75/91. Letter, Cox to Muir-Mackenzie, 19 July 1918. IR 75/91. Letter, Muir-Mackenzie to Cox, 19 July 1918. 43 Hansard, Fifth Series, Lords, vol 31, cols 53–9 (30 July 1918). 44 Hansard, Fifth Series, vol 109, col 243 (30 July 1918). 45 Hansard, Fifth Series, vol 109, cols 1307–15 (6 August 1918). The Solicitor-General (Hewart) handled the proceedings on behalf of the government and took the view that ‘it is important that the Bill should become law at the earliest possible moment. There should be no risk of delay until autumn’ (at col 1310). 46 8 & 9 Geo 5 c 40. 47 RC, above n 10, iv. 48 Minutes Q 26,613. Cox gave evidence on 4 December 1919. 42

The Income Tax Law Rewrite Projects: 1907–56 143 that envisaged a programme in four stages. In the first stage, the existing income tax legislation would be consolidated; in the second stage, the Royal Commission would make recommendations for the reform of the tax; in the third stage, amending legislation would be enacted to give effect to the Royal Commission’s recommendations; and, in the fourth and final stage, there would be a ‘single new statute’. By the time Cox gave his evidence, the first stage of the initiative had been carried out successfully. The second stage of the initiative was also duly completed. The Royal Commission on the Income Tax reported on 11 March 1920;49 and, early on in its report, there was a generous tribute to the value of the recent Consolidation Act.50 Austen Chamberlain, the Chancellor of the Exchequer, was of the view that the report marked ‘an epoch in the history of income tax in this country’; but, as he pointed out in his budget speech on 19 April of that year, the recommendations of the Royal Commission were not all of equal importance; and they differed in the measure of authority which they carried.51 One of the recommendations made by the Royal Commission, which may be considered to be of lesser urgency, followed on, in particular, from the evidence given by AM Bremner, on behalf of the General Council of the Bar.52 The Royal Commission recommended that steps should be taken in due course to prepare a Bill containing the whole law on the subject in the most modern and approved form.53 The two matters which the Royal Commission considered in particular detail were allowances and reliefs (in part III of that report) and administration (in part IV); and these two matters—the centrepieces for the amending legislation envisaged as the third stage of the rewrite initiative— had different fates. The commission’s proposals relating to allowances and reliefs were enacted with commendable promptness in the Finance Act 1920;54 but its proposals relating to administration were not enacted at all. It was clearly envisaged, during 1920, that provisions relating to the administration of income tax would be a central feature of a future Revenue Bill. However, the substantial preparation of such a Bill was 49

RC, above n 10, 141. ‘We feel it right that we should acknowledge at the outset how greatly our task has been lightened by the recent consolidation of the whole of the Income Tax legislation into one comprehensive Statute, the Income Tax Act of 1918. Had we been obliged to have recourse to the tangled mass of legislation which that Act superseded and repealed our position would have been much more difficult and uncertain’. RC, above n 10, 1, para 4. Later on in its Report, the Royal Commission stated ‘That consolidation was advisable in any event, but as a preliminary step to any serious attempt to improve the form and content of the Income Tax law it was absolutely indispensable’. RC, above n 10, 89, para 398. 51 Hansard, Fifth Series, vol 128, cols 91–3 (19 April 1920). 52 Minutes Qs 15,883–16,056. 53 RC, above n 10, 89, para 398. 54 10 & 11 Geo 5 c 18. For further details on the Royal Commission’s proposals on these topics and their enactment, see Pearce, above n. 9, at 104–11. 50

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postponed until after the enactment of the annual Finance Act; and, even then, the preparation of the Revenue Bill did not make rapid progress. At a meeting held on 29 September 1920, Austen Chamberlain ‘said he saw very little prospect of getting a Bill this Session and appeared to view without much favour a suggestion to introduce one early next year for passage in the first part of the Session’.55 On 16 February 1921, Chamberlain told a deputation from the Federation of British Industries that he had hoped that it might have been possible to introduce a Revenue Bill during the previous year, but That was not possible. My officials and I were very hardly worked, and it was not possible for me to find the time to get that Bill drafted in time, or even if I had had it drafted, could I have hoped to make progress with it in so crowded a session.

Chamberlain then added that he was hoping to introduce the Bill early in the current session and to get it through.56 One week later, on 22 February 1921, the Revenue Bill was still yet to appear and, in the House of Commons, Chamberlain was asked what he was going to do about it, and whether it would be taken on the floor of the House. His reply was ‘No. I shall ask the House to send it upstairs. That is the only hope of passing it. If the House treats it as a contentious measure it will not be proceeded with.’57 Chamberlain was well aware that an attempt to give the Inland Revenue additional powers over the administration of income tax might be unpopular58 (an awareness that showed that he had a better grasp of the political realities of the Revenue Bill than many of his contemporaries), but this remark still appears to

55 IR 63/99, fos 1–2. Note by Hopkins, dated 2 October 1920, of meeting held on 29 September 1920. 56 T 171/198. Transcript of the shorthand note made of a meeting between a Deputation from the Federation of British Industries and the Chancellor of the Exchequer, 16 February 1921 (at 20–21 of that transcript). 57 Hansard, Fifth Series, vol 138, col 760 (22 February 1921). A little later, Chamberlain added that ‘the House must understand that if it is to be treated as a contentious measure, I cannot possibly hope to make progress with it this session’ (ibid, col 761). 58 Thus, in the House of Commons in 1913, Chamberlain had said that ‘I think you will have to consider very carefully before you change the system of having District Commissioners . . . [A]lthough the District Commissioners may be unpopular as long as the present system exists, they begin to become popular when you propose to put others in their place’. Hansard, Fifth Series, vol 53, cols 676–7 (2 June 1913). In October 1919, having learned that a member of the Royal Commission, who was a General Commissioner, had become ill, Chamberlain wrote to the Chairman (Lord Colwyn) saying that ‘I think the recommendations of the Commissioners, in so far as they may deal with . . . the machinery of assessment or collection, would be very much strengthened if they were concurred in by an experienced Income Tax Commissioner. You may remember that on two or three occasions, notably under Mr. Gladstone and Lord Goschen, attempts were made to withdraw a large part of the powers of the Commissioners, but met with so much opposition in the House of Commons that they had to be withdrawn’. T 172/985. Letter, Chamberlain to Colwyn, 17 October 1919.

The Income Tax Law Rewrite Projects: 1907–56 145 be ill-judged. Those opposed to the enactment of the Revenue Bill were told precisely what they had to do to cause the Bill to be abandoned. The Revenue Bill was eventually presented to Parliament on 6 April 1921.59 It faced hostile criticism,60 being the subject of resolutions passed by bodies of general commissioners and of a campaign in the press.61 On 22 April 1921, The Times, which was opposed to the Bill, reported that Sir William Joynson-Hicks proposed to move, on the second reading in the Commons, that the House ‘declines to give a second reading to a Bill which increases the powers of Government officials and reduces the safeguards provided by the Constitution for the taxpayers of the country’.62 The Revenue Bill was accordingly due to be treated as a contentious measure—a state of affairs likely to be fatal for its enactment. These troubles came at a time when, for reasons of high politics, government ministers were in no position to deal with them. On 17 March 1921, Bonar Law had unexpectedly announced his resignation on grounds of ill health,63 thus prompting a government reshuffle. On 20 March 1921, Austen Chamberlain told a correspondent that ‘The PM wishes me to step fully into Bonar’s shoes. I shall give up the Chancellorship at once, go to live in Downing Street & lead the House’.64 On 1 April 1921, as part of the government reshuffle, Baldwin ceased to be Financial Secretary to the Treasury and entered the Cabinet as President of the Board of Trade. On 5 April 1921, and again as part of the government reshuffle, Sir Robert Horne succeeded Austen Chamberlain as Chancellor of the Exchequer. It was known, however, that Horne’s first priority was to continue to deal with the difficult industrial situation (and particularly with the situation in the coal industry). One dramatic result of this state of affairs was that, about midnight on Monday 18 April, Austen Chamberlain was told that he, and not Horne, must make the budget speech one week later—which Chamberlain duly did.65 During the all-important month of April 1921, 59 Hansard, Fifth Series, vol 140, cols 279–80 (6 April 1921). The date of 6 April 1921 also appeared on the backsheet of the Revenue Bill as printed by order of the House of Commons (Bill 60). An Explanatory Memorandum (Cmd 1242) giving information about the Bill was also prepared. There are copies of these documents in several locations in the National Archives, for example in T 171/195. 60 For further details on the contents of the Revenue Bill and its fate see JHN Pearce, ‘The Role of Central Government in the Process of determining liability to Income Tax in England and Wales: 1842–1970’ in J Tiley (ed), Studies in the History of Tax Law, vol 3 ((Oxford, Hart Publishing, 2009) 341–43. 61 Evidence of hostility from General Commissioners may be found in IR 40/2622 and IR 74/36. There is a collection of press cuttings relating to the Bill in IR 74/36. 62 The Times, 22 April 1921, 10, col g. 63 RC Self (ed), The Austen Chamberlain Diary Letters: the Correspondence of Sir Austen Chamberlain with his sisters Hilda and Ida, Camden Fifth Series, vol 5 (Cambridge, Cambridge University Press for the Royal Historical Society, 1995) 147. 64 Ibid, 155. 65 For Chamberlain’s account see ibid, 157–58. For the comments of a later Chancellor of the Exchequer on this state of affairs see R Jenkins, The Chancellors (London, Macmillan, 1998) 239.

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therefore, Treasury ministers were in no position to deal with well-foreseen Treasury business—such as the presentation of the budget. Still less were they in a position to take a vigorous role in combating the agitation that had arisen in connection with the Revenue Bill. With opposition both inside and outside Parliament, and an absence of vigorous political leadership within the Treasury (even if that absence was only temporary), the Revenue Bill was withdrawn.66 It was never reintroduced;67 and, with the abandonment of the 1921 Revenue Bill, the first initiative to rewrite the income tax legislation came to an end. There was no further attempt to effect a general enactment of the Royal Commission’s proposals—let alone to advance to the final stage of that initiative, and to follow the enactment of those proposals with a new statute setting out the entirety of income tax law.

T HE SEC OND INITIATIVE

Three years later, after the general election held on 29 October 1924, Baldwin became Prime Minister and Churchill became the Chancellor of the Exchequer. The simplification of income tax was one of a great number of issues on which Churchill was prepared to be active. On 27 October 1925, Sir Richard Hopkins, the Chairman of the Board of Inland Revenue, sent him ‘some observations as desired by you on the complexity of the Income Tax system and the practicability of remedial measures’.68 Hopkins adduced three major causes of complexity: these derived from the ascertainment of ‘income’; from the operation of the system of taxation at the source; and from the day-to-day administration of the tax. It was Hopkins’s belief, however, that little could be done.69 So far as administration was concerned, the Revenue Bill of 1921 had been withdrawn and ‘[i]t appears useless even to consider its re-introduction at the present time’. So far as the complexities relating to the system of taxation at the source were concerned, Hopkins believed that some rationalisation of the various existing bases of assessment was possible, but otherwise ‘these matters are not susceptible of remedy except by abolishing the system of 66

Hansard, Fifth Series, vol 141, cols 1045 and 1188 (4 May 1921). ‘The proceedings on that Bill were an absolute fiasco, because the government were beaten by the Daily Mail and the General Commissioners for the City of London before they had uttered a single word in this House in defence of the proposals in the Bill. There has never been an occasion, as far as I know, to equal it’. Douglas Houghton speaking on the Second Reading of the Income Tax Management Bill on 12 February 1964. Hansard, Fifth Series, Commons, vol 689, cols 395–96 (12 February 1964). 68 IR 63/114, fos 318–31. Memorandum, with covering note, Hopkins to Churchill, 27 October 1925. 69 One year later Hopkins stated that ‘I approached this quest at the outset with only modest hopes of success’. T 171/255 fo 227. Submission, Hopkins to Churchill, 27 October 1926, para 9. 67

The Income Tax Law Rewrite Projects: 1907–56 147 taxation at the source, a remedy which undoubtedly would be altogether worse than the disease’. So far as the ascertainment of ‘income’ was concerned, Hopkins thought that ‘[t]he only question which seems to arise in this connection is whether this mass of rules could be expressed in more logical order or in clearer or more concise form’. He returned to this matter towards the end of his memorandum: The remaining point is whether advantage would be gained by a re-arrangement and re-expression of the Income Tax Acts. The Royal Commission recommended that this task should, at a convenient opportunity, be undertaken.70 It is, however, clear that this recommendation was made upon the assumption that the proposals . . . [envisaging major changes in the administration of income tax] would first be carried into effect. As the problem now presents itself the suggested attempt to re-express the existing legislation still has, no doubt, some attractions. There is, however, practically no public demand for it. If it were taken in hand it seems very doubtful whether, at any date in the near future, the large amount of Parliamentary time necessary for the revising measure could be found. It must also be borne in mind that the existing statutes have been so frequently under the review of the Courts that most of their ambiguities, it may be hoped, have now been removed by case law. The substitution of the new measure on the other hand would call into being new squadrons of test cases and send them out upon their weary march from the local Commissioners to the Lords.

Churchill continued to pursue his aim of simplifying income tax71 and, after a lengthy course of dealing with the Inland Revenue, some of it very testy,72 a scheme was devised by an Inland Revenue departmental committee.73 Hopkins, in his own additional comments, divided these proposals into two parts. There was a ‘scheme of simplification capable of adoption in the next Budget’ and ‘the initiation of measures for the codification of the Income Tax statutes with a view to their expression in a simpler and more modern and more intelligible form’.74 The leading features of the scheme of simplification were a more unified basis of assessment (current year for taxed income, preceding year for other income); a single graduated scale of income tax (with surtax replacing 70

See text around n 53. In his 1926 Budget Speech, Churchill stated that ‘Everyone seeks for the simplification of the Income Tax . . . and I trust some day to be able to frame extensive proposals’. Hansard, Fifth Series, vol 194, col 1704 (26 April 1926). 72 See, in particular, T 171/255, fos 109–22. Minutes, Churchill to Hopkins, 27 December 1925, and Hopkins to Churchill, 5 January 1926. During the summer of 1925, Neville Chamberlain wrote to Baldwin of Churchill that ‘not for all the joys of Paradise would I be a member of his staff! Mercurial! a much abused word, but it is the literal description of his temperament’. Quoted from M Gilbert, Winston S Churchill: Volume 5 1922–1939 (London, Heinemann, 1976) 132. 73 T 171/255, fos 238–316. ‘Report Of a Committee appointed to consider the Simplification of the Income Tax and Super-Tax’, 14 October 1926. 74 T 171/255, fos 222–37. Submission, Hopkins to Churchill, 27 October 1926. 71

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the separate super-tax); and the adoption of the principle of ‘one man, one return’ (with a taxpayer completing a single return which was received from the Inland Revenue and was to be sent back to that Department). Churchill accepted the departmental committee’s report; and the proposals comprising the simplification scheme were enacted in the Finance Act 1927.75 So far as the codification of the income tax legislation was concerned, Churchill told the House of Commons during his 1927 budget speech that he proposed ‘to ask a body of experts of the highest qualifications to take the task in hand. Their labours will be long, but I hope when they fructify the fruits will be found to be both rare and refreshing.’76 On 17 May 1927, and after a discussion with Hogg, the AttorneyGeneral, Hopkins sent Churchill a submission about the proposed Codification Committee, envisaging that it ‘would consist exclusively of members of the legal profession’.77 So far as membership of the Committee was concerned, the Attorney-General considered it very important that the private practice side should be represented;78 and, once it was constituted, it was possible to divide the members of the Committee into two categories: lawyers in private practice and lawyers in government service. The lawyers in private practice appointed to the Committee were Bremner, RP Hills, the Junior Revenue Counsel, and EM Konstam, the author of a leading work on the law of income tax.79 So far as lawyers in government service were concerned, Hopkins’s submission suggested that Sir Frederick Liddell, the First Parliamentary Counsel, should take the chair. Liddell’s retirement was approaching, ‘but if he were willing to devote some period of his leisure to this task, his assistance would be quite invaluable’. For Hopkins, it also went ‘without saying’ that the Second Parliamentary Counsel, Sir William Graham-Harrison,80 and the Solicitor of Inland Revenue, Sir John Shaw,81 should be members of the Committee. All three were appointed. Having regard to the identity of the six individuals appointed to be members of the Committee, therefore, an optimist could take the view that the final draft Bill produced would benefit from the combined wisdom of a balanced Committee, consisting of three lawyers 75 17 & 18 Geo 5 c 10. For further details on these contents of the Finance Act 1927, see Pearce, above n. 60, at 346–9. 76 Hansard, Fifth Series, vol 205, cols 84–85 (11 April 1927). 77 T 160/592 (F 10520/1). Submission, Hopkins to Churchill, 17 May 1927. 78 T 160/592 (F 10520/1). Hogg’s endorsement, dated 26 May 1927, on Hopkins’s submission to Churchill, 17 May 1927. 79 EM Konstam, The Law of Income Tax (London, Stevens). This work went through 12 editions between 1921 and 1952 80 Sir William Graham-Harrison (knighted 1926) was Second Parliamentary Counsel from 1917 to 1928 and First Parliamentary Counsel from 1928 to 1933, when he retired. At that time he also retired as a member of the Codification Committee (see below). 81 Sir John Shaw (knighted 1927) was Solicitor of Inland Revenue from 1921 to 1939. He was succeeded in that post by Mr WB Blatch (later Sir Bernard Blatch), who had been the secretary to the Codification Committee.

The Income Tax Law Rewrite Projects: 1907–56 149 in private practice and three lawyers in government service. A pessimist could take the view that the Committee would divide into two hostile camps. Hopkins’s submission also set out the ‘general method of work of the Committee’ as he visualised it. At the outset, the Committee of lawyers, after hearing the Inland Revenue view, would lay out the general groundwork and arrangement of the new statute. The Inland Revenue staff would then supply the detailed material on the lines of that groundwork in the same manner as they supplied material to Parliamentary Counsel. On this basis, Liddell and Graham-Harrison, in consultation with the Committee, would be the drafters, and the Committee would ultimately review the finished product. The Chairman of the Board of Inland Revenue accordingly envisaged that the role of the Committee would be of a general, supervisory—and even, perhaps, occasional—nature. On the view that Hopkins took, there would be work for the Codification Committee to do at the beginning of its life: for it would lay out the general groundwork and arrangement of the statute ‘after hearing the Inland Revenue view’. The Committee would (merely) have a consultative role while the text of the draft Bill was being prepared, but there would also be work for the Committee to do at the end of its life: for it would then ‘review the finished product’. However, within this general framework, Hopkins envisaged that the detailed work on the text of the new Codification Bill would be a matter (first) for Inland Revenue staff, who would supply material to the drafters ‘in the same manner as they now supply material to Parliamentary Counsel’ in the context of the other bills relating to income tax, and (secondly) for those who would draft the Codification Bill. The drafters, as Hopkins envisaged the matter, would be the two members of the Office of Parliamentary Counsel who were members of the Codification Committee (Liddell and Graham-Harrison). On Hopkins’s view, therefore, the draft Bill that emerged would have very substantial resemblances with other bills relating to income tax, as regards both the process by which it had been produced and the extent to which Inland Revenue staff had been involved. It was implicit in this view that Inland Revenue staff would have been so closely involved in the production of the draft Codification Bill that, when produced, it would have (at least) their assent, and (with only a modicum of luck) their support and commitment to assist in the further task of enacting the Bill as drafted. The history of the Codification Committee may be divided into two halves according to the identity of its chairman, with Liddell, the chairman from 1927 to 1932, being succeeded by Lord Macmillan, the chairman from 1932 to 1936. The Codification Committee made little progress during the earlier period: and the evidence suggests that this failure was the result of decisions taken by the Committee itself. The minutes of the Committee’s early meetings do not suggest that Liddell had any overall

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plan as to how the Committee should fulfil its terms of reference; and there is nothing to suggest that he ever attempted to obtain the Committee’s agreement to its acting along the lines of Hopkins’s ‘general method of work of the Committee’—even if he was aware of Hopkins’s views. The minutes of the Codification Committee’s first meeting recorded that ‘[i]t was agreed that written memoranda should be invited from responsible bodies interested in the codification and simplification of Income Tax law’.82 It may be inferred that one such invitation was sent to the Board of Inland Revenue, for the Board accepted an invitation ‘to make suggestions as to the manner or direction in which the purposes for which the Committee has been appointed could best be accomplished’ and, during the first half of 1928, the Board submitted a number of memoranda to the Committee. One of those memoranda discussed the question ‘whether the existing classification of income for assessment purposes under the five schedules should be retained’—and took the view that it should.83 The minutes of the Committee’s second meeting say nothing about any attention being given to any memoranda. It was agreed, however, that members of the Committee should provide the secretary with a list of topics they wished to discuss at future meetings; that it was open to individual members to put in memoranda on any topic; and that one topic for discussion at the next meeting should be ‘classification’.84 At the third meeting, the subject of ‘classification of income’ was duly discussed, and Konstam, ‘having indicated that he would be prepared to put in for circulation to the Committee a memorandum showing in categories the sources of income charged by existing enactments as a basis for discussion, was invited and agreed to do so’.85 Konstam’s memorandum was duly submitted,86 and the Committee then discussed the classification of income for the next two years. By the end of 1930, the Codification Committee’s actions (such as they were) gave grounds for concern. The Committee was not working closely with the Inland Revenue. On the contrary: while the Inland Revenue had favoured the retention of the existing classification of income, the Committee had instead devoted the great majority of its time to devising a new classification—and that task was still not complete. A still more striking ground for concern, however, related not to qualitative matters (the possible misdirection of activity) but to quantitative ones. The Committee 82

IR 75/4, document 00001 (emphasis in original). IR 75/2 (BO 107) fos 302–4. IR 75/4, document 00002. 85 IR 75/4, document 00003. This document was prepared with a view to becoming the Minutes of the Committee’s Third Meeting, but at the Fourth Meeting it was decided that the Minutes should not record discussion and that this document should be redrafted accordingly. The final version of the minutes (document 00005) was accordingly of a much more anodyne nature. 86 IR 75/4, document 00006. 83 84

The Income Tax Law Rewrite Projects: 1907–56 151 had produced very little draft text. The 65th meeting of the Committee was held on 31 July 1930 (at a time, therefore, when the Committee had been in existence for the best part of three years), and a document was later produced setting out the clauses settled up to the end of that meeting.87 There were 37 draft clauses; and the presence of square brackets around text in some of those clauses indicated that some of that text was still under discussion. The Income Tax Act 1918, when enacted, had 239 sections; and the Codification Committee also needed to consider much material in the schedules to that Act and in later Finance Acts. The prospects for the Committee producing a draft Codification Bill within a reasonable time appeared very poor indeed. The whistleblower was Sir Ernest Gowers, the recently retired Chairman of the Board of Inland Revenue, who, on 21 November 1930, wrote to the Principal Private Secretary to the Chancellor of the Exchequer asking him to bring the activities of the Codification Committee to the attention of the Chancellor (Snowden). Gowers had ‘good ground for believing that the amount of useful work done so far is disappointingly small’; and enclosed a draft letter for the Chancellor to send to the Committee asking how they were getting on. Snowden minuted ‘Send the suggested letter’—and this was done.88 Liddell replied on 11 December 1930 after consulting with his colleagues. They had ‘reluctantly come to the conclusion that whilst it remains constituted at present, there is little probability of its being able to present a completed draft within a manageable time’. The reply ended, however, by offering two suggestions as to ‘how the preparation of the bill or bills referred to in the terms of reference might be expedited’. The first suggestion was that ‘one or more draftsmen should be employed to give the whole or the greater part of their time to the work’. The second suggestion was that the Committee should be strengthened by the appointment as Chairman of a person who holds or has held high judicial office and by the inclusion of a non-legal element capable of offering criticism and help from such points of view as those of accountancy and intelligibility of language.89

Snowden agreed with both suggestions made, and instructed Grigg, the Chairman of the Board of Inland Revenue, to contact Lord Macmillan

87

IR 75/5, documents 159 and 160. T 160/592 (F 10520/1). Letters, Gowers to Fergusson, 21 November 1930, and Snowden to Liddell, 25 November 1930. 89 T 160/592 (F 10520/1). Letter, Liddell to Snowden, 11 December 1930. A later letter from Konstam to Liddell dealt with the two suggestions by stating that ‘Proposals . . . were made with which you agreed’, thus permitting the inference that the initiative for these suggestions came not from Liddell himself, but from other members of the Committee. IR 75/5. Letter, Konstam to Liddell, 12 June 1931. 88

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with a view to persuading him to accept the chairmanship.90 However, the Lord Chancellor (Sankey) was opposed to a senior judge being appointed to be Chairman of the Codification Committee and, on 20 February 1931, Snowden told him that if he could hold out no hope whatever of being able to help me even at the end of 6 months I do not know what to do. At present I see nothing for it but to allow the Committee to die of inanition. At any rate Liddell is quite clear that matters have got beyond his capacity.91

By the end of 1931, however, Sankey was willing to consent to Macmillan becoming the Chairman of the Codification Committee.92 The first meeting of the Committee with Macmillan in the chair was held on 8 February 1932.93 On 20 February 1932, Macmillan reported to the Chancellor of the Exchequer (Neville Chamberlain) that ‘I think we have devised a satisfactory system of carrying on our work for the future’;94 and it is certainly true that the period of the Macmillan chairmanship was one in which a draft Codification Bill was produced on a steady basis, with the Committee’s report being signed on 12 March 1936.95 Lord Macmillan, in his autobiography, described the report as ‘a formidable document in two parts’. The first part ran to 541 pages and contained the report itself (consisting of a general introduction, a detailed discussion of special topics, and the Committee’s conclusion) followed by five appendices, one of which dealt, clause by clause, with the Committee’s draft Bill. The second part contained the text of the Committee’s draft Bill, which, in 417 clauses and eight schedules, presented a complete recasting and codification of the whole existing income tax law.96 These very impressive documents nevertheless had characteristics which meant that they did not command universal assent. During the period of the Macmillan chairmanship, the ‘private practice side’ achieved a clear predominance over the ‘government service side’. At the end of 1930, Grigg had suggested to Snowden that two Inland Revenue officials might be appointed to the Committee; but, although Snowden approved of this suggestion, nothing came of it.97 Instead, Macmillan’s appointment was followed shortly afterwards, on 25 February 1932, by the appointment 90

IR 75/5. Letter, Grigg to Liddell, 5 January 1931. T 160/592 (F 10520/1). Letter, Snowden to Sankey, 20 February 1931. 92 T 160/592 (F 10520/2). Letters, Chamberlain to Sankey, 8 December 1931, and Schuster to Chamberlain, 10 December 1931. 93 IR 75/6, document 236. 94 T 160/592 (F 10520/2). Letter, Macmillan to Chamberlain, 20 February 1932. 95 Cmd 5131, 106. 96 Rt Hon Lord Macmillan, A Man of Law’s Tale (London, Macmillan, 1953) 200–01. The two parts of the Report were published as Cmd 5131 and 5132. 97 T 160/592 (F 10520/1). Submission, Grigg to Snowden, 20 December 1930. Snowden’s minute on the relevant passage was ‘This is a good suggestion’. 91

The Income Tax Law Rewrite Projects: 1907–56 153 of two barristers in private practice (Fergus Morton KC and CL King) and by a chartered accountant in private practice (Sir Gilbert Garnsey).98 The Committee accordingly consisted of a senior judge (Macmillan), three lawyers in government service (Liddell, Graham-Harrison and Shaw) and six individuals in private practice: five lawyers (Bremner, Hills, Konstam, Morton and King) and one accountant (first Sir Gilbert Garnsey and then, after his death, DH Allan).99 This imbalance became still greater when, in December 1933, Graham-Harrison resigned—and was not replaced.100 Evidence exists which shows that the Codification Committee was deeply divided.101 At the time of his resignation, Graham-Harrison told the Chancellor of the Exchequer’s Private Secretary that I have felt for a long time past (and I know Sir Frederick Liddell shares my opinion) that I have been altogether in a false position on the Committee; almost all the members of the Committee have throughout looked with the greatest suspicion on everything I have said, and every suggestion which I have made, no doubt influenced by their preconception that I am the person mainly responsible for the state of confusion in which the Income Tax enactments find themselves . . . As some slight evidence of the attitude of the Committee, I may perhaps repeat to you in confidence an observation made by a member of the Committee to a friend of mine who passed it on to me; the remark was this ‘it is quite clear that the Committee does not mean to listen to anything that Graham-Harrison says’.102

Somewhat earlier, on 26 January 1933, Sir John Shaw, the Solicitor of Inland Revenue, had spoken to Lord Macmillan at the suggestion of the Chairman of the Board of Inland Revenue (Grigg). Shaw told Macmillan that he had always assumed that when the Committee had prepared a 98 Cmd 5131, 6. These appointments had been proposed in a letter from Macmillan to Chamberlain dated 20 February 1932 (T 160/592 (F 10520/2)). 99 Cmd 5131, 6–7. 100 IR 75/8, document 476; Cmd 5131, 6–7. 101 In a memorandum dated 1 November 1945, the First Parliamentary Counsel (Sir Granville Ram) said of the Codification Committee that ‘At an early stage of their proceedings it became clear that some members of the Committee regarded the Department of Inland Revenue and Sir William Graham-Harrison (who had drafted almost all the Finance Bills during the preceding period of nineteen years) as the people mainly responsible for the existing tangle and accordingly regarded any suggestions they made with the utmost suspicion. Success could never have been attained in such an atmosphere’. IR 40/8554. ‘Simplification of Income Tax Law, Memorandum by the Parliamentary Counsel’, 1 November 1945, para 4. 102 IR 40/8554. Letter, Graham-Harrison to Fergusson, 29 December 1933. In a supplementary letter, Graham-Harrison made a further point: ‘Before the Income Tax Committee’s Bill is introduced (if it ever is) it ought to be examined carefully by someone familiar with the procedure of the House of Commons applicable to Finance Bills. On two occasions at least, I pointed out that an alteration which the Committee proposed to make would or might affect procedure on Finance Bills, and in one of the cases might seriously embarrass the Chancellor of the Exchequer in Committee on the Bill. The only result of my protests was that I was told by the Chairman that the Income Tax Committee had nothing to do with questions of Parliamentary procedure on Bills—“let the House of Commons look after its own procedure”.’ IR 40/8554. Letter, Graham-Harrison to Fergusson, 1 January 1934.

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Bill, the Board would be given the opportunity of considering the Bill as a whole, and of making such observations and suggestions with regard to it as occurred to them, and that the Committee would consider these observations and suggestions. He had further assumed that his presence on the Committee would in no way restrict the Board’s freedom to make such observations and suggestions. It was possible that the Board might desire to consult him with regard to the draft Bill, and he would be glad to know that he had a perfectly free hand to criticise the Bill as a whole. Macmillan told him that he could feel assured that his freedom to criticise was in no way prejudiced by his membership of the Committee. ‘He thought that the Board certainly ought to have an opportunity of considering the Bill as a whole, though he would deprecate suggestions tending to reverse large decisions of policy taken by the Committee.’103 A note by Grigg, dated 16 June 1933, stated that On reconsideration I am not at all sure that it would be a good thing for the Committee formally to refer the draft Bill to the Inland Revenue for examination. Such an examination would take 6 months at least and it would probably involve the Inland Revenue too deeply in the ultimate fortunes of the Bill.104

It may be observed that the Inland Revenue was concerned to distance itself from the Codification Committee’s report long before that report was in existence. The final meeting of the Codification Committee was held on 12 March 1936;105 during the following month, its report was presented to Parliament and published in two parts.106 The Inland Revenue examined the Codification Committee’s draft Bill in detail—and had many observations.107 At the end of 1937, ‘the alterations which we propose’ were grouped under a number of broad headings. There were the correction of accidental errors; the modification of some provisions relating to the machinery of administration; the alteration, in details only, of some of the new provisions introduced for the protection of the taxpayer; the amplification of some provisions designed to codify case law and existing practice; the amendment of some provisions involving departures from existing practice; and modification of the provisions relating to penalties. In addition, there were three matters where the Inland Revenue considered it necessary to obtain a decision from the Chancellor of the Exchequer 103 IR 40/8554. Note, ‘JHS’ [ie Shaw] to ‘Chairman’ (of the Board of Inland Revenue) [ie Grigg], ‘Income Tax Codification Committee’, 2 February 1933. 104 IR 40/8554. Note by PJG [ie Grigg], 16 June 1933. 105 IR 75/9, document 667. Minutes of the 154th Meeting of the Committee, held on 12 March 1936. 106 Cmd 5131 and 5132. 107 IR 40/19419 and 19420 are two bound volumes in which these observations are collected.

The Income Tax Law Rewrite Projects: 1907–56 155 about the modifications that would be proposed to the Codification Committee’s draft Bill: the definition of residence; the allowance for wear and tear of machinery and plant; and ‘the classification of income for the purposes of the actual charging of the tax’.108 The preparation of the Bill to be presented to Parliament was a matter for the Office of Parliamentary Counsel, working in conjunction with the Inland Revenue; and, by May 1937, the First Parliamentary Counsel, Sir Maurice Gwyer, was already uneasy. That Office viewed the passing of time with disquiet: ‘experience shows that Consolidation Bills put into cold storage deteriorate very rapidly, with the result that a very large amount of work is thrown away’.109 In the context of the Codification Committee’s draft Bill, therefore, the passing of time immediately following its publication was not an event that was ‘neutral’: it was the effluxion of the time that constituted the one and only window of opportunity for the Bill’s enactment. Indeed, a point could be reached where a decision not to press ahead with the Codification Committee’s draft Bill for the time being, would amount, in practice, to a decision not to press ahead with the Bill at all. The tensions between the Office of the Parliamentary Counsel and the Inland Revenue were discussed at a meeting held on 21 July 1937. The new First Parliamentary Counsel, Sir Granville Ram, explained that his Office was very hard pressed with preparing legislation which was urgently required; and that, in particular, special legislation connected with wartime conditions would have to be prepared towards the end of the year. He was accordingly anxious to avoid deputing one or more of his staff to devote time to the Codification Bill, unless there was a reasonable prospect that the Bill would make progress soon. It was agreed that when the Inland Revenue was ready with its final review of the Codification Committee’s draft Bill, the position would be considered ‘with a view to reporting to the Chancellor on the general position in regard to the Bill’. The aim was ‘that a decision should be obtained at the earliest possible moment from the Chancellor as to the line to be followed in regard to the Bill’.110 During the second half of 1937, therefore, the next major task consisted of reporting to the Chancellor on the general position in regard to the Bill with a view to obtaining a decision on the line to be followed;111 and when, early in 1938, the Chancellor of the Exchequer (Simon)112 came to 108 T 172/1860. Submission, Canny to Chancellor of the Exchequer, 17 December 1937, paras 5 and 6. 109 IR 40/5274. Letter, Gwyer (First Parliamentary Counsel) to Forber (Chairman of the Board of Inland Revenue), 28 May 1937. 110 IR 40/5274. Note (by Canny) of meeting held on 21 July 1937. 111 T 172/1860 is the file presented to the Chancellor of the Exchequer, together with the Chancellor’s own memorandum. 112 In May 1937, Neville Chamberlain had succeeded Stanley Baldwin as Prime Minister; and Sir John Simon had succeeded Neville Chamberlain as Chancellor of the Exchequer.

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consider this matter for himself, he had material contributed by the Inland Revenue, the Departmental Treasury and the Office of Parliamentary Counsel. The Inland Revenue wanted to proceed with the Codification Committee’s draft Bill, but thought it ‘abundantly clear that the draft Bill requires a large number of alterations’—and took an optimistic line about the Bill’s Parliamentary prospects.113 The Departmental Treasury thought that the Inland Revenue underestimated the Parliamentary difficulties involved in its preferred course of action114—and so did the Office of Parliamentary Counsel. The first important component of the material contributed by that Office consisted of a letter from Stainton, the Parliamentary Counsel who was dealing with the Codification Bill, written on the basis that he thought it ‘essential that Ministers should recognise the Parliamentary difficulties which the Bill is likely to present’.115 The Bill was ‘not a pure Consolidation Bill, and therefore will not be subject to the convenient procedure which enables such a Bill to be passed without taking up any Parliamentary time’. Stainton went on to point out that it would be quite clear that any Bill presented to the Commons would differ very significantly from the draft one produced by the Codification Committee, and thought it virtually certain that the House of Commons would wish to investigate why those differences existed. Proceedings in the Commons could therefore become protracted—and (among other things) involve ministers in detailed explanations of highly technical matters. The second important component of the material contributed by the Office of Parliamentary Counsel consisted of a memorandum by Ram. The first part of this memorandum dealt with the disposal of the drafting resources of his Office; and, after referring to the government’s ordinary legislative programme and to ‘no less than 48 projected Bills’ that might be needed at short notice to deal with wartime conditions,116 Ram’s conclusion was that consolidation work must in any case be postponed until after the Emergency Bills had been prepared. He also concluded that the carrying out of the Inland Revenue’s programme would involve some risk that his Office might be unable to meet its obligations either in respect of the Emergency Bills or in respect of the ordinary legislative work of the session. The second part of Ram’s memorandum expressed his general views on the whole subject. He was in general agreement with Stainton; and thought that the Inland Revenue were too optimistic in their estimate

113

T 172/1860. Submission, Canny to Chancellor of the Exchequer, 17 December 1937. T 172/1860. Memorandum by JHE Woods, 10 January 1938. 115 T 172/1860. Letter, Stainton to Canny, 8 December 1937. 116 Some details of the preparation of this emergency legislation are given in HS Kent, In on the Act: Memoirs of a Lawmaker (London, Macmillan, 1979) 107–11. Kent mentions the preparation of one main enabling Bill and 42 other emergency Bills (109). 114

The Income Tax Law Rewrite Projects: 1907–56 157 of the parliamentary difficulties likely to be encountered in the passage of their Bill.117 Simon’s own formal memorandum was dated 18 January 1938: It certainly would be a misfortune, and would represent a great waste of time and labour of very busy people, if, as the result of the Macmillan Committee, there is not a comprehensive Income Tax Bill passed into law. I have, however, the gravest doubts as to whether this result can be achieved at a time when Parliamentary time is so much occupied. If the Bill was a pure codification Bill, and if the Chancellor of the Exchequer and the Attorney General were able to assure the House that the Bill’s passage would not change the law, that would be another matter. But the very first question which the House of Commons would want answered about the Bill is whether this enormous measure changes the law. The answer, I understand, is that it does change the law, and if so, I should expect that the House of Commons would refuse to accept it on the certificate of Lord Macmillan or anybody else and would insist on examining and discussing the changes.

Simon therefore took a very unfavourable view of the chance of passing a vast Bill of this character into law in any near session, when Parliament was likely to be very busy. However, he had ‘no desire to be more gloomy as to prospects than is necessary’, and promised that, if the Inland Revenue were to provide him with an explanation of the main points on which it was felt necessary to depart from the Codification Committee’s recommendations, ‘I will study the points and do my best to understand them’.118 During the second half of January 1938, therefore, the Inland Revenue was at work on a memorandum on the ‘classification of income’.119 The covering note for the memorandum stated that the Department’s detailed examination of the Codification Committee’s classification compelled the conclusion that their aim of achieving intelligibility had fallen a long way short of realisation and that the Committee had actually introduced 117 T 172/1860. Memorandum by Ram, 10 January 1938. As part of his general consideration of the subject, Ram stated that ‘From the point of view of this office the thing most to be desired is that this Bill should be prepared, pressed forward, and passed without delay, for until it is either passed or finally abandoned it will be a constant source of embarrassment to us, more particularly in impeding the vast amount of consolidation which is urgently required to be done. I dare not, however, ask for authority for Mr. Stainton’s whole time employment upon the Bill without emphasising not only the risks involved but also the need for a full appreciation of the Parliamentary difficulties to which the passage of the Bill may give rise, for it would be a calamity if, after so much had been sacrificed to secure the preparation of the Bill, it had ultimately to be abandoned.’ 118 T 172/1860. Memorandum by the Chancellor of the Exchequer (Simon), 18 January 1938. Simon’s memorandum appears to point clearly to the conclusion that the Codification Bill would have to be abandoned, but then to stop short of the implied conclusion. Neville Chamberlain once described Simon as ‘temperamentally unable to make up his mind when a difficult situation arose’. Quoted from GC Peden, The Treasury and British Public Policy, 1906–1959 (Oxford, Oxford University Press, 2000) 250. 119 IR 40/5274. This piece contains both the draft memorandum and the draft covering note. A marginal annotation on the draft covering note ‘Memo on Reclassification—sent to Stainton January 1938’ establishes the date at which these documents came into existence.

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complexities. ‘Indeed, the anomalies, the circumlocution and the needless complexities are so serious that corrective amendments are . . . absolutely necessary.’ The Department’s verdict on the Codification Committee’s classification of income was that ‘Briefly, it is unsuitable to an Income Tax an essential feature of which is taxation at the source’. The draft memorandum was shown to Stainton, who felt ‘compelled to attack it . . . violently’. ‘I can only say that the [Codification] Committee’s classification has given me a clearer picture of income tax law than I ever had before, and I agree with them [ie the Committee] that it is an improvement on the existing system to which you wish to revert.’ ‘I wish to goodness I could convince you of the righteousness of my cause, but I am afraid this seems past hope.’120 The Codification Committee and the Inland Revenue had parted company on the subject of classification of income at an early stage in the Codification Committee’s history; 10 years later, there were still no signs of reconciliation. Against this background, Ram was able to obtain a decision from Simon that further work on the Codification Bill should be downgraded and that Stainton should not work on the Bill in the foreseeable future.121 Macmillan was accordingly informed that ‘some postponement is inevitable’.122 The Inland Revenue policy file dealing with the Codification Bill123 suggests that the text of the Codification Committee’s draft Bill ceased to receive attention after these developments, and that the draft memorandum on the ‘classification of income’, prepared during January 1938, was never sent. Time passed, and the decision that there should be ‘some postponement’ of the Bill gradually moved towards becoming a decision that the Bill would be abandoned. A milestone along this path was reached in August 1939, when Simon stated in Parliament that ‘[s]o long . . . as the present pressure of affairs continues, I can see no possibility of finding sufficient Parliamentary time to deal with legislation on this complicated subject’.124 The Second World War began one month later. There was no question of work on the Codification Bill being undertaken while the war was in progress; and, by 1945, the Inland Revenue and the Office of the Parlia120 IR 40/5274. Letters, Stainton to Canny, 1 February 1938 and 5 February 1938 (twice). In these letters Stainton also stated that ‘The gulf [between Stainton and an Inland Revenue Committee which had considered the Codification Committee’s draft Bill] seems unbridgeable—mainly I think because they [ie the Inland Revenue Committee] have such a profound understanding of the form in which the existing law is expressed that they cannot appreciate the difficulties it presents to people who have not devoted most of their lives to studying it’. 121 IR 40/5274. Letter, Ram to Canny, 1 March 1938. On 10 March 1938 Canny began a letter to Woods with the words ‘I gather from a letter I have received from Ram that owing to the other demands upon Parliamentary Counsel’s time, it will not be practicable to go full steam ahead with the Codification Bill, with the result that its introduction early next session will no longer be possible’. IR 40/5274. 122 IR 40/5274. Letter, Simon to Macmillan, 17 March 1938. 123 IR 40/5274. 124 Hansard, Fifth Series, vol 350, col 2631 (3 August 1939).

The Income Tax Law Rewrite Projects: 1907–56 159 mentary Counsel were both quite clear that the draft Codification Bill was a text that was not of practical use.125

T H E TH IR D INITIATIVE

While, during the Second World War, the subject of restating the United Kingdom’s income tax law was necessarily in abeyance, it re-emerged as soon as the tasks facing a post-war government began to be considered. Somervell, the Attorney-General during the war, ‘was strongly of the view that codification or consolidation of the Income Tax was one of the most urgent tasks to be undertaken in the post war period’, and during the first half of 1945 raised the matter at a ministerial conference.126 On 7 June 1945, the subject was also raised in the House of Lords, where, during the Second Reading of the Income Tax Bill,127 Lord Nathan referred to the draft Bill produced by the Codification Committee and urged that (as a first step) the law should be consolidated, and that a committee should then be set up for the codification of tax law.128 A few months later, this topic was the subject of a letter from Terence Donovan, a barrister who was now a Labour MP, which was published in The Times on 11 October 1945. Donovan thought that the draft Bill prepared by the Codification Committee ‘should now be brought up to date and passed into law’.129 His letter was taken up immediately by the Attorney-General (Shawcross), who wrote to the Prime Minister (Attlee) to support what Donovan said ‘in the strongest terms’: The present state of our Income Tax Law seems to me an unmitigated scandal. It is incomprehensible to all laymen and most lawyers—including myself . . . In my view the present need for codification and simplification of the law as to income tax and death duties is at least as great as that which led to Lord Birkenhead’s codification of the Law of Property. May I suggest that consideration may be given to the establishment of a small committee . . . of which Donovan should be, at least, a member, to bring the 1936 draft Bill 125 In a document dated 3 November 1941, Ram and Stainton expressed the views that ‘the abortive Income Tax Bill . . . threw away work which occupied almost the whole time of two members of the office for about a year’, and that ‘the Bill prepared by the Income Tax Committee in 1936 was not acceptable to the Inland Revenue. Much work was done on it by the department and Parliamentary Counsel, but it was far from ready when it had to be dropped owing to pressure of war legislation . . . The legislation passed since will make another committee and another Bill almost inevitable’. LCO 2/3816. ‘Observations by Parliamentary Counsel with respect to a projected memorandum to the Lord Chancellor on the subject of the Statute Book’, para 7 and Appendix A; and letter, Somervell to Schuster, 6 November 1941 for the attribution of this document to Ram and Stainton. 126 IR 40/8554. Report, Inland Revenue (Gregg) to Chancellor of the Exchequer (Dalton), 2 November 1945. 127 This Bill was enacted as the Income Tax Act 1945 (8 & 9 Geo 6 c 32). 128 Hansard, Fifth Series, Lords, vol 136, col 504 (7 June 1945). 129 The Times, 11 October 1945, 5, col e.

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up to date and to extend its scope to death duties with a view to legislation later in the life of the Parliament if time permits. Such a measure would not be controversial but would, on the contrary, be welcomed by all sections of the community. And now that income tax is so widely spread it becomes the more important that ordinary people should have some idea of what the Taxing Statutes really mean.130

Shawcross sent a copy of his letter to the Chancellor of the Exchequer (Dalton),131 who stated that he would have the matter looked into as speedily as possible.132 The Inland Revenue was accordingly asked to state its views: but Sir Cornelius Gregg, the Chairman of the Board of Inland Revenue, was quite clear that the Chancellor should also obtain the views of the First Parliamentary Counsel.133 When Dalton came to consider the matter for himself, therefore, he had before him substantial contributions from both Gregg and Ram.134 Both men opposed the proposal that work on the Codification Committee’s draft Bill should be resumed. In a letter to Gregg, Ram stated of his own memorandum that it is outspoken but the situation requires the utmost frankness and in the circumstances outspokenness on this subject probably comes better from here than Somerset House . . . There is no doubt that you and I are in complete agreement over this and it would be well that we should speak with the same voice.135

130

IR 40/8554. Letter, Shawcross to Attlee, 11 October 1945. IR 40/8554. Letter, Shawcross to Dalton, [11 October 1945]. The letter to Dalton is only partly dated and the month is misstated: but the date may be deduced with confidence from Dalton’s reply. In his covering letter to Dalton, Shawcross expressed the view that ‘The proposed codification would, I believe, be a most useful job which would resound greatly to our credit. It would not, I am afraid, save my life—but it might prolong that of my successor!’ 132 IR 40/8554. Letter, Dalton to Shawcross, 15 October 1945. Dalton indicated his own sympathies at this time when speaking in the House of Commons on 25 October 1945: ‘Another MP [the young James Callaghan] raised one point to which I am sympathetic and which is already being considered. That is with regard to the whole question of the Income Tax law, which has become cumbrous and elephantine. I think it is prima facie reasonable that we should soon have an effective inquiry with a view to simplification and clarification. I am considering that now, though I have not reached a point where I can make a positive announcement . . . It would be a great thing if within the life time of this Parliament, we could clarify, codify and clean up this, from the Revenue point of view productive, and from the point of view of trade and industry important, branch of the law’. Hansard, Fifth Series, vol 414, col 2299 (25 October 1945). 133 IR 40/8554. Letter, Gregg to Trend, 2 November 1945; Report, Inland Revenue (Gregg) to Chancellor of the Exchequer (Dalton), 2 November 1945. 134 IR 40/8554. Report, Inland Revenue (Gregg) to Chancellor of the Exchequer (Dalton), 2 November 1945; Memorandum by the Parliamentary Counsel headed ‘Simplification of Income Tax Law’, 1 November 1945. 135 IR 40/8554. Letter, Ram to Gregg, 1 November 1945. ‘Great Stuff—This Bass!’ was Gregg’s view of the document prepared. IR 40/8554. Letter, Gregg to Ram, 2 November 1945. 131

The Income Tax Law Rewrite Projects: 1907–56 161 Gregg’s report began by recalling that the Inland Revenue took the view that the draft Bill produced by the Codification Committee ‘would require a large number of alterations’. He stated that his Department would not be able to give any future Committee the help it would require, and suggested that the task of preparing a new draft Bill should be carried through departmentally, by the joint action of the Inland Revenue and Parliamentary Counsel. ‘If there is to be a Committee representing the outside world it should come in rather to consider the Bill produced departmentally.’ It was Gregg’s view, however, that ‘there is a lot to be said for attempting only a consolidation of the Income Tax law’. Ram’s memorandum stated early on that the clarification of income tax law was a project upon which much effort has been expended in the past and the causes which have hitherto led to disappointment are probably more apparent in this office than elsewhere. I therefore conceive it to be my duty to mention frankly certain mistakes which should be avoided this time in order that success may be attained.

Ram highlighted two mistakes (as he saw them) that had been made by the Codification Committee: the Committee had attempted to undertake the actual drafting of the Bill,136 and there had been only occasional consultations with the Inland Revenue. He went on to urge that a draft Bill should be prepared by one of the Parliamentary Counsel on the instructions of the Inland Revenue, and that only when that stage had been completed should it be examined by a Committee. Ram also considered the implications of a draft Bill for his Office, and had no difficulty in reaching the conclusion that ‘the task [of drafting] must devolve upon Mr. Rowlatt’. It would also be necessary, in due course, to consider the conflicting claims of new legislation (on the one hand) and consolidating and codifying legislation (on the other hand); of the place to be taken by the rewriting of the legislation governing income tax law vis-à-vis the rewriting of the legislation governing other areas of the law; and of the relative merits of the consolidation and codification of income tax law. These two documents made a moderate impact only. Dalton stated that he discounted a good deal of the material submitted: ‘But we can’t spare Parliamentary Counsel just yet’.137 After this, Dalton discussed the position first with Donovan and then with Shawcross, telling them that, in view of the current pressure upon Parliamentary Counsel, imposed by the government’s legislative programme, there was no prospect of making progress at that time; but that he proposed to review the position in the

136 137

‘Same old Song!’ was Dalton’s marginal comment on this passage. IR 40/8554. Note, Dalton to Trend, 11 November 1945.

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summer of 1946.138 It does not appear, however, that any such review was then carried out. During the first year of the Attlee Government, therefore, there was agreement, at a general level, that income tax law could advantageously be rewritten: but, during the summer of 1946, nothing in particular was being done. When the rewriting of the income tax legislation eventually made progress, it did so in the context of a programme of statute law reform— and required reference to a number of different committees. On 31 January 1946, Ram submitted a major memorandum on ‘statute law reform’ to the Lord Chancellor (Jowitt);139 and, on 20 February, Ram was able to tell Sir Edward Bridges (the Permanent Secretary to the Treasury and Head of the Civil Service) that the Lord Chancellor had read his memorandum and approved it.140 It was only on 30 July 1947, however, that Jowitt made a general announcement on the subjects of statute law revision and consolidation in the House of Lords.141 A separate branch devoting its whole time to the preparation of Consolidation Bills and Codification Bills was to be established in the Office of the Parliamentary Counsel, and Ram, who was retiring as First Parliamentary Counsel, was to be the head of the new branch. The Statute Law Committee was also to be reconstituted,142 with its membership including three members of each House of Parliament. On 8 December 1947, the Statute Law Committee met and agreed that the question of the consolidation of the Income Tax Acts should 138 IR 40/8554. Letter, Trend to Gregg, 27 November 1945. See also IR 40/8554, letter, Trend to Rowan, 2 January 1946. 139 T 162/911 (E 17496/1). Memorandum (printed), headed ‘Statute Law Reform; Memorandum by the Parliamentary Counsel to the Treasury’, 31 January 1946. Ram’s memorandum began by stating that ‘The chaotic condition of the Statute Book has been the subject for complaint for at least five hundred years, and it must be acknowledged that the long history of the intermittent attempts made to improve its form and arrangement is, in the main, a story of failure’. The memorandum also included the statements that ‘The two subjects upon which clarification of the law is at present most urgently demanded are probably those dealt with by the Income Tax Acts and by the Rent Restriction Acts respectively. Of the first it need only be said here that although “pure” consolidation might perhaps be useful as a first step towards a more thorough investigation of the whole subject it could do no more than this. Memoranda were recently submitted to the Prime Minister and the Chancellor of the Exchequer making suggestions as to how progress might be made with the task of simplifying Income Tax Law which explain the reasons why this subject requires to be dealt with by special methods.’ 140 T 162/911 (E 17496/1). Letter, Ram to Bridges, 20 February 1946. 141 Hansard, Fifth Series, Lords, vol 151, cols 738–41 (30 July 1947). This timetable had been envisaged at a meeting, held on 28 March 1946, and attended by Bridges, Ram, Brook (the Secretary to the Cabinet) and Coldstream (of the Lord Chancellor’s Office). Bridges’s note of the discussion recorded that ‘We agreed that the right plan was that the Statute Law Committee should be reconstituted in the summer of 1947, with a view to the new scheme becoming fully operative in October 1947. The reason for this delay is that the pressure of legislation next year will make it impossible to launch the new scheme effectively before that date.’ T 162/911 (E 17496/1). Note of discussion, initialled by Bridges, 28 March 1946. 142 The Statute Law Committee had been set up by Lord Cairns in 1868.

The Income Tax Law Rewrite Projects: 1907–56 163 be brought before the next meeting.143 Before that meeting, the new Chairman of the Board of Inland Revenue (Sir Eric Bamford) formed the view ‘that the first step is to start off with consolidation of the existing law. The Revenue say that whatever subsequent steps are taken, it is clear that this must be done.’144 The Treasury, the Inland Revenue and the Office of Parliamentary Counsel then went on to co-operate in producing a joint memorandum for the Committee.145 The memorandum proposed that there should (first) be a consolidation of the existing income tax statute law, to be followed (secondly) by an attempt at codification. It was proposed that the Inland Revenue and Parliamentary Counsel should prepare a draft Codification Bill, which should then be considered by a committee. The joint memorandum accordingly proposed a plan of campaign consistent with the views expressed by Gregg and Ram in 1945 (as opposed to those expressed by Donovan and Shawcross). The Statute Law Committee had its next meeting on 28 July 1948, and the proposals relating to income tax consolidation and codification were referred to a sub-committee.146 Shortly before the sub-committee was due to meet on 5 November 1948, Donovan circulated a note to the other members in which he expressed grave doubt about whether consolidation was worthwhile, proposing, instead, that the provisions relating to the income tax treatment of husband and wife should be codified and clarified in the next Finance Bill, with further steps on similar lines being considered in the light of the experience thus gained.147 143

IR 40/14566. Joint Memorandum, 6 July 1948, opening words. T 273/263. Letter, Bridges to Ram, 18 June 1948. In his reply, Ram stated that he was ‘surprised’ to learn that the Inland Revenue thought that consolidation should be the first step ‘because, in the many discussions on this subject, I have always been led to believe that consolidation would, in itself, effect very little. If this is wrong and the truth is that consolidation is a necessary preliminary—or even would be a very useful one—we shall have to arrange accordingly; but it would be a very big job and I should be loath to undertake it “unadvisedly, lightly or wantonly” particularly at this moment’. T 273/263. Letter, Ram to Bridges, 21 June 1948. 145 IR 40/14566. Statute Law Committee; Consolidation of Income Tax Acts; Joint Memorandum submitted by the Secretary to the Treasury on behalf of the Treasury, the Board of Inland Revenue and Parliamentary Counsel, 6 July 1948. In a letter written to Bridges during November 1951, Rowlatt referred to this Memorandum as ‘your Memorandum’. IR 40/14566. Letter, Rowlatt to Bridges, 14 November 1951. 146 IR 40/14566. Statute Law Committee; Minutes of Meeting held on 28 July 1948. The Sub-committee, which consisted of Bridges, Donovan, Sir Alan Ellis (who had replaced Ram as First Parliamentary Counsel), Sir John Rowlatt (of Parliamentary Counsel), Lord Simonds, Sir John Stainton and a representative of the Board of Inland Revenue, accordingly had a substantial majority of members who could be relied upon to support the proposals made in the Joint Memorandum. WS Murrie, who attended this meeting on behalf of Sir Norman Brook, the Secretary to the Cabinet, reported that both Donovan and Shawcross ‘expressed some doubts as to whether the proposed programme was good enough’. CAB 21/2150. Note, Murrie to Brook, 28 July 1948. 147 IR 40/14566. Statute Law Committee; Income Tax Acts; Note by Mr Terence Donovan KC, MP, 30 October 1948. In a letter to Bamford, dated 2 November 1948, Rowlatt commented on Donovan’s proposals, stating that he ‘pours a good deal of well-merited cold water on both Consolidation and codification’. On the other hand, Rowlatt considered 144

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Donovan’s note prompted Bridges to take action. He talked with Ellis (the new First Parliamentary Counsel) and Rowlatt about it on 4 November 1948,148 and sent a submission, critical of Donovan’s proposals, to the Chancellor of the Exchequer (Cripps)149 on the same day.150 Cripps minuted that ‘I agree that Terence Donovan’s suggestion though ingenious would not be acceptable to any Chancellor—anyway to this one! I think we must go ahead as fast as we can with codification & consolidation’.151 The sub-committee could accordingly be told that Donovan’s proposal had been placed before the Chancellor of the Exchequer—and was unacceptable (with the obvious consequence that the proposals contained in the joint memorandum should be implemented). On 5 November 1948, the sub-committee met and reached the conclusion that the programme to be adopted should follow the lines recommended in the joint memorandum;152 on 10 December 1948, the full Statute Law Committee approved the sub-committee’s report.153 The endorsement, by the Statute Law Committee, of the proposals made in the joint memorandum of 6 July 1948 did not, in itself, ensure that any action would be taken, as it gave rise to operational difficulties in the Office of the Parliamentary Counsel. The consolidation of the income tax legislation could not be prepared in the newly created Consolidation Branch of that Office, but would have to be entrusted to the Parliamentary Counsel in the ‘main’ part of the Office, which did Finance Bill work (ie Rowlatt). Further, in order to carry out the programme envisaged by the Statute Law Committee, it might well be necessary for the government to give priority to the Income Tax Consolidation Bill over other new legislation that the government might have in mind. Ellis raised these points with the Cabinet Office.154 His letter was shown to the Lord President (Morrison),155 who, on 31 January 1949, wrote to Jowitt asking him what he had in mind about the consolidation and codification of income tax that codification of the provisions relating to husband and wife was ‘merely crackers’; and suggested, instead, that a restatement of the law relating to personal allowances might be preferable. IR 40/14566. Letter, Rowlatt to Bamford, 2 November 1948. 148 T 273/267. Note of a talk with Ellis and Rowlatt about Mr Donovan’s Memorandum, 4 November 1948. 149 Cripps had replaced Dalton as Chancellor of the Exchequer during November 1947. 150 T 273/267. Submission, Bridges to Cripps, Income Tax Acts; Consolidation and Codification, 4 November 1948. 151 T 273/267. Manuscript initialled Minute (by Cripps), 5 November 1948. 152 IR 40/14566. Statute Law Committee; Report of Meeting of Sub-committee on Income Tax Codification Procedure (meeting on 5 November 1948). Donovan added an addendum recommending that, as an addition to that programme, and not as an alternative to it, he would like to see the experiment of codifying and clarifying a suitable part of income tax law in a current Finance Act tried—and he clearly had in mind the income tax provisions relating to husband and wife. 153 LCO 2/3815. Statute Law Committee; Minutes of Meeting held on 10 December 1948. 154 T 273/267. Letter, Ellis to Johnston, 21 January 1949. 155 T 273/267. Letter, Johnston to Ellis, 24 January 1949.

The Income Tax Law Rewrite Projects: 1907–56 165 law, for there appeared to be the danger of a clash between the needs of current legislation and those of consolidation.156 Jowitt’s reply indicated that he would welcome the opportunity to discuss the matter at a meeting with officials present.157 Bridges wrote to Ellis: I rather expect that the next stage will be a meeting of the Lord Chancellor and the Lord President; and I would imagine that the officials mainly concerned with this would be invited to be present. Although I am only on the side lines, I shall try and get invited to the party.158

This meeting took place on 16 February 1949; in addition to Morrison and Jowitt, Bridges, Ellis, Ram and Rowlatt were also present. The official note of the meeting recorded that it was agreed ‘that a paper should be prepared for the Legislation Committee recommending that consolidation should be put in hand immediately with a view to its completion by June 1950 if possible, and that codification should proceed thereafter’.159 Bridges also made his own note. After recording who was present, he stated ‘Sir . . . [Alan Ellis] was pessimistic. Sir . . . [Granville Ram] was statesmanlike. Sir . . . [John Rowlatt] was factual but obviously ready to get on with the job. I was merely rude, and said that the present position was a scandal; but if Ministers were not prepared to get started with the job and go ahead with it, they had better say so and leave the existing confusion to stand.

‘In the end,’ he recorded, ‘it was decided to get ahead with the business.’160 A memorandum on the consolidation of the income tax legislation was prepared for the Cabinet Legislation Committee161 and, at a meeting held on 1 March 1949 (considerably more than three years after Shawcross had urged action on members of the Cabinet), the Committee approved the proposals in that memorandum for the rewriting of the Income Tax 156

T 273/267. Letter, Morrison to Jowitt, 31 January 1949. T 273/267. Letter, Jowitt to Morrison, 1 February 1949. Jowitt went on to say that ‘With regard to the codification of the income tax law, I am afraid that this does mean the whole time services of Sir John Rowlatt. I am advised . . . that as a first step it would be necessary to consolidate the income tax law and this might well take three years. Thereafter it would be necessary to codify it, and I agree with you that great credit would rightly accrue to any Government that accomplished this task. There is much to be learned from the abortive attempt of the Macmillan Committee which I can give you in discussion, but I am sure the right course is in the first instance to have a meeting with Ellis and Ram and perhaps Rowlatt in order that you may be acquainted with all the difficult problems that arise.’ 158 T 273/267. Letter, Bridges to Ellis, 9 February 1949. 159 T 273/267. Note of a Meeting held in the Lord President’s Room, House of Commons on 16 February 1949 to consider consolidation of income tax law. See also LCO 2/3815. Note to the Lord Chancellor on Income Tax codification, 16 February 1949. 160 T 273/269. Note initialled by Bridges. This Note has the date 15 February 1949, but the date 16 February is to be preferred—see the material cited in the previous footnote. 161 IR 40/14566. Cabinet; Legislation Committee; Income Tax Consolidation; Memorandum by the Financial Secretary to the Treasury, 24 February 1949. The Financial Secretary to the Treasury was WG Hall. 157

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Acts.162 ‘I should have liked to be able to tackle the Income Tax Acts,’ Cripps announced in his Budget Speech on 6 April 1949, ‘but that is too large a task for the moment. I hope, however, we may get ahead towards their consolidation, which must be the first step in their reform and simplification.’163 The preparation of a consolidating Income Tax Bill began. The drafter was Sir John Rowlatt, one of the Parliamentary Counsel, who, from the end of 1949, worked with a committee of Inland Revenue officials, led by RO Nicholas.164 Initially, Rowlatt was unenthusiastic about what could be expected from the Consolidation Act: A stuffy, almost paste-and-scissors, Consolidation Act would not be very satisfactory, but it might perhaps be reasonable to prepare it and pass it reasonably quickly, and, when passed, it might perhaps avoid throwing doubt on most of the existing case law, while remaining of some utility to persons who wanted to see, rather more easily than is possible at present, where the income tax as a whole has got to.165

However, the extent of Rowlatt’s lack of enthusiasm became fully apparent only during November 1949, when he despatched a memorandum arguing at length that ‘whatever can or cannot be done about the Income Tax Acts, the idea of consolidating them is misconceived and should be abandoned’.166 Bamford, on behalf of the Inland Revenue, predictably urged Rowlatt to reconsider his view.167 A meeting to discuss the situation was held on 2 December 1949, with Bridges in the chair,168 when it was decided to continue with the preparation of the Consolidation Bill. Bridges felt strongly that, in view of the previous failure to deal with the subject, ‘they would have to have a satisfactory alternative if they were to drop the Consolidation Bill’. It was agreed, however, that it was not practicable to work directly on a Codification Bill ‘and that the prepa162 IR 40/14566. Minutes of the Meeting of the Cabinet’s Legislation Committee held on 1 March 1949 (copy of part). 163 Hansard, Fifth Series, vol 463, col 2087 (6 April 1949). 164 IR 40/9687 consists of the Minutes of this Committee’s meetings. 165 IR 40/14566. Letter, Rowlatt to Bamford, 14 April 1949. 166 Papers in the Office of Parliamentary Counsel on the Income Tax Act 1952, vol 13, fos 1504–08. Income Tax Consolidation; Memorandum by Parliamentary Counsel, 14 November 1949. In February 1955, Jowitt stated in a letter to Kilmuir (then Lord Chancellor) that ‘I have the highest regard for John Rowlatt personally, for his great intellectual ability and, of course, for his complete integrity. On the other hand, his mind is purely destructive. He will give you a thousand and one reasons against any project of law reform: the one may be good, but the thousand will probably be bad’. Quoted from RFV Heuston, ‘Lord Chancellors and Statute Law Reform’ [1988] Statute Law Review 194. 167 Papers in the Office of Parliamentary Counsel on the Income Tax Act 1952, vol 13, fos 1529–30. Letter, Bamford to Rowlatt, 24 November 1949. 168 A note of this meeting prepared by Bligh (Bridges’s Private Secretary) is on T 273/267; and the quotations in the text are from this note. A note of this meeting prepared by Rowlatt is in the papers in the Office of Parliamentary Counsel on the Income Tax Act 1952, vol 13, fos 1548–49.

The Income Tax Law Rewrite Projects: 1907–56 167 ration of a Consolidation Bill to become an Act was very necessary before codification’. By the beginning of 1951, the draft Bill was nearly complete, and Bamford sought and obtained the authority of the Chancellor of the Exchequer (Gaitskell)169 to publish the draft Bill in the form of a White Paper when it was ready.170 Bridges had written slightly earlier: Prima facie . . . I think that there is everything to be said for getting an Income Tax Consolidation Bill passed. Though such a Bill will be far from perfect, it is an essential stage in any improvement of the Income Tax Acts. My own view is that any progress beyond this stage will almost certainly have to take place by instalments, eg codification of various branches of the Income Tax law as and when agreement is reached and opportunity offers. Experience I think shows that any attempt to produce an entirely new ideal Income Tax law in one motion is just not practical politics’.171

During February 1951, Bridges was concerned that the Preliminary Note to the White Paper might say something ‘about further progress in the direction of codification’. Accordingly, Bamford was prompted to add a sentence stating that consolidation was not only desirable in itself but was a useful, if not essential, preliminary to codification when that could be undertaken. It was Bamford’s own belief, however, that ‘codification in one piece is too big a job ever to be carried through in this work-a-day world, so that we can only hope to proceed by stages’.172 On 21 March 1951, information about the Consolidation Bill was given by Gaitskell in a written answer to a parliamentary question, and copies of the White Paper, with the text of the draft Bill, became available shortly afterwards.173 According to Rowlatt, writing a few months later, The White Paper had an excellent press when it was published . . . though I think it would be a mistake to think that there is any very profound public feeling in favour of the Bill or any great comprehension either of its merits or of its demerits.174

During the summer and autumn of 1951, it was agreed that Lord Radcliffe should become the Chairman of the Joint Committee that would consider

169

During October 1950, Gaitskell had succeeded Cripps as Chancellor of the Exchequer. LCO 2/3818. Submission (Inland Revenue) to Chancellor of the Exchequer (Gaitskell), 10 January 1951. T 273/267. Note, Inland Revenue (Bamford) to Chancellor of the Exchequer, 12 February 1951. 171 T 273/267. Note, Bridges to Trend, 8 January 1951. 172 T 273/267. Letters, Bridges to Bamford, 13 February 1951, and Bamford to Bridges, 27 February 1951. 173 Hansard, Fifth Series, vol 485, cols 303–04 (Written Answers), 21 March 1951. The White Paper had the reference number Cmd 8174. 174 LCO 2/3818. Letter, Rowlatt to Napier, 8 September 1951. 170

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the Bill,175 and the parliamentary timetable for the Bill received consideration. The obvious date for the new legislation to take effect was 6 April 1952. That day was the beginning of the next income tax year; it was also a date before the Royal Commission on the Taxation of Profits and Income was expected to report. Since the Inland Revenue would have work to do between the royal assent and the coming into force of the legislation, it was envisaged, at this stage, that the Bill should be passed into law before the end of 1951. A timetable of this nature implied rapid action during the parliamentary session beginning in the November of that year.176 During September 1951, it was announced that there was to be a general election in October. The announcement prompted the Inland Revenue to reconsider its views on the parliamentary timetable; and it now decided that it could manage even if the Bill did not become law until (say) February 1952—a decision that helped others concerned with the legislative process.177 Following the general election held on 25 October 1951, the Conservative Party obtained a small majority in the House of Commons: Churchill became Prime Minister (again); Butler became Chancellor of the Exchequer; and Lord Simonds became Lord Chancellor. The Civil Service had given thought as to how the Income Tax Bill could make progress in the event of a change of government; and Bamford, Rowlatt and Napier (Lord Chancellor’s Office) were all active in ensuring that arrangements were made.178 Napier considered that, should there be a change of government, the new government was ‘almost certain’ to proceed with the Bill.179 On 1 November 1951, Bridges sent a note to the Chancellor of the Exchequer hoping very much that he would authorise the introduction of the Income Tax Consolidation Bill. ‘Though the Bill is far from perfect, it is an enormous improvement on the present position. Furthermore, the passage into law of the Consolidation Bill is a necessary stage in any attempt at simplification of income tax law.’180 175 The Inland Revenue gave a very definite hint that a Law Lord might be appointed, but Jowitt was ‘very doubtful’ whether it would be possible to find one. However, during the summer, Lord Radcliffe was approached and accepted, on the basis that his existing commitments could be accommodated. Jowitt was quite clear that matters should be settled accordingly. ‘I think it is quite essential to get him for this job for I can think of no-one else suitable.’ LCO 2/3818. Letter, Bamford to Napier, 23 January 1951; Submission, [Coldstream] to Lord Chancellor, 24 January 1951, together with Jowitt’s Minute on the Submission; letter, Coldstream to Bamford, 24 January 1951; letters, Jowitt to Radcliffe, 4 July 1951 and Radcliffe to Jowitt, 6 July 1951; note, Jowitt to Napier, 7 July 1951; letter, Jowitt to Radcliffe, 9 July 1951. 176 LCO 2/3818. Letter, Rowlatt to Napier, 8 September 1951. 177 LCO 2/3818. Letter, Rowlatt to Napier, 20 September 1951. 178 LCO 2/3818. Letters, Bamford to Napier, 24 October 1951, and Rowlatt to Napier, 2 November 1951. 179 LCO 2/3818. Letters, Radcliffe to Napier, 25 September 1951, and Napier to Radcliffe, 26 September 1951. 180 T 273/267. Copy Note, Bridges to Chancellor of the Exchequer, 1 November 1951.

The Income Tax Law Rewrite Projects: 1907–56 169 Butler gave his authorisation speedily: for, on the following day, Rowlatt was able to tell Napier that the Chancellor of the Exchequer wished the Bill to be introduced.181 After such a lengthy pre-parliamentary stage, the Income Tax Bill had (by contrast) a short and simple passage through Parliament. The Bill was introduced in the House of Lords by the Lord Chancellor, and had its first reading on 6 November 1951.182 On 22 November 1951, it had a formal second reading, and was referred to the Joint Committee on Consolidation Bills.183 The Joint Committee, with Radcliffe in the chair, held three meetings—on 29 November and 4 and 5 December 1951—and made various amendments to the Bill. On all three occasions, Rowlatt and Nicholas attended and gave evidence. On 29 January 1952, the Joint Committee reported on the Bill,184 which was recommitted to a Committee of the whole House of Lords.185 The Income Tax Bill completed its passage through the House of Lords on 5 February 1952.186 In the House of Commons, the Income Tax Bill had its second reading on 19 February 1952. In moving the second reading, the Attorney-General (Heald) placed the Bill in its larger context: When there are such augean conditions in the law as at present exist in the case of the Revenue law, it is necessary to have two separate stages when cleaning up. The first is to secure a clear view of the law as Parliament intended it, and that, of course, is the process of consolidation. The second stage is the stage of codification, which involves the reform of the law and its re-statement. This Bill is only concerned with the first stage. I should be merely deceiving the House if I left it under any misapprehension or allowed it to believe that codification is anything but a very long way ahead indeed. After all, a Royal Commission on Taxation is now sitting, and it may very well be that they will make proposals which will require careful consideration. But I think the House will agree, when it appreciates what has been done, that a great task has already been performed, and that we have taken a real step forward.

The Bill was discussed at greater length than in the House of Lords, but was nevertheless given a second reading without a division.187 The remaining stages of the Bill were completed on 25 February 1952, and

181

LCO 2/3818. Letter, Rowlatt to Napier, 2 November 1951. Hansard, Fifth Series, Lords, vol 174, col 20 (6 November 1951). Hansard, Fifth Series, Lords, vol 174, col 505 (22 November 1951). 184 Consolidation Bills, 1951–52, First Report by the Joint Committee . . . being a Report upon the Income Tax Bill. HL 7, 17-I. The formal Report is at iv. 185 Hansard, Fifth Series, Lords, vol 174, col 946 (29 January 1952). 186 Hansard, Fifth Series, Lords, vol 174, cols 1060–64 (5 February 1952). 187 Hansard, Fifth Series, vol 496, cols 65–81 (19 February 1952). The passage quoted directly is at cols 65–6. 182 183

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on 28 February 1952 it received royal assent,188 to become the Income Tax Act 1952.189 The preparation and enactment of the Income Tax Act 1952 was a very considerable achievement. At one point, Rowlatt allowed himself to say of the Consolidation Bill that ‘[m]iracles apart, it is broadly speaking as good and uncontroversial as any Consolidation Bill is ever going to be’.190 At that time, the statute was the longest ever enacted.191 On the one and only occasion on which any speeches on the Bill were made in the House of Lords, Lord Radcliffe, Lord Schuster and the Lord Chancellor all praised Rowlatt by name. ‘The successful preparation of the Bill was an effort such as Hercules might have made.’192 Explicit praise of Rowlatt had been suggested in a letter to Schuster written by Coldstream of the Lord Chancellor’s Office: Generally speaking, I think it is a pity for individual Civil Servants to be mentioned in either House, but most of us think that Rowlatt’s work on this Bill is a tour de force. Ellis told me that the Bill could hardly have been done at all except by Rowlatt and only then because the Parliamentary Counsel’s work in the last two years has been comparatively slack. But for the coincidence of Rowlatt’s exceptional ability and the slack period I imagine that we should never have got the consolidation done at all.193

Rowlatt, in his turn, sent Bamford a manuscript letter, for: it is only decent that I should put on record the exceedingly high view I formed of the revenue performance in the matter—especially that of Nicholas and his Committee . . . They were ideally placed to gum the whole thing up, & nothing would have been easier than to do so. As it was . . . we had astonishingly little of the wrong kind of bright idea. At the same time, I don’t believe much was missed. Whether the thing will work or be an improvement on the existing chaos remains to be seen, but if it doesn’t or isn’t, it isn’t the Revenue’s fault. Indeed, with any other Department, I don’t believe the thing would have stood a chance of getting on its feet at all.194 188 Hansard, Fifth Series, vol 496, cols 946 (25 February 1952) and 1503 (28 February 1952). 189 15 & 16 Geo 6 & 1 Eliz 2 c 10. 190 LCO 2/3818. Letter, Rowlatt to Bamford, 25 October 1951. 191 When the Income Tax Bill was before the Joint Committee Rowlatt was asked ‘Is it true that this is the longest Bill there has ever been?’ and answered ‘I know of no longer one’. First Report by the Joint Committee . . . upon the Income Tax Bill [1951–52] 44 (Q 214). 192 Hansard, Fifth Series, Lords, vol 174, cols 1060–64 (5 February 1952). The direct quotation is from the speech of Lord Schuster at col 1063. For Rowlatt’s reception of the compliments paid to him, see Kent, above n 115, 215–16. 193 LCO 2/3818. Letter, Coldstream to Schuster, 1 February 1952. 194 IR 40/9687. Letter, Rowlatt to Bamford, 10 December 1951. In his reply, Bamford thanked Rowlatt, but ‘All the same we fully realise that the main burden has fallen on your

The Income Tax Law Rewrite Projects: 1907–56 171 C O N C L U S I O N —TH E A BA NDONMENT OF R EWR ITING

During November 1951, Bridges had a chance encounter with Donovan (now a High Court Judge). ‘After some general pleasantries he assaulted me—verbally, but with some vehemence—about consolidation . . . I was too flabbergasted by all this to make any really adequate reply.’ Bridges accordingly wrote to ask Rowlatt what justification there might be for Donovan’s complaints.195 In his reply, Rowlatt took the view that Donovan’s claims had ‘some plausibility’, and went on to say that I at any rate am converted, to the view that wholesale codification is quite impossible and that it is simply a waste of time and money to try it on. The necessary Bill would never get finished, if it did get finished it would never get passed, and if it did get passed it could never be brought into operation. If one codifies at all, one must codify in much smaller mouthfuls.196

Bridges replied, referring to Rowlatt’s remarks that wholesale codification was quite impossible and that a government with a small majority was not going to do anything to speak of by way of codification or clarification of the income tax law in current Finance Bills—and ended his letter with the question ‘Where, then, does our hope of progress lie?’197 Rowlatt sent copies of the recent exchange of correspondence to Bamford—adding parenthetically that ‘I suppressed a passing impulse to reply monosyllabically and by return “nowhere”’.198 He sent his substantial reply to Bridges on 11 January 1952.199 The first paragraph recorded that the question posed in Bridges’s letter of 10 December had also been discussed with Ellis, Bamford and Verity (another Commissioner of Inland Revenue). ‘I am afraid our conclusions are extremely depressing.’ Codification of income tax law ‘all in one lump’ was dismissed. The possibility of ‘piecemeal clearings up of particular subjects, as occasion offered, in Finance Bills, is much nearer sense and reality but the outlook is at present by no means good for it’: legislation of this type would require extra space in an annual Finance Bill; and the space in question was simply not there. Legislation outside the Finance Bill also presented difficulties, for legislation of this type was likely to take up more time and energy than the government would probably be prepared to agree to spare; and even if a Bill were to be prepared, it might be so handled in Parliament ‘that if shoulders and that you have been the champion and protagonist throughout’. IR 40/9687. Letter, Bamford to Rowlatt, 13 December 1951. 195 IR 40/14566. Letter, Bridges to Rowlatt, 13 November 1951. 196 IR 40/14566. Letter, Rowlatt to Bridges, 14 November 1951. 197 IR 40/14566. Letter, Bridges to Rowlatt, 10 December 1951. 198 IR 40/14566. Letter, Rowlatt to Bamford, 15 December 1951. 199 IR 40/14566. Letter, Rowlatt to Bridges, 11 January (1952). (In the letter itself, the year is specified as ‘1951’, but that is clearly an error, with ‘1952’ being intended.)

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it is passed at all (there was a Revenue Bill in 1921 which dropped) the last state of the subject dealt with might easily be worse than the first’. Rowlatt ended his letter with two general observations. One general observation related to staff: a major initiative would require time to be given by officials (particularly in the Inland Revenue) who were already fully occupied. The other general observation: you will think is mere defeatism, but I must nevertheless make it. You ask ‘Where does our hope of progress lie?’ The only true answer to this question is that there is no question of progress but only, at the best of delayed regress. What is most wrong with the Income Tax Acts is that there is more of them than anybody can possibly absorb, and this is quite certain to get worse every year. The draft Consolidation Bill published as a White Paper last March was 495 pages long. The Consolidation Bill introduced in the Autumn, which incorporated the new provisions from the 1951 Finance Act, was 507 pages long. Neither Consolidation Bill had much fat on it, and the Finance Bill was one which Mr. Gaitskell had ordered to be shrunk to the minimum dimensions. We are, in fact, as respects income tax law, in the same position now as Cobbett was a hundred years ago as respects London. He said it was too big but its growth was in fact only beginning.

After conferring with Treasury colleagues, Bridges replied to Rowlatt’s letter in what is surely a masterpiece of Civil Service prose: Sheer obstinacy alone would prevent me from concurring in the view that the most we could do in any field of administration was to slow down somewhat the progress of inevitable decline into an increasing perplexity which would finish up as chaos. And a certain expression in your letter led me to think that this was rather your point of view. But reading your letters through again, I do not think that this was exactly what you meant. I agree that progress beyond the stage which we have now reached, will almost certainly have to take place by instalments, ie codification of particular branches of income tax law as and when opportunity offers. I also agree that at the moment the circumstances are not propitious for any further advance in this way and that we shall probably have to await the Report of the Royal Commission on Income Tax. Thereafter I do feel that we should endeavour to get on the march again; and although reasons are never lacking for putting off difficult and unpleasant jobs to some other season, I am sure you will agree with me that it is our business to try and make progress as opportunity offers in the only way in which we believe that progress can be made.200

Bridges wished to find out which aspects of income tax law were likely to be amended as opportunity offered.201 Ellis told him that these were Schedule A, pensions and the administrative provisions. In all three cases, it was thought that a future need to make legislative changes could be 200 201

IR 40/14566. Letter, Bridges to Rowlatt, 7 February 1952. T 273/269. Note by Bridges, 29 April 1952.

The Income Tax Law Rewrite Projects: 1907–56 173 expanded into the opportunity to codify the area of law in question. The need to make the legislative changes might arise from the carrying out of the rating revaluation in the case of Schedule A; from the second Tucker Committee’s activities in the case of pensions; and from the likelihood of a recommendation of the Royal Commission in the case of the administrative provisions.202 After this point, in the face of a consensus among those involved that nothing could be accomplished in the foreseeable future, the discussion of the subject faded away. In 1955, the Royal Commission on the Taxation of Profits and Income, in its Final Report, concluded by considering the question of codification. The Committee was ‘not satisfied that a full codification of income tax law is either feasible, or, if feasible, valuable enough to justify the vast labour involved’. The Commission thought that the best that should be looked forward to was the possibility of some separate branch of the law being codified without any attempt to link it with a general codification. If some substantial change of law was going to be made anyhow by new legislation, there was much to be said for trying to make it the occasion to bring into existence a single comprehensive code which covered the whole branch of the subject, instead of patching or reshaping the existing structure. The Commission also recommended that there should be a regular consolidation of the Income Tax Acts every 10 years, beginning in 1962.203 About this time, too, a considerable number of the Civil Servants involved in the general discussion of 1951 and 1952 departed from the scene. In the Office of Parliamentary Counsel, Ellis retired in 1952. Rowlatt succeeded him, but collapsed and died in 1955. In the Inland Revenue, Verity retired in 1954 and Bamford in 1955. Bridges retired in 1956. By the end of 1956, neither the idea of wholesale codification nor those who had discussed that idea some five years earlier were active any longer. The limited programme for the rewriting of the income tax legislation still extant in the mid-1950s was not implemented. There was important legislation relating to the taxation of pensions in the Finance Act 1956,204 to the reform of Schedule A in the Finance Act 1963205 and to the reform of the administrative provisions in the Income Tax Management Act 1964,206 but none of this legislation could be described as codification. The Income Tax Acts were not consolidated in 1962; this work was only

202

T 273/269. Letter, Ellis to Bridges, 9 May 1952. Royal Commission on the Taxation of Profits and Income: Final Report, signed on 20 May 1955 (Cmd 9474), ch 34, paras 1076–89, 330–33. The material quoted directly is at para 1089, 332–33. 204 4 & 5 Eliz 2 c 54. 205 1963 c 25. 206 1964 c 37. 203

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completed several years later.207 It was only in the 1990s, and in different circumstances, that the idea of rewriting the income tax legislation could experience a real re-quickening.208

207 In the Capital Allowances Act 1968 (1968 c 3), the Taxes Management Act 1970 (1970 c 9) and the Income and Corporation Taxes Act 1970 (1970 c 10). 208 The last sentence of this paper echoes the last sentence of the paper by JS Roskell, ‘Perspectives in English Parliamentary History’[1964] Bulletin of the John Rylands Library XLVI, reprinted in EB Fryde and E Miller (eds), Historical Studies of the English Parliament: Volume 2: 1399 to 1603 (Cambridge, Cambridge University Press, 1970) 296–323.

5 Law and Administration in Capital Allowances Doctrine: 1878–1950 DOMINIC DE COGAN

A BSTR A C T This chapter reviews the law and administration of capital allowances, from the introduction of a general plant and machinery allowance in 1878 to the first few years of operation of the prototype modern system of the Income Tax Act 1945. It is discovered that the period, far from representing an idyll of pre-modern simplicity, witnessed a ferment of experimentation and debate on the nature of asset depreciation, the extent to which it should be recognised for tax purposes and the regulatory means by which any relief should be implemented. In turn this points to a rich and diverse intellectual history from which both ideas and stern warnings might be drawn by tax reformers looking for escape routes from our present reliance on fine statutory detail.

I N T R ODU C T ION

T

HE FOCUS OF this chapter is the history of capital allowance doctrine, not only in terms of its technical content, but also the complex and dynamic ways in which it was implemented into law and administration in the late nineteenth and early twentieth centuries. In both of these senses, the period from 1878 to 1950 may be seen as a bridge between the rather rudimentary treatment of depreciation

* Dominic de Cogan PhD ACA, Leverhulme Early Career Research Fellow, Birmingham Law School. The doctoral work on which this chapter is based was funded by the Yorke Foundation, the Chartered Institute of Taxation and the Harbour Charitable Trust. Thanks also to Peter Harris, Stephen Barnfield, Lynne Oats, Rick Krever, Richard Thomas and Ann O’Connell for their helpful and insightful comments on an earlier draft. Any errors or omissions remain mine.

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expenditure under the Income Tax Act (ITA) 1842 and the modern law from the ITA 1952 onwards. The changing structure of tax administration in the Victorian period has already been subject to detailed studies by Stebbings, who explains how the Inland Revenue progressively gained control over the income tax from the General Commissioners of Income Tax, panels of local laymen who initially exercised substantial powers over assessment and collection.1 A similar point is made by Lamb in a sustained analysis of the seminal capital allowance decisions of the 1870s and 1880s, in which it is argued that the Revenue made use of the newly extended rights of appeal to the courts2 to extend its jurisdiction at the expense of the Commissioners, and to restrict the range of assets upon which tax allowances were available.3 The historical materials reviewed for the purposes of this chapter support the substance of these claims, but even more striking is the sheer diversity of the law and practice that obtained in this field. Different rules applied to trading and property income under Schedules D and A of the ITA 1842 respectively, to the different Cases within these Schedules,4 to the wartime and post-war taxes such as the Excess Profits Duty and to different classes of assets under each of these headings. On the regulatory side, even the well-known increase in the length and specificity of statutory expression was neither as linear nor as straightforward a process as might be imagined, besides which the clarity of the older legislation should not be exaggerated. Similarly, any idea that revenue authority discretions, either overt or covert, are modern in origin is unsupported by the evidence, which if anything suggests that they are significantly more circumscribed now than a century ago.5 The effect of this chapter, then, is not so much to offer a definitive interpretation of the history of capital allowances but rather to reveal its complexity, to analyse significant trends in legal and administrative structures during the time period and to suggest possible reasons for these changes. In order to provide structure for this discussion, and in particular our consideration of sub-statutory rules, the following classification of regulatory methods is felt to be helpful, although it is accepted equally that any attempt at definition may be challenged. First, the subjective method involved the decision by General Commissioners or their subor1 C Stebbings, The Victorian Taxpayer and the Law: A Study in Constitutional Conflict (Cambridge, Cambridge University Press, 2009) ch 3. 2 See below n 23. 3 M Lamb, ‘Defining “Profits” for British Income Tax Purposes: A Contextual Study of the Depreciation Cases, 1875–1897’ (2002) 29(1) Accounting Historians Journal 105. 4 See in particular the discussion in the text at n 151 below. 5 It is interesting to note in this regard that the 1940s witnessed the first serious proposals to publish registers of extra statutory concessions: see Inland Revenue, Notes on the Finance Bill 1944, Committee Stage, 52, and compare http://www.hmrc.gov.uk/thelibrary/esc.htm (accessed on 28 July 2012).

Law and Administration in Capital Allowances Doctrine: 1878–1950 177 dinates that allowance for depreciation should be granted on the facts of a particular case, with or without detailed analysis of the applicable legislation. The consensus method represents the securing of allowances by agreement between the Inland Revenue and taxpayer representatives. The discretionary method involved explicit delegation to Revenue officials of judgments relating to the existence, quantum, timing and allocation of tax allowances; and finally, the objective method required the detailed specification of allowances in primary or secondary legislation. These concepts gain more substance in their historical context (below), but it should be noted immediately that they are not mutually exclusive and may in many instances balance against each other. A move towards objective regulation, for example, might reduce the scope for subjective tribunal decisions, taxpayer participation and Revenue discretion. The history is related in chronological order below under three headings, covering Schedules D and A of the income tax and then the special wartime and post-war taxes. This is purely for the purposes of clarity and should not disguise the fact that the problem of relieving depreciation is essentially the same in each case. In this regard, it is also worth anticipating that there seems to have been substantial convergence over the period with respect to regulatory appraoches, even as the content of the rules applicable in different circumstances and to different types of assets became entrenched into a number of separate regimes. These interplays between the potential theoretical unity of capital allowance doctrine and its perplexing diversity in practice are important and cannot yet be said to have been resolved entirely satisfactorily.

S C H E DU LE D

The ITA 1842 The starting point in the ITA 1842 was that capital expenditure was not deductible from trade profits for the purposes of income tax.6 The third rule of Schedule D Case I states that no allowance may be made: for any sum employed or intended to employed as capital in such trade . . . nor for any capital employed in improvement of premises occupied for the purposes of such trade . . .7

This rule is reinforced in section 159:

6 7

See also s 213 of the ITA 1803. S 100 of the ITA 1842.

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it shall not be lawful to make any other deductions therefrom than such as are expressly enumerated in this act nor to make any deduction on account of . . . diminution of capital employed or of loss sustained in any trade . . .

These provisions seem clearly to discourage the deduction of capital expenditure, including, it seems, amounts representing the annual depreciation of plant and machinery.8 However, a somewhat different picture is painted by the first portion of the third rule of Schedule D Case I, as follows: no sum shall be set against or deducted from, or allowed to be set against or deducted from, such profits or gains, on account of . . . any sum expended for the supply or repairs or alterations of any implements, utensils, or articles employed for the purpose of such trade . . . beyond the sum usually expended for such purposes according to an average of three years preceding the year in which such assessment shall be made . . .9

This is a peculiarly nebulous example of statutory wording that raises two interpretative issues. The first is to understand what is meant by ‘implements, utensils or articles’. This would seem to imply something tangible rather than intangible, but beyond this, things are less clear. Might it include depreciating assets, such as plant and machinery, or should it be restricted to items fully used up in the process of generating profits, such as paper in a publishing business? The latter seems a more natural reading of the statute but is also redundant, given that consumables would normally be deductible as revenue expenses under the principal charging provisions of Schedule D Case I.10 The second problem is how to interpret ‘supply or repairs or alterations’. ‘Alterations’ and ‘supply’ in particular might be read as encompassing improvements to or purchases of capital assets, contradicting the usual prohibition on the deduction of capital. The materials reviewed for the purposes of this project offer no definitive answers to these questions, and indeed judicial comments from as late as 1946 suggest that they were never fully resolved.11 There is no doubt, though, that a relatively liberal position was adopted by at least some tax administrators,12 in a clear example of the subjective approach to regulation. It should be remembered that tax assessments at this time were performed not by the Inland Revenue but by subordinate officials 8 That this view was current immediately following the enactment of the ITA is confirmed by correspondence of December 1842 between the Inland Revenue and the General Commissioners for Stockport: The National Archives (TNA), IR40/290, Whether depreciation of plant and machinery may be an allowable item in an income tax assessment 1842–1843. 9 S 100 of the ITA 1842. 10 Rule 1 of Schedule D Case I provides as follows: ‘The duty to be charged . . . shall be computed on a sum not less than the full amount of the balance of the profits or gains of such trade . . .’ (emphasis added). The rule is contained within s 100 of the ITA 1842. 11 CIR v Great Wigston Gas Company (1946) 29 TC 197 CA, 207 per Somervell LJ. See also the extended discussion in HARJ Wilson and JS Heaton, Wilson and Heaton on the Income Tax Act, 1945 (London, HFL Publishers, 1948) 135. 12 See the text at n 80 below.

Law and Administration in Capital Allowances Doctrine: 1878–1950 179 of the independent General Commissioners,13 who were appealable to the Commissioners themselves but not generally to the courts before 1874,14 reducing the degree to which centralised control could be exerted over the provision of allowances. Nevertheless, the Revenue performed an oversight function over the tax system15 and was able to influence practice through the advice offered by its salaried Surveyors16 to the local tax administrators, as well as through widely publicised circulars. In 1877, then, the Revenue responded to taxpayer demands for depreciation allowances by instructing General Commissioners that the deduction for ‘supply or repairs or alterations’:17 should be construed liberally, so as to comprehend the full amounts actually expended on an average of three years, not for repairs only but also for renewals or replacements of plant and machinery, while sums expended in actual enlargements of premises or in providing additional machinery must clearly be treated as an outlay of capital not authorised as a deduction from profits.

This confirms, first, that ‘implements, utensils or articles’ were understood to include plant and machinery, and secondly, that ‘supply or repairs or alterations’ covered renewals or replacements of existing assets. This meant that a deduction could be made from profits, equal to the average cost of replacement plant and machinery over the past three years.18 As taxes under Schedule D were assessed on the average of the actual profits of the previous three years, the overall result was that much expenditure on the replacement of plant and machinery could be deducted in a similar way to other trade expenses.19 In one particular context, moreover, the allowance was not merely provided for replacement assets, but could be spread over many years in the manner of a modern capital allowance. The cost of a new ship was so large that to provide immediate expense relief would almost certainly create a tax loss, which in the mid-nineteenth century would have been 13 Note that taxpayers with particularly complex or commercially sensitive affairs could elect to be assessed by the Special Commissioners of Income Tax, a central government body that also assessed all railway undertakings: see J Avery Jones, ‘The Special Commissioners after 1842: From Administrative to Judicial Tribunal’ [2005] British Tax Review 80; S Matthews, ‘The Administration of the Revenue: The Growth of Bureaucracy 1839–66’ [2008] British Tax Review 170. 14 See n 23 below. 15 See, eg Stebbings, above n 1, 94 ff. 16 Now known as ‘Inspectors of Taxes’. 17 Twentieth Report of the Commissioners of Her Majesty’s Inland Revenue on the Inland Revenue, for the year ended 31st March 1877 (C 1896, 1878), 55–56. 18 The statute refers to the amount ‘usually expended’, but for ease of calculation this was interpreted as the amount actually expended in the previous three years. See JT Pratt, Pratt and Redman’s Income Tax Law, 9th edn (London, Butterworth, 1916) 133 note (c). 19 This was to become known as the ‘renewals basis’ of allowance. See also KM Gordon and XM Manzano (eds), Tiley & Collison’s UK Tax Guide 2009–10 (London, LexisNexis Tolley, 2008) 615 on the modern status of the renewals basis.

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difficult to relieve.20 Hence there developed a practice of allowing an annual depreciation allowance upon a straight-line basis. In letters dated April 1856 and January 1857, the Attorney General and Solicitor General noted that section 159 of the ITA prevented certain types of relief for losses but opined that allowances for ship depreciation were not debarred. The rules of the Income Tax Acts were ‘elastic’ and the Solicitor’s Office of the Inland Revenue had been acting on the liberal view for a while.21 A clearer refutation of objectivity in tax regulation would be difficult to find. The Chairman of the Inland Revenue Herbert Primrose, who professed a liberal approach to depreciation deductions in his submission to the Departmental Committee of 1905, nevertheless registered some concern over the divergence between ‘practice’ and the ‘strict law’ or the ‘letter of the law’.22 This could cause considerable frustration to taxpayers, in particular where different attitudes were taken by Commissioners in different parts of the country. The courts also placed certain limitations on the application of the ITA 1842 following the introduction in 1874 of a general right of appeal on points of law from the General and Special Commissioners.23 In Re Addie & Sons (1875),24 the Scottish Court of Exchequer held that the cost of sinking coal or iron pits, and of constructing mine buildings, was capital and non-allowable under the third rule of Schedule D Case I. In Forder v Handyside (1876),25 the English High Court confirmed that contributions to a contingency fund covering depreciation and certain other items were non-deductible, for similar reasons. The reasoning differed somewhat between the judges, but Pollock B made an important distinction between expenditure on renewals,26 which could be deducted under the rules of Schedule D, and 20 The three-year average basis of Schedule D taxation that applied until 1926 resulted in the automatic offset of profits and losses within this three-year period. There was, however, no provision to carry forward average losses, with the limited exception of the excess capital allowances rules of the Finance Act 1907. 21 Opinions of R Bethell and JS Wortley on depreciation allowances dated 2 April 1856 and 17 November 1857 from TNA, IR98/13, Board of Inland Revenue: Office of the Solicitor: Law Officers’ and Counsels’ Opinions. It is interesting to note that the shipping industry was also at the vanguard of double-taxation arrangements: see J Avery-Jones, ‘The Definition of Company Residence in Early UK Tax Treaties’ [2008] British Tax Review 556. 22 Appendix to the Report of the Departmental Committee on Income Tax; with Minutes of Evidence taken before the Committee (Income Tax) (Cd 2576, 1905), 9. 23 S 9 of the Customs and Inland Revenue Act 1874. 24 Re Addie & Sons (1875) 1 TC 1 CES 1st Div. 25 Forder v Handyside (1876) 1 TC 65 ExD. 26 The language used by Pollock B is, however, significantly more circumscribed than the Inland Revenue circular of the subsequent year discussed in the text to n 17. At Forder v Handyside, ibid, 65 he offers the following example of the application of the renewals allowance: ‘Therefore, where drilling machines are employed it may be usual to have so many new drills per week, or ate end of a year, and then this provision would come in; it would be necessary and usual, as of course when a breakage occurs that breakage comes in the average of three years, however large the amount may be’. For a more comprehensive discussion of this case, see Lamb, above n 3, 132.

Law and Administration in Capital Allowances Doctrine: 1878–1950 181 accounts entries reflecting annual depreciation, which could not. This judgment would certainly have placed the allowance for ship depreciation into some doubt, though the matter was not considered directly and the law was changed by the Customs and Inland Revenue Act (CIRA) 1878 shortly afterwards. The decision in Knowles v McAdam (1876)27 confirmed that allowance could be made for the gradual depletion of mineral seams, on the basis that the ‘balance of profits’ taxed under rule 1 of Schedule D Case I should automatically reflect this expense. However, this result went against the grain and was overruled by the House of Lords in Coltness Iron Company v Black (1881).28 In a lengthy and informative article, Lamb argues that the interpretative approach of the courts in these cases enabled the Revenue to exert a tighter control over the availability of allowances, regardless of the accounting judgments that happened to have been made by particular taxpayers.29 Furthermore, it was decided to apply different rules for taxation and certain other financial reporting purposes, establishing interesting divergences in the law that are discussed in more detail below.

The CIRA 1878 It should come as no surprise that this uneasy cohabitation of liberal interpretation of the ITA 1842 with a series of judicial pronouncements setting relatively strict limits on the scope of deducibility failed to satisfy some taxpayers,30 and the inconsistencies of existing arrangements were summarised neatly in a letter dated 11 March 1878 from the Glasgow Chambers of Commerce to the Treasury.31 On the one hand, it was noted that the liberal practice for ships and steam vessels had recently been formalised by a Treasury Minute.32 On the other hand, it had been made clear that depreciation deductions for other plant and machinery were contrary to the third rule of Schedule D Case I. The Chambers argued 27

Knowles v McAdam (1877) 1 TC 161 ExD. Coltness Iron Company v Black (1881) 1 TC 287 HL. See also the decision in Gillatt and Watts v Colquhoun (1884) 2 TC 76 HC, in which Coltness was followed in deciding that lease premium depreciation was capital and non-deductible under the ITA 1842. 29 Lamb, above n 3, (2002) 29(1) Accounting Historians Journal 105. 30 Twenty-first Report of the Commissioners of Her Majesty’s Inland Revenue on the Inland Revenue, for the year ended 31st March 1878 (C 2158, 1878) 64; Appendix to the Report of the Departmental Committee 1905, above n 22, 9. 31 TNA, IR74/71, Income tax memorandum on depreciation, mining profits, basis of assessments, royalties out of mines and capital outlays, 1878–1888. See also reference to these letters in the Report of the Commissioners of Inland Revenue 1877, above n 17, 54, and to earlier correspondence between the Chambers and the Revenue in Lamb, above n 3, 107. 32 One might speculate that this Treasury communication was issued in response to Forder v Handyside, above n 25, 65, and maintained the prevailing practice in anticipation of the enactment of the CIRA 1878. 28

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that depreciation allowances should be available more generally, and as of right. This line of argument evidently gained traction with legislators and, in the same year, section 12 of the CIRA 1878 was enacted. This provided as follows. Notwithstanding any provision to the contrary contained in any Act relating to income tax, the Commissioners for general or special purposes shall, in assessing the profits or gains of any trade . . . under Schedule (D), or the profits of any concern chargeable by reference to the rules of that Schedule, allow such deduction as they may think just and reasonable as representing the diminished value by reason of wear and tear during the year of any machinery or plant used for the purposes of the concern . . .

This provided an outright depreciation allowance for a range of assets but left unresolved a number of questions. The reason for the restriction of allowance to ‘machinery and plant’ is not entirely clear, for instance, although it seems from the Glasgow letters and the Revenue report of 1878 that contemporary demands for reform had focussed on this class of asset. ‘Machinery and plant’ were not defined in the CIRA, but suggest conventional industrial equipment and appear to exclude intangibles and other capital assets such as buildings, interests in land and even shop and office fittings.33 There was also surprisingly little detailed judicial consideration of the terms, although a few important cases are discussed below. The quantum of the allowance was to reflect the ‘diminished value by reason of wear and tear’, but once again the precise meaning of this was left open. In particular, it was unclear whether a reasonable estimate of deterioration in the fashion of an accounting depreciation charge sufficed or whether evidence of actual wear and tear was necessary.34 If a machine suffered heavy wear in one year but little in the next, for example, a normal straight-line or reducing balance allowance would probably not reflect this change in circumstances. More certain was that decisions on the quantum of allowances were to be exercised by the General or Special Commissioners, to whom the words ‘just and reasonable’ granted broad powers of fact-finding.35 The clear implication of this was that Commis33 In TNA, T171/65, Notes by Inland Revenue on Finance Bill (Part 1) 1914, 65, it is explained that a statutory definition of plant and machinery would open the door to controversy. In view of the different views held on the matter, any definition would have to be specified very minutely. 34 Note parallel with the suggestion that nineteenth-century accounting practices treated depreciation as a function of decline in ‘economic value’, a claim strongly contested by Bryer: see RA Bryer, ‘The Late Nineteenth-Century Revolution in Financial Reporting: Accounting for the Rise of Investor or Managerial Capitalism?’ (1993) 18(7/8) Accounting, Organizations and Society 649, 654. 35 Note the resemblance of this provision to an Inland Revenue discretion on the quantum of allowance, with the exception that the General Commissioners were formally independent of the government.

Law and Administration in Capital Allowances Doctrine: 1878–1950 183 sioners should retain an element of subjective jurisdiction in relation to the quantity of allowances and should not be overruled by the courts unless they had suffered errors of law or proceeded on entirely unreasonable grounds.36 Some final questions that the CIRA 1878 left unanswered are as follows. The wear and tear had to occur ‘during the year’. Did this refer to the year of trade profits or to the year of assessment, during which the average profits of the previous three years were charged to tax? Secondly, how did the new allowance fit with the existing ‘renewals’ basis? In only the previous year, concerns had been voiced by the Inland Revenue on the potential for over-allowance. Had the matter been exaggerated or did the risk remain? Finally, what would happen if machinery or plant were to be scrapped before allowances had been granted with respect to 100% of the original purchase cost? The problem would not arise under the renewals basis of allowance,37 yet would seem not to represent ‘wear and tear during the year’ as required under section 12. Many of these questions were addressed by the courts in subsequent decades as discussed below, yet the Inland Revenue notes on clauses from 1878 also provide some clues. The allowance was certainly intended to be cumulative with existing allowances for repairs under rule 3 of Schedule D Case I.38 Moreover, the intention was not that Commissioners should attempt to determine the actual wear and tear suffered every year, but that a regular writing down rate would be applied to the eligible assets by reference to their purchase values and working lives, assuming in the latter case that repairs would be carried out from time to time. A machine costing £20,000 and lasting for 20 years might receive a 5% rate of allowance, or a deduction of £1,000 per year, if the straight-line approach were adopted.

From 1878 to 1945 The developments taking place between the milestones of the CIRA 1878 and the ITA 1945 were multifarious; a useful method of organising these is to begin with the problems of interpreting the earlier Act that were identified above and to provide a few additional comments on other trends in tax and accounting at the end. For convenience, the wear and tear allowance under the CIRA 1878 is henceforth referred to as WTA.

36 An example of unreasonableness might be the provision of allowances over a number of years representing more than the purchase cost of the asset. See text at n60. 37 This is because 100% of the replacement cost would be available under the renewals deduction. 38 TNA IR74/71, above n 31.

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‘Machinery or Plant’ The problem of what constituted ‘machinery or plant’ was not addressed quickly or particularly clearly by the courts. The most important early indication came from Yarmouth v France,39 a case concerned not with taxation but the qualification of a horse as ‘plant’ for the purpose of the contemporary workmen’s compensation scheme. In the course of his decision that the horse could so qualify, Lindley LJ made the following general comments, drawing upon the older decision of Blake v Shaw:40 There is no definition of plant in the Act: but, in its ordinary sense, it includes whatever apparatus is used by a business man for carrying on his business—not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business.

The first wear and tear decisions on point seem to be a line of maritime judgments in which the qualification of ships for WTAs was assumed without detailed argument, possibly on account of the long history of shipping deductions.41 The question reached the courts more directly in Derby v Aylmer,42 where allowance was sought for the gradual diminution in value of a racehorse. Perhaps in view of the Yarmouth decision, the court declined to state conclusively that a horse could not be ‘machinery or plant’ for the purposes of the CIRA 1878, but noted that the deterioration was caused by natural ageing processes and not in pursuance of the trade.43 As a result, section 12 of the CIRA could not apply. In Dumbarton Harbour Board v Cox44 a harbour bed was held not to qualify for allowances, and in Daphne v Shaw45 the same conclusion was reached 39 Yarmouth v France (1887) 19 QBD 647. Lord Esher MR made comments along similar lines, and Lopes LJ dissented on a separate point. 40 Blake v Shaw (1860) John 732, [1843–60] All ER Rep 504, which concerned the meaning of the word ‘plant’ in a will. Page-Wood V-C thought that ‘[a]ll the matters permanently used for the purposes of a trade, as distinguished from the fluctuating stock, are commonly included in the term “plant”. It consists sometimes of things which are fixed, as, for example, counters, heating, gas, and other apparatus and things of that kind, and in other cases of horses, locomotives, and the like, which are in this sense only fixed that they form a part of the permanent establishment intended to be replaced when dead or worn out, as the case may be.’ 41 For example Leith, Hull and Hamburg Steam Packet Company v Bain (1897) 3 TC 560 CES; Watson Brothers v Lothian (1902) 4 TC 441 CES. See, however, Walton J in John Hall v Rickman [1906] 1 KB 311. 42 Earl of Derby v Aylmer (1915) 6 TC 665 HC. 43 It is interesting to observe that Yarmouth v France, above n 39, was mentioned by counsel in Earl of Derby v Aylmer, ibid, as well as in John Hall v Rickman, above n 41, and Dumbarton Harbour Board v Cox (1918) 7 TC 147, [1919] SC 162, CES 1st Div, but seems from the Tax Cases volumes and official Law Reports not to have been cited judicially until the speech of Lord Reid in Hinton v Maden (1959) 38 TC 391 HL. 44 Dumbarton Harbour Board v Cox, ibid. 45 Daphne v Shaw (1926) 11 TC 256 HC (overruled by Munby v Furlong (1977) 50 TC 491 CA).

Law and Administration in Capital Allowances Doctrine: 1878–1950 185 in respect of the law library of a barrister. Rowlatt J thought that the terms ‘plant’ and ‘machinery’ could not be defined precisely, but felt that books did not constitute an acceptable ‘extension of the ordinary, commonsense meaning of the word “plant”’. The statutory terms were considered again in Margrett v The Lowestoft Water & Gas Company,46 where WTAs were claimed in respect of a water tower. The court concluded that qualification depended on the nature of an asset rather than its use, and again held that water towers did not accord with commonsense interpretations of the 1878 requirements. It should be observed that Margrett was the only one of these four wear and tear cases in which the Appeal Commissioners were reversed, but in none was their decision given particular weight. The scope of the words ‘machinery’ and ‘plant’ was a matter of interpretation for the courts. A slightly different story is evident from Leake, who noted in 1912 that WTAs were unavailable on furniture and fixtures, although relief could be claimed on the renewals basis.47 A later edition of the same book indicates that a letter had been sent by the Inland Revenue to tax officials in 1914 to the effect that WTA claims should be permitted for such assets, provided that revenue expense deductions had not already been claimed.48 So, in spite of the extension of judicial authority over statutory interpretation since 1874, there clearly remained some aspects even of these important definitions that eluded the direct control of the courts. ‘Diminished Value’ and the Renewals Basis At first sight, the early case law appears to have adopted a highly restrictive interpretation of the words ‘diminished value’. In the critical case of Caledonian Railway v Banks,49 the court upheld the Special Commissioners in refusing a WTA on the grounds that no wear and tear had actually occurred. However, the broader picture was that the taxpayers had already claimed the purchase price of new assets on the ‘renewals’ basis, including elements of improvement. Therefore, even though the Chairman of the Inland Revenue in 1905 viewed Caledonian as an example of a strict approach to the CIRA 1878,50 the author’s opinion is that the court intended primarily to preclude double allowance. A similar problem arose 46

Margrett v The Lowestoft Water & Gas Company (1935) 19 TC 481 HC. PD Leake, Depreciation and Wasting Assets and Their Treatment in Assessing Annual Profit and Loss (London, Henry Good & Son, 1912) 182. Note that this confirms that the scope of assets covered by WTAs and the renewals basis was not necessarily the same. 48 PD Leake, Depreciation and Wasting Assets, 5th edn (London, Gee & Co, 1948) 155. As the definition of ‘machinery or plant’ in the CIRA 1878 was so indeterminate, this communication resembled an interpretation of the tax legislation by the Inland Revenue as opposed to an outright extra-statutory concession. Refer also to TNA, T171/65, above n 33, 65. 49 Caledonian Railway Co v Banks (1880) 1 TC 487 CES 2nd Div. 50 Appendix to the Report of the Departmental Committee 1905, above n 22, 9. 47

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in London County Council v Edwards,51 in which the taxpayer had agreed renewals allowances with the Commissioners but wished to surrender these retrospectively and instead to claim WTAs under the CIRA 1878. Channel J refused to allow the change in basis on the somewhat doubtful rationale that the Appeal Commissioners had exercised their factual jurisdiction under the CIRA 1878 by granting a renewals deduction, which could not be overruled merely because the Council were ‘disappointed at the result’.52 The possibility that renewals might be available aside from the CIRA 1878 under the rules of Schedule D Case I was not considered. Tiley and Collison surely get closer to the point when they describe the renewals basis as ‘an extra-statutory concession dating from the days when there were no capital allowances’ and note that the types of assets qualifying as ‘implements, utensils or articles’ do not necessarily equate to plant and machinery.53 It is even conceivable, therefore, that the continued existence of the renewals basis was tolerated by judges in order to offer taxpayers more flexibility than the perhaps unexpectedly restrictive 1878 allowance.54 In any case, the net effect of Caledonian and Edwards was to prevent concurrent claims for WTAs and renewals, but not to require strict proof of ‘diminished value’ every year or to arrest the development of WTA rates for specified classes of assets. Indeed, a sophisticated system of rates came into existence and is discussed further below. ‘Just and Reasonable’ The statutory direction to the Commissioners to allow a ‘just and reasonable’ deduction suggests that the responsibility to determine the quantum of WTAs was intended to rest primarily on those tribunals, and this is broadly how the provision was interpreted by the courts. A line of decisions from the twentieth century rejected arguments from taxpayers— predominantly shipowners—that the rates of allowance provided by the Commissioners were insufficiently favourable, and should be raised on appeal. The courts consistently refused to accept these arguments, and opined that a decision of the Commissioners should not be overturned unless it disclosed a misconstruction of the law or some other serious error. The Scottish Court of Exchequer expressed the point as follows, in the case of Leith, Hull and Hamburg Steam Packet Co v Bain.55

51

London County Council v Edwards (1909) 5 TC 383 HC. London County Council v Edwards, above n 51, 5 TC 383, 393. 53 Tiley & Collison, above n 19, 615. 54 Compare Krever’s analysis of the treatment of payments under an exclusivity agreement as revenue expenses in BP Australia Ltd v Federal Commissioner of Taxation [1966] AC 224 in R Krever, ‘Analysing Implicit Tax Expenditures’ [2011] Melbourne University Law Review 426. 55 Leith, Hull, and Hamburg Steam Packet Company v Bain, above n 41. 52

Law and Administration in Capital Allowances Doctrine: 1878–1950 187 I am far from saying that it is the duty of this Court to accept an estimate of diminished value through wear and tear which can be shown either to have been made without rhyme or reason, or to have proceeded upon some demonstrably erroneous method of estimation.

More detail was given by Kennedy J in Peninsular and Oriental Steam Navigation Co v Leslie.56 If it be shown that in fact there has been a misconstruction of the section, if it is shown that they have not done, or applied their minds to doing, that which the section directed to be assessed, that is a good ground of appeal; or, if it is clearly shown that they have included in coming to their result some element— where the result is one of money and of value—which they ought not to have included, or have clearly excluded some element which they had no right under the section to exclude, those again would be good grounds of appeal.

Similar remarks were made in British India Steam Navigation Co v Leslie,57 in which Kennedy J added that the Commissioners should judge fairness and reasonableness ‘as business men’. All three of these decisions upheld the Commissioners, but a different conclusion in the case of Leith, Hull and Hamburg Steam Packet Company v Musgrave58 demonstrated that limits could be placed on the subjective decision-making of the General Commissioners even in this context. The taxpayers appealed against the decision of the Commissioners to reduce WTAs in respect of the interest that could have been earned by investing the proceeds of each allowance in interest-bearing securities over the life of the asset. The Scottish Court reversed the decision on the grounds that the tribunal had ‘included or taken into consideration an element, which they should have excluded, viz the interest’.59 In the course of the preliminary proceedings, the same court had requested further details from the Commissioners on the basis of their decision, marking an important assertion of authority. By requiring more detailed reasoning on the part of the Commissioners, the court was increasing the probability that ‘errors’ would be identified and then reversed. Another instance in which the power of the Commissioners was curtailed arose from John Hall v Rickman.60 The court in this case upheld a decision of the Commissioners granting WTAs in excess of 100% of the asset cost, but was soon reversed by Parliament in section 26(2) of the Finance Act 1907.

56

Peninsular and Oriental Steam Navigation Company v Leslie (1898) 4 TC 177 HC. British India Steam Navigation Company, Limited, v Leslie (1900) 4 TC 257 HC. 58 Leith, Hull and Hamburg Steam Packet Company v Musgrave (1899) 4 TC 80 CES 2nd Div. 59 Ibid, 97. 60 John Hall v Rickman, above n 41. 57

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‘During the Year’ The most obvious meaning of the words ‘during the year’ would seem to be that the WTA was deductible from the profits of the year in which the wear and tear occurred. However, the court in Cunard Steamship Company v Coulson61 took the different view that the wear and tear of the year of assessment should be deducted from the assessable profits, being the average profits of the previous three years. Grantham J expressed his opinion as follows.62 In one case to arrive at the profits they must take an average of three years, but to arrive at how much is to be allowed by way of deduction they are to take the wear and tear during the year. It may be wise or it may be unwise. I cannot tell. It seems to me it would have been as well to take the average of the depreciation the same as they take the average of the profits, but they have not done so.

This might be rationalised on the basis that the purpose of averaging was to provide a reasonable estimate of current year profits. To deduct current year wear and tear was, therefore, to treat like with like. Nevertheless, the result in Coulson seems illogical to modern eyes and, in an important example of unintended consequences, was to cause substantial complications in the field of tax losses.63 Obsolescence The converse problem from John Hall v Rickman64 arose when qualifying assets were scrapped before 100% of the purchase cost had been allowed by way of WTAs. In this case, there might still be a balance of potential allowances, earmarked for future periods but still unclaimed. The Appeal Commissioners seem to have permitted this ‘obsolescence’ balance to be deducted on at least some occasions,65 but in Burnley Steamship v Aikin66 the practice was considered not to be warranted by the CIRA 1878. If suffered to stand, this decision would have encouraged traders to retain 61

Cunard Steamship Company v Coulson (1899) 4 TC 63 HC. Ibid. 63 See Report of the Royal Commission on the Income Tax (Cmd 618, 1920) 49–50, which recommended that capital allowances should be treated in the same way as any other trading expenses and that the separate regime for carry-forward of excess capital allowances in the Finance Act 1907 should be removed. Nevertheless, the effect of the Coulson case survived even the reform of trade taxation from a three-year average to a prior-year basis in 1926. Thenceforth the wear and tear of the current year was deducted from the profits of the prior year: see Codification Committee Report Volume I: Report and Appendices (Cmd 5131, 1935–36) 49. 64 John Hall v Rickman, above n 41. 65 See A Murray and RN Carter, A Guide to Income Tax Practice (London, Gee, 1895), 96. 66 Burnley Steamship Co v Aikin (1894) 3 TC 275 CES 1st Div. 62

Law and Administration in Capital Allowances Doctrine: 1878–1950 189 old machinery in preference to investing in new assets, but it was effectively overruled when the Chancellor of the Exchequer announced an ‘obsolescence’ allowance in Parliament in 1897. This extra-statutory rule was communicated to tax officials nationally67 and allowed the taxpayer to deduct unclaimed WTAs as an expense in the year of disposal—not from three-year average profits as with standard WTAs.68 There seem to have been complaints that the rule was not applied uniformly enough,69 and it was ultimately legislated as section 24(3) of the Finance Act 1918. WTA Rates It was noted above that the requirement of ‘diminished value’ did not prevent the development of estimated rates of wear and tear, in the style of standardised depreciation policies. Indeed, by the time of the Departmental Committee of 1905, the agreement of rates between taxpayers and Appeal Commissioners in large manufacturing centres had become formalised to the extent that a Schedule of rates could be published as an Appendix to the Committee report.70 These were not always fully consistent, so that in Leicester, for instance, an engineering business could be given a straight-line WTA of 7.5% on the purchase price of machinery or plant. The same business in Cardiff would receive a 5% reducing-balance WTA on the same investments. These practices evolved rapidly and by 1918 rates were issued directly by the Inland Revenue in consultation with organised taxpayer representatives, essentially bypassing the Commissioners.71 These communications seem to have been followed for most purposes, although they remained, formally, vulnerable to disapplication by Commissioners exercising their authority under the ‘just and reasonable’ wording of the CIRA 1878. This might be done if a taxpayer were able to provide convincing reasons why a standard rate was inappropriate in its specific circumstances.72 Note that this provides yet another illustration of the shift towards Revenue control observed by Stebbings and Lamb, here in the one field in which the 1878 Act itself left the subjective jurisdiction of the Commissioners relatively untouched. To set against this, however, section 24(1) of the 67

See Appendix to the Report of the Departmental Committee 1905, above n 22, 15. Report of the Royal Commission 1920, above n 63, 49. 69 Report of the Departmental Committee on Income Tax (Cd 2575, 1905) xiv. 70 Appendix to the Report of the Departmental Committee 1905, above n 22, 14. There are documents on mining profits and machinery that indicate that standardised allowances were provided in this field from the 1880s (TNA IR74/71, above n 31), and of course they were available on ships from the mid-1850s at the latest (TNA, IR98/13, Board of Inland Revenue: Office of the Solicitor: Law Officers’ and Counsels’ Opinions). 71 See Income Tax: Statement Respecting Allowances for Wear and Tear and Obsolescence of Plant and Machinery, &c (Cd 9134, 1918); Report of the Royal Commission 1920, above n 63, 49. 72 See Report of the Royal Commission 1920, above n 63, 49. 68

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Finance Act 1918 also enabled groups of taxpayers to appeal WTA rates to the Board of Referees, a panel of tax experts originally established for the purposes of the wartime Excess Profits Duty.73 This facility was almost never used by taxpayers,74 yet one could speculate that it acted as a threat, hanging over the tax authorities and encouraging them to seek a higher degree of taxpayer consensus than they might otherwise have been prepared to entertain. It should be noted, finally, that the Finance Acts of 1932 and 1938 increased all existing WTA rates, by 10 and 20% respectively.75 The purpose in both cases was to compensate productive businesses for a temporary rise in income tax rates, but the mechanism was unsatisfactory as it involved giving allowances of 20% more than was ‘just and reasonable’. These provisions were ultimately more permanent than expected, and again caused difficulties that are reviewed in more detail below. Accounting Practices and Tax Reform There is a lively controversy concerning the collection and presentation of tax and financial information during the nineteenth century. Whilst some modern commentators stress that considerable efforts were made to collate useful information,76 there was undoubtedly a lack of uniformity around accounting policies77 and theories78 that could not but have borne upon the tax system. At an extreme level, an essay by the wife of the author Thomas Carlyle detailing her experiences of the income tax system in the 1850s confirms that many Schedule D taxpayers declined even to attempt an accurate calculation of income, and simply restated the amounts contained in the prior year return.79 Edwards notes that this laxity was known to extend to depreciation and capital allowances, and suggests in particular that taxpayers would have disguised purchases of wasting assets as revenue expenses in order to maximise the likelihood of

73 Note that challenges to rates could only be brought under the subsection by taxpayers and not by the Inland Revenue. The reference procedure appears to have been prompted by the concerns of taxpayers that existing rates were too low: see Inland Revenue, Notes on the Finance Bill 1918, 18. 74 See Report of the Royal Commission 1920, above n 63, 48–49; Inland Revenue, Notes on Finance Bill 1934, Committee Stage, 43 and 102. 75 S 18 of the Finance Act 1932 and s 22 of the Finance Act 1938. 76 See Bryer, above n 34. 77 See TJ Baldwin and RH Berry, ‘The Measurement of Nineteenth Century Accounting Error: Cases from the British Coal Industry 1864–1900’ (1999) 4 Accounting History 79. 78 See RL Watts and JL Zimmerman, ‘The Demand for and Supply of Accounting Theories: The Market for Excuses’ (1979) 54(2) The Accounting Review 273. 79 M Lamb, ‘Horrid Appealing: Accounting for Taxable Profits in Mid-nineteenth Century England’ (2001) 26(3) Accounting, Organizations and Society 271.

Law and Administration in Capital Allowances Doctrine: 1878–1950 191 tax relief.80 The wasting-asset expert Leake was likewise concerned about the ‘remarkable absence of any attempt to deal with depreciation in a systematic and regular manner’ and especially the risk of manipulation. The subject [of depreciation is] of public importance even as it affects enterprises administered in an able and honest manner, but it assumes far greater gravity in connection with that large class of undertakings which are habitually carried on under less sound and capable management.81

The Companies Acts gave some guidance on the point, the standard articles of association (Table A) specifying that ‘no dividend shall be paid otherwise than out of profits’.82 Cotton LJ admitted in Lee v Neuchatel83 that the adoption by a company of these articles would create an obligation that did not exist under general company law, but also emphasised that the determination of profits was primarily ‘a matter of internal arrangement’ for a company.84 This absence of detailed control on depreciation accounting, Lamb argues, inspired the courts in their judgments of the 1870s and 1880s to institute a definitive separation between tax computations and other forms of accounting. The relatively liberal company law position, it appears, could be prevented from compromising tax revenues by interpreting the ITA 1842 so as to preclude any allowance for depreciation besides the renewals basis and the WTA of 1878.85 In any case, despite the best efforts of Leake and others, there seem to have been real limits to the development of accounting practices for depreciation throughout the period of the present study. The section in the textbook Advanced Accounts that covered wasting assets, which detailed no less than seven different methods of recording depreciation, was not altered significantly between 1915 and 1942 and, if anything, the

80 JR Edwards, ‘Tax Treatment of Capital Expenditure and the Measurement of Accounting Profits’ [1976] British Tax Review 300, 307. 81 Leake, above n 47, 4. 82 Art 97 of Table A, Schedule 1 to the Companies (Consolidation) Act 1908; Art 91 of Table A, Schedule 1 to the Companies Act 1929; Leake, above n 48, 30. 83 Lee v Neuchatel (1887) 41 Ch D 1 (CA). 84 Ibid, 18, per Cotton LJ: ‘if the Court sees that the directors and the company have acted fairly and reasonably in ascertaining whether this is a division of profit and not of capital, and then in what is really a matter of internal arrangement (if it is done honestly, and does not violate any of the provisions of the articles) the Court is very unwilling to interfere, and in my opinion ought not to interfere, with the discretion exercised by the directors, who have the management of the company, or with the powers exercised by the company within the articles’. See similarly Lindley LJ at 21: ‘There is nothing at all in the Acts about how dividends are to be paid, nor how profits are to be reckoned; all that is left, and very judiciously and properly left, to the commercial world. It is not a subject for an Act of Parliament to say how accounts are to be kept; what is to be put into a capital account, what into an income account, is left to men of business.’ 85 In Lamb’s view the reasoning of the courts has much in common with late eighteenthcentury aristocratic accounting: see Lamb, above n 3, 158–62.

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preface to the 1948 edition of Leake’s monograph deepens the exasperated tone of 36 years previously.86 At the least, the jurisprudence discussed by Lamb would have reduced the scope for outright manipulation of accounting entries so as to create income tax allowances. The Departmental Committee report of 1905 also prompted an ongoing tightening of the inspection, penalty and other administrative powers of the Inland Revenue, which should again have prevented some of the most egregious misstatements of financial data in tax returns.87 As the broad potential application of depreciation theory to income tax became more generally appreciated, though, the pressure for more comprehensive allowances became intense, and indeed this was one of Leake’s declared aims in publicising the issue.88 In his view, the far-too-narrow focus of income tax deductions on industrial machines was attributable largely to the failure of the ‘commercial community’ to account for depreciation properly. A more robust and consistent approach to financial reporting might lead, in particular, to broader tax allowances on buildings, fixtures, raw materials, mine shafts and terminable annuities.89 An important outlet for this rising discontent was the parliamentary process, and a review of the Inland Revenue notes on Finance Bill clauses discloses countless demands from business representatives for reform, which also underline the multiplicity of theories and practices that were applied to the depreciation problem at the time. Some submissions argued in favour of comprehensive allowances on ‘inherently wasting assets’ along the lines suggested by Leake90 and in the report of the Royal Commission of 1920.91 Other proposals drew explicit links between wasting assets and business savings more generally, arguing that businesses should be permitted to build up tax-free sinking funds for the replacement of capital

86 Refer to n 92, below. See also RN Carter (ed), Advanced Accounts: A Manual of Advanced Book-keeping and Accountancy for Accountants, Book-keepers and Business Men (New York, EP Dutton, 1915) 600. Note, however, the positive view given by Leake, above n 48, xiii: ‘considerable progress has been made in recent years’ . . . ‘many industrial undertakings have adopted the . . . straight line method of measurement as recommended in this book . . .’. 87 For example ss 22–23 of the Finance Act 1907, on which see also TNA T172/19. On the capacity of the tax authorities to influence taxpayer behaviour through the ‘disciplinary technology’ of ‘registration, categorization, administrative placement, the complication of dossiers and the threat of investigation’, see AM Preston, ‘The Taxman Cometh: Some Observations on the Interrelationship between Accounting and Inland Revenue Practice’ (1989) 14(5/6) Accounting, Organizations and Society 389. 88 Leake, above n 47, 176. 89 Ibid, 181–82. 90 Ibid, 177. 91 Report of the Royal Commission 1920, above n 63, 46. An example of an ‘inherently wasting assets’ proposal is found in Inland Revenue, Notes on the Finance Bill 1930, Committee Stage, 94.

Law and Administration in Capital Allowances Doctrine: 1878–1950 193 assets.92 This would help to reverse the relative decline of Britain as an industrial power and could be widened into a full-blown policy of taxing ‘retained’ profits at lower rates than profits distributed to business owners.93 Another argument noted that the Super-tax apportionment rules of the Finance Act 1922 penalised certain undesirable forms of profits retention;94 in return, more socially useful methods of business saving might be remitted from taxation. Finally, the ‘Burgin clause’ involved a temporary rise in the obsolescence allowance, with a view to encouraging industrial reinvestment after the Great Depression.95 This was rejected on the plausible grounds that temporary tax concessions may be difficult to remove once they have become entrenched. The attitude of the Inland Revenue to the other suggestions was generally to accept the need for reforms whilst either pointing out specific flaws in the proposal or remarking that the problem was too difficult to resolve within the instant parliamentary session and should be examined at a later stage. In any case, comprehensive tax reforms were to wait for a long time after the first publication of Leake’s book in 1912.

The ITA 1945 The long-anticipated overhaul finally arrived in the budget speech of Sir John Anderson on 25 April 1944.96 He opened his discussion of wasting assets by rejecting calls for a comprehensive allowance on all retained profits, but then accepted that the income tax should be applied only to true business profit as reduced by accurately recorded depreciation charges. However, this consideration would need to be reconciled with the

92 Sinking funds are discussed in Inland Revenue, Notes on the Finance Bill 1920, Committee Stage, 1920. See also RN Carter and WR Carter (eds), Advanced Accounts: A Manual of Book-keeping and Accountancy for Students, 3rd edn (London, Sir Isaac Pitman & Sons, 1949) 125, 133, where the sinking fund is presented as one of seven different methods of accounting for depreciation. 93 An early example of a retention proposal is found in Inland Revenue, Notes on the Finance Bill 1923, Committee Stage, 48. A wide-ranging discussion of capital allowances in the context of the balance between savings and expenditure taxation is contained within Inland Revenue, Notes on the Finance Bill 1925, Committee Stage, 37. 94 S 21(1) of the Finance Act 1922 was targeted at the avoidance of Super-tax by wealthy individuals through the retention of profits in personal companies, and provided as follows: ‘Where it appears to the Special Commissioners that any company to which this section applies has not, within a reasonable time after the end of any year . . . distributed to its members . . . a reasonable part of its actual income . . . the Commissioners may . . . direct that for purposes of assessment to super-tax, the said income of the company shall . . . be deemed to be the income of the members’. 95 See, eg Inland Revenue, Notes on the Finance Bill 1930, Committee Stage, 141. 96 Hansard, HC Deb vol 399 cc 671–79 (25 April 1944).

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political objective of encouraging industrial re-equipment and investment in science after the war.97 This compromise between principle and political necessity was reflected throughout the scheme set out by the Chancellor. Machinery and plant allowances remained largely unchanged, except that a generous ‘initial allowance’ was provided for each asset in the year of acquisition in order to encourage re-equipment.98 Secondly, the types of mining and extraction expense eligible for deduction were increased to encompass certain forms of exploration and temporary construction, although the bar on mineral depletion allowances remained.99 Thirdly, expenditure on scientific research was granted a series of generous allowances that built upon existing liberal practices of the Inland Revenue.100 Fourthly, the principle of allowances on purchased patents was admitted for the first time in the income tax,101 although it was felt necessary to protect revenues by imposing a corresponding charge on capital sums received by the seller, this tax liability to be spread over a period of six years.102 Fifthly, the Chancellor noticed that lease premiums might be considered wasting assets, but thought the matter too complicated to include in the present reforms. Industrial and agricultural buildings allowances relate to Schedule A and are covered below. Other notable innovations in the 1944 scheme included the system of balancing adjustments that superseded the obsolescence rules and ensured that total tax deductions enjoyed over the lifetime of an asset equalled its purchase price less proceeds received on disposal.103 An important set of anti-avoidance rules also aimed to prevent taxpayers from raising the price or frequency of asset transfers merely in order to claim increased 97 Anderson expressed the position thus: ‘Tax should be charged on true profits reasonably measured, but not more. The appropriate allowances for capital expenditure are of supreme importance in relation to the work of reconstruction at the end of the war when, in order to take up the challenge which I have mentioned, in the interests of employment policy, industry of all kinds may have to embark upon modernisation and re-equipment’ (ibid, 672–73). 98 S 15 of the ITA 1945. It is made clear by Wilson and Heaton, above n 11, 95, that the deduction of current year plant and machinery allowances from prior year profits under Cunard Steamship Company v Coulson, above n 61, survived the ITA 1945. The Coulson principle did not extend to the other annual or initial allowances conferred by the Act, including the initial allowance for plant and machinery. These were instead governed by complex basis period rules, yet in a simple case, prior year allowances would have been deductible from the assessment relating to prior year profits: see Wilson and Heaton, ibid, 48, example (2). 99 Part III of the ITA 1945. 100 Part IV of the Finance Act 1944. The earlier practice was detailed by the Chancellor at Hansard, HC Deb vol 399 c 678 (25 April 1944). 101 But provision was made at an earlier date in respect of the Excess Profits Duty; see text at n 172 below. 102 S 37 of the ITA 1945. For an explanation of the difficulties with patent allowances that necessitate this capital charge, see Leake, above n 48, 158; see also Inland Revenue, Notes on the Income Tax Act 1945, 73. 103 Sections 17 and 18 of the ITA 1945.

Law and Administration in Capital Allowances Doctrine: 1878–1950 195 allowances. It applied where allowances would be a ‘sole or main benefit’ of the sale and to all connected party transactions, and is discussed further below.104 On balance, Anderson’s scheme represented the most thorough attempt in a generation to reconcile income tax relief for asset depreciation with other political and technical considerations, albeit that it relied to a much greater extent than previously on objective and detailed statutory rules. Nevertheless, the provisions of the ITA 1945 and the Finance Act 1944 represented more an advance on existing doctrines than a fundamental restructuring of the law along the lines of a general allowance for all wasting assets or a simple deduction for all accounts depreciation. The continued restrictions on the scope of assets covered by allowances were a particular concern for the Tucker committee of 1951, who highlighted the non-deductibility of costs relating to goodwill, land, commercial buildings, lease premiums, dredging, slag heaps, mineral depletion, liquor licences, insurance policies and business development activities, amongst other items.105 The report recognised the obstacles to providing allowances in these areas,106 but considered that a greater deal of flexibility could be applied. If the nature of a class of assets made it impossible or impractical to estimate annual wastage, for example, deductions could be delayed until ultimate disposal so that balancing allowances were available but not annual allowances.107

After the ITA 1945 In retrospect the ITA 1945 may seem like an improvement on the previous arrangements, but at the time there were various complaints from practitioners that the legislation was overly complicated and unnecessary.108 The rules also needed to be changed in various respects during the period that followed enactment. The anti-avoidance rules, for instance, were softened in 1946 so that connected party purchasers would no longer be disqualified automatically from initial allowances.109 The beginnings of asset pooling practices were also witnessed, whereby annual allowances and balancing adjustments could be computed by reference to a class of assets

104

S 59 of the ITA 1945. Report of the Committee on the Taxation of Trading Profits (Cmd 8189, 1950–51) (Report of the Tucker Committee), ch V. See also n 54. 106 See, eg ibid, 71–72, which outline the problems of providing allowances on lease premiums and of taxing the lessor on the same amount. 107 See, eg ibid, 71–72, on the expenses of cutting and tunnelling. 108 Institute of Chartered Accountants in England and Wales, ‘The Accountant Tax Supplement’, 3 March 1945. 109 S 34(1) of the Finance Act 1946. 105

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rather than individual items;110 and special arrangements were made to facilitate the nationalisation of coal mining and the reorganisation of the cotton mills.111 Further changes put through with the Finance Act 1949 concerned mineral depletion, allowance rates and inflation, and may now be discussed in turn. The nationalisation process reduced the importance of mining allowances to the private business community,112 but the question of overseas mineral depletion arose in 1949 and was resolved in favour of an allowance. This placed into effect a recommendation of the Royal Commission of 1920,113 although the Tucker report suggests that the reform was motivated by competitive considerations rather than principle alone.114 On the second issue, the clear intention of the ITA 1945 was that generous initial allowances in the year of purchase should be mirrored by lower annual allowances thereafter. In other words, the allowances were to be accelerated, but only in the first year. Unfortunately for the Revenue there was nothing in the Act to bind General Commissioners to this understanding in respect of plant and machinery allowances; on the contrary, they remained subject to the original 1878 requirement to bestow deductions that were ‘just and reasonable as representing the diminished value by reason of wear and tear during the year’. The legislative response to this contradiction was to sweep away the old system entirely, to codify the existing practice of standardised WTA rates into a long and detailed Schedule to the Finance 1949 and to confer on the Inland Revenue an outright discretion to set rates for the future.115 This reflected an important trend emerging in the drafting of legislation known as the ‘mathematical’ method, the essence of which was that tax legislation could be made more certain by specifying the quantity of assessable or deductible amounts very precisely within the primary legislation, if necessary using mathematical formulae. This approach was particularly important in the context of corporate group taxation,116 but its influence is 110 It is explained at Report of the Tucker Committee, above n 105, 39, that many smaller businesses kept records on a ‘global’ basis, claiming annual allowances on the aggregate written-down value of all assets of a particular type and avoiding the calculation of balancing adjustments except in extraordinary circumstances. 111 See the cotton and coal provisions in ss 18 and 29 of the Finance Act 1947. 112 Inland Revenue, Notes on the Finance Bill 1949, Committee Stage, 16. 113 See Report of the Royal Commission 1920, above n 63, 44. 114 Report of the Tucker Committee, above n 105, 77. 115 See para 1(2) of Schedule 6 Part I to the Finance Act 1949: ‘The said percentage is such percentage as may be determined by the Commissioners of Inland Revenue to be appropriate to be applied for the purposes of this paragraph in relation to machinery or plant of the class in question for the year of assessment in question’. A very helpful review of the issues is provided in Inland Revenue, Notes on the Finance Bill 1949, 13. Note, however, that some specialised rates are still determined by agreement: see Tiley & Collison, above n 19, 706. 116 See the highly detailed rules on the recognition of corporate groups for National Defence Contribution purposes in Schedule 4 Part I to the Finance Act 1938.

Law and Administration in Capital Allowances Doctrine: 1878–1950 197 clearly also evident in the Finance Act 1949,117 which forms an important milestone in the gradual shift from the simple Commissioner discretion of 1878 to the growth of standard rates and ultimately a closely detailed statutory solution. The change in style was almost sufficient to elicit an apology from the Inland Revenue, who acknowledged that the new rules were highly verbose, considering that they were only intended to codify existing practice.118 Finally, concerns on the rate of inflation were becoming widespread, and various proposals were made to assist businesses to purchase modern machinery in spite of the ever-rising prices of new plant. The government rejected suggestions that taxpayers should be permitted to make tax-free contributions to profits reserves for the purpose of purchasing new assets119 but did respond with drastic increases in initial allowances. This enabled businesses to deduct a large proportion of the cost of new assets immediately and targeted assistance to those cases in which proposed purchases had actually been made.120

S C H EDU LE A

Income tax under Schedule A was charged on the ‘annual value’ of land and buildings, with the exception of certain special types of property that are not our immediate concern here.121 The rules on the calculation of annual value were complicated, but in essence it represented the actual rental value of a property or, if untenanted, the notional value at which the property was ‘worth to be let by the year’.122 This fictional rental value was supplied by a series of periodic revaluations of property, carried out by specialist tax administrators. These encountered certain problems that are reviewed in more detail elsewhere.123 For present purposes, though, the examination of Schedule A reliefs focuses on the three most important areas, being the repairs allowance, the maintenance allowance and the mills and factories allowance (MFA). The changes effected by the ITA 1945 are also reviewed in brief.

117

See the reference to geometric progressions in Notes on the Finance Bill 1949, 139. Ibid, 20. 119 This was because there was no reliable method of ensuring that the tax relief was used for its stated purpose. See ibid, 4. 120 S 20 of the Finance Act 1949. The effect of high initial allowances was similar to the old ‘renewals’ basis of allowance, except that it encompassed the purchase of entirely new assets and not merely replacements for existing items. See further the extended discussion in Wilson and Heaton, above n 11, 135. 121 But see the text at n 151 below. 122 Schedule A No I, contained within s 60 of the ITA 1842. 123 See J Tiley, ‘Aspects of Schedule A’ in J Tiley (ed), Studies in the History of Tax Law (Oxford, Hart Publishing, 2004) 90. 118

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The Repairs Allowance The ITA 1842 allowed repairs expenditure to be deducted from the annual value of universities, hospitals, public schools and almshouses,124 but adopted the stringently objective approach of offering no such general allowance to other types of property. This could be tolerated to an extent, as annual values were often based upon historic valuations that understated the true value of property.125 Schedule A income therefore tended to be under-taxed relative to certain other Schedules, even before questions of allowances or expenses were introduced. Nevertheless, pressure grew in the late nineteenth century for Schedule A taxation to be restated on a profits basis, or even to be merged outright with Schedule D.126 Policymakers consistently declined to go so far, principally because large numbers of taxpayers were being processed on a highly routine basis under Schedule A, and the introduction of profit concepts involving the review of detailed accounting information would add greatly to the costs of administration.127 In 1894, though, the Chancellor of the Exchequer announced an important concession in the form of stereotyped repairs deductions amounting to 1/8 and 1/6 of the annual value of land and houses respectively.128 This provided an element of relief to landowners without requiring officials to review evidence of actual repairs in each case. From a political perspective, the repairs allowance was linked to the Death Duty reforms, which, amongst other matters, increased duties on land and buildings by placing them on a similar basis to other properties.129 The repairs allowance was a neat method of compensating for this change whilst retaining the basic structure of Schedule A taxation. A suggestion that accounting entries for repairs should be certified by accountants and then deducted for the purposes of Schedule A was rejected briskly. The important question was not whether repairs expenditure had genuinely been incurred, but whether it was of an appropriate nature to deduct from income tax liabilities, and policymakers were deeply unwilling to delegate this judgment to advisors paid by the taxpayer.130

124

Schedule A no VI, contained within s 61 of the ITA 1842. See Report of the Royal Commission 1920, above n 63, 98. This problem worsened during the mid-twentieth century: Tiley, above n 123, 84 and 90. 126 TNA IR63/1, Budget and finance bill papers 1869–1894. See also Sir W Harcourt at Hansard, HC Deb vol 23 c 499 (16 April 1894). 127 TNA IR63/1, ibid. 128 S 35 of the Finance Act 1894. 129 Hansard, HC Deb vol 23 c 499 (16 April 1894). 130 TNA IR63/1, above n 126. This argument is rather unconvincing, though, as it does not preclude the possibility of a statutory definition of the scope of permissible repairs and the certification by accountants that the actual expenses fit within this definition. After all, this is not so far from the routine tax compliance advice that modern accountancy firms provide to businesses. 125

Law and Administration in Capital Allowances Doctrine: 1878–1950 199 It appears from the 1894 archives that the standardised allowance was presented as a temporary milestone on the road to a fuller approximation of profits taxation within Schedule A.131 Whilst the maintenance allowance and the MFA, discussed below, could be seen as further steps in this direction, it was not until the later 1930s that allowances for the wastage of real property started to be dissociated fully from annual values based upon actual and notional rental receipts.132 The underlying structure of Schedule A reliefs therefore remained remarkably constant, although the rates of repairs allowance were raised substantially in 1922 and 1923.133

The Maintenance Allowance The maintenance allowance was introduced by the Finance (1909–10) Act 1910, and enabled the owners of land and small houses to claim a repayment of tax in respect of costs of ‘maintenance, repairs, insurance, and management, according to the average of the preceding five years’, to the extent that this figure was shown to exceed the stereotyped repairs allowance.134 Importantly, the statutory definition did not encompass the addition of new and improved features to property, and strict limits were initially placed on the quantum of maintenance expenses that could be deducted, although the latter were relaxed significantly by the Finance Act 1914.135 In 1924 the maintenance allowance was widened further, to include certain additions to land and buildings that had been necessitated by local authority by-laws.136 The Inland Revenue was later to portray this provision as a mistake, and as generating a precedent for wealthy estateowners to demand tax relief on a whole range of land improvement projects.137 Interestingly, whilst stating repeatedly that the maintenance allowance should not be extended further, the Revenue seems to have taken a more accommodating view in practice. A discussion of extra131 See the reluctant rejection by the Inland Revenue of a further move towards profits taxation in TNA, IR63/15, Finance Bill 1909–1910: amendments to income tax clauses, Committee Stage, 232. Particular prominence is given to the extra administrative costs that would be generated by any change. 132 See text at n 154 on the introduction of allowances in 1937 based on a percentage of acquisition cost. 133 S 24 of the Finance Act 1922 and s 28 of the Finance Act 1923. 134 S 69 of the Finance (1909–10) Act 1910. The logical counterpart to providing additional allowances based upon accounting records was to tax additional rental receipts that were not reflected in the usual Schedule A charge: see Tiley, ‘above n 123, 91. 135 S 8 of the Finance Act 1914. 136 S 25 of the Finance Act 1924. In view of the potential value of this concession to aristocratic interests, it is interesting to note that it was introduced by the first Labour Chancellor, Philip Snowden: see B Mallet and CO George, British Budgets: Third Series 1921–22 to 1932–33 (London, Macmillan, 1933) 114. 137 See, eg Inland Revenue, Notes on the Finance Bill 1930, Committee Stage, 131.

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statutory concessions in 1944, for example, reveals that land additions carried out in order to comply with Agricultural Committee requirements were routinely treated as maintenance expenses.138 If the comments are accurate, the operation by the Revenue of a concession specifically regarded as too controversial for Parliament seems a highly inappropriate use of administrative powers, and would presumably be unlawful today under the Wilkinson139 precedent.

The Mills and Factories Allowance The repairs and maintenance allowances were not depreciation treatments in the same sense as the WTA for plant and machinery, as they compensated upkeep expenditure rather than the gradual wastage of the initial investment in the asset.140 One school of thought was indeed that land and buildings cannot be said to depreciate in any meaningful sense, as their value is volatile and also tends to rise steadily over time. On this view, the expiration of purchase costs are impossible to separate from these wider trends, and it would thus appear unfair to grant depreciation allowances at the same time as allowing large capital gains to remain untaxed.141 Not everyone subscribed to such ideas,142 and in any case the report of the Departmental Committee stated that some types of buildings (‘mills, factories and similar premises’) were particularly vulnerable to wear and tear in the pursuit of trade and were clearly deserving of an allowance.143 This mills and factories allowance (MFA) operated on a rather technical feature of the tax law that arose from the parallel treatment of industrial buildings under Schedules A and D. With the exception of some special cases,144 the buildings would be charged to income tax under Schedule A on the usual annual value basis, subject to the repairs allowance. Trading profit would also be taxed normally under Schedule D except that two 138

See Inland Revenue, Notes on the Finance Bill 1944, Committee Stage, 52. R(Wilkinson) v IRC [2005] UKHL 30, 77 TC 78, in which the House of Lords held the authority of the tax authorities to issue concessions to be much more closely circumscribed than had previously been understood. 140 See discussion in Lamb, above n 3, 157. 141 See Report of the Royal Commission 1920, above n 63, 50–51. Note that capital gains were not taxed directly until 1962: see Part II Chapter II of the Finance Act 1962. 142 See, eg Leake, above n 47, ch XII, in which it is argued that the tax treatment of income and capital could be clarified through stricter accounting. 143 Report of the Departmental Committee, above n 69, xiv. 144 Indeed, it might be suggested that many of the problem in this area arose from the parallel application of the rules under Schedules A and D to what was essentially a single business. See comments on Helena Housing v HMRC [2012] EWCA Civ 569; [2012] 4 All ER 111 in M Bowler Smith, ‘Case Comment, Helena Partnerships Ltd v HMRC: A Step Too Far’ [2012] BTR 519; see also comments on Bray v Brothers [1897] 3 TC 550 (HC) in D de Cogan, ‘Building Incoherence into the Law: A Review of Relief for Tax Losses in the Early Twentieth Century’ [2012] BTR 655, 660. 139

Law and Administration in Capital Allowances Doctrine: 1878–1950 201 extra deductions were available in respect of a premises occupied for the purposes of trade. First, repairs to the property could be deducted in line with the average actual expenses of the three preceding years.145 Secondly, the annual value of owner-occupied property could be deducted from trade profits.146 The interaction between the two Schedules can be summarised by saying that the notional Schedule A income was expended for Schedule D trade purposes and therefore generated a net charge of £nil. Initially, the deduction of annual value did not have to reflect Finance Act 1894 repairs deductions that had already been provided under Schedule A. However, to charge the taxpayer on 5/6 of annual value under Schedule A and then to deduct 6/6 from Schedule D profits would result in the double deduction of repairs, once on the standard 1/6 annual value basis, and again according to the average actual expenditure of the three previous years. The Finance Act 1898 corrected this error, ensuring that the annual value deduction under Schedule D was restricted to 5/6 of annual value, that is, net of the 1894 repairs allowance. The concept behind the MFA, which was prompted by the report of the Departmental Committee, was simply to remove this 1898 restriction in the context of ‘mills, factories and similar premises’ that were prone to exceptionally rapid deterioration in the pursuit of trade.147 The double repairs allowance would provide a rough and ready measure of relief for depreciation without requiring any substantial changes to the underlying structures or interactions of the two Schedules. This relief was eventually passed into legislation in 1918,148 but encountered significant criticism for its unwieldy mechanism,149 as well as for its restriction to industrial buildings.150 There is insufficient space to review these arguments in full, but it should be noted that the MFAs encountered particular difficulties in respect of an important class of businesses that included iron, gas and water works. These were taxed exclusively under Schedule A no III on a profits basis,151 and a special annual value had to be computed solely for the purpose of conferring MFAs.152 This amount tended to be both arbitrary and overstated, with the effect that excessive allowances were offered routinely.153 This was addressed by section 15 145

Rule 3 of Schedule D Case I, contained within s 100 of the ITA 1842. Rule 2 of the rules applying to Schedule D Cases I and II, contained within s 100 of the ITA 1842. 147 Report of the Departmental Committee, above n 69, xiv. 148 S 24(4) of the Finance Act 1918. 149 Report of the Royal Commission 1920, above n 63, 47. 150 See discussion in Report of the Royal Commission 1920, above n 63, 50–51. 151 The profits from these businesses were not taxable under Schedule D and the rental value of the property was not taxable under Schedule A no I: see s 60 of the ITA 1842. 152 S 18 of the Finance Act 1919. 153 This was because the ‘annual value’ computed under s 18 of the Finance Act 1919 did not form the basis of any tax charge, hence there was an incentive to overstate the figure in order to inflate the MFA. See Inland Revenue, Notes on the Finance Bill 1937, 36. 146

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of the Finance Act 1937, under which 1% of the ‘actual cost’ of two types of depreciating buildings154 within these works could be deducted in each year. As already indicated, this was the first allowance under Schedule A for building repairs or depreciation that was fully independent of the annual value concept. The ITA 1945 went further and replaced both types of MFA with annual allowances amounting to 2% of the cost of ‘industrial buildings’ in addition to an initial allowance of 10%.155 Unfortunately industrial buildings allowances were in some circumstances less generous than MFAs. This proved politically inexpedient and MFAs were therefore retained as an alternative to the new allowances during the difficult post-war years up to and after 1950.156

S P E C I AL TA XES A ND WA RT IME

As noted at the outset of this chapter, a number of special direct taxes were imposed in order to address the costs and social upheavals of the two world wars. Some of these were based on the excess profits concept, whereby tax was levied on the excess of actual wartime profits over a pre-war ‘standard’ representing the profits expected in a normal peacetime period. Taxes in this mould included the Excess Profits Duty157 (EPD) of 1915 and the short-lived Munitions Levy158 of the same year, and the Excess Profits Tax159 (EPT) of 1939. Other taxes were imposed on more straightforward grounds, as fixed percentages of specified types of business income, and these included the Corporation Profits Tax (CPT) of 1920,160 the National Defence Contribution161 (NDC) of 1937 and the Profits Tax162 of 1947.163 154 These are detailed at s 15(3)(i) and (ii) of the Finance Act 1937. Note also the revealing comment at Inland Revenue, Notes on the Finance Bill 1937, Committee Stage, 7-B1, that the figure of 1% ‘was taken because it has in practice formed the basis of the relief given in some cases in the past’. 155 Industrial buildings are defined at s 8 of the ITA 1945 and encompass buildings used for a wide range of specified purposes. The scope of buildings included within allowances was much greater than for the old MFAs: see Wilson and Heaton, above n 11, 27. Industrial buildings were also subject to similar balancing adjustments and anti-avoidance provisions as plant and machinery. Note also provision for agricultural buildings in Part IV of the ITA 1945. 156 Inland Revenue, Notes on the Finance Bill 1950, 18. 157 S 38 of the Finance (no 2) Act 1915. 158 Enabled by s 4 of the Munitions of War Act 1915. 159 S 12 of the Finance (no 2) Act 1939. 160 S 52 of the Finance Act 1920. 161 S 19 of the Finance Act 1937. 162 S 30 of the Finance Act 1947. 163 This is not the appropriate place for a detailed examination of the interaction between the taxes, but note that only the Profits Tax achieved any significant post-war permanence, as well as the Corporation Profits Tax in the new Irish Free State (Saorstát Éireann) of 1922. See also D de Cogan, ‘The Wartime Origins of the Irish Corporation Tax’ 3(1) Irish Journal of Legal Studies, forthcoming.

Law and Administration in Capital Allowances Doctrine: 1878–1950 203 The legislation implementing these special taxes was typically drafted by replicating income tax concepts and then modifying them to reflect the excess profits mechanism, the exclusion of individuals and partnerships from the CPT or certain other structural features of the taxes. In some respects, indeed, existing income tax doctrines needed to be altered substantially in order to produce equivalent effects in the special tax setting.164 This was not the case for capital allowances, as demonstrated by the following EPD provision of the Finance (no 2) Act 1915. Deductions for wear and tear or for any expenditure of a capital nature for renewals, or for the development of the trade or business or otherwise in respect of the trade or business, shall not be allowed except such as may be allowed under the Income Tax Acts . . .165

This replicates the income tax rules, and supports the general provision on the calculation of profits in section 40(1), which does the same. It is therefore not necessary to review the special tax rules on capital allowances in great detail; rather, the discussion below concentrates on specific areas in which the special taxes made a distinctive contribution to the history of wasting asset taxation. One of the most conspicuous of these, especially during the First World War, was the extent to which reliance was placed upon Inland Revenue discretions.166 A key EPD provision was section 40(3) of the Finance (no 2) Act 1915, which provided as follows. Where it appears to the Commissioners of Inland Revenue, on the application of a taxpayer in any particular case, that any provisions of the Fourth Schedule to this Act should be modified in his case, owing to [specified circumstances,] or to any other special circumstances specified in regulations made by the Treasury, those Commissioners shall have power to allow such modifications of any of the provisions of that schedule as they think necessary in order to meet the particular case.

This provision delegated to the Inland Revenue the authority to decide whether modifications to the detailed rules of assessment in the fourth Schedule were necessary, and to determine exactly what those modifications should be. This discretion appears extremely far reaching at first sight, allowing the Revenue to control the existence and quantum of tax charges and allowances, some of which were already discretionary in terms.167 On closer inspection, though, there were various limitations on the power of the tax authorities. There had to be an application by 164 For example, relief was not given from EPD or EPT for ‘losses’ as such, but rather for the ‘deficiencies’ that arose when profits in a wartime period were lower than the pre-war standard. 165 Para 3 of Schedule 4 Part I to the Finance (no 2) Act 1915. 166 See also to ss 4 and 5 of the Munitions of War Act 1915, which conferred wide taxing powers on the Minister of Munitions. 167 See the timing discretion in para 3 of Schedule 4 Part I to the Finance (no 2) Act 1915, which was intended to prevent taxpayers from manipulating capital allowances in

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a taxpayer, and the modification only applied to the ‘particular case’. The Revenue was also only entitled to act on certain specified grounds, most of which related to repairs or depreciation expenses.168 These could be increased in number by Treasury regulation, but this stipulation was designed explicitly to maintain an element of parliamentary control over the context of tax regulation169 as well as to protect Revenue officials against frivolous demands for lenient treatment.170 Thirdly, though, the refusal of a modification by the Revenue could be appealed by the taxpayer to the Board of Referees,171 who would then have the power fully to reperform the decision under section 40(3). The notes to the Finance Bill 1919 indicate that only one Treasury regulation had been enacted under section 40(3) by that time, for the depreciation of patents.172 There had been demand for further regulations dealing with the suspension of advertisements and the loss of trade goodwill during the war, but the Inland Revenue recommended against this upon the somewhat nebulous grounds that ‘the whole question is very intangible and incapable of being brought to the test of any recognised standard’.173 The liberalisation of this area would be difficult to administer and might be unfair in the absence of a tax on the appreciation of goodwill.174 In the Second World War, the tendency was for matters of fine detail to be regulated in lengthy Schedules to the Finance Acts. A significant early instance of this was the fourth Schedule to the Finance Act 1938, which outlined the NDC treatment of corporate groups, but the clearest example in the capital allowances field was the eighth Schedule to the Finance Act 1947, which devoted nine pages to the operation of wasting asset and similar treatments in the context of the Profits Tax.

order to achieve lower excess profits: see Inland Revenue, Notes on the Finance (no 3) Bill 1915, Committee Stage, 263. 168 Whilst the Inland Revenue enjoyed the subjective power to decide whether one of the specified grounds had been engaged, it seems unlikely that a modification made on an impermissible ground would have been entirely insulated from judicial review: see the discussion at n 55. 169 Note that s 50 of the Finance (no 2) Act 1915 required regulations under the Act to be laid before Parliament for 21 days. 170 Inland Revenue, Notes on the Finance (no 3) Bill 1915, Committee Stage, 93, 131, 136, 145, 263 and Report Stage, 10, 15(A). The comments at page 10 of the Report Stage volume imply that discretion is a reasonable method for putting the ‘scheme’ of the Act into effect. 171 See text at n 73 above. 172 This regulation has not been located. Note the contrast with Income Tax, for which patent depreciation was introduced for the first time by the ITA 1945. 173 Inland Revenue, Notes on Finance Bill 1919, Committee Stage, 124. 174 These recommendations suggest that the Inland Revenue exerted some influence over the process of developing regulations, in spite of the deliberate institutional barrier described above.

Law and Administration in Capital Allowances Doctrine: 1878–1950 205 In terms of the technical content of the wasting asset legislation, three particular wartime doctrines are worthy of note. First, ‘exceptional depreciation’ allowances were given for certain assets that suffered unusually rapid deterioration during wartime conditions, and also for certain installations that would become worthless to the taxpayer on cessation of hostilities. These were sometimes implemented through Inland Revenue discretions,175 although during the Second World War these were typically narrower in scope than in the 1915 provision examined above. The EPT rules relating to exceptional depreciation, for example, confer a specific power on the Revenue to offer provisional deductions pending the final determination of allowances at the end of the war, subject to certain restrictions: The Commissioners, if they are satisfied that any buildings, plant or machinery provided as aforesaid are of such a character that it is likely that the conditions [for special allowances] will be fulfilled . . . may allow . . . such sums as they think fit, not exceeding ten per cent . . . of the net cost of the buildings, plant or machinery . . .176

The second special wartime treatment comprised the lenient treatment of ‘terminal losses’ at the end of the Second World War, that is, the cost of switching from wartime to peacetime industrial practices.177 Thirdly, limited allowances were provided for the accelerated depletion of mineral resources during the Second World War.178 These were typically provided by raising standard profits for Excess Profits Tax, so that the wartime excess would be lower, and a reduced tax charge experienced. This mechanism was complemented in 1943 by ‘mathematical’ legislation specifying the exact allowance to be granted to each taxpayer.179 The appeals provisions for the special taxes were relatively liberal. The EPD arrangements, for example, were described by the Revenue as ‘unusually full’, and included enhanced procedural powers for the General and Special Commissioners, varied opportunities to refer disputes to the specially convened panel of tax experts known as the Board of Referees

175 One of the grounds for modification of the rules of assessment under s 40(3) of the Finance (no 2) Act 1915 was ‘exceptional depreciation’. See text at n 168. 176 Para 3 of Schedule 7 Part I to the Finance (no 2) Act 1939. Note the double discretion, on the fulfilment of the factual conditions for relief and on the quantum of the provisional exceptional depreciation allowance. 177 See, eg the excess profits tax provisions at s 37 of the Finance Act 1946. 178 See s 31 of the Finance Act 1941. The intention of these allowances was not to compensate depletion as such, but rather the ‘hidden’ costs of accelerating wartime production. See further n 179. 179 S 22 of the Finance Act 1943. This section dealt with situations where the mining company would usually be required to work a mixture of good and poor mineral seams but had increased wartime production by working the good seams only. A notional increase was made to the costs of production in order to reflect the reduction in anticipated post-war profits caused by such practices: see Inland Revenue, Notes on Finance Bill 1943, 21b.

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and appeals from all of these bodies to the ordinary courts.180 The Second World War provisions were similar,181 though there were some complaints that appeals provisions in respect of Revenue discretions182 and Board of Referees decisions183 were insufficient and should be extended yet further.

C H A NGI N G PATTER NS OF R EGU LATION

Looking at the big picture of allowances under Schedule D, Schedule A and the special taxes enables us to appreciate that there was a complex layering of legal rules and administrative activities that developed in different ways in different contexts. The dream of Leake and others that a standardised system of depreciation accounting might give rise to a simple and generous tax allowance covering a wide range of asset wastage remained unrealised during the period of this study, although it surely asserted an influence, as is discussed further below. Explaining the rather haphazard history of repairs and depreciation allowances is a complex and controversial matter, which has clear parallels in modern discussions of extra-statutory concessions,184 legitimate expectations from tax authority publications,185 tax authority discretions186 and so forth. The paragraphs below do not purport to settle such questions definitively, but offer a number of suggestions rooted deeply in the Inland Revenue notes on clauses and other archival material reviewed for this paper, and also building on the studies of Stebbings, Lamb, Daunton, Leake and others. It is also accepted that there are substantial overlaps between the factors identified, albeit that they are presented discretely for the purposes of clarity.

A Retreat from Theory It was explained above that the non-standardised state of depreciation accounting in the nineteenth century led to calls by Leake and others for more systematic means of measuring the annual expense of asset wastage to businesses. These ideas permeated deeply into the discourses 180

Inland Revenue, Notes on the Finance (no 3) Bill 1915, Committee Stage, 239. See the appeal provisions for the national defence contribution at Schedule 5 Part II to the Finance Act 1937, applied to the excess profits tax by s 21 of the Finance (no 2) Act 1939. 182 Inland Revenue, Notes on the Finance Bill 1942, Committee Stage, 13. 183 Inland Revenue, Notes on the Finance Bill 1943, Committee Stage, 131. 184 See D Williams, ‘Extra Statutory Concessions’ [1979] British Tax Review 137. 185 See R(Davies) v HMRC; R(Gaines-Cooper) v HMRC [2011] UKSC 47. 186 See C Evans, J Freedman and R Krever (eds), The Delicate Balance: Tax, Discretion and the Rule of Law (Amsterdam, IBFD, 2011). 181

Law and Administration in Capital Allowances Doctrine: 1878–1950 207 of tax reform, with business associations repeatedly sponsoring parliamentary proposals to the effect that improved accounting practices should be reflected by expense or annual allowances upon a broader range of wasting capital assets. The hope of some reformers was that this could be achieved in a very simple way, for example by offering a statutory allowance for all inherently wasting assets. This would cover most of the important situations in which allowances were thought to be deserved, and presumably the detailed treatment of different classes of assets could be governed by judicial precedent or Revenue communications. These types of wide-ranging solutions were rejected definitively in the process of enacting the ITA 1945. In his budget speech of 1944, John Anderson acknowledged the significance of coherent theory, but chose to expand allowances incrementally rather than replacing the existing system in its entirety. For example, buildings allowances were expanded and special relief was granted in respect of patents and scientific expenditure, yet each class of assets remained subject to its own special rules. Whilst some of these were necessary, such as the capital tax on the sale of patents, others could only be justified on the grounds of historical accident, such as the preservation of the illogical Coulson principle that current-year WTAs on plant and machinery should be deducted from the profits of the prior year.187 In terms of regulatory style, moreover, it is hardly surprising that these several parallel regimes were implemented in the ITA 1945 and Finance Act 1949 through an exhaustive objective approach that specified clearly how each type of case was intended to be governed; a single, all-embracing allowance might have been effected with a much lower degree of statutory detail. The other risk presented by this dispersal of doctrine was that the links between principle and detail would become steadily more invisible as new incremental rules accreted to each regime over extended periods of time. In turn, this could encourage a rather technical attitude on the part of taxpayers and advisors, whereby ‘fairness’ in allowances would be understood not by reference to general theories of depreciation but to the maximum permitted under the statutory wording. This would equate a fair outcome with a legally tenable one, and, if this seemed to encourage avoidance, the proper solution was for Parliament to refine the legal rules or to delegate to the courts some additional method of distinguishing between good and bad tax forms of tax minimisation. It is easy to appreciate the political virtue of the ITA 1945 in achieving a compromise of the raging conceptual debates of the 1930s,188 but there

187

See text at n 61. In this regard it is interesting to refer to the discussion of political prudence and the Machiavellian legacy in taxation in J Snape, The Political Economy of Corporation Tax: Theory, Values and Law Reform (Oxford, Hart Publishing, 2011) 28ff. 188

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is equally an argument that Anderson’s stopgap solution lies at the root of present complexity.

Increased Accounting Accuracy As previously discussed in some detail, accounting data could be rather approximate during the nineteenth century. An important feature of the subjective and discretionary approaches to tax rules was accordingly their ability to accommodate a very poor quality of information. It should not matter that the taxpayers’ figures for depreciation were unavailable or evidently incorrect, as more sensible amounts could be estimated by the Commissioners or Inland Revenue. In contrast, objective approaches were impracticable without financial records that were reasonably accurate and consistent across businesses, especially after the introduction of balancing charges and allowances by the ITA 1945.189 The calculation of an allowance under this legislation might then involve demonstrating, for each asset, the costs of acquisition, the date of disposal, the proceeds received on disposal and the sum of allowances already received. The process of concluding rate agreements under the consensus approach might demand an even higher level of accounting analysis. If rate agreements were expected to reflect a genuine effort to approximate the cost of asset wastage each year, industry representatives would need to demonstrate the anticipated working life of assets within the given class, the likely disposal proceeds, the relative speed of deterioration during the working life—or, in other words, all of the data needed for depreciation accounting in more recent times.190 The renewals basis of allowance sat somewhere in the middle, encouraging the production of recent and accurate cost information without necessarily requiring sophisticated accounting techniques, which may help to explain its unexpected persistence. Whilst the quality of financial data is clearly relevant to the adoption of particular approaches to law and regulation, the establishment of a causal link between developments in accounting and an increased emphasis on objective rules is a more difficult matter.191 On the one hand, it appears that accounting for depreciation was surprisingly static during the period of the study in spite of the reforming zeal of Leake and others.192 On the other hand, the gradual move towards taxation on a profits basis under Schedule A, together with the provision of maintenance allowances upon 189 The introduction of asset pooling would have reduced the administrative difficulties: see Inland Revenue, Notes on the Finance Bill 1949, 16. 190 If, on the other hand, rate agreements contained a large degree of political compromise, these calculations might not need to be quite so precise. 191 See Edwards, above n 80, 313. 192 See text at n 85.

Law and Administration in Capital Allowances Doctrine: 1878–1950 209 production of adequate evidence, indicates an increased willingness on the part of legislators to trust accounting information relating to land. Perhaps the most that may be said is that improvements in the reliability of financial records facilitated the use of objective rules but did not necessarily encourage them. This gains a degree of support from the observation of Lamb that the General Commissioners tended to come to decisions on the basis of personal impressions, whereas the Revenue preferred to operate from documentation.193 On this view, the shift in authority to the Inland Revenue during the twentieth century that was exemplified by the decline in the subjective approach to capital allowances may as well have caused improvements in accountancy as reacting to them.

The Decline of ‘Localism’ The subjective approach to wasting assets became possible because the ITA 1842, and later the CIRA 1878, devolved substantial powers to the General Commissioners to decide on the availability and quantum of allowances. In common with many aspects of the tax system, however, the allocation of authority to prominent but unpaid members of the local community rested on particular conceptions of society, and reflected certain political and administrative needs. As these foundations shifted, the ingrained ‘localism’ of the ITA 1842 became vulnerable.194 A critical part of this process was played by the ongoing centralisation of business and political life195 that was stimulated by the technological advance in communication and rail travel.196 These developments could only serve to highlight the divergences between the decisions of Commissioners in different districts, and thence feed into calls for greater consistency.197 This increased emphasis on consistent treatment could have been furthered by more widespread central assessment by the Special Commissioners, in line with longstanding practice for railway companies.198 193

See Lamb, above n 79, 294. Stebbings, above n 1, ch 3. 195 These developments were not always welcomed. John Stuart Mill’s negative views on political centralisation are reviewed by M Daunton, Trusting Leviathan: The Politics of Taxation in Britain, 1799–1914 (Cambridge, Cambridge University Press, 2001) 256; see also Stebbings, above n 1, 87. 196 See Matthews, above n 13. 197 TNA, IR63/50, Notes on the Finance Bill 1914, 63 is instructive, describing how the Inland Revenue had managed to achieve agreement between district Commissioners on WTA rates without yet assuming full control over the process. 198 See Matthews, above n 13, 174; Inland Revenue, Notes on the Finance Bill 1917, 32. However, the Special Commissioners were known for being less generous than district Commissioners (Appendix to the Report of the Departmental Committee 1905, above n 22, 106), besides which many taxpayers were unaware of their existence: see C Stebbings, ‘Access to Justice before the Special Commissioners of Income Tax in the Nineteenth Century’ in J Tiley (ed), Studies in the History of Tax Law, vol 2 (Oxford, Hart Publishing, 2007) 62. 194

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Instead, there seems to have been a gradual transfer of authority from the General Commissioners to the Revenue, both on a formal basis and underneath the surface.199 The local officials lacked the time, resources and sometimes the skills to deal with the new complexities in business and taxation, and in some respects their role had become residual by the beginning of the twentieth century.200 This process may be observed clearly in the context of capital allowances under Schedule D, where the formal powers of the lay administrators under the CIRA 1878 were hollowed out by a consensus approach that allocated the real decisions to the Inland Revenue and industry representatives. By 1949 the involvement of the Commissioners in WTA decisions seems almost to have been fictional. The Inland Revenue was particularly vocal about inconsistency in Commissioners’ decisions, but the prevailing complaint from industry was that allowances were too low and were available on too narrow a range of assets. Moreover, whilst WTA rates could usually be negotiated between taxpayer representatives and the Revenue within the framework of local decision-making,201 disagreements on the scope of allowance tended to raise fundamental considerations that ultimately required parliamentary resolution.202 In this way, the decline of localism, and the consequent inability of Commissioners to allow deduction in ‘deserving’ cases falling outside the strict wording of relief, would have contributed to the calls for wide-ranging statutory reform. This vacuum was addressed by the objective approach of the ITA 1945, and the Finance Act 1949 finally removed the veneer of local decision-making that had survived from the CIRA 1878.

Tensions between Routine Administration and Taxpayer Participation There were clear elements of tension between routine administration and the opportunity for taxpayers to introduce evidence relevant to the availability or quantum of allowances relating to asset depreciation. What is particularly interesting is that notably different approaches were at first taken for the purposes of Schedules A and D of the income tax. In respect of the former, the strictly defined and easily calculated repairs allowance was clearly intended to prioritise the interests of administration, and even 199

See Stebbings, above n 1, ch 3. D Williams, ‘Surveying Taxes 1900–14’ [2005] British Tax Review 222, 229. The Royal Commission of 1920 observed this development but argued persuasively for the preservation of an appellate role for the General Commissioners: see Report of the Royal Commission 1920, above n 63, 76. 201 See also Inland Revenue, Notes on the Finance Bill 1940, Committee Stage, 19, which discusses the administrative practice of raising rates to compensate the overtime operation of assets during wartime. 202 As indeed was recognised quickly by the courts: see the text at n 208, below. 200

Law and Administration in Capital Allowances Doctrine: 1878–1950 211 this concession was only granted in return for higher estate taxation. In contrast, Schedule D taxpayers had the opportunity to persuade local tax officials that deductions should be allowed in response to a range of circumstances—initially, it seems, even in the face of explicit statutory prohibitions. This balance was altered by the restrictive approach of the courts from the 1870s onwards, yet the new WTA of 1878 did not specify how much should be deducted each year and again allocated this decision to the Commissioners. As the twentieth century progressed, though, these traditional positions shifted, Schedules A and D increasingly starting to approximate each other. Schedule A was relaxed by means of the maintenance allowance and other, more controversial, deductions at the same time as Schedule D was rigidified by the evolution of standardised rates and later by the objective rules of the ITA 1945 and Finance Act 1949. It might be observed, further, that this greater objectivism in Schedule D did not immediately remove from taxpayers the opportunity to influence the content and structure of depreciation treatments. The potential for allowances to be increased through new statutory allowances was obvious, and accordingly industrial organisations were highly active in lobbying Parliament for more generous provision. Yet arguably it was the consensual methods of sub-statutory regulation, such as the WTA rate agreements and the seemingly extra-statutory extension of Schedule A maintenance allowances, that offered taxpayer representatives a more direct, and presumably cheaper, means of seeking more advantageous treatment. It would be easy to denigrate this state of affairs on the grounds of regulatory capture,203 but this would be to overlook some of the subtleties of the position. First, the benefits of participation flowed in two directions, so that the Inland Revenue was able to disseminate its own views widely through explanatory leaflets and other avenues of communication,204 and in turn benefited from the statistical and other financial information volunteered by taxpayers as part of the negotiation process, as well as from closer industry relationships in general.205 It is trite from administrative legal scholarship to suggest that such an improved flow of information and ideas might not only further the narrow interests of the parties but also improve the effectiveness of tax regulation in achieving its intended 203 For a particularly colourful example of this argument, see G Monbiot, ‘To Us, It’s an Obscure Shift of Tax Law. To the City, It’s the Heist of the Century’, The Guardian, 7 February 2011, available at http://www.guardian.co.uk/commentisfree/2011/feb/07/tax-cityheist-of-century. 204 See TNA, IR78/75, General Instructions to Surveyors of Taxes (London, HMSO, 1911). The insert immediately prior to page 105 contains a collection of useful circulars. 205 In this sense the WTA rate agreements are comparable to the modern arrangements for the disclosure of tax avoidance schemes (DOTAS) and for the development of relationships between the tax authorities and industry: see, eg HM Revenue and Customs, ‘Disclosure of Tax and NICs Avoidance Schemes’, available at http://www.hmrc.gov.uk/aiu/index.htm; ‘Large Business Service’, available at http://www.hmrc.gov.uk/lbo/index.htm (accessed on 27 June 2012).

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results.206 Secondly, in many senses the legal framework seems to have been tailor-made to preserve a balance between different stakeholders and between flexibility and certainty. The appeal against WTA rates to the Board of Referees may seldom have been used, but it would have dissuaded the Revenue from too unilateral an attitude and highlighted the importance of choosing credible taxpayer representatives with whom to negotiate. An even clearer example is the 1915 provision that allowed the categories of EPD allowance to be extended by Treasury Regulation, thus in theory restricting both Revenue overenthusiasm and the pressuring of individual tax officials by powerful business interests. Building on the arguments above, it might be said that these balances of different actors, reflected in careful assemblages of statutory and lowerlevel rules, might not so much have offended the will of Parliament as helped to further it. This type of logic is commonplace in various other fields of regulation,207 but seems to have been abandoned in the capital allowances context, as demonstrated by the detailed objectivism of the ITA 1945 and the replacement of negotiated WTA rates with an outright Revenue discretion in 1949. Whether this was attributable to a general antipathy in taxation to sub-statutory regulation or to the difficulty of negotiating sensibly in the context of an increasingly complex and possibly incoherent theoretical framework is not entirely clear and would benefit from further study.

The Role of the Courts The cases reviewed above demonstrate that the introduction of a general appeal from the income tax Commissioners in 1874 played a pivotal role in the development of capital allowance doctrines. The scope for the tribunals to provide allowances as they considered best was curtailed deeply by the courts’ reassertion of the requirements of the ITA 1842, and in particular the stipulations that deduction should not be allowed from profits in respect of capital expenditure. This point seems frequently to have been overlooked by Commissioners, but was confirmed in Re Addie208 and Forder v Handyside,209 amongst other cases. The courts by no means sought to overturn every decision of the tax tribunals and were especially deferential with regard to the quantum of allowance, which was characterised as a determination of fact that should only be impugned in

206 For a critical perspective see the review in C Harlow and R Rawlings, Law and Administration, 3rd edn (Cambridge, Cambridge University Press, 2009) 172ff. 207 See generally J Black, Rules and Regulators (Oxford, Clarendon Press, 1997). 208 Re Addie & Sons, above n 24. 209 Forder v Handyside, above n 25.

Law and Administration in Capital Allowances Doctrine: 1878–1950 213 the event of serious error.210 Yet the argument of Lamb that the judgments of the 1870s and 1880s afforded the Inland Revenue a substantial increase in power over the General Commissioners in respect of the structure and administration of allowances is certainly supported by the materials reviewed for the present chapter. On some occasions, the consequences of court decisions seem to have been more restrictive than even the Revenue had wished or anticipated, and the WTA of 1878 was only the first in a series of statutory interventions that clarified and sometimes liberalised allowances for capital wastage. In this way, the insistence of judges on adherence to statutory requirements can be seen to have encouraged an objective yet incremental approach to the drafting of new legislative rules. However, it must be remembered that many elements of non-statutory regulation survived the scrutiny of the courts. In successive judgments the availability of 1878 WTAs and renewals allowances in parallel was preserved despite the inability of the judges to articulate exactly how this was possible on the strict words of statute. The refusal of the courts to lay down strict constraints on the quantum of relief meant that the sophisticated system of agreed WTA rates was permitted to continue, and in 1897 the Chancellor of the Exchequer was able effectively to reverse Burnley Steamship211 without even introducing legislation. It might therefore be summarised that the courts brought into focus the need for parliamentary control of basic distributive decisions and thus placed the subjective approach into doubt, but did not in every respect cause the adoption of a more detailed and specific approach to legislation. Even the ultimate transfer of formal WTA powers from Commissioners to Revenue in the Finance Act 1949 was not forced by an actual court judgment but by the purported belief of the Revenue that the existing system of allowances could not be substantiated if challenged in front of the courts.212

Industrial and Other Policies The attempts of Leake and others to restructure tax allowances around rational theories of asset depreciation could also conflict with the predictable desire of governments to employ capital allowances as instruments of broader policies, such as industrial re-equipment. The evidence suggests that there was a divergence of opinion between those who favoured a pragmatic approach to the availability of deductions and those preferring to maintain either existing structures of allowance or theoretical 210 This boundary was clearly not fixed, as previously discussed in relation to Leith, Hull and Hamburg v Musgrave, above n 58. 211 Burnley Steamship, above n 66. 212 Inland Revenue, Notes on Finance Bill 1949, 13.

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integrity. These tensions may be observed in relation to the Schedule A maintenance allowances, which were extended to cover certain specified land improvements by the Finance Act 1924 but not further,213 on the grounds that deductions for capital additions were inconsistent with the principle of the allowance. The 1932 increase of 10% in WTA rates was another controversial innovation that was intended to compensate for higher income tax rates and to target assistance for capital reinvestment where it was most needed.214 Unfortunately, the logical corollary was that allowances were required to be 10% more than was thought to be ‘just and reasonable’ for the purposes of the CIRA 1878. The ITA 1945 initial allowance, similarly, prioritised the political aim of encouraging post-war industrial reinvestment, but fitted so poorly with the existing deductions for plant and machinery that the entire structure of WTAs had to be recast by the Finance Act 1949.215 A sympathetic observer might point out that the large increases in the rates of initial allowance in the late 1940s offered policymakers an expedient and flexible means of helping businesses with immediate outlay on new equipment, in the context of high post-war inflation. This demonstrated that objective statutory rules could be used to mould existing concepts to unexpected crises and, more fundamentally, to reflect the balance of principle and extraneous considerations that was expressed clearly by John Anderson in 1944. An important feature of this approach was that it maintained the form of parliamentary approval whilst providing the government with a much greater freedom of interference than would have been conceivable within the framework of subjective or consensus regulation. Whether detailed statutory rules were the best means to exercise this micromanagement or whether a US-style combination of statutory general principles and sub-statutory detail would have allowed for greater doctrinal coherence over the long term is ripe for speculation, but would require a detailed study of the development of capital allowance regimes after 1950.

Tax Avoidance A consistent theme in the development of capital allowances was how to prevent their use for the avoidance or evasion of tax. In the early years of the ITA 1842 it was notoriously easy to complete Schedule D returns with spurious information,216 but even in 1905 it was still possible for taxpayers to operate a ‘one-way bet’ against the Revenue by understating 213 214 215 216

At least See text See text See text

as at at at

a n n n

matter of statutory law: refer to text at n 138 above. 75 above. 115 above. 79 above.

Law and Administration in Capital Allowances Doctrine: 1878–1950 215 income and seeking to settle any dispute for an amount lower than the true liability.217 The taxes based on the excess profits principle were also inherently vulnerable to taxpayer manipulation through the reallocation of expenses from ‘standard’ to tax periods or otherwise. In general terms, these practices were countered with enhanced administrative powers in the Revenue,218 more stringent reporting requirements in the Companies Acts and increasingly complex and fast-moving anti-avoidance rules.219 In the context of Schedule D WTAs, though, even the fact-finding jurisdiction of the income tax Commissioners was rather effective at neutralising some forms of avoidance. The point is neatly illustrated by the case of Kirby v Steele,220 where Atkinson J refused to overturn a factual decision of the General Commissioners holding that a series of transactions intended to inflate WTAs was not ‘bona fide’ and should be disregarded.221 This device could not remedy supposed under-taxation that was genuinely permitted by the law. In the Charente Steamship222 litigation, the taxpayers had sold three ships, two for more and one for an amount less than their tax written down value. The Court of Appeal overruled the Special Commissioners and held that obsolescence deductions could be claimed on one ship even though the prevailing law did not impose balancing charges on the other two. A case decided in favour of the Revenue on a legal basis was United Steel Companies v Cullington (No 2),223 in which the House of Lords held that a new company formed as part of a merger agreement could not access carried-forward capital allowances of the predecessor companies. On a correct interpretation of the law, certain methods of manipulating allowances were simply not available. In IRC v Great Wigston Gas224 the taxpayer had negotiated with the Revenue to change from the renewals basis of allowance to the standard wear and tear basis.225 Unfortunately for the gas company, the 217

Report of the Departmental Committee, above n 69, vi. See text at n 87 above. 219 The latter particularly in the excess profits context. See, eg the EPD rules on shipping depreciation in s 47 of the Finance Act 1916 and s 22 of the Finance Act 1917. 220 Kirby v Steele (1946) 27 TC 370 HC. 221 Note that this approach is not entirely dissimilar to the modern style of purposive interpretation as explained in the Hong Kong case of Collector of Stamp Revenue v Arrowtown Assets Ltd (2004) 6 ITLC 454 and adopted in Barclays Mercantile Business Finance v Mawson [2004] UKHL 51: ‘The driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.’ See also G Aaronson, ‘GAAR Study: A Study to Consider Whether a General Anti-avoidance Rule Should Be Introduced into the UK Tax System’ (11 November 2011), available at http://www.hm-treasury.gov.uk/d/gaar_final_report_111111.pdf (accessed on 2 August 2012). 222 Charente Steamship v Wilmot (1941) 24 TC 97 CA. 223 United Steel Companies v Cullington (No 2) (1940) 23 TC 91 HL. 224 CIR v Great Wigston Gas Company, above n 11. 225 Compare this to the refusal of the Revenue in London County Council v Edwards, above n 51, to recalculate prior year allowances on a changed basis. 218

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EPT standard profits calculation was then reperformed by the Revenue on the revised basis, resulting in higher liabilities. The taxpayer appealed successfully to the Special Commissioners but failed in the Court of Appeal, who decided that the Revenue had acted correctly and in accordance with the law. With the staged replacement of the 1878 structure of WTAs in the 1940s by detailed statutory provisions, the emphasis shifted definitively from the decision-making powers of the Commissioners to the anti-avoidance jurisdiction of the courts under section 59 of the ITA 1945. The uncertain scope of this provision created substantial disquiet in business circles. A particular concern was that the risk of large and unexpected tax liabilities could create a ‘chilling effect’ and discourage taxpayers from carrying out legitimate transactions.226 In the case of Prior v Martin,227 Harman J described parts of section 59 as ‘shocking’, and followed Scottish precedent in deciding that the statutory language was too ‘inaccurate’ to apply to the case in point. Perhaps the problem lay in an expectation that section 59 would enable the courts to replicate the pragmatic approach of the Commissioners in Kirby v Steele228 and to disallow amounts ‘in cases where on the merits relief is not really justified’.229 Whereas the tax tribunals were well positioned to prevent the abuse of open-ended legislation in the exercise of their wide fact-finding jurisdiction, it was quite another matter for courts to be entrusted with the ‘spirit’ of highly detailed and potentially contradictory statutory rules. In view of this precedent value of judicial decisions, it may not be too uncharitable to view this as an open invitation to future complexity.

War and Discretion The emphases of tax policy were somewhat different during wartime than under ordinary conditions. Not only were large revenues required at short notice, but there was also a political imperative to combat perceived war profiteering and to ensure that all sections of society made an appropriate contribution to the overall war effort.230 This might be described as a focus on distributive justice as opposed to fair procedure. Meanwhile it was necessary to ensure that tax rules and high rates did not restrict economic activity unduly or otherwise discourage productive behaviour. In order to strike the right balance in quickly changing conditions, the 226

See, eg Inland Revenue, Notes on the Finance Bill 1946, 34. Prior v Martin (1952) 34 TC 39 HC, 44. 228 Kirby v Steele (1946) 27 TC 370 KBD. 229 Inland Revenue, Notes on the Income Tax Bill 1945, 123. 230 See brief comments in EE Spicer, The Excess Profits Duty and Profits of Controlled Establishments (London, Foulks, Lynch & Co, 1916) 2; RJ Sutcliffe, Excess Profits Duty and the Cases Decided Thereon (London, Stevens & Sons, 1919) iii and 1. 227

Law and Administration in Capital Allowances Doctrine: 1878–1950 217 tax system had to be more flexible than usual, as well as less tolerant of tax avoidance. The discretionary approach to regulation was well suited to these pressures, allowing tax rules to be changed without cumbersome procedures and freeing legislators to deal with more pressing matters. There are questions that might be raised on the compatibility of this approach with rule of law values and the Bill of Rights 1689,231 but checks and balances were incorporated into the system, including the institutional barriers to the extension of EPD discretion and the wide opportunities for taxpayer appeals to the tax tribunals, the courts and the Board of Referees. There are some indications that the Inland Revenue might have favoured a continuation of the discretionary approach after the First World War,232 but this appears never to have gained widespread traction, and decisions such as Duke of Westminster233 indicate that there was rather a backlash against discretionary government in general and discretionary taxation in particular. Indeed, by 1929, Lord Hewart CJ could speak of tax discretion in terms of a hypothetical danger, in support of his famously reactionary understanding of public law.234 It is interesting to note, finally, that most of the revenue from the EPD was ultimately returned to taxpayers in the form of retrospective reliefs,235 and that in this sense the EPD turned out to be more forced loan than discretionary tax. The issues faced by the tax system in 1915 were novel and demanded a highly flexible approach whereby the principal elements of allowance were contained within statute but the Revenue had the discretionary power to develop detailed informal rules as the body of institutional experience accumulated.236 In contrast, there was a much greater familiarity with the problems of war taxation in 1937, and the delegated discretions of the Second World War taxes accordingly tended to be narrower and more focused.237 This may in part have reflected the general progression towards objective or ‘mathematical’ legislation in the income tax context. 231 On which see further J Freedman and J Vella, ‘HMRC’s Management of the UK Tax System: The Boundaries of Legitimate Discretion’ in Evans et al, above n 186. 232 See Inland Revenue, Notes on the Finance Bill 1920, 87. 233 IRC v Duke of Westminster (1935) 19 TC 490 HL. 234 Lord Hewart CJ, The New Depotism (London, Ernest Benn Ltd, 1929) 46. For a critical view see M Taggart, ‘From “Parliamentary Powers” to Privatization: The Chequered History of Delegated Legislation in the Twentieth Century’ (2005) 55 University of Toronto Law Journal 575. 235 See comments in Inland Revenue, Notes on the Finance Bill 1945, Committee Stage, 15. 236 This is precisely the type of flexibility that was in scarcer supply in the late 1940s, when capital allowances in the income tax were instead governed by precise statutory rules; see further the discussion in text below n 215. 237 See s 33 of the Finance Act 1948 for an example of a minor timing discretion in the capital allowances field. An interesting comparison is also made at Inland Revenue, Notes on the Finance (no 2) Bill 1940, 13c, between the broad powers of the Board of Referees to raise the EPD standard in respect of wasting assets and certain other matters, and the much more tightly constrained powers of the same body in respect of EPT.

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In both periods, though, there was a tendency for new rules to accrete quickly, introducing new methods of calculating standards, restricting or extending relief, altering the tax rate prospectively, and so forth. As these rules did not always work smoothly within the original framework of the taxes, or indeed with each other, this contributed a degree of structural complexity that obscured the relationship between Revenue decisions, statutory authority and depreciation theory. This cannot have been particularly helpful from the perspective of operating costs,238 let alone the understanding and acceptance by taxpayers of their obligations under the special tax legislation.

C ONC LU SIONS

It was observed at the beginning of this chapter that no simple explanation would be offered of the structure and direction of capital allowances during the late nineteenth and early twentieth centuries. On the contrary, it is hoped that the historical material above has helped to dispel any notion of a pre-modern idyll wherein tax rules were statutory, simple, stable, expressed briefly and administered both competently and impartially. The reality seems quite different, being rather a ferment of experimentation on the problems of how allowances for depreciation should be conceived, how principle and expedience should be reconciled in a mature system, and, critically, how this should be translated into a network of statutory and lower-level rules. There were undoubtedly some clear trends, including the shift in jurisdiction from General Commissioners to the Inland Revenue and the courts that has been described by Stebbings and Lamb. There was also certainly an explosion in statutory detail in the late 1930s and 1940s that seems to have been connected to the ‘mathematical’ approach to drafting and to the growing belief that governments could take advantage of increased accuracy in financial data in order to micromanage the tax system, sometimes in pursuit of extraneous political aims. To the extent that this resulted in an objective style of regulation that facilitated the routine administration of the vast majority of cases and minimised the degree of judgment exercised in respect of individual taxpayers, it might be suggested that there was a degree of regulatory convergence between Schedules D and A of the income tax, as well as the special wartime and post-war taxes. A final thought, though, is that we may not necessarily have taken the best features from this exciting and formative period. In particular, the 238 In the sense of the running costs of the tax system, encompassing the ‘administrative’ costs of government and the ‘compliance’ costs of taxpayers see CT Sandford, More Key Issues in Tax Reform (Bath, Fiscal, 1995) 89–91.

Law and Administration in Capital Allowances Doctrine: 1878–1950 219 entrenchment of the ITA 1945 compromise into a series of connected but discrete capital allowance and amortisation regimes239 seems an opportunity lost for a radical simplification of the now very lengthy legislation on the subject. Perhaps it is not too late to revisit some of the theoretical arguments of the 1930s in order to root reform firmly in UK history without necessarily adopting the various post-1944 regimes as the starting point. The idea that deductions for asset wastage should be justified by reference to a common theory of accounting or economics is hardly unknown to contemporary observers240 yet still struggles to gain purchase as a viable reform proposal. Yet more radical possibilities are suggested by the historical material, including the idea that a simple basic allowance could be contained in statute and implemented in specific situations through a series of lower level rules, which could in turn be overturned if they were inconsistent with the statutory allowance.241 This would have the advantage of bringing into clear relief the balances struck in this field between certainty and flexibility, between routine administration and various types of participation, and between the interests of different actors, which exist equally in the modern law though often in more or less hidden ways.242 Obviously much of the evidence from the 1930s and before is unpromising, particularly with respect to conceptual confusions that were rooted in the absence of standardised practices of depreciation accounting, but which were exacerbated by insensitive incremental legislation such as the 10% increase in WTAs in 1932. Nevertheless, let it not be said that there are no practicable alternatives to the hundreds of pages of primary legislation on depreciation treatments that are contained within the Capital Allowances Act 2001 and other enactments; the evidence from the turbulent period of history covered by this study points strongly in the other direction.

239 See Explanatory Notes to the Capital Allowances Act 2001, paras 18–19, available at http://www.legislation.gov.uk/ukpga/2001/2/notes (accessed on 2 August 2012). 240 See, eg HM Treasury and Inland Revenue, ‘Reform of Corporation Tax: A Consultation Document’ (August 2002), paras 3.12–3.17, available at http://webarchive.nationalarchives. gov.uk/20061209025025/http://hmrc.gov.uk/consult_new/taxreform_final.pdf (accessed on 2 August 2012). 241 The agreed WTA rates under the CIRA 1878 represent a clear example of this type of arrangement, even if aspects of their operation left much to be desired. 242 A clear example of this is the confusion in the Gaines Cooper litigation on how the Inland Revenue explanatory booklet IR20 related to statute and whether it created enforceable legitimate expectations, matters on which even the judges of the higher courts were not unanimous: see Gaines Cooper, above n 185, and also the decision of the Court of Appeal, [2010] EWCA Civ 83.

6 What is the ‘Full’ Amount? RICHARD THOMAS

A BSTR A C T Inland Revenue manuals suggest that substantial receipts that do not appear in a profit and loss account drawn up under generally accepted accounting principles can be included in the tax return as being ‘adjustments required by law’, namely the requirement to return the ‘full amount’ of the trading profits. This paper considers whether this is correct. It examines the history of the words ‘the full amount’ as they have been used (or not used) in computational provisions for all types of income in taxing statutes from 1798 to the present day (including draft legislation), and as they have been interpreted by the courts. It concludes that the evidence from the statutes is so inconsistent that the words are essentially meaningless or do not relate to the computational rules, so that the phrase does not support the weight HMRC puts on it.

I N T R ODU C T ION

I

HAVE BEEN prompted to set out at some length what I think is the answer to this question by what I consider to be a remarkable attempt to make a whole mansion out of a piece of straw by the Revenue.1 Until I read what the Revenue suggest as an interpretation of the words ‘full amount’ in the context of its use in the phrase ‘full amount of the profits [of a trade]’, I would have confidently answered anyone who asked me that it simply meant the whole amount and that it might have carried the implication that it did not allow for any external reduction, much as the phrase ‘total profits’ in corporation tax does. With a bit more thought I might have come to the conclusion that the word ‘full’ is essentially meaningless, especially when use of the term ‘full amount’ in contexts other than the trading profits one is considered.

1

Ie the Inland Revenue and its successor HMRC.

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It is clear, however, that the Revenue thinks differently. Therefore, in this chapter I set out the Revenue’s views as expressed in their Guidance Manuals and as gleaned from discussions with former colleagues.

TH E R EVENU E’S VIEW

The Business Income Manual of HMRC (BIM) at paragraph 31002 (Tax and accountancy: general charging provisions) says: Until Section 42 FA 1998 the Taxes Acts did not provide any comprehensive guidance on the way in which these profits should be calculated and the methodology has emerged and refined over the years through court decisions. With effect for periods of account beginning after 6 April 1999 Section 42 FA 1998 requires that for the purposes of Case I or II of Schedule D the profits of a trade, profession or vocation are to be computed on an accounting basis which gives a true and fair view, subject to any adjustment required or authorised by law. The true and fair view concept is imported from the Sections 226–227 and Schedule 4–4A Companies Act 1985. The concept is therefore a legal one. One adjustment required by law is that tax is charged on the full amount of the profits so a tax adjustment would be made if the accounting method did not compute this figure. [My emphasis]

And BIM 31019 (Tax and accountancy: need to conform to tax law) says: Profits computed in accordance with UK generally accepted accounting practice form the starting point for the computation of taxable profits. Adjustments to those profits may, however, need to be made to conform to tax law. As well as those required by specific statutory principles adjustments may also be needed to give effect to more general tax principles, best seen as being derived from the need to tax the ‘full amount’ of the profits of the trade, laid down by the courts. [My emphasis].

BIM gives some examples of cases where HMRC considers that the ‘general tax principles’ derived from the ‘full amount’ requirement make a departure from the accounts necessary. They include cases where materiality is an issue (BIM 37030), insurance commissions (BIM 40685) and, more importantly, certain Private Finance Initiative (PFI) contracts (BIM 64000 onwards). BIM 64000+ is the part which is most explicit and which seeks to justify the treatment proposed in some depth. BIM 64125 says that where a PFI operator (the financier) accounts for the arrangement as a finance debtor, then the following applies: Accounting treatment as finance debtor . . . However, an element of the ‘part payment’ credited to the finance debtor may never be recognised, or reflected, in a profit and loss account. If this is

What is the ‘Full’ Amount? 223 the case, the statutory principle that the income taxed as trade profits is made on the ‘full amount’ of the profits applies (Section 7(1) ITTOIA and Section 70 of the 1988 Act). In order to compute the ‘full amount’ of the profits for tax purposes, the whole of the unitary payment receivable in the accounting period has to be reflected in a trading profits or Property profits tax computation. Therefore, to the extent that it has not been recognised, and will not be recognised in a profit and loss account, the ‘part payment’ credited to the finance debtor is included as income in the tax computations for the accounting period in which it is receivable (see examples 2, 5 and 6 at BIM64145, BIM64160 and BIM64165).

The amounts involved in the first two of the three specific ‘full amount’ departure cases (materiality and insurance commissions) are not necessarily large in either absolute terms or by reference to the size of the income that is reflected in a profit and loss (P & L) account drawn up in accordance with generally accepted accounting principles (GAAP). In the case of the third—PFI contracts—however, the BIM examples do suggest that the amounts involved may be large both absolutely and in relation to the recognised income. For instance, Example 2 at BIM 64145 shows that £3m is treated by the ‘full amount’ rule as taxable out of a total credit of £15 million. There is also an area of taxation where amounts not recognised in a P & L account but said to be taxable are often likely to be substantially more than the recognised amounts: that is in finance leasing. Finance leasing is not covered in BIM, but the HMRC guidance is now in its Business Leasing Manual (BLM), which replaces and updates its Finance Leasing Manual (FLM). What is notable about BLM (and FLM) is the absence of reference to the ‘full amount’ concept as set out in BIM 64125. But for a number of reasons, the author believes that the ‘full amount’ doctrine in BIM 64125 is equally applicable, in HMRC’s view, to finance leasing, and is the main justification for the treatment described in FLM. Since 1999, UK tax law has explicitly linked the charge to tax on trading profits to the amounts shown in accounts drawn up in accordance with GAAP (or, for a time, a true and fair view, which amounts to the same thing). This rule, enacted in section 42 Finance Act (FA) 1998 (now see section 25 Income Tax (Trading and Other Income) Act 2005 (ITTOIA) and section 46 Corporation Tax Act (CTA) 2009) allows for departures from GAAP if tax law provides for a different treatment (eg the rule against deducting entertainment expenses)—called here ‘departure rules’. Section 42 FA 1998 is a codification of previous law, as explained by the courts in PE Consulting,2 Gallagher,3 Herbert Smith4 and the joined cases

2 3 4

Heather (HMIT) v PE Consulting Group Ltd 48 TC 293. Threlfall v Jones (HMIT), Gallagher v Jones (HMIT) 66 TC 77. Herbert Smith (a firm) v Honour (HMIT) 72 TC 130

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of Mars and Wm Grant.5 That law, and section 42 implicitly, requires that the bringing into account is in a profit and loss account (or similarly named account performing the same function—that of showing the distributable profits of the business earned in the period of the accounts) and not, for example, in a reserve fund or directly in the balance sheet by amending the amount of an asset or liability. In the accounts of a finance lessor, only the ‘interest’ element of the payments received appears in the profit and loss account (the balance going to reduce the asset in the lessor’s balance sheet). In the accounts of the lessee, only the ‘interest’ element of the payment made is so shown. What, then, are we to make of statements by HMRC in its FLM and BLM? BLM 335 However, unless the lease is a long funding lease of plant or machinery (BLM00545 and BLM20000) or Schedule 12 FA 1997 applies (BLM70000), the taxation of finance lease rentals is essentially based on the rentals receivable, rather than on the accounting treatment, see BLM33010. BLM 525 Finance leases Unless the lease is a long funding lease (see BLM20000 onwards) the tax treatment of finance leasing is different from the accountancy because it generally follows the legal form . . . . Therefore, where the lease is not a long funding lease, for tax purposes the finance lessor has leased the asset to the lessee for a revenue hire charge. Hence, the gross rentals due under a finance lease (‘interest’ plus ‘capital’ repayments) are all on revenue account. The gross rentals are •

all taxable as income in the hands of the finance lessor

FLM 21.25 For the tax treatment of the ‘capital’ element in the rentals, there is no accountancy model which can be followed. Unless the lease is a long funding lease the capital element in the rentals is income for tax purposes, but for accountancy purposes it is loan repayment and a balance sheet item. The ‘capital’ element of the rentals is taxed following ordinary accruals principles.

And by contrast FLM 23.07 For . . . an intermediate lessor . . . (emphasis added) 5 HMRC v William Grant and Sons Distillers Ltd and Small (HMIT) v Mars (UK) Ltd 78 TC 442.

What is the ‘Full’ Amount? 225 The accounting treatment should be followed for tax purposes, unless there is a mismatch between the rental periods and/or the rental profiles of the leases inwards (to the intermediate lessor) and the leases outwards (by the intermediate lessor to the lessee).

It needs only a moment’s thought to show how substantial the departure required by these paragraphs in the Manuals actually is. Take a five-year lease of an asset where the implied interest rate is 5% and the asset’s value at Day 1 is £1,000. The lessor will receive ‘interest’ payments of 5% of 1,000, 800, 600, 400 and 200, 150. It will also receive 1,000 by way of ‘repayment’. So the departure, to bring in 1,000 is over six times as large as the amount in the P & L account. HMRC is clearly reluctant to spell out the basis on which the non-recognised amounts may be charged to tax, but it is difficult to see what the departure rule involved could be if not the ‘full amount’ concept as set out for PFI contracts in BIM. The Revenue’s interpretation of ‘full amount’, in the context of trading profits at least, is that it amounts to an adjustment required by law to the profits of the trader as shown in GAAP accounts so as to fully reflect some different concept of profit. The concept of an ‘adjustment required by law’ derives from section 42 FA 1998, but that, as can be seen from prior case law, is no more than a statement of what has always been the case, that traders are taxed on their accounting profits subject to provision of tax law to the contrary. So if HMRC is right, references to the ‘full amount’ of trading profits in legislation earlier than 1998 have the same meaning.

T H E OR I GI N S OF ‘F U LL A MOU NT ’

Introduction To fully consider the meaning of the phrase ‘full amount’ we have to go back to follow its usage through the centuries. We are not just looking for ‘full amount’, however, but a more complex proposition. For example, if we look at the equivalent of the current phrasing of the trading profits ‘full amount’ term in section 7(1) ITTOIA 2005, ‘Tax is charged under this Chapter on the full amount of the profits of the tax year’, and compare it with that in the Income Tax Act 1842, we find (when selectively comminuted) that: ‘The Duty to be charged . . . shall be computed on a Sum not less than the full Amount of the Balance of the Profits or Gains . . . upon a fair and just Average of Three Years . . . without other Deduction than is hereinafter allowed’.6 6

Rule 1 of the First Case of Schedule D.

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This, in both Acts, is a computing provision—the charge having been imposed elsewhere.7 We can also see that, as well as the ‘full amount’ phrase itself, there are temporal qualifications (‘of the tax year’ and ‘upon a fair and just average of three years’) and, in the 1842 Act, a proviso about deductions. As part of the examination into the trading profits use of ‘full amount’ that follows, we will also find its use in relation to other types of income or receipt. Thus, this chapter now looks at the legislative history of the phrase, which I call ‘the statutory phrase’, which encompasses the basic proposition of law that when a tax is charged by a provision of the Tax Acts it is charged (a) on the full amount of X (X being a type of income, profits or receipts of an income nature) (b) for a period and (c) sometimes with a rule about deductions. The 1842 Act is an almost exact copy out of the previous Income Tax Act in force—that of 1806—which, in turn, substantially reflects the Acts of 1805 and 1803. The latter is usually taken as the first ‘modern’ Income Tax Act in a form which is clearly recognisable to readers of Income Corporation Taxes Act 1988 (ICTA) at least. However, the ‘full amount’ term also appears in Income Tax Acts before 1803 which were not set out in the same way. So first I look at those Acts.

The 1798 and 1799 Acts Despite the orthodox view of the history of income tax, the Act of 1799 (39 Geo III c 13 amended by c 22) (the 1799 Act) is not the first to deal comprehensively with rules for determining how income is computed. For that, we go to the 1798 Act imposing the triple assessment8—the existing assessed taxes on eg windows, hair powder, servants etc were tripled, but there was a cap based on income.9 Section 70 of, and the Schedule to, the 1798 Act determined how income was to be calculated for the relevant period 6 April 1798 to 5 April 1799 and subsequently. So we have: LXX. And, in order that the Estimates of the Annual Income of Persons assessed may be made according to known Rules, and with as much Uniformity as the respective Cases will admit, be it further enacted, That in every Case where any Person shall claim to be exempted from the additional Rate or Duty hereby imposed, or to be entitled to any Abatement thereof, according to the Amount of his or her Annual Income, the said Income shall be estimated, and the Declaration hereby required shall be made in the Form set forth in 7

In section I and in the opening paragraph of Schedule D. An Act for granting to His Majesty an Aid and Contribution for the Prosecution of the War, 38 Geo III c 16. 9 A form of early alternative miminum tax. 8

What is the ‘Full’ Amount? 227 the Schedule hereunto annexed, and according to the Rules and Directions prescribed, as far as the same respectively are applicable to the Income of such Appellant; and in all Cases where the same are not applicable, then according to the best of his or her Knowledge and Belief, or of the Person making such Declaration on his or her Behalf;

The Schedule to which section 70 refers has nine cases. The first case covers the occupation of freehold land other than houses. The charge is on a notional amount and is imposed on the ‘true annual value’. No mention is made of how that is found, however, except that it cannot be less10 than 18 months’ rent of similar land after deductions allowed. There is no mention of a ‘full’ amount of anything. The second case covers land let to tenant. Where there is no fine (premium), the charge is on ‘the full amount of the rent reserved for one year’. In the second case there are also rules for cases where there is a fine only, or a fine plus rent. Where there is a fine only, the fine is averaged to find the correct receipt for one year. This is not stated to be a ‘full’ amount; it is in fact only part of a larger amount. In the case of a fine plus rent, the rent plus a part of the fine is taken. Here there is no mention of full either, even though it is likely that the rent charged will be the whole amount reserved for one year. The third case is uncertain profits, such as from mines, manors or tithes. The charge is on a sum equal to the receipts of one year, with no reference to ‘full’. The fourth case covers occupier-tenants of land. Here the rule for tenants with rent of less than £100 per annum is that their income is taken to be not less than three-quarters of the rent they pay; if their rent is £100 or more per annum, however, their income is instead take to be the ‘full amount’ of their rent. The fifth case is similar to the fourth and deals with cases where the tenant has paid a fine (premium), whether with or without a rent. In that case the income is taken, in all cases, to be not less three-quarters of the rack rent obtained for similar properties. There is no mention of the full amount (because there does not need to be—unlike the fourth case). The sixth case reverts to owners, this time of houses let to tenants. There the income is equal to the rent, but with deductions for repairs. Again, there is no mention of ‘full amount’ of the rent, unlike in the first part of the second case, even though the rent is the whole of the annual amount (no more and no less). The seventh case is similar to the first, but for houses. In this case, the income is equal to the rack rent that could be obtained, rather than 10 This is not the only use of the ‘not less than’ idea. I assume that no one in a position to do so paid more than the ‘not less than’ figure unless the Commissioners somehow came to the view that the ‘true annual value’ was greater.

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the true annual value, being not less than 18 months’ rack rent. Once more, there is no mention of ‘full amount’ of the rent, unlike in the first part of the second case, even though the rent is the whole of the annual amount (no more and no less) With the eighth case we finally leave land and come on to trades, professions and vocations. Here the case refers to the ‘full amount’—in this case, of the profits or gains acquired or received within the calendar year 1797 (so effectively a previous year basis). There was an alternative—a three-year average—but this is expressed as a ‘sum not less than the fair or just average’ with no reference to ‘full’. In the ninth case, which covered interest annuities, rentcharges and anything else, the income was not less than the whole sums payable within the year preceding the passing of the Act. We now turn to the 1799 Act, which also has a Schedule that sets out the way income is computed. There are 19 cases instead of 9 because some of the 1798 Act cases have been divided up (Table 1). As to the measure of income, the 1799 Act had a general section introducing the Schedule (section 77) and a rule for trades etc that the income arising is estimated according to the ‘actual produce’ (this, it is thought,11 is merely a way of stressing that the charge is on income and not capital gains etc) in either the immediately preceding year or on an average of the three preceding years. It should be noted, however, that this section does not refer to the ‘full amount’. The first part of the Schedule, covering all land, is also subject to a general rule on valuation. It provides that in all cases the annual value of lands is estimated from the actual rent or the rack rent that could be obtained, plus tithes taken in kind, but deducting a fourth part (ie a quarter). There is no reference to ‘full amounts’. It seems that the ‘actual produce’ (section 79) was also the full amount of the profits or gains. • The first case follows the first case of the 1798 Act save that there is mention of the ‘true annual value’. Instead of not less than 18 months rent, the rule is income equal to one year’s rent augmented by between one-quarter and one-half of the annual value (determined as in the general rule). As with the 1798 Act, there is no ‘full’ here. • The second case is the same as the seventh case in 1798—a rack rent without reference to ‘full’. • The third case, following the first part of the 1798 Act’s second case, repeats the income as being the ‘full amount of the rent reserved’. • The fourth and fifth cases follow the second and third parts of the second case in the 1798 Act; no mention of ‘full’ in connection with the rent (as distinct from the fine) 11 See P Harris, Income Tax in Common Law Jurisdictions: From the Origins to 1820, vol 1 (Cambridge, Cambridge University Press, 2008) 412.

What is the ‘Full’ Amount? 229 Table 1: Derivation of Cases in Schedule to 1799 Act 1799 Case

1798 Case

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16—19

1 7 2, 1st sentence 2, 2nd sentence 2, 3rd sentence 6 2, 2nd sentence 2, 3rd sentence 3 3 4 3 5 New 8 9

• The sixth case in the 1799 Act does refer to the ‘full amount of the rent reserved’, as in the third case, though there was no such reference in the 1798 Act’s sixth case. • The seventh and eighth cases are new but do for houses let what the fourth and fifth12 cases do for lands, and the income is found in the same way (literally so). • The ninth and tenth cases are essentially new and replace the third case in 1798. The income in the ninth case (tithes) is estimated on a fair average of three years of the actual value. There is no mention of ‘full’ unless ‘actual’ is a synonym for what ‘full’ means in other cases. That of the tenth case is also an average to be agreed by Commissioners, though mines must not be for more than five years. No ‘full’ appears. • The eleventh case is a tenant case where the tenant pays a rack rent. If the annual value as estimated in the general rule is less than £300 (it was £100 in 1798), the income is taken as not less than one-half. If £300 or more it is taken as not less than three-fifths and not more than three-quarters of that annual value. No reference to ‘full’—though of course there was one in the 1798 fourth case. That, however, was a case where a whole year’s rent was one of the alternatives. 12 The fifth and eighth cases are a little more sophisticated than the seconnd and third parts of the second case in the 1798 Act. They cater for a case where there is a fine and nominal rent as well as where there is a fine only.

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• The twelfth case follows the ninth and tenth by reference. • The thirteenth case follows the fourth and fifth cases as the case may be. • The fourteenth case (for mesne lessors) follows the relevant rule for owners of land etc. • The fifteenth case is trades etc. Here, again, we have alternatives, with the main rule that the computation is of not less than the full amount of the profits or gains within the preceding year and the alternative being a sum not less that the average for the three preceding years without reference to ‘full’. It thus follows the eighth case in 1798 exactly. • The sixteenth case takes the amount of income to be charged as ‘not less than the whole Income’ within the year preceding, and with respect to income arising from property not possessed by the same person during the whole of the preceding year, as not less than the whole income which will become payable in the succeeding year. In other words this is a previous year basis if the income covered the whole of that year, or a current year basis otherwise.13 There is no ‘full amount’ but there is the ‘whole amount’. • The seventeenth case was new and covered income arising out of Great Britain from foreign possessions. These would have been mostly trades and concerns to do with land, such as plantations in ‘the Americas’ (ie the West Indies). Here, for the first time, was a remittance basis and the charge was on the ‘full amount of the actual annual net income received in Great Britain’. Note that in this case the alternative bases of charge (previous year or average of three years preceding) is applicable to the ‘full amount’. • In contrast, the eighteenth case, income from foreign securities, which was also new, had no such ‘full amount’ rule. • The nineteenth case,14 miscellaneous income not otherwise described, had no reference to the ‘full amount’.

The 1803 Act, Its Successors of 1805 and 1806, and its Re-establishment in 1842 The Act reimposing an income tax, the Income Tax Act, 180315 (‘the 1803 Act’16) was, as ‘every schoolboy knows’, the work of Addington, and its main features distinguishing it from Pitt’s 1799 Act were the use 13 In fact the ‘succeeding year’ could be a future year, ie the year succeeding the year for which the tax is imposed rather than the year succeeding the preceding year. 14 In the Schedule to the 1799 Act, there is no expressly listed nineteenth case. However, there is a Part IV coming after the eighteenth case which contains the rules for ‘Income not falling under any of the foregoing Rules’. 15 43 Geo III c 13. 16 From here on, references to a ‘[Year] Act’ are to the Income Tax Act of that year, or, in the case of the 1970 and 1988 Acts, the Income and Corporation Taxes Act of that year.

What is the ‘Full’ Amount? 231 of ‘stoppage at source’ to ensure greater compliance and the creation of the modern Schedular system, which lasted until the Corporation Tax Act 200917 finally abolished it. It is with the Schedules of income and the computational rules in them that we are concerned here. Schedule A No I (called ‘Head I’ etc here) in the 1803 Act had no reference to ‘full’. This seems to be because Head I is exclusively based on a notional rack rent like the first Case of the 1799 Act, where equally there was no ‘full amount’. The computational rules for certain sorts of income by reference to an actual rent reserved, which in the 1799 Act did contain ‘full amounts’, disappeared in the 1803 Act. In Schedule A Heads II and III the amount of income charged each year is the ‘full amount’ for ‘one year, or the average amount for one year of the profits received therefrom, within the respective times herein limited’. Those ‘times’ varied according to the type of profits: in some cases it was three, in others five or seven, years, averaged. In some cases it was a simple previous year basis (tithes and fines in Head II, money in lieu of tithes, quarries and works of various kinds in Head III). It should be noted that the ‘full amount’ applies only to the simple charge on the amount for one year and not on the average basis. Compare this with the ninth and tenth cases of the 1799 Act, which had no reference to ‘full’: the difference is that most of the now separately enumerated concerns had some likeness to a trade and so the computational rules followed closely those for Case I of Schedule D (as to which see below). Tax under Schedule B was charged on the ‘full amount of the annual value’. This is a term not found in the 1798 or 1799 Acts. The ‘full amount’ was subject to a deduction of one-eighth. This rule is found in the charging section for Schedule B, while the computational section contains no ‘full’ words, only a rule applicable to market gardeners and hop growers allowing tax on the profits of one year or an average of three years (as with Schedule D). Compare this with the equivalent of Schedule B in the 1798 and 1799 Acts, which had one reference to ‘full amount’, in the fourth case in the 1798 Act, which had alternative bases—the ‘full amount’ and threequarters of the amount. This differs from the Schedule B rule in the 1803 Act, which, instead of charging seven-eighths of the annual value (following the 1798 Act), charges the full amount with an abatement or deduction of one-eighth. The charging section for Schedule D itself contains no reference to ‘full amounts’, but the Cases provide that income is computed: • on a sum not less than the full amount of X . . . upon a fair and just average of three years (Cases I and V), where X is the ‘balance of the 17

2009 c 4.

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profits or gains’ (Case I) or the actual sums annually received in Great Britain (Case V) on a sum not less than the full amount of the balance of the profits gains and emoluments within the preceding year (Case II) on a sum not less than the full amount of the profits or gains arising . . . within the preceding year (Case III Head 1 profits of uncertain value) on a sum not less than the whole and just sum and sums . . . which have been or will be received in Great Britain in the current year (Case IV) either on the amount of the full value of the profits and gains received annually, or according to an average of such period greater or less than one year as the case may require, and as shall be directed by the said Commissioners (Case VI)

In relation to Case I, the main rule did not apply if the trade was set up and commenced within that three-year period. In such a case, ‘the computation shall be made for one year on the average of the Balance of the Profits or Gains from the period of first setting up’, without the ‘full amount’ words.18 In Case III, it should be noted that the second rule (introduced in 1805) for interest on government securities, short interest and discounts did not have the full amount words. Before leaving 1803–42, it should be noted that neither the charge under Schedule C nor that under Schedule E referred to a ‘full amount’. The various Acts from 1803 to 1842 did, however, contain in Schedules to the Acts the form of return to be made for particular purposes, and in these there are descriptions of the various types of income for which a return is required. In Schedule G to the 1803 Act there is what is in effect a template for the return form. This does not mention ‘full amount’ at all in relation to the descriptions of income to be returned, but the declaration at No 6 made by each of the persons liable to make a return refers to the ‘full amount of my profits or gains estimated according to the Directions and Rules of the above mentioned Act’. This means estimated in accordance with all the Schedules, not just those that use the ‘full amount’ in their rules. Finally, it should be noted that in the 1806 Act a third Head of Case III was formed to cover cattle and milk dealers, and allowed a charge on such further Sum thereon, as, together with the Charge in respect of the Occupation of the said Lands, shall make up the full Sum wherewith such Trader ought to be charged in respect of the like Amount of Profits charged according to the First Rule in this Case. (emphasis added)

18 Where the trade was set up within the year of assessment itself, the basis of assessment in Case VI was applied (current year basis), based on ‘full value’ not ‘full amount’.

What is the ‘Full’ Amount? 233 I assume that the extra charge is for a year, as in Schedule B, and there is no option to average as in Case I. ‘Full’ here seems to be emphasising that the understatement of profits, even if not by design or fraud, does not amount to fulfilling the requirement to compute the amount on which a person ought to be charged. It is in effect simply saying that a trader whose profits do not derive directly from land because he is a dealer in the produce of the land, not just a producer, should really be taxed under Case I, because the charge under Schedule B will be less that the Case I profits would have been.

DE V E L OP M E N T OF T H E C H A R GING A ND C O M P U TAT I ONA L R U LES A F TER 1842

Cases I and II of Schedule D The basic computational rule for Case I (Trading profits) has remained constant through the 1918 Act to the present day. In FA 192619 it was amended to become a preceding year rule (and so brought Case II into line with it). That 1926 change, made in section 29(1), was a masterpiece of legislation by reference, and by reference to nearly the whole of the Schedule D rules for the basis of computation: Such enactments in the Income Tax Acts as provide that income tax under Schedule D shall in certain cases be computed on the full amount of the balance of the profits or gains, or on the full amount of the income, upon an average of three years, and so much of Rules 1 and 2 of the Rules applicable to Case IV of Schedule D as provides that income tax under that Case shall be computed on the full amount of the income which arises, or which has been or will be received, in the year of assessment, shall cease to have effect.

This is neatly reflected in the 1952 Act, where section 127 (headed ‘Computation of profits under Case I or II normally to be on profits of previous year’) provides: (1) Subject to the provisions of this and the three next following sections, tax shall be charged under Case I . . . of Schedule D on the full amount of the profits or gains of the year preceding the year of assessment.

It should be noted, however, that in the 1952 Act the reference to ‘computed’ that was in all the previous Acts from 1803 has gone from the ‘full amount’ provision (‘computed’ is to be found much later at section 137 of the 1952 Act—the computational rules for Schedule D

19 16 & 17 Geo V c 22. This Act made a number of major changes to the basis of charge, moving from three-year (and other) averages to a preceding year basis for most types of income.

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Cases I and II20). This layout was followed, with immaterial drafting changes, in the 1970 and 1988 Acts, where the relevant provisions were sections 115(1) and 60(1). The Finance Act 199421 introduced the self-assessment system, and to that end imposed income tax on a current year basis. Section 60(1) was substituted so as to read ‘Subject to subsection (2) below and section 63A, income tax shall be charged under Cases I and II of Schedule D on the full amount of the profits or gains of the year of assessment’, and the sidenote to section 60 became ‘Assessment on current year basis’. It was rewritten in ITTOIA as section 7(1) so ‘Tax is charged under this Chapter on the full amount of the profits of the tax year’.22

Case III of Schedule D The computational rules for Case III in the 1842 Act referred to the ‘full amount’ directly in the case of the first head (uncertain profits) and indirectly in the third (cattle and milk dealers). By 1918 uncertain profits had disappeared, and there was a list consisting of interest of all kinds, annuities and annual payment and discounts. The computational rules in Rule 2 of Case III included the ‘full amount’ in both legs—the new commencement leg and the ongoing leg. These two remained constant in relation to Case III up to and including section 64 of the 1988 Act. The rewriting of section 64 in FA 1994 led to just the single rule for the current year still requiring the ‘full amount’.

Cases IV and V of Schedule D In relation to Cases IV and V, FA 191423 introduced the arising basis for Case IV and for dividends and rents in Case V (except where the taxpayer was not domiciled in any part of the UK). Thus, in both Cases there was a ‘full amount’ rule for both remittances and arising income. (Previously Case V had a ‘full amount’ rule, while Case IV had a ‘whole sums’ rule, both only on remittances.) This amended pattern for Cases IV and V continued through the 1918 to 1988 Acts (the latter including as amended by FA 1994). 20 The 1952 Act is the first to disentangle the ‘Rules’ applying to Cases I and II. In 1918 and previous Acts the ‘Rules’ contained a jumble of computational rules, rules about who is assessed, rules about losses, etc. The hand of Sir John Rowlatt who drafted the 1952 Act is apparent. 21 1994 c 9. 22 The reference to ‘or gains’ was removed by Finance Act 1995, and ITTOIA changed ‘year of assessment’ to ‘tax year’. 23 4 & 5 Geo V c 10.

What is the ‘Full’ Amount? 235 Until 1926 Case IV was charged on a current year basis, and Case V was on a three preceding years average basis, but in FA 1926 both were put on a previous year basis. This lasted until FA 1994, when both (sharing as they did a single basis period provision) were put on a current year basis.

Case VI of Schedule D Case VI changed in 1918 to a conventional ‘full amount’. Rule 2 Case VI provided that: The computation shall be made, either on the full amount of the profits or gains arising in the year of assessment, or according to an average of such a period, being greater or less than one year, as the case may require, and as may be directed by the Commissioners.

This remained constant in FA 1926 and the 1952 to 1988 Acts. Finance Act 1994 substituted24 a new section 69 of the 1988 Act with the average rule dropped. In ITTOIA the rules for Case VI, so far as not dealing with specific provisions imposing a Case VI charge, emerged as section 688 (miscellaneous profits).

The ITTOIA Multiplication ITTOIA (and to a lesser extent Income Tax Act (ITA) 2007) introduced a plethora of ‘full amounts’ in cases where income that was previously within Cases III, IV or V (and, in some cases, VI) is described and charged separately, and still includes the remittance basis cases. They are: • in ITTOIA, sections 370 (Interest), 403 (Foreign dividends), 424 (Annuities), 428 (Deeply discounted securities), 553 (Certificates of deposit), 556 (Guaranteed return from derivatives), 572 (Sale of coupons), 580 (Royalties and other intellectual property), 585 (Know-how), 610 (Film income—non-trade), 615 (Telecommunications income—non-trade), 657 (Foreign estate income), 684 (Annual payments) and 832 (Income charged on the remittance basis). • in ITA 2007, sections 617 (Accrued income profits), 758 (Artificial transactions in land) and 776 (Sale of occupation income). By contrast, in Part 4 of ITTOIA the charging section for Chapters 3 (UK dividends), 5 (Stock dividends), 6 (Released close company loans), 9 (Gains 24

S 207.

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on life assurance policies) and 10 (Distributions from unauthorised unit trusts) do not charge the ‘full amount’ of the gains as income. This reflects the fact that the previous charge was under Schedule F (UK dividends) or under section 1 of the 1988 Act (income not within any Schedule— the rest), both of which had no ‘full amount’ rule. The absence of ‘full amount’ in Chapter 9, however, disguises the fact that some charges on life assurance policies were within Case VI of Schedule D, which had a ‘full amount’ rule, now reflected in section 688 ITTOIA (miscellaneous income not otherwise charged)

Income from Land (Schedules A and B) Schedule A Head II was moved to Case III of Schedule D by section 28 of, and Schedule 3 to, FA 1926 and Head III to Case I of Schedule D in the same year by the same provision, and the Rules of those cases would be applied thereafter. Head I remained based on annual value without reference to the ‘full amount’ until its repeal in FA 1963. It was replaced by Case VIII of Schedule D but restored in 1970 as Schedule A; in neither case was there a ‘full amount’ phrase—the charge was on the rents to which the owner was entitled in the year. Change came in 1995, when Schedule A was rewritten to adopt Case I Schedule D rules, and here the ‘full amount’ phrase appeared in section 21 of the 1988 Act as substituted: ‘(2) Income tax under Schedule A is charged on the full amount of the profits arising in the year of assessment’. This became section 270 ITTOIA: ‘(1) Tax is charged under this Chapter on the full amount of the profits arising in the tax year’. But ITTOIA added more ‘full amounts’ to the property income charging rules: sections 270, 337 (Mineral rights), 347 (Electric line wayleaves) and 351 (Post-cessation receipts) As for Schedule B, the 1918 Act contained neither the full amount reference nor the one-eighth deduction that were features of the 1842 Act and was concerned solely with an ‘assessable value’ based on the annual value (twice that value in the 1918 Act and the actual value in the 1952 Act onwards until Schedule B’s disappearance.)

Income from Employments and Offices (Schedule E and its Predecessors) Schedule E had no ‘full amount’ in Acts up to the 1842 Act, nor in the 1918 and 1952 Acts. It was, however, substantially rewritten by paragraph 1(1) Schedule 3 FA 195625 so that tax under Schedule E was expressed 25

4 & 5 Eliz 2 c 54.

What is the ‘Full’ Amount? 237 to be chargeable on ‘the full amount of the emoluments falling under [the relevant] Case, subject to such deductions only as may be authorised by the Tax Acts’. The FA 1956 rule was consolidated in section 183 of the 1970 Act, then section 131 of the 1988 Act and section 15 Income Tax (Earnings and Pensions) Act 2003,26 where it remains. ITTOIA added a few more ‘Schedule E’-type ‘full amounts’, in sections 613, 631 and 635. The change in section 613(3) is notable: (3) The full amount of the annuity arising in the tax year is to be calculated on the basis that the annuity is 90% of its actual amount, unless as a result of subsection (4) the annuity is charged in accordance with section 832 of ITTOIA 2005 (relevant foreign income charged on the remittance basis)’. [my emphasis]

A further provision relating to Schedule E was found in paragraph 4 Schedule 9 to the 1952 Act: (1) If, at any time, either during the year of assessment or in respect of that year, a person becomes entitled to any additional salary, fees or emoluments beyond the amount for which an assessment has been made upon him, or for which at the commencement of that year he was liable to be charged, an additional assessment shall, as often as the case may require, be made upon him in respect of any such additional salary, fees or emoluments, so that he may be charged in respect of the full amount of his salary, fees or emoluments for that year.

This dates from section 53 Income Tax Act 185327 and was repealed by FA 1956. It bears an interesting resemblance to the rules for milk and cattle dealers in No 3 of Schedule A in the 1806 and 1842 Acts.

Total Income We saw that in the 1803 to 1842 Acts there was a return of all types of income, in Schedule G. It reappeared in the 1918 Act as Schedule 5, the term ‘full amount’ appearing only in the same places as in 1842, though with the provisions relating to Cases IV and V amended to reflect the FA 1914 changes to those cases. The Schedule was amended again to reflect the 1926 changes, the changes being made by a statutory instrument, the Income Tax (Schedule V, Amendment) Order 1927.28 But the Schedule, insofar as it listed the income to be included (other than under No 1 of Schedule A), was repealed from 1928 by Schedule 6 to the Finance Act 1927.29 26 27 28 29

2003 c 1. 16 & 17 Vict c 34. The power for this was in s 36(2) Finance Act 1926. 17 & 18 Geo V c 10.

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Section 120 ITA 1842, on appeals to General Commissioners for Schedule (D), permitted those Commissioners to send for details of ‘the amount of the balance of . . . profits and gains’, not the ‘full amount’. This power resurfaced as section 139 of the 1918 Act, but here, in subsection (1)(c), the information was ‘the amount of his profits or gains’ (omitting the ‘balance’, even though that was retained in Rule I of Case I and of Case II). Information of that particularity30 was absent from section 12(3) Income Tax Management Act 1964,31 replacing section 54 of the 1952 Act.

Double Taxation Agreements A number of the UK’s double taxation agreements make special provision for the remittance basis applying to foreign income where the taxpayer is not domiciled in any part of the UK. A typical such provision is Article 29 of the UK–France Double Tax Agreement (DTA): Miscellaneous Rules 1. Where under any provision of this Convention any income is relieved from tax in a Contracting State and, under the domestic law in force in the other Contracting State, a person, in respect of that income, is subject to tax by reference to the amount thereof which is remitted to or received in that other State and not by reference to the full amount thereof, then the relief to be allowed under this Convention in the first-mentioned State shall apply only to so much of the income as is taxed in the other State. This provision shall not apply to income referred to in Articles 7 and 11.

This usage dates back to at least 1945, where it is found in the 1945 UK–USA DTA32 in Article II(4). These provisions of treaties seem to me to have overlooked that the charge on the remittance basis, as with the arising basis, is on the ‘full amount of the income’.33

‘F U L L A MOU NT ’: OTH ER TA XES

A number of other taxes on income or profits have been imposed by the UK legislature, usually in time of war. The taxes usually rely on the rules of income tax to provide the computation of their tax base. To go

30 31 32 33

I refuse to use the modish term ‘granularity’. 1964 c 37. S R & O 1946 No 1327. As does Lord Justice Scrutton in Singer v Williams. See below.

What is the ‘Full’ Amount? 239 through each of them would be laborious in the extreme, so this part of the chapter simply picks out the messages to be gleaned from them. Excess Profits Duty The main computational provision, section 40 Finance (No 2) Act 1915, charges the tax on ‘The pre-war standard of profits for the purposes of this Part of this Act’ and the detail of the computation of those profits is in the fourth Schedule, where Paragraph 1 of Part I provides that ‘The profits shall be taken to be the actual profits arising in the accounting period; and the principle of computing profits by reference to any other year or an average of years shall not be followed’. Not, it should be noted, in section 40(2) the ‘full’ amount of the profits arising from the trade, nor in paragraph 1 the ‘full amount’ of the actual profits—only the ‘actual’ profits. Corporation Profits Tax Same type of provisions as for EPD; again, no ‘full amount’. Profits Tax (National Defence Contribution) Same type of provisions as for EPD; again, no ‘full amount’. Excess Profits Tax & Armaments Profits Duty Same type of provisions as for EPD; again, no ‘full amount’. Excess Profits Levy Same type of provisions as for EPD; again, no ‘full amount’.

Corporation Tax Section 49(3) Finance Act 196534 imposed the charge to corporation tax (CT) ‘for any financial year . . . on profits arising in that year’. No ‘full amount’ here, but section 51(1) said: 34

1965 c 25.

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Except as otherwise provided by this Part of this Act, corporation tax shall be assessed and charged for any accounting period of a company on the full amount of the profits arising in the period (whether or not received in or transmitted to the United Kingdom) without any other deduction than is authorised by this Act.

The sidenote was ‘Basis of, and periods for, assessment’. Note that in the Profits Tax (which CT replaced) the expression used for the current period basis was the ‘actual’ profits. These provisions of FA 1965 were consolidated in the 1970 and 1988 Acts without material amendment. Then CTA 2009, rewriting the main provisions of corporation tax, provided: 8 How tax is charged and assessed (1) Corporation tax for a financial year is charged on profits arising in the year. (2) Corporation tax is calculated and chargeable, and assessments to corporation tax are made, by reference to accounting periods. (3) Corporation tax which is assessed and charged for an accounting period of a company is assessed and charged on the full amount of profits arising in the accounting period. (4) Subsection (3) is subject to any contrary provision in the Corporation Tax Acts.

This reproduces section 49(1) and (3) as well as section 51(1) FA 1965. However, the 1970 Act also included a specific CT rule in the Schedule D rules that was not in FA 1965: 129.—(1) In accordance with Part XI of this Act (company taxation), for the purposes of corporation tax for any accounting period, income shall be computed under Cases I to VI of Schedule D on the full amount of the profits or gains or income arising in the period (whether or not received in or transmitted to the United Kingdom), without any other deduction than is authorised by the Corporation Tax Acts.

This became section 70(1) of the 1988 Act. The provision seems to duplicate what is in section 12(1) of that Act and serves no useful purpose—it was not rewritten by CTA 2009, the Explanatory Note for section 8 of which says: Section 8: How tax is charged and assessed 57. This section sets out how corporation tax is charged and assessed. It is based on section 8(3) and section 12(1) of ICTA. 58. The reference to deductions in section 8(3) and section 12(1) of ICTA and the words in brackets in section 12(1) ‘(whether or not received in or transmitted to the United Kingdom)’ have not been rewritten since they do not add anything substantive to these provisions. There are rules elsewhere about what deductions can be made and this section together with section 5 make it clear that the charge is on profits wherever arising.

What is the ‘Full’ Amount? 241 59. Section 70(1) is not rewritten in this Act but is reflected in subsection (3) of this section which contains the general rule about the basis of assessment.

The drafters of this Note therefore assumed that the ‘no deduction’ rule is unnecessary, so to divine the implication of section 51(1) FA 1965 we must look elsewhere. In fact, if one ignores the ‘no deduction’ rule, then section 51(1) stands as a single proposition containing a meaningless modifier, ‘whether or not’. This type of provision in legislation adds nothing as it simply provides that the rule it modifies operates if either X is the case or not-X is the case. It is an example of rhetorical emphasis designed to explain to the world that there has been a major change—here that the remittance basis is abolished for corporation tax. In my view, in section 51(1) ‘full amount’ merely reinforced the fact that the whole of the profits arising and not just those remitted are taxable. It follows the wording of the parts of Case IV and V which are based on the full amount of the income arising and explicitly ignores the other use of ‘full amount’ in those Cases—the full amount of the sums received, etc. If one removes the words in parentheses as well as the no deduction rule, section 8(3) is redundant, its job being done by section 8(1). Section 51(1) FA 1965 is odd in that it brings in the ‘full amount’ in respect of income chargeable under Schedule A, Schedule B, Schedule C and Case VII of Schedule D, none of which at the time had a ‘full amount’ rule, and in respect of chargeable gains, which did not have a ‘full amount’ rule either.

T H E DE D U C TIONS PR OVISO

We have seen that the earliest computational provisions for Schedule D, including those for Case I, had a rule about deductions. But they were not alone.

The 1803 to 1842 Acts In Schedule A Heads I–III the rule is to be found in Rule 14 of Head IV—‘No Deduction from the Estimate or Assessment on any Lands, Tenements, Hereditaments, or Heritages shall be allowed in any Case not authorized by this Act’. The rule on deductions is therefore divorced from the ‘full amount’ Rule found in Head II and III. In Schedule B, as we have seen, there is a provision allowing a deduction in certain cases—‘there shall be deducted out of the Duties contained in this Schedule a Sum not exceeding One Eighth Part thereof . . .’;

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It seems that what ‘full’ is therefore doing in Schedule B is emphasising that the whole rack rent for one year is taken as the initial measure and then one-eighth is subtracted as a form of abatement or deduction. This rule was different from the various provisions in relation to land in the 1798 and 1799 Acts, which charged a proportion only of the rent reserved. For Schedule C, the rule against any deduction was in section LXVI of the 1803 Act,35 the main rule charging the tax under that Schedule: Upon all Profits arising from Annuities, Dividends, and Shares of Annuities, payable to any Person or Persons, Bodies Politick or Corporate, Companies or Societies, whether Corporate or not Corporate, out of any Publick Revenue, there shall be charged for every twenty Shillings of the annual Amount thereof the Sum of one Shilling without Deduction . . .

In Schedule D, each of Cases I to V has its own rule (see Table 2). In each case, the same Rule as dealt with deductions also contained the ‘full amount’ words (where relevant—not in Case IV). However, there was no deductions rule in Case VI. In Schedule E there was no ‘full amount’, but there was a deductions rule:

Table 2 Case I

Case II

Case III

Case IV

Case V

35

Duty assessed, charged and paid without other deduction than is hereinafter allowed Rule 1 Duty computed at a sum . . . without any deduction (1803) (after making such deductions, and no other, as by this Act are allowed) (1805, 1806, 1842) Rule 2 Computed at a sum . . . to be paid on the actual amount of such profits or gains, without any deduction Rule 1 Duty computed on a sum . . . without any deduction or abatement Rule 1 Duty computed at a sum . . . without other deduction or abatement than is herein-before allowed in such Case [the First] Rule 1

In 1805 this charge was in s I (1), as it was in the 1806 and 1842 Acts.

What is the ‘Full’ Amount? 243 after deducting the Amount of Duties or other Sums payable or chargeable on the same by virtue of any Act of Parliament, where the same have been really and bonâ fide paid and borne by the Party to be charged . . .

If this were not enough, section CLIX (159) of the 1842 Act36 said: CLIX. And be it enacted, That in the Computation of Duty to be made under this Act in any of the Cases before mentioned, either by the Party making or delivering any List or Statement required as aforesaid, or by the respective Assessors or Commissioners, it shall not be lawful to make any other Deductions therefrom than such as are expressly enumerated in this Act . . .

Despite the reference to Cases, this rule applied to the entire Act and all the Schedules. What this account of the 1803 to 1842 Acts provisions shows is that it is only in Schedule D that the ‘full amount’ and the proviso against deductions were linked so closely as to appear in the same sentence in the Act. In Schedule A there was a ‘full amount’ rule in Heads II and III, but the ‘no deductions (unless authorised)’ rule was in Head IV in paragraph 14. In Schedule B there was a specific deduction rule but no ‘full amount’, while in Schedule C there was a specific ‘no deduction’ rule but no ‘full amount’. Case VI of Schedule D had a ‘full amount’ rule but did not have a deduction rule, while Schedule E had no full amount but did have a deduction rule.

2. The 1918 Act Onwards Going forward from 1842, we find in the 1918 Act: • Schedule A: the no deduction rule has gone. • Schedule B: the 1/8th deduction is replaced by a multiplier of the Schedule A annual value (1/3 in 1918). • Schedule C: the rule has gone. • Schedule D: the no deduction rule for Cases I and II is now Rule I of the Rules applicable to both Cases, whereas the ‘full amount’ is in Rule 1 of each of the Rules applicable to the single Case; the Case III rule is in a separate sub-paragraph of the same Rule, (1), while for Cases IV and V the same Rule for each Case now contains a specific deduction rule (introduced in FA 1914). • Schedule E: rules remain the same as in the 1842 Act.

36 To the same effect, ss CXCVIII (198) of the 1806 Act, CCV (205) of the 1805 Act and CCXIII (213) of the 1803 Act. In Schedule F of the 1803 Act a referee appointed to settle Contributions under this Act was obliged to swear: ‘I, AB, do swear, or affirm . . . in investigating the same, I will allow no Deductions to be made which are directed not to be allowed by the said Act; So help me GOD’.

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• The general no deduction unless authorised Rule in section 159 of the 1842 Act is section 209 of the 1918 Act. In the 1952 Act there is no real change to the position for Schedules A to D or the general rule. For Schedule E the position in 1952 was the same as in 1918, but by paragraph 1(1) Schedule 2 FA 1956 the ‘full amount’ rule and the ‘no deduction except as authorised’ rule were included in that Schedule for the first time. In the 1970 Act in Schedule D, in Cases I and II, there is no ‘no deduction’ rule. Otherwise no substantive change, save for one significant change related to the rule for foreign pensions in Case V: section 22(1) Finance Act 197437 provided: In section 122 of the Taxes Act paragraph (c) of subsection (2) (remittance basis for income arising from foreign pensions) shall be omitted; but in charging any income arising from a pension which would have fallen under that paragraph a deduction of one-tenth of its amount shall be allowed unless it is the income of a person falling under paragraph (a) of that subsection.

In the 1988 Act there is no substantive difference from the 1970 Act, but in the 1988 Act section 22(1) Finance Act 1974 was recast (in section 65(2)) to—‘Income tax chargeable under Case IV or V of Schedule D on income arising from any pension shall be computed on the amount of that income subject to a deduction of one-tenth of the amount of the income’. This does not use the ‘full amount’ term (though there is no reason why it should not, as the full amount has been used in cases where deductions of a specified nature are allowed from the full amount, as well as where they are not.) ITTOIA removed the ‘no deduction’ rule for Case III and also the general rule, which was by then in section 817 of the 1988 Act, as paragraph 327 of Schedule 1 made the rule applicable for corporation tax only.

‘F U LL A MOU NT’: OT H ER U K L E GISLAT IVE PR OPOSA LS

Over the centuries, committees and commissions have reported, and White Papers have been published, proposing changes to the UK tax system and including draft legislation which would, if enacted, have affected the ‘full amount’ wording. In 1935 the Macmillan Committee on the Codification of the Income Tax published a draft bill with copious explanatory Notes. The Bill divided

37

1974 c 30.

What is the ‘Full’ Amount? 245 income into a number of Classes, of which Class D corresponded roughly to Cases I and II of Schedule D. The draft contains, at clause 21(1): ‘In the case of income of Class D the assessable income shall be the amount of the profits of the business carried on in the United Kingdom for the year of computation’. The Notes on this clause say: Clause 21 Subsection (1) line 2 ‘the amount’ The expression used in 1918, Schedule D, Case I, rule 1 is ‘full amount of’. It is considered that the word ‘full’ is unnecessary.

The comments of the officials of the Board of Inland Revenue make no mention of this omission. In April 1964 the government published a White Paper, ‘A Scheme for an Accounts Basis for Income Tax on Company Profits’.38 This also contained draft clauses, and in clause 1 it said: (1) Any assessment and charge to tax to be made under Case I of Schedule D on a company shall be made for an accounting period of the trade instead of being made for a year of assessment as required by section 3 of the Income Tax Act 1952, and shall be made on the amount of the profits or gains of that period computed according to the law applying to tax for the year in which the period ends; and sections 127 to 130 of that Act (period of computation of profits) shall not apply to the computation.

The Notes on [draft] Clauses do not comment on the omission of ‘full’.39 In December 1922 the government published the ‘Report of the Interdepartmental Committee on Income Tax in the Colonies not Possessing Responsible Government’.40 This report included a model tax ordinance for such colonies. The main charging and basis provisions of the draft ordinance were: 5. Income tax shall, subject to the provisions of this Ordinance, be payable at the rate or rates specified hereafter for the year of assessment commencing on () 1923 and for each subsequent year of assessment upon the income of any person accruing in, derived from, or received in, the Colony in respect of: (a) gains or profits from any trade, business, profession or vocation, for whatever period of time such trade, business, profession, or vocation may have been carried on or exercised; . . .

38

Cmnd 2347. The drafter was not obviously copying the Codification Committee’s approach generally, but he may have been aware of it. 40 Cmd 1788. 39

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6. Tax shall be charged, levied and collected for each year of assessment upon the chargeable income of any person for the year immediately preceding the year of assessment.

There is no reference here to the ‘full amount’.

T H E C A SE LAW

Case Law: Cases I and II A search in HMSO Tax Cases for ‘full amount of the balance’ (the phrase used in legislation up to the 1952 Act to describe the measure of profits in Cases I and II) or ‘full amount of the profits’ (used from the 1952 Act for Cases I, II and VI) leads to about 100 hits once duplications are omitted. In the vast majority, however, there is the same hit, which is a recitation of the relevant legislation containing the phrase ‘the full amount of the [balance of] profits and gains’, and this is simply a scene setter giving the relevant law to be interpreted. Where there is some discussion of the total section or subsection containing the ‘full amount’ words, then in the vast majority of cases the question at issue is what is meant by ‘[the balance of] profits or gains’ (sometimes also in the context of the words that permit no deduction unless authorised, or the significance of the temporal rule included in the wording of the relevant section or subsection). The cases where only the import of the word ‘full’ or the words ‘full amount’ is given any attention are few, though there are some. The first case to directly address the meaning of ‘full’ is CIR v Scottish Central Electric Power Co Ltd41 in the judgment of Lord Morison. In that case, the company owned land and buildings in Scotland, which it occupied for the purpose of its trade. Relief had been claimed and allowed from the Schedule A assessments on the property (based on the annual value) under Rule 4(1) of No V of Schedule A in respect of the owner’s rates (a peculiarly Scottish concept) charged on and paid by the company. The company contended that the owner’s rates so paid should also be deducted in computing its profits for purposes of assessment under Schedule D. In the Court of Session, Lord Morison said: It is, of course, absurd to say that any tax-payer, who deducts from his profits the amount of his rates twice over, is being charged Income Tax on the full amount of his profits. In my opinion, the principle of the tax is of universal application viz that it is the full amount of the statutory income which is chargeable to duty, and that, in every case, a double deduction of the same 41 15 TC 761. Not to be confused with CIR v Scottish Central Electric Power Co Ltd 13 TC 331 (although the cases are related).

What is the ‘Full’ Amount? 247 item of expense is necessarily prohibited, even in the case where the assessable income is charged under the two Schedules A and D . . . I think it is equally plain that the rules must be construed so as to give effect to the principle of the tax, viz that it is a tax upon the full amount of the business profits and not a tax upon a balance of profits brought out after a double deduction of an item of expenditure. Although the point was not argued to us, my impression is that this result also follows from an application of Section 208 of the statute of 1918, which corresponds with Section 188 of the statute of 1842.42

To put this statement in context, it should be noted both that Lord Morison was in a minority in the Court of Session and that in the House of Lords the majority (Lord Atkin strongly dissenting) found that the deduction was not allowable, following such cases as Strong & Co (Romsey) Ltd v Woodifield,43 on the basis that the rates were incurred in the capacity of landowner, not trader. They did not therefore need to discuss Lord Morison’s views on double deductions and ‘full amount’. There was, however, some obiter support for Lord Morrison by two of their Lordships, but they approved primarily of Lord Morrison’s point about double deductions not being authorised either by section 208 ITA 1918 or ‘the scheme of the Acts’. Undaunted, in FA Lindsay, AE Woodward and W Hiscox v Commissioners of Inland Revenue (the case being on whether illegal trading is taxable),44 Lord Morison said in the Court of Session: It is, in my opinion, absurd to suppose that honest gains are charged to tax and dishonest gains escape. To hold otherwise would involve a plain breach of the rules of the statute, which require the full amount of the profits to be taxed and merely put a premium on dishonest trading. The burglar and the swindler, who carry on a trade or business for profit, are as liable to tax as an honest business man, and, in addition, they get their deserts elsewhere.45

This view, not echoed by any of the other judges, seems to follow that same line of thought as was evident in Scottish Central Electric. It is saying that the fraudulent evasion of income tax by the omission of illegal profits from a return is a failure to comply with the computation rules for trading profits—and so it is, in a way. However, I suggest it does not help one to find out what ‘full amount’ means in the absence of evasion. In FS Securities Ltd v CIR,46 Viscount Radcliffe, considering the question whether tax law required the exclusion from a Case I computation of income from a trade of share dealing income including UK dividends which had separately been the subject to tax by deduction at source,

42 43 44 45 46

Ibid, 774–5. 5 TC 215. 18 TC 43. Ibid, 58–9. 41 TC 666.

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including where dividends were paid out of a taxed fund and so treated for tax purposes as an amount net of income tax, said: If one were asked the bare question whether in making up the trading account of such a man it would be right to bring in interest and dividends received on the stocks and shares that he was dealing in, I should think that the answer would certainly be Yes. In principle it seems to be the way to arrive at a full and fair statement of his profit or loss . . . What is material is to find out whether the theoretical method of composing the trading account, which I have just supposed, can possibly be adhered to, so far as interest and dividends are concerned, when the same individual has to strike the balance of his profits or gains for assessment under Case I of Schedule D of the Income Tax Act.

And later It is neither here nor there that in the words of Section 127 of the 1952 Act tax is to be charged under Cases I and II of Schedule D on ‘the full amount of the profits or gains’. That has no effect on the principle of computation. The rule of excluding income which has been assessed to tax ‘under its own title’ from insertion as an item in an assessment under Case I of Schedule D was recognised and given effect to by this House in the well known Salisbury House decision, (rents from land), and again by the Court of Appeal in Thompson v The Trust and Loan Co. of Canada, 16 TC 394 (interest on Government bonds). The principle is clearly stated in the first case in the speeches of Viscount Dunedin at page 308 and of Lord Atkin at pages 319–21, and in the second case in the judgment of Lord Hanworth, MR, at pages 406–7. I regard the decision in Hughes v Bank of New Zealand, [1938] AC 366, as an enforcement of the same principle.

It seems that Lord Radcliffe is using ‘full’ in the first quotation in a general way in relation to ‘normal commercial accounting’, and in the second is concentrating on the exercise of finding the ‘balance of profits and gains’, a computational exercise (as implied in the second quotation) to which the adjective ‘full’ in the statutory phrase adds nothing. A series of cases on stock have considered valuation methods which, while in conformity with normal or commercial practice in a particular industry, or generally, are not the ‘Revenue-approved’ lower of cost or market value. In BSC Footwear Ltd v Ridgway47 the House of Lords (not including Lord Radcliffe) had to consider whether the company’s particular method of valuing shoes below cost was appropriate for income tax purposes. They held (by 3–2) that it was not. It was in the Court of Appeal that the words ‘full amount’ first appear. Lord Justice Salmon opens by saying ‘This appeal raises the point as to whether or not the Appellants’ audited accounts for the year 1959 disclose the full amount, for tax purposes, of the profits or gains for that year’.

47

47 TC 495.

What is the ‘Full’ Amount? 249 This is a promising start, though in a sense it again is doing no more than recasting the statutory phrase for the Case I computation. Later he says: For upwards of 20 years prior to 1959 the eminent chartered accountants who audited the Appellants’ accounts have accepted the Appellants’ method described by my Lord, which I need not repeat. The auditors would certainly not have certified the accounts unless in their view these accounts had presented a true picture of the Appellants’ profits or gains. The Crown must equally have been satisfied during all those years that the Appellants’ method fairly revealed the full amount of the Appellants’ profits or gains for the years in question. The findings of the Special Commissioners show that there are many chartered accountants who agree that this method, approved for so long by the Crown and by the Appellants’ auditors, is unexceptionable. The Crown, however, claim that now at last they have seen the light. They have discovered that they erred for more than 20 years in accepting the Appellants’ method as correctly showing the Appellants’ full profits or gains for each of those lost years.

I suggest that both uses of ‘full amount’ here are no more than the judge describing the full statutory phrase in force for the years concerned (even though in the second instance he foreshortens it somewhat), and that for Salmon LJ the most important part of the statutory phrase in this case is ‘for the year of assessment’—or, as he actually says, ‘for the years in question’ and ‘for each of those lost years’. Stock valuation cases always involve a temporal issue. Valuation issues only arise if stock purchased in one year is still on hand unsold at the end of that year and the beginning of the next. So the question is how are the profits or losses that the company eventually makes on the sale of its stock allocated between the periods over which it is held? Is it right for stock to be written down in such a way that a false picture, say by way of loss in the first period, is created? It is the element of loss anticipation that caused the problem for BSC in the Court of Appeal and the House of Lords, as Salmon LJ soon makes clear: we are not concerned with whether the Appellants’ method of stock valuation is commercially sound and gives a fair picture of their trading results over the years. This is not challenged. The question for us is whether, taking the year 1959 in isolation, as we must, the Appellants’ method shows, for income tax purposes, the actual amount of profit made in that particular year’. [my emphasis]

In Threlfall v Jones and Gallagher v Jones,48 the Special Commissioner approached the issue by saying that ‘What has to be ascertained is “the full amount” of the profits or gains or losses arising in 1989–90’. The use of quotation marks around the full amount suggests that the phrase is what he is seeking to construe. However, he then goes on to say that 48

66 TC 77.

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In ascertaining them the correct principles of commercial accountancy have to be applied. The law of income tax applies the principle that neither profits nor losses should be anticipated. The correct principles of commercial accounting may have to yield to the law of income tax if they conflict . . .

This, again, is no more than a restatement of the customary view of what is meant by the statutory phrase. In the Court of Appeal there are three substantive judgments. That of Lord Bingham MR has become a much-cited classic, as in it he lays down the modern approach to the computation of trading profits and losses for income tax, stressing the primary importance of accounts drawn up in accordance with accepted principles of commercial accountancy and the difficulty with the notion that a non-statutory departure from the accounts can ever be justified, in the name of anticipation of loss or profit, or of the doctrine that ‘expenses lie where they fall’. However, he mentions ‘the full amount’ only in a recitation of the statutory phrase (here found in section 60(1) of the 1988 Act). Lord Justice Nolan mentions the ‘full amount’ phrase once, but in a context much relied on by the Revenue. After a discussion of the so-called ‘non-statutory principle’ that neither a profit nor a loss may be anticipated, he states: With great respect I would suggest that this [the non-statutory principle] might equally be described as a re-statement in a particular context of the statutory rule, in s 60 of the Act, that tax shall be charged ‘on the full amount of the profits or gains of the year’—no more and no less.

Sir Christopher Slade, in a shorter judgment agreeing with his two brethren, added this: In conclusion, I would stress that the reason why the courts rightly attach so much importance to accepted principles of commercial accounting in this context is, of course, that these principles will normally afford the surest means of ascertaining the true profits or losses of a trader, as the case may be.

This suggests that true profits, the accounting profits (subject to statutory adjustments) and the full amount of the profits are all one and the same thing (as, indeed, is ‘the true statement of the full profits for tax purposes’ as used by Knox J in Britannia Airways49).

Case Law: Not Cases I and II Case I and II cases are not the only ones in which the words ‘the full amount’ have been considered; a number of cases have looked at the similar terms in Cases III, IV, V and VI. 49

Johnston v Britannia Airways Ltd 67 TC 99.

What is the ‘Full’ Amount? 251 In Singer v Williams (7 TC 419) the Court of Appeal considered the effect on income from foreign shares of the Finance Act of 1914, which abolished the remittance basis for such income. It was pointed out that the words in FA 1914: Income Tax in respect of income arising from . . . shares in any place out of the United Kingdom shall, notwithstanding anything in the rules under the fourth and fifth case in section one hundred of the Income Tax Act, 1842, be computed on the full amount of the income, whether the income has been or will be received in the United Kingdom or not

meant simply that the whole amount arising and not merely the amount received in the UK was subject to income tax. As Scrutton LJ noted: In my view, the words of the Act itself ‘whether the income has been or will be received in the United Kingdom or not’ show that what Parliament was dealing with was the question of received income as distinguished from full income . . .

This seems, on the face of it, to be a rather neat of way of drawing the contrast, but the Court of Appeal appeared to be under a misapprehension over what ‘full’ means, as the Case V charging provision on ITA 1918 describes both the arising and the remittance bases in terms of the ‘full amount’, arising or received. This was picked up in the House of Lords where Viscount Cave said An argument was founded on the direction contained in Section 5 of the Act of 1914 that the tax should be computed on the ‘full amount’ of the income, whether received in the United Kingdom or not; and it was suggested that the expression ‘full amount’ there used meant the actual income for the year. But the expression ‘full amount’ is found in the rules relating to Case V in the Act of 1842 as well as in other parts of the Income Tax Acts; and no inference can be drawn from the use of the same expression in Section 5 of the Act of 1914.50

When we come to Lord Greene MR’s judgment (the judgment of the Court) in Mitchell v Gibson (where the different ways of using ‘full amount’ in Cases IV and V are discussed in relation to the FA 1926 rules moving from the three-year average and current year to a common previous year basis) we can see a real consideration of the word ‘full’ in relation to Cases IV and V. The issue in the case was whether a compendious reference in section 29(1) FA 1926 (change of basis period from three preceding years average or current year to preceding year) to the case where a person was taxed on the ‘full amount of the balance of profits or gains, or on the full amount of the income’ also covered the case where, as in Rule 2 of Case V, a person was taxed on the ‘full amount of the sums received in the United Kingdom’ (ie the remittance 50 The correction by Viscount Cave did not prevent the drafters of Double Taxation Agreements making the same erroneous contrast as Scrutton LJ in all of the UK’s comprehensive DTAs in the ‘remittance basis’ article or paragraph.

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basis), despite special rules for Case IV specifically catering for ‘the full amount of income which arises, or has been received’. Mr Gibson argued that it did not, so that the remittance basis for Case V (but not for Case IV) remained on a three preceding years average basis, the only type of income so to do if he were right. Lord Greene MR, giving the judgment of the Court in favour of the Crown, embarked on a purposive construction which took into account the entire context of the extremely convoluted subsection, and related it to the evident purposes of the section as whole. He was making up for the fact that draftsman in the opening part of section 29(1) did not specifically mention all three of the cases of ‘full amounts’ which had been on the three preceding year average basis, but only two of them, and not including the remittance basis ‘full amount’. And he did not stop there. He added ‘In the proviso itself “full amount of the income” and “income” are used indifferently as meaning the same thing, which show that no particular importance is to be attributed to the word “full”’. The question that arises about this is: are these remarks intended to apply to all uses of ‘full amount’ in relation to the basis of computation in the rest of the body of tax law? The next non-Case I and II case to consider what ‘full’ means is Ockendon v Mackley.51 In this case, the taxpayer had rents from overseas but could not bring himself within any of the three enumerated types of deduction available against Case V income in respect of interest he had paid on borrowings to acquire the property. His counsel argued in the High Court that the ‘full amount’ of income must be struck after the deduction of those expenses which are allowable on ‘commercial principles’. Nourse J dealt with this argument so: Section 122(1) both refers to the full amount of the income and either contemplates or provides that certain deductions can be made from it according as to whether it is or is not received in the United Kingdom. Once you have made those deductions you have the annual profits or gains for the purposes of the basic charge in s 108.

The final case that touches on the issue is Jones v O’Brien.52 There, Mr O’Brien53 appealed against an assessment on Irish dividends under Case V which was, in accordance with the special rules for such dividends, actually made during the year of assessment concerned. Hoffmann J held this was not possible for a number of reasons, the final one of which was that In my view the imposition of liability to tax on the full amount of the income arising in a year necessarily entails that the year has elapsed. Until then the 51 52 53

56 TC 2. 60 TC 706. Who was a Special Commissioner.

What is the ‘Full’ Amount? 253 profits in respect of which he is liable to tax will not exist and therefore no charge to tax can attach.

This focuses more on the words ‘in the year’ than ‘full’, but clearly at the time the assessment was made the taxpayer may not have received all, ie the full amount, of the income that would arise to him in the year. So neither the Case I and II cases, dealing with the ‘full amount of the [balance of the] profits or gains’, nor the Cases III–VI cases, dealing with ‘the full amount of the income’, tell us a great deal about the significance of the word full. There is, however, a case on a rather peripheral point which may point the way. In Kennard Davis v CIR,54 rules relating to the computation of the amounts liable to Super-tax were under consideration. Section 15(4) FA 1920 provided that In estimating the total income of any individual for the purpose of super-tax, the amount of any earned income shall be taken to be the full amount of that income without the deduction of any allowance under this Part of this Act, and section five of the Income Tax Act, 1918, shall have effect accordingly.

Commenting on this, Lord Sterndale MR (in the Court of Appeal) said: Section 16 is the one that provides for a deduction or allowance in respect of earned income. It is to this effect: ‘For the purpose of ascertaining the amount of the assessable income of an individual for the purpose of income tax, there shall be allowed in the case of earned income a deduction from the amount of that income as estimated in accordance with the provisions of the Income Tax Acts of a sum equal to one-tenth of the amount of that income, but not exceeding in the case of any individual two hundred pounds’. The argument, as I follow it, upon that sub-section (4) is this. But for Subsection (4) the taxpayer would have a right to a deduction or allowance—I do not really care which you call it—of one-tenth of his earned income. Subsection (4) provides that in returning his total income for Super-tax he shall not be entitled to that one-tenth deduction but he must return his earned income in full’.

So the significance of ‘full’ here is that there are no deductions, reductions or allowances to be made from the amount concerned. Is this the true meaning of ‘full’?

C ONC LU SIONS

From the previous parts of this chapter, we can see that there has been continuous and consistent use of ‘the full amount of [the balance of] the

54

8 TC 341.

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profits [or gains]’ of a trade55 from 1798 to 2005 (and currently). There has been continuous and consistent use of the ‘the full amount of the income’ in respect of one or more at least of the types of income to which Schedule D applied before ITTOIA 2005. Despite this, reaching a single conclusion on the meaning of ‘full’ is bedevilled by an apparent lack of consistency in the usage, both within an Act and across time. Consistency of usage was certainly not a feature of laws enacted before the establishment of the Office of the Parliamentary Counsel in the mid-nineteenth century, and usages enshrined in the series of Acts from 1798 to 1842 were not lightly discarded by Parliamentary Counsel in the 1918 consolidation that predated the Consolidation of Enactments (Procedure) Act 1949. Looking at the 1798 and 1799 Acts, we can see that there are numerous inconsistencies between: • ‘full’ and synonyms of ‘full’ in the same • the use of ‘full’ and its absence within the same Case • similar subject matter in different Cases. The only real conclusion that can be drawn from the 1798 and 1799 Acts is that the ‘full amount’ in land cases seems to be reserved (no pun intended) for the case where the measure is simply a full year’s rent, no more and no less, and in other cases only where the measuring period is exactly one year and not an average of more than one year. Looking at the ‘modern’ Acts from 1803 to the present day, there are inconsistencies between: • ‘full’ and synonyms of ‘full’, both between Cases of a Schedule in the same Act, and also between consecutive Acts: for example, in Case IV of Schedule D ‘whole sums’ is used rather than ‘full amount of the sums’ in the 1803, 1805, 1806 and 1842 Acts. The change to ‘full amount’ came with Finance Act 1914 • ‘full’ and its absence within the same Case. One such inconsistency is no longer there. In the 1803 to 1918 Acts ‘full’ is used of an average, by contrast to the position in the fifteenth and seventeenth Cases in the 1799 Act, but in the later Acts the average basis is the only one • similar subject matter in different cases • between the descriptions in the rules for Schedule D and those for Schedule D income in Schedule G (Form of Return) to the Acts from 1803 to 1918. Further inconsistencies can be seen in the progression over time of the use of ‘full amount’ or the lack of them for the same type of income. In Schedule E there was no ‘full amount’ until 1956. 55 Though from the 1799 to 1842 Acts the actual words were ‘not less than the full amount’.

What is the ‘Full’ Amount? 255 Consistency of usage was certainly not a feature of laws enacted before the establishment of the Office of the Parliamentary Counsel in the mid-nineteenth century, and usages enshrined in the series of Acts from 1798 to 1842 would not be lightly discarded by Parliamentary Counsel in the 1918 consolidation that predated the Consolidation of Enactments (Procedure) Act 1949. Consideration of the ‘full amount’ must then start by considering usage in taxing Acts between 1798 and 1806. The 1803 Act, the first ‘modern’ Act on which all subsequent Acts up to ITTOIA have been based is no different from the early nineteenth century norm. It used ‘full’ in relation to ‘amount’ in each of the first, second, third and fifth cases of Schedule D, and it is of course this usage with which we most concerned. It did not, however, just use ‘full amount’ in these cases. There seem to be at least two ways in which ‘full’ is used elsewhere in the 1803 Act in relation to ‘amount’. In the ‘Rules for estimating the annual Value of Properties before described in Schedules (A) and (B), situate in England, Wales, and Berwick-upon-Tweed’, it says in the third such rule: Where the Poor Rate shall be made throughout by such Pound Rate on any proportionate Part of the annual Value as aforesaid, the Proportion thereof shall be observed as in the Poor Rate; but the Estimate thereon to be made under this Act, shall be made at the same Sums respectively as they would have been estimate at, if the Poor Rate had been made on the full Amount of such annual Value.

There is the same usage in the same context in section XXXII (32). In both of these it means simply unity, and not some fraction. In section LIII56 (53) we have then and in every such Case, the said Surveyor or Inspector shall certify the same in Writing under his Hand, together with an Account of every Default, and the full Amount of the Duty which ought to be paid, by way of Surcharge, to any two or more of the said respective Commissioners for putting in Execution this Act in relation to the Duties on which such Surcharge shall be made, in order to have such Default or Under-rate rectified in the said Assessment . . .

Here ‘full’ seems merely to be emphatic—nothing of substance would be lost by its omission. Apart from these other ‘full amounts’, we can find ‘full’ as an adjective in other places in the Act of 1803. In the fifth of the Rules for charging duties under Schedule A we have In regard that the Duty hereby directed to be charged on the Occupier of Lands or Tenements ought in all Cases to be estimated on the full annual Value as 56 The sidenote is ‘Officers shall afford Access to Returns and Assessments. After Allowance, Surveyor or Inspector may surcharge, by Certificate to and Allowance of Commissioners’.

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aforesaid, there shall be allowed and deducted out of the Assessment to be made of the said Duties on Lands or Tenements demised in Consideration of a Fine or Fines in respect of the Property, the like Amount of Duty as shall be chargeable on an Average of such Fine or Fines upon the Lessor or Lessors, pursuant to the foregoing Rule . . .

This is a reference to the main charging Rule of Schedule A: ‘For all Lands, Tenements, Hereditaments, or Heritages, there shall be charged throughout Great Britain, in respect of the Property thereof, for every twenty Shillings of the annual Value thereof the Sum of one Shilling’, which does not have ‘full’, so ‘full’ in the fifth of the Rules is again primarily emphatic, having regard to the fact that the rule allows a deduction from the annual value. In sections XXXIII(33) and XXXV(35) we have: but such Assessment shall not be binding in case it shall appear to the Commissioners, that the said Lease or Agreement doth not express the full Consideration for the Demise, or the Rent bona fide paid for the same, or is made in any other Respect with Intent to conceal or diminish the annual Value of [such Premises] [the premises held under such demise].57

This is one of several places where ‘full’ is being used to reinforce the message that Parliament will not tolerate the evasions to which Pitt’s 1799 Act was subject. Section XLVII(47) is similar: and the said Commissioners shall be satisfied that the said Estimates have been made truly and without Fraud, so as to enable them to charge the several Properties contained therein with the full Duty which ought to be charged upon them respectively.

Section CLII (152) says: [the] Oaths or Affirmations respectively shall be, That the Contents of the said Schedules are true, to the best of his Knowledge and Belief, and contain a full and true Account of all the Profits and Gains of the Deponent or Deponents chargeable by this Act, to the best of his or her Knowledge and Belief . . .

This is doubly emphatic.58 Then we have section XL(40): And be it enacted, That the respective Assessors acting in the Execution of this Act shall make their Certificates of Valuation or Estimates on all Lands, Tenements, and Hereditaments, or Heritages, within the Limits of those Places for which they are to act throughout Great Britain, and shall set down the full and just annual Value for which all such Lands and Premises are let, or 57 The sidenotes are ‘Assessors may make their Estimates of Lands, on the Production of the Lease by the Tenant, according to the reserved Rent’ and ‘Penalty for delivering false Account, 20 l and double Duty’. 58 Reminiscent of the even higher standards required of person entrusted with foreign dividends ‘(2) Every chargeable person shall deliver to the Board—(a) on demand by the Board, true and perfect accounts of the amount of all such dividends or proceeds’.

What is the ‘Full’ Amount? 257 really worth to be let by the Year, estimated in each particular Case according to the Directions of this Act together with the Names and Surnames of the Occupiers or the Proprietors thereof.

‘Full and just’ are here both emphatic only. What I take from these various usages and from many other similar usages (which are much more prevalent in the 1803 Act that in the 1799 Act) is that, where an Act of this time referred to ‘full’ and to some quantity less or more than the whole, then ‘full’ means ‘the whole’ or ‘100 per cent’. We can see this very clearly in the fourth Case in the 1798 Act: In the Case of a Demise at Rack Rent, the Income of the Occupier of Lands, under the Rent of one hundred Pounds per Annum, shall be taken at not less than Three-fourths of such [Rack] Rent for one Year. If of one hundred Pounds per Annum, or upwards, then at not less than the full Amount of such Rent for one Year.

In other cases it seems clear that the experience of governments in having their tax laws circumvented and evaded, often by the most blatant devices, led to the tax laws of 1798 to 1806 (and therefore 1842) being full of what are little more than exhortations to play fair and return the proper, actual and true amounts of their income. When the law says ‘full’ it means the whole of the amount given by the law, not the amount which the taxpayer thinks is his obligation and which he returns by suppressing receipts. In the 1799 Act we can see this in the third Case—also the ‘full amount of the rent reserved’—and to the same effect the sixth Case (which, unlike the sixth Case in the 1798 Act, does not have a comparison with a lesser amount). I suggest that this is also what we see in the fifteenth and seventeenth Cases (trades etc and foreign possessions) in the 1799 Act. It should be remembered that this Act was relying on the honesty of the taxpayer to make a proper attempt to quantify his income without any reliance on what we would now call compliance machinery. In the 1803 Act there is machinery for ‘stoppage at source’ on many sorts of income, including Schedule A. There is thus no longer any ‘full amount’ in the computational rules for Schedule A except in relation to cases where a proportionate part or the full amount of the Poor’s Law value is taken as a measure of income (a case reminiscent of the fourth Case in the 1798 Act). Schedule C did not have, and never acquired, any ‘full’ phrases—tax under Schedule C was stopped at source by the Bank of England, etc. Similarly, tax under Schedule E was stopped at source by the office or department concerned and did not acquire a ‘full’ in the computational provisions until 1956 (for reasons which are not apparent). Schedule E did, however, have a ‘full’ in the special rule to ensure that there was no accidental or deliberate evasion of tax.59 59

See text before n 46.

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As for Schedule D, tax was stopped at source on annual interest and other annual payments, and the charging section for them did not have ‘full’.60 In the first to fifth Cases and in the first head of Case III (uncertain profits), the ‘full amount’ was referred to as these were matters solely within the control of the taxpayer as far as declaring the taxable amount was concerned. ‘Full amount’ is used with consistency in these four cases in the main computational rule, but the usefulness of a word which could be omitted without in any way altering the sense of the provisions was questioned, notably by the Macmillan Committee on codification and by judges such as Lord Greene MR in Mitchell v Gibson and Lord Radcliffe in FS Securities. Two possible uses for the phrase have been suggested in other cases. Lord Hoffmann, in Jones v O’Brien, concentrates on the ‘full amount . . . for the year of assessment’ aspect, the temporal aspect. The Irish income rules were unique in requiring tax to be paid by reference to an amount of income during but not at the end of or after the period in which the income arose or was to be measured by. This rule no longer applies, since under self-assessment all sources of income are taxed on a current year basis though tax is not paid until after the year, the loss of tax being catered for by a system of payments on account. The other interpretation stresses the link between the ‘full amount’ and what I have called the deductions proviso. It is in fact exceedingly difficult, if not impossible, to find a rule that refers to the ‘full amount’ of the income without any deduction. Even the Case III rule, which has never had any allowance for a deduction, actually says income tax under Case III of Schedule D shall be computed on the full amount of the income arising within the year preceding the year of assessment, and shall be paid on the actual amount of that income, without any deduction. [my emphasis].

In Mitchell v Gibson and in Ockendon v Mackley, Lord Greene MR and Nourse J both say in effect that ‘full amount’ does not mean ‘without any deduction’, because the Case V rules contemplate deductions from the full amount before arriving at the taxable amount. Usage has also been so inconsistent in relation to the deductions proviso that it is impossible to see any rational connection between ‘full amount’ and deductions. The deductions rules for each Case or type of income simply apply, and would apply equally whether they are deducted or prohibited from being deducted from the amount, the actual amount or the full amount of the income. At most, the deductions provisos can be seen as a not wholly consistent attempt to establish in the eighteenth and early nineteenth centuries that 60

S CII (102) of the 1842 Act etc.

What is the ‘Full’ Amount? 259 in the income tax there is a rule against unwarranted deductions. This, again, is part of the campaign against evasion of the Acts—and a predecessor can be seen in the Land Tax. I thus set out my final conclusions as being that the use of the word ‘full’, or even the words ‘full amount of’, is little more than rhetorical emphasis, something of which eighteenth and nineteenth century Acts were not free of in general, and what, if anything, they emphasise in the Schedule D cases is a rule against unwarranted deductions. Where does this leave the Revenue’s view on PFI contract and finance leases as set out in the extracts from their Manuals? On the basis of what I have set out above, I do not think it can be justified. However, as it is the judgments in the Court of Appeal in Gallagher to which the Manuals refer, it is worth looking at those judgments, and particularly that of Nolan LJ, again: With great respect I would suggest that this [the non-statutory principle of nonanticipation of profits or losses] might equally be described as a re-statement in a particular context of the statutory rule, in s 60 of the Act, that tax shall be charged ‘on the full amount of the profits or gains of the year’—no more and no less.

The only bit of Nolan LJ’s statement here that gives some pause for thought is ‘no more and no less’. This can only refer to the ‘full amount’: but, in doing so, it merely glosses ‘full’ as being ‘the whole’ or ‘100%’ or ‘entire’. The whole tenor of his and Bingham LJ’s judgments is to show that there is no rule about anticipating losses beyond what GAAP provides for and no scope for somehow bolstering inadequate amounts of profit or bringing them up to the full amount by invoking that notion, whether it be computational or not. In the context of leases which continue over many years and of non-anticipation of losses, the phrase ‘of the year’ seems to be as important, if not more so, than ‘the full amount’—loss anticipation creates less than the full amount of the year in the year of anticipation and more than the full amount in the subsequent years when the loss is realised. But none of this goes anywhere near justifying the bringing in of a large multiple of what is actually accounted for.

7 ‘Danegeld’—From Danish Tribute to English Land Tax: The Evolution of Danegeld from 991 to 1086 BARBARA A ABRAHAM

A BSTR A C T This paper examines the evolution of Danegeld over the century from 991, when Æthelred the Unready first bought off the Danes with tribute, until 1086, when William the Conqueror ordered the Domesday survey. It summarises the key historical events which influenced the transformation of the tax, as it evolved from tribute paid to Viking invaders to remuneration for the defensive Danish fleet in London, financed by an annual land tax which continued to be collected long after the Danes departed. The devastating Viking attacks contrasted with England’s peaceful, well-regulated society earlier in the tenth century. The country’s developing economic structures, such as a national coinage system, facilitated Danegeld payments and were also refined as a consequence of the tax. The impact of Danegeld and the Viking raids is considered in the context of notions of Christian kingship prevalent at the end of the first millennium. As well as damaging Æthelred’s reputation, it is suggested that such notions led to the perception of Danegeld as an ungodly tax and to the persistent opprobrium which attached to it. Once emergency tribute payments were replaced by regular payments of heregeld, a national tax assessment system was introduced, based on the centuries’ old division of the country into hides.1 Numerous exemptions from Danegeld were granted over time, leading to an inequitable tax burden. Collection of Danegeld was rigorously enforced by sheriffs, resulting in frequent sales and forfeitures of land.

1 An area of agricultural land sufficient to support a peasant family. See ‘Assessment of Danegeld’ for a full explanation.

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T

HE TAX GENERALLY referred to as ‘Danegeld’ was levied, sometimes spasmodically and sometimes regularly, over the best part of two centuries, from 991 to 1162, and there were major changes in its nature over a period which witnessed invasions and conquests, as well as social upheaval and cultural changes. This paper looks at the evolution of Danegeld over the period from 991, when Æthelred the Unready first bought off the Danes with tribute, until 1086, when William the Conqueror ordered the Domesday Survey. A major motivation for the Domesday Survey was to establish the taxation and tax potential of land in England. The fundamental nature of Danegeld changed dramatically during this tumultuous period and what was true of Danegeld at the end of the tenth century did not apply during the twelfth century. The very name ‘Danegeld’ supports the popular conception of the tax as a tribute paid to the Danes, but in fact the Danes ceased to be part of the equation after 1042. ‘It was called Danegeld, as being originally agreed to be paid to the Danes, and, like many things, continued to retain the name long after it became appropriated to uses intirely different.’2 Table 1 presents a timeline of relevant events that occurred over this period.

TER MINOLOGY

The term ‘Danegeld’ is in common use, and continues to be used, metaphorically at least, even in the twenty-first century. It is debatable though whether it was a word commonly used during the tenth and eleventh centuries. Several commentators note that the word ‘Danegeld’ is used only once in the Domesday Survey. Other words are often used in medieval documents to denote payments of tax, and the nature of Danegeld is such that it cannot be viewed as a single consistent tax throughout its two centuries of existence. Anglo-Saxon documents use the words gafol, geld and heregeld, as well as Danegeld. Danegildum occurs in medieval Latin documents. It is unclear whether geld and Danegeld were synonymous during the tenth and eleventh centuries, but, from Henry I’s reign (1100–35), royal charters granting immunity from various tax impositions make a distinction between geld and Danegeld.3 Gafol derives from gifan—to give—and is a non-specific word which could be translated simply as ‘payment’. It came to be applied to that which is paid and, depending on the context, translations include tax, 2 3

253.

PC Webb, A Short Account of Danegeld (Society of Antiquaries of London, 1756) 2. JA Green, ‘The Last Century of Danegeld’ (1981) 96 The English Historical Review

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tribute, rent and interest. Geld derives from geldan—to pay, restore, make an offering, serve, worship—and has the same root as ‘yield’ and ‘guild’. It appears to have a different derivation from the Anglo-Saxon word ‘gold’. The term heregeld has a more specific meaning than gafol or geld and is applied to the payments made between 1012 and around 1042 to the Danish mercenary force which defended England, and London in particular, against foreign invading forces. Heregeld can be translated as ‘army payment’, here meaning army, especially an enemy army. (The ‘Great Army’ was the name given to the Viking4 force active in England from 866 to 878 and the Anglo-Saxon Chronicles refer to a great heathen army—mycel hæþen here—coming to England.) Whilst acknowledging that the term is not without its difficulties, this paper generally uses ‘Danegeld’ for the evolving tax, except where the more specific term heregeld is appropriate.

SOU R C ES

The documentary evidence concerning Danegeld is fragmentary, and includes charters and diplomas, chronicles, especially the Anglo-Saxon Chronicles,5 and the Domesday Survey. However, the texts we have to rely on are generally preserved in rather later manuscript copies, raising questions about their completeness and authenticity. Exceptionally, the later laws of Æthelred and those of Canute survive in contemporary manuscripts associated with Archbishop Wulfstan of York.6 The Old English and Latin chronicles of Æthelred’s reign record each levy of Danegeld and the amounts raised, although the reliability of the amounts recorded are disputed by modern scholars. These annals are said to ‘consist of a rich amalgam of record and comment, fact and fiction, drawn, from sources of varying origin, reliability and bias, and compiled and revised over a number of years’.7 They are thought to have been compiled in two monastic establishments, Ramsey Abbey in 4 This paper uses the unspecific term ‘Viking’ to refer to the Scandinavian raiders active in Great Britain and elsewhere in the eighth to tenth centuries. 5 The Anglo-Saxon Chronicles are a collection of annals in Old English and Latin chronicling the history of the Anglo-Saxons. The first manuscript was created late in the ninth century, probably in Wessex, during the reign of Alfred the Great (King of Wessex 871–99). Multiple copies of the original were distributed to monasteries across England, where they were independently updated. In one case, the chronicle was still being updated in 1154. There are several extant versions of the Chronicles. Except where otherwise stated, quotations in this paper are taken from the online version at http://www.britannia.com/history/docs/ asintro2.html (Rev James Ingram’s translation, 1823). 6 E Screen, ‘Anglo-Saxon Law and Numismatics: A Reassessment in the Light of Patrick Wormald’s The Making of English Law I’ (2007) 77 British Numismatic Journal 158. 7 CR Hart, Chronicles of the Reign of Æthelred the Unready (Lampeter, Edwin Mellen Press, 2006).

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East Anglia and in Worcester. Based on the evidence of the annals, the writers of the Anglo-Saxon Chronicles were antipathetic to Æthelred, and this bias influenced views of Æthelred for the next thousand years; only recently have there been reassessments of Æthelred’s reign.8 The annals are preoccupied with the Viking campaigns in England and record very little information about the country’s wealth, nor about the substantial legal and social developments of the era. Æthelred’s government produced extensive legislation, and records of at least six legal codes survive from his reign. The laws commonly ascribed to Edward the Confessor give an account of Danegeld, but this may be a later interpolation. The Domesday Survey was commissioned by William the Conqueror in 1085 to discover the resources and taxable values of all the boroughs and manors in England, with the purpose of ascertaining what was owed to him as king in tax, rents and military service. A reassessment of the Danegeld (Inquisitio Geldi) took place at about the same time as the Domesday Survey, and that relating to the south west still survives. Whilst the Domesday Survey provides a wealth of data pertinent to Danegeld, there is a danger of generalising from details for a specific locality and from assuming that what was true in 1085 had prevailed earlier in the eleventh century. Other medieval records which throw light on aspects of Danegeld include Sermo Lupi ad Anglos (c1010–16) by Wulfstan II Archbishop of York, the chronicles of Florence of Worcester (died 1118) and others, the Historia Anglorum of Henry of Huntingdon (c1088–1154), Hemming’s Cartulary (collected in the second half of the eleventh century) and the chronicle of Ingulphus, abbot of Crowland, who wrote in the reign of William I. Dialogus de Scaccario (Dialogue concerning the Exchequer, c1180) has a chapter on Danegeld. John Selden’s Mare Clausam (1652), translated into English by Marchamont Nedham, has a chapter on Danegeld. Philip Carteret Webb’s 1756 monograph—A Short Account of Danegeld—is a triumph of scholarly research and arguably remains the most comprehensive account of Danegeld. The absence of social, economic and financial information is a major hindrance to a thorough understanding of Danegeld. There are no financial records of Danegeld in pipe rolls until the twelfth century. However, coins have proved very useful material finds. Anglo-Saxon coinage has been studied in detail in recent decades, and the changing designs and inscriptions of coins enable them to be dated with reasonable precision. Hoards of English coins found in Scandinavia apparently bear witness to the payment of tribute, as do runestones raised in Scandinavia to commemorate, or indeed celebrate, the predatory excursions which led to payments of Danegeld. 8 See, eg S Keynes, The Diplomas of King Æthelred ‘the Unready’ (Cambridge, Cambridge University Press, 1980).

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Table 1: Historical Context—Timeline Dates of reign

King

978—1013 Æthelred II ‘the (& 1014–16) Unready’

Key events relevant to Danegeld

Payments of Danegeld

991 Battle of Maldon, Essex: Viking victory

£10,000 991

994 Olaf Tryggvason baptised at Andover

£16,000 994 £24,000 1001

1002 St Brice’s Day Massacre of Danes in England 1012 45 Danish warships to defend England

£30,000/£36,000 1007 £8,000/£48,000 1012

1013–14

Sweyn Forkbeard, London defeated—pays King of Denmark & tribute & gives hostages Norway

1014–16

Æthelred II, invited back from exile in France

1016–35

Canute, son of Sweyn; marries Æthelred’s widow

1017 Danish defensive fleet paid to leave. 40 ships left in English pay

1035–40

Harold Harefoot, son of Canute

1039 16 Danish ships 1040 32 Danish ships

£11,048 for 32 ships

1040–42

Harthacnut, son of Canute

62 Danish ships

£32,147 1041

1042–66

Edward I ‘the Confessor’, son of Æthelred II

Stopped payments to Danes c.1042 but continued to collect Danegeld. Repealed Danegeld or heregeld 1051.

1066 Jan– Oct

Harold II

1066 Battle of Hastings

1066–87

William I ‘the Conqueror’

= Norman Conquest

£72,000 (+£10,500 by London) 1017

Danegeld as annual tax: 2/- per hide as norm.

1085 threat of Danish 6/- per hide 1084 invasion 1086 The Domesday Survey

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There were two kinds of payment in Æthelred’s reign: ‘tributary’ and ‘stipendiary’.9 Tributary payments were made to purchase peace so by their nature were spasmodic. They were funded by whatever means possible to meet the urgency and necessity of the situation. As Gillingham notes, ‘It was presumably normal practice for the whole sum due to be handed over before the Vikings left the country, even if the subsequent collection of taxes by which the king recouped himself was a process lasting several years’.10 Stipendiary payments of heregeld were made annually in consequence of treaties and were paid to the Danes for providing a fleet of ships of war. The recurrent nature of heregeld led to the levying of an annual land tax, also referred to as heregeld, Danegeld or geld.

Danegeld as Payment of Tribute, 991–1011 Viking raids on England had been going on for centuries. The first recorded Viking raid on Britain was in 793, when there was a devastating attack on the holy site of Lindisfarne. Alfred the Great (King of Wessex 871–99) was the first to pay tribute to stop the raids by the Vikings. Æthelred II ‘the Unready’ came to the throne in 978, when about ten years old. He was the son of King Edgar (ruled 959–75) and Queen Ælfthryth, and became king after the murder of his half-brother Edward at Corfe Castle, possibly at the instigation of Ælfthryth. The first Viking incursion of Æthelred’s reign took place in 991, when 93 ships, led by Olaf Tryggvason, a renowned Norwegian Viking leader, made their way up the river Blackwater in Essex and defeated the English alderman, Byrthnoth, at Maldon. A famous Old English poem, the Battle of Maldon, records the heroic defeat of Byrthnoth by the Vikings. Following this defeat, Æthelred agreed to pay a gafol of ten thousand pounds. (It is unclear whether the ten thousand pounds represented a monetary amount of £10,000 or the weight of silver.) It is said that he was advised by Archbishop Sigeric of Canterbury and others to buy off the Vikings. Æthelred acquired the nickname ‘Æthelred Unræd’, a play on his name ‘Æthelred’, meaning ‘noble counsel’, and ‘Unræd’, meaning ‘bad counsel’. Æthelred the Unready, whilst something of a mistranslation, retains the pun of the Old English. The Anglo-Saxon Chronicle does not comment on whether the Archbishop’s advice was ‘bad counsel’.

9

Webb’s terms (above n 2). J Gillingham, ‘The Most Precious Jewel in the English Crown: Levels of Danegeld and Heregeld in the Early Eleventh Century’ (1989) 104 The English Historical Review 380. 10

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Given the military and financial success of their 991 excursion, it is perhaps unsurprising that the Vikings returned and were bought off time after time. In the words of Rudyard Kipling’s well-known poem: But we’ve proved it again and again, That if once you have paid him the Dane-geld You never get rid of the Dane.11

In 994 Olaf Tryggvason was joined by Sweyn Forkbeard, King of Denmark. The City of London was protected by its Roman walls, which were well defended by its citizens. The Viking force failed to break down London’s defences, so moved on to ravage the surrounding countryside and winter at Southampton. Olaf met Æthelred at Andover and accepted baptism, as well as a payment of Danegeld of £16,000. The Anglo-Saxon Chronicle records that ‘[Olaf] promised, as he also performed, that he never again would come in a hostile manner to England’.12 Is the writer of this annal implicitly making the point that the word of a Christian can be relied upon? In 1002, the king gave an order to slay all the Danes that were in England. This was accordingly done on the mass-day of St Brice; because it was told the king, that they would beshrew him of his life, and afterwards all his council, and then have his kingdom without any resistance.13

This became known as St Brice’s Day Massacre. Gunhilde, sister of Sweyn Forkbeard, was said to be one of victims. Æthelred put forward his justification for the massacre in Oxford in a royal charter of 1004 concerning the rebuilding of St Frideswide’s church (now Christchurch) in Oxford.14 Historians have generally viewed this Anglo-Saxon example of ethnic cleansing as a political misjudgement which provoked Sweyn’s invasion of 1003, leading on to the escalation of Danish incursions and eventually the Danish conquest.

11

Rudyard Kipling, 1911. ASC 994. 13 ASC 1002. 14 ‘For it is fully agreed that to all dwelling in this country it will be well known that, since a decree was sent out by me with the counsel of my leading men and magnates, to the effect that all the Danes who had sprung up in this island, sprouting like cockle amongst the wheat, were to be destroyed by a most just extermination, and thus this decree was to be put into effect even as far as death, those Danes who dwelt in the afore-mentioned town, striving to escape death, entered this sanctuary of Christ, having broken by force the doors and bolts, and resolved to make refuge and defence for themselves therein against the people of the town and the suburbs; but when all the people in pursuit strove, forced by necessity, to drive them out, and could not, they set fire to the planks and burnt, as it seems, this church with its ornaments and its books. Afterwards, with God’s aid, it was renewed by me.’ D Whitelock (trans), English Historical Documents 500–1042, vol I (London, Routledge, 1996). 12

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In 1008, in a concerted attempt to repel the invaders, Æthelred levied a large fleet and army to oppose the Danes. Every 310 hides of land was taxed with providing a ship and every eight hides with finding, or funding, a soldier armed with headpiece and breastplate.15 In 1009 he ordered that the churches were to receive a penny or the value of a penny for each hide ‘to invoke the mercy and help of God’ in defending his kingdom.16 The Anglo-Saxon Chronicles record at least four payments of tribute: in 991, £10,000; in 994, £16,000; in 1001, £24,000; and in 1007, £30,000 or £36,000 (according to different versions). These payments total at least £80,000—a vast sum for the era. A number of scholars, both historians and numismatists, have considered the accuracy of the amounts quoted in the Anglo-Saxon Chronicle.17 Some doubt the sums, finding them improbably and suspiciously high, and note the steady escalation in amounts paid. Were the sums chosen by the authors of the chronicle to convey the message that England was going from bad to worse? Other scholars have attempted to prove that payments of the recorded sums were possible. These divergent views have not been resolved, but the fact remains that these are the only numbers we have for the payments of Danegeld. We have some indication of the Vikings’ attitude to the receipt of Danegeld from England. Three runestones in Sweden still survive which commemorate successful Viking campaigns in England and the Danegeld received. One stone, in Vasby in Uppland, records ‘Alle had this stone raised to his own memory. He took Knut’s geld in England. God help his soul.’ Another, in Yltergarde in Uppland, says ‘And Ulv has taken three gelds in England. The first which Tosti paid. Then Thorkell paid. Then Knut paid.’18 Little is known for certain about how Æthelred raised money for tribute, but it can be assumed that he used all expedient means. Payment of tribute is likely to have included bullion, precious objects and commodities as well as coins. Archbishop Wulfstan in Sermo Lupi ad Anglos (c1010–16) complains that ‘we have entirely stripped God’s houses of everything fitting, within and without’.19 It is unclear whether ecclesiastical and other hoards of silver together with the output of domestic silver mines would have been sufficient, or whether imported silver would have been needed to meet the payments of Danegeld. Consequent upon 15

ASC 1008. Æthelred VII. AJ Robertson (ed & trans), The Laws of the Kings of England from Edmund to Henry I (Cambridge, Cambridge University Press, 1925) 109. 17 Including the debate between MK Lawson and John Gillingham in the pages of The English Historical Review. 18 M Blackburn and K Jonsson, ‘The Anglo-Saxon & Anglo-Norman Element of Northern European Coin Finds’ in Blackburn and Metcalf (eds), Viking-Age Coinage in the Northern Lands, BAR Int Series, 1981. 19 M Bernstein Ser (ed & trans), The Electronic Sermo Lupi ad Anglos, available at http://english3.fsu.edu/~wulfstan. 16

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the uncertainty about the amounts of tribute actually paid, there is also uncertainty about the amounts of silver and coinage required to fulfil the tribute payments. Silver mines in the Harz mountains of Germany had been exploited since the late tenth century, and England may have imported Harz silver in exchange for wool exports.20 One charter survives in which Æthelred sells land for the express purpose of paying tribute, and a second charter of 1005 with the abbey of St Albans tells how he had given them 61 hides of land in exchange for a payment of £200 in gold.21 However, it is probable that the main burden fell on the people. The fact that the Witan22 usually participated in offers of geld supports this. As Lawson says, ‘it is highly unlikely many landowners would have given up either estates or valuables before their dependents had first been induced to contribute as much as possible’.23 Wulfstan’s sermon records that the people had been greatly afflicted by taxation.

Stipendiary Payment of Danegeld/Heregeld, 1012–42 In 1011 Æthelred sued for peace, and in 1012 concluded a treaty in consideration of either £8,000 or £48,000, varying according to different versions of the Anglo-Saxon Chronicle and other sources. The Danes, led by Thorkell the Tall, were to provide 45 warships, anchored in London, to protect against foreign invasions. The nature of the payment made in 1012—whether of £8,000 or £48,000—is ambiguous, and it is unclear whether this was a final payment of tribute or a payment to secure the protection of fleet, or indeed a combination of the two. For the next 30 years, a Danish fleet of fluctuating size was based in London and paid for by the English. The presence of Danes in London over this period is still evident today, in the names of churches such as St Clement Danes and St Olave, Hart Street. (There were as many as six churches dedicated to St Olave, a Norwegian king who was martyred in 1030 and became the patron saint of Norway.) There is little evidence that the Danes became fully integrated with the English, and the Anglo-

20

Blackburn and Jonsson, above n 18, 156. Webb (quoting Ingulphus), above n 2, 35. 22 The Witan, also known as the Witenagemot, was a political institution in Anglo-Saxon England which operated from before the seventh century until the eleventh century. It was an assembly of the most important noblemen in England, including aldermen, thanes and senior clergy, whose primary function was to advise the king on matters of both national and local importance. ASC for 994, 1002 and 1011 refer to the Witan’s sanction of Danegeld payments. 23 MK Lawson, ‘The Collection of Danegeld and Heregeld in the Reigns of Æthelred II and Cnut’ (1984) 99 The English Historical Review 727. 21

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Saxon Chronicle, as well as other documents, continues to distinguish between the English and the Danes during this period. The Danish fleet came at a considerable price, and from about 1012 onwards Danegeld changed from an extraordinary imposition to meet extraordinary need into an annual tax. Danegeld, or more specifically heregeld, started to be levied as an annual land tax. According to the Dialogus Scaccario (c1180), In order, therefore, to ward these off, it was decreed by the English kings that, from each hide of the kingdom, by a certain perpetual right, two shillings of silver should be paid for the use of the brave men who, patrolling and carefully watching the shores, kept off the attack of the enemy.24

Green asserts that the national system of land taxation developed to raise heregeld was the first to reappear in western Europe since the collapse of the Roman Empire.25 However, as discussed later, what is known about hidage suggests that there had been a framework for tax assessment in place for centuries, and it would be surprising if it had not been used from time to time to raise some form of tribute or taxation, albeit this may not have been on a countrywide or regular basis. Nor was the concept of annual taxation new in England. The payment of tithes (one-tenth of annual produce or income) to the church had been common practice for centuries and, as noted later, Æthelstan and Edgar put the weight of secular law behind the payment of tithes. Whilst Æthelred’s new strategy of paying a Danish force to stay and defend England may well have seemed more promising than the former strategy of paying them to go and stay away, in fact it did not have a happy outcome for Æthelred. Æthelred’s defensive fleet was not sufficient to protect against Sweyn Forkbeard (by then King of Denmark and Norway), who arrived at Sandwich, Kent in 1013 with a strong fleet. Sweyn eventually defeated London, and London was forced to pay tribute to Sweyn and give hostages. Æthelred was forced into exile in Normandy and Sweyn was accepted as king by practically the whole of England. He became the uncrowned king of England before dying suddenly in 1014. Sweyn’s son Canute was elected king by the Danes in England but he had insufficient support amongst the English nobles or from London, and the Witan favoured Æthelred. A deputation was sent to Æthelred to negotiate his return from exile in France and his restoration to the throne, subject to their terms. He was required to govern more justly than before, to bring in certain reforms, and to forgive all that had been said and done against him in his previous reign. Unfortunately there is no extant record of the specific reforms required. The terms of this agreement are of great constitutional interest in early English history as they are the 24 25

Dialogus Scaccario, available at http://avalon.law.yale.edu/medieval/excheq.asp#preface/. Green, above n 3, 241.

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first recorded pact between a king and his subjects. It is also suggests that many English noblemen had submitted to Sweyn primarily because of their dissatisfaction with Æthelred’s governance. When Æthelred died in 1016, Canute eventually won out over Edmund Ironside, Æthelred’s son, and became king. He married Æthelred’s widow, Emma of Normandy. London had supported Edmund Ironside and was a threat to the security of Canute’s conquest, and it appears that he placed the City of London under the authority of one of his Danish commanders, Osgot Clapa.26 After two years, Canute felt sufficiently secure to pay off all but 40 ships of the Danish fleet with a huge payment of £72,000 in silver collected nationally, plus a further £10,500 payment from London. The 40 ships were retained as his personal bodyguard. The Anglo-Saxon Chronicle refers to Canute’s lithsmen (professional shipmen) based in London in 1035. With a Danish king of England, the purpose of the Danish fleet had shifted from protecting England from Danish invasion to protecting the Danish king from English rebellion. Canute enacted laws to enforce sanctions for the non-payment of Danegeld. It is worth noting that Canute was staunchly Christian and undertook a pilgrimage to Rome in 1027. Canute was succeeded as king by his two sons, Harold Harefoot and Harthacnut. Harold Harefoot ruled England from 1035 until 1040, possibly as regent, maintaining the protection of a modest fleet of Danish ships and collecting heregeld to fund the fleet. Harthacnut, who was also the king of Denmark, succeeded Harold as the king of England, ruling from 1040 to 1042. According to the Anglo-Saxon Chronicle, Harthacnut ‘was soon acknowledged as well by English as by Danes; though his advisers afterwards grievously requited it, when they decreed that seventytwo ships should be retained in pay, at the rate of eight marks for each rower’. In 1041 Harthacnut raised £32,147 to pay his fleet, which the Anglo-Saxon Chronicle calls a severe tax and says it was borne with difficulty. According to Florence of Worcester, the 1041 levy was ‘so heavy that hardly anyone could pay it’ and, when two of Harthacnut’s housecarls, acting as tax collectors, were killed at Worcester, the king’s response was to have all Worcestershire harried. Florence refers to the king’s men as ‘the enemy’, and recounts that they ‘ravaged the city and shire for four days, burned down the city and then returned home on the fifth day loaded with plunder’.27 In 1042 England reverted to an Anglo-Saxon king, Edward I ‘the Confessor’, son of Æthelred and Emma of Normandy and half-brother to Harold and Harthacnut. In 1050 or 1051 the Anglo-Saxon Chronicle records that Edward dismissed the remaining standing force of 14 ships: 26 P Nightingale, ‘The Origin of the Court of Husting and Danish Influence on London’s Development into a Capital City’ [1987] English Historical Review 565. 27 B Thorpe (ed & trans), Florence of Worcester’s Chronicum (1848–49).

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‘they went away with their ships and everything’. It is said that Edward abolished the Danegeld at the same time—‘that tax distressed all the English nation during so long a time, as it has been written; that was ever before other taxes which were variously paid, and wherewith the people were manifestly distressed’.28 There is a legend that the pious king abolished Danegeld in consequence of seeing the devil leaping for joy on the gathered treasure. Round suggests that this legend bears witness to ‘the peculiar horror with which Danegeld was regarded’.29 Despite apparently abolishing the tax, an annual tax continued to be collected by Edward throughout his reign. One can rationalise this inconsistency by speculating that it was heregeld which was abolished and another form of geld which continued to be collected. It is easy to appreciate why Edward would have wished to dissociate himself from the hated tax but hard to see that his reputation would have been enhanced if he continued to collect the tax as before. The events which followed Edward I’s death in January 1066 are some of the best known in English history: Harold Godwinson of Wessex ruled for nine months before William, Duke of Normandy, defeated Harold at the Battle of Hastings and became the first Norman king of England. William continued to collect Danegeld as an annual land tax, generally at two shillings per hide, but sometimes at a higher rate. According to the Anglo-Saxon Chronicle, in 1067 ‘the king imposed a heavy tax (micel gyld) on the wretched people’. In 1084 Danegeld was paid at an unprecedented rate of six shillings per hide. This may have been connected with the invasion planned by Canute IV of Denmark, allied with Robert Count of Flanders—the most serious threat of invasion in William’s reign.30 The raising of taxation is generally thought to have been one of William’s primary motives for instigating the Domesday Survey. According to the Anglo-Saxon Chronicle for 1087: ‘He reigned over England, and by his sagacity so thoroughly surveyed it that there was not a hide of land within England that he knew not who had it, or what it was worth, and afterwards set it in his writ’. The Survey was based on inquests in the Hundred Courts of the land. Compliance with the inquests was high because acknowledgement of the obligation to pay Danegeld was tantamount to a confirmation of ownership rights to the land and, conversely, its absence would put ownership of the land in jeopardy.

28

ASC 1040. JH Round, ‘Danegeld and the Finance of Domesday’ in PE Dove (ed), Domesday Studies: On the Study of Domesday, vol 1 (London, Longmans, 1888) 82. 30 ASC 1085: ‘Cnute, King of Denmark, son of King Sweyne, was coming hitherward, and was resolved to win this land, with the assistance of Robert, Earl of Flanders; for Cnute [was married to] Robert’s daughter’. 29

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N O T I ONS OF C H R ISTIA N K INGSH IP

From before Alfred’s reign, Anglo-Saxon kings had endeavoured to promote themselves as righteous Christian kings ruling their realms in accordance with Christian principles—their relationship with their kingdom mirroring that between God and his people. In exchange for moral and material support for Christian principles and the church, the king acquired an aura of the divine, and the protection of the church. For example, Æthelstan (the first king of all England, who ruled from 925 to 939) issued a tithe edict which asserted the importance of paying tithes of livestock and agricultural produce to the church, and one of Edgar’s law codes made the payment of tithes compulsory. The object of such laws, and of others in the Anglo-Saxon era, was to put the weight of royal power behind the church’s dues.31 Screen suggests that Edgar’s desire to control and regulate both ecclesiastical observance and lay society was linked to his vision of Christian kingship.32 There were only isolated Viking raids during Æthelstan’s and Edgar’s reigns, and both were respected for ruling over a well-ordered, peaceful kingdom and for fulfilling the role of a Christian king. Ælfric, Abbot of Eynsham, wrote a short tract on kingship early in the eleventh century, in which he refers to three Saxon kings, Alfred, Æthelstan and Edgar, who were ‘victorious because of God’.33 Æthelred came to the throne after the murder of his brother. The murder of a king, with his divine protection, was a terrible crime and, although Æthelred was not implicated in the murder, the circumstances of his accession would have been perceived as extremely inauspicious. His reign was blighted by repeated incursions and defeats by the heathen Vikings, leading to oppressive payments of tribute. Keynes strives to give a balanced view of Æthelred’s reign, but admits that ‘the sorry tale of military disaster recounted in the Anglo-Saxon Chronicle can hardly be discounted as a complete misrepresentation of the truth’.34 The AngloSaxon Chronicle also records instances of treachery by some of Æthelred’s noblemen, who joined forces with the Danes for personal gain. The appropriation of church treasures for payment of tribute was devastating to the clergy. Apart from the physical ravages of the Vikings and the economic straits caused by payments of Danegeld, that such damage was inflicted by heathens on a self-consciously Christian nation would have carried a powerful symbolism, suggesting that God was not on England’s side. It is hard to read Archbishop Wulfstan’s words as anything other than 31 P Wormald, The Making of English Law: King Alfred to the Twelfth Century. Legislation and Its Limits (Malden, MA, Blackwell, 2001) 211–12. 32 Screen, above n 6, 158–60. 33 S Foot, Æthelstan, The First King of England (New Haven, CT, Yale University Press, 2011) 184. 34 Keynes, above n 8, 202.

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critical of Æthelred’s reign: ‘God’s dues have diminished too long in this land in every district, and laws of the people have deteriorated entirely too greatly, since Edgar died’.35 However, it should not be thought that Æthelred was indifferent to what was required of a Christian king. A fragment remaining from later in his reign explains the aim of law-giving: The eternal God alone is the ruler and maker of all created things, and in honour of his name I, King Æthelred, have been considering first of all how I could best promote Christianity and the just interests of the royal authority, and how, in affairs both religious and secular, I could determine with the greatest profit to myself, and ordain most justly, for the advantage of all my subjects, the conditions which we ought to observe.36

It is not known how widespread and powerful millenarian beliefs were around the year 1000, but, as Wormald points out, it is clear that a sense of millenarianism informs Wulfstan’s attitude and sermons,37 and is also apparent in Ælfric’s Homilies. The timing of the Viking raids, starting a few years before the millennium, would have lent credence to beliefs about the imminent end of the world and exacerbated their psychological impact. The circumstances under which Danegeld commenced seem to have endowed it with a moral taint, above and beyond its economic impact. Some 50 years after its introduction, the legend surrounding Edward I’s abolition of the tax suggests that it continued to be regarded as an ungodly imposition.

T H E E C O N O M Y OF A NGLO-SA XON ENGLA ND

Æthelstan strengthened his control over his large kingdom by introducing law codes which regulated markets, trade and coinage, and Edgar subsequently reinforced and extended such regulations. There was considerable expansion in the number of market towns and monasteries in the tenth century. As Keynes says, ‘the reformed system of coinage as a whole demonstrates the remarkable degree of sophistication attained in one area of royal government in the late tenth century, and thus suggests to the historian what he can reasonably expect in others’.38 With fertile soils and the relative efficiency of strip farming, England’s agriculture was productive and surplus grain was exported. Sheep farming was increasing, 35

Bernstein Ser, above n 19. X Æthelred, Robertson, above n 16, 131. 37 Wormald, above n 31, 453; see also, eg Bernstein Ser, above n 19: ‘And therefore things in this world go ever the longer the worse, and so it must needs be that things quickly worsen, on account of people’s sinning from day to day, before the coming of Antichrist. And indeed it will then be awful and grim widely throughout the world. Understand also well that the Devil has now led this nation astray for very many years’. 38 Keynes, above n 8, 196. 36

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with significant wool exports, particularly to the Flemish cloth industry and the lower Rhinelands. As a consequence of this trade, there may well have been an inflow of silver into England. It is safe to conclude that England had sufficient wealth to attract the Viking raids of the late tenth and eleventh centuries. Whilst it is clear that England had an international trading network and that London was an established port, there is little evidence as to the extent or value of international trade. There is a dearth of evidence of the impact of Danegeld on the English economy, and modern scholars take opposing views. Nightingale concludes that ‘England’s wealth was directed from commercial wealth to the maintenance of a foreign military force, with deleterious long-term effects on the English merchant class and its overseas trade’.39 Blockmans and Hoppenbrouwers assert that Viking activities and the payment of Danegeld had a positive effect on western Europe, stimulating the circulation of goods and capital there, and the entry of the region into an intercontinental trading system.40 The necessity of raising funds for the payment of Danegeld and the sanctions for non-payment were contributory factors to the many changes in land ownership in the course of the upheavals of the eleventh century. The requirement to pay Danegeld in its various manifestations certainly appears to have been one of the factors contributing to the sophistication of England’s national economic structures. Numerous coinage reform laws maintained a coinage system across the country, providing money for the payment of taxes and generating income for the king from the changes of dies. The creation of a system of tax assessment and collection capable of repeatedly raising huge sums of Danegeld is posited by some commentators as a significant achievement in its own right.41

E N GL I S H C OINA GE IN ENGLA ND A ND SC A NDINAVIA

Only English royal coins were legal tender in England and foreign coins could not legally be passed from hand to hand. Any foreign silver which came into England was required to pass through the mints. According to Æthelstan’s law code, ‘there is to be one coinage over all the king’s dominion, and no-one is to mint money except in a town’,42 and the monetary reforms continued by Edgar had important implications for the 39

Nightingale, above n 26, 574. W Blockmans and P Hoppenbrouwers, Introduction to Medieval Europe 300–1550 (London, Routledge, 2007) 105. 41 See, eg H Loyn, ‘Progress in Anglo-Saxon Monetary History’ in M Blackburn (ed), Anglo-Saxon Monetary History (London, Leicester University Press, 1986) 5. 42 Foot, above n 33, 152. 40

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uniting of England by introducing a uniform type of coin. As discussed, successive Anglo-Saxon kings made deliberate efforts to establish a powerful sense of identity across the nation, and the visual symbol of coins bearing the image of the king was one of the means by which this was achieved. To promulgate the concept of the king as God’s ruler on earth, coins also carried explicitly Christian symbols, such as crosses and the hand of God.43 From the tenth century onwards, England had a multiplicity of mints— as many as 70 are recorded at the end of the tenth century—and King Edgar introduced a system whereby all the coinage was periodically recalled and reminted, with the moneyers being forced to pay for new dies. Thus the king effectively exercised control through the issue of dies, as well as obtaining revenue from the process. Reminting took place six yearly as a general rule during Æthelred’s reign, and every two to three years during Edward I’s reign. The basis of English coinage was the silver penny, which by the late tenth century was an important and commonplace means of exchange, circulating widely and being widely accepted at its face value. The silver pennies varied in weight and fineness and were true coins—that is, tokens of value, not weight of bullion. No doubt much trade, particularly local trade, was done by barter, but there was a significant monetary element to the economy. A penny was not small change: a few pence represented a reasonable price for a sheep. Men were paid for their services and were paid in coins.44 Well over 50,000 English coins, mostly minted between 980 and 1051, have been found in hoards or in separate finds in Scandinavia. The extent of trade between England and Scandinavia during the tenth and eleventh centuries is not known, but the finds of coins in Scandinavia coincide with the period during which Danegeld was paid to the Vikings and Danes. The prevailing view is that most of these coins were exhorted as tribute in Viking raids or were paid to the Danish fleet based in England from 1012 to 1042. As Blackburn and Jonsson say, ‘The coincidence between the period in which the Anglo-Saxon coinage is well represented in the Scandinavian and Baltic finds and the sixty years during which tributes were paid or heregeld levied is very close’.45 Covering this period, there are thousands of each major coin type, from Æthelred’s Crux (991–97) to Canute’s Short Cross (c1030–35/6) among northern European collections. Relatively small numbers of Anglo-Saxon coins have been found in Scandinavia which can be dated to before or after this period. The coins recovered can only be a small part of the total that reached Scandinavia, 43 Screen, above n 6, 157; J Campbell, The Anglo-Saxon State (London, Continuum International Publishing, 2000). 44 Loyn, above n 41, 2–3. 45 Blackburn and Jonsson, above n 18, 153.

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and not all Danegeld would have been carried off to Scandinavia. Some Danes remained in England, either as part of the Danish fleet or as settlers, and would have spent the Danegeld in England. Whilst such finds cannot provide support for the individual payments of Danegeld recorded in the Anglo-Saxon Chronicle, they do evidence the enormity of the total sums paid. Whilst the correlation between the dates of English coins found in Scandinavia and the payments of Danegeld appears persuasive, Metcalf considers a number of other hypotheses to explain the decline in finds of English coins in Scandinavia dated after 1036—for example, the introduction of reminting in Scandinavia—but concludes that there is insufficient evidence to draw firm conclusions.46

A S S E S S M ENT OF DA NEGELD

From around 1012 onwards, when Danegeld took the form of an annual land tax, it was assessed according to fiscal units called hides, carucates and sulungs. In southern England the tax was based on hides or hidages, an area of agricultural land sufficient to support a peasant family. The exception was Kent (formerly the Kentish kingdom) where the unit was a sulung of four yokes, the amount of land that could be ploughed in a season by a team of oxen. In the north and east (the former Danelaw area) the unit was the carucate, or ploughland, which was broadly equivalent to Kent’s sulung. Much has been written about hides and hidage in the context of the Domesday Survey, but the concept of the hide had existed for a few hundred years by then. As far back as Bede’s The Ecclesiastical History of the English People (c731), a hide could be interpreted as a household, but with territorial connotations.47 As time passed, the term came to signify land sufficient for the support of a peasant and his household, eventually becoming disassociated from the concept of ‘household’ into a territorial unit of taxation. The hide of the Domesday Survey (hida ad geldum) was certainly a fiscal unit for the assessment of Danegeld, and it seems that at no stage did the hide represent a specific and consistent physical measure of land. A survey, compiled at some point between the seventh and ninth centuries, was discovered in the nineteenth century and named then as the ‘Tribal Hidage’.48 This comprises a list of 35 peoples or ‘tribes’, 46 DM Metcalf, ‘Continuity and Change in English Monetary History c973–1086: Part 2’ (1981) 50 British Numismatic Journal 57. 47 JF McGovern, ‘The Hide and Related Land-Tenure Concepts in Anglo-Saxon England AD 700–1100’ (1972) 28 Traditio 105. 48 British Library: Harley MS 3271.

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accompanied by an assessment in hides, with an estimated number of hides assigned to each tribal area. It is clear from the round numbers of hides quoted for each tribe—for example, Kent held 15,000, East Anglia 30,000 and Wessex 100,000—that the Tribal Hidage was not intended to reflect accurately each tribe’s land-holdings; rather, it is more likely that the hidage attributed to each area had symbolic significance, indicating the relative status of each tribe.49 The purpose of this survey has not been established beyond doubt, but there is support for the view that it records tributes due by the tribes which owed allegiance to Mercia or Northumbria, with the amount of tribute measured in hundreds of hides. Higham refers to it as ‘the earliest fiscal document that has survived from mediaeval England’.50 Another document, dating back to the early ninth century and named the Burghal Hidage by FW Maitland in 1897, shows hidage values for the kingdom of Wessex, and lists 33 fortified places (burhs) and the taxes (recorded as numbers of hides) assigned for their maintenance. According to Campbell, ‘it is certain that by the late seventh century there were hidage assessments settlement by settlement’.51 By the time of the Domesday Survey in the eleventh century, the hide, as a geldable or taxable unit, was based on arable land and excluded pasture, meadow, fallow land or woodland. Land was divided into sown and fallow, that is, taxpaying and non-taxpaying. Tax was therefore based on potentially productive land, providing at least some relationship with the capacity of the land to generate money annually to pay the geld assessed on it. The assessment of Danegeld was through the ‘Hundred’, the division of a shire for administrative, military, judicial and indeed fiscal purposes, or the ‘Wapentake’ for the former Danelaw area using the assessable unit of the carucate. King Alfred is usually credited for grouping the country into Hundreds. The Hundred originally comprised a hundred hides, and many Hundreds in the Domesday Survey were still composed of the requisite number of hides. The assessment was upon the Hundred as a whole rather than on individual landowners and their tenants, and when the Danegeld was unpaid or in arrears it was in the Hundred Court that the king’s fine (gyldivite) was imposed on the offending individual.52 The districts and properties comprising the Hundred were estimated at a certain number of units, and the liability for Danegeld cascaded down to individual properties and their owners and tenants according to these estimates. 49 P Featherstone, ‘The Tribal Hidage and the Ealdormen of Mercia’ in MP Brown and CA Farr (eds), Mercia: An Anglo-Saxon Kingdom in Europe (London, Continuum International Publishing, 2005) 28–29. 50 NJ Higham, An English Empire, vol 2 (Manchester, Manchester University Press, 1995) 74. 51 Campbell, above n 43. 52 JH Round, ‘Danegeld and the Finance of Domesday’ (1888) I Domesday Studies 117.

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Little has been written about how London was assessed to Danegeld and further research is needed to establish the basis on which London participated in payments of the tax. The Anglo-Saxon Chronicle records the £10,500 paid by the City of London in 1017 separately, and it can be assumed that London contributed to the heregeld paid to the Danish fleet anchored in London. According to Webb, cities and towns which had no arable land paid Danegeld in proportion to a certain number of hides (for example, Salisbury gelded for 50 hides).53 Danegeld was assessed at a certain number of shillings per hide and, insofar as there was a standard rate, this appears to have been two shillings per hide. The Dialogus de Scaccario mentions two shillings and Webb refers to ‘an annual tax of two shillings on every hide of arable land in the kingdom’. Using Sir Henry Spelman’s estimate of the total hidage for England of 243,600 hides, Webb calculates that at two shillings per hide this tax would have generated £24,360 annually.54 The unprecedented payment of six shillings per hide exacted around 1085 by William is recorded in various sources, including the Inquisitio Geldi for the five southwestern counties. However, the Danegeld payments made in 1018 totalling £82,500 were the largest payments of all and approximate to one pound per hide.55 In the course of the eleventh century, a growing number of exemptions from payment of the tax were put in place. The desire to understand and simplify what had become a complex, opaque pattern of exemptions is likely to have been one of William I’s aims in commanding the Domesday Survey. As might be expected, the demesne lands which belonged to the king and those in the hands of the king’s immediate tenants and farmers were exempted from payment of Danegeld, even though it appears that such land was assessable in the first instance. The taxability of church land was complex and appears inconsistent. Not all ecclesiastical estates were free from Danegeld, though much of such land was exempted from payment. The Archbishop of Canterbury’s manor of Aldintone in Kent is recorded as being taxed at 21 sulungs in the reign of Edward I and at 15 in the reign of William I.56 In many cases it appears that the clergy claimed exemption from tax on their demesne lands on the grounds that they should serve the needs of religion and of the clergy. However, some clergy continued to levy the tax on their tenants but used their exemption from liability to Danegeld to justify retaining the money for themselves. When the king’s

53

Webb, above n 2, 20. Ibid, 2. Lawson, above n 23, 737. 56 P Vinogradoff, English Society in the Eleventh Century (Oxford, Oxford University Press, 1908) 179. 54 55

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geld was thus diverted, it was said to go into the ‘abbot’s pouch’—in marsupiam Abbatis is the actual term employed in the Burton Cartulary.57 In addition to exemptions for royal and church lands, successive monarchs granted exemptions from Danegeld. These included redress for areas blighted by invasion and reward for loyalty and service to the monarch. The resulting anomalies in assessment led to adverse comment both before and after the Norman Conquest, as well as a diminishing and inequitable tax take. Examples include Somersetshire, where out of 113 hides of land in Witestane Hundred, Danegeld was answered to the Crown for no more than fifty hides.58 The Hampshire Survey records the lightening of the fiscal burden of Farnham from 30 to 20 hides by King Edward on account on account of the ravages of the Vikings. In the county of Gloucester, it is testified that, out of 15 hides which used to pay geld in Siward’s manor of Lecelade, six were exempted by the king himself. In Hampshire, Alwi the thane was able to produce a writ under the seal of King Edward in respect of a yardland which had been freed and exempted.59

C OL LEC TION OF DA NEGELD

Danegeld was collected by the local sheriffs or shire-reeves. The Domesday survey recording Berkshire customs states that Danegeld was paid in two equal instalments at Christmas and Whitsuntide,60 though this may just have been local practice and it cannot be assumed that the same payment arrangements prevailed across the country. There were stringent penalties for late or non-payment of the tax. The detail of sanctions applied in Æthelred’s reign is not known, but penalties in Canute’s reign included the forfeiture of land if the tax was not paid within three days of the due dates. According to the monk Hemming, writing in Worcester late in the eleventh century, in Canute’s day those who had not paid their tax by the appointed time lost their land to whoever gave the money due to the shire-reeve. Those unable to pay their taxes were liable to forfeit their estates to the king instead. He or his agents, the shire-reeves, might eventually allow them to be redeemed or they might grant the land to whoever could pay the geld due, providing opportunities for Danish kings in particular to reward their supporters with holdings of land. Lawson gives several examples of alienations of land which occurred during Canute’s reign.61 No doubt the threat of 57 58 59 60 61

Round, above n 52, 126. Webb, above n 2, 24. Vinogradoff, above n 56, 181. Round, above n 52, 89. Lawson, above n 23, 724–29.

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forfeiture of land was sufficient to enforce prompt payment wherever possible by most of the populace. Lawson recounts the example of Eadric Streona (‘Eadric the Acquisitor’), an alderman in Æthelred’s reign, who acquired a Dorset estate belonging to the church of Sherborne, which he later sold for a great price in gold and silver to a friend of the monks, who returned it to them.62 The Domesday Survey gives an example of a man whose land was confiscated by the sheriff because of his failure to pay geld.63 The eleventh century was a time of fluidity in land ownership, and different documents give plenty of examples of estates, or parts of estates, changing hands. The sheriffs were notorious for profiting from their tax collecting role. Round suggests that the unpopularity of Danegeld was due to its being that ‘on which the sheriffs made their greatest profit’.64 A proclamation of Canute’s from 1027 instructs the sheriffs not to infringe the law of just possession in order to collect money for him.65 This implies an awareness that sheriffs often went beyond the law in their tax collection tactics. The Laws of Canute also state that he who serves by land or sea by the witness of the shire shall have his land unmolested by lawsuits.66

C ONC LU SION

From tribute paid to Viking invaders to remuneration for the defensive Danish fleet in London and to an annual land tax at the disposition of the king’s treasury, the tax known as Danegeld did not so much evolve as mutate in response to the changing circumstances of eleventh-century England. Round, writing in 1888, makes a comparison with income tax: ‘what was meant for an emergency-tax has become a normal source of revenue’.67 On the one hand, the sophistication of English social and economic structures is evident from the markets, coinage and legal systems which had developed during Æthelstan’s and Edgar’s reigns. In marked contrast was England’s military ineffectiveness and consequent inability to repel Viking raids and later invasions from Denmark and Normandy. However, 62

Ibid, 734. Ibid, 723. 64 Round, above n 52, 82. 65 ‘I enjoin likewise upon all the sheriffs and reeves throughout my kingdom that, as they desire to retain my friendship and their own security, they employ no unjust force towards any man, either rich or poor, but that all, both nobles and commoners, rich and poor, shall have the right of just possession, which shall not be infringed upon in any way, either for the sake of obtaining the favour of the king or of gratifying any powerful person or of collecting money for me; for I have no need that money should be collected for me by any unjust exactions’ (Robertson, above n 16, 151). 66 I Canute 79, Robertson, ibid, 215. 67 Round, above n 52, 81. 63

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by capitalising on its civil structures, England was able to raise substantial amounts of tax as the need arose. The centuries-old hidage framework across the country readily lent itself to the assessment of tax on a national basis. Coinage and legal systems respectively were necessary to enable and enforce tax payments, and, in turn, the raising of taxes funded and prompted further advancements in mints and legal courts, notably during the reigns of Æthelred and Canute. Even if one allows for some degree of exaggeration in the sums recorded in the Anglo-Saxon Chronicle, Danegeld in its various incarnations produced vast revenues. As such, it cannot fail to have been oppressive to those who had to generate funds from their land-holdings to meet their tax liabilities. Whilst the hidage system was theoretically based on productive arable land, the exemptions granted by successive eleventhcentury monarchs led to inequities and a concentration of the tax burden on those not favoured by specific exemptions. A relatively sophisticated tax assessment system was enforced by the blunt penalties and tactics used to collect the tax. The penalties enacted in Canute’s laws were stringent, including the potential forfeiture of land for late or non-payment of Danegeld, but there are indications that the tax collection tactics employed by the sheriffs went beyond the law. Numerous documents bear witness to widespread changes in land ownership during the period, with the burden of Danegeld leading to forced sales to fund payment, or forfeiture as a result of failure to pay. The one facet of Danegeld which endured through its various mutations was the opprobrium with which it was viewed. Whilst taxes by their nature are never popular, Danegeld was hated—by the church, nobility and by the populace as a whole. Danegeld began as tribute paid by a Christian nation to heathen invaders: symbolically it was the price paid for national dishonour and divine disfavour. The negative connotations which attached to the tax seem to have persisted throughout the eleventh century, long after its original purpose and destination had changed. Consequently, the kings of England needed to maintain a balance between the usefulness of Danegeld in filling treasury coffers and the reputational damage accruing to those who imposed this harsh and tainted tax.

8 Tax and Quacks: The Policy of the Eighteenth-Century Medicine Stamp Duty CHANTAL STEBBINGS*

A BSTR A C T In 1783 a stamp duty was imposed on quack medicines. The eighteenth century saw the height of the trade in proprietary medicines, promoted by a wide range of unqualified entrepreneurs who were popularly known as quacks. They invented and sold remedies to the general public, with secret compositions and exaggerated claims for their efficacy in relieving illness. These remedies were sometimes useless and frequently dangerous, and were consumed in prodigious quantities by a gullible populace. The tax imposed on such medicines endured for almost 160 years, being abolished in 1941. This paper analyses the policy which lay behind the imposition of this new duty. It shows that the tax was driven by political imperatives and imposed with the primary purpose of raising public revenue in a period of acute need. It also reveals that there existed a subsidiary social purpose behind the tax, namely to impose some control on this dangerous trade. The paper also demonstrates that the tax was an astute, realistic and pragmatic political compromise, the government being aware of continental Europe’s failure to address the problem of the quack medicine trade by other, non-fiscal, means.

I NTR ODU C TION

I

T IS A rarity in the history of taxation to find an enduring tax on a specific commodity. In general, such taxes constitute the ephemeral subject matter of a major species of tax, the content shifting with changing social, political and fiscal imperatives. Imposts on hats, gloves, carriages, servants, windows, hair powder and armorial bearings are *

The generous support of the Wellcome Trust for this research is gratefully acknowledged.

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reflections of an earlier age when taxation had yet to reach the degree of sophistication and organisation that was to emerge in the later nineteenth century. The medicine stamp duty was a tax that was introduced in the context of a trade in medicines promoted and puffed by a wide range of unqualified entrepreneurs who were collectively and popularly known as quacks. They invented and sold remedies to the general public, with secret compositions and exaggerated claims for their efficacy in curing, preventing or relieving illness. These remedies were unproven, sometimes useless and frequently dangerous, and were consumed in prodigious quantities by a gullible populace desperate for relief at a time when medical science was rudimentary. The trade had reached an unprecedented height in the later years of the eighteenth century and was viewed by many European states with concern. The overall aim of this paper is to analyse the nature of the British fiscal response to this problem and to identify the various social, political and legal forces that drove it. Specifically, and first, it ascertains whether the introduction of the medicine stamp duty was an attempt to curb or control the trade in quack medicines or to raise urgently needed revenue, or both. Secondly, it establishes why Britain chose to tax when its European neighbours adopted an overt regulatory regime. Thirdly, it investigates whether the tax was perceived as an alternative to, or a form of, the regulation of dangerous medicines and unqualified medical practice. Finally, it explores the character of the original tax to identify what it was in its original form that enabled it to transcend fiscal fashions and endure for 160 years into the modern age of taxation.

T H E P H ENOMENON OF QU A C K ERY

A plurality of medical services characterised the eighteenth century. Physicians and apothecaries, along with surgeons, constituted the regular medical profession, at the core of which lay the professional values of education, ethics and, theoretically, monopoly. If they had the means, the sick would consult a physician, the elite of the medical world, otherwise they could consult an apothecary for advice. Equally, however, the public, and especially the poor, would consult an array of individuals operating on the fringe of orthodox medical practice. One facet of medical treatment in the eighteenth century was the use of therapeutic medicines. A physician would prescribe medicines to be made up by an apothecary on his instructions, following a one-to-one consultation between the physician and the individual patient. Apothecaries, and later chemists and druggists, would stock standard medicines prepared according to the official pharmacopoeia. There developed a widespread and growing culture of self-treatment, with the public purchasing medicines created by individuals who were neither

Eighteenth-Century Medicine Stamp Duty 285 physician nor apothecary, and were commonly known as quacks. The invention and sale of medicines was central to the activities of the great majority of quacks. The precise meaning of the term ‘quack’ was always uncertain, and problems of definition pervade this field of activity. It was a subjective term, generally used as a term of abuse, and was loosely used to describe an unorthodox medical practitioner, with connotations of amateurism and false premises.1 It included a diverse range of practitioners, notably individual medicine vendors and entrepreneurs who at best were astute businessmen, at worst were simply crooks. However, the term also included members of the regular medical profession who engaged in commercial activity. This, and the fact that quack remedies were often concocted from ingredients used by regular practitioners in the preparation of the medicines they prescribed,2 served to make the dividing line between quack medicines and orthodox medicines extremely difficult to draw. So, while the term quack was a familiar term that most people felt they understood instantly and precisely, it was one that was particularly challenging to define. The pre-eminent feature of quack medicines was their highly pronounced commercial nature. Quack medicines were invariably aggressively advertised to the public. By the eighteenth century, the preferred method of publicising such products was through advertisements in the ever increasing number of national and provincial newspapers.3 The advertisements nearly always made exaggerated and miraculous claims for the medicines’ powers in curing, preventing or relieving every illness, from the common cold to cancers and tuberculosis. These claims were generally supported by fulsome testimonials from respectable middle-class individuals or, even better, the nobility or royalty.4 The name of the product was prominent, usually reflecting that of the inventor or proprietor, who thereby claimed the formula as their own and accordingly kept it secret. Secrecy was a central characteristic of quack medicines in order to maintain the exclusive right to manufacture, though some inventors went further and sought the formal protection of Letters Patent from the Crown.5 However, the

1 JM Adair, ‘Essay on Empiricism or Quackery’ in Medical Cautions for the Consideration of Invalids (Bath, R Cruttwell, 1786) 138. 2 Ibid, 132. 3 R Porter, Quacks, Fakers & Charlatans in English Medicine (Stroud, Tempus Publishing, 2000) 109–14. This book is the illustrated version of Professor Porter’s seminal work on quackery, R Porter, Health for Sale, Quackery in England 1650–1850 (Manchester, Manchester University Press, 1989). 4 See the testimonials for Spilsbury’s Antiscorbutic Drops in Bath Chronicle, 23 September 1784. 5 Statute of Monopolies 1624 (21 James I c 3), s 6; S Dowell, A History of Taxation and Taxes in England, 4 vols (London, Longmans, Green & Co, 1884) vol 4, 366.

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extremely costly and cumbersome processes6 meant that the great majority of medicines sold were not formally patented. However, in order to give their medicines an aura of official approbation, many quack medicine vendors falsely claimed a patent, most consumers being entirely unaware whether a particular medicine was formally patented or not. By the eighteenth century, the terms quack, proprietary, patent, nostrum and empiric were used interchangeably, with the term ‘patent medicine’ being the most widely, and inaccurately, employed. The trade in quack medicines was at its height in the eighteenth century.7 At least 200 were well known in 1748,8 with many, such as Dr Johnson’s Yellow Ointment, Daffy’s Elixir, Friar’s Balsam, Dr James’s Fever Powders and Velnos’ Vegetable Syrup being household names and consumed in vast quantities. Many celebrated individuals used quack remedies. For example, Queen Anne, who was severely short-sighted, swore by her oculist William Read, a tailor by trade;9 and George II employed Joshua Ward, who had once worked in the salt trade, to attend to his dislocated thumb.10 Various powerful economic and social factors combined to create and sustain this intense demand for quack medicines from people of all classes, from the educated and wealthy to the poor and ignorant. In the eighteenth century, acute and chronic illnesses were widespread, death rates high and the age of mortality low.11 Healthcare was rudimentary, as the state of medical science in the Western world was as yet undeveloped and the causes of disease not understood. Most serious diseases could not be cured, relieved or prevented by orthodox medical practitioners. Individuals thus naturally sought whatever relief they could obtain from whatever source, and were prepared to try almost anything. The sick, the ignorant, the gullible and the desperate were the target consumers of the quack medicine vendor. Enjoying other advantages, such as convenience, ease of purchase, anonymity and some degree of efficacy,12 the trade in quack medicines went from strength to strength. There were concerns, however. Many quack medicines were merely benign, useless and unpleasant, containing bread, brick-dust or sheep dung,13 but many were dangerous. They were sold to the general public with no individual consultation, and contained powerful and often harmful ingredients in unregulated amounts and concentrations. Toxic constituents such as mercury and antimony, and addictive 6 See the process described in W Holdsworth, A History of English Law (London, Methuen & Co Ltd, 1965) vol 15, 35–37. See too Adair, above n 1, 141. 7 Adair, ibid, 126. See generally Porter, Quacks, above n 3, 24–43. 8 ‘Pharmacopoeia Empirica’ (1748) 18 Gentleman’s Magazine 346–50. 9 LG Matthews, ‘Licensed Mountebanks in Britain’ (1964) 19 Journal of the History of Medicine 30, 45. 10 Porter, Quacks, above n 3, 61, 68. 11 Ibid, 32–3. 12 Eg Dr James’ Powders: Adair, above n 1, 134. 13 Ibid, 141.

Eighteenth-Century Medicine Stamp Duty 287 substances such as alcohol and opium, were routinely used.14 The power of vested interests, along with perhaps a genuine desire to protect the public from unscrupulous vendors of harmful medicines, combined to create a denigration of these medicines as quack medicines. The outcome was a call for some form of regulation.

T H E LAW’S R ESPONSE

It was in this context of a thriving trade that Lord John Cavendish introduced the medicine stamp duty in 1783 with the intention of taxing quack medicines for the first time.15 The Act provided that all persons selling medicines in Great Britain had to purchase an annual licence,16 and that any medicines they sold had to pay stamp duty on the container of the medicine at a rate which depended on the value of the medicine sold. The stamp had to be fixed to the bottle, packet, phial or box to show that the duty had been paid before sale, and in such a way that the medicine could not be consumed without tearing the stamp.17 This comprehensive charge was refined by the inclusion of a number of exemptions. Mindful of the difficulties in defining quack medicines sufficiently precisely to tax them, the Chancellor of the Exchequer took the view that the only alternative was to judge the quality of the medicines by the status of the vendor; that medicines sold by medically qualified persons would be wholesome, while those sold by unqualified persons could be harmful. Accordingly, the 1783 Act was directed primarily to the sellers, and not to the medicines they sold,18 and those who had served an apprenticeship to a surgeon, apothecary, chemist and druggist,19 or who had served as a navy or army surgeon,20 were exempt.21 Another exemption, not related to medical qualification, applied to individuals who had kept a shop ‘for the vending of drugs and medicines only, not being drugs or medicines sold by virtue of His Majesty’s Letters Patent’ and had done so for three years before the passing of the Act.22 14 (1734) 4 Gentleman’s Magazine 616–18. See generally RI McCallum, Antimony in Medical History (Bishop Auckland, Pentland Press, 1999). 15 23 Geo III c 62. 16 23 Geo III c 62 ss 1, 5. 17 The notion of stamping the wrapper of an article subject to duty was not new. In the case of the 1711 tax on playing cards, the pack of cards would be enclosed in a wrapper that had already been sent to the Stamp Office to be stamped. 18 See notice in St. James’s Chronicle or the British Evening Post, 11–14 September 1784, issue 3670. 19 23 Geo III c 62 s 1. 20 Ibid, s 2. 21 Physicians were not included in this exemption because they were not permitted to dispense medicines. 22 23 Geo III c 62 s 1.

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Unqualified persons wishing to sell medicines had to be licensed, and the intention of the Act was that all licensed persons should pay tax on all the medicines they sold. The 1783 Act was an immediate financial failure, yielding well under half its predicted revenue.23 William Pitt replaced the Act by a radically recast measure only two years later. The second Medicine Stamp Act 178524 laid down the duty in the form it was fundamentally to retain until its abolition some 160 years later, and did so with immediate financial success.25 At the end of its first year, the reformed duty had yielded over £12,000 and that remained more or less constant until 1800, when it rose over £14,000.26 The Act adopted a different and more realistic approach, reflecting the acknowledged need to clearly set out the object of charge—the medicine—and to attach the duty to it whoever should happen to be selling it. In other words, the duty had to attach primarily to the medicine, not to the vendor. Pitt directly addressed the difficulties inherent in the definition of key terms and subjective popular perceptions and arrived at an objective test to tax quack medicines. The Act began by charging every packet of medicine sold in Great Britain, irrespective of the vendor’s status.27 It then refined this general and all-inclusive charge, explaining it more precisely in an official description of the remedies that were to be taxed,28 and carefully, realistically and accurately identified the universally recognised characteristics of quack medicines.29 The Act brought into charge every preparation used as a medicine to prevent, cure or relieve any human ailment, if the maker or seller made or sold it under Letters Patent, or claimed a secret art, or an exclusive right in doing so, or recommended it to the public as an effective remedy, or if it was expressly named in a supplementing schedule, which contained over 80 named preparations, including famous ones such as Bateman’s Drops, Godfrey’s Cordial and Turlington’s Balsam. This was a pragmatic and realistic approach, correctly identifying secrecy, ignorance, deception, publicity and proprietary claims as the leading characteristics of quacks and the medicines they sold, and thereby showing an understanding of these powerful social and cultural beliefs. As the characteristics laid down 23 Board of Customs and Excise and Predecessor: Private Office Papers, Medicine Stamp Duty 1783–1936, The National Archives (hereafter TNA) CUST 118/366, 6. 24 25 Geo III c 79. 25 Morning Chronicle and London Advertiser, 26 September 1785. 26 Board of Customs and Excise and Predecessor, above n 23, 11. 27 25 Geo III c 79 s 2: the duty attached to ‘every packet, box, bottle, phial, or other inclosure, containing any drugs, oils, waters, essences, tinctures, powders, or other preparation or composition whatsoever, used or applied, or to be used or applied, externally or internally, as medicines or medicaments, for the prevention, cure, or relief of any disorder or complaint incident to, or in anywise affecting, the human body, which shall be uttered or vended in Great Britain’. 28 Ibid, s 16. 29 Porter, Quacks, above n 3, 11.

Eighteenth-Century Medicine Stamp Duty 289 were disjunctive, the scope of the charge was very wide. It covered all patented, secret, proprietary, advertised and scheduled medicines. The rate was determined, as before, by the value of the medicine,30 and the requirement to obtain a licence remained.31 As the duty was grounded in the nature of the taxed medicine as a quack medicine, it followed that no exemptions could properly be given.32 Nevertheless, Pitt wished to ensure that legitimate medical and pharmaceutical practice was not undermined. He did so by including three exemptions. The first applied to imported medicines which were already subject to customs duties, mainly natural drugs and certain chemicals in general use by chemists, druggists and apothecaries.33 The second exempted medicines which were ‘entire’, namely pure and unmixed, and were sold by a medically qualified or licensed person.34 The third exempted composite medicines which were ‘known, admitted and approved’ remedies for illnesses and were sold by a qualified person.35 It could not be claimed if the medicine was secret, proprietary, patent or recommended as an effective remedy.36 This exemption, which Dowell suggested was included in order to make it quite clear that ordinary medicines were no longer chargeable,37 was to become of immense importance to the modern pharmacist.

T H E R AT IONA LE OF T H E TA X

The objective of the legislation in introducing the medicine stamp duty was undoubtedly to tax quack medicines and not medicines in general.38 In all pre-legislation discussion and when he introduced the tax in 1783, Lord John Cavendish expressly called it a tax on quack medicines, and knew the term would be well understood by his audience in the House. Newspaper reports gave it the same name,39 and contemporary pamphleteers agreed. The public, too, took the duty as one that attached to quack medicines.40 The non-appearance of the term ‘quack medicines’ in the legislation itself was not significant and not an indication of the object of the charge. 30

25 Geo III c 79 s 2. Ibid, ss 5, 7. 32 Stamp Office: Observations upon the present Medicine Act and Proposals for an Improvement of that Duty, TNA T1/624/514–19, 21 May 1785. 33 25 Geo III c 79 s 3. See Board of Customs and Excise and Predecessor, above n 23, Appendix 1 and para 17. 34 25 Geo III c 79 s 3. 35 Ibid, s 4. 36 Ibid. 37 Dowell, above n 4, vol 4, 367. 38 The Stamp Commissioners expressly confirmed it in 1785: Stamp Office, above n 32. 39 The term is used, for example, in Public Advertiser, 12 July 1783; Morning Herald and Daily Advertiser, 11 July 1783. 40 See the wedding announcement in Morning Post and Daily Advertiser, 8 September 1785. 31

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The constitutional principle of consent to taxation demanded that a tax be imposed only in express and clear words. There was a clear tension between this requirement and the term ‘quack medicine’. Although it was a familiar term that was widely understood, it was virtually impossible to define. It was a slang term, with no clear meaning, and was certainly far too loose to be used in an instrument as formal as an Act of Parliament. The Stamp Office itself acknowledged that it was ‘unfit to be introduced into an Act of the Legislature’.41 The underlying purpose of imposing the tax, however, is not selfevident. It is tempting, particularly in retrospect, to assume that when a tax is imposed on an activity or commodity that has been identified as an obvious evil, it was imposed in order to address that mischief. However the forces at play in the imposition and maintenance of a tax are complex, and the essential character of the medicine stamp duty as a regulatory instrument or merely a means of revenue-raising is far from clear. The political reality was undeniable. In the late eighteenth century there was a desperate need for public revenue. Transcending a political maelstrom42 was the parlous financial state of the country. Britain had been at war for much of the eighteenth century, against France, Spain and, latterly, America, and the challenge facing successive administrations was that of raising sufficient public revenue to finance their bellicose activities. More specifically, in the early 1780s, when the medicine stamp duty was first introduced, Britain faced urgent and considerable financial exigencies. Cavendish’s budget was not strictly a war budget, as the preliminaries of peace with France and Spain had been signed five months earlier, and the Treaty of Versailles between the three parties would be signed the following September; however, the size of the national debt was the result of a series of long and expensive wars. The American war had left Britain’s finances seriously depleted and with a national debt of £234 million. The annual tax revenues amounted to some £13 million, and of that £8 million serviced the national debt.43 Thus, when the tax was first introduced, the anticipated yield of £15,00044 would have constituted a small but welcome contribution in the context of Britain’s finances. The payment of the interest on the newly floated loan of £12 million was the only justification that Lord John Cavendish gave for imposing any of his new taxes in 1783. He admitted the task was unpleasant for any Chancellor of the Exchequer, but he would endeavour to ensure the least inconvenience to the public. The bad weather and poor harvests of recent 41

Stamp Office, above n 32. D Wilkinson, The Duke of Portland, Politics and Party in the Age of George III (Basingstoke, Palgrave Macmillan, 2003) 48–52. See too J Cannon, The Fox-North Coalition (Cambridge, Cambridge University Press, 1969) 82–88. 43 See generally J Jeffrey-Cook, ‘William Pitt and his Taxes’ [2010] British Tax Review 376, 380. 44 10 Parliamentary Register 1780–1796, 71, 26 May 1783 per Lord John Cavendish. 42

Eighteenth-Century Medicine Stamp Duty 291 years prevented him raising the customs and excise duties, for the burden would ultimately fall on corn and that would cause national distress. He chose, instead, to both increase current stamp duties and introduce new objects of charge, because such imposts would raise a large revenue ‘without materially affecting the poor’.45 He calculated that his proposals would raise £560,000.46 There was no suggestion, in relation to the tax on quack medicines, that there was any reason other than the raising of revenue. The Chancellor chose as his objects of new taxation those he felt ‘could well bear taxation, and be truly productive’.47 He made no mention of the possible evils of the trade and expressed no concern for the health of the public. He gave no reasons for the introduction of the medicine stamp duty other than the generalised justifications he outlined in introducing his budget. Indeed, only in relation to the taxation of the registration of births, marriages and deaths did he mention that it was a matter of policy and not merely finance.48 And when Pitt succeeded Cavendish in January 1784, amid political chaos and less than four months after the 1783 Act had come into force, he had to address the same immense and largely unabated financial challenge. Pitt’s financial policy was, therefore, equally dominated by the urgent need for fresh sources of public revenue and ensuring that established ones were made as productive as possible. His principal financial objective was to create a surplus so that he could reduce the country’s enormous national debt,49 and he looked to taxation to achieve it. The argument that the medicine stamp duty was imposed for purely financial reasons is supported by its fiscal context. It was just one of a number of new taxes, many of which had no discernible wider policy perspective at all. The taxation of a large variety of human events, transactions and commodities was a characteristic of British taxation from the seventeenth century onwards. Taxes on burials, on bachelors, on glass, stone and earthenware bottles, on windows and on hearths were all found in the seventeenth century, and throughout the eighteenth century taxes were imposed on hair powder, dogs, servants, silver, beer, candles, coal and many other items. Furthermore, stamp duties in particular proliferated, a trend which Cavendish continued by taxing promissory notes, receipts, contracts and inventories, carriages, and the registration of births, marriages and deaths, and increasing the duties or extending them on bills of exchange, probates and legacies, bonds, law proceedings, the admission to certain bodies, such as the Inns of Court, and stage coaches.50 As such, 45 46 47 48 49 50

Ibid, 70. Ibid, 73. Ibid, 67. Ibid, 72. M Duffy, The Younger Pitt (Harlow, Longman 2000) 81, 85–86. 10 Parliamentary Register 1780–1796, 66–73, 26 May 1783 per Lord John Cavendish.

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the medicine stamp duty was a minor feature of Lord John Cavendish’s budget, but nevertheless part of a comprehensive increase in the scope of stamp duty taxation. Equally in urgent need of increased public revenue, Pitt looked to taxation and explored every item as a possible object of charge—corks, guns, pins, fans, printed music, visiting cards, operas, clocks, racecourses, ropes and so on.51 He was certainly a prodigious and effective tax legislator and reformer, who would introduce 17 new taxes during his ministries, reforming existing ones and thoroughly overhauling the structures for the administration of the taxes.52 His fiscal approach was immediately clear in his budget of June 1784, where he increased or extended a number of established taxes and introduced new duties, including those on bricks and tiles, horses, game licences and hats.53 The last resembled the medicine stamp duty, being a stamp duty on a luxury commodity. He favoured the imposition of licences on shopkeepers and traders as a form of business taxation, and proceeded to extend the practice.54 Clear-sighted, acute and above all pragmatic, Pitt was prepared to increase existing taxes, introduce new ones, abolish old ones, improve administration, take advice from friends, the revenue departments and commercial interests,55 and, in doing all this, be guided by the principles of taxation derived from Adam Smith. He thus chose not to abolish the medicine stamp duty but to reform it as part of this general traditional policy and surge of fiscal activity, agreeing with the view of the Stamp Commissioners, expressed only four months after the 1783 Act came into force, that, although the duty was ‘in some respects incomplete’, it ‘merits attention, as an object of revenue that may admit of much extension and improvement’.56 In July 1785 the first Medicine Stamp Duty Act was addressed by the House and a revised Act considered.57 Many tax reforms of the eighteenth century resulted from suggestions from the revenue boards themselves, and the stamp duty was no exception. It was unsurprising, therefore, that the recasting of the medicine stamp duty by Pitt in 1785 was effected entirely in accordance with the proposals of the Stamp Commissioners in order to make the law workable and profitable.58 Equally influential in determining the financial rationale of the medicine stamp duty was the orthodox understanding of the nature of taxation in 51

Dowell, above n 4, vol 2, 186–87. See Jeffrey-Cook, above n 43, 376–91. 53 15 Parliamentary Register 1780–1796, 272–88, 30 June 1784. 54 Ibid 285. 55 Jeffrey-Cook, above n 43, 381–82; Duffy, above n 49, 75–78, 136–37. 56 First Report from the Committee Appointed to Enquire into the Illicit Practices Used in Defrauding the Revenue, 38 House of Commons Sessional Papers of the Eighteenth Century 23 (24 December 1783). 57 40 Journals of the House of Commons 1144, 15 July 1785. 58 Stamp Office, above n 32. 52

Eighteenth-Century Medicine Stamp Duty 293 the eighteenth century, and indeed until well into the twentieth, as an instrument of government whose sole object was to raise money. This was indeed confirmed when the Stamp Office adopted the conventional determinant of the success of a tax and declared that, with an annual yield of just a quarter of the anticipated return, the 1783 medicine stamp duty was a failure.59 With the exception of customs duties, which were used to achieve strategic economic objectives, tax was not conceived of as an instrument to effect any non-financial policy. The remedying of social ills did not fit into this paradigm, and accordingly taxation was only very exceptionally introduced deliberately to control harmful social behaviour. Indeed, a rare and earlier attempt to use tax in this way had proved a complete failure. The demand for strong drink in the early eighteenth century had led to the development of a new spirit made from malt spirit manufactured in England, mixed with other spirits paying little duty and flavoured with juniper berries. It was called gin, and its consumption, particularly among the poor, grew at such an alarming rate that the legislature felt compelled to intervene to curb public drunkenness,60 believing that the affordability of gin was the cause of the problem. It aimed to control the trade through taxation. Stringent legislation in 1736 imposed a very heavy tax on all spirits, and a licence duty of £50 on their retailers.61 The Act failed because so comprehensive were its provisions that it had the effect of depriving the people of all spirits, which was totally unacceptable to them. Spirits were still sold, often under the guise of medicines, and the legislation was simply evaded. Prohibitive taxation had clearly failed, and so a more moderate regime of taxation of spirits was imposed and maintained in its place in the mid-eighteenth century.62 Furthermore, the traditional perception of taxation as primarily an instrument of revenue-raising led governments to adopt an attitude of unconcern as to the possible or actual social effects of a tax. For example, the harmful effect of the window tax on public health began to be understood in the earliest years of urban growth but, despite a growing body of evidence confirming its injurious consequences, the government refused to repeal it until the middle years of the nineteenth century.63 Finally, fiscal ambitions appear far more likely than regulatory ones, since the 1783 Act was wholly unconvincing as a means of suppressing quack medicines. It permitted qualified persons to sell any quack medicine 59

Board of Customs and Excise and Predecessor, above n 23, 6. See generally Dowell, above n 4, vol 4, 103–9. 61 9 Geo II c 23. 62 24 Geo II c 40 (1751). 63 C Stebbings, ‘Public Health Imperatives and Taxation Policy: the Window Tax as an Early Paradigm in English Law’ in J Tiley (ed), Studies in the History of Tax Law, vol 5 (Oxford, Hart Publishing, 2011) 43. 60

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they wished, free of duty, and unqualified individuals could sell them as long as they had a licence and paid the duty. The legislation did not include any provision to ensure the regulation or scrutiny of applicants for licences, and it would seem that a completely unqualified individual could obtain a licence to sell any medicine as long as it was paid for. The Act, therefore, imposed no control on the quality of the medicines sold to the public, and suggests that the legislature had no direct concern with this matter. At best, the legislature took the view that only unqualified individuals would sell dangerous or inappropriate medicines, and qualified persons would not. So, by targeting unqualified vendors, they would thereby control the sale of their medicines, which, by the nature of the vendors as unqualified, were presumed to be quack remedies. Although this minimal quality control was undermined by the exemption for established shopkeepers, it was removed entirely by the Act of 1785. With the shift in focus from the seller to the medicine itself, the qualification of the former became entirely irrelevant. Anyone could sell quack medicines as long as a licence was purchased and the medicines were stamped. The licence merely assisted the supervision and collection of the revenue and constituted no kind of guarantee that the vendors were qualified in any way other than materially. Despite these strong indications that the tax was driven entirely by pecuniary motives,64 the evidence establishes that the medicine stamp duty was introduced for two, albeit unequal, purposes: namely, a primary purpose to raise revenue and secondarily to impose a modicum of control over the trade in quack medicines. Although it was never formally stated, the tax was undoubtedly politically and popularly believed to be imposed to suppress, and not merely to tax, quack medicines. When he introduced the duty in 1783, Lord John Cavendish stated that medicines were ‘very proper objects of taxation’.65 While his expression was ambiguous, potentially referring to the significant fiscal potential of this commodity, it could equally have been referring to the dangers and deceits well known to be inherent in the trade and the resulting wider benefits of taxing quack medicines. Indeed, this is how his political colleagues interpreted it, commenting that quack medicines were proper objects of taxation because they were ‘very pernicious to mankind’66 and observing that the tax was imposed ‘for the sake of humanity’.67 Moreover, that most vociferous opponent of the tax, Francis Spilsbury, not only believed that Cavendish had introduced the tax because he thought quack medicines

64 Accepted by scholars such as G Griffenhagen, Medicine Tax Stamps Worldwide (Milwaukee, WI, American Topical Association, 1971) 3. 65 10 Parliamentary Register 1780–1796, 72, 26 May 1783 per Lord John Cavendish. 66 Gazetteer and New Daily Advertiser, 28 May 1783. 67 Parker’s General Advertiser and Morning Intelligencer, 28 May 1783.

Eighteenth-Century Medicine Stamp Duty 295 were harmful,68 but maintained that he had introduced the Act by saying that, since quack medicines had done much harm to the public, it was fair game to tax them.69 This was not reprinted in the parliamentary records but, as the accurate reporting of debates in 1783 was in its infancy and was neither comprehensive nor regulated, it is possible that the Chancellor had intimated that there existed in his mind some kind of nexus between the evils of quackery and the imposition of taxation. The substance of the legislation supported this. The 1783 Act was unambiguously and exclusively aimed at unqualified sellers of medicines, suggesting that at least part of the motivation was to put an extra burden on quacks in order to discourage the trade. The fact that Pitt, who was well known to be prepared to abolish taxes if they were either unproductive or excessively unpopular, maintained the medicine stamp duty even though it had failed dismally could also suggest he saw a wider purpose in it—to repress a social evil—a characteristic not shared by the duties that he did abolish. Furthermore, although the taxation of gin had been a failure, both financially and in terms of the regulation of a trade dangerous to the public health, it did constitute a precedent for the use of taxation in this way. What was more common was the introduction of a tax with the primary purpose of raising finance, but having a regulatory effect which was, as such, welcomed by legislators. One example is the newspaper stamp duty. It has been suggested that Pitt increased the newspaper duty in 1789 in order to curb the radical press in Britain, which was reporting about the progress of the French Revolution. It was a time of intense apprehension as to the damaging nature of newspapers.70 While the problems of the quack medicine trade were of a different order, they were well recognised. Unlike the newspaper stamp duty of the eighteenth century, which was only subsequently expressly revealed as an instrument of censorship, there is no need to rely on circumstantial evidence.71 Correspondence has been found between the Commissioners of Stamps and the Treasury in 1785 which shows conclusively the intention of the draftsmen of the medicine stamp duty legislation. The raising of public revenue was not the sole rationale of the medicine stamp duty, because it was also intended to affect behaviour and suppress a perceived evil. The correspondence asserts that 68 F Spilsbury, Discursory Thoughts Disputing the Construction of His Majesty’s Hon. Commissioners and Crown Lawyers, relative to the Medicine and Horse Acts . . . with Remarks on the Late Trials Concerning the Medicine Act (London, Dispensary in Soho Square, 1785) 41. 69 Ibid, 1. 70 H Dagnall, Creating a Good Impression (London, HMSO, 1994) 29–32; L Oats and P Sadler, ‘Stamp Duty, Propaganda and the French Revolutionary and Napoleonic Wars’ in J Tiley (ed), Studies in the History of Tax Law, vol 1 (Oxford, Hart Publishing, 2004) 243, 252–53. 71 P Sadler and L Oats, ‘‘This Great Crisis in the Republick of Letters’—The Introduction in 1712 of Stamp Duties on Newspapers and Pamphlets’ [2002] British Tax Review 353, 363–64.

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the object of the tax was to act as ‘a Regulation of Police, or as a Law of Revenue’72—in other words, it was both to control and limit the use of quack medicines and to raise public revenue. With the precedent of the dual purpose inherent in the newspaper stamp duty, the introduction of the medicine stamp duty with the ancillary purpose of controlling quack medicines in the interests of the public health was neither new nor surprising. The regulation the government was aiming at was a purely market regulation: protecting legitimate medicines used by the regular medical profession, while making quack medicines less attractive to the consuming public by forcing a rise in their price and thereby hoping to reduce the volume of the trade in quack medicines. It did not even attempt any kind of quality regulation, and there was no attempt at an informed assessment of the quality of the product. Market regulation was, at least, better than no regulation at all. Taxing quack medicines imposed a certain degree, albeit slight, of control. The evidence shows that the sellers of medicines, above all the chemists and druggists, feared the impact of the tax on their businesses.73 The tax was bound to make a commercial impression: they would have to purchase a licence; raise their prices to cover the cost of the stamp; take the time and trouble within their working lives to correspond with the Stamp Office to check whether any new products, or uncertain products, were dutiable; and, if they breached the Act, would be liable for the heaviest financial penalties. The imposition of the stamp duty undoubtedly made such products more expensive for the customer, but it also sent a clear signal that quack medicines had now been brought to the attention of the state. Thus the evidence establishes that the rationale of the tax included a regulatory element, though one that was unambiguously ancillary to the principal purpose of revenue-raising. Nevertheless, the presence of even a subsidiary element of regulatory intent shows that the government recognised its desirability. That raises the question of why the British government did not follow the example of the French and introduce explicitly regulatory legislation and why it was content merely to tax. The British fiscal response to the phenomenon of the trade in quack medicines was singular in eighteenth-century Europe. Other states adopted an overt regulatory and legalistic approach. In France, for example, where, it was said, ‘quackery prevails more, if possible, than in this country’,74 it was understood that, in order to protect the health of the public, the trade in quack medicines had to be legally controlled.75 So, at the very time that Britain was imposing a tax on quack medicines, 72 73 74 75

Stamp Office, above n 32. Spilsbury, above n 68, 10–11. London Chronicle, 27–30 September 1783, issue 4199. Adair, above n 1, 139–40.

Eighteenth-Century Medicine Stamp Duty 297 the authorities of the Ancien Régime in France established a succession of regulatory legal frameworks to suppress the manufacture and sale of secret remedies.76 Where a remedy was useless or dangerous, the French adopted two approaches.77 The first was retail control, providing that only apothecaries or licensed individuals could sell proprietary medicines, and enforced by financial penalties. This was similar to the licence element of the British medicine stamp duty and, like that, the control was remote from the medicine itself and any control of its quality was fortuitous. The second was one that was not adopted in Britain, namely the analysis and control of the medicines themselves. The first significant French attempt to do this was in 1728, when a commission composed of physicians, surgeons and apothecaries was established to examine all licensed proprietary medicines and to either renew or withdraw the licence according to the commission’s findings as to the quality and effectiveness of the medicine.78 This commission adopted a variety of forms throughout the rest of the eighteenth century to carry out the state’s determination to regulate the quality of quack medicines, culminating in the Société Royale de Médecine taking on the duty in 1776.79 Official evaluation was compulsory, with proprietors of remedies having to submit samples for analysis, and to disclose the ingredients and methods of manufacture.80 Beneficial remedies were approved and authorisation given, though very sparingly;81 dangerous ones were prohibited; and medicines of uncertain value were subjected to closer analysis and, if non-toxic, clinical trial.82 Difficulties resulting from multiple possible avenues of authorisation for quack medicines,83 from ideological tensions following the Revolution in 178984 and from a widespread evasion of the law or claims to exemption resulted in an overall failure to curb the trade in quack medicines, let alone ban it. The trade remained as robust in France as it was in Britain. Nevertheless, the French system in the eighteenth century demonstrated a serious commitment of the state to regulate quack medicines in the public interest. Intensive official debate at the highest levels of government and the medical professions characterised the French approach and, as 76 For a comprehensive account of unqualified medical practitioners in France in the eighteenth and early nineteenth centuries see M Ramsey, Professional and Popular Medicine in France, 1770–1830 (Cambridge, Cambridge University Press, 1988) 129–228. 77 M Ramsey, ‘Traditional Medicine and Medical Enlightenment: The Regulation of Secret Remedies in the Ancien Régime’ in J-P Goubert (ed), La Médicalisation de La Société Francaise 1770–1830 (Waterloo, Ontario, Historical Reflections Press, 1982) 217. 78 Ibid, 217–18. 79 Ibid, 219. 80 For specific examples of the process, see ibid, 225–31. 81 Ibid, 222–23. 82 Ibid, 220. 83 Ibid, 218–19. 84 M Ramsey, ‘Property Rights and the Right to Health: the Regulation of Secret Remedies in France, 1789–1815’ in WF Bynum and R Porter (eds) Medical Fringe and Medical Orthodoxy 1750–1850 (London, Croom Helm, 1987) 79–105.

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each initiative failed, the government persisted in looking for an effective solution.85 This systematic engagement with the problem was noticeably absent in Britain until the twentieth century, even though eighteenthcentury British critics of quackery thought penal laws on the French model were necessary to suppress quacks, and James Makittrick Adair, a regular practitioner, condemned the absence of state regulation of quackery. He doubted the wisdom and efficacy of Britain’s decision merely to tax.86 Similarly, the British press commented that regulation along the French lines would ‘prevent the unhappy effects of the credulity of the people’.87 There were two principal and cogent reasons why Britain made the decision not to regulate. The first was political. The theory of mercantilism, which had dominated economic thinking for the past 200 years, was giving way to laissez-faire. And when, in the early nineteenth century, laissez-faire came to dominate economic and political thought, regulation became politically unacceptable. The importance of trade and commerce was recognised, but prevailing theories believed that it was best promoted through market forces rather than proactive regulation. Also, although quack medicines caused concern to the government in terms of public health, medical science was not sufficiently advanced to prove that quack medicines were a threat to the public. Moreover, quacks themselves were not perceived as a sufficiently severe social or political threat.88 The second, and crucial, reason was professional. Orthodox regulation through penal laws administered by the regular medical professional bodies had already been tried but had failed. When the Royal College of Physicians received its royal charter in the early sixteenth century, its principal function was to grant licences to qualified practitioners to practise medicine and to punish unqualified practitioners.89 It could examine and grant licences to individuals of whom it approved, including some quacks, could discipline unlicensed practice, and could examine the stocks of apothecaries and druggists. While this had some effect in exposing and punishing some notorious quacks,90 it was largely ineffective. The reason for this failure lay in the state of development of the British professional structure. It was weak, divided, complex, uncoordinated and confused prior to the mid-nineteenth century. The College of Physicians was just one of a number of bodies which could licence various branches of medical practice in certain areas, namely the professional medical bodies of physicians, surgeons and apothecaries, the universities,

85

See generally Ramsey, above n 77, 215–32. Adair, above n 1, 142. 87 London Chronicle, 27–30 September 1783, issue 4199. 88 Porter, Quacks, above n 3, 56. 89 For earlier attempts to do so see G Clark, A History of the Royal College of Physicians, 2 vols (Oxford, Clarendon Press, 1964) vol 1, 24–29, 102. 90 Adair, above n 1, 140–41. 86

Eighteenth-Century Medicine Stamp Duty 299 the Archbishop of Canterbury and the Crown.91 Not only did these provide quacks with opportunities for legitimising their practice,92 the granting of exemptions from such licensing93 and the rigid demarcation between the three traditional branches of medical practice which they were determined to maintain contributed to the inability of the professional bodies to enforce regulations. In addition, the best efforts of the College of Physicians in particular were undermined by bribery, apathy, vested interests, inconsistency and practical problems of enforcement against the itinerant quack.94 The absence of powerful and effective corporate control meant that the medical profession was essentially unregulated both in London and in the provinces,95 and there was nothing to stop the proliferation in the eighteenth century of unqualified persons practising medicine, including the manufacture, advertisement and sale of quack medicines, even with the most outrageous and unlikely claims. This combination of political and professional conditions prevailing in eighteenth-century Britain made the overt regulation of quack medicines difficult, if not impossible. This left a vacuum which the government, grasping a market opportunity, filled with tax. The decision to tax, however, was not just a second best to regulation. In its own right, it was overwhelmingly the choice of the government. Taxing quack medicines was simply more attractive from almost every perspective. First, the trade was very extensive, and so evidently a species of commercial enterprise rather than professional practice, that it was naturally an object of taxation. Quack medicines were almost predisposed to be taxed. And, indeed, in fiscal terms, the recast medicine stamp duty of 1785 was very successful. Whereas the 1783 Act had raised only £2000, the reformed Act immediately yielded more, and soon met its target of £15,000 per annum. In the context of the overall tax yield, this was small—indeed, it was less than 1% of the entire stamp duty yield, and the stamp duty was the smallest producer of the four main imposts of customs, excises, taxes and stamps. Nevertheless, it had an unrealised potential as a small but secure source of much needed revenue and, as such, was a worthwhile contribution in a time of imperative financial exigencies. Secondly, the medicine stamp duty conformed to the orthodox principles of taxation which dominated the fiscal policy of the eighteenth century

91 M Ramsey, ‘The Politics of Professional Monopoly in Nineteenth-Century Medicine: The French Model and Its Rivals’ in GL Geison (ed), Professions and the French State 1700–1900 (Philadelphia, PA, University of Pennsylvania Press, 1984) 225, 245–46. 92 Matthews, above n 9, 34–6; 40–1. 93 See Porter, Quacks, above n 3, 58. 94 Clark, above n 89, vol 1, 116–8, 140–41, 144, 194- 96, 262–64; vol 2, 507, 513–15, 677–79. 95 Porter, Quacks, above n 3, 37–9.

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and were expounded by Adam Smith in his Wealth of Nations in 1776.96 These were that taxes should be voluntary, non-inquisitorial and necessary, and that the poor should be taxed sensitively or not at all. Pitt, who was particularly influenced by Smith, was concerned in his taxation policy with raising public revenue as efficiently and cheaply as possible, but doing so with the lightest impact on the people in general and ensuring as far as possible that the tax burden was shared fairly according to ability to pay. He avoided taxing the poor as far as possible, and accordingly targeted luxuries rather than necessities. Arguably the medicine stamp duty satisfied these canons. It was an indirect assessment through an increased cost of a commodity which the public could choose whether or not to purchase. As such, it was a non-inquisitorial and voluntary tax. The one issue of doubt was as to the nature of quack medicines. Opponents of the tax naturally argued that medicines were not luxuries but necessities,97 and that their purchase by the public was thus not a matter of choice. Not only did that breach that canon of taxation, it also implicitly breached the one that maintained that the poor should not be taxed. Furthermore, tax had always been an exception to the policy of laissez-faire, with its adherents accepting that it was necessary for effective government. As such, the medicine stamp duty was a useful tool: it provided a measure of regulation in a politically acceptable guise, which could be denied as such at will, and was always justifiable as pure revenue-raising for the necessities of the state. Thirdly, a number of factors combined to make taxing quack medicines relatively easy. It was socially acceptable because, although quack medicines were very popular, quacks were not. The traditional perception of a quack as an ignorant, cheating and often foreign itinerant rogue, preying on the misfortunes of others, persisted.98 Indeed, when the tax was introduced, one newspaper observed that even if the quacks evaded the tax by reducing the price of medicines to 6d per box or phial, they would still make a profit of some 600 or 800%, as well as ‘the certainty of a greater sale’.99 Also, with respect to the medicines the quacks sold, the public resented the element of secrecy, particularly when allied to extravagant advertising and uncertain results.100 To keep the ingredients of medicines secret could only be to prevent others manufacturing them and thereby diminishing the profits of the inventor. This was ‘naked selfserving, sanctimoniously masquerading under the cloak of humanity’,101 96 A Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, edited by RH Campbell, AS Skinner, WB Todd (Oxford, Clarendon Press, 1976) vol 2, book V, ch 2, 825–28. 97 Spilsbury, above n 68, 11. 98 For quackery in pre-modern England, see Porter, Quacks, above n 3, 15–16. 99 London Packet or New Lloyd’s Evening Post, 22–24 October 1783, issue 2036. 100 Porter, Quacks, above n 3, 17–18. 101 Ibid, 44.

Eighteenth-Century Medicine Stamp Duty 301 and created widespread and intense grievance. This made the quack a legitimate target for taxation, and the taxation of quack remedies not universally unpopular. More significantly, however, the tax of choice—the stamp duty—had many practical advantages. As with so many of Britain’s fiscal instruments, stamp duty originated in Holland, and was introduced to Britain in 1694 to finance the war against France.102 It was initially imposed on vellum, parchment and paper, and was immediately very successful. Its potential to produce more revenue was understood, so it was steadily increased in scope. Prior to the introduction of the duty on medicines, it was already imposed on a large range of documents, notably conveyances, grants of probate, legacies, newspapers, marine and fire insurances, and bills of exchange, and on a number of commodities, namely cards and dice, and gold and silver plate. As already mentioned, when the stamp duty was first imposed on medicines, it was also newly laid or extended on a number of other documents and commodities.103 The Medicine Stamp Act 1783 was the third of three Acts imposing or raising stamp duties in the same year as part of a general increase within the stamp duty regime to finance the new loan. The medicine tax was a stamp duty, albeit not one of the original kind, being on a commodity rather than a document and accordingly known internally within the revenue departments as one of the ‘unstamped duties of stamps’.104 It was a tax on a consumable, and taxes of this nature were the most acceptable to the public. Such taxes were, as Adam Smith observed, ‘not so much murmured against’105 because they were imposed in the first instance on the manufacturer or seller, who would increase the price of the commodity accordingly to pass the burden of the tax to the purchaser. The tax was thereby ‘insensibly paid by the people’.106 Thereafter, the duty could be increased as small rises would barely be noticed. Thus far this was true of the medicine stamp duty, though the fact that the bottle, packet or box of medicines would bear a physical stamp served to remind the purchasers that they were paying the duty and, as such, it was more visible than other indirect taxes. Although the stamp duty was the least productive of the four eighteenth-century imposts of customs, excise, stamps and taxes, it enjoyed the inestimable advantages of easy and cheap management. Administration was kept to a minimum, and the bureaucratic procedures were established 102 5 & 6 Will & Mary c 21. For the early history of the stamp duties, see E Hughes, ‘The English Stamp Duties, 1664–1764’ (1941) 56 English Historical Review 234; Dagnall, above n 70, 3–14. 103 See text at n 50. 104 Dowell, above n 4, vol 2, 188. 105 A Smith, Lectures on Justice, Police, Revenue and Arms delivered in 1763 (Oxford, Clarendon Press, 1896) 243. 106 Ibid.

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and efficient. The items which had to bear a stamp were laid down in the charging statute, and the manufacturer or vendor simply had to purchase the stamps of the required value from the Stamp Office. The distributors of stamps did not have to give advice, merely to provide the stamps requested. In 1797 Pitt expressed his reasons for favouring the stamp duties in the raising of public revenue, reasons which were to endure for all subsequent governments:107 In looking at the different branches of revenue, there was one source of taxation which appeared to him to be preferable to any other, because the produce was easily raised, widely diffused, and which pressed little upon any particular class, especially the lower orders of society; and it was the more eligible on this account, that the revenue arising from it, at the same time that it was ample, was safely and expeditiously collected at a small expense.108

C ONC LU SION

It is always difficult to discern the policy of any taxing legislation, particularly that of the eighteenth century, because of the strength of orthodox thinking that the purpose of a tax was purely to raise money. That is not to say that other motives were absent, but they were rarely articulated and they emerge, if at all, by close examination of contemporary sources, particularly extra-statutory ones, and educated guesses. This is in contrast to modern taxes: today, governments are quite open about using taxation to achieve non-fiscal aims and to shape social and environmental policy. The evidence shows that the eighteenth-century medicine stamp duty was imposed with the primary purpose of raising public revenue in a period of acute need and, as such, was the outcome of a clear and dominant political imperative. It has also been found to have been introduced with a subsidiary purpose, namely to impose some control on the undesirable and mischievous trade in quack medicines. As such, it was a response to a social imperative. Most nineteenth-century and later commentators took the view that the medicine stamp duty had been introduced solely to raise money, such a flourishing trade inevitably attracting the attention of the revenue departments.109 Only Stephen Dowell believed that the tax was imposed ‘[i]n the interests of the public, the qualified practitioners and the revenue’110 and was recast ‘for the sake of convenience and the 107

See RS Nock, ‘1694 And All That’ [1994] British Tax Review 432, 433. W Pitt, The Speeches of William Pitt (London, Longman, Hurst Rees & Orme, 1806) vol 3, 122–23. 109 EN Alpe, Handy Book of Medicine Stamp Duty (London, Offices of ‘The Chemist and Druggist’, c 1888) 7; LG Matthews, ‘The Medicine Stamp Acts of Great Britain’ (1986) 16 Pharmaceutical Historian 2. 110 Dowell, above n 4, vol 4, 366. 108

Eighteenth-Century Medicine Stamp Duty 303 public service’.111 However, his placing of revenue as the last of the tax’s objectives is belied by contemporary evidence. The imposition of stamp duty on quack medicines in the eighteenth century was a singular and undoubtedly a lesser response to the phenomenon of quack medicines than that of other European states. The reason was that it was first and foremost a response to the financial exigencies facing the country after many years of war and only secondarily a response to the evils of the trade. Indeed, any regulatory effect of the tax was an unlooked for but welcome by-product. It could be that quack medicines were not regarded as an unmitigated evil that had to be prevented; or that the evils of the trade were recognised by the government but, when balanced against the benefits of a new taxable object with a material yield, the profit motive dominated; or, finally, that a pragmatic government thought that taxing quack medicines would be to obtain the best possible compromise: that the tax would raise money for the public revenue, but might also serve to deter at least some of the smaller quacks. The British legislature saw that the European model of overt regulation signified an official commitment to addressing the evils of the quack trade, but recognised that it had failed. Social and medical conditions in Europe were such that there was a huge public appetite for quack medicines, supported by public need and public credulity.112 Britain had but to look to France’s serious efforts to suppress the trade by regulatory legislation to understand that to legislate against quack medicines, however strongly, was unlikely to be effective. It recognised that, in attempting to suppress the trade in quack medicines, all legislatures faced the fundamental problem that the principal obstacle in protecting the health of the public was the public itself. Thus, when forced by the weak and fragmented state of the British regular medical professional bodies to accept that a similar regime of regulation was impossible, the albeit minor controlling side-effect of the taxation which contemporary political conditions and fiscal policy rendered inevitable was both recognised and welcomed by the eighteenth-century British legislature. It is possible that Britain also understood that the effective regulation of quack medicines could not be achieved by one single regime, and that various techniques were legitimate instruments of control. To impose a tax and eschew formal regulation was an astute, realistic and pragmatic political compromise. It raised money for the public revenue and imposed a potential, though small, measure of market control on quack medicines. The evidence shows that the publicly proclaimed eighteenth-century orthodox view of taxation being solely to raise public revenue, with no wider policy objectives, was maintained in

111

Ibid, 367. Dr Faligot, La question des remèdes secrets sous la Révolution et l’Empire (Paris, Occitania, 1924) 155. 112

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its essentials but was not inflexible. The government did have a policy agenda in imposing the medicine stamp duty, albeit a subsidiary one. The policy objective inherent in the medicine stamp duty was presumed by politicians and public, but never formally or openly articulated. No regulatory claims were made for the tax at its inception, and its formal character was as no more and no less than a tax like any other. However, when financial and regulatory objectives were united in the same tax, albeit unequally, tensions were inevitably created. Having chosen taxation as an instrument of regulation, even to a minor degree, that regulation would not be allowed to operate outside the constraints of the essential nature of taxation. The fiscal character dominated, and the medicine stamp duty brought with it all the consequences of its character as a tax. That was an inherent and probably unavoidable limitation of the tax regime. The problems for commercial pharmacy arising from this characterisation thus established in the eighteenth century would only become apparent in the nineteenth century, but should not overshadow the achievements of the eighteenth-century tax. It was a new impost on a thriving commercial activity; the charge was as clear as the subject matter allowed; despite some complexity within the exemptions, they were regarded as clearly protecting the regular medical profession; the tax was as well administered as any of the taxes, depending as it did on the established processes of the Stamp Office; it was generally accepted by the public; and it consistently raised its predicted yield. It was these characteristics, established in the eighteenth century, which would transcend the problems caused in the next century by its ancillary regulatory function and ensure it endured as a viable impost for nearly 160 years into the modern age of taxation.

9 Plaintive Glitterati: Famous People in Tax Cases PHILIP RIDD

A BSTR A C T Jerome K Jerome warned against litigating. In the penultimate chapter of his Second Thoughts of an Idle Fellow, a chapter entitled ‘On the Inadvisibility of Following Advice’, he has a man of law giving the following advice: My dear sir, if a villain stopped me in the street and demanded of me my watch and chain, I should refuse to give it to him. If he thereupon said, ‘Then I shall take it from you by brute force,’ I should, old as I am, I feel convinced, reply to him, ‘Come on.’ But if, on the other hand, he were to say to me, ‘Very well, then I shall take proceedings against you in the Court of Queen’s Bench to compel you to give it up to me,’ I should at once take it from my pocket, press it into his hand, and beg of him to say no more about the matter. And I should consider I was getting off cheaply. That was the Queen’s Bench. Chancery is worse according to Dickens. In chapter 1 of Bleak House one passage ends: ‘Suffer any wrong that can be done you rather than come here!’ Nevertheless many famous people— at least, famous in their time—have been involved in litigation about their tax affairs. The purpose of this chapter is to examine that litigation, as found in the Tax Cases series of law reports. The product will inevitably lack coherence and theme, but the sheer variety may, it is hoped, stimulate interest.

I N T R ODU C T ION

B

RIGHT IDEAS ARE hatched in the oddest places, and in this instance it was a No 11 bus on which I encountered Susan Bell, former editor of Simon’s Tax Cases, now in private practice. I remarked on the recent death of Sir Norman Wisdom, the film star who was so popular both in the UK and, surprisingly, in Albania: Norman 305

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Wisdom eventually visited Albania and was made an honorary citizen of Tirana. He was the Wisdom of Wisdom v Chamberlain (HM Inspector of Taxes). Susan and I then instanced several other famous folk who had been involved in litigation with the Revenue, and we hatched the idea of a paper on that subject. Like most things which look simple at first blush, it proved to have its challenges. I considered tax evasion cases but smartly rejected them. Fiction was more tempting. Bertie Wooster’s Uncle Tom Travers—who was described as looking like a pterodactyl with a secret sorrow—had a bill for £58 1s 3d and moaned about ruin and the sinister trend of socialist legislation and what will become of us all. That passage gives the idea that PG Wodehouse was expressing his own feelings. In 1995, Tony Ring wrote a book about Wodehouse’s experiences in tax matters—You Simply Hit Them With An Axe. The title comes from a song called ‘Bongo on the Congo’ written for a show called Sitting Pretty in 1924. It proved an interesting book, though I detected a possible flaw in that the Ramsay doctrine1 and sham seemed to be treated as more or less the same thing. Wodehouse was, of course, a genuine sufferer because he had both UK income and US income in those unhappy days when double taxation relief was not yet in operation. Wodehouse liked France because France taxed only income derived from within its borders. Other authors were mentioned in the Tony Ring book: AP Herbert was hopping mad about the Entertainments Tax; Evelyn Waugh, Sax Rohmer and Hugh Walpole all had income tax grievances. Wodehouse’s main troubles were with the US authorities. He did have a case here in 1934, but the General Commissioners for St Martin-inthe-Fields were persuaded by Raymond Needham QC to find largely in Wodehouse’s favour on residence issues and the effectiveness of an assignment of copyright. The dissatisfied tax inspector was taken to lunch at The Savoy by Needham and Wodehouse. What a thing! A Revenue official in receipt of hospitality! It surely wouldn’t happen these days. I did enjoy the Wodehouse idea of a tax deduction for an author whose dachshund jumped on his neck, causing him to forget an excellent epigram, but I decided not to do fiction. I decided to concentrate on what is in Tax Cases, that invaluable law report series, my admiration of it having nothing to do with the fact that I was its editor for some 16 years. The next challenge was to decide who is famous and who isn’t. Fame is an odd business. Enduring fame is granted to few people—Shakespeare, Genghis Khan, Moses, perhaps—but even then there are probably a good many folk in remote areas of, say, Indonesia, Paraguay and Senegal who have never heard of Shakespeare. Look back a bit—say, 1,000 years, or 800, or 600—how many people 1

[1982] AC 300.

Famous People in Tax Cases 307 can you name who were alive in 1012, 1212 and 1412? Jane Frecknall Hughes has written about taxation in the time of King John.2 King John was around in 1212, but who else was? For most people, their fame will fade away. Consider authors, for example. There are 15 cases concerning authors in the present chapter. Four, Georgette Heyer, Rudyard Kipling, DH Lawrence and Compton Mackenzie, were novelists, some of whose books are still in the shops today and are available on audio. One, JM Barrie, was a playwright whose most famous character, Peter Pan, has even become a familiar linguistic term to denote a person of childlike character. Two, Peter Cheyney and Hammond Innes, were novelists whose many works were big sellers in their time but who are relatively unknown today. Two, John Wain and Geoffrey Household, might be remembered by some people of pensionable age, but few, if any, will recognise the names of Stella Benson, Peter B Kyne, Olga Nethersole, George Billam, Margaret Irwin and Dr Albert Carter. Two cricketers, now virtually unknown, are also mentioned. Cricket is an example of a small world within the bigger world. Another small world which came to my mind is the tax world. There are names in Tax Cases which are well known to those who specialise in tax. For example, at 51 TC 443, there is the name Avery Jones, operating in his capacity as Rowley’s Administrator. In Jones v O’Brien the respondent was the Special Commissioner of that name. I decided to cast my net wide. I even included the aristocracy in my research work, but they proved to be prolific litigators and as a result I discarded them. It is quite possible that I have failed to identify some cases which involved famous people. The names of cases can be inadequate pointers. When ‘Olivier’ or ‘Agassi’ are spotted in an index, life is easy, but Julie Christie is not brought instantly to mind by ‘Black Nominees Ltd’, and ‘Stainer’s Executors’ does not instantly convey that the case concerns the actor Leslie Howard. At any rate, I apologise, and am open to correction if I have missed any cases that I should have covered. The third challenge that I encountered proved insuperable. It is that the cases are a ragbag. There is no consistency, no theme. My best defence is that they deal with interesting characters and that there is something to be said for the variety of issues which they raise. Categorising was a fourth challenge. There is an old story about a lawyer upbraiding his son for breaking a window by kicking a football at it. The terms of the boy’s denial vary from storyteller to storyteller, but are along the lines: ‘The window was already broken; further, or in 2 ‘John Lackland: A Fiscal Re-evaluation’ in J Tiley (ed), Studies in the History of Tax Law, vol 1 (Oxford, Hart Publishing, 2004), 201–26.

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the alternative, it was not a football which broke it; further, or in the alternative, I was not there when the football was kicked at the window; further, or in the alternative, I was there but it was not I who kicked the football’. An adaptation to income tax (which is taken to include supertax/ surtax), leaving out ‘further, or in the alternative’, might read: ‘1. I am not subject to income tax at all; 2. There is no income to be charged; 3. My receipts are capital, not income; 4. My receipts do not fall within any of the heads of charge, or at any rate not within the head of charge under which I have been assessed; 5. I am liable but I haven’t been given a relief or deduction to which I am entitled. 6. I might have been liable but there has been a fatal flaw in the process; 7. I might have been liable but I have successfully taken avoidance action; 8. Well, anyway, I am not going to co-operate’. Although some of the cases do not fit the headings with the utmost comfort, and a few scarcely fit at all, the cases will be considered under those headings, albeit with some sub-categorisation by sub-headings.

1 . I A M N O T SU BJ EC T T O INC OME TA X AT A LL

Case 1: Whitney v CIR (1924) 10 TC 88 Harry Payne Whitney (1872–1930) and his wife, Gertrude (née Vanderbilt), Americans residing in New York, owned shares in a UK company which paid dividends. The main issue was whether supertax applied to a person who was neither resident in nor a citizen of the UK. The Law Lords were divided 2–2, with Lord Carson’s speech to come. Lord Carson rarely gave a reasoned speech, and the fact that his speech would be decisive of the matter did not deter him from the simple course of agreeing with one or more of his colleagues: he agreed with Lords Dunedin and Wrenbury, so the Revenue sustained its success in the courts below. The case has been cited on many occasions because it contains Lord Dunedin’s remarks (page 110) on the three stage process of liability, assessment and collection, often known, if somewhat fatuously, as ‘Lord Dunedin’s celebrated trichotomy’. Case 2: Curtis Brown Ltd (as Agents for Stella Benson, DH Lawrence and Peter B. Kyne) v Jarvis (HMIT) (1929) 14 TC 744 Stella Benson (1892–1933), DH Lawrence (1885–1930) and Peter Bernard Kyne (1880–1957) were all novelists who, at material times, were not resident in the UK. The case concerned royalties paid to them by a literary agency. The assessment concerned was for 1925–26, so section 27 Finance Act 1927, which dealt with situations of this sort, was not applicable. It was held that, while the royalties did not derive from a trade, profession

Famous People in Tax Cases 309 or vocation exercised in the UK, they derived from property in the UK, although the agency’s commissions and incidental expenses were held to be allowable deductions. Case 3: Agassi v Robinson (HMIT) (2006) 77 TC 686 Andre Kirk Agassi (1970–), a top tennis player, won tournaments all over the world, including the Wimbledon Men’s Singles in 1992. The case related to 1998–99, during which he had played in the UK at Wimbledon and elsewhere, using clothing and equipment under sponsorship deals with companies not resident in the UK which paid Agassi Enterprises Inc, a company controlled by Andre Agassi and also not resident in the UK. The main issue was whether the relevant charging provisions were inapplicable because they were subject to the territorial principle. By a majority, the House of Lords concluded that the territorial principle could not sensibly be applied and the statutory language should be given its natural meaning.

2 . T H E R E I S N O INC OME T O BE C H A R GED

Case 4: Taylor (HMIT) v Dawson (1938) 22 TC 189 Peter Dawson (1882–1961) was a bass-baritone singer whose recordings are still available on the market: though an Australian, he was a specialist in traditional English ballads. The case concerned contractual stipulations for payments ‘on account and in advance of the royalties due under the provisions of this agreement’. The contention that the payments so made were a loan got short shrift in the High Court. Case 5: Bambridge v CIR (1955) 36 TC 313 Mrs Elsie Bambridge (1896–1976) was a daughter of Rudyard Kipling (1865–1936), the famous author, and his wife, Caroline (1862–1939), an American lady. Mrs Bambridge was the inspiration for, or the original of, the character called Una in Puck of Pooks Hill (1906) and Rewards and Fairies (1910), her brother, John, corresponding to the character called Dan. Her elder sister, Josephine, died young of pneumonia, and John died in 1915 at the Battle of Loos. Kipling was awarded the Nobel Prize for Literature in 1907, the first English language writer to receive that accolade. Amongst Kipling’s poetry, both ‘Mandalay’ and ‘A Smuggler’s Song’ were set to music and made famous by their rendition by Peter Dawson (for whom see Case 4).

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The case concerned assessments to income tax and to surtax for 1948–49 and 1949–50 raised under section 18 Finance Act 1936 (transfer of assets abroad) in reliance on Congreve v CIR (1948) 30 TC 163, in which the House of Lords held that section 18 Finance Act 1936 applied to a transfer of assets abroad whether or not the individual assessed was the person who made the transfer. Mrs Bambridge owned all the share and loan capital of Kamouraska Investments Ltd, a Canadian company, by way of two life interests, one under a settlement made by her father and the other under her mother’s will. The main contention for Mrs Bambridge— that deaths were not ‘associated operations’—was accepted, but the deaths were held to be no more than the events on which the interests conferred by the settlement and the will came into effect. The Bambridge decision, along with Congreve, was overruled in Vestey v Commissioners of Inland Revenue (1979) 54 TC 503. Mrs Bambridge was, no doubt, one of many people who had paid tax for years on the footing that Congreve had been correctly decided. In the event, she had died before the House of Lords rowed back, so she was not in the position of having to rue the curious workings of fate. Case 6: Mason (HMIT) v Innes (1967) 44 TC 326 Ralph Hammond Innes, CBE (1913–98) wrote novels, many involving ordinary people who ran into exciting adventures in different parts of the world. The case concerned The Doomed Oasis, the copyright for which the author assigned to his father by way of gift. The Revenue, relying on Sharkey v Wernher (1956) 36 TC 275, contended that the market value of the rights assigned should be brought in as a receipt of the profession of author. Unlike the taxpayer in Sharkey v Wernher, Hammond Innes had always computed his annual profits on a cash basis, so book rights never came into the picture and the Revenue’s argument failed.

3 . M Y R E C E I P T S A R E C A PITA L, NOT INC OME

Lump Sum Payments Case 7: Glasson (HMIT) v Rougier (1944) 26 TC 86 Case 8: Howson (HMIT) v Monsell (1950) 31 TC 529 Case 9: Mackenzie v Arnold (HMIT) (1952) 33 TC 363 Mrs Rougier was Georgette Heyer (1902–74), a prolific writer of historical romance and detective fiction. Margaret Monsell (1889–1967) wrote many mystery and historical novels under the name of Margaret Irwin. Sir Compton Mackenzie (1883–1972) is best known as the author of Whisky

Famous People in Tax Cases 311 Galore, of which the 1949 film is popular even today, and of The Monarch of the Glen, which generated a long-running television series. He wrote over 100 books across a range which included novels, biography, literary criticism and children’s stories. Each case involved the conclusion that certain receipts relating to various books were income receipts notwithstanding that they were lump sums rather than regular royalty payments.

Provision of services or sale of property Case 10: Beare (HMIT) v Carter (1940) 23 TC 353 Dr Albert Thomas Carter, CBE, KC, DCL (1861–1946), Eldon and Vinerian Scholar, Honorary Fellow of Queen’s College, Oxford, an academic, was the author of A History of the English Courts, originally entitled A History of English Legal Institutions, first published in 1899. In 1935 Dr Carter, as the copyright owner, granted a licence to the publishers for a new edition in return for a payment of £150. His case succeeded on the basis that the transaction in issue involved a sale of part of the rights he had in the book. Case 11: Hobbs v Hussey (HMIT) (1942) 24 TC 153 Case 12: Housden (HMIT) v Marshall (1958) 38 TC 233 Case 13: Alloway v Phillips (HMIT) (1980) 53 TC 372 These three cases involved payments made by newspapers for memoirs. In the first case, the recipient was a man who was crisply described in another case as ‘the infamous William Cooper Hobbs—blackmail, forgery and arson’. It was held that William Cooper Hobbs had not carried on the profession or vocation of an author, but that his receipts were annual profits or gains within Case VI. The test applied by Lawrence J was whether the transaction was a sale of property or the performance of services, the conclusion being that no property was involved in the instant case. Bryan Marshall (1916–91), the recipient in the second case, was an immensely successful steeplechase jockey who twice rode the winner of the Grand National. Harman J held that an individual does not have property in his reminiscences and Bryan Marshall, who had no property to sell, was simply being paid for services rendered. In the third case, the recipient was the wife of Charles Wilson, one of the robbers in the Great Train Robbery of 1963. Wilson escaped from prison and he and his wife lived in Canada under the names of Mr and Mrs Alloway until they were discovered and he was reimprisoned. The argument for Mrs Alloway was that she derived her receipt from services which she had rendered in Canada and that her contractual rights with the

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newspaper concern were not property situated in the UK. It was held that the contractual rights provided Mrs Alloway with property in the form of a chose in action situated in the UK and that the receipts derived from those rights and were chargeable to tax under Case VI of Schedule D. The conclusion is highly debatable. The test between providing services and selling property lacks meaning if the rights under the contract for the provision of services or the sale of property are themselves regarded. When a greengrocer makes money by selling a kilogram of turnips, the taxable source is not his rights under the contract of sale but his trade; likewise, Mrs Alloway turned her memories to account by providing services, just as Messrs Hobbs and Marshall had done, and the contractual provisions were mere machinery.

Generally Case 14: Mills v Jones (HMIT) (1929) 14 TC 769 Sir William Mills (1856–1932) was the inventor of the hand grenade known as ‘the Mills bomb’, which was much used during the First World War. Under the Patents Act 1907, government departments were able to use patented inventions on a pay-later basis, and £27,750 was received by the inventor in 1921 following an award by a Royal Commission. In Constaninesco v Rex (1927) 11 TC 730, a similar case which had made faster progress, the House of Lords determined that payments by the Royal Commission were in respect of the user of a patent and were taxable as income. That was determinative. There might have been a distinction if Sir William Mills’s award had been wholly or partly referable to future user, but the General Commissioners’ conclusion was that the amount of future user involved was negligible, and that conclusion was upheld in the Courts. Case 15: Paget v CIR (1938) 21 TC 675 The Hon Dorothy Wyndham Paget (1905–60) was a very successful racehorse owner. The case involved the arcane world of foreign securities in the form of bearer bonds to which were attached coupons in respect of the interest which from time to time accrued due. Miss Paget sold certain coupons, the bonds concerned being Hungarian and Jugoslavian and subject to default arrangements which those countries had put in place because of difficulties over foreign exchange. The case is of some complication, but the essential question was whether Miss Paget had, through the operation of the default arrangements, received the interest to which the coupons related, and the analysis showed that she had not.

Famous People in Tax Cases 313 4 . M Y R E C E I P T S DO NOT FA LL WITH IN A NY OF T H E H E A DS OF C H A R GE, OR AT A NY R AT E N O R W I T HIN T H E H EA D OF C H A R GE U NDE R W H I C H I H AVE BEEN A SSESSED

Receipts Not Derived from Trade or Profession Case 16: Billam v Griffith (HMIT) (1941) 23 TC 757 George Ephraim Downes Billam was a barrister who wrote plays in his spare time. After 17 years, he struck lucky. In 1936 the Duchess Theatre put on his play Spring Tide, as revised in association with JB Priestley, who did the work for a share in the royalties and other payments. Remarkably, scenes from the play were shown in 1938 on that new-fangled instrument, the television. The principal issue in the case was whether George Billam had, at material times, carried on the profession or vocation of dramatist, and the conclusion was that he had. Case 17: Higgs (HMIT) v Olivier (1951) 33 TC 136 Lord Olivier (1907–89) was the first actor to receive a life peerage. The case related to the film of Henry V, made in 1944. It was generally regarded as having been a phenomenal success, but recorded in the Case Stated as initially having failed financially in England, though a success in New York. The case concerned an agreement made in the course of initiatives to promote the film by which the actor gave, in consideration of a payment to him by the film company of £15,000, an undertaking not to act in, produce or direct any film for any other person for a period of 18 months. It was held that the payment was not a professional receipt because it was a sum paid for a promise not to pursue the profession. Case 18: Commissioner of Income Tax v Savundranayagam (1957) 67 TC 239 Emil Savundra (1923–76) was a swindler. His activities were exposed by The Sunday Times’ Insight team, Private Eye and The Frost Programme. In 1968, he was sentenced to eight years’ imprisonment, with a fine of £50,000 or a further two years. Earlier he had achieved some fame during the Profumo Affair by becoming known during the trial of Stephen Ward as ‘the Indian doctor’. The case was decided by the Judicial Committee of the Privy Council in 1957. It was belatedly reported in Tax Cases because it was often being cited and, inconveniently, the only report was at [1960] 1 Ceylon Tax Cases 479.

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The case involved a complex commercial transaction, involving forged documents and a fictitious ship. The essential fact is that Emil Savundra managed to walk away from a Swiss bank with US $235,000 and that, while the bank and a Chinese company concerned in the transaction had claimed the money back, it was found as a fact that nothing would ever be repaid. The issue was whether that was a trading receipt. The Privy Council held that it was, concluding that, where the payee is liable to pay to the payer the same amount which he has received, the tax position is only affected if the seller can show that the payment received as the purchase price has been or will be diminished or extinguished—a matter on which the Board of Review had made a finding of fact adverse to Emil Savundra. The Privy Council distinguished Morley v Tattersall (1938) 22 TC 51, in which auctioneers held moneys unclaimed by vendors, on the grounds that the moneys had not been received as profits or credit items on account of a trade. Case 19: Shiner v Lindblom (HMIT) (1960) 39 TC 367 Ronald Shiner (1903–66) was an actor, principally in film, though also in the theatre and music hall. He made a profit on the assignment to a film company of film rights which he had acquired in respect of Aunt Clara by Noel Streatfeild. His evidence, which was accepted, was that he did not intend to sell the rights but to hold them as an investment, but the only production company which showed an interest in making the film was not prepared to proceed unless he sold the rights to it. His case succeeded because the receipt was held to be distinct from remuneration for acting and was the realisation of an investment; further, the transaction was an isolated one and not in the nature of trade. Case 20: Wisdom v Chamberlain (HMIT) (1968) 45 TC 92 Sir Norman Joseph Wisdom, OBE (1915–2010) was an English actor, comedian and singer-songwriter. The films, many of which involved a hapless character called Norman Pitkin outwitting the tedious forces of authority, encountered especial success in Albania, where the dictator, Enver Hoxha, permitted them to be shown as a demonstration of proletarian success over capitalist bureaucracy. The case related to an initiative on the part of the actor’s accountant to find a hedge against a possible devaluation of sterling. Silver bullion was bought and sold over a 14 month period. That activity was held to be an adventure in the nature of a trade . . . as the bureacracy asserted.

Famous People in Tax Cases 315 Case 21: Wain’s Executors v Cameron (HMIT) (1995) 67 TC 324 Professor John Barrington Wain, CBE (1925–94) was a journalist, author, poet, critic and academic. The case concerned the sale to the University of Edinburgh of Professor Wain’s collection of working papers and manuscripts for £25,000. It was held that a receipt from anything produced by an author in the course of his profession is a taxable profit of his profession.

Post-cessation Receipts Case 22: Nethersole v Withers (HMIT) (1946) 28 TC 501 Olga Isabella Nethersole, CBE, RRC (1867–1951) was famous on two accounts, namely as a theatrical actress, producer and director, and as a pioneer in health education. In 1897 Miss Nethersole played Carmen in such a way that ‘the Nethersole kiss’ became well known. In New York she later starred in, produced and directed Sapho, a play involving a woman who had affairs with two men to neither of whom was she married. She was prosecuted, but acquitted of violating public decency. The play is now recognised as having provided a big step towards a change of attitude in the US to works which dealt with the subject of sexual activity. After nursing during the First World War, she founded the People’s League of Health, resulting in her award of the Royal Red Cross in 1920. Apart from one play in 1923, she did not pursue matters theatrical after that. She was awarded the CBE in 1936 for her contributions to public health. The fact that she had ceased her profession in the theatre disposed of part of the case, but it continued to the House of Lords concerning three receipts in 1937 and 1939 relating to film rights relating to Miss Nethersole’s dramatisation of Rudyard Kipling’s book The Light that Failed. Miss Nethersole succeeded because the facts disclosed the sale and transfer outright of an item of property.

Post-death Receipts Case 23: Purchase (HMIT) v Stainer’s Executors (1951) 32 TC 367 The film and stage actor (also producer and director) Leslie Howard (1893–1943) died when a civilian flight from Lisbon was shot down by the Luftwaffe in the Bay of Biscay. The case concerned films called Pimpernel Smith, 49th Parallel and The First of the Few, made in 1941 and 1942, which resulted in a variety of

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different receipts. It was held that the sums were not chargeable to income tax in the executors’ hands under Case II of Schedule D or otherwise, since they represented money earned while Leslie Howard was following his vocation and their character had not changed following his death. On this point, Lord Asquith of Bishopstone said, at page 413: If Mr Leslie Howard had stipulated for payment in blocks of shares or bonds, or any other instruments which by their independent vitality generate income, the dividends or interest might well have been taxable in the hands of his executors. The contracts in the present case enjoy, in my view, no such independent vitality. The consideration for what Mr Howard was to do—to act or manage—was not the grant of a contract or contracts but the payment of money under the terms of those contracts. Mr Howard acted for money; he did not act for contracts. The contracts were mere incidental machinery regulating the measure of the services to be rendered by him on the one hand and, on the other, that of the payments to be made by his employers; they were not the source, but the instrument of payment, and his death, in my view, did nothing to divest them of that character.

Case 24: Carson (HMIT) v Cheyney’s Executor (1958) 38 TC 240 Peter Cheyney (1896–1951) was a writer of fast-moving thrillers. The case was about receipts after his death, and it suffices to say that it was indistingushable from Purchase v Stainer’s Executors. Case 25: Hume (HMIT) v Asquith (1968) 45 TC 251 Simon Asquith (1919–73) was the son of Lady Cynthia Asquith (1887– 1960) and grandson of the ex-Prime Minister, Herbert Asquith. Sir James Barrie Bt (1860–1937), the playwright, who was divorced and had no children, bequeathed the copyrights of all his works except Peter Pan—the copyright of which he had given to the Great Ormond Street Hospital for Children—to Lady Cynthia Asquith, his secretary. In 1953 Lady Cynthia had assigned to Simon Asquith certain interests in two of Sir James Barrie’s plays, a full share in The Admirable Crichton and a half share in Quality Street. The interests were the same as to each play but they were of three different types, designated A, B and C for the purposes of the case. Type A royalties derived from agreements made by Sir James Barrie with publishers. Type B royalties derived from an agreement made in 1944 between Lady Cynthia and Samuel French Ltd. Type C royalties derived from an agreement made in 1949 between Lady Cynthia and Samuel French of New York. As to Type A, Simon Asquith succeeded because Purchase v Stainer’s Executors applied, and as to Type B, he succeeded because the payer should have deducted tax under section 169 Income Tax Act 1952. As to Type C, the Revenue succeeded because it had not

Famous People in Tax Cases 317 been shown that tax had not been deducted by the payer under section 170 Income Tax Act 1952. The case is probably unique in that the taxpayer relied on some wise judicial words uttered by his own uncle (see Case 23 above).

Employed or Self-Employed Case 26: Davies (HMIT) v Braithwaite (1933) 18 TC 198 Dame Lilian Braithwaite (1873–1948) was an English actress. The issue was whether she was self-employed or an employee in the years in which she acted in plays and films in England and in the US, performed on the wireless for the BBC, and made recordings for gramophone companies. She was held, contrary to her contention, to have been self-employed. Case 27: Archbishop of Thyateira v Hubert (HMIT) (1942) 25 TC 249 From 1922 until his death in 1951, Dr Germanos Strenopoulos was Archbishop of Thyateira. Based in London, he was head of the Greek Orthodox Church in Western Europe and representative of the Oecumenical Patriarch of Constantinople to the Archbishop of Canterbury. The issue in the case was whether he was assessable under Schedule D or Schedule E in respect of his income from three sources, viz: voluntary collections from churches in the UK; voluntary collections from churches elsewhere in Western Europe; and allowances or payments made by the Greek government. It was held that Rule 6 of Schedule E, which dealt with public offices in the UK and, at (g), included ‘offices or employments of profit under any ecclesiastical body’, applied. In the Court of Appeal, MacKinnon LJ described the appellant taxpayer as having a ‘picturesque’ nature—a strange choice of adjective. He then rejoiced in the fact that the decree (or Tomos) which created the Archbishopric was written ‘not in the base jargon which I am accustomed to see in newspapers in modern Greek, but in the delightful ecclesiastical Greek that it was once my pleasure to study’ (page 259). Case 28: Household v Grimshaw (HMIT) (1953) 34 TC 366 Geoffrey Household (1900–88) wrote thrillers and other fiction. He received £2,700 net when a film company cancelled a contract with him. He failed to establish that the contract was one of employment (the receipt not being, he contended, an emolument) or that the receipt was a capital receipt.

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Case 29: Hall (HMIT) v Lorimer (1993) 66 TC 349 Ian Lorimer is the director of the popular television show QI, and over the years he has been associated in different capacities with the quiz show Have I Got News for You, which has been running for over 20 years. The case related to years in which he had many hundreds of engagements for different companies, mostly as a vision mixer, and he succeeded with the contention that he had been self-employed.

Whether Emoluments Case 30: Reed (HMIT) v Seymour (1927) 11 TC 625 James Seymour (1879–1930) played cricket for Kent from 1902 until 1926. His club awarded him a benefit. This took two forms: there was an invitation to the public to subscribe money; and he was to receive the gate money, shorn of various expenses, from one particular match. The question was whether the share of the gate money was a taxable emolument, no assertion being made by the Revenue that the subscription money was chargeable to tax. That caused comment. Rowlatt J was unable to see any distinction between gate money and subscription money. Lord Carson, who, unusually, made a speech, albeit a short one, said that the money was never the money of the club at all but was subscribed by the public for the benefit of James Seymour—a complete misunderstanding of the facts. Yet the distinction between gate money and subscription money might be said to be obvious: gate money was paid by members of the public to get into the Canterbury ground to see the cricket match; it was a contractual consideration, not a gift; as matters worked out, 60% (in round terms) of each payment of gate money accrued to James Seymour, but it would be fanciful to say that each member who paid, say, 10d to get into the ground was giving 6d to James Seymour and 4d towards the club’s expenses; the money reached James Seymour’s pocket because the club decided to forego the net gate money. This point is laboured because it had relatively little recognition in the judgments. Possibly the judges looked through the fact that James Seymour received the money from the club to the source of the hard money—the payments made by the public—but it may be said that the original source was the club’s decision to award a benefit. It is quite difficult to read the six judgments in favour of James Seymour and conclude that the facts were properly appreciated. The result of the case was that the £939 16s was held to be a personal gift, not a profit of the recipient’s employment. Although the judgments may be criticised, that is not to say that the decision was wrong. The decision to award a benefit is a generous act by a club and may reasonably

Famous People in Tax Cases 319 be described as a gift. By nature, it is a termination payment over and above the ordinary remuneration by weekly or monthly wage because it recognises that a cricketer’s career is necessarily relatively short and he will, while at an ordinary working age, have to find some other way to make a living. Case 31: Davis (HMIT) v Harrison (1927) 11 TC 707 Nowadays anyone to whom the name ‘George Harrison’ and the location ‘Everton’ were mentioned in one breath would probably think of the late Beatle of that name. The George Harrison (1892–1939) of this case, however, was an Everton FC and England footballer. He played for Everton from 1913 to 1923, and twice for England in 1921. The case concerned a payment of £650 made after Everton released him in November 1923 and he transferred to Preston North End. It was held that the payment was not compensation for loss of office but an emolument, as it had been made under a business-like arrangement and was plainly a reward for services—as, indeed, Rule 9 of the Football League Rules, under which the payment had been made, recognised. Case 32: Moorhouse (HMIT) v Dooland (1954) 36 TC 1 Bruce Dooland (1923–80) was an Australian cricketer. He played for some years in the Lancashire Cricket League, the rules of which provided for a collection to be taken from spectators if a player scored 50 or more runs in an innings or if he bowled with the degree of success defined. The issue was whether the sums so collected were emoluments within Schedule E. It was held that they were, as they had arisen in the ordinary course of the service, had a recurrent quality and, crucially, were provided for in the contract. Case 33: Moore v Griffiths (HMIT) (1972) 48 TC 328 The footballer Bobby Moore (1941–93) is most famous for being the England captain in England’s win in the final of the World Cup competition of 1966. The football manager Jock Stein said of him: ‘There should be a law against him. He knows what’s happening twenty minutes before everyone else.’ The players were unaware of it, but the Football Association had resolved to award a bonus pool of £22,000 if England were to win. The squad of 22 players requested an equal distribution. Bobby Moore’s £1,000 was held to have the quality of a testimonial or accolade rather than the quality of remuneration for services rendered, so it was not an emolument, and neither were two smaller sums awarded by a manufacturing company.

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Case 34: Shilton v Wilmshurst (HMIT) (1991) 64 TC 78 Peter Leslie Shilton OBE (1949–) was a goalkeeper who earned 125 caps for England. On his transfer from Nottingham Forest to Southampton, Nottingham Forest paid him £75,000. The House of Lords held that the payment was an emolument from the employment with Southampton, dismissing the gloss put on the statutory words by the courts below that for an emolument to be chargeable it must be referable to the performance of services by the employee under his contract of employment. A curiosity of the case is that Morritt J observed (at page 91) that the Commissioners rejected the contention that the payment was compensation for the loss of the rights under the contract with Nottingham Forest, and Lord Templeman, who gave the only substantive speech in the House of Lords, made reference (at page 108) to that observation. However, there is no sign in the Case Stated of any suggestion having been made that the payment was in the nature of compensation. In effect, it was common ground that the payment was, in its nature, an inducement. It may be remarked that an inducement to leave Nottingham Forest and an inducement to join Southampton were two sides of a coin: it was a payment to stop one employment and to start another; each party was concentrating on one side of the coin and wholly overlooking the other. The courts did not, however, analyse the case in that way; nevertheless, it leads to the simple solution that the ‘inducement to start’ element resolves the emolument issue in the Revenue’s favour, the ‘inducement to stop’ element being irrelevant because the ‘golden handshake’ provisions are subordinate to the basic charge under Schedule E.

5 . I A M L I A B LE BU T I H AVEN’T BEEN GIVEN A R E L I E F OR DE DU C T ION TO WH IC H I A M ENTIT LED

Case 35: CIR v Maxse (1919) 12 TC 41 Leopold Maxse (1868–1932) was a journalist and editor. The case concerned Excess Profits Duty. Leopold Maxse claimed the benefit of an exemption under section 39(c) Finance (No 2) Act 1915 for professions which were dependent mainly on the personal qualifications of the individual concerned and required little, or no, capital expenditure. The Court of Appeal directed severance of the profits between the occupation of publisher (not exempt) and the occupation of editor and journalist (exempt). Case 36: Mary, Lady Wyndham v CIR (1920) 7 TC 608 Lady Wyndham, who, as Mary Moore, had been an actress, was the wife of Sir Charles Wyndham (1837–1919), the actor-manager. The case

Famous People in Tax Cases 321 concerned supertax for the year 1918–19. An election was made on 3 May 1918 for separate assessment of Sir Charles and Lady Mary. Sir Charles died on 11 January 1919. Under section 6 Finance Act 1912 his supertax liability fell to be reduced on a time basis, a reduction of some 23%. Had there been no election for separate assessment, the 23% reduction would have applied to the total supertax liability for Sir Charles and Lady Mary. Lady Mary’s contention that she was entitled to a reduction under section 6 failed because the wording of section 6 plainly covered only the circumstances of someone who had died. Case 37: Avery Jones (Rowley’s Administrator) v CIR (1976) 51 TC 443 In Volume 3 of Studies in the History of Tax Law the entry for the firstnamed contributor read ‘Dr John Avery Jones, CBE, Judge of the Upper Tribunal (Finance and Tax Chamber), Special Commissioner and Visiting Professor, London School of Economics’. He has since retired from quasijudicial duties. In relation to the estate of a Mrs Muriel Rowley, Dr Avery Jones took out letters of administration with the will annexed as attorney of the United States Trust Co of New York. Mrs Rowley had at all times been a citizen of the US. As the wife of a British subject, she had become a British subject, and, under section 12(5) British Nationality Act 1948, she acquired citizenship of the United Kingdom and Colonies on 1 January 1949. She did not renounce that status. Mrs Rowley had received trust income as a life tenant of US settlements, though the issue whether that income was within the scope of UK income tax was deferred until after the position on double taxation became final. The case post-dated Lord Strathalmond v Commissioners of Inland Revenue (1972) 48 TC 537, by virtue of which Mrs Rowley was not a ‘resident’ of the UK for the purposes of Article XV of the UK/US double taxation agreement of 1946, as replaced by a 1966 protocol. However, unlike the situation in the Strathalmond case, the word ‘citizen’ in Article XV was in play. The argument for relief was that Mrs Rowley could not be described as ‘a citizen of the UK’ because that phrase was unknown in UK law, which used the expressions ‘British subject’ and ‘citizen of the United Kingdom and Colonies’. That argument was rejected because it would leave the phrase in Article XV as having no meaning at all. Case 38: Munby v Furlong (1977) 50 TC 491 Sir James Munby is a Lord Justice of Appeal and was Chairman of the Law Commission. He was called to the Bar in 1971, awarded silk in 1988, appointed a High Court judge in 2000 and elevated to the Court

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of Appeal in 2009. The case concerned a claim for capital allowances in respect of legal text books and law reports. The decision in Daphne v Shaw (1926) 11 TC 256, in which a solicitor’s law library was held not to be ‘plant’ qualifying for a capital allowance, stood in the way, but the Court of Appeal overruled that decision and the claim succeeded. Case 39: Mallalieu v Drummond (HMIT) (1982) 67 TC 330 Ann, Baroness Mallalieu QC (1945–) is a barrister and politician. The case concerned clothing worn by Ann Mallalieu when exercising her profession as a barrister. It was not concerned with specialist items, such as wigs and gowns, but only with perfectly ordinary clothing which would not by itself mark the wearer down as a barrister. In compliance with official guidelines, Ann Mallalieu had a wardrobe of clothes, such as black suits and white shirts, for use in her professional life, and a separate wardrobe of clothes for use at other times. The House of Lords held that the cost of buying and laundering the court wear was not a deductible expense as expenditure wholly and exclusively incurred for the purposes of her profession within section 130(a) Income and Corporation Taxes Act 1970. The fact that Ann Mallalieu had given no thought to warmth and decency when buying the clothes was dismissed because it was inescapable that one object, though not a conscious motive, was the provision of clothing which she needed as a human being and the Commissioners were not constrained to have regard only to the conscious motive. It is just worth pausing to boggle at the tax regime which would have resulted if the opposing view (favoured by the courts below) had prevailed: the purchaser who has no thought of warmth and decency is entitled to a tax deduction; the purchaser who does realise that clothes will have the gratifying result of warmth and decency—a worthy object, which will be achieved by the purchase—will get no deduction; mere realisation would seem fatal, but it would be a fortiori if, for example, a heavier suit were acquired for greater warmth or a lightweight suit for reduced warmth. Case 40: Koenigsberger v Mellor (HMIT) (1995) 67 TC 280 Carl Wolfgang Koenigsberger is a barrister who started in practice in 1958 and who specialised as a tax practitioner. He claimed a deduction for a retirement annuity premium against the income from syndicates at Lloyd’s to which he belonged as an ‘external Name’. The question which arose was whether that income was ‘immediately derived by him from the carrying on or exercise by him of his trade, profession or vocation . . . as an individual . . .’ (section 623(2)(c) Income and Corporation Taxes Act 1988). It was held that an external Name does not carry on

Famous People in Tax Cases 323 a trade at all, because the trade from which he derives income is carried out exclusively by the managing agent. A claim that external Names were unfairly treated was also dismissed, not merely because it was a matter for judicial review but also because it lacked substance. Amongst other things, it was stated that a taxpayer cannot complain that he does not enjoy the benefit of a concession accorded to others. Case 41: Major (HMIT) v Brodie (1998) 70 TC 576 Stanley Brodie QC was called to the Bar in 1954. Elizabeth Gloster (1949–) was called to the Bar in 1971 and took silk in 1989. She was appointed to the High Court Bench in 2004, and in 2010 became head of the Commercial Court. Married for some 30 years, they were divorced in 2004 and she subsequently married the retired judge Sir Oliver Popplewell. The issue was whether bank interest was deductible in respect of interest on loans related to farms in Scotland. It was plain that the interest arose on moneys used in the trade of farming. The Revenue’s argument was based on the structure of the business relationship by which a Mr Murdoch did the actual farming. That relationship involved a Scottish partnership, but it was held that the fact that such a partnership has legal personality made no difference because a partner, with or without legal personality, is a partner, and that the relief was due.

6 . I M I GH T H AV E BEEN LIA BLE BU T TH ER E H A S B E E N A FATA L F LAW IN TH E PR OC ESS

Case 42: Bowles v Attorney-General and others (1912) 5 TC 685 Thomas Gibson Bowles (1841–1922), who was a journalist and politician, was described in an obituary in The Times as ‘a sworn foe to officialism in any form’ and someone with ‘native independence of mind’. He sought a declaration that a notice purporting to require him to make a supertax return for 1911–12 was void. It was held that supertax was an additional income tax and that in-year demands for returns were authorised by the combination of section 30 Customs and Inland Revenue Act 1890 and section 72 Finance (1909–10) Act 1910. Case 43: Bowles v Bank of England (1912) 6 TC 136 Mr Bowles protested that the Bank of England had, without lawful authority, deducted tax from his dividends following a budget resolution. In argument, he relied on the Magna Carta (1215) and the Statute de

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Tallagio non Concedendo (1297), though later he even introduced King Alfred, whose laws were said to recognise the principle that the subject cannot be taxed without consent, or otherwise than by law. Parker J held that the resolutions of the Committee of Ways and Means and of the House of Commons, upon which the Law Officers had relied, had no legal effect because it had been settled by the Bill of Rights (1 W & M sess 2, c 2) and that there could be no taxation except under the authority of an Act of Parliament. As to section 30 Customs and Inland Revenue Act 1890, the judge concluded that that provision merely kept alive the machinery of the Income Tax Acts for the purposes of the preliminary work necessary for the collection of any income tax which might be imposed, but did not authorise any assessment or collection of a tax not yet imposed by Parliament. Mr Bowles’s success led to the enactment of the Provisional Collection of Taxes Act 1913. Case 44: R v Special Commissioners of Income Tax ex parte Elmhirst (1935) 20 TC 381 Leonard Knight Elmhirst (1893–1974) is best remembered as the co-founder of Dartington Hall, an enterprising project in progressive education and rural reconstruction. The application was for a writ of prohibition to prevent the Special Commissioners from proceeding with an appeal which Leonard Elmhirst had purported to withdraw. The courts held that a notice of appeal against an income tax assessment could not be unilaterally withdrawn. The provisions about appeals, then in Part VII of the Income Tax Act 1918, were analysed and the crucial feature was that the duty of the Commissioners, whose powers included one to increase the amount of the assessment, was to see that a true asssessment was reached, so the machinery of appeal, once set in motion, could not be stopped by one of the parties unilaterally. Case 45: Jones (HMIT) v O’Brien (1988) 60 TC 706 ‘Mr [Brian] O’Brien is himself a Special Commissioner after a distinguished civil service career in, among other places, the office of the Solicitor of Inland Revenue.’ Those words, taken from the judgment of Hoffmann J in this case, are a sufficient introduction to Brian O’Brien. Brian O’Brien’s appeal was against an assessment under Case V of Schedule D for 1986–87 made on 7 October 1986, ie an in-year assessment, in an estimated sum of £2,000. The provision by which estimated assessments might be made was section 29 Taxes Management Act 1970, section 29(1)(b) starting ‘If it appears to the inspector that there are any profits in respect of which tax is chargeable and which have not been included in a return . . .’ It was held that ‘which have not been included’ meant ‘which

Famous People in Tax Cases 325 should or could have been included but have been for one reason or another omitted’, so the provision did not authorise in-year assessments. Case 46: R v Dickinson (HMIT) ex parte McGuckian (1999) 72 TC 343 John Brendan McGuckian (1939–) is a prominent Northern Irish businessman who was Chairman of Ulster Television from 1991 to 2012 and has been a director of many important companies. In December 1997 a Special Commissioner gave leave under section 41(1) Taxes Management Act 1970 for an extended time limit assessment to income tax to be made on Mr McGuckian for 1978–79. Mr McGuckian’s application for judicial review of that decision was dismissed. On the main argument it was held that, on an application for leave under the section, the obligation upon the Inspector was to provide the Commissioner with such information as was necessary to enable him to perform his statutory function of making a judgment on the matter entrusted to him by the section; the Inspector was subject to the ordinary obligation of any litigant that he must not mislead the Commissioner or omit material which is germane to the decision which he had to make and, on the facts, the Inspector had fulfilled, or more than fulfilled, that duty. Case 47: Fayed v Advocate General for Scotland (2004) 77 TC 273 Mohamed Abdel Moneim Ali Fayed (1933 (probably) –) is essentially a businessman. Of Egyptian origin, he is said to have arrived in the UK in 1964 on a Haitian diplomatic passport. Since then he has led a colourful and controversial life, much of the detail of which is so well known that it seems unnecessary to devote space to it here. While much is known of Mohamed Fayed, little is known of his brothers and business associates, Ali and Salah. The case involved a challenge to the cancellation of a forward tax agreement, that expression meaning an agreement which regulated the amounts of tax payable in future years. The Revenue realised belatedly that it had no power to make such agreements. It was held that the Revenue had no power to make forward tax agreements; that the Revenue had no discretion to abide by the terms of an ultra vires agreement which it had made; that, in the context of an ultra vires action by a public body, no legitimate expectation arises to the citizen concerned, and cancellation is not an abuse of power; that there was no breach of the applicants’ rights under the Human Rights Act 1998 because the cancellation decision was made prior to the Act coming into force, and it made no difference that the effect of that decision continued beyond that date; that the Revenue’s duty to act fairly may be infringed where similarly placed taxpayers were

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treated differently, but there was no unfairness on the facts of this case; and that the Revenue’s decision not to give advance notice of the intention to terminate the forward tax agreement was not unfair to the applicants provided that the Revenue was prepared to do all in its power to ensure that undue prejudice was not suffered, a matter on which there could be no adjudication without the necessary evidence. Case 48: Hitch (R on the application of) v Oliver and Everett (2005) 77 TC 70 Sir Stephen Oliver QC, Thomas Everett and David Shirley were all Commissioners for the Special Purposes of the Income Tax Acts. Mr Hitch was vexed that on a preliminary issue Mr Shirley and Mr Everett had made findings of sham in respect of some components of a tax avoidance scheme and those findings had been upheld by the Court of Appeal. Sadly, Mr Shirley had died in the meanwhile. If the proceedings started afresh before the Commissioners, the issue might be argued again, possibly on different evidence; however, a direction was made for the proceedings to resume on a continuing basis. Mr Hitch challenged that direction unsuccessfully. It was held that, as a matter of common law, the problem presented was no more than a question of case management, and, as to statute, section 45(3) Taxes Management Act 1970 did not apply to the circumstances of the case.

7 . I M I GH T H AVE BEEN LIA BLE BU T I H AVE S U C C E S S F U LLY TA K EN AVOIDA NC E A C TION

Case 49: John Mills Productions Ltd (in liquidation) v Mathias (HMIT) (1967) 44 TC 441 Sir John Mills (1908–2005) was a famous British actor. The Case Stated recorded worries around 1951 that the actor might have been coming to the end of his career, though in fact his career flourished continuously until he was in his 90s. The case related to receipt by a service company of £50,000 on 29 March 1951 for the cancellation of a long-term contract. A voluntary winding-up resolution had been passed on 26 February 1951. The crucial issue was whether the agreement for the payment had been made before or after the latter date. The Revenue contended successfully that it had been made before that date.

Famous People in Tax Cases 327 Case 50: Crossland (HMIT) v Hawkins (1961) 39 TC 493 Jack Hawkins, CBE (1910–73) was a prolific actor, mainly in films. On facts of some complication, the Revenue contended successfully that Jack Hawkins had, by virtue of a service agreement, indirectly provided funds for a settlement made by his father-in-law, or that the formation of a company, the making of a service agreement and a deed of settlement comprised an ‘arrangement’ and, therefore, Jack Hawkins was a ‘settlor’ within the definition in section 403 Income Tax Act 1952. Case 51: Mills v CIR (1972) 49 TC 367 Hayley Mills (1946–), the actress, began her career as a child. The case was essentially a rerun of Crossland v Hawkins. It had the complication that Hayley Mills was only 14 years old at the material time, but that was held to make no difference, it being pointed out that, if she had made a plea of non est factum, the income would be held on trust for her and the desired end of avoiding surtax would not have been achieved. Case 52: Black Nominees Ltd v Nicol (HMIT) (1975) 50 TC 229 Julie Christie (1941–) is a film actress. The case involved a complex tax avoidance scheme called ‘the open commercial trust scheme’, the object of which was to have Julie Christie’s earnings flowing into Black Nominees Ltd as capital rather than income. The events included one of those pantomime-style completion meetings at which strange things were done in accordance with a prearranged sequence. Crucial to the scheme were the payments said to have occurred at the meeting; Knowsleys, the merchant bank, was ostensibly putting up money; bankers’ drafts fluttered round the table, but it was all circular; Knowsleys left the meeting without having disgorged a penny. Neither the Special Commissioners nor Templeman J were willing to accept that any payments were involved. The case is rarely mentioned these days. Just as the Cheshire Cat’s smile eventually faded away, Ramsay and subsequent cases have had the effect that any need to cite Black Nominees has vanished. Case 53: Newstead (HMIT) v Frost (1980) 53 TC 525 Sir David Paradine Frost (1939–) made his name as a television presenter. The case concerned a scheme to park large amounts of his earnings in the Bahamas by means of a partnership with a Bahamian company, the business of the partnership being to exploit David Frost’s talents. The scheme was held to work. None of the Revenue’s various arguments made any real headway.

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Case 54: Reed (HMIT) v Clark (1985) 58 TC 528 Dave Clark (1942–) was the leader of the Dave Clark Five, a 1960s pop group and he was later a successful entrepreneur in the music industry. In order to avoid tax, Dave Clark lived in the US from 3 April 1978 to 2 May 1979. The Revenue contended unsuccessfully that he was resident in the UK for 1978–79 notwithstanding his absence or that he was chargeable under section 49 Income and Corporation Taxes Act 1970 because he had ‘left the United Kingdom for the purpose only of occasional residence abroad’. Case 55: McGuckian v CIR (1997) 69 TC 1 John Brendan McGuckian (1939–) has already been introduced (Case 46). Put shortly, a complex tax avoidance scheme designed to make the undistributed profits of a company available in capital was held to fail by application of the Ramsay principle.

8 . W ELL, A NY WAY, I A M NOT GO ING TO C O-OPER AT E

Case 56: Mankowitz v Special Commissioners of Income Tax (1971) 46 TC 707 (Cyril) Wolf Mankowitz (1924–98) was an author, playwright and film script writer. The case concerned the imposition of penalties for failures to respond at all, or adequately, to notices for information issued under section 414 Income Tax Act 1952. Wolf Mankowitz blamed his accountant. A dim view was taken of the protracted failure to co-operate, and it was concluded that by the material date there was no excuse for reliance on the accountant. As to the amount of the penalties, the judge commented that it was lucky for Wolf Mankowitz that the Revenue had not asked him to invoke his power to increase the penalties. Case 57: Lonrho plc v Fayed (No 4) (1993) 66 TC 220 The Fayed brothers have already been introduced (Case 47). The case was a sideshow about confidentiality of tax affairs in the context of an action by which Lonrho had sued the Fayed brothers over their acquisition of Harrods, asserting fraudulent misrepresentation relating to financial matters. Lonrho wanted discovery of documents relating to the Fayeds’ tax affairs. In response, the Fayeds claimed public interest immunity for the documents. The action was settled, but the Court of Appeal nevertheless gave judgment on the confidentiality issue. The main conclusion

Famous People in Tax Cases 329 was that documents which are confidential in the hands of the Revenue are not also confidential in the hands of the taxpayer concerned. The judges disagreed on the issue of whether public interest immunity was the principle in play, but they were agreed on the result. The Fayeds’ claim for public interest immunity failed. It was added that, in any event, the public interest in disclosure outweighed the public interest in non-disclosure in the particular case. Case 58: R v CIR ex parte Goldberg (1988) 61 TC 403 David Gerard Goldberg QC has for many years been a prominent member of the Tax Bar. The case concerned a notice served on him by the Revenue under section 20(3) Taxes Management Act 1970 requiring him to produce documents which had been sent to him by an American lawyer resident in London who had instructed him to give advice in relation to the tax affairs of a Mr Al-Atia. David Goldberg QC successfully claimed the protection afforded by section 20B(8) to documents in relation to which a claim to professional privilege could be maintained. Case 59: R v CIR ex parte T C Coombs & Co (1989) 64 TC 124 Terry Ramsden (1952–) is a flamboyant entrepreneur whose activities have not always remained on the right side of the law. There was publicity when he turned a period of compulsory rest to use by making a prison canteen run at a profit. The case concerned notices for information issued under section 20(3) Taxes Management Act 1970 to a firm of stockbrokers of whom Terry Ramsden was a client. A stalemate was reached, with the stockbrokers asserting that there was no connection between Terry Ramsden and the accounts identified in the notice and the Revenue saying that confidentiality of sources precluded revelation of the material which led to the belief that there was such a connection. The House of Lords held that the stockbrokers had produced insufficient evidence to displace the presumption that the notice had been properly issued. Case 60: CIR v Aken (1990) 63 TC 395 Marion Aken (possibly Akin), often described as ‘Miss Whiplash’ or as Lindi St Clair (or Claire), was engaged in prostitution. In 2009, following a car accident, she turned to Christianity and was confirmed by the Bishop of Hereford. Various assessments to income tax on the profits of prostitution were resolved by agreement under section 54 Taxes Management Act 1970. The Court of Appeal held that such agreements were final and conclusive, and that precluded the raising of a defence in recovery proceedings. It was held that, in any event, prostitution was a trade for

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tax purposes. At the hearing before the Court of Appeal Marion Aken draped over the court benches certain paraphernalia of her trade, but the fear that she was going to make some late claim for capital allowances proved misplaced.

C ONC LU SION

Jerome K Jerome warned against litigating. In the penultimate chapter of his Second Thoughts of an Idle Fellow, a chapter entitled ‘On the Inadvisibility of Following Advice’, he has a man of law giving the following advice: My dear sir, if a villain stopped me in the street and demanded of me my watch and chain, I should refuse to give it to him. If he thereupon said, ‘Then I shall take it from you by brute force,’ I should, old as I am, I feel convinced, reply to him, ‘Come on.’ But if, on the other hand, he were to say to me, ‘Very well, then I shall take proceedings against you in the Court of Queen’s Bench to compel you to give it up to me,’ I should at once take it from my pocket, press it into his hand, and beg of him to say no more about the matter. And I should consider I was getting off cheaply.

That was the Queen’s Bench. Chancery is worse if you consider Dickens. In chapter 1 of Bleak House you will find: This is the Court of Chancery, which has its decaying houses and its blighted lands in every shire, which has its worn-out lunatic in every madhouse and its dead in every churchyard, which has its ruined suitor with his slipshod heels and threadbare dress borrowing and begging through the round of every man’s acquaintance, which gives to monied might the means abundantly of wearying out the right, which so exhausts finances, patience, courage, hope, so overthrows the brain and breaks the heart, that there is not an honourable man among its practitioners who would not give—who does not often give— the warning, ‘Suffer any wrong that can be done you rather than come here!’

It would be delightful to finish with some explanation of the motives and feelings of those who have undertaken the nerve-wracking and costly business of litigating with the Revenue and, in some instances, of why the Revenue have pursued hopeless causes. Unfortunately, we are left to guess. Space considerations have resulted in very little being said about both the people and the issues in the cases covered. A longer version is available on the web at www.ctl.law.cam.ac.uk, or can be obtained by application to [email protected].

10 Estate Duty (1965–75): The Making of a Modern Tax JOHN TILEY*

A BSTR A C T This chapter examines estate duty (ED) as it was in 1894 and then concentrates on the ways in which Roy Jenkins, Chancellor of the Exchequer from 29 November 1967 to 18 June 1970, reformed it. His tax had many features we can see in the taxes which have superseded it—Capital Transfer Tax (CTT) for 1975–86 and, now, Inheritance Tax (IHT).1 The changes modernised the tax in various ways. One was to move from a general principle of charging property passing on a death to a system where there was some nexus between the property and the deceased. ED lasted in this revised form until 1975, so this chapter takes note of some of the changes made by Tony Barber between 1970 and 1974.2 Whether Mr Jenkins would have introduced a gift tax for us instead of reforming ED had he had more time is one of the unknowns of history. The Finance Acts of 1968 and 1969 were built on a series of Inland Revenue documents discussing various reforms all based on the Board’s experiences of the tax. This chapter draws

* Some of the work for this chapter was carried out when I had the honour of holding a Leverhulme Trust Emeritus Fellowship (2009–11). I record not only my indebtedness to the trust but also my admiration that a grant giving body can have such an understanding of scholars’ needs. 1 I should declare a personal interest in estate duty. This was the first piece of tax law on which I was invited to lecture and therefore had to study. Moreover, this was in 1967 and so, by some miraculous intervention, as I now see it, before the 1968 changes. This led me to Beattie’s elegant Elements of Estate Duty (CN Beattie, Beattie’s Elements of Estate Duty, 6th edn (London, Butterworths, 1966))—a book whose concise style has influenced me in writing about tax law. 2 FA 1975, s 22 imposed CTT on deaths occurring after the passing of the Act. As it received royal assent on 13 March 1974, CTT applied to deaths as soon as the clock began to strike twelve on the night of 12 March: Tomlinson v Bullock (1879) 4 QBD 230, 232. Lifetime transfers were subjected to CTT if made after 26 March 1974: FA 1975, s 20(5). Terminations of life interests after 26 March 1974 were subject to estate duty if death occurred before 13 March: FA 1975, s 49(4).

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on those documents.3 These papers show that we have been well served by those working for us—the quality and succinctness of the writing are admirable.

T H E DAWN OF ESTATE DU T Y FA 1894

E

STATE DUTY (ED) was introduced by the Finance Act (FA) 1894, Part 1 (sections 1–24 and Schedules I and II). When Roy Jenkins came to reform it 74 years later, the legislation was still in the 1894 Act. The Chancellor of the Exchequer carried out his ten-piece reform programme in two stages—1968 and 1969. Consolidation and simplification had been mooted in 1945, but dismissed.4 By the 1960s only consolidation was in issue, but even that opportunity was declined,5 so the duty was sent to its grave in 1975 still in its 1894 shell. This is testimony to a tax which had been well thought through and had been absorbed into the minds of generations of solicitors as they passed their exams. It was an old tax and therefore, for some at least, a good tax. FA 1975, Part III (sections 19–52 and Schedules 4–12 and 13 Part 1 replaced ED with Capital Transfer Tax (CTT). The CTT legislation needed much amendment by the 1976 Act and was eventually consolidated in 1984. CTT was much changed by FA 1986, which added potentially exempt transfers (PETs) to our legislation and a new name—Inheritance Tax (IHT)—which we still have today. The start of PETs meant that we had to revive two old ED rules: one to do with gifts with reservation of benefit to the donor and the other to do with debts.6 The question whether today’s IHT is closer to the old ED than to CTT is one for examiners to ask.

3 When Her Majesty’s Revenue and Customs (HMRC) were leaving Somerset House, the department, under the leadership of Mr Dave Hartnett, decided to place various duplicate sets of Inland Revenue Papers on the Finance Bills more than 30 years old in some of our libraries, including at the University of Cambridge. 4 J Pearce, this volume, Chapter 4, p 159. 5 Work on consolidation was mentioned in M 414, para 42; the 1968 legislation would be a good opportunity to introduce pre-consolidation amendments. M 414 is one of the important memoranda (M 414–21) printed in Notes to Finance Bull 1969, 1569 et seq. 6 ED was not an estate and gift tax but a death tax which reached back and, thanks to FA 1894 s 2(1)(c) and earlier FAs, caught lifetime gifts made in a limited period before death. In 1965 that period was five years. It also caught gifts made more than the stated number of years if the now deceased had not been sufficiently excluded under what we know now as gift-with-reservation rules. Today’s strengthened gift-with-reservation rules are to be found in FA 1986, ss 102, 102A and Sch 20. The debt rule which limits or excludes the deductibility of a debt where the consideration was derived from the deceased is to be found in FA 1986, s 103.

Estate Duty (1965–75) 333 T H E 1 8 9 4 A C T (1): STR U C TU R E

The basic principle of the 1894 scheme was that ED was a mutation tax on property which passed on death.7 These very precise words developed their own learning just as ‘income’ did in income tax. The basic principle was to be found in FA 1894 section 1 and supplemented in section 2. The standard books on the tax treated the provisions in that order but the precise relationship between sections 1 and 2 was a matter of difficulty, especially in the 1960s, when the tax came close to intellectual breakdown.8 It will be seen that, in contrast to more recent rules, the 1894 rules focus on property ‘passing on’ death and interests ‘ceasing on’ death. In terms of formulation, it was very much a mutation duty. It is time to turn to the words of the 1894 legislation (italics supplied): ‘s 1 Grant of ED . . . in the case of every person dying . . . there shall . . . be levied and paid, upon the principal value of property, real and personal, settled or not settled, which passes on the death of the person a duty called ‘Estate duty’ at the graduated rates hereinafter mentioned . . . s 2 What Property is deemed to pass (1) Property passing on death shall be deemed to include the property following, that is to say:a) Property of which the deceased was at the time of his death competent to dispose9 b) Property in which the deceased or any other person had an interest ceasing on the death of the deceased to the extent to which a benefit accrues or arises by the cesser of such interest; but exclusive of property the interest in which of the deceased or other person was only an interest as holder of an office, or recipient of the benefits of charity, or as a corporation sole c) Property which would be required on the death of the deceased to be included in an account under Customs and Inland Revenue Acts s 1881 s 38 as amended by Customs and Inland Revenue Acts 1889 s 11, if extended to real property and omitting ‘voluntarily’ and ‘volunteer’10 d) Any annuity or other interest purchased by the deceased either by himself alone or in concert or by arrangement with any other person, to the extent of the beneficial interest accruing or arising by survivorship or otherwise on the death of the deceased.

Section 2(2) dealt with certain foreign property and tied liability to ED to that under Legacy Duty or Succession Duty. Section 2(3) is one of 7 On death taxes in Victorian Britain see M Daunton, Trusting Leviathan (Cambridge, Cambridge University Press, 2001) ch 8. On mutation duties see Beattie, above n 1, 8th edn, 1. 8 See, eg Cross J In Re Weir’s Settlement [1968] 2 All ER 1241 at 1252 below p 357 9 This phrase is still in TCGA 1992, s 62(6), dealing with the effect of variations of wills or intestacy. However, it is not to be found in the counterpart IHT rules (IHTA, s 142) which rightly prefers its own language of property ‘in his estate immediately before death’. 10 For some problems arising from this adaptation of the ED legislation from these other taxes see change 10 below. For details of changing periods under s 2(1)(c) see p 341/350 below.

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the provisions enacting a gift with reservation rule. It excluded property held as trustee provided the trust was made by someone other than the deceased or, if it was made under a disposition made by the deceased more than 12 months before his death, where possession and enjoyment of the property was bona fide assumed by the beneficiary immediately on the creation of the trust and then retained to the entire exclusion of the deceased or of any benefit to him by contract or otherwise. We are familiar with these words, as they still appear in our current gift with reservation rule.11 Before turning to some examples, we should just note how these words in sections 1 and 2 struck Lord Macnaghten just five years later in the famous case of Earl Cowley v IRC.12 His views prevailed for most of our period—from 1899 to 1960. For him, ‘The first section contains the pith and substance of the enactment. It is comprehensive, broad and clear. The other provisions of the Act, which were dragged into the discussion . . . are strangely confused and ill-drawn.’ He went on to hold that the present case fell within section 1. I think it belongs to a class of case where a limited interest under a settlement ceases on death and passes to no one. Now if the case falls within s 1 it cannot also fall within s 2. The two sections are mutually exclusive.

He went on to refer to sections 4 and 5 of the Succession Duty Act, from which the provisions of sections 2(1)(a) and 2(1)(b) were ‘evidently adapted’. In 1960 the House of Lords took a less stark view of the relationship (see p 356 below). While this enabled them to reach a sensible result in the immediate case, it generated considerable uncertainty, and this in turn led to the 1968/69 rearrangement of the provisions. Here are some examples. 1. If A died, leaving only free estate to B under his will, ED was charged on the value of the property passing under section 1. If A had made an inter vivos gift caught by section 2(1)(c), it was brought in and added to the death estate. 2. If A’s interest was not absolute but a beneficial life interest in possession and B became entitled to the property absolutely on A’s death, there was a charge on the underlying property in the way that was general until 2006 under what we know as Inheritance Tax Act, 1984 (IHTA), section 49. So far, there is not much difference. However, change comes with the next example. 11

FA 1986, s 102(1). [1899] AC 198, 211. The House of Lords held that what passed under s 1 was the equity of redemption so that a mortgage was deductible. 12

Estate Duty (1965–75) 335 3. If A died and on the occasion of that death property passed from B to C, there was a charge to ED on the occasion of A’s death. If, as here, A had no beneficial interest in the property, it was not exempt from ED itself but it was exempt from aggregation with any other property that might pass on A’s death, eg A’s free estate. It formed, as they said, ‘an estate by itself’. The great example of this—and the reason why the exemption from aggregation was there—was the royal lives clause—a conveyancing practice whose longevity eventually led to the Perpetuities and Accumulations Act 2009. It will be apparent that, with an estate such as this, known as an estate ‘pur autre vie’, B’s interest did indeed end when A died. However, the books show that duty was charged only on the value of B’s interest at that time according to B’s expectation of life.13 These words are, naturally, redolent of the era of the strict settlement and the system of property law to which the tax was applied in 1894. By 1968 there had been many changes. The great 1925 reforms had seen the conversion of trusts of settled land into trusts for sale and the reduction of legal estates to two.14 Explaining those technical changes and relating them to the surrounding politics and economic and social conditions is a task way beyond this article, but a few pointers from friends at the conference itself and since may suffice for now.15 Stuart Anderson has written that freedom of testation operated within a matrix of property law to which it must conform. However subtle and enabling that law was, yet it was narrower and less flexible than many a testator’s imagination, particularly of those who meticulously mapped alternative contingencies for their extensive family over the next two or three generations . . . There were rules and there were counter rules and there were rules for choosing between them.16

13 DJ Lawday and EJ Mann, Green’s Death Duties, 7th edn (London, Butterworths, 1971) 237. 14 On the 1925 changes see A Offer, ‘Origin of the Law of Property Acts 1910–1925’ (1977) 40 Modern Law Review 505. 15 The reader is referred in the first place to WR Cornish and G de N Clark, Law and Society in England 1750–1950 (1989) ch 2; and for the period ending in 1914, W Cornish, JS Anderson, R Cocks, M Lobban, P Polden and K Smith, The Oxford History of the Laws of England, vol XII (Oxford, Oxford University Press, 2010). Other sources to which I have been referred by friends and colleagues include F Pollock, The Land Laws, 3rd edn (1896); AWB Simpson, Introduction to the History of Land Law 2nd edn (1988); A Offer, Property and Politics 1870–1914; S Anderson, Lawyers and the Making of English Land Law 1832–1940; GR Rubin and D Sugarman, Law, Economy and Society Essays in History of English Law (Professional Books, 1984). I was also referred to M Daunton (ed), The Cambridge Urban History of Britain, vol III (Cambridge, Cambridge University Press, 2002), which provided an unexpectedly refreshing weekend. 16 S Anderson in Cornish et al, ibid, 18.

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Among these rules was the rule against perpetuities, which decided whether interests were valid or not by reference to lives in being when the interest vested. In 1894 there was no Perpetuities and Accumulations Act 1964, which allowed trusts to last for 80 years and then terminate by passage of time and not on a death.17 The 1964 Act was a threat to the ED system and was recognised, as such, by the Revenue (documents listed on p 345 below). More worryingly, the ED based on interests passing or ceasing had been subverted by the development of the discretionary trust. In 1968 Cross J noted that the 1894 legislature, in giving its explanation of what it meant by passing on death, had failed to take discretionary trusts into account at all, either from the point of view of the death of an object of a continuing trust or from the point of view of a discretionary trust of income. However, ‘it was not in the least surprising that Parliament should have been guilty of this omission, for in 1894 it must have been rare for a testator or settler to create an immediate discretionary trust of income’.18 This left existing non-discretionary trusts in a difficult ED planning position as it was hard to end trusts early or in other ways extricate capital from such trusts. All that changed when The Variation of Trusts Act, that ‘most generous of tax giveaways’, was enacted in 1958.19 The Law Reform Committee report leading to the Act had foreseen this generosity in its report.20 After 1958 a trust could be long ended before the death appointed by the settlor and on which ED would have been charged. One wide social aspect deserves mention. This was the scope of change in the extent and type of housing—land’s principal use today. At the start of ED, the middle classes often had to rent rather than buy. Both the protection of tenants and the provision of social housing were a long way off. As Peter Scott has written, The emergence of owner-occupation as a significant tenure in Britain is essentially a post-First World War phenomenon. It has been estimated that only around 10% of Britain’s 1914 housing stock was owner-occupied, less than one% was municipally owned, and around 90% was rented out by private landlords.21 17 JHC Morris and WB Leach, The Rule Against Perpetuities, 2nd edn; RE Megarry and HWR Wade, Law of Real Property, 3rd edn (1966) ch 5, pt 4, taking account of the 1964 changes. 18 Re Weir’s Settlement [1968] 2 All ER 1241, 1252, the latest of many cases in which taxpayers and their advisers succeeded in avoiding estate duty by means of a discretionary trust; another recent loss was Gartside v IRC [1968] 1 All ER 121, below p 361. 19 J Harris, Variation of Trusts Act cited by G Moffatt, Trusts Law: Text and Materials, 5th edn (Cambridge, Cambridge University Press, 2009) 352. Moffatt’s summary of the debates and the intervention of Viscount Simonds is not to be missed (338). 20 The Law Reform Committee 6th Report (Cmnd 310, 1957) November, para 16. 21 P Scott, Selling Owner Occupation to the Working Classes in 1930s Britain (Henley Business School, University of Reading 2004) 023 citing S Merrett, Owner-occupation in Britain (London, 1982). I am indebted to Professor Kevin Gray for these references.

Estate Duty (1965–75) 337 The social status of owner-occupiers was broad, ranging from the very rich to skilled and semi-skilled workers such as coal miners. Yet workingclass owner-occupation was highly localised, in relatively few manufacturing and mining districts in the North and in the Midlands, and was ‘virtually unknown in most areas’.22 Post-First World War is post-1894.

T H E 1 8 9 4 A C T (2): PR INC IPLES OF C A L C U L ATION OF TH E TA X

So ED, as it was immediately before the Jenkins reform, was basically what had been laid down in 1894. It was a duty on property passing on death. Its mechanics included a charge to tax based on a system of slabs, not slices, and the principles of aggregation (and therefore sometimes providing relief by way of non-aggregation) and progression; these were reflected in rates which rose as the value of the estate rose. Harcourt had wanted ED to be progressive so that it could sit alongside the flat rates of Legacy Duty and Succession Duty. However, there was a wider point. As Martin Daunton put it,23 Harcourt made reform of the death duties central to a shift in the fiscal constitution. Graduated taxation of estates on death was more easily accepted than graduation of income tax, and paved the way for the later reforms of Asquith and Lloyd George.

The Slab System of ED The 1894 slab system (FA 1894, section 17) had 14 rates, including a nil rate band. Rates ran from 1% on an estate exceeding £100 to 8% on an estate of £1m or more (Table 1). It will be noted that under this table, with its 7.5% rate from £500,000 to £1m, it was greatly to the advantage that the person’s estate should be £1m (duty of £75,000) rather than £1,000,001 (duty now of £80,000.08p). This anomaly was not addressed until the Finance Act of 1914.24 Section 13 reads as follows: The amount of Estate duty payable on an estate at the rate applicable thereto under the scale of rates of duty shall where necessary, be reduced so as not to exceed the highest amount of duty which would be payable at the next 22 Ibid, citing M Ball, Housing Policy and Economic Power: The Political Economy of Owner-occupation (London, 1983) 25; AD McCulloch, ‘Owner-occupation & Class Struggle: the Mortgage Strikes of 1938–40’ (unpublished Ph.D thesis, University of Essex, 1983) 109. Both cited by Scott, ibid. 23 Above n 7, 225. 24 FA 1914, s 13(1).

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Table 1 Principal value of the estate (£)

Rate (%)

Duty at top of band (£ s d)

Does not exceed 100

Nil

Nil

Exceeds 100 and does not exceed 500

1

Exceeds 500 and does not exceed 1000

2

20

Exceeds 1,000 and does not exceed 10,000

3

300

Exceeds 10,000 and does not exceed 25,000

4

1,000

Exceeds 25,000 and not exceed £50,000

4.50

2,250

Exceeds 50,000 but not 75,000

5

3,750

Exceeds 75,000 but not 100,000

5.50

5,500

Exceeds 100,00 but not 150,000

6

Exceeds 150,000 and not exceed 250,000

6.50

16,250

Exceeds 250,000 and not exceed £500,000

7

35,000

Exceeds 500,000 but not 1,000,000

7.5

75,000

Exceeds 1 million

8

5

9,000

lower rate, with the addition of the amount by which the value of the estate exceeds the value on which the highest amount of duty would be so payable at the lower rate.

Green’s Death Duties25 provides the following explanation and example: The purport is that, where an estate slightly exceeds a turning point in the scale, the taxpayer is not to be worse off than if the estate were smaller. He must, in effect, surrender the excess value and then pay duty at the lower rate.

For example, the net value of the estate is £25,150. The duty thereon at 18%. The rate for an estate exceeding £25,000 and not exceeding £30,000 would be £4,527. The highest amount of duty at the next lower rate, viz 15% on £25,000, is £3,750. This, with the addition of the £150 excess value, making £3,900 in all, is the amount to be paid. One understands why the Inland Revenue notes regularly commented that, while this was technically a relief, it did not look one; people regarded it as the expropriation of the top slice.26 Today the prime examples of a slab system are to be found in stamp duty. There is nothing equivalent to section 13(1) there. Instead, the market invites the vendor to lower the price to prevent the higher rate bracket from applying. This is a market-distorting practice crying out for reform, and these ED changes show how easy it is. 25 26

Lawday and Mann, above n 13, 237. Eg Memorandum M 414, para 49.

Estate Duty (1965–75) 339 T H E S L A B SY ST EM A F T ER 1945

In 1946 Mr Dalton increased the rates on estates over £12,500 to well above the wartime level but the rates for smaller estates were reduced.27 Beyond that the rate structure remained very stable. A major adjustment was made in 1949, when the rates were doubled to compensate the Revenue for the abolition of Legacy Duty and Succession Duty.28 By 1954, Harcourt’s 14 rates had become 24, with the rates on the various slabs ranging from 1%, for principal value exceeding £3,000 but not £4,000 to 80% where that value exceeded £1m. The rates were 1, 2, 3, 4, 6, 8, 10, 12, 15, 18, 21, 24, 28, 31, 35, 40, 45, 50, 55, 60, 65, 70, 75 and 80%. Before Roy Jenkins came to power the nil rate band was raised to £4,000 by FA 1962 section 27 and £5,000 by FA 1963, section 52 (Table 2). The new slice system of Jenkins’s stage II reform is set out on p 354 below. That table had 10 ten slices, and the duty began at 25%. However, the Chancellor was very anxious that the very rich should not gain from the decision to reduce the burden at the bottom—hence the coupling of the 85% top rate with the maximum 80% overall rate (the same, in effect, as the top 80% rate under the slab system).

W H Y DI D T H E S LA B SY STEM LA ST SO LONG?

As we shall see, the principal supporters of this system had for many years been the legal profession(s), and it was their change of position that triggered the change to the slice method.29 The glib explanation for this is to say that lawyers were not good at the arithmetic/mathematics needed to make a slice system work. Those who learnt their relatively elementary maths in the 1940s s and 1950s will recall hours spent (happily?) on logarithms. There was also extra help for those special people with good fingers and eyes in the form of slide rules. Pocket calculators were still unknown.30 By contrast, the slab system avoided the need for most of these skills and might be especially useful if a non-professional had been asked to be a personal representative. Under the slab system, the rate of tax would only be affected by the discovery 27

FA 1946, s 46. FA 1949, ss 27 and 28. On 1949 changes see Inland Revenue, Notes to Finance Bill 1949, cited by J Tiley Studies in the History of Tax Law, vol 3 (Oxford, Hart Publishing, 2009) ch 13. 29 Memorandum M 414, para 50. 30 Clive Sinclair’s wonderful executive pocket calculators did not appear until 1972. Hewlett Packard produced a very expensive desk-top calculator in 1968; a pocket version (the HP-35) appeared on 1 February 1972. 28

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Table 2: 1963–69 Table in Force at the Start of the Jenkins’s Reforms but Taking Decimalisation into Account Principal value of the estate (£)

General scale

‘Reduced rate’ scale

Rate (%) Value below which Rate (%) Value below which section section 13(1) of the 13(1) of the Finance Act 1914 Finance Act 1914 operates (£) operates (£) Does not exceed 5.000

Nil

–

1

5,050.50

0.55

5,027. 65

5,000–6,000

2

6,061.22

1.10

6,033.26

6,000–7,000

3

7,072.16

1.65

7,039.14

7,000–8,000

4

8,083.33

2.20

8,044.98

8,000–10,000

6

10,212.76

3.30

10,113.75

10,000–12,500

8

12,771.73

4.40

12,643.82

12,500–15,000

10

15,333.33

5.50

15,174.60

15,000–17,500

12

17,897.72

6.60

17,706.10

17,500–20,000

15

20,705.88

8.25

20,359.66

20,000–25,000

18

25,914.63

9.90

25,457.82

25,000–30,000

21

31,139.24

11.55

30,559.67

30,000–35,000

24

36,381.57

13.20

35,665.32

35,000–40,000

28

42,222.22

15.40

41,04018

40,000–45,000

31

46,956.52

17.05

45,895.11

45,000–50,000

35

53,076.92

19.25

51,362.22

50,000–60,000

40

65,000.00

22.00

62,115.38

60,000–75,000

45

81,818.18

24.75

77,74086

75,000–100,000

50

110,000.00

27.50

103,793.10

100,000–150,000

55

166,666.66

30.25

155,913.97

150,000–200,000

60

225,000.00

33.00

208,208.95

200,000–300,000

65

342,857.14

35.75

312,840.46

300,000–500,000

70

583,333.33

38.50

522,357.72

500,000–750,000

75

900,000.00

41.25

785,106.38

750,000–1,000,000 80 1,000,000

1,250,000.00

44.00

1,049,107.14

Taken from Green’s Death Duties, 7th edn, 1214.

Nil

–

Estate Duty (1965–75) 341 of an extra item if it pushed the property passing on death onto another slab. In later times, these would be called compliance costs. It was also good for the Inland Revenue, who might get their tax more quickly.

T H E 1 8 9 4 A C T (3 ): T H E TR EAT MENT OF GIF T S: L E GI S L AT I ON B Y R EF ER ENC E TO A C C OU NT S DU TY

FA 1894, section 2(1)(c) caught property which would be required on the death of the deceased to be included in an account under Customs and Inland Revenue Acts s 1881 s 38 as amended by Customs and Inland Revenue Acts 1889 s 11, if extended to real property and omitting ‘voluntarily’ and ‘volunteer’.

Accounts duty had been brought in in 1881 to counter the avoidance of legacy and succession duties. Among other things, it imposed accounts duty on gifts made within three months of the death. That was extended to 12 months in 1889, and it was this 12 month period that was the starting reach-back period for ED. The 12 month period was extended to three years by Lloyd George, to five years by Hugh Dalton in 1946 and was about to be extended to seven year by the Jenkins stage I (1968). FA 1909–10, section 59(1) extended this period, but provided exemptions from the extension to gifts for public or charitable purposes bodies. However, section 59(2) provided exemptions from the extension for (a) gifts made in consideration of marriage or (b) ‘proved to satisfaction of the Commissioners to have been part of the normal expenditure of the deceased and to have been reasonable having regard to his income, or to the circumstances’, or (c) ‘which, in the case of any one donee, do not exceed in the aggregate one hundred pounds in value or amount’. There was also a gift with reservation rule.31 FA 1957 made major reforms by providing new rules to determine what account should be taken of changes to the property after the original gift.32 These were not needed where property consisted of unsettled gift of cash or of unsettled gift of other property so long as it did not change. Where the gift was not of cash and had changed, one had to trace through until one reached cash. The exemptions for marriage gifts were narrowed by FA 1963 as a result of the decision of the House of Lords in IRC v Lord Rennell, where the Revenue had lost, albeit by a bare majority.33 Lloyd George’s legislation 31 FA 1909–10, s 59(3); Green, above, 138 points out that to track the GWR rules under estate duty one has also to examine Customs and IR Act 1991, s 11 and Customs and Inland Revenue Act 1889, s 2(1)(c). 32 FA 1957, s 38; the IHT version of these rules is to be found in FA 1986, Sch 20, paras 2 and 3. 33 [1963] All ER 803.

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had referred simply to gifts in consideration of marriage. The majority held that this was not confined to gifts to those ‘within the marriage consideration’ as normally understood by practitioners, ie in broad terms, the parties to the marriage and any issue. The 1963 change allowed anyone to claim an exemption for outright gifts to the parties to the marriage but barred gifts where some might become entitled to a benefit other than a short list which was family based—ie issue, subsequent spouses and those entitled on failure of issue etc.34 The drafting, which embodied a restriction on an existing relief, was necessarily in terms of what cannot be done rather than what can, so is not easy to follow. There was no cap on the amount given; that had to wait for 1968. The same year also saw a redrafting. The other significant change to the rate system for gifts had been the start of taper relief for gifts in 1960.35

T H E 1 8 9 4 A C T (4): OR IGIN OF TH E S U RV I VING SPOU SE EXEMPT ION

The exemption for the surviving spouse’s life interest is usually regarded as odd. As usual, in England, the explanation is historical. Ever since 1894 there had been no exemption, as such, for transfers to a surviving spouse—as we are used to today. However, in 1968 there was an exemption where a surviving spouse died where the property passing on that death was settled property which had borne duty on the death of the deceased’s spouse. This survived the Jenkins reforms.36 Critics might wonder why the exemption was given on the second rather than the first death.37 As Green notes,38 This exemption depends on a proviso, excepting cases of husband and wife from the effect of the repeal of a more general exemption; and the authorities are difficult to follow unless the history of the matter is borne in mind. The design of the Act of 1894 was that Estate duty should be levied on the first occasion when any property passed on death whether the deceased was competent to dispose of it or not, but that settled property should not be taxed again until the death of a person competent to dispose. A prior payment of 34

FA 1963, s 53. FA 1960, ss 64 (gifts) and 65 in relation to FA 1940, ss 46 and 48. See GSAW [1960] BTR p 233 noting that that period—and so the present change to tapering—also applied to FA 1940, ss 46 and 55, on which see text at p 344 below. 36 FA 1969, Sch 7, para 6; see the current HMRC Manual, para IHM04343. 37 Among other efforts to change the law see eg Humphrey Atkins’s 1969 Private Members Bill, the Estate Duty (Surviving Spouse) Bill 1969. It was read a first time and ordered to be printed as Bill 37, HC Official Report 1968–69 Session, 27 November, vol 774, col 510; the bill was never debated and was deferred six times. 38 At 277. 35

Estate Duty (1965–75) 343 Probate duty, Inventory duty or Account duty was treated as equivalent to a payment of Estate duty. The terms of the exemption were varied by the Acts of 1898 and 1910. The exemption was finally abolished by the Finance Act 1914, subject to a proviso that the repeal should not affect the relief conferred by the Act of 1894 in cases where the two deaths in question were those of a husband and wife. The Act of 1910 dealt only with prior payments of duty on interests in expectancy . . .

S O M E P O ST-1894 C H A NGES

Termination of Life Interest FA 1940, section 43 extended the charge to a person with a life interest whose interest was disposed of or determined and the person died within the gift period. We are used to finding this alongside other terminations of interest in possession, but in 1940 it was a self-standing rule. The rule proved effective for fixed interests or more accurately ‘interests limited to cease on death’. The post-war planners got round this by creating interests which were limited to cease not on death but on some other event.39 Section 43 was repealed as part of the reform of the settlement rules in 1969, but the new rules covered this situation.40 The whole of section 43 was repealed in 1969; the situation was covered by the new section 2(1)(b)(i) and (ii).

Charge on Company Assets if Benefits are Received within a Specified Number of Years of Death FA 1940, section 46 imposed a charge on a company’s assets if benefits accrued from a company within a period of five years ending with the death; this was to be changed to seven by FA 1968, section 35. It will be noted that section 46 originally specified a period of five years even though the normal period for gifts under section 2(1)(c) at that time was three. The section was criticised by Beattie: The section is drawn in such wide terms as to apply to cases which were never within the mischief which the statute was intended to cure. The CIR have intimated that they intend to apply the statutory provisions in a reasonable manner and in fact it is relatively rare to find s 46 invoked at all. But it can

39 40

Eg Ralli Bros v IRC [1966] 1 All ER 65. FA 1969, s 61(6) and Sch 21.

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only be regarded as unsatisfactory that a statutory provision should be so drawn as to give the Commissioners excessive powers of taxation leaving the subject to rely on a benevolent interpretation by State officials.41

Assets Basis FA 1940, section 55 applied to controlled companies and provided that shareholdings should, in the prescribed circumstances, be valued by reference to the underlying assets basis.

Business Property FA 1894 provided relief for the agricultural value of agricultural land (duty was charge at 55% of the normal rate) and this remained a feature of the rate structure right the way through to 1975. However, relief for qualified business assets, viz industrial hereditaments, plant and machinery, only began in 1954; they used the same 55% rate.42

Foreign Land The exclusion of foreign immovable property from ED by FA 1949, section 28(2) was removed by FA 1962.43 As was normal for ED changes, it applied to all deaths after the commencement of the Act, and so to such property whether acquired before or after that commencement.

Avoidance FA 1966, section 40 dealt with an ED scheme under which the interest limited to cease on death and so be treated as passing was less, upheld by the House of Lords in Ralli Bros v IRC.44 Mrs R had a life interest under will made in 1895. On 5 December 1961, then aged 85, she appointed funds to two adult grandchildren (GCs). On 6 December 1961 the GCs assigned to Mrs R their interest in income down to 1965 so that it might merge with her interest and give her a right to the trust income down to 31 December 1965. The assignment was subject to the GCs’ right to 41

Beattie, above n 1, 132. FA 1954, s 28; Green, 381 et seq; the relief was not available for professions, FA 1954, s 28(9). 43 FA 1962, s 28 and subject to the terms of that section. 44 [1966] 1 All ER 65. 42

Estate Duty (1965–75) 345 revoke, but this power was released by GCs on 12 December. Mrs R died on 24 December 1961. The House held that the scheme succeeded and that it was only the balance of her interest in income down to 31 December 1965 that passed on her death. In the House of Lords the leading speech was given by Lord Upjohn, with whom Lords Guest and Morton agreed. For those less familiar with these concepts at this distance, the easier speech to start with is that of Lord Donovan. He first proceeds on the basis that section 1 was not an independent charging section but simply paved the way for the deemed heads of charge in section 2 On this basis, section 2(1)(b) caught property in which D ‘had an interest ceasing on the death of the deceased to the extent to which a benefit arises by cesser of such interest’. For Lord Donovan, the ultimate question was not whether Mrs A’s two interests coalesced or whether they were successive interests but whether, on any view, the beneficial interest in the whole trust changed hands on the death. In his opinion, it did not.45 This meant that what passed on Mrs R’s death was the unexpired portion of her limited interest, and that passed under section 2(1)(a). Duty had already been paid on that basis. Lord Donovan also considered whether a charge could arise under section 1. He held that it was only her limited interest which passed.46 Parliament’s riposte was swift and clinical. FA 1966, section 40(2) provided that, if the deceased had immediately before his death an interest limited to cease on death, then, in determining whether section 2(1)(b) applied, any other interest in that property belonging to the deceased at his death should be treated as belonging to someone else.

1 9 6 7 : T H E B OA R D’S PLA N F OR R EF OR M

The Board had submitted proposals for reform to be implemented in Finance Bill 1967 but were invited to go back and reconsider, especially in relation to settled property. This they did. Memorandum M 414 contained proposals for legislation and was supported by separate memoranda on settlements (M 415), gifts inter vivos (M 416), aggregation (M 417), superannuation benefits (M 418), agricultural relief (M 419), death on active service (M 420) and quick succession relief (M 421).47 The topics in M 415–21 were also covered in M 414. M 414 also covered the level of rates and the change to the slice method (paras 45–51). 45 Lord Donovan at 72C agreeing with Russell LJ in the CA. Note that at 72G Lord Donovan suggests that the premise of Lord Denning’s judgment that there had been a concession on one point was not correct. Lord Upjohn’s cogent but longer reasons on this point are at 70C–70I. 46 Lord Donovan at 72F; Lord Upjohn’s conclusion is at 71F. 47 Gathered together at the Finance Bill 1969 Memoranda, vol 3, 1569 et seq.

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Some of these ideas were not proceeded with. These included proposals on superannuation benefits (left to income tax) and the possible withdrawal of agricultural relief (no action). Withdrawal of this relief would have yielded £6m—out of a total of £20m if all the proposals in M 414 were enacted.48 The ideas for reform of the exemption for death on active service remain unaddressed. The treatment of them in the 1968 memorandum is very sensitive; it was found that the existing test was not always easy to apply and should be redrafted. They suggested that consideration should be given to a time limit. On quick succession relief the memorandum preferred the American system, which gave a percentage deduction without having to identify the doubly charged property.49 The Board had hoped that the combined effect of the proposals discussed would amount to a worthwhile general overhaul of the ED and that all would be dealt with in one year’s bill so as to avoid the criticism that partial legislation was merely tinkering with a major problem.50 It was not to be. One possible reason why reform was not proceeded with in 1967 was that the country was facing severe economic problems, which led eventually to the devaluation of sterling and the resignation of James Callaghan in late November 1967. Roy Jenkins succeeded him as Chancellor and produced his first budget in March 1968. In that budget speech he explained that, while he had, as a new Chancellor, looked at various canvassed new methods of taxation, he had decided to make ‘the sacrifice of abandoning a widespread search for novelty’ as he had only been in office a few months.51 One is left to wonder whether we could have had CTT in 1968 had Jenkins been in this office longer.52 Jenkins’s reasons for not rushing tax reform need to be kept in the pocket of anyone trying to restrain an overenthusiastic minister:53 First, the successful introduction of a new method of taxation requires a great deal of careful preparation. The broad economic consequences should be carefully and calmly thought through . . . And the collecting department . . . requires a good deal of time—and a good deal of spare manpower—to work out the administrative details. A year in which the Chancellor takes office only a few months before the budget and in which in addition he thinks necessary to bring the budget forward by a few weeks is not therefore a good year for a major programme of tax innovation . . .

48

M 414, para 45. M 414, para 40. 50 M 414, para 41. 51 Official Report, 5th Series, HC 1967–68 Session, 19 March 1968, vol 761, col 273. 52 At cols 274 et seq he considered what we know as VAT but he correctly refers to as TVA. 53 Above n 51. 49

Estate Duty (1965–75) 347 Second, I have been impressed by the force with which many of those engaged in industrial and commercial planning have asked for a little stability in our taxation system. The would also like stability of rates but that is not compatible with an effective policy of demand management . . . When rates are bound to go up, there is, in my view, a good deal to be said for not, at same time, making major changes in the basis of taxation . . . Third, I believe it is my duty at the present time . . . to view with a very jaundiced eye any new tax that could not be administered without a large additional recruitment of staff.

The first instalment was announced in the March 1968 budget. Edmund Dell described the speech as a masterpiece—‘never has pain been inflicted with greater elegance’.54 The Chancellor spoke for two and a quarter hours; the extra taxes raised two and a half times the maximum previous increase imposed.

1 9 6 8 – 6 9 : T H E J ENK INS C H A NGES

Change 1: Extending the Gifts Period to Seven Years By FA 1968, section 35 the period of charge for section 2(1)(c) was extended from five years to seven as from 19 March 1968. Gifts made before 19 March 1963 were exempt from the change, the reason being that the donors had survived the full five-year period. This was to avoid accusations of retrospection. Tapering also needed protection from retrospection. FA 1960, section 64 had introduced tapering of the duty over the last three years, then years 3, 4 and 5; if the death took place in last three years, there was a reduction in the value of the property of 15, 30 and 60%, respectively. FA 1968, section 35(2) provided that these should now apply to years 5, 6 and 7 instead of 3, 4 and 5 for deaths after 19 March 1968. Section 35(4) was designed to preserve a higher reduction for the middle of the three years, which would have applied if D had died on 19 March 1968. Overall, therefore, FA 1968. section 35 tried very hard to make sure that no one lost. To the argument that people’s expectations were being changed, some well-known precedents were cited. The retrospection argument was fought much more keenly over life policies (see change 3 below, page 351).

54

E Dell, The Chancellors (Harper Collins, 1996) 357.

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The Arguments for Change Document M 416 pointed out that gifts during lifetime almost certainly represented the major ED avoidance device. Human nature put some restrictions on it, for there were many wealthy people who could not bring themselves to dispose of their wealth so long as they were capable of its management. But it was common knowledge that others passed on a substantial part of their wealth during life in the hope of preserving the family fortune free of duty. (One may note that, using work published eight years later, it was estimated that the total amount of tax lost to avoidance of death duties was about £177m or about 10% of the net capital value of the property assessed for ED).55 The charge on gifts made within five years gave a good deal of protection to the Revenue. It brought in £15m immediately, and a further £5m was expected to be raised (para 2). However, one had to acknowledge that executors and their solicitors had difficulty in tracing all the gifts made within five years of the death. Not everybody kept all their bank statements, cheque stubs, receipts etc even for five years. ‘With a 7 or 10 year period it is certain that many chargeable gifts of money would escape, quite innocently’ and then, M 416 adds, ‘our capital gains records will however help for the future in regard to gifts of assets as distinct from cash’ (paragraph 3(a)). The Minister was advised that this problem of practicality was the only one that he should admit as having some force when considering the extension from five years to seven. Gifts in settlement should be easy to trace and, again, the Department’s capital gains tax records would in the future assist them for other gifts, except in the case of gifts of cash. It would have to be recognised. however, that many gifts would in practice escape duty; and it might well be argued (eg by the Law Society) that it was wrong (as well as unduly burdensome) to put on executors and their advisers a responsibility for tracing gifts which, with the best will in the world, they might often be unable to discharge in full. The first argument to be rejected was hardship to the donee. In the case of small gifts, donors often provided that the duty should be paid out of their free estate; however, with bigger gifts the donee was usually left to bear the duty himself. Representations might be made to the effect that somebody who has been given a sum of money for some worthy purpose is inhibited from spending it until the period of potential liability is over. ‘The answer is that donors and donees will have to adapt themselves to the new situation’ (paragraph 3(b)). The second argument concerned settlements. Releases of life interests and purchases of reversions gave rise to a potential liability should the 55 M Daunton. Just Taxes (Cambridge, Cambridge University Press, 2002) 333 note 75, referring to Horsman (1975) 85 Economic Journal 521.

Estate Duty (1965–75) 349 life tenant die within the statutory period, and trustees were required to hold back sufficient capital to meet that potential liability. If the potential rate of duty was 80%, they would have to hold back four-fifths of the capital. To do this over a prolonged period would be a severe restriction upon their freedom to make advances. The answer was brisk ‘these transactions are very commonly aimed at saving tax’ (paragraph 3(c)). The third argument concerned a situation in which the extension might affect the quantum of liability. This arose where the subject matter of the gift was a policy of life assurance which had to be kept on foot by periodic payment of premiums. Under the ED rules, the proportion of the policy money was related to the proportion of the premiums paid within the statutory period to the whole of the premiums. An extension of the statutory period would accordingly increase the amount liable. The revenue response was that not many policies would be affected for, where they have been taken out less than five years before death, they would usually be exempt because payment of the premiums would form part of the normal and reasonable expenditure of the deceased. The note also covered the question whether tapering should be retained (paragraph 4). The argument against tapering was that people who went in for avoidance should take their chance of failing. Tapering in a sense condoned the avoidance and perhaps to some extent encouraged people to give their property away even if the prospect of surviving the full five years was small. On the other hand, the argument for graduation had considerable appeal, because it was hard if failure by even one day to survive for five years made all the difference between full liability and no liability at all. An extension of the period probably added force to the argument. Certainly its repeal would ‘be highly controversial and on the whole we think that graduation should continue’. That left the form of the relief. This was matter of taste. The present relief could be pushed back the appropriate number of years or a new graduation introduced. The Minister was reminded that, in 1960, when the first taper was introduced, the opposition (now the government) had suggested that there could be a full charge up to five years, a 50% charge for gifts made in the sixth year before death and a 25% charge for those made in the seventh year.56 This seemed a rather sudden taper; their preference would be for graduation over at least three years. This account of the first stage of the 1968 reform extending the period to seven years is almost at an end. However, one must note also the analogous reform to FA 1940, section 43. As already seen, this rule applies to settled property where D had an interest in possession but disposed

56

Official Report, 5th Series, HC 1961–62, 3 May 1962, vol 624, col 1284.

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of it and died within the gift period. Here, too, the period was extended from five years to seven, in line with the changes to gifts.57

Change 2: Tightening the Exemptions for Certain Gifts FA 1968, section 38 modified FA (1909–10), section 59 to amend the existing exemptions for gifts on marriage, gifts which were part of the normal and reasonable expenditure of the deceased, and gifts to an individual not exceeding £500 in the fiveyears. Memorandum M 416, paragraphs 7–15 dealt with exemptions beginning with marriage. One could argue that there should be no special exemption for gifts made in consideration of marriage, should the donor subsequently die within the gift period. However, liability rested on the donee, and it could be hard if they, as a young married couple, would have to find the money. The exemption was of long standing and was said to have ‘considerable sentimental value’. So the exemption should remain but a limit should be set. Possible figures were £5,000 for gifts made between the spouses themselves or by parents to their children, and a limit of £1,000 in all other cases. Readers will not need reminding that the figure remains the same in 2012 IHTA, section 22 save for the addition of a £2,500 limit on some gifts. One hopes such limits will be reviewed by the Office of Tax Simplification, because no other government institution seems to have done so. Document M 416 also reminded the Minister of Lloyd George’s reasons for introducing the exemption in 1910. In the 1909–10 Act, Lloyd George increased the range of liability from one year to three years, but accepted the opposition plea for an exemption from the increase on behalf of marriage gifts on the grounds that the increase in the period of liability was intended to counter avoidance but marriage gifts were not an avoidance device. ‘No man,’ he said ‘can compel his son to marry in order to evade the death duties. He would probably consider the penalty would be too high.’ The Revenue mind of the 1960s had other ideas. The point no doubt was still valid, but marriages in the normal course of events might occur at very convenient times for passing on the family property. Every year, the Revenue learnt of about a dozen cases of fairly substantial gifts of this sort. The most striking example was a gift of £1m made the day before the wedding by a grandfather who died on the morning of the wedding. There had even been examples of marriages taking place solely to obtain ED benefit, though they were no more than curiosities. There was one instance in which a couple lived together unmarried for many 57 FA 1968, Sch 14, para 1; this lists 14 sections where ‘five’ was changed to ‘seven’. S 43 was repealed by FA 1969, s 61(6) and Sch 21, and the situation covered by the new s 2(1)(b).

Estate Duty (1965–75) 351 years until his doctor warned the gentleman of his impending death; he then offered marriage to the lady with the promise of a marriage settlement of £1/4m. They were married by special licence. He made the gift. He died within the week. Today the problem might well not arise since they would probably be well enough to marry and make the transfer by interspouse gift after the ceremony. The Revenue officials then turned (paragraph 10) to exemption for normal and reasonable expenditure, recommending the current rule—that it should be confined to moderate gifts made by individuals out of income. The formulation at that time was ‘particularly troublesome’ as it was largely subjective. The department had no statistics. The changes were made by FA 1968, section 37. The third category was small gifts (paragraph 15). This exemption had the practical advantage that it kept ordinary birthday presents, charitable subscriptions etc which might otherwise come into liability and which would therefore have to be traced. There were actually two alternative exemptions: one, of £100 per donee, from 1909–10 and the other, of £500 per donee, from 1949, when the rates of ED had been increased and legacy and succession duties repealed.58 It is worth remembering that in 1968 one could buy a very good secondhand car for £500. The £500 exemption had benefited from a marginal relief provision since 1957 duty was limited to the excess over £500.59 One difference was that the £100 rule could apply to settled property. M 414 suggested that the £500 limit for gifts to any donee could be increased. The matter is discussed in more detail in M 416. It was thought that there was no case for keeping the exemption for £100 out of settled property—but they did. Naturally the exemption intersects with the rate structure (change 5 below), and it may be for this reason that eventually no change was made here.

Change 3: Aggregation 1 Exemption for Existing Married Women’s Property Act Policies Preserved but Capped Document M 417 was summarised at Document M 414, paragraphs 27–30. FA 1968 revised the special treatment of life policies under MWPA 1882 where proceeds were held on trust for wife and/or children.60 Such policies were usually arranged so to be property in which the now deceased never had an interest (usually by declaring trusts under MWPA, section 58 FA 1909–10, s 59 (s) and FA 1949, s 33. For differences see Beattie, above n 1, 7th edn, 97. 59 FA 1957, s 38(11). 60 FA 1968, s 38(7)–(13). S 38 was repealed in full by FA 1969, Sch 17. However, life policies passing on a death after 15 April 1969 were to continue to enjoy subs (7)–(13) as if they had not been repealed, FA 1969, s 40(2)(c).

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11), so making the policies exempt from aggregation. FA 1968 abolished the exemption from aggregation for all future policies. It provided for the continuation of the exemption for existing policies, but only within certain limits. That limit was £25,000, a sum for which one could then buy a large house in a very good part of Cambridge. (Interestingly, for just £60,000 one could buy a terrace residence in Edwardes Square (Kensington), London.) The debates showed that the £25,000 exemption was not enough to prevent some injustice. These rules were so important that they were treated by Beattie in an Appendix.61 Before 1954 the rules had been extremely generous, allowing the aggregation rules to apply to each policy taken separately. In 1954 the abuse had been limited when it was provided that all the policies going to one beneficiary should be aggregated together, but even that limited aggregation gave opportunity for very considerable reductions in liability. As just seen, FA 1968 began by including all future polices within FA 1894, section 2(1)(c). This 1968 change caused considerable heat during the Committee stage. Ministers took the advised line that there was no constitutionally objectionable retrospection even though there would be major repercussions for some taxpayers where the £25,000 limit was exceeded. The opposition were clearly unhappy with the Minister’s replies. One may note that when the matter reached the report stage it was a more senior Treasury minister who spoke for the government. The Inland Revenue position was that in most cases there could be no ED liability as the system was based on the proportion of the premiums that were chargeable to ED. In practice, most premiums would not be chargeable to ED, as they would have been covered by the exemption for normal and reasonable gifts and its new successor. Clause 33(6) of the original Finance Bill, eventually FA 1968, section 38(8), had provided that where a premium was chargeable aggregation would occur only if the sums exceeded £25,000. A later amendment made sure that where the £25,000 limit was exceeded those liable to duty could elect to waive the sums by which the benefits exceeded £25,000. Life policies were long-term investments and, thanks to the exemption from aggregation, were a staple of estate planning. The normal ministerial response repeated over the years was that the operative date for ED was the date of death. Roy Jenkins cited two Conservative predecessors. The first was Mr John Boyd Carpenter, then Financial Secretary, in the debates on the 1954 change to the ED aggregation rules on life policies. He had said that to adopt a principle that would protect existing arrangements would mean that any forms of tax evasion or avoidance which was discovered by human ingenuity—from time to time human ingenuity does exert itself on 61

Beattie, above n 1, 7th edn, 192–94.

Estate Duty (1965–75) 353 this diverting pastime—could be checked only in respect of new arrangements. I must remind the committee that not only would that interfere seriously in the operation of the tax but it would really be contrary to the practice which has generally been adopted for a good many years by the governments of all political colours.62

Roy Jenkins also cited a speech by the later Lord Dilhorne, who, as Attorney General in a Conservative administration, had described the principle that people expected existing arrangements to be protected as startling and difficult to believe.63 This was in relation to the extension of ED in 1962 to certain foreign immovable property. Lord Dilhorne had also observed that a good solicitor would have warned a client buying foreign property before 1962 that there was a risk that the loophole would be removed.64 However, Roy Jenkins then put the matter more generally: no chancellor could wait 20, 30 or even 50 years for the change to become fully effective.65 Over the years, eg in 1954, various discussions had taken place with life companies and it was eventually accepted that the Revenue had reserved their position to make any change at any time. However, it seemed that no meetings had been held with brokers. In one troublesome case, a businessman—and therefore someone who could not easily dispose of his business in stages—had taken out polices with a benefit of around £85,000.66 This person had invested £500 in a company in 1924 at the age of 24. He had taken out the life policies in 1947 following advice from his accountant, who had, very understandably, suggested that he should consider the serious position that would arise in the event of his death. The policies gave him increased life cover and spread the estate among his wife and four children. As a result of the 1968 change he would have to sell the shares on his death to pay the ED. The alternative was to surrender the life policies, so reducing his estate, and go on a buying spree for the rest of his life.

Change 4: (1969) Rate Structure: From Slab to Slice Document M 414, paragraph 45–61 identified two intersecting problems— slab or slice and the overall burden of the tax. We have already looked at the slice system and noted the pressure for change. This was now carried out by FA 1969, section 35, which gave a new table (Table 3). 62

Official Report, 5th Series, 1953–54 Session HC, 28 June 1954, vol 529, cols 967–68. Official Report, 5th Series, 1961–62 Session HC, 3 May 1962, vol 658, col 1348. 64 Ibid. 65 Official Report, 5th Series, HC 1967–68 Session, 24 April 1968, vol 763, col 263. 66 Mr Patrick Jenkin, Official Report, 5th Series, 1968–69 Session HC, 4 July 1968, vol 767, cols 1758 et seq, Finance Bill Report Stage. 63

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Table 3: Roy Jenkins’s New Rates from FA 1969 (1) Slice (£)

0–10,000

(2) Width of (3) Rate (4) Duty on (5) (6) slice (£) on slice whole slice Cumulative Effective (%) (£) duty (£) rate (approx) (%) 10,000

Nil

Nil

Nil

Nil

10,000–17,500

5,000

25

1,875

1,875

10.71

17,500–30,000

12,500

30

3,750

5,625

18.75

30,000–40,000

10,000

45

4,500

10,125

25.31

40,000–80,000

40,000

60

24,000

34,125

42.66

80,000–150,000

70,000

65

45,000

79,625

53.08

150,000–300,000

150,000

70

105,000

184,625

61.54

300,000–500,000

200,000

75

150,000

334,625

66.92

500,000–750,000

250,000

80

200,000

534,625

71.28

750,000–[2,070,000*] [1,320,000] 85

[1,122,625] [1,656,000] 80

*£2,070,000 is the aggregate principal value for which the total amount of duty on The successive slices represents an effective rate of 80%, the maximum effective rate permitted by FA 1969, section 35 and Schedule 17, Part I. 80% of £2,070,000 = £1,656,000. Above that value, a rate of 85% on the top slice would bring the effective rate above 80%. Duty on estates exceeding £2,070,000 will accordingly be calculate as a flat 80% of the aggregate principal value.

Unfortunately the legislative draftsman still could not cope with tables, so the rates in FA 1969 still took effect as words.67 Document M 414, paragraph 46 begins by noting that, in the case of income tax, steps had been taken to mitigate the tendency of the fall in the value of money to increase the burden of taxation in real terms and that no such mitigation had taken place in the case of ED. They proposed an increase in threshold to £10,000. The Notes on Clauses Finance Bill 1969 on clause 28 make clear that the doubling of the exemption limit was intended to alleviate the burden on small estates, which would gain £400 from the increase in the threshold to £10,000. The scale was constructed so that, after initial decreases up to £14,705, duty at that point was, for the first time, the same under both the new and the old systems. Thereafter there were both decreases and increases in duty along the way, as the smoother graduation of the slice scale eliminated the sharp changes in duty immediately above the change points in the old scale. A

67

FA 1969, Sch 17, para 1.

Estate Duty (1965–75) 355 table setting out the workings in full was included in the Red Book for 1969–70 as Table 21.68 Paragraph 45 went on to note that the UK rates were easily the highest in the world and, particularly in middle ranges—say up to £100,000—are so severe that they enforce on the dependents of the deceased a drastic change in their living circumstances. For example, an estate of £50,000— not an enormous sum in these days—attracts £15,500 duty (31 per cent). If £20,000 of the estate is the family home the liquid resources (£30,000) are halved by the duty. One sees currently difficult cases where substantial duty has to be paid though the immediate dependants have only a life interest and are not, therefore, able to dispose of capital and although a substantial part of the estate may be in assets that do not yield. In another instance an estate comprising little more than a modest residence was liable to duty and widows had been left with a house but hardly any other capital and have to live on the National Insurance pension.

The idea that a gift to a surviving spouse should be exempt in part (enacted in 1973) or as a whole (enacted in 1975) is some way off. The reduced rates for agricultural property and excepted business property remained at 55% of the rates achieved by the new slice system.

Change 5: (1969) Clarifying the Relationship between Sections 1 and 2 and Rewriting Them This was the fundamental change. Paraphrasing FA 1894 as originally enacted, section 1 charged the principal value of property passing on the death, section 2(1)(a) charged property of which the deceased was competent to dispose at his death, section 2(1)(b) charged property in which the deceased or any other person had an interest ceasing on the death, section 2(1)(c) charged gifs made before death and section (2)(1) (d) charged certain annuities. FA 1969 abolished section 1’s role as a charging provision and a new section 2(1) listed all the heads of charge in a single list with no extraneous overriding principle—a move from a comprehensive base to a schedular one or, as the editors of Green’s Death Duties put it, ‘The duty is now rather one imposed on prescribed categories of property, each defined in terms of some nexus between the deceased person’.69 68

Financial Statement and Budget Report, HC 211, Table 21, 38–40. Lawday and Mann, above n 13, Preface. The preface goes on to ‘This result has been secured, notably, by the exhaustive definition of “property passing on death” as meaning property specified in later charging provisions, and by the replacement of the former charge of duty on property in which an interest ceased on the deceased’s death by one on settled property in which he himself had a beneficial interest in possession.’ ‘The revision of the main charging provision has required the rewriting of much of the early part of the book. Regular users will note that the chapters “property passing on death” and “cesser of interest” 69

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The Relationship between Sections 1 and 2 Before the 1968/69 changes, most property passing on death and so subject to ED would come within both sections 1 and 2. As we have seen earlier, the prevailing view from 1899 to 1960 had been articulated—with great confidence—by Lord Macnaghten in Earl Cowley v IRC.70 This was that the two sections were mutually exclusive and that in the event of a clash section 1 would prevail. In Public Trustee v IRC,71 clinging to such a position would lead to an irrational decision. The testator (Lord Northcliffe) had given income to a Mr Arnholz so long as he acted as executor and trustee of the will by way of remuneration for being a trustee. Mr Arnholz died. His interest was clearly held ‘as holder of an office’ and therefore a charge under section 2(1)(b) was expressly excluded. Could a charge still arise, as the Revenue contended, under section 1? It is hard to conceive of any good reason why the Revenue’s claim should succeed. Why on earth had Parliament included the exception for trustees’ annuities in section 2 if it could be displaced by section 1? The House of Lords Appellate Committee consisted of just four judges— Viscount Simonds, and Lords Radcliffe, Cohen and Keith. Lord Keith dissented, but the other three, overruling both of the lower courts, decided that the relationship was more complicated than Lord Macnaghten’s dictum would suggest. Crucially, they held that the exemption from a charge under section 2(1(b) would also exempt from liability under section 1. The majority of the House were clearly troubled by the novelty of the Revenue argument that the trustee exemption should not apply. There had been earlier occasions on which to try to charge the trustee under section 1, eg the Duke of Norfolk case,72 but the Revenue had not attempted to do so.73 In Green’s Death Duties it was observed that, although the House had shown that there was no clear distinction between the two sections, they had provided no help for the future.74 disappear and are replaced by three new chapters dealing with the charge on settled property just referred to, with the entirely new liability imposed by the Act of 1969 on the death of a beneficiary under a discretionary trust, and with what can only be described as a miscellany of new charging provisions introduced by that Act to deal with specific situations formerly within the general charge on property which passed, or in which an interest ceased or arose, on death.’ 70

[1899] AC 198, 212. [1960] AC 398. [1950] Ch 460. 73 Eg Viscount Simonds at 415. Keen scholars may look not only at Duke of Norfolk [1950] Ch 467 but also Re Tapp, Gonville and Caius College v IRC [1959] Ch 443, especially at 457, in relation to s 2(1)(b) on continuing nature of annuity. The case concerned a substantial addition to the endowments of that college, a proportion of which had to be for law. 74 Lawday and Mann, above n 13 (5th edn, 1963), 16. 71 72

Estate Duty (1965–75) 357 Potter, in his note on the case for the British Tax Review,75 after praising the House of Lords for its common sense, identified four situations where a change might result but concluded that only in one was this likely. He summarised the position as follows: ‘It is thus still possible that there could be property which passes under s 1, but is not included under any of the four paragraphs of section 2(1). Viscount Simonds mentioned this possibility, although he confessed that he was unable to think of any property which would not be so included. Since sections 1 and 2 of the Finance Act, 1894, are the foundation upon which the whole law of estate duty is built, one might suppose that a reversal of the accepted interpretation would have far-reaching consequences in practice. It is perhaps too early to say for certain; but at first sight it appears that the practical results of the decision may be few . . .

Practical problems did, however, arise. Re Weirs Settlement,76 which has already been referred to above in relation to the ease with which discretionary trusts bypassed the ED rules, appears in the Revenue Note to Ministers on Clause 29, which became section 36, to reinforce the need for change.77 Cross J had been dealing with a discretionary trust of income created by S for his daughter and son-in-law and their issue on the occasion of their marriage. As it turned out, there were no issue and there was no trust for accumulation. The income was in fact paid to the wife throughout. H died before the wife, and the Revenue succeeded in their claim for duty on his death under section 1 as being bound by two earlier cases.78 Cross J had dismissed their case under section 2.79 He ended provocatively by saying that he was bound by the two older cases to hold that there was a charge under section 1 ‘but that in view of the Public Trustee case and Gartside I can find no satisfactory reason why duty should be payable’.80 Perhaps it was not surprising, therefore, that clarification of the relationship did not come by litigation but by legislation. FA 1969, section 36 enacted that, while section 1 would remain unchanged, section 2 would now say, as Cross J had suggested might be the law but not at his Chancery Division level, ‘Property passing on death means for the purposes of ED’. There was no talk of deeming, and it was clear that 75

Potter, ‘A Minor Mystery of the Law’ [1960] British Tax Review 65. [1968] 2 All ER 1241. 77 240. 78 At 1251–52; the cases were Scott v IRC [1937] AC 174 and Burrell v A-G [1937] AC 286. In Burrell there was a change on H’s death in the membership of a discretionary class; duty was held to be due under s 1. In Scott a discretionary trust ended on the death of the Sixth Earl; the Seventh Earl succeeded as tenant for life having been an object of discretionary trust. 79 At 1249. 80 At 1251C. On Gartside v IRC see below p 361. 76

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section 1 could not widen the ambit of section 2 or any other provisions. In turn, this meant separate provision in sections 2(1)(e)–(g) for situations which had fallen only within section 1. The Notes to the Minister on the Finance Bill list (on page 246) and discuss the following, each of which was duly enacted: D’s partnership interest not passing to D’s executor, section 2(1)(e); property subject to an option, section 2(1)(f); and three types of Scottish property, section 2(1)(g). A new regime was enacted for discretionary trusts in a new section 2(1)(b)(iii) (change 9 below).

Change 6: Simplification of Aggregation In Memorandum M 417, summarised at M 414, paragraphs 27–29, the Revenue suggested that non-aggregation on the ground that the deceased never had an interest in the property should be abolished. In consequence, the charge on the death of the Royal Life would disappear and so the original reason for the rule would also disappear. This abolition was made easier by the related repeal of the charge on annuities under section 2(1) (d). The Revenue noted that the rule allowing such aggregation was being used to secure an advantage in circumstances other than a royal lives clause, especially with life policies (change 3 above). It was expected that use of the royal lives clause would decline now that the 80 year period had been provided by the Perpetuities and Accumulations Act 1964, section 1. In fact, the use of royal lives clauses did not end and, in any case, there were many settlements made before the 1964 Act came into force. The Perpetuities and Accumulations Act 2009 was needed to address practical issues, eg where trustees believe that it is difficult or not reasonably practical for them to ascertain whether the lives in being have ended and so whether the perpetuity period has ended.81 The exception for property in which the deceased had never had an interest was removed.82 However, this was not the end of relief from aggregation altogether. The exemption for life policies had been revised in 1968 above and was preserved for pre-1968 policies.83 Another exemption from aggregation concerned timber.84 There was also a limited exemption from aggregation for works of art sold more than three years after the death.85 The other exemption from aggregation retained in 1969 was that for the deceased’s free estate up to a set figure. The original figure had been 81 S 12 converts the period to one of 100 years. R Ramage, Solicitors Journal, 15 December 2009; R Hughes, ‘Society of Trusts and Estates’, Practitioners Journal, May 2010. 82 FA 1969, Sch 21, Pt V. 83 FA 1969, s 40(2)(c). 84 FA 1912, s 9. 85 FA 1969, s 39(2), refining FA 1930, s 40. See Beattie, above n 1, 7th edn, 36.

Estate Duty (1965–75) 359 £1,000; since 1894 that figure had been changed just once, when it was increased to £10,000 in 1954—quite a bit greater than the 1954 threshold of £3,000.86 FA 1969 retained the exemption from aggregation but left the amount untouched. So, if D had £10,000 free estate and was tenant for life of a trust with a capital value of £90,000, the free estate was exempt from aggregation and so exempt from duty; duty on the settled property was calculated on a value of £90,000.

Change 7: (1969) Settled Property: Interests in Possession Proposals for a completely new section 2(1)(b) had been set out in the April 1969 White Paper, “ED on Settled Property”.87 While three of the main changes outlined in paragraph 3 of the White Paper were enacted, the proposals for discretionary trusts were substantially redrafted—and softened—at Report stage (see change 8 below). In the new section 2(1)(b) the former charge of duty on property in which an interest ceased on the deceased’s death is replaced by one on settled property in which the deceased himself had a beneficial interest in possession. More fully, section (2)(1)(b) provides that, subject to section 37 (which dealt with situations where part only of the property passed), it catches property in the case of which (i) at any time during the period of seven years ending with the date of the deceased’s death, the deceased was entitled to an interest in possession in that property as, or as successor to an interest of, a beneficiary under the settlement. Section 2(1)(b)(ii) charges the property if the person entitled to the interest in possession in such property had been entitled more than seven years before death and the interest had determined or been disposed of before the seven year period but the person had not been entirely excluded during the last seven years of life. The White Paper mentioned three areas where substantial changes in tax law were to be made by the new rules. The first were interests for a fixed term. Before 1966 this had been limited to the value of the right to receive income for the remainder of the term. The 1966 revenue-protecting change amended the old section 2(1)(b) and so no longer worked. Under the new section 2(1)(b), duty was now to be charged on the capital value itself if D was in possession of the interest at death or had been within the previous seven years.88

86

FA 1894, s 16(3), as substituted by FA 1953, s 33(1). Cmnd 1421. Among the changes eventually made was an updating of the definition of settled property in FA 1894, s 22 so that it referred to the Settled Land Act 1925 instead of the Settled Land Act 1882, FA 1969, s 36(4). 88 See also Notes on Clauses Finance Bill 1969, vol 1, 220. 87

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The second substantial change would be the charge on the interest for the life of another. Under the pre-1969 law, if A’s interest ended on D’s death, there was a charge on D’s death even though D had no beneficial interest. As already seen, FA 1894 had provided an exemption from aggregation under section 4(2). To make matters even more complicated, under the pre-1969 law the change on D’s death was limited to the value of the right to receive income; the charge on the capital was imposed when A died. Under the 1969 changes there was no charge on the death of D, the charge would now arise on the death of A—to the extent of A’s full interest—if D was still alive or had died within the previous seven years.89 Thirdly, the treatment just outlined for a person with an interest pur autre vie was adapted for use where there had been an assignment. The charge on the death of the assignor was abolished save where the assignor died within seven years or had not been not totally excluded.90

Change 8: Settled Property Analogy of Beneficial Interest Applied to Discretionary Trusts Section 2(1)(b)(iii) applied as from 15 April 1969 to existing trusts.91 It applied where the deceased had been eligible to participate and had benefited from the trust during the material period. The rules required the trustees first to calculate the combined income of all the property in the trust income available for distribution under the discretion (but excluding a discretion only as to the amount of an annuity or a provision for the maintenance of an infant). Section 2(1)(b)(iii)(aa) applied where the deceased had been eligible to benefit from the discretion, and it looked to the extent that the beneficiary had benefited from the discretion during the period of seven years ending with the date of death but falling after 15 April 1963. This meant taxing the benefit from discretionary trusts by looking at the proportion of trust income spent on the now deceased beneficiary over the period relevant for gifts and taking the same proportion of the trust capital. In his budget speech, Jenkins had proposed ‘to put an end to the existing freedom from ED on the death of a beneficiary under a discretionary trust’.92 The analogy with the fixed interest in the final rules is self-evident. There was clearly a risk that, as a result of the seven-year rule, trustees might indulge in tax planning by reducing the benefits to 89

Ibid, 221. Ibid, 222. 91 FA 1969, s 37, adding s 2(1)(b)(iii). For a more detailed explanation see Beattie, above n 1, 7th edn, ch 4. Changes are detailed in Notes on Clauses for the Report Stage, on which see Official Report, 5th series, Session 1968–69 HC, 17 July 1969, vol 787, cols 968–76. 92 Official Report, 5th series, Session 1968–69 HC, 15 April 1969, vol 781, cols 1017–18. 90

Estate Duty (1965–75) 361 their elderly or infirm objects—or even devise investment strategies that increased overall income available for distribution (some of these matters were later addressed for CTT and so for IHT).93 However, on balance there was an element of fairness in the compromise and the new rules would be clear and provide a proper base for taxing these trusts. Section 2(1)(b)(iii)(bb) dealt the ceasing to be eligible during the seven years. Section 2(1)(b)(iii)(cc) dealt with the situation in which he had ceased to be eligible former than seven years before but had not been entirely excluded during those seven years. The original proposal was to charge where the object had been eligible with the last seven years but had received a benefit under it at any time. White Paper clause 2 (1)(b)(iii) would have gone back not seven years but over the whole period for which the object had been eligible. This failed because of the problem of record keeping which had surfaced in connection with the extension of the gift period.94 The need for reform had been reinforced by the decision of the House of Lords in Gartside v IRC.95 Here, a trust had been created by the will of a testator (T) who died on 8 January 1941. The discretionary beneficiaries of the relevant quarter of T’s estate were T’s son, S, and S’s wife and children. The trustees had the power to distribute income but a duty to accumulate undistributed income as capital. This duty would expire in January 1962, giving rise to a charge to duty and so the power of advancement was exercised on 2 January 1962. A capital sum of £47,000 was declared to be held on new trusts for the twin sons, then aged 17 years. The only other discretionary beneficiaries were S and S’s wife. S died on 8 May 1963. It was admitted that duty was due on all these trust funds except for the sums advanced to S’s sons. The Revenue sought tax on these on the basis that, under FA 1940, section 43, an interest limited to cease on death had been ended by the appointment. They argued that these four contingent beneficiaries had enough of an interest between them to trigger the ED charge. As Lord Reid saw it, this would mean that if one of the beneficiaries died there would be a charge not on the quarter but on the whole interest and this would apply on each succeeding death as well.96 The Revenue had won 3–0 in the Court of Appeal (Lord Denning MR, Harman and Salmon LJJ). They now lost 5–0 in the House of Lords. For Lord Reid, with whom Lords Morris and Guest agreed, an interest in possession was one which entitled a person to claim now whatever was the subject of his interest and he went on ‘Even if I had thought that the objects of discretionary trusts had an interest, I would not

93 94 95 96

See now IHTA 1984, s 50. Notes on Clause, 1530. [1968] 1 All ER 121. At 126I.

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find any good reason for holding that these are interests in possession’.97 Lord Wilberforce gave a separate speech but reached the same result— these were interests in expectancy, not interests in possession.98

Change 9: Accumulations Section 2(b)(iv) completed the reform by providing a charge where the settled property was held on trust to accumulate or with a power to accumulate where the duty or power ended on the death of the settlor. The Revenue defended the clause as a more effective form of the previous Section 2(1)(d), adding that it did not affect accumulation periods not for the life of the settlor but for a fixed period of years; this risk of avoidance would have to be kept under watch.99

Change 10: Technical Improvements Finally, the Revenue document M 414, paragraph 41 turned to a number of comparatively minor and technical aspects of the duty which required revision. One of these was the rewriting of the provisions relating to machinery and enforcement. The 1894 Act had imported into the ED a number provisions relating to the earlier probate duty which was repealed on the introduction of the ED. These provisions had been ‘obscure and archaic’ even at the time, but they still remained on the statute book. It was essential to clear them out of the way as preliminary to the consolidation of the ED law, on which work was proceeding. ‘In the process we would hope to put better teeth into our powers of enforcement.’

F INA LE F OR J ENK INS

Jenkins delivered one more budget as Chancellor before the Labour government was, slightly surprisingly, defeated at the General Election in June 1970. He just had time to alter the rules on interest payments and make minor amendments to the new rules on discretionary trusts.100

97

At 128D. At 133I. Notes on Clauses Finance Bill No 1, 223. Previously a charge had arisen either under s 2(i)(b) or under s 1 itself. 100 FA 1970, ss 30 and 31 98 99

Estate Duty (1965–75) 363 T H E BA R BER Y EA R S

After the excitement of the Jenkins era, Tony Barber’s years were those of consolidation, but a whole series of useful changes emerged—if not always easy to follow. The year 1971 saw an increase in the of ED threshold from £10,000 to £12,500 for deaths after 30 March 1971, and related change to exemption from aggregation rule and marginal relief. The facility for payment by instalments was widened to cover shares valued on assets basis under FA 1940, section 55.101 The following year saw a new rates table start at £15,000 for deaths after 21 March 1972.102 However, main interest was focused on section 121 and Schedule 26, which brought in limited reliefs for property passing to the surviving spouse (£15,000), charities (£50,000) and certain institutions (no limit). The limit for charities was ‘to prevent serious abuse’. It gave rise to one of the most celebrated articles in the British Tax Review: GSA Wheatcroft’s ‘Puzzle Corner Estate Duty Relief for Spouses and Charities’.103 In the end, Wheatcroft gave the new legislation ‘quite high marks’, even though it was ‘incomprehensible on first reading and probably on many readings’.104 It is fair to say that neither the Notes on Clauses nor the parliamentary debates anticipated these difficulties— whether they should have done is another matter. The Notes on Clauses did, however, explain that, although the new reliefs would take effect from budget day, there was no legal basis for this until the Finance Bill had been enacted as one could not use the Provisional Collection of Taxes Act machinery. The Notes explain how the £15,000 limit for spouses came about. It was intended as relief for a widow where she acquired the former matrimonial home and not much else. The ‘widows’ problem’ had been talked about by the Chancellor at the party conference. The effect of the change could be seen where S1 left an estate of £30,000 to S2. (In the examples, it is always the widow who survives.) As a result of the change, the estate would pay no tax. This was because of a combination of the new threshold (£15,000) and the new exemption (also £15,000). He could not agree that the relief should take the form of exempting the matrimonial home as this would be inequitable between owners and renters. It was 101 FA 1971, ss 61 and 62. Interestingly, the increase in the threshold to £12,500 was accompanied by an adjustment to the start of the first chargeable band but not its ending, so the 25% rate now applied from £12,500 to £17,500 instead of £10,000 to £17,500. 102 FA 1972, s 120. 103 [1973] British Tax Review 207. The reader is referred particularly to the conclusions and note 83, where Wheatcroft refers to the simpler method put forward in the budget consultation by the National Council of Social Service. The article grew out of a conference given in London, where I had the pleasure of listening not only to GSAW but also Philip Lawton and John Avery Jones. 104 Ibid, 242.

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left to Denis Healey to remove the limit on the exemption, so also ending the surviving spouse’s life interest exemption. However, the 1972 government did produce a Green Paper on taxation of capital on death, and this suggests that section 121 was seen as a first step in the direction of an inheritance tax.105 The files show a consistent attempt to keep debate open—eg briefing the Chancellor on the merits or otherwise of a gift tax rather than ED or an inheritance tax—both floated long before 1972. Usually discussion is curtailed by a nice minute advising the Minister why that might not be a good idea. FA 1973 was the last Conservative budget until Mrs Thatcher’s victory in 1979. Barber introduced the now familiar relief where investments had been sold within 12 months of death:106 one could take proceeds instead of market value at death. Section 44 tightened up one of the heritage exemptions on works of art, etc; the Treasury had to be satisfied that it was pre-eminent.107 Finally, from the capital gains tax part of the Act, the open market value rule for unquoted securities was amended to overcome Re Lynall.108

C O N C L U SION A ND T H E U NMA K ING O F TH E MODER N TA X

Although much modernising work had been done since 1965, ED remained a tax which Denis Healey, the incoming Chancellor of the Exchequer after the election of February 1974, could treat as full of loopholes. Healey gave the budget on 26 March 1974 and announced that a real estate and gift tax, CTT, would take over from that day.109 However, there is much to admire in what the Jenkins reforms did and one has to note that much remains in place today. He showed that one could change a duty from slab to slice, something that is a reproach to those in charge of our stamp duty ‘system’. The rules on exempt gifts are still with us—even the amounts. The rules on interest in possession trusts in section 2(1)(b)(i) and 105 Taxation of Capital on Death: A Possible Inheritance Tax in Place of Estate Duty (Cmnd 4930, 1972); this suggests that s 121 was seen as a first step in the direction of an inheritance tax proper. Among notes see G Macdonald [1973] British Tax Review 306; S Cretney (1973) 36 Modern Law Review 284; Wheatcroft was against the change—above n 103, 242. 106 FA 1973, s 43. 107 FA 1973, s 44. 108 FA 1973, s 51 [1971] 3 All ER 914. There is a good note in the Simons Taxes Handbook on the way in which the effects might go in different directions for the two taxes. Lynall had excluded unpublished information. While the case could work either way, the norm was to reduce the value for estate duty, ie take a lower value. But the case imposed extra burdens for capital gains tax on individual taxpayers, especially if the reduced value of a holding held from before 1965 (only eight years before). 109 In fact, estate duty remained as the tax on death until Royal Assent, 13 March 1975; FA 1975, s 49, above n 2.

Estate Duty (1965–75) 365 (ii) survived until 2006. The rules in section 2(1)(b)(iii) on discretionary trusts proved to be weak, but they had had to be reduced in scope by being limited to benefits received during the last seven years. Those who did not want lifetime record keeping got their come-uppance in 1975, when the new draconian rules on discretionary trusts with ten-year charge and real charge to tax when property was transferred to a beneficiary were enacted. The question whether Jenkins would have done such a thing if he had had more time remains open. His warnings against precipitate tax changes ring true. His use of the English language is, as ever, a joy.

11 The Advancement (or Retreat?) of Religion as a Head of Charity: A Historical Perspective ANN O’CONNELL AND JOYCE CHIA

A BSTR A C T The income tax exemption for religious institutions is long standing and widespread. However, it has not always been fully supported. The eligibility of religious entities for tax relief must be viewed against the background of: the changing nature of religion, as a the primary provider of charitable assistance to the situation where advancement of religion is seen as one aspect of charity; the changing relationship between religion and the state, starting with the Reformation, which ultimately led to a deep suspicion of all things religious and enabled the development of a much more secular society; and the changing nature of taxation, from a situation where levying of tithes by religious organisations was common through to the compulsory imposition of income tax by governments on entities unless specifically exempted. The settlement of Australia saw the results of these developments become embedded in Australian society more generally and in the tax system in particular, with some modifications. Unlike the UK, a ‘religious institution’ does not rely on being an aspect of charity in Australia but rather qualifies for exemption in its own right. This chapter explores the history, including more modern Australian history, that led to this position.

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I

N 2011, THE Australian government committed to introducing a statutory definition of ‘charity’.1 The announcement indicated that the definition would be based on the report of an inquiry, commonly known as the Charities Definition Inquiry, but updated to take account of more recent judicial developments. That report in 2001 had proposed a modernised definition of the common law meaning of charity.2 The definition will be used for all Commonwealth purposes, including access to taxation concessions, although access to those concessions will be subject to other conditions.3 As is common elsewhere, in Australia charitable institutions qualify for a range of tax concessions, including exemptions from income tax. While the current legislative provisions specifically exempt certain types of charitable institutions, including religious institutions separately, it seems likely that, as part of the simplification process, the notion of charity will assume greater importance. In late 2011, Treasury released a consultation paper on the proposed statutory definition and indicated that one of the matters requiring consideration would be whether to retain the presumption of public benefit for entities that are for the relief of poverty, advancement of education and advancement of religion.4 In April 2013, an Exposure Draft Charities Bill was released. The draft Bill retains ‘advancement of religion’ and the presumption.5 It is almost certain that ‘advancement of religion’ will remain as a charitable purpose under a statutory definition and so a range of tax concessions will be available. However, in the context of rethinking what we mean by ‘charity’, it is useful to examine how religion came to be regarded as charitable in the first place and to consider how this has been shaped by the changing nature of religion, the changing relationship between church and state, and the changing conception of taxation itself. This chapter charts the history of tax exemptions for religious bodies and purposes in England and Australia. It begins with a consideration of how religion came to be viewed as almost synonymous with charity in early modern England and the struggles that loosened the bonds of religion and charity. It also considers the changing, often hostile, relationship 1 Treasury, ‘Budget 2011-12, Part 1: Revenue Measures’, available at http://www.budget. gov.au/2011-12/content/bp2/html/bp2_revenue-07.htm. 2 IF Sheppard, R Fitzgerald and D Gonski, ‘Report of the Inquiry into the Definition of Charities and Related Organisations’ (2001), available at http://www.cdi.gov.au/html/ report.htm 3 In particular, the government has introduced legislation to strengthen the geographical conditions for access to tax concessions: see Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012. 4 Treasury, ‘A Definition of Charity’, Consultation Paper (28 October 2011), available at http://archive.treasury.gov.au/contentitem.asp?NavId=037&ContentID=2161 5 Exposure Draft Charities Bill 2013, ss 7 and 11.

Religion as a Head of Charity: A Historical Perspective 369 between church and state, and the changing conception of taxation from voluntary payments to the state (and sometimes to the church) to the late nineteenth and twentieth centuries, when taxation became universal enough to argue that any exemption needed to be justified. The chapter then explores the introduction of tax exemptions for religion in Australia and their subsequent history, before examining two avenues of challenge to the exceptions in Australia, in the fields of definition and the concept of ‘public benefit’. Finally, the chapter considers some issues that may be significant in considering whether religion should be regarded as charitable.

H I S T OR I C A L BA C K GR OU ND TO T H E E XE M P T I ON O F R ELIGION F R OM TA X

The exemption of religious institutions from taxation is both ancient in origin and prevalent across the globe. Indeed, such exemptions appear to be one of the most durable features of taxation systems across both time and place. Under the Romans, for example, sacred temples and sacred properties were held to have passed into the control of the divinity and were, therefore, not taxed.6 The Rosetta Stone, dealing with exemptions from tax for the priests in ancient Egypt,7 is a good example of both the prevalence and longevity of such concessions. History reveals the changing relationship between religion and the concept of charity. In the (near) beginning, religion encompassed charity— charity was a religious obligation and the church was the source of all charity. The Reformation and the Tudors marked a crucial shift towards state responsibility for welfare, and anti-clerical sentiment cast suspicion upon charity because of its close affiliation with religion. The objects of charity became increasingly secular, moving towards poor relief and the provision of education and infrastructure. History also reflects and illuminates the changing and often fractious relationship between religion and the state. In England, that early history is marked by struggles over the waxing power of the state and the waning power of the pope until the Reformation, and the subsequent slow and incomplete shift to liberal neutrality towards religion. Taxation, a key source and expression of power, tracks these seismic shifts closely. History also reveals the changing conception of taxation itself. Taxation has its roots in canon law, and in early modern history the Christian church was the principal taxing agent and revenues were applied for such 6 P Adler, ‘Historical Origin of the Exemption from Taxation of Charitable Institutions’ in P Adler (ed), Tax Exemptions on Real Estate: An Increasing Menace (Westchester County Chamber of Commerce, 1922) 1, 15. 7 C Adams, ‘The Rosetta Stone Speaks’ in For Good and Evil: The Impact of Taxes on the Course of Civilisation, 2nd edn (Madison Books, 2001).

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purposes as the church determined. The scope of state taxation remained fairly limited until the nineteenth century. Such taxes as were imposed, for example on land, were not universal and in some cases could only be imposed on the churches with their consent. As a result, the imposition of tax was the exception and required justification. It is only since the mid-nineteenth century that taxation has become universal enough to be seen as the default and any claim for exemption from taxation needs to be justified. As this reversal of the historical conception of taxation has become entrenched, exemptions for religious institutions have become apparent anomalies increasingly vulnerable to challenge.

The Changing Relationship between Church and Charity Charity, in the Judaeo-Christian tradition, is an essential element of religion. While, in other ancient cultures, the state was principally responsible for relieving the poor through distributive programmes, in ancient Israel the Jewish religion included a ‘complex system of customary social norms’ which dictated the behaviour of households to those less fortunate.8 The system was characterised by two Jewish virtues, zeddakah and hesed. Zeddakah, or righteousness, meant ‘rightly ordered human relations that did not neglect those who were disadvantaged’; hesed, or graciousness, meant ‘graciousness and loving kindness of his people’, extending to hospitality and assistance to needy neighbours.9 This later became a distinctly religious ethic addressed to individual responsibility,10 which was elaborated institutionally in a complex system of provisions and programmes for assisting the poor.11 In this system, alms-giving and tithing were required, and houses of relief for the aged, sick and poor grew up around synagogues.12 The early Christians continued to adhere to these norms, but their faith required a ‘more active, intentional practice of charity’.13 This grew out of three fundamental principles: the first commandment to love God, which required self-sacrificing devotion; the second commandment to love one’s neighbour, which obligated mutual assistance; and a third norm that ‘evil lay in too great attachment to material goods and wealth’.14 In particular, preachers and missionaries were special objects of Christian charity.15 8 F Bird, ‘A Comparative Study of the Work of Charity in Christianity and Judaism’ [1982] The Journal of Religious Ethics 144, 145–49. 9 Ibid, 148–49. 10 Ibid, 149–50. 11 Ibid, 150–55. 12 Adler, above n 6, 5–6. 13 Bird, above n 8, 156. 14 Ibid, 156. 15 Ibid, 157.

Religion as a Head of Charity: A Historical Perspective 371 With the growth of Christianity from about the third century, philanthropic forms of charity were increasingly promoted, with the church promising rewards in heaven for those who gave and punishments for those who did not, and encouraging the donation of superfluous wealth, especially upon one’s death.16 Roman law was changed to enable bequests of every kind to the church, such as gifts to ‘Christ our Lord’ or the poor.17 The church became the distribution centre for state welfare programmes,18 and its leaders responsible for the poor and otherwise disadvantaged.19 During the eleventh and twelfth centuries, as the church flourished, religious houses were founded in profusion. Frequently, the charters of such religious houses included generous privileges and immunities from temporal burdens, including immunities from liability to ecclesiastical tithes.20 The ‘church became the exclusive agent of all measures of relief’, and all ‘charitable property was necessarily in the hands of the church’.21 During the Middle Ages, the taxation of the church was a matter of some complexity. As with the early Romans, there was a theological theory that the lands and properties of the church were beyond the reach of secular control—a theory that was readily accepted. This theological theory was supplemented by other justifications for exemption. For example, from about the tenth century, the church was exempt from the Danegeld. The Danegeld was a tax paid to check the ravages of pirates, but later became more of an annual land tax. The exemption for the church was said to be because ‘more trust was put in the prayers of the church than its defence by arms’.22 Much church land was also exempted by writ in the early part of the eleventh century along with the military, because both were ‘performing functions of which the King and the public stood in need . . . Because they fought and prayed, they did not pay’.23 These justifications were supported by two more practical matters. First, the total loss to the revenue remained slight, despite the large number of exemptions.24 Secondly, the temporal powers simply did not have any organised system of taxation.25 In contrast, the papacy had a ‘highly developed fiscal administration’ which exacted contributions from church properties.26 Further, the system of taxation in this period was largely feudal, and did not affect the church.27 16 17 18 19 20 21 22 23 24 25 26 27

Ibid, 163. Adler, above n 6, 7. Bird, above n 8, 163. Adler, above n 6, 9. Ibid, 11. Ibid, 13. Ibid, 22. Ibid, 24–25. SK Mitchell, Taxation in Medieval England (Archon Books, 1971) 70. Adler, above n 6, 20. Ibid, 36. Ibid, 29.

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Even before Henry II introduced the foundations of modern taxation in the latter part of the twelfth century, however, the wealth of the church was challenged in more dramatic fashion. King William I (William the Conqueror), who ruled from 1066 to 1087, subjected many religious houses to the burdens of military tenure, and appropriated much of their wealth. His son, King William II (William Rufus), who ruled from 1087 to 1100, ransacked and seized church property, and church lands under William Rufus were subjected to the Danegeld.28

The Changing Relationship between Church and State The early modern history of taxation is shaped by the struggles between the church and the king over taxation. Exemptions for religious bodies, purposes and objects from tax were frequent and persistent, but never absolute. The religious houses continued to protest their immunity from taxation, but were often constrained to pay.29 For example, King Henry II, who ruled from 1154 to 1189, required the payment of scutage (a payment in commutation for military service) by bishops, over the objections of Archbishops.30 A tax was imposed on revenues and movables to pay a ransom for King Richard 1 (Richard the Lionheart) when he was captured by the Austrian emperor in 1192 returning from a crusade to the Holy Lands. The tax was expressly laid upon ecclesiastical as well as secular persons.31 King John, brother of William I, who reigned from 1199 to 1216, also demanded various taxes from religious houses during his reign.32 The religious houses, however, continued to claim immunity. In theory, they paid such taxes voluntarily, sometimes under the pressure of appeals from the pope.33 The writs record by statements that the levies were provided by the ‘free grace’ of the donees, or that the assessment of such property should not be held as a precedent.34 In general, however, the church made contributions when requested, with one famous exception being in 1296, when Pope Boniface VIII forbade ecclesiastics from paying taxes to the secular power without consulting him. The convocation of bishops decided to obey the papal bull; King Edward I (Edward Longshanks) responded by depriving the clergy of legal remedies for wrongs done to them by a lay person; and the ecclesiastics gave in.35 28 29 30 31 32 33 34 35

Ibid, Ibid, Ibid, Ibid, Ibid, Ibid, Ibid, Ibid,

29. 38. 35. 31. 32. 36. 35. 40.

Religion as a Head of Charity: A Historical Perspective 373 The struggles between church and state most spectacularly culminated in the Reformation in the sixteenth century, which was to have profound and long-lasting implications for the wealth and taxation of religion. The most immediate consequence was the destruction of much of the wealth of the church through Henry VIII’s confiscations and policy of persecution between 1536 and 1541. Henry VIII also exacted a tax on the ‘first fruits’ of all spiritual revenues, a tax which had previously been imposed by the pope.36 The Reformation marked a pivotal moment in the development of charity law. The privileges of charity were first developed in ecclesiastical courts applying canon law, which had exclusive jurisdiction over testamentary property until it was gradually supplanted by the Chancery Court in the sixteenth century.37 The ecclesiastical law developed particular doctrines in favour of donations to ‘pious causes’. Such causes honoured God and the church, and included gifts for the saying of masses (including the endowment of chantries or sung masses), the repair of churches and the maintenance of religious houses, as well as gifts for relief of distress and suffering on earth, including bequests for the poor and suffering, and the upkeep and repair of hospitals, bridges, roads and dykes.38 This definition of pious causes was, until the Reformation, synonymous with the legal definition of charity. Literally, therefore, the legal definition of charity is rooted in religion. In this definition, charity in the sense of benefiting others was a means to the end of serving God. One of the long-lasting effects of the Reformation was to decouple the idea of charity from the idea of religion. One key legal doctrine that expressed this decoupling was the ‘superstitious use’ or trust that developed during the Reformation. The reference to superstitious indicated that the trust was bad and would be struck down by the courts. The term applied to cases where the object of the gift was for the propagation of certain religious views forbidden by law or the promotion of tenets and doctrines differing from the established religion.39 Its legal source is somewhat unclear, although there were a number of statutes prohibiting the saying of masses, suppressing the endowment of chantries, prohibiting trusts for parish churches and chapels, and enforcing conformity with the established church (the Church of England).40 The doctrine lost much of its force once the Act of Toleration was passed in 1689 and subsequently when the Roman Catholic Relief Act 1778 was

36 Ibid, 47. The Act of Conditional Restraint of Annates 1534 transferred the tax from the pope to the king. 37 GH Jones, History of the Law of Charity, 1532–1827 (Cambridge, Cambridge University Press, 1969) 18–21. 38 Ibid, 4. 39 T Bourchier-Chilcott, ‘Superstitious Uses’ (1920) 36 Law Quarterly Review 152, 153. 40 Ibid, 153–54.

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enacted, but until a House of Lords decision in 1919 it remained unclear whether gifts for the saying of private masses could be legally charitable.41 The Reformation also spurred the Tudors in the development of a public system of poor relief and saw the enactment of the first national Act for the relief of the poor. The Poor Law of 1601 was the most important social legislation of the era, and shaped the development of social service delivery for more than the next three centuries.42 The seismic shift in the relationship between church and state was seen as the genesis of the passage of the Statute of Uses (the Statute of Elizabeth) in 1601. The rationale for the Statute has been explained as follows: Elizabeth I recognized the need to attract religious money for secular purposes. In a society which did not offer fiscal and tax benefits to donors, religion was an important factor motivating charitable gifts. The citizens with new wealth spurned her state church. Understanding the attitude of the rich Puritan merchants to both the Established church and the Crown’s history of appropriating religious endowments, Elizabeth I enacted the [the Statute].43

The functional importance of the Statute was its provisions setting out regulatory and accountability measures to ensure that assets given for charitable purposes were applied to the ‘charitable uses’ intended by the donor. The Preamble to the Statute contained a list of purposes or activities that the state believed were of general benefit to society, and to which the state wanted to encourage private contributions. The Statute itself provided a regulatory mechanism which applied only to those charities within the Preamble and did not seek to define the legal limits of charity. The Preamble to the Statute was later held to indicate the scope of the legal definition of charity, in the 1805 decision of Morice v Bishop of Durham.44 To this day, the Preamble governs the scope of the common law definition of charity. Importantly, the Preamble did not refer to religious

41

Bourne v Keane [1919] AC 815. B Bromley, ‘1601 Preamble: The State’s Agenda for Charity’, presented at the Charity Law in the Pacific Rim Conference, QUT, Brisbane, Australia 4–6 October 2001, 2. 43 Jones, above n 37, 123–24. The Preamble listed the following purposes as charitable: ‘The relief of aged, impotent, and poor people; the maintenance of sick and maimed soldiers and mariners, schools of learning, free schools and scholars of universities; the repair of bridges, havens, causeways, churches, sea banks and highways; the education and preferment of orphans; the relief, stock or maintenance of houses of correction; marriages of poor maids; supportation, aid and help of young tradesmen, handicraftsmen and persons decayed; the relief or redemption of prisoners or captives and the aid or ease of any poor inhabitants concerning payments of fifteens, setting out of soldiers and other taxes’. The most commonly cited source of these enumerated purposes is William Langland’s poem, The Vision of Piers Plowman, written in 1362. 44 (1804) 9 Ves 399, (1805) 10 Ves 522. The case involved a bequest to the Bishop of Durham, on trust for such objects of benevolence and liberality as the bishop chose. The bequest was held to be a trust for charitable purposes, based on the meaning established by the Statute of Elizabeth, and so valid. 42

Religion as a Head of Charity: A Historical Perspective 375 uses with the exception of the repair of churches.45 It thus represents a powerful expression of the increasing secularisation of charity.46 The Reformation had brought with it a ‘revolutionary, anti-clerical and socially secular’ Protestant ethic.47 The suspicion of the Catholic Church and its wealth, and in particular of the authority and privileges of the clergy, had profound effects on charity. An expression of this was the passage of the Mortmain Act 1736,48 under which all testamentary gifts for charitable purposes were rendered void and reverted to the testator’s heir-at-law.49 The Act grew out of a strong anti-clerical movement,50 which viewed the number and wealth of charitable foundations with suspicion, and was concerned that the passage of lands into church hands would ‘prejudice the nation in general’ and ‘ruin or unjust[ly] disappoint . . . many a man’s poor relations’.51 Following the passage of the mortmain legislation, the scope of the definition of charity had the effect of denying testamentary gifts to charities, rather than conferring privileges. Anti-clerical judges, therefore, sought to expand the scope of the definition.52 Ironically, this has provided the foundation for the breadth of tax exemptions to religions and other charities today in most common law countries.53

The Changing Nature of Taxation Prime Minister William Pitt’s Duties upon Income Act 1799, the first income tax legislation, provided for an exception for ‘charitable purposes’. The tax was imposed to raise money for the Napoleonic wars and was repealed in 1816. The origin of the exemption—the foundation for the continuing exemptions for charitable purposes in the UK and its colonies— is obscure, as no comment was made upon it in parliamentary proceedings or in related materials.54 Indeed, the consensus for similar exemptions was remarkable: Adler notes that the policy of exempting educational, charitable and related institutions was generally acquiesced to: ‘at least

45

Jones, above n 37, 57. Ibid, 129. Ibid, 151. 48 9 Geo 2 c 36. 49 Exemptions were subsequently granted to specified universities, colleges and schools, but other petitions for exemption were resisted: see Jones, above n 37, 111–12. 50 Ibid, 109. 51 Ibid, 110–11, citing Cobbett, Parliamentary History, IX, 1122, 1125–26, 1144–45. 52 Jones, above n 37, 107. 53 EB Bromley and K Bromley, ‘John Pemsel Goes to the Supreme Court of Canada in 2001’ (1999) 6(2) Charity Law and Practice Review 115, 123–24. 54 M Gousmett, ‘The Charitable Purposes Exemption from Income Tax: Pitt to Pemsel 1798–1891’, PhD Thesis (University of Canterbury, 2009). 46 47

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the books reveal no traces of any opposition’.55 A similar consensus is evident in the lack of debate in Australia on the introduction of charitable tax exemptions. The exemption was also inserted in the Income Tax Act 1842 introduced by Robert Peel, the first income tax imposed in Britain out of wartime. The exemption also included trusts for charitable purposes, although clergy were not exempted from duties on offices of profit.56 The phrase ‘charitable purposes’ was originally determined by reference to the Elizabethan definition, but it was noted in Morice v Bishop of Durham that the list was not exhaustive and could encompass ‘everything from which the public derive benefit’, and included the advancement of religion.57 Towards the end of the nineteenth century, figures showed that the scale of tax relief for religions, as a species of charity, was relatively small: £102,232 out of a total of over £3 million pounds.58 The bulk of the relief was provided to education and hospitals. However, concern by the Revenue over the potential breadth of the exception led it to deny charitable status to a trust established for the Moravian church (also known as the United Brethren), to support missionary establishments among ‘heathen nations’. The argument of the Commissioners for Special Purposes was that charity was limited to its popular meaning, namely, relief of poverty. Ultimately, the matter was appealed to the House of Lords in The Commissioners for Special Purposes of the Income Tax v Pemsel,59 where the Law Lords (4–2) accepted the wider legal definition of charity. Lord Macnaghton categorised its constituent divisions as: the relief of poverty; the advancement of education; the advancement of religion; and ‘other’ purposes beneficial to the community.60 Notably, religion was listed as only the third head of charity, reflecting its decline from the position it enjoyed under ecclesiastical law. Instead, the relief of poverty had become the principal head of charity. The Pemsel case ensured that there was not a complete decoupling of charity from religion. Religion was to remain a constituent part of charity, and by that route would retain access to tax exemptions in the UK.

R E L I GI O N A ND TA X IN A U STR A LIA

The founding of the Australian nation naturally brought with it many British traditions, although there were also distinctive influences. For 55

Adler, above n 6, 63. Income Tax Act 1842 (5 & 6 Vict) c 35 Sch A. 57 M Daunton, Trusting Leviathan: The Politics of Taxation in Britain, 1799–1914 (Cambridge, Cambridge University Press, 2007) 213–14. 58 Ibid, 214. 59 [1891] AC 531. 60 [1891] AC 531, 583. 56

Religion as a Head of Charity: A Historical Perspective 377 example, the established church (the Church of England or the more generic Anglican Church) was strongly affiliated with the infant state and its oppressive policies from the start,61 and the Catholic Church was strongly associated with, and benefited from, Irish nationalism.62 Although there was a dominant belief in God as a supreme being, the Anglican Church was not popular among the working classes.63 Anglicanism and Catholicism tended therefore to reflect class as well as religious divisions, and, while most people believed in God, the pews of churches were rarely full. In the mid-nineteenth century, there were fierce struggles over the role of religion in education. Initially, the model was secular education, supplemented by visiting clergy of both Anglican and Catholic faiths, based on the model existing in Ireland. In 1848, a compromise was made in New South Wales to placate those seeking a Bible-based education, with a mixed system of denominational and Irish-model schools.64 In 1851, the colony of South Australia voted to abolish state aid for religion to avert Anglican domination,65 a precedent New South Wales followed in 1879.66 In 1872, the Victorians introduced ‘the most secular school system in Australia’, with religious education taking place after hours by permission of local boards.67 The relationship of the church and state, therefore, was very much a live issue in Australia in the nineteenth century. Yet the traditional tax exemptions for religious purposes and bodies were almost always retained. Municipal ratings legislation and levies for water and sewage commonly exempted land occupied by churches and chapels or places used ‘exclusively for public worship’.68 The position in the states and later the Commonwealth was similar. The Taxation Act 1884 (South Australia), the first direct taxation Act, exempted lands used for ‘religious or charitable purposes’, and for other public purposes specified in the legislation. That Act also exempted the income of all organisations ‘not carrying on any business for the purpose of gain to be divided amongst the shareholders, or members thereof’,69 similar formulations of which were adopted by all the Australasian colonies in their direct taxation legislation.

61 RC Thompson, Religion in Australia: A History, 2nd edn (Oxford, Oxford University Press, 2002) 3–5. 62 T Keneally, The Commonwealth of Thieves (Random House, 2005). 63 Thompson, above n 61, 9. 64 Ibid, 12–13. 65 Ibid, 14–15. 66 Ibid, 20. 67 Ibid, 18. 68 See, eg Rating Act 1876 (NZ), s 37; Municipalities Act 1867 (NSW), s 163. 69 See, eg Taxation Act 1884 (SA), ss 8, 9.

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The exemption, however, was the subject of heated debate in the South Australian Parliament,70 the tone of which reveals vividly the differing attitudes to the role of religion, attitudes that resonate down the ages. Several Members of Parliament objected to the exemption on the basis that it would be ‘most difficult to know where to stop’; ‘religious bodies were wealthy enough to erect the churches and ought to be able to pay a small tax’; and that ‘the lands of churches and chapels were often enhanced in value by state expenditure, and sold for large sums’. In reply, it was said that ‘it was not too much for the churches to ask to be left alone, and there was a great deal of difference between this and asking for a grant’; and that ‘religious and charitable institutions improved the moral tone of the community, and ought to be encouraged’. After a six-month delay, the Treasurer moved an amendment to exempt land ‘used solely for religious, charitable or educational purposes’. Each category was voted on separately and ultimately the exemption for religious institutions was passed by a slim majority: 20–19. In contrast to this protracted debate in South Australia, the great debates over the first direct taxation statutes in New South Wales and Victoria barely touched the equivalent exemptions. The Land and Income Tax Assessment Act 1895 (NSW) exempted from land tax (inter alia) churches and chapels for public worship, and exempted from income tax ‘ecclesiastical, charitable and educational institutions of a public character’, a formulation later adopted in Queensland. The Victorian Income Tax Act 1895 (Vic) also exempted religious bodies. Significantly, when the Victorian legislature introduced the world’s first deduction for charitable gifts in 1907, its list did not include religious institutions. Western Australia provided a broader exemption under its land and income tax in 1907, extending to residences of ministers, schools attached to or connected with places of worship, and ‘all lands the property of and belonging to any religious body, and occupied only for the purposes of such body’. There was also an exemption of incomes and revenues of ‘all ecclesiastical, charitable and educational institutions of a public character’.71 The Commonwealth entered the field of direct taxation in 1910, with the Land Tax Assessment Act 1910 (Cth). Without any real debate, Commonwealth legislation generally replicated exemptions for religious bodies. The 1910 Act included an exemption for all land owned by, or in trust for, a religious society that was devoted to supporting aged or infirm clergy or ministers or their families, or to religious, charitable or educational purposes, as well as land used as a place of worship

70 Minutes of Proceedings of the Legislative Council, Eleventh Parliament, South Australia, 1884. 71 Land and Income Tax Assessment Act, 1907 (WA), s 19(6).

Religion as a Head of Charity: A Historical Perspective 379 or a residence for clergy or ministers.72 In 1915, the first income tax Act, Income Tax Assessment Act 1915 (Cth), exempted religious institutions, alongside scientific and charitable institutions. The enumeration of different types of entities suggests that Parliament did not believe that the word ‘charitable’ would include, inter alia, religion. When the Commonwealth introduced a tax deduction for certain gifts, it was similarly restricted to ‘public charitable institutions’. In 1925, however, the Privy Council held that the wider legal definition applied to the term ‘charitable’ in the Estate Duty Assessment Act 1914 (Cth),73 and in 1927 the term ‘public charitable institution’ in the income tax legislation was defined more restrictively to mean ‘a public hospital, a public benevolent institution and a public fund for providing money to such institutions or for the relief of persons in necessitous circumstances’.74 The gradual dissociation of religion from charity in Australia seems to have arisen as a result of courts adopting the ‘popular’ definition of charity, that is, relief of poverty. In 1920, in Swinburne v Federal Commissioner of Taxation,75 the High Court of Australia took the view that the popular view was what Parliament intended to apply in Australia. A few years later, in Chesterman v FCT,76 a majority of the High Court (Knox CJ dissenting) also declined to follow Pemsel, preferring the popular meaning. In that case, certain testamentary gifts were provided for prizes to candidates who demonstrated ‘physical, moral or literary’ achievements, and at issue was whether they were exempt under the Estate Duty Assessment Act 1914 (Cth). The Act exempted bequests for ‘religious, scientific, charitable or public educational purposes’. Isaacs J believed that the popular notion was quite broad but would not extend to prizes for individuals not in need of benevolence. He referred to the judgment of Lord Herschell (who dissented in Pemsel), which discussed the popular (or ordinary) meaning of the term ‘charity’. Lord Herschell had stated that the ‘popular’ meaning of charity included ‘the relief of any form of necessity, destitution, or helplessness which excites the compassion or sympathy of men, and so appeals to their benevolence for relief’.77 Isaacs J went further and said that it also included ‘benevolent assistance in aid of physical, mental, and even spiritual, progress for the benefit of those whose means are otherwise insufficient for the purpose’ (emphasis added).78 72

Land Tax Assessment Act 1910 (Cth), s 13. Chesterman v FCT [1925] AC 128. 74 Income Tax Assessment Act 1915 (Cth), s 23. The Estate Duty Assessment Act was also amended in 1928 to include a similar definition: s 8(5). 75 (1920) 27 CLR 377. 76 (1923) 32 CLR 362. 77 [1891] AC 531, 572. 78 (1923) 32 CLR 362, 384–85. 73

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In this statement, religion is identified as a means to the relief of disadvantage—a complete inversion of the earlier approach ,in which charity was a means to honour God. Over time, religion had become a species of charity, rather than charity being an aspect of religion. The decision of the Australian High Court in Chesterman was ultimately overturned by the Privy Council on appeal79 and thus established that, as in the UK, charity was to be construed according to its technical, rather than ordinary, meaning in Australia. However, unlike the UK, religious institutions were granted exemption from income tax on their own account. For most of the twentieth century, these tax exemptions were not challenged. In 1986, an exemption for employment benefits provided by religious institutions to religious practitioners was included in the Fringe Benefits Tax Assessment Act 1986 (Cth). Although the exemption for religious practitioners was approved by the House of Representatives, the Senate disagreed, noting that there was no ‘reason in equity’ to exempt them. However, a later amendment restricting the exemption to benefits provided ‘in respect of pastoral duties, or other duties that are directly related to the practice, study, teaching or propagation of religious beliefs’,80 was accepted.

C H A L L ENGES T O TH E EXEMPTION F OR R ELIGIOU S INSTIT U T IONS

The relatively untroubled history of tax exemptions for religious institutions, however, is partly misleading. The forces of secularism and the proliferation of new religious movements have resulted in challenges to tax exemptions via other routes. This section of the chapter examines two such avenues: a challenge based on the definition of religion and one based on the ‘public benefit’ of religion. These avenues are not exhaustive: other avenues have included constitutional challenges,81 and conflicts with the principle of freedom of religion.82 More recently, another sphere of conflict has arisen with the application of norms of non-discrimination to religious organisations.83 79

[1925] AC 128. Fringe Benefits Tax Assessment Act 1986 (Cth), s 57. 81 For a discussion of the numerous cases involving s 116 of the Constitution, see S McLeish, ‘Making Sense of Religion and the Constitution: A Fresh Start for Section 116’ (1992) 16 Monash University Law Review 207. 82 See C Evans, Legal Protection of Religious Freedom (Federation Press, 2012). 83 The Commonwealth government is currently reviewing and consolidating its non-discrimination legislation. In a draft Bill introduced in March 2013, the exemptions for religious institutions relating to religious beliefs will remain, but discrimination based on sexual preference and gender identity will not be exempt: see Sex Discrimination Amendment (Sexual Orientation, Gender Identity and Intersex Status) Bill 2013. 80

Religion as a Head of Charity: A Historical Perspective 381 Defining What a Religion Is The most famous legal controversy in modern times over tax exemptions for religions has concerned the Church of Scientology (also known in Australia as the Church of New Faith). In Australia, litigation concerning the church’s eligibility for a payroll tax exemption has provided the most authoritative judicial statement of the definition of ‘religion’. This test case and its surrounding circumstance deserve some exploration. The Church of Scientology was founded in the 1950s, growing out of the earlier practice promoted by its founder Ron L Hubbard known as ‘Dianetics’. While Dianetics was scientific in design, Scientology evolved to take on the trappings of a Western organised religion. However, controversy soon followed, principally concerning its psychological practices. By the early 1960s, concern about Scientology in Australia led to the establishment of a Board of Inquiry in Victoria. The 1965 Report of the Board stated: Scientology is evil; its techniques evil; its practice a serious threat to the community, medically, morally and socially; and its adherents sadly deluded and often mentally ill . . . In a community which is nominally Christian, Hubbard’s disparagement of religion is blasphemous and a further evil feature of scientology.84

The Board of Inquiry recommended legislation to control the psychological practices of Scientology. The Psychological Practices Act 1965 (Vic) established a Victorian Psychological Council to control psychological practices. The Act specifically banned the use of an ‘e-meter’, used in Scientology’s ‘auditing’ practices, and made it an offence to demand or receive a fee in relation to the teaching, practice or application of Scientology.85 The Act, however, was expressed not to apply to a ‘recognised religion’, being a religion recognised for the purpose of celebrating marriages under Commonwealth legislation.86 Significantly, and perhaps surprisingly, in 1973 the Attorney-General, Senator Lionel Murphy (an avowed atheist), declared the Church of Scientology to be a ‘recognised denomination’ under the Marriage Act 1961 (Cth).87 This effectively neutered the Victorian Act. Although the Church of Scientology was recognised for the purposes of payroll tax exemptions in other Australian states, the Victorian Commissioner of Payroll Tax rejected its application for a similar exemption. 84

Report of the Board of Inquiry into Scientology in Victoria (1965), 1, 152. Psychological Practices Act 1965 (Vic), s 31(1). 86 Marriage Act 1961 (Cth), s 2(3). 87 The Church was recognised as a religious denomination under s 26 of the Marriage Act 1961 on 15 February 1973 (Commonwealth of Australia Gazette No 20) and has been reproclaimed a number of times since, the last being 30 August 1983: Commonwealth of Australia Gazette No G34. 85

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That decision was upheld at first instance and on appeal in the Supreme Court of Victoria. Crockett J, at first instance, was extremely critical of the church. His Honour’s decision was based ultimately on his view that, until 1965, it was ‘non-religious’.88 However, following legal challenges to its existence, the church had endowed itself with the trappings of a Christian denomination and rewritten its key works to: invest scientological teachings with a conceptual doctrine that is fundamentally religious and to dress up the practices and ceremonies in a manner designed to give verisimilitude to such doctrine by the use of symbolism and paraphernalia of a kind which people, at least in Western countries, have come to associate with participation in religious activity.89

His Honour relied on an earlier decision by the English Court of Appeal, holding that the Church of Scientology was not eligible for tax concessions in the UK for places of religious worship.90 The decision was largely based on the ground that there was no express belief in God or another deity that could be ‘worshipped’. Crockett J also rejected a decision of the Supreme Court of Western Australia, a defamation case in which the Church of Scientology had successfully argued against a person claiming on a radio broadcast that its registration as a church was ‘only because it was a very smart way of evading taxes’.91 The Court had held that Scientology was a religion, on the basis of expert evidence from a Catholic and Anglican minister. According to Crockett J, the case had not properly investigated the ‘history of the development of the cult’, which illuminated its transformation into a church and the motivations for that transformation.92 Ultimately, his Honour held that: Scientology is not . . . a religious institution because it is, in relation to its religious pretensions, no more than a sham. The bogus claims to belief in the efficacy of prayer and to being adherent to a creed divinely inspired and also the calculated adoption of the paraphernalia, and participation in ceremonies, of conventional religion are no more than a mockery of religion.93

Nor, in his view, could the sincere belief of its followers in the restructured doctrines convert Scientology into a genuine religion because ‘[g]ullibility cannot convert something from what it is to something which it is not’.94 88 Church of the New Faith v Commissioner of Pay-Roll Tax (Vic) (1980) 11 ATR 451, 464 (Crockett J). 89 Ibid, 455. 90 R v Registrar General; Ex parte Segerdal [1970] 2 QB 697. 91 Church of Scientology Inc v Anderson (1979) WAR 71. 92 Church of the New Faith v Commissioner of Pay-Roll Tax (Vic) (1980) 11 ATR 451, 460–461. 93 Ibid, 461–62. 94 Ibid, 464.

Religion as a Head of Charity: A Historical Perspective 383 The Victorian Supreme Court, on appeal, was of similar mind. Young CJ observed the ‘evolution’ of the church and the ambiguity concerning a deity, prayers and its status as a religion. His Honour agreed with Crockett J that, in this case, they had been ‘superimposed for the purpose of obtaining whatever advantage may be obtained by designation as a religion’.95 His Honour discussed other kinds of indicia, including notably the ‘commercialism’ of the religion and whether this would disqualify it as a religion. Kaye J, while agreeing with Young CJ, appeared to take a narrower view, adopting an ‘ordinary meaning’ understanding of religion as being a belief or faith ‘bound up with a particular deity to the exclusion of all others’.96 Brooking J took a very different approach. His Honour considered that the existence of the Psychological Practices Act meant that the taxpayer was formed for an illegal object and that as a matter of public policy the organisation should not benefit from the crime.97 However, on 29 June 1982, before the matter was heard by the High Court, the Victorian Parliament repealed the Psychological Practices Act: Psychological Practices (Scientology) Act 1982 (Vic). The judges of the High Court disregarded the issue of illegality. While the High Court unanimously concluded Scientology was a religion,98 its judgments diverged. Mason ACJ and Brennan J held that the legal criteria for religion were: first, belief in a supernatural Being, Thing or Principle; and second, the acceptance of canons of conduct in order to give effect to that belief, though canons of conduct which offend against the ordinary laws are outside the area of any immunity, privilege or right conferred on the grounds of religion.99

Wilson and Deane JJ adopted slightly different indicia of religion ‘derived by empirical observation of accepted religions’,100 but it is the joint judgment of Mason ACJ and Brennan J which is regarded as defining religion in Australia. Murphy J, previously the Commonwealth Attorney-General who had designated Scientology as a recognised religion for the purpose of conducting marriage ceremonies, took an even more liberal approach: Some claims to be religious are not serious but merely a hoax . . . but to reach this conclusion requires an extreme case. On this approach, any body which claims to be religious, whose beliefs or practices are a revival of, or resemble, earlier cults, is religious. Any body which claims to be religious and to believe 95 Church of the New Faith v Commissioner for Pay-roll Tax (Vic) [1983] 1 VR 97 (Victorian Court of Appeal). 96 Ibid, 133. 97 Ibid, 136–42. 98 Church of New Faith v Commissioner for Pay-roll Tax (Vic) (the Scientology case) (1983) 49 ALR 65 (High Court). 99 Ibid. 100 Ibid, 106.

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in a supernatural Being or Beings, whether physical and visible, such as the sun or the stars, or a physical invisible God or spirit, or an abstract God or entity, is religious . . . Any body which claims to be religious, and offers a way to find meaning and purpose in life, is religious. The Aboriginal religion of Australia and of other countries must be included. The list is not exhaustive; the categories of religion are not closed.101

The Church of Scientology is a fascinating case because of the different treatment given to it by other legal systems.102 The most high profile of these was in the US. In 1957, the church was recognised as a tax-exempt religious organisation, but in 1967 this was revoked on the basis that it was operated for the enrichment of specific private individuals, rather than for religious purposes (similar to the line of argument suggested by Mason ACJ and Brennan J). The Internal Revenue Service (IRS) also denied deductions for contributions to the church. In 1989, the US Supreme Court held that the IRS ruling was correct, as the contributions represented quid pro quo payments for services.103 Continued litigation and the reshaping of its doctrines followed, until in October 1993 the IRS accepted Scientology’s tax-exempt status.104 In the UK, since 1978, when the Church of Scientology first applied for tax exemption, courts have categorised it as a philosophy for the existence of man and have tended to regard it as harmful and immoral.105 In the UK, tax exemptions rely upon the status of religion as a head of charity, rather than as an independent category of relief. As a result, the Charity Commission has held that, upon an examination of its practices, the Church of Scientology is not of ‘public benefit’, having regard to the harm caused by it.106 However, in 2000 the revenue authority granted Scientology an exemption from VAT on the basis that it was a not-forprofit body.107

101

Ibid, 86. J Walsh, ‘Tax Treatment of the Church of Scientology in the United States and the United Kingdom’ (1995) 19 Suffolk Transnational Law Review 331; P Horwitz, ‘Scientology in Court: A Comparative Analysis and Some Thoughts on Selected Issues in Law and Religion’ (1997) 47 DePaul Law Review 85; ‘Religious Recognition of the Church of Scientology in Europe—a Knol by CSI Resource Center’, available at http://knol.google. com/k/religious-recognition-of-the-church-of-scientology-in-europe#. 103 Hernandez v Commissioner of Internal Revenue (1989) 490 US 680. 104 Walsh, above n 102. 105 P Edge, Religion and Law: An Introduction (Ashgate Publishing, 2006). 106 Decision of the Charity Commissioners for England and Wales, The Church of Scientology, 17 December 1999. 107 Value Added Tax Act 1994 (UK), s 31. 102

Religion as a Head of Charity: A Historical Perspective 385 Public Benefit The requirement of ‘public benefit’ in charity law has been another avenue by which religious tax exemptions have been challenged. Historically, charity law has ‘presumed’ that the first three heads of charity, including the advancement of religion, are for the public benefit. The precise legal status of such a presumption is somewhat controversial, and may amount to nothing more than judicial notice of a well-known fact.108 Nevertheless, in recent times these presumptions have been increasingly challenged, reflecting a fragmenting consensus about the public good of (private) education and, to a lesser extent, religion itself. The most notable of these challenges has been the effective removal of the presumption in the UK, pursuant to the Charities Act 2006 (UK), now consolidated into the Charities Act 2011 (UK). Although there are some distinguished commentators who contest that the presumption has been removed,109 it has been commonly interpreted as such, and this is reflected in the guidance of the Charity Commission of England and Wales.110 The Charity Commission adopts the position that merely advancing a particular religion is not enough to satisfy the public benefit, but that benefits must be ‘sufficiently available or accessible to the public’, following the (controversial) case law which suggests that closed or contemplative orders do not provide such public benefit.111 (The principle relating to closed or contemplative orders has been reversed in Australia by statute.112) The Charity Commission’s guidance also advises that it takes into account ‘public opinion where there are objective and informed public concerns about, or evidence that, the beliefs or practices of an organisation advancing religion causes detriment or harm’.113 The context behind the removal of the presumption is worth noting. The push for the removal of the presumptions has its modern origins in the report of the Commission on the Future of the Voluntary Sector, established by the National Council of Voluntary Organisations in 1996. This report (the Deakin Report) recommended reforming the so-called ‘definition’ of charity by abolishing the four ‘heads’ of charity and establishing a single overarching charitable category in terms of benefit to the

108 See National Anti-Vivisection Society v Inland Revenue Commission (1948)1 AC 31, 65 (Lord Simonds). 109 H Picarda, The Law and Practice Relating to Charities, 4th edn (Bloomsbury Professional, 2010). 110 The Charity Commission for England and Wales, ‘The Advancement of Religion for the Public Benefit’, available at http://www.charity-commission.gov.uk/Library/guidance/ pbreligiontext.pdf. 111 Ibid, 21. 112 Extension of Charitable Purposes Act 2004 (Cth). 113 The Charity Commission for England and Wales, above n 110, 22.

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community, which would embody the essence of altruism.114 A similar Scottish report the following year, the Kemp Report, also embraced the idea of a new legal definition based on the concept of public benefit.115 In 2001, the National Council of Voluntary Organisations published a consultation paper which again advocated a strong ‘public benefit’ test across all four heads of charity, which more clearly revealed the motivation of limiting access to charitable status by independent schools.116 Interestingly, the report revealed a division in relation to religion. On the one hand, there were those who felt its charitable status was anachronistic, or that such entities provided little tangible benefit. Others felt, however, that relief of spiritual poverty was charitable, and that the public benefit was the opportunity to express belief and develop spirituality and morality.117 These two strands of public opinion continue to weave in and out of public discussion of the charitable status of religion. Similarly, a report in 2002 by the Law Society of the Irish Republic found the committee divided on the question of religion. Reflecting the greater influence of the Catholic Church in Ireland, the legislation at the time included an irrebuttable presumption of public benefit for religion. The committee was divided as to reform of such a presumption, and ultimately recommended no change.118 However, when the Irish charities legislation was eventually passed in 2009 (although it is not yet in force pending the establishment of a Charities Commission), the presumption was no longer absolute, although the regulator could only determine that a gift for the advancement of religion was not of public benefit with the consent of the Attorney-General.119 Interestingly, the Irish legislation also contains a late amendment deeming that a gift is not for the advancement of religion if it is made ‘to or for the benefit of an organisation or cult’ which either has as a principal object the making of profit or which employs ‘oppressive psychological manipulation’ of its followers.120 This provision appears to be directed to Scientology and similar ‘religions’. Scientology was also the motivation behind a Private Members Bill proposed by Senator Nick Xenophon, an independent Commonwealth

114 Commission on the Future of the Voluntary Sector, ‘Meeting the Challenge of Change: Voluntary Action in the 21st Century’ (National Council for Voluntary Organisations, 1996) [3.2.6]. 115 Commission on the Future of the Voluntary Sector in Scotland, ‘Head and Heart’ (Scottish Council for Voluntary Organisations, March 1997). 116 National Council for Voluntary Organisations, ‘For the Public Benefit? A Consultation Document on Charity Law Reform’ (2001), ii. 117 Ibid, [4.3.6]–[4.3.7]. 118 Law Society of Ireland Law Reform Committee, ‘Charity Law: The Case for Reform’ (July 2002) 73–76, available at http://www.lawsociety.ie/Documents/members/charityreport. pdf. 119 Charities Act 2009 (Ireland), s 3(5). 120 Ibid, s 3(10).

Religion as a Head of Charity: A Historical Perspective 387 Senator, in Australia in 2010.121 This Bill proposed a broad ‘public benefit’ test for all charities (but in particular Scientology), and appeared to be premised on the determination by the Charity Commission in England and Wales that Scientology was not charitable because of the detriment it caused.122 The Bill was the subject of a report by the Senate Economics Committee123—a rather odd place to be having such discussions—and was left to languish. The debate over public benefit in 2010 preceded the Australian government’s commitment to a more extensive reform of the not-for-profit sector in May 2011.124 As noted, included in this reform process is a proposed statutory definition of charity, but no possibility of removal of the presumptions of public benefit.125 Most recently, Northern Ireland was reported to be considering reintroducing the presumption of public benefit for religion.126 However, the minister in charge publicly declared himself against such a position, although this relied mostly on the fact that Northern Ireland would remain bound by the English definition of charity for tax purposes.127 The differing reactions in jurisdictions clearly reflect the differing positions of religion within those jurisdictions. Of the common law jurisdictions, the US remains the most generous, including religious institutions within the scope of its tax deductions. This is of particular significance since gifts to religion constitute the largest category of gifts in the US, accounting for 35% of all giving and amounting to over $US100 billion.128 In contrast, in the UK religion was only the sixth most popular cause for donations, with 13% of donors giving to religions, amounting to 16% of the total amount.129 Interestingly, given the common perception of 121

Tax Laws Amendment (Public Benefit Test) Bill 2010 (Cth). N Xenophon, ‘Second Reading, Tax Laws Amendment (Public Benefit Test) Bill 2010’, paper presented to the Senate Economics Legislation Committee, available at http:// parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;adv=;db=CHAMBER;group=;holdi ngType=;id=chamber%2Fhansards%2F2010-05-13%2F0039;orderBy=;page=;query=BillId_ Phrase%3A%22s754%22%20Dataset%3Ahansardr,hansards%20Title%3A%22second%20 reading%22;querytype=;rec=0;resCount=. 123 Senate Economics Legislation Committee, Tax Laws Amendment (Public Benefit Test) Bill 2010 (7 September 2010), available at http://www.aph.gov.au/senate/committee/ economics_ctte/public_benefit_test_10/index.htm. 124 Australian Tax Office, ‘Non-Profit News Service No 0283—2010–11 Budget: Measures Relevant to Non-profit Organisations’ (19 May 2010), available at http://www.ato.gov.au/ print.asp?doc=/content/00241632.htm. 125 Exposure Draft Charities Bill 2013, above n 5. 126 D Ainsworth, ‘Public Benefit Quandary in Northern Ireland’ (1 November 2011), available at http://www.thirdsector.co.uk/Resources/Governance/Article/1101287/Publicbenefit-quandary-Northern-Ireland. 127 Ibid. 128 Giving USA Foundation, ‘Giving USA 2011’ (Center on Philanthropy at Indiana University, 2011) 6, available at http://www.givingusareports.org/products/GivingUSA_2011_ ExecSummary_Print.pdf. 129 Charities Aid Foundation, ‘UK Giving 2011’ (2011), available at https://www.cafonline. org/publications/2011-publications/uk-giving-2011.aspx. 122

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Australia as a largely secular nation (supported by declining church attendances), the latest statistics (from 2005) report that 30.2% of Australians donated to religious organisations, and the average donation given was $A529, significantly higher than in any other category. Indeed, religion accounted for 36.1% of total donations.130

TA X A N D R ELIGION IN A U STR A LIA IN T H E T WENTY-F IR ST C ENTU RY

As already noted, the exemption from income tax for religious institutions is long standing in Australia, as elsewhere. It has not depended on ‘advancement of religion’ being part of charity but, rather, has stood on its own. The Income Tax Assessment Act 1997 currently exempts all income of ‘religious institutions’,131 whether from business activities,132 investment or disposals of property. Other tax concessions are not so clear. For example, the provisions that confer gift deductibility status133 do not refer to religion or religious institutions (or to charities generally). Bodies with religious affiliations may qualify if they fall within one of the specified categories. These include education, health and welfare organisations (ie public benevolent institutions or necessitous circumstances funds). There are a number of exemptions from fringe benefits tax—for religious practitioners134 and for their domestic employees.135 Perhaps one of the most significant exemptions (given the massive land holdings of the churches) is the state-based land tax exemptions.136 It is not uncommon to see arguments being made that these exemptions are justified.137 However, there have also been suggestions that it may be time to re-examine the exemptions from tax, particularly where the ‘public benefit’ is not obvious.138 So what is the benefit to the public from religion? Where churches engage in health, education or welfare activities, 130 Australian Council of Social Service et al, ‘Giving Australia: Research on Philanthropy in Australia’ (October 2005) Table 8, available at http://www.fahcsia.gov.au/sa/communities/ pubs/Community/Giving_Aus_Finding/Pages/GAF_Recipients.aspx. 131 Income Tax Assessment Act 1997, s 50-5, Item 1.2. 132 There is, however, a proposal to tax ‘unrelated business income’ of certain exempt entities: no legislation has been introduced, but the proposal is contained in a Treasury Consultation Paper, ‘Better Targeting of NFP Tax Concessions’ (May 2011), available at http://archive.treasury.gov.au/contentitem.asp?NavId=037&ContentID=2056. 133 Income Tax Assessment Act 1997, Div 30. 134 Fringe Benefits Tax Assessment Act 1986 (Cth), s 57. 135 Fringe Benefits Tax Assessment Act 1986 (Cth), s 58T. 136 For example, Land Tax Management Act 1956 (NSW), s 10(1)(e). 137 H Sorenson and A Thompson, ‘The Advancement of Religion is Still a Valid Charitable Object in 2001’, Working Paper CPNS 13 (Centre for Philanthropy and Nonprofit Studies, QUT, August 2002); T Carter, ‘Advancing Religion as a Head of Charity’ (2007) 20(4) The Philanthropist 257. 138 See, eg Richard Dawkins, who argues that the tax exemption for religion is a ‘disgrace’: R Dawkins, Washington Post, 6 July 2012, available at http://www.washingtonpost.

Religion as a Head of Charity: A Historical Perspective 389 it is clear that there are benefits to the public. What is not so clear is whether there is any benefit to the public in the absence of such activities. A former Chief Justice of the High Court has argued that religion qua religion provides public benefit in the sense that it make society a better place—it establishes a common good, or set of values, that enriches the whole community, not just those that engage in worship.139 Against this it could be argued that both religion and society as a whole have changed since the exemptions were introduced and that eligibility for tax exemption should be re-examined. There are at least three issues that are worth considering in this regard. First, when the exemption was introduced, there were probably only about two or three religions being practised in Australia—Catholicism (as a result of Irish settlement) and Anglicanism (as a result of English settlement). Over time, there has been an enormous growth in the number of religions,140 many as a result of migration and some (home-grown) that are quite exotic, such as the evangelical churches.141 At the same time that there has been a growth in the number of religions, there has been a decline in the number of Australians that regard themselves as religious.142 As a society, we may be less willing to regard religion per se as providing public benefits. A second issue is that for a number of years there have been various scandals involving religions. For example, the claims of abuse of children by Catholic priests and, more importantly, the cover up by church officials143 has resulted in significant concern about the position of the church, and the church hierarchy, as upholders of the moral high ground. Apart from the covering up of abuse, there have been a number of issues on which churches appear to be out of step with changing community attitudes on matters such as ordination of women and gay marriage.144 These conflicts have diminished respect for churches in many communities. The third, and perhaps most significant, factor is that it is clear that churches engage in business activities unrelated to their ‘charitable activities’ and are clearly

com/blogs/guest-voices/post/dawkins-dont-need-god-to-be-good--or-generous/2012/07/06/ gJQA4fvLSW_blog.html. 139 M Gleeson, ‘The Relevance of Religion’ (2001) 75 Australian Law Journal 53. 140 The 2011 Australian Census dictionary lists more than 100 types of religions. In the census the main classifications are Christian religions (nine general types) and non-Christian religions (five general types). 141 For example the Pentecostal Church, which has a number of related entities, such as the Christian Revival Crusade and the Foursquare Gospel Church. 142 In the 2011 Australian Census, 22.3% of the population identified themselves as having ‘no religion’. Interestingly, the most popular religion was Catholicism, with 25.3%. The question was optional, so was not completed by all households. 143 A Victorian Parliamentary Committee commenced an Inquiry into the Handling of Sex Abuse by Religious and Other Organisations in October 2012. A Commonwealth Royal Commission was announced in November 2012. See also J Courtin, ‘The Truth Deserves a Commission’, The Age, April 2012. 144 Cardinal Pell argues against gay marriage in The Australian, 12 April 2012.

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generating enormous profits.145 In addition to business activities, churches hold vast amounts of land on which they pay no land tax and, upon disposal, pay no capital gains tax. This can result in huge tracts of land being held in perpetuity resulting in no return to government through taxes. This clear ‘ability to pay’146 should be taken into account, especially at a time when the government is struggling to collect enough revenue for basic government functions. The privileged position of religion should at least be examined to see if the significant range of tax concessions can continue to be justified.

C ONC LU SION

This chapter has noted that the notion of an apparently continuous exemption of religious bodies, persons and property from taxation is at least partially misleading. Underneath this relatively untroubled pattern of exemption lie great shifts in the relationship between religion and charity, and between the role of the church and the state, and changes in the concept of taxation itself. This chapter has focused on the position of England and Australia, but it is worth observing that the position of tax concessions for religious organisations in the US in particular has been even more controversial, especially in light of its distinctive constitutional position towards religion.147 Despite the superficially similar language in section 116 of the Australian Constitution respecting the establishment of religion, the High Court of Australia has taken a much narrower approach to this expression of the core principle of liberal neutrality towards religion than in the US.148 The general position of liberal neutrality towards religion is a doubleedged sword. On the one hand, liberal neutrality towards religions fosters both pluralism and secularism that threatens the cultural consensus underlying the exemption of religious institutions. On the other hand, such a position broadens the scope of the exemption, and thereby increases the stake of other members of the community in such exemptions. Such exemptions become expressions of the principle of freedom of religion, fortifying the exemptions from legislative attack. These opposing tensions have resulted in a delicate balance that remains today. 145

J Cadzow, ‘Our Man in Rome’, Sydney Morning Herald, 6 June 2012. See, eg S Utz, ‘Ability to Pay’ (2002) 23 Whittier Law Review 867, 915–17, referring to HC Simons, Personal Income Taxation: the Definition of Income as a Problem of Fiscal Policy (Chicago, IL, University of Chicago Press, 1938) 49. 147 See J Chia, A O’Connell, M Harding and M Stewart, ‘Taxing Not for Profits: A Literature Review’ (28 February 2011), available at http://www.law.unimelb.edu.au/index. cfm?objectid=CEA40D40-A304-11E1-8C420050568D0140#Publications. 148 McLeish, above n 81. 146

Religion as a Head of Charity: A Historical Perspective 391 Ultimately, the question of tax exemptions for religious institutions raises fundamental questions regarding political power. The issue of tax exemptions for religious institutions is not purely a question of tax and not purely a subsidy granted by the legislature. Justice Robert H Jackson said in 1944 that ‘the price of freedom of religion . . . is that [Americans] must put up with, and even pay for, a good deal of rubbish’.149 But perhaps in the twenty-first century Australia does not have to.

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US v Ballard (1944) 322 US 78, 95.

12 Of Taxes: An Enquiry into Dutch to British Malacca, 1824–39 DIANE KRAAL*

A BSTR A C T What happened to taxation in nineteenth-century British Malacca when the transition from Dutch government to British East India Company rule forced changes to the system? This study covers the period 1824–39 and sets out to examine the claim that British control of Malacca meant the government was conducted on ‘improved principles’, which presumably included taxation. The influence of the political economy writings of Adam Smith (1723–90) and James Mill (1773–1836) are considered in the evaluation of tax and associated administrative changes. Findings reveal that Enlightenment free-market principles were applied in the abolition of customs duties (excluding opium tax), and some smaller goods and service tax farms were modestly reformed. A limited direct tax assessment system was established for commercial and residential buildings. The positive principle of the right to appeal tax assessments was established, together with tax expenditure on societal infrastructure. Rent law theory was applied to increase land revenues, but failed in practice.

* The author is grateful to the Faculty of Business and Australia, for the grant provided to research this study. participant comments from the Tax History Conference, Cavendish College), UK, 2–3 July 2012. Thanks also to and Martin Maarleveld.

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M

ALACCA (MELAKA), A port town situated on the Malay Peninsula’s west coast, once dominated the Malacca Straits trading corridor. The Dutch held Malacca for over 150 years from 1641, then the town was administered by the British in ‘caretaker mode’ from 1795 to 1817. The Dutch returned to Malacca after the end of the Napoleonic wars, but within five years (in 1824) the town was formally ceded by The Netherlands to the UK. The population of Malacca at the time was around 22,000.1 Today, in a street called Fort Terrace, well inside the boundary of the remains of the town’s old fort, the Dutch Graveyard can be found. The cemetery’s name seems somewhat of a misnomer, as surviving graves are predominantly British; nonetheless, it is a reminder of European colonialism and its foray into the Malay Archipelago. Most noticeable in the graveyard is the Naning Memorial (Figure 1), an obelisk erected as a tribute to the valour of two British East India Company (EIC) officers killed in the 1831–32 Naning War, which the British won, though at a high cost of lives and ordnance.2 At Naning, an inland district on the periphery of Malacca, the villagers fought against the British as a reaction to the indiscriminate efforts of the new administrator to collect land taxes.3 While the Naning War could be used as a metaphor for the disruption caused by nineteenth-century Malacca’s changed taxation system during transition from Dutch to British rule, logically the outcome of the EIC tax policy in Malacca needs to be considered more widely than the context of this skirmish. The aim of this study is to investigate nineteenth-century British Malacca’s taxation when the transition from Dutch government to British EIC rule forced changes to the tax system. The early 1820s were a time of substantive legislative and regulatory upheaval, whereby Dutch practices— based on monopolistic mercantilism—were progressively replaced by British EIC free-market policies. Directives to British Malacca came from the EIC offices in London, and through its Bengal and Penang presidencies. Thomas Braddell, who was the first Attorney-General of the Straits Settlements (1867–82), retrospectively recorded aspects of Malacca’s economic characteristics, noting that when the British took physical control of Malacca in 1825 ‘arrangements 1 T Braddell, Statistics of the British Possessions in the Straits of Malacca (Pinang, Pinang Gazette Printing Office, 1861) 3. Braddell’s reporting of Population Census Returns shows 19,627 for 1817. 2 For contemporary aerial photos of Malacca, including the old town site, cemetery and fort, see D De Witt, Melaka from the Top (Selangor, Nutmeg Publishing, 2010). 3 There are many accounts of the Naning War, eg E Chew, ‘The Naning War, 1831–1832: Colonial Authority and Malay Resistance in Early Period of British Expansion’ (1998) 2(2) Modern Asian Studies 32.

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Figure 1 Naning War 1831–32 Memorial obelisk, Dutch Graveyard, Malacca

were at once made to conduct the government on improved principles’.4 This study questions Braddell’s claim of a progressive British approach by specifically considering the tax system in Malacca during the period 1824–39. If there was a significant difference to the preceding Dutch system, how do we account for it? The shift from Dutch monopolistic mercantilism to the (theoretically) free-market economy of British Malacca is the colour of this investigation. A rereading of the period’s primary archival records, including British Residents’ Malacca Diaries, is undertaken to evidence progressive British thinking and its practical implementation regarding tax at the time.5 This study illustrates (via graphs) and interprets both Dutch and British tax revenue records to reflect the underlying theories 4 T Braddell, ‘Notes on Malacca’ (1856) 1 The Journal of the Indian Archipelago and Eastern Asia 46. 5 The diaries used were from the Straits Settlement Records (SSR), Monash University, Matheson Library: V165 Resident’s Diary of Proceedings, August 1826–25 June 1827; V168 Diary, January–December 1828; V169 Diary, January–December 1829; V171 Diary, January–12 July 1830; and V172 Diary, 26 June 1827–5 July 1827.

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and policy imperatives which drove the two tax systems. The data was drawn from various sources, such as the ‘accounts and ledger of the Malacca Residency’.6 Together with a review of key secondary texts, the influence of the political economy writings of Adam Smith (1723–90) and James Mill (1773–1836) are considered in the evaluation of tax policy and associated administrative changes. While there were outputs of thinkers on political economy prior to Adam Smith’s seminal 1776 book, Wealth of Nations,7 it has been argued that Smith’s work might be seen as a paradigm in the field of economics, and both James Mill and his son, John Stuart Mill, ‘worked within it for almost a century . . .’8 This study of nineteenth-century Malacca facilitates an understanding of the influences on tax policy changes during a changeover in colonial governance and extends knowledge in the field of tax history concerning the development of colonial tax towards modern taxation practice. It also adds to the literature concerning colonial Southeast Asian taxation, for the study elicits liberal thought from the British Residents’ Malacca Diaries. An overview of Dutch mercantilism and its taxation system in Malacca to 1824 is followed by insights into the tax legacy of Adam Smith and James Mill, whose works are used later to explain the findings. The changeover to a British administrative and justice system is outlined next, with selected issues highlighted to convey the strength of character required by administrators in facing the challenges of implementing a new tax regime. The focus then shifts to a description of the newly introduced system of land revenue, tax farm reform and direct tax assessment. An analysis of the findings on the tax system provides some answers to the claim about ‘improved principles’, before the conclusion. Findings reveal that Enlightenment free-market principles were applied in the abolition of customs duties (with the exclusion of the opium trade) and to modest reforms of some smaller goods and service tax farms. A limited direct tax assessment system was established for commercial and residential buildings. The positive principle of the right to appeal assessments was established, together with the application of tax expenditure to societal infrastructure. Rent law theory was applied to increase land revenues, but failed in practice.

6 See SSR, V174 Accounts & Ledger of Malacca Residency, August 1826–April 1827; V175 Accounts, May 1827–April 1828; V176 Accounts, May 1828–April 1829; V177 Accounts, May 1829–April 1830; V178 Accounts May–July 1830. 7 A Smith, An Inquiry into the Nature and Causes of the Wealth of Nations reprint 1812 edn (London, Ward Lock, 1812, orig 1776). 8 RL Meek (ed), Precursors of Adam Smith (London, Dent,1973) xii, viii.

Dutch to British Malacca, 1824–39 397 DU T C H M E R C A NTILISM A ND TA X

The Malay rulers of the port town of Malacca had encouraged open trade for centuries, but in 1511, with the rise of mercantilism in Europe, the Portuguese sailed to the Malay Archipelago to wrest monopoly control of the flourishing port trade from the Malacca Sultanate. Sovereignty encompassed the right to exact payment of tolls from vessels sailing through the Straits.9 In 1641 the Portuguese, in turn, were challenged and driven from Malacca by the Dutch East India Company (Verenigde Oost-Indische Compagnie, or VOC), in union with the Johor Malays. The primary objective of the VOC was to profit from trade and, in the mercantile context, the central arrangement was to exclude competitors by means of trade monopolies. In VOC Malacca the key monopolies were tin and pepper, which were supplemented by the right to collect customs tolls—a ‘prize’ arising from the Dutch treaty with Johor. Monopoly practices included forcing trading vessels to dock at defined ports, where the required customs were to be paid.10 Figure 2, depicting the VOC cumulative trade and tax revenue for the 15 years from 1775 to 1790, shows that trade revenue averaged 56% of total revenue, which equates with other research findings.11 In the period 1785–90 trade revenue rose sharply in comparison to earlier decades, most likely as a result of the huge rise, in the late 1700s, of European consumer demand for tea from China.12 There are gaps in the data due to the Fourth Anglo-Dutch war years (1780–84). During the VOC period in Malacca (1641–1795), two streams of licence revenues were collected through tax farming: goods and services, and customs. Figure 2 also shows that the licence fees from the customs farm made a significant contribution to overall VOC revenue. Tax farming is a system of indirect taxation whereby the state (or sovereign) allows the acquisition of a periodical monopoly of taxing rights by private interests through auction, tender or, as was more prevalent in pre-modern eras, by 9 Mercantilism may be described as direct state intervention in trade, such as the promotion of exports over imports, and monopoly trading. 10 See, eg S Arasaratnam, ‘Monopoly and Free Trade in the Dutch–Asian Commercial Policy: Debate and Controversy within the Voc’ in Maritime Trade, Society, and European Influence in Southern Asia (Norfolk, VA, Variorum, 1995) ch VII. The English translation of the 1606 VOC/Johor treaty found in P Borschberg, ‘The Johor–VOC Alliance and the Twelve Years’ Truce: Factionalism, Intrigue and International Diplomacy 1606–13’, International Law and Justice Working Papers, Appendix 3, available at http:// www.iilj.org (accessed on 31 December 2011). 11 FS Gaastra, The Dutch East India Company: Expansion and Decline (Leiden, Walburg Pers, 2003). 12 Glaman’s data is cited in JP De Korte, The Annual Accounting of the Dutch East India Company (Leiden, Martinus Nijhoff, 1984) 65. Tea sales from the Amsterdam Chamber had increased by more than five times over some 80 years, as follows: 1698/1700: 4,100 guilders; 1738/1740: 24,920 guilders; 1778/1780: 22,920 guilders. Note that the VOC used rijks dollars for financial reporting from Asia.

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Figure 2 VOC Malacca: 1775–90 revenue by type. Source: VOC Archives, Monash University; Hussin, below n 55, 422–23

hereditary right. For instance, a private individual paid a licence fee to the VOC for the annual right to collect customs directly from vessels.13 Dutch Malacca had developed an annual auction system to contract out tax collection rights for various goods and services farms. Later, some tax farms were attained through a sealed tender process. The tax farmer bid for the monopoly rights to retail basic commodities, such as rice or timber; to provide certain public services, such as weights and measures; or to tax certain lifestyles, such as consumption of pork and spirits. A licence deposit was then paid to the VOC, followed by monthly instalments.14 The tax farmer had to cover the licence fee (and make a profit) by levying tax or dues on the taxpayer for the commodity or service bought or used. Given the higher revenue of the trade stream in the years 1785–90, one might expect that the customs farm income would rise proportionately and the price of the licence fee would be driven up by trade conditions. However, customs income levels were generally the same as in the previous decade. This can be partly explained by customs fraud, which was an ongoing problem. In an attempt to counter the practice of fraud, VOC officials had been allowed a percentage of customs duties since 1745.15 13 Moetoe Mara Chittij, a southern Indian Hindu, is an example of a customs farm lessee, Malacca, 1751. Dutch East India Company file (VOC) 8638/374 dd 30 January 1751, National Archives, The Hague, Netherlands. 14 Mirantje Chittij, a southern Indian Hindu, is an example of a ‘weights and measures farm’ lessee, Malacca, 1754. VOC 8641/61 dd 25 March 1754; 327 dd 11 January 1754. 15 D Lewis, Jan Compagnie in the Straits of Malacca 1641–1795 (Athens, OH, Ohio University Press, 1995) 64.

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Figure 3 VOC Malacca: 1681–1796 tax farm licence fees, average per cent share of revenue. Source: Appendix A.

Such emoluments, and general private profiteering of customs, were to the detriment of VOC income while increasing prices to its customers. Figure 3 depicts the average percentage share of each type of tax farm, with licence fees from the customs farm contributing 60% of tax income. Malacca was a trading port and so customs duties arguably spread the burden of tax across the community. Table 1 reflects the population ethnicity in Malacca from 1678 to 1817, providing an overview of various taxpayers. Some, in maritime pursuits, paid customs, others paid taxes through gambling or as shopkeepers. The most noticeable change was the large increase in Malays living in the town precincts by 1817, which marks the end of the British caretaker period in Malacca. The Dutch returned to Malacca in 1818 in the aftermath of Napoleon’s defeat. The Malay scholar Abdullah Kadir, who witnessed the Dutch retaking of Malacca, recorded—in his now classic autobiography—that most people did not realise that the Dutch ‘newcomers were leeches who would suck the very blood from our bodies’.16 Kadir was referring to the start of the shift in the tax burden to the Malay community, with the onerous tax regime of the returning Dutch administration. Taxes were exacted from the population 16 A bin Abdul Kadir, The Hikayat Abdullah (trans AH Hill) reprint 1849 edn (Kuala Lumpur, Oxford University Press, 1970) 137.

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Table 1: Malacca Town population, 1678–1817: ethnic mix

with little tolerance, partly to cover the personal financial excesses of the Governor, Jan S Timmerman-Thijssen (1818–23).17 The Netherlands ceded Malacca to the UK in March 1824, at which time the key British administrator, the Resident, was answerable to the EIC’s Penang presidency. A series of short-term Resident appointments, until late in 1826, ended with the appointment by the EIC of Samuel Garling, who held the position for nine years and steered some freemarket changes to Malacca’s economy.18 Close to the time of Garling’s appointment, editions of Adam Smith’s Wealth of Nations had been reprinted and James Mill was a rising influence at the EIC in London.19 Before looking at the changeover in British Malacca, the following sections on Smith and Mill set the context.

B R IT ISH C H A NGE A GENTS

Adam Smith Adam Smith’s Wealth of Nations, first published in 1776, assists in the understanding of the differences between the Dutch approach to taxation and that of the British. Smith was an Enlightenment philosopher and

17 D Kraal, ‘The Circumstances Surrounding the Untimely Death of Jan S TimmermanThijssen, Governor of Malacca 1818–1823’ (2010) 83(1) Journal of the Malaysian Branch of the Royal Asiatic Society 19. 18 In 1811 Garling had been appointed as the EIC second covenanted assistant to Mr Heath, the Resident at Saloomah and Manna, Fort Marlborough, Sumatra; see Personal Records and the Index, reference O/6, vols7, 17 in the OIO Collection at the British Library, London. 19 See D Buchanan (ed), Adam Smith: An Inquiry into the Nature and Causes of the Wealth of Nations, 2nd edn (Edinburgh, Oliphant, Waugh & Innes, 1796/1817). For insights on Mill’s EIC career, see E Stokes, The English Utilitarians and India (New Delhi, Oxford University Press, 1959) 47–49.

Dutch to British Malacca, 1824–39 401 one of many such thinkers who turned their attention to taxation.20 He described the discipline of political economy as ‘a branch of science of a statesman or legislator’, one that contained two distinct objectives: to provide revenue, or enable people to generate enough revenue for subsistence; and to supply the state enough revenue for public services.21 He outlined two systems of political economy: agriculture and commerce. When looking at commerce, he identified the mercantile system of monopoly and the free-market economy. Smith argued that unregulated free-market economies were more beneficial to society than governmentregulated mercantile systems and their inherent monopolies—such as that operated by the VOC. To Smith, customs duties were unnecessary as they effectively restrict imports and raise prices: ‘Taxes imposed with a view to prevent or to diminish importation, are evidently as destructive of the revenue of customs as of the freedom of trade’.22 Customs duties threatened the free-market sole purpose of production, which, in Smith’s view, was consumption. The mercantile system, by contrast, placed the short-term interests of the producer ahead of those of the consumer.23 Smith’s strong views on land as a resource for rent in a free-market economy are important to this study. In his chapter on ‘rent of land’, he reiterates three basic ways in which income is derived: rent from land, wages of labour and the profits of stock. He then isolates rent from land as the one source of revenue where capital appreciation (or unearned increment) can be generated without labour or any other expense outlay. In Smith’s time, agricultural land was central to the general welfare of society; it was thus the focus of his claim that land rent alone could fund all government expenditure.24 Smith further developed his position on land rent by arguing against the practice of concentrated holdings of landlords (generally aristocrats or parishes) and the collection of ‘tithes’, which were calculated on the gross produce tilled from the land by the tenant cultivators. The impost of the tithe forced the tenant cultivators into slave-like service and discouraged them from land improvement. Smith favoured proprietors with small holdings, both as the best improvers of land and as the basis for a more equitable land rent system.25 Allied to land rent was Smith’s chapter ‘Of Taxes’, concerning his four tax maxims of equity, certainty, convenience and efficiency.26 The maxims 20

See Meek, above n 8. K Sutherland (ed), Adam Smith: An Inquiry into the Nature and Causes of the Wealth of Nations (New York, Oxford University Press,2008) Book V, 275. 22 Ibid, Book V, 301. 23 Ibid, Book IV, viii, 376. 24 Ibid, Book I, xi. Today’s parallel of land rent are resource rent taxes, such as the petroleum rent tax. 25 Ibid, Book III, ii; Book III, iv, 268. 26 Ibid, Book V, ii ‘of Taxes’, 451–54. 21

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are still relevant today, and underpin much contemporary taxation legislation, tax reform and modern tax texts.27 For Smith, equity has two manifestations, namely, vertical equity—where tax contributions should be proportionate to a taxpayer’s level of income—and horizontal equity, whereby taxpayers with a similar level of income should pay a similar amount of tax. Taxpayers should be able to predict tax timing, so certainty will diminish the corruption fostered by arbitrariness in liability or valuation of tax payments. The maxim of convenience acknowledges the need for time, in terms of both capacity to pay and mode of payment. Finally, it is imperative for a successful tax system to have an efficient mechanism to collect taxes. Penalties for non-payment should be reasonable, so as not to encourage corruption (such as smuggling), and collectors should not be vexatious. Implicit in these four maxims is the assumption that their implementation is integral to the objectives of a free-market economy. Of the literature that informs this study about Malacca’s transition period from Dutch to British rule (including the broad themes of trade revenue and taxation), even well-known texts barely discuss Smith’s influence. For instance, British Malaya 1824–67 by LA Mills, which remains a standard work, omits consideration of the influence of economists such as Smith. Mills notes, in regard to the underlying reasons for the introduction of English land rent in early Malacca, that ‘it is all the more strange’ because the Penang presidency knew the Malay tenure system well and its difference ‘to the English system’.28 More recently, Turnbull draws on Adam Smith’s criticism of mercantile monopolies in stating that the Straits Settlements were examples of ‘justification of the theories of free trade, light taxation and laissez-faire government’, but she expands no further on the Smith theme. Kratoska provides extensive detail on Malacca land revenue problems, but is too general in concluding that, ‘the failing can be traced to a parsimonious attitude of the government’.29 27 See, eg Australian Treasury, Australia’s Future Tax System: Architecture of Australia’s Tax and Transfer System (Canberra, 2008); and JE Stiglitz, Economics of the Public Sector, 3rd edn (New York, WW Norton, 2000). 28 LA Mills, ‘British Malaya 1824–67’ (1960, reprint 1925 edn) 33(3) Malayan Branch of the Royal Asiatic Society 127. 29 CM Turnbull, The Straits Settlements, 1826–67: Indian Presidency to Crown Colony (London, Athlone Press, 1972) 1. PH Kratoska, ‘Land Law and Land Tenure in British Melaka’ in KS Sandhu and P Wheatly (eds), Melaka: The Transformation of a Malay Capital C. 1400–1980 (Kuala Lumpur, Oxford University Press, 1983) 523. Other texts consulted about tax for the period include: N Hussin, Trade and Society in the Straits of Melaka Dutch Melaka and English Penang, 1780–1830 (Stockholm, NIAS Press, 2007); B Harrison, Holding the Fort: Melaka under Two Flags 1795–1845, monograph no 14 (Kuala Lumpur, Malaysian Branch of the Royal Asiatic Society 1986); DGE Hall, ‘The Straits Settlements and Borneo, 1786–1867’ in A History of South-East Asia (New York, Macmillan, 1966); J Butcher and H Dick (eds), The Rise and Fall of Revenue Farming: Business Elites and the Emergence of the Modern State in Southeast Asia (New York, St Martin’s Press, 1993);

Dutch to British Malacca, 1824–39 403 This gap in the literature has necessitated that this study examine selected Straits Settlements records over 1824–39 for evidence of Smith’s influence on tax policy.

James Mill James Mill is important to this study as it is contended that his influence on land rent extended as far as Malacca. Mill may be described as an acolyte of Adam Smith because of his agreement with Smith’s promotion of land rent as the primary source of government revenue in preference to the costs-of-production distorting effects of a flat land tax, customs duties, or taxes on wages and profits.30 Mill wrote that ‘there is a peculiar advantage in reserving the rent of the land as a fund for supplying the exigencies of state’.31 In 1819, Mill joined the EIC executive government at India House, London, as an examiner of India correspondence, and shortly after, in 1821, his textbook Elements of Political Economy was published, the first of a number of editions. Mill’s duties with the EIC included drafting revenue despatches to India. He headed the Examiner Department from 1830 to 1836, where his position, and dominant personality, enabled him to exert his influence over British administration principles in India.32 Mill’s preference for land rent was underpinned by rent law theory, which economist David Ricardo developed and first published in 1817. However, the implementation of rent law theory required costly land surveys and a legislated land registration system.33 Barber wrote that Mill followed the moral principle of utility, whereby the rightness of an action, policy or institution could be established if it had the object of the pursuit of happiness. In the tax context, utilitarians advocated a competitive society with individual rights to the soil. Barber’s insights into the connection between Mill’s adherence to Adam Smith’s preference for land rent and Mill’s blinkered embracing of its practical application via Ricardian rent law theory inform this study.34 KC Tregonning, The British in Malaya: The First Forty Years 1786–1826 (Tucson, AZ, The University of Arizona Press, 1965). 30

Sutherland, above n 21, Book V, ii, 449. J Mill, Elements of Political Economy, 3rd edn (London, Henry G Bohn, 1844) 249. 32 JS Mill, Autobiography, reprint 1873 edn (London, Oxford University Press, 1924) 22–23. See also Stokes, above n 19, 47–49. 33 Rent theory was supposed to ensure an elastic rent charge, based on differential fertility of the soil, wage and profits; see D Ricardo, Principles of Political Economy and Taxation 3rd edn(1821), ch 2, available at http://www.econlib.org/library/Ricardo/ricP1a.html#2.3 (accessed on 24 January 2012). 34 W Barber, ‘James Mill and the Theory of Economic Policy in India’ (1969) 1 History of Political Economy 1. 31

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Stokes notes that the EIC offered rent law as a subject at its college in Haileybury. It was claimed that rent law theory showed that land rent could be determined in a scientific manner.35 Land Rent in India Mill’s influence at the EIC and on utilitarian politics were ‘tools in his kit’ that might explain the promotional vigour behind the new ideas for land rent in India that extended to British Malacca. The Bengal presidency’s zemindar system, for instance, was one of British India’s main land systems, involving permanent land assessments (fixed in perpetuity). Of relevance to this study is another land revenue system, the ryotwari (peasant) rental system, which operated in the Madras presidency and was drawn loosely from Adam Smith’s viewpoint that land rent would provide for all government needs. Under this system, the pillars of government— land ownership and private property rights—were implicitly acknowledged. The ryotwari system required direct tax assessment by government employees with an annual assessment (although assessments of each plot might be valid for 20 or 30 years) and a dependence on the fertility of the soil.36 In 1831 Mill appeared at the British Commons Select Committee to defend his position on land revenue based on Ricardian rent law theory. He qualified his preference for the Madras ryotwari land revenue system by admitting its formidable problems in actual practice. He conceded that it fell short of rent law theory claims.37 Ultimately, in India, the utilitarian position of determining land rent based on rent doctrine was ‘too extreme to find acceptance’;38 and Mill’s powerful influence was extinguished with his death in 1836.39 The next section shifts back to a description of British Malacca, where the influence of Mill became quickly established. 35

Stokes, above n 19, 81, 87. Ibid; see ch II for details on the Bengal and Madras land rent. From 1793, in Governor Cornwallis’s Bengal presidency, land was vested in the government and the EIC promulgated fixed rental, to be collected by an agent (zemindar), who in turn collected from individual tenants or families. The payment demands upon tenant cultivators of zemindars were unregulated and in time became oppressive, disproving Cornwallis’s economic rationale that the zemindars, recognising their own ultimate best interests, would not make unreasonable demands on the peasantry. 37 Ibid, 91–93. However, Mill was resolutely against the Bengal system of fixed perpetual rents, collected by the zemindars, for he saw the system as facilitating the emergence of a dysfunctional landed aristocracy. 38 For instance, Robert Pringle, Superintendent of the Revenue Survey and Assessment at Deccan, was a practical exponent of the rent doctrine. Pringle designed an elaborate method for calculating land rent, which was supported by Mill as an acceptable empirical method. However, Pringle’s approach was eventually rejected in 1835. See Stokes, above n 19, 101–03. 39 Ibid, 110. In 1823 James Mill’s son, John Stuart Mill, joined his father’s department as an assistant examiner of India correspondence and in 1856 he became Chief Examiner, a position he held until the end of the EIC Charter in 1858. Stokes saw JS Mill’s influence 36

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Figure 4 Malacca Customs Revenue, 1796–1824. Source: Braddell, above n 1, 24; Hussin, below n 55, 423–25. T H E C H A NGEOVER

In March 1824, the British EIC took legal possession of Malacca; however, Dutch administrators remained until Walter Cracroft was appointed British Acting-Resident in April 1825. The Resident Councillor (Resident) was the highest ranking official in Malacca. At the core of EIC operations was trade. Cracoft immediately regulated for the policy of free trade for Malacca, a policy based on the East India Company Act 1813, which ended the EIC’s commercial monopoly, with the exception of trade with China.40 With customs fees abolished, only a duty on non-EIC landed opium was left, collecting a minor sum of 5,000 Spanish dollars annually.41 Prior to the EIC’s cessation of customs, revenue on opium, pepper, tin and non-EIC goods averaged around 50,000 Spanish dollars—as can be seen in Figure 4. Figure 4 further shows that when Malacca was in EIC caretaker mode, from 1795 to 1817, revenue was recorded in Spanish dollars. Also, revenues for the years 1799 to 1802 look unusually even and there are no data at all for 1803. These aberrations may have been the result of lacklustre financial stewardship by the quick succession of Malacca’s British Residents.42 Most certainly, Major-General William within EIC occurring towards the end of the company’s hegemony. See Stokes, above n 19, vii–viii. JS Mill’s importance was more in the area of political theory; such as his work, On Liberty (1859). 40 For free trade details see Dutch Records of Malacca, R/9 series, British Library, India Office Records (IOR): R/9/37/3 Rules for the Office of Registrar of Imports and Exports, Malacca, 20 April 1825. See also http://dialogue.hubpages.com/hub/Indian-Charter-Acts (accessed on 29 March 2012). 41 SSR, V165, 12 December 1826. 42 Major Archibald Brown (1795); Captain Thomas Parr (1795–96); Lt-Colonel Richard Tolson (1796–97); Lt-Colonel David Campbell (1797–98); Major Aldwell Taylor (1798– 1803); and Major-General William Farquhar (1803–18).

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Farquhar, Malacca’s Resident from 1803 to 1818, was heavily criticised for his poor management of the trading port’s accounts. Samuel Garling, Resident from 1826, listed Farquhar’s ‘defective’ records as: patchy correspondence, financial journals only for the period 1807–16, no detailed customs records, and no ledgers or Collectors Department customs documents.43 This study has not found any customs financial data for the period of the Dutch return (1818–24), with the exception of 1821. This is despite the outgoing Dutch administrators’ claims that profits had been accrued and the books had been balanced to April 1825.44 British Malacca in-transition took orders from the Penang presidency, but records show that it also received direct instructions from the EIC Bengal presidency at Fort William, Calcutta.45 Malacca’s Imports and Exports Registrar was provided with regulations determining reports, forms and types of entries. The movement of all ships, in and out, needed written or verbal approval.46 Fort Cornwallis (in Penang) requested monthly accounts and established an audit programme. Maps of Malacca Town and suburbs were requested, property title deeds were sought—the start of the investigation into land rent. Lists of Malacca’s European residents, including their occupations, were prepared, perhaps to determine allegiances and usefulness to the new administration. Pension funds were set up for new British staff and a general hospital was established. In September 1826 an additional Chinese school, as well as Malay and Tamil schools, were established—all supported by the London Missionary Society.47 That Malacca’s language schools were established so promptly links into James Mill’s dispatch on colonial education and Adam Smith’s argument for government tax revenue to pay for education of youth ‘as instructed and intelligent people are always more decent’.48 By the end of 1826, a new administration in Malacca managed local EIC trade and addressed the public infrastructure. Table 2 depicts some of the key administrative roles and publically funded facilities and services.

43 SSR, V165, Report from Samuel Garling to John Anderson about defective accounts, 12 January 1827. Stamford Raffles also heavily criticised William Farquhar’s competency as an administrator in his role as the first Resident of Singapore, 1819–23, see MSS EUR F202: 1781–1826, Stamford Raffles Papers, British Library. 44 Ibid, fol 64, letter from Dutch administrators H Kraal, P Overree and JB De Wind to S Garling, 1 August 1826. 45 See, eg the request from Fort William, Calcutta, Accountant General requesting Malacca’s monthly cash balance, SSR V166, Reel 55, fol 100, 9 September 1826. 46 SSR, V165, fol 586, 11 April 1827. 47 RM Martin, Statistics of the Colonies of the British Empire (Colonial Office, London: WH Allen, 1839) 407. 48 Stokes, above n 19, 57. Sutherland, above n 21, Book V, i, 436.

Dutch to British Malacca, 1824–39 407 Table 2: EIC, Malacca 1826 • • • •

Resident Deputy Resident Assistant Resident Malay Translator

• Treasury • Marine Department • Imports & Exports Registrar • Surgeon • Convict Superintendent • Chaplain • Roman Catholic Priest • Free School • Malay and Tamil School • Chinese College • Editor, Malacca Observer Source: Braddell, above n 1, Table 17.

Justice With handover, the system of Roman-Dutch law remained in place. The early British Residents in-transition adhered to regulations framed by their Dutch predecessors and maintained the objective of ‘avoiding interference with private property, except in cases of most urgent necessity’.49 In 1826 a new Royal Charter of Justice was granted to Penang, and a second Charter, later in 1826, ‘was extended to Malacca’ and the Dutch Court of Justice dismantled.50 The Charter was important to the Resident in Malacca as a framework for adjudication on the application of imported English legislation, as well as new regulations, such as matters of taxation. Fort Cornwallis in Penang wasted no time in forwarding existing legislation for the encouragement of British shipping and navigation, and interim Penang regulations and rules.51 Resident Garling set about the task of drafting the settlement’s regulations for sanctioning by the Governor-inCouncil in India.52 The former members of the Dutch Council of Justice and other Dutch administrators, for whom alternative employment could 49

SSR, V166, Fort Cornwallis to Garling, fols 107, 149–50, 29 September 1826. Harrison, above n 29, 104. The new Royal Charter of Justice 1826, created a new court called ‘The Court of Judicature of Prince of Wales’ Island, Singapore and Malacca’. By the Second Charter of Justice, 27 November 1826, a Court of Judicature was established for the settlements of Penang, Malacca and Singapore, see SSR, V27/141/11. 51 SSR, V166, fol 543, 1826. 52 Ibid, fol 448, 12 February 1827. 50

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not be found within the EIC, had to requisition arrangements for their pensions to be forwarded from Dutch Batavia. The records are peppered with their requests and concerns about delays.53 As most had families in Malacca, they were precluded from returning to the Netherlands, and eventually found businesses or private employment in Malacca.54 Slavery had been practised for centuries in Malacca and slave owners paid a poll tax, although by 1819 the Dutch had emancipated child slaves.55 At the time of transition, the British administrators were uncertain about the legality of slave owning. The slave issue was controversial, and provides insights into Resident Garling’s liberal values and strongly opinionated disposition. During 1829, some slaves petitioned for their freedom, triggering acrimonious disagreement between Garling and his assistant, WT Lewis, about the interpretation and applicability of English law on slave emancipation in Malacca. Garling accused Lewis—who was also the Magistrate, Police Superintendent and Lands Superintendent—of not paying proper attention to individual rights (a most liberal concept). Garling noted unacceptable incidents involving slaves: ‘scenes ensue on public streets, which ought not to be tolerated’.56 Diary notes, letters and minutes reveal deep, personal animosity between Garling and Lewis. They had, for instance, a major dispute over the appointment of Mr S Church to replace Lewis as Assistant Resident and to cover police duties. The changes were possibly executed to separate Lewis’ judicial from his executive duties: a normal practice of the EIC.57 Governor Fullerton (based in Penang) intervened and requested that Lewis forward him all records concerning slavery, even those of the Dutch.58 Garling further exacerbated the situation by noting he was prepared to take court action for a writ of habeas corpus, as he saw the holding of slaves as unlawful.59 A practical compromise was later brokered, and the status of slaves converted to that of debtors requiring individual debts to be paid off by their work.

53 Ibid, fol 155; for example, Messers H Kraal, J Overee and J Baumgarten request increases in pensions, 6 October 1826. V167: A Rodyk and G Koek enquire about overdue pensions, 21 November 1827; J Hendriks is ‘out of a job’ and requests his Dutch pension. 54 D Kraal, ‘From VOC to Merchant: The Story of Hendrik Kraal (1758–1826)’ [September 2008] Journal of Malaysian Biographies. 55 SSR, V169, fol 143, 17 November 1829. N Hussin, ‘Melaka and Penang 1780–1830: A Study of Two Port Towns in the Straits of Melaka’, unpublished PhD thesis (Vrije Universiteit, 2002). Appendix 9: List of Registered Slaves in Melaka 1819–1824; and IOR: R/9/40/1 Child slave emancipation in Malacca, 1819. 56 SSR, V169, fol 111, 25 May 1829. 57 See BB Misra, The Central Administration of the East India Company 1773–1834 (Manchester, Manchester University Press, 1959) 296–97. 58 SSR, V169, fol 257, 18 July 1829 and fol 4, 21 October 1829. 59 Ibid, fol 29, 3 November 1829.

Dutch to British Malacca, 1824–39 409 By November 1829, Garling noted both Lewis’s unwillingness, as Magistrate, to interfere with slave issues and the existence of a petition to elevate Lewis to the Residency position, instigated by those with vested interests in slaves.60 Lewis disclaimed being an upholder of slavery, arguing he had endeavoured to be guided by legislation.61 Revealing the stressfulness of dealing daily with these complex matters, Garling requested a leave of absence in late November 1829 and returned to the Residency in March 1830. In July 1830, the Supreme Government of India sent a legal opinion that slaves had ‘not been liberated’ on the establishment of an English Court of Judicature in Malacca.62 The hostility between Garling and Lewis, who was also Lands Superintendent, may also have undermined the efficient resolution of the major issue of land revenue.

Land Rent Revenue The British required an efficient land rent system to cover the income shortfall created by the general abolition of the customs tax. At the time of Malacca’s Dutch to British transition, Malay society had maintained a feudal corvée system, whereby tenant cultivators were levied a 10% tithe based on the gross produce cultivated from the land, and paid via in-kind labour or produce. It was acknowledged that the land was solely owned by those of noble lineage: there was no freehold for the cultivators. Variations on the corvée system have existed worldwide, and can be traced back over the centuries.63 Kratoska has collated the problems with land holdings in colonial Malacca so, without going over the same ground, his findings are reflected in the following paragraphs.64 British administrators understood well, from their experience in India, that their legitimacy was embodied in the correct handling of the Malacca land issue. The EIC identified three principles for their legitimacy: (i) the British government asserted sovereign power over the territory and trade through its Charter of Justice; (ii) the British government was the successor to ‘the oriental ruler’ and possessed the rights associated with oriental

60

Ibid, fol 134, 17 November 1829. In the late 1830s TS Lewis was Resident of Malacca and by 1846 was a judge of HM Court, Penang. 62 SSR, V169, fol 91, 3 July 1830. 63 The literature on tax systems in pre-modern states includes, for example, I Copland and MR Godley, ‘Revenue Farming in Comparative Perspective: Reflections on Taxation, Social Structure and Development in the Early Modern Period’ in J Butcher and H Dick (ed), The Rise and Fall of Revenue Farming: Business Elites and the Emergence of the Modern State in Southeast Asia (New York, St Martin’s Press, 1993). 64 Kratoska, above n 29, 497–534. See also, Harrison, above n 29. 61

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sovereignty; and (iii) on taking over from the Dutch administration, the British took the rights belonging to their predecessors.65 The British found that land on the periphery of Malacca Town seemed to be permanently alienated to a limited number of persons (many of whom were Dutch) who were loosely referred to as ‘proprietors’. EIC investigations ensued to determine the status of landholdings to establish whether the proprietors owned or leased the land. This would, hopefully, enable the new administration to address the ‘ruinous system of farming out the rents’.66 The British realised that the Malay system of tenure, a proprietor and tithe land system, impeded large-scale commercialisation and they wanted to end it, legally. However, Malacca’s EIC administrators were required to be respectful of existing land rights. By January 1828, Resident Garling, and Lewis, Superintendent of Lands, had undertaken a detailed examination of Dutch records. They found that the proprietors of land had contracted out the collection of the tithe to tax farmers, who collected from the tenant cultivators. The cultivators were kept much like vassals, the result being inadequate levels of agriculture, with much cleared land having reverted to jungle. Garling, in his evangelical-liberal style, called for a replacement system to engender for the oppressed cultivators ‘a vigorous pursuit of wealth . . . in common with their fellow creatures’.67 This position was supported by John Anderson, Penang’s secretary, who relayed Governor Fullerton’s plan for the government to buy out the rights to the tithes, with the anticipated result that ‘all forced labour would be forthwith abolished’. Both the Penang men had a background of liberal, forward thinking.68 Malacca’s land rent regulations were drafted by 25 June 1828, loosely following the regulations of Singapore, which only had freehold land. One result in Malacca was that the proprietors’ rights to the tithe were commuted in return for an annual payment in perpetuity. The EIC Malacca draft regulations (promulgated much later as Regulation 9 in 1930) declared the right of the British to one tenth of land produce, and, if land was left uncultivated, its ownership reverted to the government.69 Regulation 9 was designed to regularise land rights and recognise two kinds of tenure: land held by grant or deed, and land worked by tenant cultivators who had no written title. It has been observed that the push

65

Kratoska, above n 29, 500. SSR, V168, fol 166, 30 January 1828. 67 Ibid, fol 57, 30 January 1828. 68 Ibid, fol 34, J Anderson (Penang Secretary) to Garling, 12 February 1828. For observations on the ‘liberal’ views of Anderson and Fullerton see N Tarling’s introduction in J Anderson’s journal, Mission to the East Coast of Sumatra in 1823 (London, Oxford University Press, 1971), xii, xiv, xvii. 69 SSR, V168, fol 78, 25 June 1828. 66

Dutch to British Malacca, 1824–39 411 for each cultivator to have a title deed ‘seems to have taken complete possession of that generation of Land Revenue officials’.70 The government’s collection (in lieu of tax farmers) of ‘the tenth’ on produce returned meagre revenues that failed to cover costs.71 Underlying problems, which included the mixing of Malay with English land tenure, persisted. However, Lewis was advised by Penang to withhold further revisions.72 Differing from the tithe, Regulation 9 prescribed that the calculation of ‘the tenth’ on the rice crop was to be based on forward estimates and paid either by cash or in kind. This system prompted a petition from the Chinese rice planters, who wanted to return to the former tithe system because up-front payments resulted in losses when crops later failed.73 The tenth on other crops was paid at toll houses along the roads to Malacca markets, leaving cultivators’ personal consumption untaxed. In-kind payments rendered to the toll houses were sold by daily auction at Malacca Town’s District Office. The in-kind payment had its inefficiencies, so a new system of fixed cash payments was introduced, based on an estimated tenth of the land yield. Still, low collections of land revenue persisted. In his report of March 1830, Lewis proposed an alternative approach, based on the replication of an earlier Dutch regulation, which was similar to the Madras ryotwari system of land rent. It would require payment of the tenth as if the land was fully cultivated, based on the average yield of adjoining ground.74 The EIC Bengal Board of Directors agreed readily to this change of method, their decision influenced by James Mill.75 However, the ryotwari system required resource-consuming annual assessments and agreements with individual cultivators. In 1830, Regulation 1, concerning disposal of government land via 15 year leases, was declared and provided a scale of increasing rents with a maximum of SpD$10 per acre. Finally, the Legislative Council of India Act 10 of 183776 repealed Regulations 1 and 9, and authorised a Commissioner to investigate land tenure and taxation in the Straits Settlements, in preparation for the drafting of new regulations. Land Commissioner for the period 1837–39, WR Young, was a liberal in economic matters 70

Mills, above n 28, 131, quoting WE Maxwell. Malacca’s land revenue returned a net loss for the years 1828–53; see Braddell, above n 1, 11. 72 SSR, V169, fol 28, Penang Department Secretary Salmond to Lewis, 6 January 1829. 73 Ibid, fol 267, 26 November 1829. 74 Ibid, fol 97, 24 Mar. 1830. 75 For Mill’s support of the Madras ryotwari system, see Stokes, above n 19, 61–62. Misra wrote that the ryotwari system was ‘inspired by principles of liberalism’. See Misra, above n 57, 209. 76 Unrepealed and Unexpired Acts of the Legislative Council of India, [1834–61], available at http://books.google.com.au/books/about/Unrepealed_and_unexpired_acts_of_the_leg. html?id=bOkSAAAAYAAJ&redir_esc=y (accessed on 12 March 12). 71

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and opposed what he saw as ‘a very objectionable direct interference [by laws] in matters best left to the guidance of individual interests [a laissez faire approach]. He favoured free and spontaneous use of the land.’77 Liberals such as Young drew on Adam Smith’s theories, but through an evangelical style of pursuit-of-happiness aims. Young knew that James Mill’s utilitarian theories were the basis of EIC tax policies: that land was the most suitable source of government revenue, and that land rent was preferable to taxes on property, business profits or the wages of labour.78 Young’s appointment in 1837 was timely, for the influential James Mill had died the year before, by which time utilitarianism had clearly fallen from favour.79 Young rejected Mill’s support for the rent law theory, claiming it undermined government aims for land cultivation, as he saw the theory’s elastic rent charge, based on differential fertility, as a clear disincentive to cultivators. Young’s recommendations, to regulate the clearing of land as well as assessment and collection of land tax in the Straits Settlements, were adopted as part of the Legislative Council of India Act 16 of 1839.80 However, the registration of titles and transfer was left as optional. The Act 16 of 1839 had shortcomings, in that it dealt only with land not already under grant or title from the government and exempting tenant cultivators.81 Young attempted to commute the tithe to a fixed land tax, paid in cash and based on an estimated 10% of average land produce—and, in conjunction, eliminated toll houses.82 However, there was voluntary, instead of compulsory, commutation of tithes to deeds (issued from November 1839) which generally lasted 20 years.83 Malaccans were generally reluctant to accept deeds, for they meant a higher tax compared to tithes, which were lower when crops were poor. Those who did accept the deeds generally did so as a preferable alternative to the inconvenient and oppressive methods of private tax collectors. Overall, the 10% tithe (and its tax farming) remained the basic source of land revenue in Malacca for most of the nineteenth century—certainly well beyond 1839, when this study ends.84

77

Kratoska, above n 29, 512. J Mill, above n 31, 249. 79 Stokes, above n 19, 59–60. Misra also refers to James Mill’s ‘considerable influence’ at the EIC, see Misra, above n 57, 51. 80 Act 16 of 1839, see Unrepealed and Unexpired Acts of the Legislative Council of India, [1834–61], above n 76. 81 Ibid, provision II. 82 Young’s inspiration was the Act for Commutation of Tithes in England and Wales, 13 August 1836, where parish tithes were commuted and replaced by rent-charge payment of a fixed annual sum. 83 Act 16 0f 1839, provision V, see Unrepealed and Unexpired Acts of the Legislative Council of India, [1834–61], above n 76. 84 The Straits Settlements (Malacca, Singapore and Penang) were placed under the British India’s Bengal presidency until 1851, after which time they were administered directly under the British Governor-General of the Supreme Government of India. In 1867 the Straits 78

Dutch to British Malacca, 1824–39 413 Tax Farms When the EIC disbanded customs collection, it was vital that the balance of the Dutch tax farm system continue as a revenue source.85 Both the Penang and Bengal presidencies issued Malacca’s administration with instructions and requests for tax revenue data, such as the remittance of revenue reports from Malacca’s tax farms for the 12 month financial year from May to April.86 In January 1827, Malacca’s Resident, Garling, wrote to John Anderson, Secretary at Fort Cornwallis, about the arrangements for tax farms.87 Garling noted that Malacca’s tax farm licences were generally based on the principles applied in Singapore. Tax farming had similarities across many jurisdictions, being a system that allowed private interests to acquire periodical monopoly of taxing rights through auction. Even though Garling’s authority was limited, he endeavoured to recommend reforms to tax farms, as exemplified in the following extracts from his Resident Diaries. Although Garling recommended an offer of 50 opium farm licences, with limits on the number of opium dens per licence-holder, he was advised against limitations because opium revenue was important to the EIC.88 As head of the Malacca police, TS Lewis issued regulations regarding goods and services subject to tax farm licences.89 Garling noted that the eight licences for spirits ‘were a general nuisance’. Returns often fell short of licences paid, and lessees absconded, leaving monthly payments in arrears. He reported illegal vending of spirits and raised the need to ‘invite the attention of good capitalists’ to promote commercial enterprise.90 There was disquiet about monopolistic practices by individuals with large amounts of capital, so Garling advocated that tax farms for toddy and baang (local liquors) be restricted to collection from only four establishments each. Garling noted the five licences for gaming (eg cockfighting) as adequate, whilst warning that gaming’s many ‘vicious’ practices were not consistent

Settlements became a crown colony and transferred to British Colonial Office until Malaya’s independence in 1957: Turnbull, above n 29. 85 Mills, above n 28, 110. 86 SSR, V166, fols 3, 107, 9 September 1826. 87 SSR, V165, fol 369, 9 January 1827. 88 SSR, V169, fol 18, Anderson to Garling, 20 April 1830. See R/9/37/4 Grant to Tan Koosing of the licence for selling opium at Malacca for the year 1 May 1826–30 April 1827. By establishing an opium farm, Garling was in line with the practice in Singapore, but it went against Raffles’s original vision for Singapore: see British Library, India Office Records (IOR): G 35/50, fols 1–74, S Raffles to J Dart, Bengal, 28/12/1819, para 47. 89 See R/9/32/8 Police regulations 1826; also R9/37/5 Sirih farm; R9/37/6 Leasing of Government Market Stalls; and R9/37/7 Pork farm, April 1827. 90 SSR, V165, fol 369, 9 January 1827.

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with the ‘principles of wise legislation’. The ‘parallel consumption of wine and gambling does not appear just’.91 Garling rationalised the taxation regime by abolishing the tax farms for weights and measures, fish, buffalo flesh, timber and small boats. This was either because they were inconvenient, unpopular and encouraged evasion, or because the purpose of the tax no longer existed. As pork was a basic food item for the Chinese, Garling recommended that tax farms for pork be abolished in favour of pawn-broking farms. On the other hand, he retained licences for the addictive stimulant sirih leaf, which he said was a necessity for the labouring classes and ‘as Asiatic as salt’, even though he had contemplated banning the drug.92 Garling wrote that the licences for taxing stalls at the eight governmentrun market sites were ‘neither questionable nor unpopular’, and the revenue could be returned to the community through ‘upkeep of markets’. Finally, the ‘shop and cart’ tax farm was to be superseded by governmental direct assessment for taxation of the owner, the delay being ‘the introduction of regulations’.93 In April 1827, the final tax farm regulations were issued for the financial year May 1827 to April 1828. They included the pork farms, covering pig slaughter and pork retail, and required the tax farm lessee to pay monthly amounts to the Treasury. Failure to pay resulted in an additional (penalty) payment or withdrawal of the licence. The regulations for leasing of stalls at government markets were similar. The lessee of a sirih leaf tax farm also paid a set monthly amount to Treasury, but was limited to charging a duty of 10% on the sales value. Under the regulations, any disputes about the ‘convenience’ of paying the duty were to be decided by the Magistrate.94 In early May 1827, Garling noted that tax farmers had anticipated that the colonial transition would result in tax farm losses, due to the transition period’s proliferation of cut-price drugs and liquor. Therefore, many established tax farmers did not purchase new farm leases because of deficits from the previous year. For instance, in seeking new tax farm lessees for the opium farms, Garling found that the tender offers were too low and required readvertising.95 Figure 5 depicts Malacca’s tax farm revenue. With the historically lucrative customs farm repealed, the graph shows spirits, opium and gaming farms as the highest value farms, followed by pork farms. When the gaming farm was abolished (by May 1830), it was feared that a consequence might be reduced spirit tax farm revenue.96 Although Garling saw 91

Ibid. Ibid. 93 Ibid. 94 Ibid. 95 SSR, V166, fol 613, 2 May 1827. 96 SSR, V169, Garling letter to Anderson 1 May 1829, fol 68–69. See R/9/37/8 advertising the auctions of tax farms, 15 April 1830. 92

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Figure 5 Malacca large tax farms, 1826–37. Source: Braddell, above n 1, Table 10.

the pork tax as discriminatory, it was not abolished; however, the receipts were donated to the poor house operators.97 To save EIC administrative costs, the Penang presidency was to be dissolved by 1830 and the Straits Settlements (Malacca, Singapore and Penang) placed under British India’s Bengal presidency.98 Garling was to remain the Malacca Resident and, in preparation for the 1830 dissolution, was reminded to adhere to the new tax farm regulations: the only time government duties could be reduced was when their impact made selling prices so high as to become a vexatious ‘tax on the people’.99 Despite further tax farm adjustments made post-1830, the system was not reformed enough to address the perniciousness of contracted tax collectors. This was, no doubt (at least until 1841), because the cost savings of an indirect system of tax collection were essential to cover Malacca’s administration expenses.100

Direct Tax Assessment Following regulations issued from Fort Cornwallis, the EIC introduced direct tax assessment of residential and commercial buildings. Assessment exceptions included vacant lots, religious establishments, and military and temporary accommodation. The system required the establishment of a committee of government officials and paid persons from the community 97

SSR, V171, fol 77, 1 July 1830. Mills, above n 28, 104. 99 SSR, V171, fol 11, Penang Secretary Pattullo to Garling, 20 April 1830. 100 Harrison, above n 29, 129. 98

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for tax collection management. The committee’s work included, for instance, the implementation of Tax Regulation C2, mandating that persons dissatisfied with a direct assessment on their property had the right to appeal, ‘so as to be equitable’.101 Tax revenue from direct assessment of buildings was expended on repair and maintenance of public infrastructure. The next section considers the findings from the preceding descriptive sections and draws on the tax and free-market theories of Adam Smith for explanation.

A NA LY SIS OF F INDINGS

Customs Duties The immediate abolition of customs duties in 1825 by the EIC was a key legislative response to the concept of a free-market, as Adam Smith was fundamentally adverse to customs fees and monopoly practices in general.102 Later, in 1827, Resident Garling suggested that the ‘personal inconvenience’ of residual port duties be abolished, as ‘duties impede the freedom of the Port of Malacca’;103 here, Smith’s convenience maxim might be noted. Ironically, the revenue stream from non-EIC opium duties was an absolute necessity to cover costs, and remained. This policy was compatible with the collection of opium duties in Singapore from 1819, for the revenue was such that Stamford Raffles wrote that the EIC trade in opium to China ‘should be protected’, noting that ‘our object is to bring [opium] as directly to the consumer as possible’.104

Land Rent The EIC made the decision to privilege revenue from land rent, which was to be structured in a superior manner to feudal land systems. Adam Smith wrote of the feudal system shortcomings: ‘A person who can acquire no property, can have no other interest, but to . . . labour as little as possible’.105 He preferred the economy-expanding benefits of exchanging labour for wages. Smith argued against the ‘feudal anarchy’ prevalent with large tracts of aristocratic and parish-held land. He contrasted this to the 101 102 103

SSR, V 166, fol 330, 29 December1826. Sutherland, above n 21, Book IV, viii, 365. SSR, V165, Regulations for Registrar of Imports and Exports, fol 412, 30 January

1827. 104 IOR: G 35/50, fols 1–74, S Raffles to J Dart, Bengal, 28 December 1819, paras 39 and 43. 105 Sutherland, above n 21, Book III, ii, 238; Book 1, viii, 63–94.

Dutch to British Malacca, 1824–39 417 greater land improvements that could be made by small proprietors.106 Garling’s liberal call for a replacement of Malacca’s feudal corvée system to embody ‘a vigorous pursuit of wealth’ was backed by instructions from Penang. Both echoed Smith’s thesis. In 1831, the Straits Settlements Governor, Ibbetson, proclaimed: ‘The Malays will in the future be relieved from all vassalage and feudal service and the free employment of their labour will be theirs’. Again, the Governor’s inspiration might well have been Smith’s treatise.107 Balestier, Singapore’s first American Consul, from 1834 to 1852, wrote in 1848 of the lack of incentive to cultivate the land in Malacca, because of uncertainty of land ownership. By contrast, land in Singapore was freehold. He gave the example of the Chinese, who preferred to spend their wealth on large houses in Malacca Town rather than invest in riskily held agricultural land.108 His observations of the Malaccan land situation can be seen as reasonably objective, given he had no financial interest there. Blundell, Malacca Resident from 1847, wrote of his sobering experience of the land situation in Malacca: ‘All the ingenuity of Residents and Assistants has been put to trying to explain to the Malay peasants the principles of political economy’.109 Blundell’s views are further evidence suggesting that British administrators in Malacca looked for guidance to the principles that stemmed from Smith’s original Wealth of Nations and later acolytes, such as James Mill, who promoted the Madras ryotwari system, to reform the Malaccan land revenue system. However, the liberal Land Commissioner WR Young scuttled the late James Mill’s notions, along with the Ricardian rent law theory, and drafted his recommendations for new legislation, the Legislative Council of India Act 16 of 1839. Act 16 of 1839 regulated Malaccan clearing of land, assessment and collection of land tax—with the registration of titles and transfer left as optional. Those who accepted the deeds generally did so because of the oppressive methods of private tax collectors, which contradicted Adam Smith’s convenience maxim. In effect, the new legislation failed to generate sufficient much-needed land revenue, exacerbated the complexity of the existing land system and shifted the overall tax burden to the tenant cultivators.

106

Ibid, Book III, ii, 237. Bengal Secret & Political Proceedings, Ibbetson report, 362, fol 14, 14 October 1831. Robert Ibbetson was Straits Governor 1830–33. 108 J Balestier, ‘View of the State of Agriculture in the British Possessions in the Straits of Malacca’ (1848) II Journal of the Eastern Archipelago and Eastern Asia 144. 109 EA Blundell, ‘Notices of the History and Present Condition of Malacca’ (1848) II Journal of the Eastern Archipelago and Eastern Asia 742. 107

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Tax Farms and Direct Tax Assessment Resident Garling’s authority was limited with regard to the reform of goods and services tax farms. Nonetheless, it may be seen that he gave due thought to free-market principles in making his initial recommendations about tax farms, with some Smithsonian principles and turns of phrase evident in the extracts from his Resident Diaries, such as ‘encouragement of good capitalism’, ‘wise legislation’ and ‘public infrastructure management’. When Garling recommended that the licence fees from government markets be returned to the community for ‘upkeep of markets’ and that direct assessment revenue be expended on repairs and maintenance of public infrastructure, it reflected Smith’s position.110 Smith’s advocacy of government expenditure to fund public institutions most likely also influenced the decision to redirect revenue from Malacca’s pork tax farms to support the poor house.111 Garling allowed disputes about the ‘convenience’ of payment or amount of duties to be decided by the Magistrate. Further, persons dissatisfied with a direct tax assessment on their property had the right to appeal. This access to redress aligns with Smith’s equity and convenience maxims, and his vision of a properly functioning political economy.

C ONC LU SION

This study aimed to investigate nineteenth-century Malacca’s taxation when the transition from Dutch to British EIC rule forced changes to the system. The research has questioned the claim by Braddell, the first Attorney-General of the Straits Settlements (1867–82), that when the British took control of Malacca the conduct of government was on improved principles. On balance, it is arguably correct that, in relation to tax, there was a concerted attempt to conduct government on improved free-market principles, but there were mixed results. The study has found that the British in Malacca were decisive in their prompt abolition of customs duties, a move that was traced back to Adam Smith’s opposition to customs fees, as they went against free-market tenets. The cost of administering a direct tax system meant no major reform was made to tax farms such as spirits and sirih leaf. The exception was the enlightened introduction of direct tax assessment for residential and commercial buildings. Taxpayers benefited from recourse to appeal and some tax revenue being expended on community infrastructure, or directed to the poor. 110 111

Sutherland, above n 21, Book V, i, 413. Ibid.

Dutch to British Malacca, 1824–39 419 However, the land rent system reform from 1825 to 1839 can be seen as a failure. Well after Land Commissioner WR Young’s two-year investigation, uncertainties remained, including issues around old VOC leases to Dutch proprietors; deeds issued under the Legislative Council of India Act 16 of 1839 and tenant cultivator rights.112 Indeed, even in presentday Malacca there are still enduring land problems. Until Young’s arrival, Malacca had followed the ryotwari system of land rent (promoted by James Mill), based on Adam Smith’s thesis that land rent could provide for all government expenditure. In rejecting Mill’s utilitarian views, Young took a liberal, laissez-faire approach to the use of land. He saw elastic rent charges—higher taxes based on higher productivity—as a clear disincentive to cultivators. Unfortunately, his contributions to Act 16 of 1839 only added to the complexity of the administration’s efforts to increase land revenue. In studying the period of transition from Dutch to British colonial power in Malacca, we have gained some understanding of the influence of Smith and Mill on tax policy modifications during the changeover in colonial governing powers. This work also extends knowledge in the field of tax history concerning the development of colonial tax to modern taxation practice, and adds to the literature concerning colonial Southeast Asia taxation in eliciting liberal thought from the dairies and papers of the British colonial administrators. This research is significant in its consideration of tax issues arising from the change of colonisers in Malacca and the change from the perspective of a mercantile monopoly policy to the philosophical viewpoint of freemarket economics. Enlightenment thinkers had long questioned the effectiveness of taxation revenue-raising practices, and their writings had become well-known by 1824—British Malacca provided the opportunity to see some of their theory put into practice.

112

As previously described in the ‘Land Rent Revenue’ section.

40 1168

45 1105

5991

400

6130

5834

75 500 310 60 720 161 30 440 1482 120

70 430 371 80 700 160 40 540 1500 140

850 550 100 800 550 30 450 60 50 550 1040 100 600

20 708

40 770

1743

1060 170 1780 3120 470 68350 84405

1110 230 1840 3010 470 63700 79155

1230 185 2180 3660 420 59050 75730

610 610 650 25 760 600 225 2320 2440 155

10 600

1781

1420 100 1320 3700 445 32400 46575

450 540 610 25 830 520 160 1250 2160 150

10 485

1782

1630 335 1720 4600 420 60000 76380

370 440 450 25 400 610 170 2300 2200 150 * * * *

* * * * * * * * * *

10 * 550 *

1783

1784

17700 51000 68700

- VOC Archives, Monash University * All the farms were sold in sealed proposals. * * In 1792 the value of many farms were not known and the value of the unknown farms was Rijks dollars 9,463 (farms were perhaps sold by sealed proposal).

- 1742-1795, Hussin, N. (2002) 'Melaka and Penang', PhD thesis, pp.422-423.

510 650 700 25 740 550 270 2970 2270 170

10 590

1780

740 600 710 25 700 520 210 2400 2100 180

10 600

1779

VOC Malacca: 1681- 1796, Tax Farms (Rijks Dollars) 1742

Sources: -1681,Reid, A. (1993) The Origins of Revenue Farming in Southeast Asia, pp. 75-76. per VOC Generale Missiven, Vol 4 . 1675-1685, p.904

Gentlemen's tavern Shopholders Fish and vegetable sellers Timber cut from forest Distilling arak Slaughter tax Cock fighting Sirih or betel leaves Rice-sellers in the market Draw-bridge over the river Weigh-house Sea and river fish Inspection of weights and measures Chinese gambling Portuguese ships Prouws Head tax on the Chinese Opium Head tax on prouws Customs house Total

1681

APPENDIX A

* * * *

* * * * * * * * * *

* *

20530 52050 72580

1785

* * * *

* * * * * * * * * *

* *

19785 69150 88935

1786

* * * *

* * * * * * * * * *

* *

21140 66000 87140

1787

250 20 239 661 61 6325 8623

77 63 62 2 100 46 25 240 366 13

1 72

178

420 Diane Kraal

13 The History and Development of the Taxation Profession in the UK and Australia JANE FRECKNALL-HUGHES AND MARGARET M CKERCHAR*

A BSTR A C T The aim of this chapter is to examine and contrast the history and development of the tax profession in the UK and Australia. The growth in the complexity, volume and importance of taxation legislation in both jurisdictions has resulted in taxation becoming a distinct and highly specialised profession, though one which is often regarded as fragmented, given the diverse backgrounds of its members. The tax profession includes (but is not limited to) solicitors, barristers, accountants, employees of revenue authorities and tax experts working within industry. Its members also include those who are officially designated as ‘tax practitioners’ as a result of their membership of tax-dedicated professional bodies, such as the Chartered Institute of Taxation (CIOT, formerly Institute of Taxation) in the UK, and the Tax Institute (TI, formerly Tax Institute of Australia) in Australia; or by virtue of regulatory bodies, such as the Tax Practitioners Board in Australia. The diffusion of taxation practitioners as described above has had a major impact on academic studies of tax practitioners in terms of omission, as no one has examined how this diffusion has occurred, the history underlying it or the professionalisation of taxation. This research aims to address this gap in the context of the UK and Australia. Whilst tax advice is given by many, it appears that the origins and driving forces of the establishment of the tax profession can be traced to the accountancy profession. This chapter considers the context of the development of the CIOT and TI in

* The authors would like to thank the various professional bodies for allowing access to their materials. In particular, Jane Frecknall-Hughes acknowledges the financial support provided by CIOT; and also the late John Jeffrey-Cook for granting access to his own working papers and research, both published and unpublished, on the history and foundation of the IOT.

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the light of the formation of professional accounting bodies generally, and traces their history and relationship from inception to date. The chapter is based on archival research and provides insights into the emergence of the tax profession, the visions held by its foundation members, and assesses the contribution of the dedicated professional bodies in advancing the tax profession in both the UK and Australia.

INTR ODU C TION

T

HE AIM OF this chapter is to examine and contrast the history and development of the tax profession in the UK and Australia, and show how in both jurisdictions accountants laid claim to this work domain ahead of other professions, such as law. This might appear counter-intuitive, given that taxation is imposed by law. However, there is no research which examines this phenomenon from a comparative perspective. In both jurisdictions the growth in the complexity, volume and importance of taxation legislation has resulted in taxation becoming a distinct and highly specialised profession, though one which is often regarded as fragmented. Per Frecknall-Hughes1 and Doyle,2 tax advice in the UK is given by a broad range of business professionals, including accountants, solicitors, barristers, payroll agents, former and current members of government revenue authorities, and tax experts working within industry,3 as well as those officially designated as tax consultants as a result of their membership of tax-dedicated professional bodies, such as the Chartered Institute of Taxation (CIOT, formerly Institute of Taxation (IOT)) in the UK.4 The emergence of a work domain that appears open to different professions to claim it is, in our view, an undoubted reason for the fragmentation of the profession in both jurisdictions. The position in Australia is not dissimilar to that of the UK in terms of the range of business professionals providing tax-related advice, although it can also include bookkeepers. The latter cannot prepare annual tax 1 J Frecknall-Hughes, ‘An Empirical Investigation of the Share Valuation Work of Taxation Practitioners’, unpublished PhD thesis (University of Leeds, 2002). 2 E Doyle, ‘An Empirical Analysis of the Ethical Reasoning Process of Tax Practitioners’, unpublished PhD thesis (University of Sheffield, 2010). 3 Tax experts working in industry may, of course, originate from any of the aforementioned groups, or those mentioned subsequently. 4 There are six other main bodies professionally involved in taxation in the UK: the Association of Taxation Technicians; the Association of Chartered Certified Accountants; the Institute of Chartered Accountants in England and Wales; the Institute of Chartered Accountants of Scotland; the Institute of Indirect Taxation; and the Society of Trust and Estate Practitioners. At the time of writing, however, the Institute of Indirect Taxation is merging with the Chartered Institute of Taxation. There is also the Worshipful Company of Tax Advisers. In the public sector, there is, of course, HM Revenue & Customs (HMRC).

The Taxation Profession in the UK and Australia 423 returns or give advice on income tax law. Instead, they assist businesses in preparing their business activity statements (BAS)5 and are referred to as ‘BAS agents’. A significant point of difference from the UK is that in Australia the official designation as either ‘tax agent’ (ie those who can advise taxpayers or act on their behalf on all tax matters) or ‘BAS agent’ is not a result of membership of tax-dedicated professional bodies but instead is conferred on those that have satisfied the registration requirements of the newly formed national Tax Practitioners Board.6 For both tax agents and BAS agents, there is a requirement that they be a voting member of a recognised professional association. In the case of tax agents, the Tax Institute (TI, formerly Tax Institute of Australia (TIA)), CPA Australia and the Institute of Chartered Accountants in Australia (ICAA) are amongst the accredited associations that meet this requirement.7 Whilst the international academic literature has tended to use a range of terms almost interchangeably to denote tax practitioners (including tax advisers, tax agents, tax intermediaries, tax preparers, paid preparers and tax professionals),8 it is clear that in different jurisdictions and over time the term ‘tax practitioner’ and its meaning (and regulatory requirements) have evolved in different ways. In contrast to the highly regulated position in Australia (it has been a nationwide requirement to be registered as a tax agent since 1943),9 anyone can set up in business as a tax practitioner in the UK.10 The same is true in many other countries, including New Zealand, and, until recently, in most states in the USA. From 1 January 2011, federal registration of tax intermediaries in the USA has become mandatory, along with a range of compliance checks (related to good standing), and, for those intermediaries who are not licensed by certain

5 BAS agents can give advice to taxpayers (and transact on their behalf with the Australian Taxation Office) on matters pertaining to Goods and Services Tax law, fuel tax law, luxury car tax law, Fringe Benefits Tax law (relating to collection and recovery only), Pay As You Go (PAYG) withholding and PAYG instalments. They cannot give advice on income tax law. 6 The National Tax Practitioners Board was established on 1 March 2010 under the Tax Agent Services Act 2009. It replaced six State Tax Agents’ Boards. 7 There are several other accredited tax agent associations and also a list of accredited associations for BAS agents. See www.tpb.gov.au for further and more current details as they are subject to change. 8 ‘Tax preparers’, however, is a term more usually used (and especially in the US) to mean individuals or firms who/which provide assistance in completing individuals’ tax returns, that is, compliance services. They might only provide basic, rather than complex, tax advice. The 2009 HMRC report, ‘Modernising Powers, Deterrents and Safeguards. Working with Tax Agents: A Consultation Document’, ch 5, looks more closely at different definitions for different types of tax professionals. 9 R Fisher, ‘Agent Registration and Regulation: A Cross-Tasman Contrast’ (2010) 16 New Zealand Journal of Taxation Law and Policy 395. 10 The HMRC 2009 consultation document, above n 8, does suggest, in ch 5, some form of registration for the 12,000 estimated tax practitioners who are currently unregulated by any professional body.

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professional bodies, there are competency tests and requirements regarding continuing education currently being rolled out.11 From the brief discussion thus far, it is evident that the fragmentation of the tax profession and its lack of monopoly, as observed in many countries in the 1990s by Thuronyi and Vanistendael,12 still remain. The paucity of academic literature on this subject is somewhat surprising, given the almost universal acknowledgement that tax practitioners have increasingly become key players in modern tax administrations seeking to maximise taxpayer compliance. Thus this chapter illuminates the historical underpinnings and development of the tax profession in two jurisdictions that are related, but have taken different paths. In doing so, the research seeks to identify the drivers of change and to record and reflect on the course of events to shed light on the tax profession and the role of professional bodies. The remainder of the chapter is structured as follows. We first consider the emerging importance of taxation and the demand for tax specialists; the following two sections examine the responses by UK and Australia accountants respectively; we then look at the emergence of specialist tax professional bodies in the UK and Australia; and in the last section we offer conclusions to the chapter.

T H E E M E R GING IMPORTA NC E OF TA XAT ION A ND T H E DEMA ND F OR TA X SPEC IA LIST S

The development of any individual profession cannot be examined without taking account of the economic, political and legal context of its formation.13 In terms of taxation, the growth in the complexity, volume and importance of taxation legislation, especially income tax legislation in the late nineteenth and early twentieth centuries in the UK and in the

11 Treasury Department, ‘Regulations Governing Practice before the Internal Revenue Service’, Circular No 230 (Rev 8-2011) (Washington, DC, IRS, 2011) Catalog Number 16586R, available at http://www.irs.gov/pub/irs-pdf/pcir230.pdf (accessed on 25 October 2011). Note that registration of paid preparers has been a requirement in Oregon since 1973, in California since 1997 and in Maryland since 2008: M McKerchar, K Bloomquist and S Leviner, ‘Improving the Quality of Services Offered by Tax Agents: Can Regulation Assist?’ (2008) 23(4) Australian Tax Forum 399, 402–11. 12 V Thuronyi and F Vanistendael, ‘Regulation of Tax Professionals’ in V Thuronyi (ed), Tax Law Design and Drafting (Washington, DC, International Monetary Fund, 1996) 135, 160–63. 13 NAH Stacey, English Accountancy. A Study in Social and Economic History (London, Gee & Co, 1954); H Wilmott, ‘Organising the Profession: A Theoretical and Historical Examination of the Development of the Major Accountancy Bodies in the UK’ (1986) 11(6) Accounting, Organizations and Society 555; SP Walker, ‘The Genesis of Professional Organization in Scotland: A Contextual Analysis’ (1995) 20(4) Accounting, Organizations and Society 285; J Maltby, ‘“A Sort of Guide, Philosopher and Friend”: The Rise of the Professional Auditor in Britain’ (1999) 9(1) Accounting, Business & Financial History 29.

The Taxation Profession in the UK and Australia 425 twentieth century in Australia, was extremely significant and resulted in a demand for tax specialists. The realisation that income tax was a permanent tax, together with people needing help to deal with it or find a legitimate way not to pay it, were key developments, with increasing impact as tax rates increased. In the UK, it seemed clear after the Crimean War that income tax would never be abolished, even though Gladstone’s government had intended to abolish it in 1860—an intention signalled in the 1853 budget. Gladstone retained it—aware that such a policy reversal of policy required considerable justification. He provided this by abolishing the majority of remaining import tariffs and the excise on paper.14 It was the price paid for tax reform in these other areas.15 Over the next few years, the permanency of income tax in the UK became more generally accepted, although Gladstone again proposed its abolition as late as 1874.16 Increasing numbers of companies and persons were affected by it, the latter now including ‘skilled workers and senior clerks who would be earning over the exemption limit’.17 It was not always easy to administer or collect, as the rules were inconsistently applied, full of anomalies, loopholes and opportunities for avoidance, as the 1851 Hume Committee18 had revealed. Possibly, over time, the UK population had become conditioned to the idea of income tax being temporary, so there was no perceived need to do anything about a tax soon to be abolished. Gladstone was explicit in 1860 about retaining it indefinitely (although subsequently calling for its abolition), which possibly created a shift in the way society at large viewed the tax and reacted to it. Thus, the years immediately following 1860 are the crucial UK context for this chapter, with 1874 being significant,19 as that was Gladstone’s last call for the abolition of income tax. In contrast, the period of greatest interest in Australia is after 1942, when the Uniform Tax Scheme was introduced, which effectively saw the federal government take control of the imposition of income tax. When the Australian colonies were federated and became states in 1901, Federal Parliament was given a general power of taxation under section 51(ii) of the Constitution, though a federal income tax was not introduced until 1915—and only then to assist in funding World War I (albeit as a temporary measure). The Income Tax Assessment Act (Cth) 1915 was 65 14 C Stebbings, The Victorian Taxpayer and the Law (Cambridge, Cambridge University Press, 2009) 62; I St John, Gladstone and the Logic of Victorian Politics (London, Anthem Press, 2010) 96. 15 BEV Sabine, A History of Income Tax (London, George Allen & Unwin Ltd, 1966) 90; M Daunton, Trusting Leviathan: The Politics of Taxation in Britain, 1799–1914 (Cambridge, Cambridge University Press, 2001) 167. 16 Sabine, ibid, 116. 17 Ibid, 96. 18 The ‘Select Committee on Income and Property Tax’ was its official title. 19 Stebbings, above n 14, 213.

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pages in length and consisted of 22 sections. Thus, from 1915 until 1942 there was a two-tiered system whereby taxpayers paid income tax to both the state and federal governments. The practical effects of the Uniform Tax Scheme were that from 1942 the states no longer levied income tax and instead accepted conditional and compensatory grants from the Commonwealth; and the rate of federal tax increased substantially, exceeding the former federal and state rates combined.20 This increase in tax rate from 1942 was a particularly significant driver in increasing the demand for tax specialists. Further, whilst Australia’s taxation history is considerably shorter than the UK’s, the volume and complexity of Australian taxation legislation is renowned. By the early 1990s the volume of income tax legislation had grown to over 2,500 pages and was described as a ‘monster’—a system out of control and becoming progressively worse.21 Subsequently, the situation has been further exacerbated by an abandoned attempt to rewrite the legislation in plain English and ongoing, extensive reforms, including the introduction of new taxes.

T H E R E S P ONSE BY U K A C C OU NTA NTS

The founders of the IOT in 1930 were accountants, lawyers22 and ex-Revenue men, though the (newer) accounting profession had not been slow to colonise this area and appeared to be at the forefront of meeting the need for tax expertise, as demanded by ‘the magnitude and complication . . . necessary to meet the growing wants of the age’23 in the period after 1860. The earliest issues of The Accountant, the accountants’ professional journal, first published in 1874, are very useful in providing this evidence. A recurrent theme is the correct deductions of income tax from dividends or interest (the treatment differed). This surfaced very early on in 1878,24 in an article reporting on apparent discrepancies between the ways in which English railway companies and Indian railway companies dealt with a difference of rate charged where two different fiscal years were involved. A letter in the London press from Fred B Garnett, Secretary of the Board of the Inland Revenue, was cited to confirm the correct treatment.25 20 C Coleman and M McKerchar, ‘The Chicken or the Egg? A Historical Review of the Influence of Tax Administration on the Development of Income Tax in Australia’ in J Tiley (ed), Studies in the History of Tax Law (Oxford, Hart Publishing, 2004) 285–312. 21 ICF Spry, ‘Editorial: Developments in Taxation from 1971–1993’ (1993) 1 Australian Tax Review 5, 5–6. 22 The full extent to which the legal profession in the UK colonised the newer areas offered by income tax remains to be investigated and is beyond the scope of this chapter. 23 The Accountant, 1874, no 1, 5. 24 No 189, 5. 25 See also 1880, no 292, 4–5; 1880, no 314, 12; 1884, no 523, 13.

The Taxation Profession in the UK and Australia 427 In 1880, under the heading of ‘Income Tax’, a letter was printed26 that encapsulated much bitter feeling against income tax and the way it was collected. The writer contends: 1.

2. 3. 4. 5.

That this is a tax on labour, and that no distinction is made in the rate charged to the man who does not work at all, and to him who has to work. That it is an inquisitorial tax. That it is assessed on a most unfair principle, and is not a correct way of ascertaining a man’s real profit. That the conditions imposed, whereby a mortgagor or borrower is deemed to act as agent for the collector, are unjust. That it is unjust to assess on an average of 3 years.

This type of complaint was similarly made by the National Traders’ League in 1883,27 particularly emphasising point (2) above: 1. 2. 3.

Surveyors of taxes28 regularly increase sole traders’ assessments without cause and aggrieved parties cannot appeal without closing their shops. Victims submit rather than expose books to district commissioners. District commissioners habitually ignore accounts submitted to them.

The traders complained about the district commissioners not allowing deductions from profit and of their high-handed dealings in general,29 and wanted accounts certified by a chartered accountant to be conclusive evidence as to assessment. That these matters were of considerable professional concern is reflected in various different kinds of material included in The Accountant. For instance, 1880 also carried a report30 of a paper read by David Chadwick (the first President of the Institute of Chartered Accountants in England and Wales (ICAEW)) at the Social Science Congress in Edinburgh, entitled ‘For Purposes of Taxation What Is the Most Scientific and Practical Definition of the Word “Income”?’ It should be a clear annual amount after deducting all necessary outgoings received from any property or investment of capital, or from any trade, profession or occupation, or from any annuity or other source leaving at the end of each year the capital of source intact.

The articles and letters in the early issues of The Accountant indicate uncertainty as to what the law allowed and the role of the Revenue commissioners in administering and applying the law, especially in the 26

No 279, 5–6. No 470, 4–5. 28 These were the forerunners of Inspector of Taxes. 29 For example, ‘cutting about’ the profit and loss account so that the true profit is ‘unrecognisable’. This is supported by similar complaints in letters to the editor, etc, in 1883, no 466, 6–7; no 467, 6; and no 468, 5–6. 30 No 306, 8. 27

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context of trade. An article headed ‘Income Tax’ in 188431 suggests that the commissioners ‘overstep the bounds between duty and tyranny’,32 and that their refusals to accept estimates of income leading to examination of a person’s private affairs make people appear dishonest. The journal often prints queries and/or letters on other topics, such as whether income tax is payable on capital borrowed from bankers as distinct from private lenders;33 on the apparent different treatments of depreciation;34 on how tax should be levied on agents of foreign ‘houses’;35 and how building societies should deal with income tax in respect of interest on mortgages.36 The matters referred to above typify much of the tax content of the early issues of The Accountant, which continued unabated subsequently. It is thus not surprising to find that one of the earliest tax specialist firms was the Income Tax Adjustment Agency, which began offering services in 1890, shortly followed by the Income Tax Repayment Agency in 1901, with 14 competitor firms by 1914.37 Stopforth,38 in work looking at the growth of tax avoidance mechanisms, cites the comments of Sir Josiah Stamp in 1919, after a world war which had seen income tax rates significantly rise: Taxation is now rapidly developing from a merely unpleasant incident into a dominating feature of daily life, and those features which hitherto have been of little interest, because they have been too small to matter, now become of great importance; the blemishes which were insignificant may now be intolerable because in the magnitude of the burden they have become sufficiently magnified or intensified to be within the range of ordinary human feeling.

Stopforth39 remarks on the development of professional expertise in the area of avoidance schemes in the period from about 1910, with The Accountant setting up a regular advice column, because of the increasing importance of income tax, since the taxpayer realised ‘the advantages of professional assistance in a subject of such intricacy’, citing The Accountant, 6 June 1914. In 1922, the journal put up its fees as a result of the increased cost of providing such advice to its readers.

31

No 480, 8–9. Ibid, 8. 33 1884, no 481, 6. 34 1884, no 482, 8. 35 1885, no 556, 9. 36 1884, no 523, 13–14. 37 J Jeffrey-Cook, ‘The First Tax Practice? Taxation, 18 July 2002, available at http:// www.taxation.co.uk/taxation/print/1951 (accessed on 19 June 2010). 38 DP Stopforth, ‘Settlements and the Avoidance on Tax on Income—The Period to 1920’ (1990) 7 British Tax Review 225, 238. 39 Ibid. 32

The Taxation Profession in the UK and Australia 429 The professional journal Taxation was begun in 1927,40 again to provide useful tax information in an increasingly complex environment. Significantly, it was begun by Ronald Staples, a founder member of the IOT. In 1931, Taxation carried an article justifying the formation of the institute since, after World War I, the tax burden: has increased with its ever-growing ‘ill-digested mass of legislation’, [and] has become a highly specialised subject and every accountant and solicitor in the country realises the importance of studying it. Learned judges and eminent lawyers are constantly admitting that the subject is one of the most intricate in their experiences, and as the years go by the Finance Act provisions relating to taxation seem to become more obscure and official publications more exacting.41

The material already cited from The Accountant would suggest that, even before World War I, there were considerable technical difficulties posed by taxation. These clearly continued. Accountants had been swift to become involved in income tax issues because of their involvement in commercial accounting and financial statements, income tax on company profits, dividends, interest, etc, following on as a natural corollary to that involvement. They were already on the spot and prepared both to acquire the technical knowledge and apply it. It is important to note that this is but one area of the work which the profession was undertaking, as part of establishing its validity as a profession. In establishing professional validity, problems often arise in defining the work domain and who is allowed to operate within that domain. In looking at the attempts by the ICAEW to define the professional boundaries of an accountant’s work, Anderson et al,42 following Macdonald,43 comment that established practitioners are ‘central’ to this process as they will typically agree on a definition of membership for those already practising the skills, usually referred to as a ‘grandfather’ clause, and one for new entrants, usually involving passing examinations. The dilemma here is whether to confine membership to ‘high status practitioners, thus ensuring the almost certain emergence of competitor institutions’44 or to include

40

Jeffrey-Cook, above n 37. Anon, ‘The Institute of Taxation’, Taxation 10 January 1931, reproduced in Taxation, October 1987, 34. 42 M Anderson, JR Edwards and RA Chandler, ‘“A Public Expert in Matters of Account”: Defining the Chartered Accountant in England and Wales’ (2007) 17(3) Accounting, Business & Financial History 381, 382. 43 K Macdonald, The Sociology of the Professions (London, Sage, 1995) 131–32. 44 JR Edwards, M Anderson and RA Chandler, ‘How Not to Mount a Professional Project: The Formation of the ICAEW in 1880’ (2005) 35(3) Accounting and Business Research 229, 239. 41

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everyone, and run the risk of a diminished public perception.45 The ICAEW tried to have the best of both worlds, but simultaneously to try to eliminate the ‘scaff and raff’, the ‘self-styled’ accountants whose activities were damaging to the occupational group.46 Despite a narrowing of the jurisdictions claimed publicly by accountants in the 30 years prior to initial organisation formation (at least in London, from the evidence of trade directories as examined by Edwards et al47), this left out a body of ineligibles who existed in sufficient numbers ultimately to form a competitor group—the Society of Accountants.48 The Law Times and the Solicitors’ Journal, the professional organs of the law profession in these years, lost no time in voicing criticism, with a constant sniping about the ‘selfstyled’ accountants whose activities they took to be representative of the accounting profession as a whole. The ‘grandfather’-type clause caused considerable difficulties for the newly formed ICAEW as regards work deemed ‘appropriate’ for an accountant, as such a clause in the ICAEW’s 1880 Royal Charter appeared to allow work which newer members could not do.49 A major problem was the lack of an agreed definition of what ‘accounting’ involved, as persons who called themselves ‘accountants’ could, and did, involve themselves in all kinds of different work.50 As it was common for accountants to carry on several businesses at the same time as being an accountant (Anderson et al 51 refer to these as ‘combined businesses’), the grandfather clause applied to these as well.52 However, this engendered a debate about how this 45 H Perkin, The Rise of Professional Society in England Since 1880 (London, Routledge, 1989). 46 Edwards et al, above n 44. 47 JR Edwards, M Anderson and R Chandler, ‘Claiming a Jurisdiction for the “Public Accountant” in England Prior to Organisational Fusion’ (2007) 32(1–2) Accounting, Organizations and Society 61. 48 This body was particularly recruited from non-urban districts which the ICAEW founders had neglected, where it was usual for a practitioner to be more of a ‘jack of all trades’—a tendency which long survived in rural districts. One has only to consider, for instance, the typical village shop, which even today sells everything from postage stamps to bootlaces. Edwards et al, above n 44, 242 (citing from The Accountant, 20 March 1886, 160), list the array of jobs members of the Society were perceived as doing—rent collectors, corn merchants, shopkeepers, valuers, collectors of taxes, bailiffs, secretaries of various concerns, civil engineers, school board clerks, overseers, timber agents, pawnbrokers and manure merchants (see also Edwards et al, above n 47). 49 Anderson et al, above n 42. 50 Members of the five predecessor bodies, which merged in 1880 to form the ICAEW, generally had to be in practice as a ‘professional accountant’, ‘accountant’ or ‘public accountant’ (Anderson et al, above n 42, 385) and the final version of the Charter agreed on ‘public accountant or some business which in the opinion of the Council is incident thereto or consistent therewith’ (ICAEW, Charter of Incorporation and Bye Laws (London, Henry Good & Son, 1882) 19). 51 Ibid, 289 52 Edwards and Walker (2007: 77) cite the instance of one John C. Collier of Godalming, Surrey (by reference to census enumerators’ books for 1881) who was a ‘Bank Manager, Accountant, House, Land and Insurance Agent, Distiller of Wood employing 11 labourers, Farmer of 1115 acres employing 6 labourers’.

The Taxation Profession in the UK and Australia 431 kind of activity accorded with the ‘higher duties’53 owed by members of the ICAEW in terms of what comprised appropriate work54 and whether membership should be confined to accountants in public practice. Despite these activities being practised under the ‘grandfather’ clause, they were all deemed unacceptable for new members, other than insurance, and this caused considerable debate about the legitimacy of the ‘grandfather’ clause.55 There is a clear attempt shown here to define what Abbott56 refers to as the jurisdiction (‘proper work’) of the profession in terms of what its members could and could not do, in a definite attempt to raise its status. The aim was for the profession to reach the same standing as that of lawyers.57 This would be a means by which it could convince wider society of the legitimacy of its claims. Accountants aspired to climb the social ladder too, and mimic the landed gentry, seeing this as part of being a highly regarded professional.58 They aimed to distinguish themselves from those who were involved in commercial occupations, which were regarded as socially tainted because of an association with trade, which was a lower class activity. The true professional had a public service ideal and autonomy.59 In Abbott’s view,60 ‘control of work . . . brings the professions into conflict with one another and makes their histories interdependent’. He includes studies of accounting, medicine and law in development of his theory. One of his defining characteristics is that professions ‘expand their 53

ICAEW, above n 50, 19. Anderson et al, above n 42, looking at the period from 1880 to 1900, cite evidence in support of auditing, adjustment of partnership and executorship accounts, liquidations, bankruptcies and receiverships in chancery being acceptable, and look at ‘test cases’ from Institute records to see whether valuation, insurance, auctioneering, stock- and share-broking, agency, debt collection, money lending and estate agency were acceptable. Similarly, they examine instances of accountants working outside public practice, and consider which jobs were deemed allowable, though the ICAEW later became more flexible in this area. 55 The ‘jack of all (financial) trades’ activities of English accountants is also mirrored in Australia during a similar period: GD Carnegie and JR Edwards, ‘The Construction of the Professional Accountant: The Case of the Incorporated Institute of Accountants, Victoria (1886)’ (2001) 26(4–5) Accounting, Organizations and Society 301. 56 A Abbott, The System of Professions. An Essay on the Division of Expert Labor (Chicago, IL, University of Chicago Press, 1988). 57 SP Walker, Towards the ‘Great Desideratum’: The Unification of the Accountancy Bodies in England 1870–1880 (Edinburgh, The Institute of Chartered Accountants of Scotland, 2004). 58 JR Edwards and SP Walker, ‘Lifestyle, Status and Occupational Difference in Victorian Accountancy’ (2010) 34(5) Accounting, Organizations and Society 551. 59 SP Walker, ‘The Defence of the Professional Monopoly: Scottish Chartered Accountants and “Satellites in the Accountancy Firmament” 1864–1914’ (1991) 16(3) Accounting, Organizations and Society 257, 268. Edwards et al, above n 44, 229, also comment that during the pre-organisational period, the ‘professionalisation process is marked by “signals of movement” . . . [with] an occupational group achieving greater economic reward and perceived respectability as the result of an enhanced degree of public recognition of the societal value of the services it offers’. 60 Above n 56, 19. 54

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cognitive dominion by using abstract knowledge to annex new areas, to define them as their own proper work’.61 He sees challenges to jurisdictions as beginning in two general ways: ‘by external forces opening or closing areas for jurisdiction and by existing or new professions seeking new ground’. This abstract knowledge62 comprised ‘a mastery of the techniques and outputs from a system of double entry bookkeeping’, which practitioners then ‘modified . . . to fulfil new purposes, analysed and interpreted its outputs and developed its potential for generating financial information capable of fulfilling a variety of different purposes’,63 such as accounting, auditing, company registration and annual returns, various aspects of bankruptcy, valuation and financial agency. As is now clear, that abstract knowledge also included income tax. The swift colonisation of an emerging or unclaimed area, as exemplified above, appears as a trait of the accounting profession’s continued willingness to develop in more modern times. For example, Dezalay comments,64 in relation to tax law consultancy in Europe, that this was an area ‘left fallow’ by lawyers, although one which theoretically fell into the legal domain, because it ‘was disdained by top European lawyers, and . . . as a consequence, was progressively appropriated by accountancy firms’. The reason was that this type of work was seen as not respectable and on the fringes of what the higher levels of the continental legal profession deemed acceptable. Accounting, to which this area was seen as connected, had been viewed as a craft allied with trade, conferring no social status on the practitioner, whereas the practice of law conferred considerable social prestige. Ironically, by involvement in trade and at an international level, accountants acquired a comfortable life, enhanced professional standing and thus access to a higher social status.

T H E R E S P O N S E BY A U STR A LIA N A C C OU NTA NTS

As convicts, military and free settlers were first transported from the UK to Australia in the late eighteenth century, British traditions of accounting appeared to accompany them. In his history of the Australian accounting profession, Linn65 noted that bookkeeping underpinned the growth of trade and commerce in the new colony. Ready money was scarce and accounting for (at times complex) barter transactions was necessary. Based 61

Ibid, 102. Edwards et al, above n 47, 71. 63 Ibid, 75. 64 Y Dezalay, ‘Territorial Battles and Tribal Disputes’ (1991) 54(6) Modern Law Review 792, 795. 65 R Linn, Power, Progress and Profit (Melbourne, Australian Society of Certified Practising Accountants, 1996). 62

The Taxation Profession in the UK and Australia 433 on his review of the ledgers of early traders and government officials, Linn66 found that in 1805 John Macarthur purchased 100 ‘of the finest wooled ewes’ for £200 from the government flock and paid for them with grain, whilst Mr Simeon Lord purchased foodstuffs, consumables and other items from the firm of Cooper & Levey and paid for them by promissory notes, soap and property rent. Similarly, Parker67 cited an advertisement in the Sydney Gazette on 21 October 1824, almost two decades later, in which the Australian Brewery in Sydney offered beer in exchange for: lard and salt, kangaroo skins, houses and eggs, grain and hemp, cattle and sealskins, sheep and fish oil, horses and sawn timber, cedar logs and pigs, pork and shingles, flax and poultry, tobacco and wattlebark, cheese and wood, candles and laths, fuel and soap, shoes and coals, hides and Spanish dollars, etc, etc, etc.

This growth in ‘bookkeeping barter’68 largely occurred because there was no government treasury issuing money and, until 1817, no private bank with a note issue.69 Hence almost anything served as a means of payment.70 The importance of bookkeeping skills in the new colonies was evident as early as 1804, with private schools routinely advertising in The Sydney Gazette71 of their teaching prowess in this regard: ‘the Pupil . . . will be taught to read, speak and write the English Tongue with accuracy and propriety, Book-keeping, Geometry, Trigonometry, and Mensuration practically applied in Navigation, Surveying, Gauging, etc . . . Geography, History and Astronomy . . .’ Accounting was thus recognised as an essential and esteemed element in the building of the new colonies. For example, in 1842 in Adelaide— only six years after settlers arrived—11 men listed their occupation as accountants (eight in practice, two with banks and the other with government).72 Yet, for many accountants in this era, having more than one vocation was the norm, with many being engaged as commission agents engaged in winding up estates and collecting debts. Notwithstanding their distance from Great Britain, accountants in Australia were not unaffected by the establishment of professional bodies in the UK in the mid-nineteenth century. By the mid-1870s there were proponents in Australia for the establishment of an accountants’ organisation that could issue certificates of competence to practitioners who 66

Ibid, 14–15. RH Parker, ‘Bookkeeping Barter and Current Cash Equivalents in Early New South Wales’ (1982) 18(2) Abacus 139, 141. 68 Ibid, 139. 69 The Bank of New South Wales formed in 1817 was the first private bank established in Australia. 70 Parker, above n 67, 141. 71 19 August 1804, cited in Parker, ibid, 150. 72 Linn, above n 65. 67

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had shown, through examination, their proficiency. There was considerable resistance from some who felt there was ‘simply no room for an exclusive club of select individuals’.73 It was not until 1885 that the first Australian accountants’ organisation, the Adelaide Society of Accountants, was formed, with its 19 foundation members being well known in Adelaide commercial, financial and banking circles. Its first president, JB Spence, was Commissioner of Public Works and a member of the Legislative Council. As Linn described it,74 Australian accountants had inherited the British model of a professional institution from which to build their own. However, the truth was that, even in the 1880s, Adelaide was a relative backwater compared with Melbourne, then hailed as Australia’s commercial capital.75 Earlier efforts to establish a professional body of accountants in Melbourne had been unsuccessful, and another attempt was made in 1885 by Charles Cooper, who claimed to be the Victorian Secretary and Commissioner, by appointment, of the Society of Accountants, London. Mr Cooper claimed to be attempting to ‘further the interests of practitioners, as well as protecting their profession and the public from the ne’er-dowells who leeched the accountancy system’.76 A preliminary gathering was held in Melbourne on 3 December 1885 with 22 men in attendance, from whom a committee of six was formed to examine Cooper’s proposal more closely. Whilst the Australians shared the beliefs of the Society of Accountants, London, there was no evidence that Cooper held such an appointment. There were also reservations about being a branch of an English society as opposed to being a self-determining colonial body. The fact that Australia was experiencing a long period of sustained prosperity (1860–90) and experiencing the highest standards of living at the time had not gone unnoticed in Britain and relationships were being reassessed.77 After a series of meetings and much debate, the Institute of Accountants in Victoria was incorporated on 1 March 1887, with 45 foundation members (41 being immigrants and at least 12 specifically stated to be engaged in fields other than accounting, including sailor, grocer, builder and butcher).78 The objectives of the new body included the elevation of the profession, the encouragement of sound practice and education; the prevention of illegal and dishonourable practices; the settlement of professional differences in a friendly, professional manner; and the promotion of good feeling and friendly intercourse among members.79

73

Ibid, 54. Ibid, 58. 75 Carnegie and Edwards, above n 55. 76 Linn, above n 65, 59. 77 WF Chua and C Poullaos, ‘Re-thinking the State Dynamic: The Case of the Victorian Charter Attempt, 1885–1906’ (1993) 18(7–8) Accounting, Organizations and Society 697. 78 Carnegie and Edwards, above n 55, 306–07. 79 Linn, above n 65, 64. 74

The Taxation Profession in the UK and Australia 435 Other bodies followed shortly thereafter, including the Queensland Institute of Accountants in 1891 and the Sydney Institute of Public Accountants in 1894. Cooper80 described the growth of accounting professional bodies in Australia from the late nineteenth century until the mid-twentieth century as ‘prolific’. The UK Society of Accountants and Auditors set up branches in Melbourne and Sydney, and the ICAEW (though always based in London) closely monitored the activities of the professional bodies in Australia. Hence, historically the ties were close between the Australian associations and their UK counterparts.81 Linn82 explains that these bodies early on established examinations (typically in auditing; bookkeeping and partnership; executorship and general accounts; the rights and duties of liquidators, trustees, receivers and arbitrators; and the general principles of mercantile law and the law relating to bankruptcy and joint stock companies) and entrance requirements to help establish prestige and provide a measure of quality for the general public. In 1899 there was discussion as to whether women should be allowed as members, but this was short lived, as by mid-1900 each of the Australian institutes had decided against it. Although the ICAEW did move in 1908 to admit women, their Australian counterparts resisted, until Mary Addison Hamilton became the first female member of a professional accounting body in Australia in 1915, when she was admitted to the Institute of Accountants and Auditors of Western Australia.83 This may have been in part due to the fact that attention was greatly diverted to the newly established Commonwealth of Australia in 1901 and calls for the forming of an Australasian Institute of Accountants. This was accompanied by great tension, as practising and non-practising accountants and their rival institutions fought for power (ie the granting of a Royal Charter) and location (ie Melbourne or Sydney).84 Two main bodies emerged in this era—the Incorporated Institute of Accountants Victoria (formed in 1886) and the Australasian Corporation of Public Accountants (formed in 1907). These bodies became the key antecedent bodies of the two dominant accounting bodies in Australia today—namely, CPA Australia (formed in 1990) and the ICAA (formed in 1928 upon receiving a Royal Charter).85 Linn86

80 K Cooper, ‘Mary Addison Hamilton, Australia’s First Lady of Numbers’ (2008) 13(2) Accounting History 135, 142. 81 Chua and Poullaos, above n 77, 700. 82 Linn, above n 65, 79. 83 Cooper, above n 80, 135. 84 Ibid. 85 GD Carnegie, JR Edwards and BP West, ‘Understanding the Dynamics of the Australian Accounting Profession’ (2003) 16(5) Accounting, Auditing & Accountability Journal 790, 791. 86 Linn, above n 65, 93.

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contends that the bad blood that was evident in these early manoeuvres for a unified accounting body is still felt today, though in more subtle forms. The pursuit of a Royal Charter was to be a 25 year battle, with three attempts being made.87 It was seen as a significant achievement in gaining status as a ‘profession’ but precluded those not in public practice from undertaking work that should only be performed by ‘public’ accountants. A Royal Charter denoted some degree of exclusiveness.88 Apart from much local opposition (from those who would be excluded from membership because they were not in public practice), members of the ICAEW expressed concerns about the quality of Australian accountants, which also served to prolong the battle.89 After World War I, with growing concern over the state of the economy, taxation was prominent on the agenda of the accounting profession, with calls in 1922 for salvation from industrial ruin ‘by the first step of reduction of Parliamentary salaries, abolition of useless departmental fripparies [sic], and immediate relief from taxation of incomes’.90 By the mid-1920s taxation had become one of the principal targets of accountants as they sought to warn the community and governments of the problems with the Australian economy, including the fact that taxation had made ‘heavy inroads’ into business.91 By 1936 the Commonwealth Institute of Accountants92 was receiving recommendations to set special examinations for postgraduate candidates in fields such as taxation (and also cost accounting, bankruptcy, banking principles and practice, methods of floating and financing companies, and the laws relating to the compilation of prospectus), and for the institute to expand its ambit to contain these specialists (some of whom had formed their own separate organisations). By the 1960s the UK influence on the Australian accounting profession had shifted, as America was becoming more influential in terms of

87 GD Carnegie, ‘The Development of Accounting Regulation, Education, and Literature in Australia, 1788–2005’ (2009) 49(3) Australian Economic History Review 276, 286. 88 Chua and Poullaos, above n 77, 700. 89 Cooper, above n 80 145. 90 Federal Institute of Accountants, New South Wales, minutes 31 January 1922, 36x–37x, cited in Linn, above n 65, 112. 91 Linn, ibid, 113. 92 In 1952 the Commonwealth Institute of Accountants merged with the Federal Institute of Accountants and the Association of Accountants in Australia to become the Australian Society of Accountants (renamed as the Australian Society of Certified Practising Accountants in 1990 and renamed again in 2000 as CPA Australia). The National Institute of Accountants (its earliest antecedent body began in 1923 in Melbourne as The Institute of Factory and Cost Accountants) represents over 22,000 members and students in 51 countries: National Institute of Accountants (NIA), 2010, Annual Report, available at http://www.publicaccountants.org.au/media/119596/nia_2009-10%20annual%20report_100.pdf (accessed on 28 October 2011). The NIA became the Institute of Public Accountants in 2011.

The Taxation Profession in the UK and Australia 437 accounting thought and practice.93 There is evidence of US influence, however, even in the 1920s, with the writings of AW Mellon (then US Treasury Secretary) in 1924 on ethics in tax practice being reproduced in Australian accounting journals.94 At the time, The Public Accountant95 reported that ‘the question of the desirability of restricting income tax work to qualified practitioners has often been raised in our columns’. Yet in Carnegie’s96 detailed review of the history of the Australian accounting profession, there is no acknowledgement that taxation is part of the domain of the accounting discipline. In Linn’s history of the Australian accounting profession, taxation receives no mention from 1937 until the 1970s. Peter Agars—later a president of the Australian Society of Accountants and the first Australian to be President of the International Federation of Accountants—believed that the profession started to mature in Australia in the 1970s and taxation became a significant issue. It was claimed that the profession developed a conscience, which it had not had previously, over tax avoidance in the 1970s.97 The 1970s was also the era in which the two main accounting professional bodies shifted from running their own qualifying examinations to requiring new members to hold a recognised tertiary qualification.98 In 1973, the Australian Society of Accountants prepared a submission on taxation issues for the Commonwealth government—and ‘there were those who greeted the move as one of the most advanced manoeuvres in the history of Australian accounting’.99 At the same time in the UK, the accounting profession’s relationship with government was becoming increasingly significant.100 However, even in the early 1980s there was still some antipathy felt by the public towards accountants, who were perceived to have contributed to the massive tax avoidance schemes of the 1970s. Some leaders of the professional bodies at the time thought this might be addressed to some extent by another attempt (after a failure in the late 1960s) at unifying the two major professional bodies (by the 1970s there were really only two 93 JM Greenwood, ‘The Integration of Taxation and Accoutancy Principles in Commonwealth Income Tax’, 7th Commonwealth Institute of Accountants Annual Research Lecture, University of Adelaide, 16 April 1951, 38; Carnegie, above n 87, 277. 94 LD Parker, ‘An Historical Analysis of Ethical Pronouncements and Debate in the Australian Accounting Profession’ (1987) 23(2) Abacus 122; see also The Public Accountant, 28 March and 28 April 1924. This was the quarterly periodical of The Corporation of Accountants in Australia, an antecedent body of the ICAA. 95 28 March 1924, 283. 96 Above n 87. 97 Agars, cited in Linn, above n 65, 186. 98 K Allen, ‘In Pursuit of Professional Dominance: Australian Accounting’ (1991) 4(1) Accounting, Auditing & Accountability Journal 51, 62. 99 Linn, above n 65, 187. 100 T Lee, ‘The Professionalization of Accountancy: A History of Protecting the Public Interest in a Self-interested Way’ (1995) 8(4) Accounting, Auditing & Accountability Journal 48, 62.

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major institutes remaining—the Australian Society of Accountants, which later become CPA Australia, and the ICAA, formed in 1928). Attempts at unification in 1975, 1981 and 1991 also failed. Allen101 attributed (at least the early failures) to vehement opposition from ICAA members who valued the symbolism inherent in the label ‘chartered accountant’. The failure of unification in 1981 was again attributed to ICAA members (who had successfully completed the rigours of Professional Year requirements), who refused to countenance the idea of unification with colleagues whom they perceived to be ‘less professional’. The last failure, by the smallest of margins, was again attributed to ICAA members, and specifically to those in small practices who were able to cast two votes—one as members and the other as holders of a practising certificate.102 Allen103 makes the interesting point that the pursuit of integration of the two main accounting bodies to create professional dominance could be counterproductive as the diversity of membership could lead to the breakaway of special interest groups.

T H E E M ER GENC E OF SPEC IA LIST TA X PR OF ESSIONA L BODIES

It is clear from the above discussion that historically there was a strong demand in both the UK and Australia for tax technical services that was being met by both accountants and lawyers. How, then, did a need arise for separate tax professional bodies (from accounting bodies) in both countries?

Tax Professional Bodies—UK The context of the formation of the IOT in 1930 shares many of the features associated with the formation of the ICAEW in 1880. The idea that established practitioners are important in the development of a professional body is reflected in the fact that the founders of the IOT in 1930 were established professional men. Seven104 were accountants of one sort or another, one was a barrister105 and five were ex-/current Revenue men.106 Some founders were both accountants/barristers and ex-/current

101

Above n 98, 58. Linn, above n 65, 201. 103 Above n 98, 58. 104 E Edward Boyles, Roger Carter, Whorlow Legge, Cecil Newport, Adam Murray, Stanley Spofforth and Walter Smee. 105 Roy Borneman. 106 Ronald Staples, Gilbert Burr, Gordon Howard, AV Tranter and HA Silverman. 102

The Taxation Profession in the UK and Australia 439 Revenue men.107 There can seldom have been a better subject-qualified group of people forming a professional body. The main objects of the new body were to ‘promote the study of taxation, hold examinations, facilitate the exchange of information, make representations and establish and maintain a high standard of conduct’.108 Jeffrey-Cook109 suggests that the formation of a ‘professional association for persons engaged in taxation’ was discussed ‘no doubt because registration of accountants by law in order to bar unqualified persons was again topical’. While there was no problem about the type of work involved in this instance (it was all tax), unlike in the formation of the ICAEW, there was a similar problem about the type of people undertaking it. The Revenue Act 1903, section 13 had allowed accountants (as well as solicitors and barristers) to appear in income tax appeals. ‘Accountant’ in this context was defined as someone who had been admitted as a ‘member of an incorporated society of accountants’,110 of whom several bodies again existed as a result of the ICAEW elitism referred to above. For example, there was the Society of Incorporated Accountants, formed in 1885, and also the London Association of Accountants Ltd (incorporated in 1904), which eventually became the Association of Chartered Certified Accountants. It was not difficult for the unscrupulous to obtain a certificate and become a member of such a body and so become involved in the practice of tax. Both ICAEW members and the legal profession felt that such persons did damage. However, another feature of the times was that bodies were also being formed for more specialist types of accounting work, such as the Institute of Cost and Works Accountants in 1919. That taxation too required specialist knowledge has been demonstrated. The formation of a taxation body might also be interpreted as part of a wider move towards further specialisation in the financial professions, in cases where the development of a new body of knowledge was being recognised. The new Institute will act as a central point for the collection and dissemination of information relating to taxation and will provide facilities for the exchange of views and the intelligent study of the subject. The rules regarding admission, it is stated, will be enforced rigidly and no ‘loop-hole’ will be left for the unqualified seeker after advertising opportunities.111

107 J Jeffrey-Cook, ‘The Institute of Taxation’ [October 2005] Tax Matters—Souvenir Supplement to Tax Adviser 2, 2. 108 J Jeffrey-Cook, ‘A Short History of the Institute of Taxation’ [December 1990] Taxation Practitioner ii, ii. 109 J Jeffrey-Cook, ‘The Institute’s History I: Formation—1930’ [January 1991] Taxation Practitioner 14, 14. 110 Ibid, 14. 111 Anon, above n 41.

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A result of lack of definition of the exact nature of an accountant’s work meant that accountants had expanded into new (and profitable) work domains, which created sub-groups who had a particular interest, like tax, and who wished to maintain a reputation for high-quality work. In a sense, the formation of the IOT was a reverse process of the usual process of professional body formation, as, instead of drawing together different local/regional individual bodies into one (as had happened in the formation of the ICAEW), it drew out members from different existing professions— chiefly accountancy, law and the public sector (Inland Revenue)—into one body which was always intended to operate at national level. As the writer of a 1931 Taxation article wrote: the organisation [IOT] is in no way set up in competition with existing bodies of professional accountants. . . . The aim is to act in an ancillary capacity and one of the qualifications for membership of the Institute of Taxation is membership of one of the older bodies. The work of the accountancy organisations is necessarily based upon a much broader foundation and membership of the new body will be available only to those members of the profession who specialise in taxation and possess the necessary qualifications.112

It seems clear that the IOT founders saw it as a ‘second tier’ professional body, for those who came to tax chiefly via accountancy and law. This was mirrored in its admittance procedures. Although the IOT introduced its own examinations (thus offering a ‘first tier’ qualification), and the first were taken in 1932,113 it used a ‘grandfather’-type clause to accept members who had passed examinations of bodies of which it approved and who also had five years’ practical experience, and did not impose a requirement for members to pass its own examinations until 1965. The majority of members in early years were accountants,114 which, given earlier discussions here, is not surprising. The idea of a ‘second tier’ profession also meant that certain issues faced by other bodies, such as social mobility, appropriate types of work and multiple business operations, had already been addressed by members being drawn from existing professional bodies, so were ‘non-considerations’ at this stage. Someone joining the IOT was unlikely to find a fellow member being a pawnbroker or manure merchant, for instance. The accountancy and law bodies did not share the sanguine view of the 1931 Taxation writer that the IOT would be an ancillary, second tier body. In subsequent years, the institute tried a number of times to obtain a Royal Charter (the ultimate confirmation of professional status, recognised both by other professions and the public). Attempts in 1952 and 1972 failed— 112

Ibid. J Jeffrey-Cook, ‘The Institute’s History II: Pre-incorporation 1930–1934’ [March 1991] Taxation Practitioner 124, 124. 114 Ibid. 113

The Taxation Profession in the UK and Australia 441 in 1952 because of doubts over whether a separate taxation profession existed, and, if it did, over its likely threat to the existing accountancy and legal professions;115 and because taxation was (and, indeed, remains) a mixture of law and accountancy, and was dealt with satisfactorily by existing law and accountancy bodies, from which most IOT members held a professional qualification anyway. The 1952 petition for a Royal Charter was opposed by all the main law and accountancy professional bodies, chiefly the ICAEW. An additional reason for opposition in 1952 was that granting a Charter would mean that those possessed of the first level of the institute’s qualification (then ATII) and no other would be tempted to offer unqualified legal and accountancy advice. It would harm members of the other bodies who did not join the IOT and was not necessary, as the institute could continue to do good work without it.116

Tax Professional Bodies—Australia Regulation of tax agents has long been the practice in Australia. Prior to the introduction of the national Tax Practitioners Board in 2009, the provision of tax services was regulated at state level with Queensland being the first state to enact legislation to regulate tax agents in 1922, with the other states following shortly thereafter.117 At the time there was only one tax-specific professional body, known as the Taxation and Tax Agents Institute (absorbed by the TIA late in 1943), though it appears that tax agents tended to belong also to one of the two main accounting bodies. The earliest tax-specific body in Australia appears to be Taxpayers Australia Inc, the first of its antecedent bodies being established in 1919 (originally as six state-based Taxpayers’ Associations). The Associations were originally formed by groups of businessmen who were concerned that the federal government would renege on its promise to eliminate the new income tax which had begun in 1915 to raise money to fight World War I.118 Thus it was originally a lobby group rather than a professional body, though its activities today are broader. In early 1943, Harold Rupert Irving, a Sydney-based practising accountant (formerly an employee of the Taxation Department) and member of both the main accounting professional bodies, became increasingly concerned about the urgent need for greater dissemination of pertinent tax information among tax agents. Even in those days the 115

G Stephens, ‘Report re: Royal Charter’, John Jeffrey-Cook, Personal Papers (1980). There is no scope in this chapter to examine the IOT’s progress towards obtaining a Royal Charter. 117 Fisher, above n 9, 396. 118 http://www.taxpayer.com.au/about/taxpayers-australia#history (accessed on 3 November 2011). 116

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ramifications and complexities of tax laws and their administration were regarded as becoming ‘increasingly burdensome’.119 Irving and some of his co-founders, including C Montague (Monty) Orr, felt that in 1943, in spite of several professional journals which included a segment on taxation matters, there was the need for a specialist body to be concerned with the interests of registered tax agents. Irving envisaged a separate and professional Institute of Registered Tax Agents. He organised a meeting in the office of the Taxpayers’ Association of New South Wales on 16 July 1943, with 12 men recorded present, eight of whom were members of the ICAA, two were members of the antecedent body of CPA Australia and the remaining two (TJ Russell and JM White) were without designations. Thus the majority clearly were professional accountants. A provisional Council was formed of the new Institute of Registered Tax Agents and RA Irish was elected its inaugural President. Irving held the position of Secretary continuously until it was redesignated as Executive Director from 1 January 1983, and he resigned from 30 June the same year after an ‘astounding 30 years as the chief executive officer of our Institute’.120 Irving wrote a detailed manuscript of the first 40 years history of the institute, which is relied on heavily in this chapter.121 The inaugural rules of the institute provided for payment of an entrance fee and an annual subscription.122 At the end of first financial year (30 June 1944), there were 301 Ordinary Members and 37 Associate Members.123 The primary objects of the institute were: • to protect the interest of practitioners; • to distribute information relative to taxation law and practice and departmental procedure of particular interest to tax agents; and • to encourage and maintain a high ethical standard amongst Registered Tax Agents, inter alia, by the prohibition of advertising, canvassing, touting or accepting ‘contingent fees’.124 The issue of advertising gained considerable importance early on for institute members as they aspired to establish ethical standards befitting 119 HR Irving, ‘A Forty-Years History of the Taxation Institute of Australia’, unpublished manuscript (1985), 1. 120 I Gzell, ‘Yesterday, Today and Tomorrow’, The Harold R Irving Endowed Lecture, 11th National Convention, Taxation Institute of Australia, 2 May 1993, 23. Gzell (2) states that Irving was born in 1899 and educated in Melbourne. He was a Fellow of the ICAA and a Fellow of the Australian Society of CPAs, of which body, under its old name, he was Australian President from 1967 to 1968. Harold was awarded the Queen’s Silver Jubilee Medal in 1977 and received the Order of the British Empire in 1979. Note that in his manuscript Mr Irving has not recorded that he was a member of any of the antecedent bodies of CPA Australia in 1943. 121 Irving, above n 119. 122 Ibid, 3. 123 Ibid, 4. 124 Ibid, note 2.

The Taxation Profession in the UK and Australia 443 a tax professional. In 1943–44, Irving125 reported that it was noticed that various persons advertised in the daily press in relation to their practice as registered tax agents whereas the institute’s rules prohibited advertising by its members. The outcome was that the Federal Treasurer was requested to amend the tax legislation to prohibit any tax agent from advertising. Not surprisingly, these representations apparently ‘fell on deaf ears’.126 The institute’s first lecture was delivered in Sydney on 27 March 1945 by JM (Jim) Greenwood (ACA) on the subject of ‘Valuation of Trading Stock for Income Tax Purposes’. The lecture was later delivered also in Melbourne, arousing considerable interest in the commercial community throughout Australia. In its first year, the Institute of Registered Tax Agents lobbied the federal government on tax reform measures, including the unjust system of rebates for concessional deductions127 and the abolition of double taxation of company profits.128 Questions were also raised with the Tax Commissioner on the issue of Income Tax Orders, or at least of decisions on taxation matters of general interest that could benefit tax agents in the nature of ‘guiding principles’, though the Commissioner was not swayed by these arguments.129 A Special General Meeting was held on 30 September 1946 and a new constitution and rules adopted to establish the institute on an Australianwide basis. Another important effect of the adoption of the new Rules was the alteration of the name ‘The Institute of Registered Tax Agents’ to ‘The Tax Institute of Australia’, in order to widen the scope of the organisation so as to enable it to operate as a professional body of persons specialising in taxation, or professionally interested therein, along the lines of the English Institute of Taxation. Provisions were also included in the new Rules enabling the Institute to conduct examinations and issue designatory degrees to members (Fellows, Associates and Licentiates).130

The retiring Council was re-elected at this same meeting. Of the 12 members of the Council, nine were members of the ICAA and the remaining three were members of antecedent bodies of CPA Australia. Five were also recorded as members of Chartered Institute of Secretaries (England).131 None of these early councillors was apparently a lawyer: all appeared to be members of the accounting profession. However, it is noted that Irving

125 126 127 128 129 130 131

Ibid, Ibid, Ibid, Ibid, Ibid, Ibid, Ibid.

7–8. 8. 20. 21. 14–16. 40.

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records that Mr Greenwood132 stepped down from his position on the institute’s advisory panel ‘owing to pressure of his professional duties and a number of other honorary positions, together with his legal studies’.133 Indeed, the dominance of accountants in the emerging tax profession in Australia is made explicit by Irving134 in recording the following: Although it caters incidentally for other people, the main body of the members of the Institute are accountants who are registered tax agents. A proportion of these people are specialising in taxation as a branch of the accountancy profession, but perhaps the majority carry out their taxation work in conjunction with and incidentally to their general accountancy practice.

This emphasis on tax as a specialisation is also evident in 1947–48 whereby members of the General Council, in discussing a proposed rule change (on the conduct of examinations and issue of designatory degrees to Members—Fellows, Associates and Licentiates),135 submitted a range of points for the consideration of members. One of the points made was as follows: ‘[w]hilst proficiency in taxation cannot be attained by a person who is not a competent accountant, it by no means follows that a competent accountant is a competent taxation specialist’.136 From its inception, the Institute of Registered Tax Agents was very active in lobbying the government for tax reform. For example, Irving records137 that in 1947–48 a ‘copy of the Council’s proposals138 was forwarded to each Member of the Federal Parliament, the Associated Chambers of Manufactures, the Associated Chambers of Commerce of Australia, the Liberal Party of Australia, the Australian Country Party and the Australian Labour Party’. Irving139 also describes that in 1951–52 the institute’s ‘objects’ fell into two broad categories, namely, ‘educational’

132 James Merewyn Greenwood graduated from the University of Sydney with B Laws in 1950. He co-authored several leading tax texts, including with JAL Gunn and Neville E Challoner. The original accounting firm of Greenwood Challoner & Co was established in the 1930s and is an antecedent body of Greenwoods & Freehills (G&F), currently Australia’s largest specialist tax advisory firm (advising exclusively on revenue law). G&F is an incorporated legal practice regulated by The Law Society of New South Wales and a practice company under the auspices of the ICCA. 133 Irving, above n 119, 44. 134 Ibid, 50–51. 135 This was provided for in the new Constitution and Rules adopted on 30 September 1946. However the Council decided to refer to members whether or not these rules should be implemented. The voting was equal (Special General Meeting held 11 June 1948) so the motion (to issue degrees) was lost. 136 Irving, above n 119, 54. 137 Ibid, 57. 138 The Council’s proposals were in respect of simplification (including a system of selfassessment; the merging of the Social Services Contribution and Income Tax so as to avoid the then-differential rates; and the imposition of tax at a common rate irrespective of the source of income). 139 Above n 119, 125.

The Taxation Profession in the UK and Australia 445 and ‘protective’. He goes to record that the Council’s future work would probably be in: endeavouring to ‘protect’ its members from the ever-increasing legislative and administrative demands which were being made upon them . . . which rendered necessary more than ever an organisation which could speak on behalf of the profession as a whole. The Council reported that it would not hesitate to accept that responsibility with due recognition of its obligations to Government, the administration and the community generally. Whilst the Council valued the cordial relationship which existed with other Institutes, many of the prominent members of which were members of the Council, it was felt that the Institute is the only body which caters for the protection of Registered Tax Agents.

In contrast, the ‘educational object’ of the institute appeared considerably less ambitious. For example, in this regard, Irving140 recorded that ‘members could assist by making available to the council for inclusion in Circulars particulars of decisions issued by the Commissioner, the Taxation Boards of Review and the various Courts, on matters of common interest’. In 1952–53 there were 12 members of General Council, including the first councillor to have qualifications in law (Mr Neville E Challoner LLB, ACA).141 By 1954–55 the institute had 1,177 ordinary and 200 commercial members.142 The institute had been very active in making submissions on tax reform to government, but without effect. Irving143 records that: The predominating note in the submissions reviewed was an expression of the council’s grave concern regarding the inaction of the Government in the many matters which have been brought under the notice of the Federal Treasurer during a period of some years. Not one satisfactory reason or explanation had been given as to why the Government was apparently unwilling to implement any of the recommendations which had been made and all of which, in the opinion of council, were either desirable or very essential.144

The lack of response by the government continued to be contentious, with Irving145 recording that in 1955–56 the Council has been seeking an annual meeting with the Treasurer since 1950 without success. The Treasurer at the time (Sir Arthur Fadden) rejected their request on 5 April 1955 and advised that he was ‘well acquainted’ with the submissions made by Council and that they would not be ‘materially advanced’ by having a meeting. Further, he (the Treasurer) ‘would communicate with

140

Ibid. Ibid, 127. 142 Ibid, 182. 143 Ibid, 211. 144 These included reforms on the valuation of livestock; the disposal of depreciated property; and calls for the abolition of payroll tax (Irving, ibid, 175). 145 Ibid, 220. 141

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Council should he require any further information on any of the matters referred to’.146 On 23 July 1954, a suggestion was made by the Tax Institute Council to the Federal Treasurer that section 186 of the Income Tax Assessment Act should be amended so as to require the Commissioner to advise a taxpayer of his reasons for disallowance of an objection at the time of conveying the decision instead of when the matter had been referred to a Board of Review for review. It was noted147 that the Law Council agreed with this suggestion, this being the first evidence of involvement from a law professional body. It is likely that the TIA Council felt their argument might carry more weight with the Federal Treasurer with the support of the Law Council. The interest by lawyers in tax matters appeared to continue, with a change to the Articles of Association of the TIA recorded in 1959–60: After much consideration the Council decided, subject to the approval of Members, that a Practising Barrister and/or solicitor should be eligible for Ordinary Membership instead of only Commercial Membership as previously. Many such persons are actually engaged in the profession of taxation, although they are exempted from registration as tax agents if they do not prepare returns’ and that ‘if this amendment were adopted, such persons would be automatically eligible for appointment to the General or State Council’.148

The Special Resolution was adopted unanimously at the Extraordinary General Meeting held on 21 June 1960.149 At the Annual General Meeting held on 18 October 1960 (ie the year 1960–61) the first non-accountant on General Council—Mr FW Millar LLB of Mssrs Allen, Allen & Hemsley— was appointed.150 Irving’s recording of the history of the TIA concludes in 1982–83, well after his last year on General Council (ie 1975–76).151 A subsequent update on the history of the TI was delivered by IV Gzell QC at the TIA’s 11th National Convention on 2 May 1993.152 Gzell highlighted the active engagement of the TIA in making representations (with flair and varying degrees of boldness) to the government in the 1940s and early 1950s, and its relative lack of success. He notes153 that it was to the credit of the institute that it continued to push for reform in the 1950s notwithstanding the lack of enthusiasm from the Treasurer. Other approaches were then tried, including gaining the support of the Commissioner of Taxation and 146 147 148 149 150 151 152 153

Ibid. Ibid, 239. Ibid, 335. Ibid, 336. Ibid, 365. Ibid, 618. Above n 120. Ibid, 10.

The Taxation Profession in the UK and Australia 447 of the Law Council of Australia, both of which were forthcoming but to little avail at the time. Depressing as this picture appeared, the TIA continued with its aggressive submissions for decades.154 Fifty years after the founding of the TIA, Gzell155 explained that the TIA was brought into existence to answer a need for representation of registered tax agents and it continued to serve that role: ‘it has established itself as a non-partisan expert body disseminating information to its members, performing a highly technical function in continuing education, and bringing forward to Government disinterested submissions of weight and substance’. It thus appears that, as a professional body, the TIA has long had a clear and sustained focus on tax policy and tax reform, rather than simply enabling its members to act as professional service providers. This interest by tax professionals in tax policy and tax reform may be at the heart of why the mainstream accounting professional bodies in the 1940s did not appear to meet the need of tax professionals adequately, hence the genesis of the TIA. Further evidence to support this conclusion can be found in the archives of the ICAA and CPA Australia and their various antecedent bodies, but this is outside the scope of this chapter.

C ONC LU SION

This chapter has attempted to look at the involvement of accountants in the development of the tax profession, both in the UK and in Australia, from which followed in time the establishment of professional tax institutes in both countries. The permanence of income tax (in the UK) and complexity and increasing volume of legislation in both countries led to a demand for tax specialists, though this occurred much later in Australia. It appears that the developing area of giving tax advice was colonised particularly by accountants, as they expanded their professional domain by acquiring and applying new knowledge, (although the law profession was also active—a topic that is not considered in this chapter). As the chapter has shown, there were considerable similarities between the two countries in the establishment of multiple accounting bodies, often competing, which experienced similar issues about whom to include or exclude as members (because of the type of practice undertaken or because individuals were considered unscrupulous ‘scaff and raff’), which likewise affected the first tax institutes’ members in terms of ‘grandfather’-type problems. Both countries saw accountants actively engaged in the formation of professional tax bodies as the need for high-quality tax 154 DG Hill, ‘In the Beginning—The First Ten Years’ [July 1985] Taxation in Australia 3, 4. The late Honorable Justice DG (Graham) Hill was president of the TIA from 1984 to 1985 and served as a judge of the Federal Court of Australia from 1989 to 2005. 155 Above n 120, 26.

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advice escalated. The education of future specialists also ranked high on the list of priorities for both countries. In the UK, the tax profession was conscious of drawing practitioners from other professions (accounting and law, chiefly) into an elite ‘second tier’ profession, but this was not the case in Australia, which quickly followed a route of registration as a way of excluding the ineligible. Developments in Australia were characterised by considerable inter-state rivalries, which effectively deferred the development of a tax professional body, whereas in the UK there was post-event antipathy from the wider professions from which founding members were drawn. Overall, though, the similarities between the two countries experiences are striking.

14 When Accounting and Law Collide: The Curious Case of Pre-1914 Dividends in Australia LYNNE OATS AND PAULINE SADLER

A BSTR A C T The first Australian federal income tax was introduced in 1915 and for individuals brought within the new income tax, which had a 30 June fiscal year, exemption was provided for income derived prior to 1 July 1914. In recognition of the fact that dividends distributed by companies could well be out of profits earned during an earlier financial year, a further exemption was provided for dividends paid out of undistributed income accumulated ‘prior to the commencement of the Act’. This seemingly simple exemption nonetheless proved to be problematic, largely as a result of the inventiveness of taxpayers and their professional advisors, until its eventual repeal in 1936. This paper explores this curious provision as an encounter between law and accounting. The concept of accumulated profits, definition of which was necessary to the exemption of dividends paid therefrom, is an accounting issue enshrined in law. As such, it provided grist to the ‘creativity’ mill at the boundary between tax planning and tax avoidance, and highlights the difficulties that arise when accounting concepts are imported into tax legislation.

I NTR ODU C TION

T

HE FIRST AUSTRALIAN federal income tax was introduced in 1915 as a result of the need to raise additional revenue to finance Australia’s war effort. Companies were liable to income tax on their taxable profits, but allowed a deduction for dividends paid, so as not to interfere with investment in company shares. For individuals brought 449

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within the new income tax, which had a 30 June fiscal year, exemption was provided for income derived prior to 1 July 1914. In recognition of the fact that dividend distributions by companies could well be out of profits derived during an earlier financial year, a further exemption was provided for dividends paid out of undistributed income accumulated ‘prior to the commencement of the Act’. This seemingly simple exemption was clearly designed to place individuals deriving income by way of corporate distributions on the same footing as those deriving income directly in terms of the temporal dimension of the commencement of the new income tax. It nonetheless proved to be problematic until its eventual repeal in 1938. The exemption provides an illustration of the difficulties in translating provisions designed to achieve equitable purposes into workable and failsafe legislation.

BA C K GR OU ND

Although the Australian federal government was created in 1901, and the Commonwealth Constitution did not preclude the imposition of income or corporation taxes, it was not until the commencement of the First World War that the need for such a tax arose. Each of the Australian state governments levied income tax under their own legislation, and each adopted slightly different methods of dealing with the interaction between company and shareholder taxation.1 Commonwealth income tax was introduced in 1915 by the Hughes government, led initially by Mr Fisher and then, in October 1915, by Mr William Morris (Billy) Hughes. As a part of that first Commonwealth Act, entitled the Income Tax Assessment Act 1915 (Cth) (ITAA 1915), assented to in September 1915, companies were considered to be appropriately chargeable to income tax and the imposition of tax on undistributed company profits as well as on dividends to shareholders. The original Bill, drafted by Sir Robert Garran, was not accompanied by an explanatory memorandum. Indeed, the legislation was passed with little resistance since it was recognised that the advent of World War I imposed on the Commonwealth obligations to raise additional revenue to finance Australia’s war effort.2 Most of the discussion in Parliament focused on

1 Detailed consideration of the manner in which the state governments taxed companies and their shareholders is beyond the scope of this paper. For a review see P Harris, ‘Metamorphosis of the Australian Income Tax 1866–1922’, Australian Tax Research Foundation Research Study No 37 (2002). 2 R Fayle, ‘An Historical Review of the Development of Income Tax in Australia’ (1984) 18(February) Taxation in Australia 666. See also L Oats, ‘The Evolution of Federal Company and Shareholder Taxation in Australia: 1915–1995’, unpublished PhD thesis (University of Western Australia, 2000).

Pre-1914 Dividends in Australia 451 the need for a federal income tax per se, without much attention to the detail of its imposition. Mr Hughes, who was at that time the Attorney General, said during the second reading of the 1915 Bill in the House of Representatives: This Bill, of course, is frankly a war measure, designed to meet the present circumstances. It calls on those who have the means to pay according to their means. No doubt, this Bill touches the high-water mark of income taxation, but it does not do so without warrant. Our present circumstances are such as to justify, and more than justify, the tax; and I know of no other means whereby we could raise the necessary revenue.3

Companies were regarded under the ITAA 1915 as separate taxable entities in the first instance, whose taxable income was determined in the same manner as for individual taxpayers, that is, assessable income reduced by allowable deductions. Special provision was made, however, for companies to be allowed a deduction for profits distributed by way of dividends to shareholders in the computation of taxable income: a dividend deduction system. The policy of the government was thus to trace those dividends into the hands of the recipient shareholders and bring them to tax only at that point. Shareholders were therefore required to include dividends in their assessable income where they were subjected to progressive income tax rates. This first incarnation of the federal company tax thus viewed the company as an extension of its shareholders, its profits being derived for the benefit of its the shareholders as beneficial owners. Indeed, during the second reading of the Bill, Mr Hughes described companies as being ‘aggregations of individuals’.4 The tax rate structure was a flat or proportional rate for companies and graduated or progressive for individuals. Taxation of dividends only in the hands of shareholders thus maintained the progressivity of the individual rate structure, at least in respect of distributed company profits. The rate of company tax at the time was 1s 6d in the £ (7.5%). Individual taxpayers were taxed under a progressive rate-scale that had a maximum marginal rate of 5s in the £ (25%).5 This system differed from the state systems in operation at the time, which broadly assessed companies on all profits, distributed or not, and did not tax shareholders on dividends received, ie dividend exemption systems. The exception was Western Australia, which adopted a crude 3 Commonwealth Parliamentary Debates, House of Representatives, 1915, 5845 (Mr Hughes). 4 Ibid. 5 Under the unique Australian progressive rate system, designed by Sir George Knibbs, each successive £ was taxed at a higher rate resulting in a continuously increasing marginal rate. Most salary and wage earners escaped this early income tax through the operation of a general exemption or tax free threshold. The continuous progressive rate structure was maintained until 1952.

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form of dividend imputation, assessing shareholders on dividend distributions but allowing a credit for tax paid by the company. In justification of the dividend deduction system, Mr Hughes said during the second reading of the Bill: To tax companies’ incomes as such, would be to place on the small investor an impost that he should not fairly bear, and which would certainly deter him from investing his savings in companies. But as we have seen that it is through the agency of companies that modern production is mainly carried on, this would mean to seriously discourage production. Therefore, companies as such, are not taxed under this Bill on their distributed incomes. On their undistributed incomes they are taxed at a low flat rate.6

There was a suggestion in the House of Representatives Debate that reserves should be taxed as ‘apportioned dividends’. Such a system of company and shareholder taxation can be described as full integration, that is, the company level tax is fully integrated with the shareholder level tax. During debate of the Bill, an opposition member, Mr Patrick Glynn, remarked: Surely we can estimate the share of each shareholder in a company’s reserve, as his share of the dividends placed to that reserve . . . Of course there would be difficulty in administering this, but regarding each shareholder of a company as being entitled to a proportion of the reserves set aside by the company, we should call on the shareholder to pay an additional tax represented by his proportion of the reserve.7

This comment reflected a somewhat simplistic view of companies, but perhaps was not unrealistic at the time. It was neatly sidestepped by Mr Hughes who said in reply ‘that point was considered very carefully. Many methods were suggested, but on the whole we found that the course followed in the Bill was the better way . . .’8 No distinction was made in the ITAA 1915 between public or widely held companies, that is, essentially those whose shares are traded publicly on a stock exchange and private or closely held companies, being essentially those under the control of a limited number of shareholders. Dwyer and Larkin describe this first approach to company and shareholder taxation as ‘logical’, but note that its ‘conceptual purity . . . was gradually muddied by administrative complexity and revenue maximisation’.9 The ITAA 1915 contained a provision that effectively forced companies to distribute a ‘reasonable portion’ of its profits.10 The ‘reasonableness’ 6

Commonwealth Parliamentary Debates, above n 3. Commonwealth Parliamentary Debates, House of Representatives, 1915, 5845 (Mr Glynn). 8 Commonwealth Parliamentary Debates, above n 3. 9 TM Dwyer and JT Larkin, ‘The Taxation of Company and Business Income’, Australian Tax Research Foundation Study No 25 (1995) 18, 20. 10 Income Tax Assessment Act 1915 (Cth), s 16(2). 7

Pre-1914 Dividends in Australia 453 of the company’s distribution policy was a matter of discretion for the Commissioner of Taxation. This provision was designed to counter the tax advantage that ensued from accumulating profits in an environment where individual marginal rates of tax were greater than that applicable to companies. If the Commissioner of Taxation considered that the level of accumulation was unreasonable, the shareholder would be taxed as if distribution of profits had taken place, that is, on a notional distribution. This special tax, based on a theoretical distribution of profits, was referred to as undistributed profits tax and would prove to be a thorn in the side of taxpayers for many years in Australia’s tax history.11 From the inception of federal income tax there was concern that it not have retrospective operation, and concern that taxpayers should not be taxed on income derived prior to 1 July 1914.

P R E-1914 PR OF ITS

In relation to companies, section 14 of the ITAA 1915 provided that distributions from accumulated profits derived by companies prior to the inception of the Act, should be excluded from assessment in the hands of shareholders. Section 14 of the ITAA 1915 provided, so far as is relevant: 14. The income of any person shall include— . . . (b) dividends, interests, profits or bonus credited or paid to any member, shareholder, or debenture-holder of a company . . . : Provided that where a company distributes to its members or shareholders any undistributed income accumulated prior to the commencement of this Act the sum so received by the member or shareholder shall not be included as part of his income . . .

The purpose of the section 14 proviso was thus to place shareholders on the same footing as other taxpayers in respect of the date of operation of the Act. In the High Court decision of Forrest v FCT (1921) 29 CLR 441, Knox CJ, Gavan Duffy and Starke JJ observed in a joint judgment that two questions arise. The first is whether the amount paid consists of dividends, interests, profits or bonus credited or paid.12 If so, the second question is whether the distribution is wholly or in part accumulated before 1 July 1914.13 It was agreed that in answering these questions ‘it

11

See L Oats, ‘Undistributed Profits Tax in Australia’ (2000) 16 Australian Tax Forum,

427. 12 13

Forrest v FCT (1921) 29 CLR 441, 446 (Knox CJ, Gavan Duffy and Starke JJ). Ibid.

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is proper to ascertain from the Act the intention of Parliament in inserting the proviso’,14 which was: in order to exempt the shareholder from liability to tax in respect of so much of his share of the profits of the company as might have been derived before 1 July 1914 but not distributed until after that date . . . Considering the object of the proviso, we see no reason for attributing to the expression ‘undistributed income accumulated’ any meaning other than income which had not been in fact distributed and had in fact accumulated to the company before 1 July 1914.15

Thus there was concern that, because dividends are paid from a mixture of profits derived on different dates, there was a need to identify the pre-1914 profits and exclude them to the extent that they were paid as dividends otherwise assessable to shareholders. This seemingly simple objective proved to be extraordinarily difficult to achieve in practice. Individual taxpayers were keen to avoid the imposition of income tax from its inception, and some apparently claimed that the proviso meant that income received during the year ended 30 June 1915 would not be taxable. The original proviso was intended, according to the government, to apply so as to ‘exempt reserve funds accumulated before the year to which the tax was to be applied’,16 and so amendment was required almost immediately to preserve that intention. In particular, the proviso was amended to specify that the exemption applied to undistributed income accumulated prior to the first day of July 1914, and an additional proviso was enacted.17 The new proviso was designed to ensure that amounts credited to a profit and loss account were not considered to be accumulated income, and read as follows: 14. The income of any person shall include— . . . (b) dividends, interests, profits or bonus credited or paid to any member, shareholder, or debenture-holder of a company . . . : Provided that where a company distributes to its members or shareholders any undistributed income accumulated prior to the first day of July One thousand nine hundred and fourteen the sum so received by the member or shareholder shall not be included as part of his income . . . Provided also that the amounts carried forward by a company to the credit of the profit and loss account shall not be deemed to be accumulated income.

14

Ibid, 447 (Knox CJ, Gavan Duffy and Starke JJ). Ibid. Commonwealth Parliamentary Debates, 12 November 1915, 7304. 17 Income Tax Assessment Act (No 2) 1915 (Cth). The new proviso was added in the course of debate of the amending Bill. 15 16

Pre-1914 Dividends in Australia 455 In this way, the government sought to strengthen the original exemption provision by apparently clarifying its scope. Before long, however, another problem arose, this time in respect of bonus shares. By further amendment in 191618 the exemption for pre- 1914 profits was extended to bonus shares subsequently issued from that source. 14. The income of any person shall include— . . . (b) dividends, interests, profits or bonus credited or paid to any member, shareholder, or debenture-holder of a company . . . : Provided that where a company distributes to its members or shareholders any undistributed income accumulated prior to the first day of July One thousand nine hundred and fourteen the sum so received by the member or shareholder shall not be included as part of his income . . . Provided also that the amounts carried forward by a company to the credit of the profit and loss account shall not be deemed to be accumulated income, but where it is proved to the satisfaction of the Commissioner that an amount standing to the credit of a profit and loss account before the first day of July One thousand nine hundred and fourteen, has been appropriated by a company for the purposes of crediting a dividend to the shareholders and the dividend or a part thereof is retained by the company for the purpose of paying for an increase in the value or number of shares issued to the shareholders, the shareholders shall not be liable to pay tax on the dividend or the part of the dividend so retained.

Even at these early stages in the development of the company tax system, there was difficulty in encapsulating the scope of this exemption. The legislature relied on the accounting treatment to determine the nature of dividends, only to find that such treatment could be, and was, manipulated. This is evidenced in 1918 in the High Court case of Meares v Acting Federal Commissioner of Taxation (1918) 24 CLR 369, where the exclusion from the exemption of amounts carried forward to a profit and loss account was held not to apply. Meares demonstrates the uneasy interaction between accounting practice and tax statute. In Meares, Griffith CJ, Gavan Duffy, Powers and Rich JJ held in a joint judgment that an amount appearing in the ‘appropriation account’ for that year as being accumulated profits from the preceding year was not an amount ‘carried forward to the credit of a profit and loss account’ and therefore qualified for exemption.19 At issue was an amount of undistributed income earned prior to 1 July 1914 but not applied in payment of dividends until after that date. The sum in question was not entered into any account called a profit and loss 18

Income Tax Assessment Act (No 2) 1916 (Cth). Meares v AFCT (1918) 24 CLR 369, 372–73 (Griffith CJ, Gavan Duffy, Powers and Starke JJ). 19

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account in the company’s books. The profit was transferred to an appropriation account in which was recorded the manner of its disposition. The court held that the term ‘carry forward to the credit of a profit and loss account’ means to transfer the balance to a profit and loss account for the next succeeding period, ie ‘the company shows its intention to treat the amounts so transferred as forming part of the transactions of the later period’.20 The Commissioner, in seeking to deny the exemption, contended that the appropriation account showing the distribution of profits becomes part of the profit and loss; that the amount in question is a fluctuating balance of its profits and, regardless of which account it is posted to, it is still part of the profit and loss account. The High Court, however, did not agree. After considering the varying accounting practices adopted by companies, and observing that the carry forward of profits is an ‘act of volition on the part of the company’, the judgment stated that the Commissioner’s construction: ‘would be to make it, not a qualification, but a flat negation of the principal enactment to which it is a proviso. This was clearly not the intention of Parliament.’21 It seems that the government was not comfortable with allowing the exemption to be applied through the simple expedient of transferring the sum to an appropriation account. The government apparently considered that further amendment was necessary to prevent a considerable loss of revenue.22 The two previous relevant provisos were now merged into a single proviso and an addition to the description of profit and loss account inserted as follows:23 14. The income of any person shall include— . . . (b) dividends, interests, profits or bonus credited or paid to any member, shareholder, or debenture-holder of a company . . . : Provided that where a company distributes to its members or shareholders any undistributed income accumulated prior to the first day of July One thousand nine hundred and fourteen the sum so received by the member or shareholder shall not be included as part of his income. For the purposes of this proviso, amounts carried forward by a company to the credit of the profit and loss account, appropriation account, revenue and expenses account or any other account similar to any of the foregoing accounts shall not be deemed to be accumulated income, but where it is proved to the satisfaction of the Commissioner that an amount standing to the credit of a profit and loss account 20

Ibid. Meares v AFCT, above n 19, 373 (Griffith CJ, Gavan Duffy, Powers and Starke JJ). Commonwealth Parliamentary Debates, House of Representatives, 16 May 1918, 4772 (Mr Glynn). 23 Income Tax Assessment Act 1918 (Cth), s 14(b) (emphasis added). 21 22

Pre-1914 Dividends in Australia 457 before the first day of July One thousand nine hundred and fourteen, has been appropriated by a company for the purposes of crediting a dividend to the shareholders and the dividend or a part thereof is retained by the company for the purpose of paying for an increase in the value or number of shares issued to the shareholders, the shareholders shall not be liable to pay tax on the dividend or the part of the dividend so retained. (emphasis added)

By broadening the exclusion to the exemption, the government sought to prevent artificial attribution of the exemption to profits to which it was not intended to apply. Although economic conditions were relatively stable in 1921, there was growing concern about the wide divergence in the incidence of income tax exaggerated by the superimposition of a federal tax on the state income taxes, which varied as to rates and deductions. In 1921 a Royal Commission on Taxation was appointed by the government under the chairmanship of Warren Kerr CBE (the Kerr Commission) to inquire into the incidence of income tax under the Commonwealth law. The Kerr Commission was charged, inter alia, with recommending amendments to make the system more equitable. The first report of the Kerr Commission, presented to Parliament on 2 November 1921, addressed the question of bonus shares, and the Third Report, presented on 4 August 1922, considered dividends paid out of capital profits should also be exempt. Acting on the Kerr Commission’s recommendations, the ITAA 1915 Act was repealed and replaced by the Income Tax Assessment Act 1922 (Cth) (ITAA 1922). The ITAA 1922 included an additional requirement for the assessability of dividends, specifically that they be distributed from the profits of the company. Evidence that the government intended the term ‘profit’ to be wider than the previously used ‘income’ can be found in the proviso that exempted dividends paid out of profits on the sale of capital assets. Such an exemption would not have been necessary if profits could be equated as income for income tax purposes. In the transition to the ITAA 1922, the pre-1914 profits dividend exemption continued without significant alteration.24 It appeared at this stage as, so far as is relevant: 16. The assessable income of any person shall include— . . . b(i) . . . where a company distributes to its members or shareholders any undistributed income accumulated prior to first day of July One thousand nine hundred and fourteen the sum so received by the member or shareholder shall not be included as part of his income. For the purposes of this proviso amounts carried forward by the company in its profit and loss account, appropriation account, revenue and expenses account or any 24 Income Tax Assessment Act 1922 (Cth), s 16(b)(i) in essence adopted and refined the second proviso to s 14(b)(ii) Income Tax Assessment Act 1915 (Cth).

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It seemed at this point that the government had covered itself to ensure that only profits carried to some form of reserve account attracted the exemption, which was its objective. The Kerr Commission, in its Third Report in 1922, had recommended that the exemption be clarified to eliminate confusion, but the government did not act on this recommendation. The confusion continued, and that the government’s objective was still not achieved is further demonstrated in the 1928 High Court case Stodart v Deputy FCT (1928) 42 CLR 106.25 This case concerned the question whether sums accumulated before 1 July 1914 were carried forward by the company in its profit and loss account and therefore precluded from the exemption. The question turned on the meaning of the words ‘profit and loss account’, and whether this encompassed the profit and loss account submitted to the shareholders or the account in the ledger headed ‘Profit and Loss’. The company only showed the profit of the immediately preceding accounting period in its published accounts. The company’s ledger, however, contained an account headed Profit and Loss, which showed for each period a credit brought forward from the previous period. The directors resolved that a dividend be paid out of reserved or undistributed profits accumulated before 1 July 1914. The Commissioner argued that the pre-1914 profits had been carried to the profit and loss account and therefore did not qualify for the exemption. The taxpayer argued that it had not, that the profits were accumulated in previous years and not carried forward in its profit and loss account.26 In the 2–2 split decision in Stodart, Knox CJ and Higgins J held that the appeal should be allowed, Isaacs and Powers JJ dissenting. Knox CJ and Higgins J, in separate judgments, were of the view that the account in the company’s ledger was not ‘its profit and loss account’ so should not be denied the exemption.27 They were of the view that the relevant profit and loss account to which the Act referred in denying the exemption must be that presented to the shareholders of the company, that is, the published account. Higgins J said: To satisfy the qualification of the proviso to s16 of the Assessment Act, it is not sufficient for the Commissioner to show that in some account, or in some summary or history of accounts contained in the books, there is a continuous chain of figures showing the history of the Company as to profit and loss (as well as the history of the Company as to capital): he has to show that in that 25 26 27

Stodart v Deputy FCT (1928) 42 CLR 106. Ibid, 110–13 (Knox J). Ibid, 132 (Higgins J).

Pre-1914 Dividends in Australia 459 account which is the Company’s distinctive profit and loss account . . . The amount of previous profits has been carried forward . . .28

Isaacs and Powers JJ, in separate judgments, were of the view that the ledger account was the relevant profit and loss account, so that the bringing forward of previous period’s profits had the effect of denying the exemption. In the view of Isaacs J: [the] drag-net reference to ‘similar’ accounts indicates a very broad inclusion in relation to accounts and to companies, an inclusion to protect the Treasury and not to defeat it, an inclusion, moreover, not limited by any technicalities or conditions, but referable to actual facts. It is important to remember what Lindley L.J said in Lee v Neuchatel Asphalte Co: ‘As regards the mode of keeping accounts, there is no law prescribing how they shall be kept’. What Parliament was insisting on in all events as a fact destroying immunity was the carrying forward by a company in some one of a recognised class of accounts kept by its agents duly authorised to keep its accounts, the prior accumulated profits.29

Isaacs J further referred to several accounting reference manuals to determine the accounting treatment, concluding that: It is therefore certain that when Parliament used the phrase ‘carried forward’ in relation to the accounts it mentioned, it did not perpetrate so palpable a blunder as to suppose the profits of a prior period could ever properly be carried into, and so as possibly to confuse, the strictly periodic statement referred to in Table A [of the Companies Act].30

Powers J said: It is not reasonable to assume that Parliament meant to allow companies to avoid payment of the tax imposed by the Act simply by neglecting to insert in, or by wilfully omitting from, the annual statement of profit and loss references to undistributed accumulated profits of past years.31

The decision in Stodart highlights the difficulty in interpreting the exemption provision. The split decision went in favour of the taxpayer only by virtue of the Knox CJ’s view, which was consistent with his earlier stance in Forrest. The judgment of Isaacs J, who went to considerable effort to try to understand extant accountancy practice, was in favour of the Commissioner, denying the taxpayer the benefit of the exemption. Two years later, in 1930, Isaacs would become Chief Justice of the High Court on Knox’s resignation. Another case, JRF Carse v FCT (1933) 11 ATD 227, concerning both the pre-1914 profits exemption and the capital profits exemption, was 28 29 30 31

Ibid. Ibid, 119 (Isaacs J). Ibid, 121–22 (Isaacs J). Ibid, 136 (Powers J).

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heard by the Supreme Court of Victoria in 1933.32 Here the appellant company JRF Carse received in 1927 a dividend or bonus declared by the company as being payable out of profits accumulated prior to 1 July 1914. The bonus was a distribution out of the proceeds of the sale of British consols,33 which had been acquired by the company before 1914. In holding that the bonuses were exempt from taxation, Wasley J in Carse said that whether the bonus came from pre 1 July 1914 profits is a matter of fact: It [the Court] is not to be bound by the verbiage of resolutions, nor by the method of accountants, but the Court has to look at the facts of the case, and then ask itself is it satisfied that the bonus did come within the terms of this section.34

Thus, according to one commentator, ‘the exemption is restricted to income which has been credited to reserve accounts of some description’.35 In 1932, before the decision in Carse was handed down, the Royal Commission on Taxation (the Ferguson Commission) was charged by the government with making recommendations for simplification of the income tax legislation. The Ferguson Commission noted that the issue of taxing dividends ‘overshadowed everything else’ in terms of complexity and difficulty in application.36 The Ferguson Commission’s recommendations were enacted in the 1934 Income Tax Assessment Act (ITAA 1934), where the exemption for dividends paid from undistributed income accumulated before 1 July 1914 became section 16AA(2), which provided: 16AA(2) The assessable income of a shareholder shall not include dividends— . . . (b) paid after the commencement of this section wholly and exclusively out of . . . (iv) undistributed income accumulated before the first day of July One thousand nine hundred and fourteen, not being income carried forward by the company in its profit and loss account, appropriation account, revenue and expenses account, or any account similar to the foregoing accounts, where the dividend are paid before the first day of July One thousand nine hundred and thirty six. 32

JRF Carse v FCT (1933) 11 ATD 227. UK government securities without redemption date and with fixed interest. An abbreviation of the term consolidated annuities according to the Concise Oxford Dictionary, 10th edn (Oxford, Oxford University Press, 1999). 34 JRF Carse v FCT, above n 32, 228 (Wasley J). 35 J Baldwin and J Gunn, Commonwealth Income Tax Amendments 1932–34 (Sydney, Accounting and Commerce Publications, 1934) 72. 36 Commonwealth, Royal Commission on Taxation (Ferguson Commission), First Report (1933) [15]. 33

Pre-1914 Dividends in Australia 461 The ITAA 1934 thus provided the exemption only if the dividends were wholly and exclusively from that source,37 and then only to 30 June 1936, at which time the exemption ceased to exist.38 This was in accordance with the Ferguson Commission recommendations, which noted that in other countries, for example Canada, time limits had been placed on the pre inception profits exemption.39 What follows in the next three sections is a brief discussion of some issues relevant to the decision-making process in the above cases.40

T H E A PPEA LS PR OC ESS

It is interesting to note that the appeals by taxpayers from the decisions of the Commissioner in Meares, Forrest and Stodart went straight to the High Court. Section 37(1) of the ITAA 1915 provided that the taxpayer’s objection would first go before the Commissioner for review. If the taxpayer was not satisfied with the Commissioner’s decision following this review, section 37(4) ITAA 1915 provided that the taxpayer: ask the Commissioner to treat his objection as an appeal, and forward it either to the High Court, the Supreme court, or a County or District Court of a state, or such other court as is specified in that behalf by proclamation, as required by the taxpayer.

Section 37(5) ITAA 1915 provided that when the appeal was to the High Court or a Supreme Court it was to be heard by a single Justice of the court. The ITAA 1922, which, as noted above, repealed and replaced the ITAA 1915, contained provisions in Part V (headed Objections and Appeals) which set up the framework for ‘a Board of Boards of Appeal’.41 The ITAA 1922 provided that taxpayer objections went first to the Commissioner who would review the objection,42 in similar terms to those of the ITAA 1915. If the taxpayer was not satisfied with the Commissioner’s decision following this review, the taxpayer may: in writing request the Commissioner to treat his objection as an appeal and to forward it, as required by the taxpayer, either to the High Court or the Supreme Court of a state (where the objection raises questions of law only),

37

Income Tax Assessment Act 1934 Cth), s 16AA(2)(b)(iv). The exemption was repealed by Income Tax Assessment Act 1938 (Cth), s 5(c). 39 Ferguson Commission, above n 36, [65]. 40 It is beyond the scope of this paper to give a more detailed analysis of the matters mentioned here. 41 Income Tax Assessment Act 1922 (Cth), s 41(1). 42 Income Tax Assessment Act 1922 (Cth), s 50(1), (2), (3). 38

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or to the High Court or a Supreme Court or a Board of Appeal (where the question raises questions of fact).43

The appeals history of these High Court cases is as follows. Meares was heard at first instance by Barton J, who found for the Acting Federal Commissioner of Taxation (AFCT) (this decision was reversed on appeal to the Full Court); Forrest went first to Starke J, who referred it to the Full Court as a case stated; Stodart came first before Knox CJ, who referred the appeal to the Full Court. Clearly in Meares, Forrest and Stodart it was the respective taxpayers who elected to be heard in the High Court. This must have been the most expensive option, but one might speculate that the appellant taxpayers made this choice on the basis that if they lost in a lower court they were always going to pursue the matter as far as possible anyway. As noted above, Carse was heard by Wasley J in the Supreme Court of Victoria.

T H E H IGH C OU RT

The 10 year period over which Meares, Forrest and Stodart were decided (1918–28) saw some great changes in the High Court. Meares was decided in 1918, and the justices who heard that case were Griffith CJ, Gavan Duffy, Powers and Rich JJ; as noted above, they delivered a joint judgment that was read to the Court by Griffith CJ. Griffith CJ was the last of the original justices remaining from when the High Court was established in 1903. Gavan Duffy, Powers and Rich JJ were all appointed in 1913. Forrest was decided in 1921 by Knox CJ, Gavan Duffy and Starke JJ, again in a joint judgment. Knox CJ was appointed in 1919, directly as Chief Justice, and Starke was appointed in 1920. Stodart was decided in 1928 by Knox CJ, Isaacs, Higgins, and Powers JJ, all in separate judgments. Whereas the judgments in Meares and Forrest were brief (three pages and two pages, respectively), each judgment in Stodart was longer, with Isaacs J running to some 15 pages. This is mentioned because it was only in Stodart that two of the deciding judges, Isaacs and Powers JJ, found for the Commissioner of Taxation. Powers JJ, having been part of the joint judgment in Meares, distinguished the facts in Stodart in order to find for the Commissioner. Isaacs J has been described as the High Court’s ‘first great dissenter’,44 and, based on his judgment in Stodart, had Isaacs heard Meares and Forrest, it is quite possible that he would have dissented in those cases 43

Income Tax Assessment Act 1922 (Cth), s 50(4). A Lynch, ‘Dissenting Judgments’ in M Coper, T Blackshield and G Williams (eds), The Oxford Companion to the High Court of Australia (Oxford, Oxford University Press, 2001) 217. 44

Pre-1914 Dividends in Australia 463 also. Isaacs J was appointed to the High Court in 1906, and his judgments are described as follows: he showed an awareness of social issues. He read widely in social and economic literature; he supported his judgments with references to such writings as well as with copious legal authority, which he mustered as a formidable artillery in support of his position.45

However, there ‘appeared to be little friendship, and even distrust, towards Isaacs by Griffith CJ’.46 Isaacs’ knowledge of the law was just as comprehensive as Griffith’s . . . He was just as determined and energetic as Griffith had been. He was a prolific judgment writer; his judgments were encyclopaedic but prolix. The days of friendly concurrences were a thing of the past. The tensions within the Court culminated in Griffith’s success in having Knox appointed as his successor, thereby frustrating Isaacs’ hopes, for the time being at any rate.47

Isaacs was in fact Chief Justice of the High Court from 1930 to 1931; he resigned in 1931 to become Governor-General.

S TAT U T O RY INTER PR ETATION

Although the literal rule, the mischief rule and later the purposive rule of statutory interpretation have been used over time by the High Court, it would appear that the literal approach was the preferred option at the time the above cases were decided. In this respect, and with particular reference to some of the High Court Justices who heard the above cases, in 1904 Barton J said that ‘the sprit or meaning should be gathered from the instrument itself’,48 and in 1920 Higgins J commented: The fundamental rule of interpretation . . . is that a statute is to be expounded according to the intent of the parliament that made it; and that intention has to be found by an examination of the language used in the statute as a whole. The question is, what does the language mean; and when we find what the language means in its ordinary and natural sense, it is our duty to obey that meaning.49

This method of interpretation, coupled with, as Pearce describes it, ‘earlier [High Court] ideologies—for example, that tax Acts should be construed

45

Z Cowen, ‘Isaacs, Isaac Alfred’ in Coper et al, ibid, 360. Justice Michael Kirby, ‘Sir Isaac Isaacs—a Sesquicentary Reflection’ (2005) Melbourne University Law Review 881, 895. 47 A Mason, ‘Griffith Court’ in Coper et al, above n 44, 314. 48 Tasmania v Commonwealth (1904) 1 CLR 329, 348. 49 Amalgamated Society of Engineers v Adelaide Steamship Co Ltd (1920) 28 CLR 129, 161. 46

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in favour of the tax payer’,50 goes some way to explaining the success of the appellant tax payers in Meares, Forrest and Stodart. Higgins J’s suggestion that ‘a statute is to be expounded according to the intent of the parliament that made it’ might lead one to believe that he was referring to the mischief or purposive rule rather than to the literal rule as his later words make clear. The mischief rule is used to identify the problem (‘mischief’) that the statute was intended to rectify and to advance the remedy as intended by the legislature. The purposive rule looks at the intent of Parliament with a view to giving effect to that purpose. If either the mischief or the purposive rule had been used in interpreting the provisions of the ITAA 1915, it seems inconceivable that the taxpayers would have won in Meares, Forrest and Stodart. Kobetsky and Krever note that the legislature did not define terms such as ‘income tax’, leaving this to the courts: the courts turned to precedents from other areas, particularly the law of trusts, to identify a narrow subset of income in the real world as constituting the ‘gross income’ (referred to in the case law as ‘income according to ordinary concepts’) that was assessable for tax purposes. . . . Rather than replace the narrow judicial concept of income with a sounder base such as accounting profits, the legislature responded to judicial basedefining initiatives in a piecemeal and ad hoc manner—time and again inserting narrow inclusion provisions often intended only to respond to the factual situations raised in particular cases.51

C ONC LU SION

The idea of excluding from an income tax system dividends paid out of profits accumulated prior to its introduction makes sense in terms of putting shareholders on the same footing as those taxpayers deriving income directly. The first version of the exemption sought to achieve this without specifying the accounting mechanisms by which such profits would be identified. Within a year of the enactment of this first version, amendment was made to specify that the exemption would not apply where the accumulated profits were credited to a profit and loss account. The decision in Meares in 1918, however, exposed the deficiency in this second version of the exemption, leading to further amendments to create a wider restriction on the exemption provision. The split decision in Stodart that the exemption applied, notwithstanding this wider restriction, illustrates the difficulties in trying to draft 50 51

D Pearce, ‘Statutory Interpretation’ in Coper et al, above n 44 642. M Kobetsky and R Krever, ‘Taxation Law’ in Coper et al, above n 44 659.

Pre-1914 Dividends in Australia 465 a provision that captures accounting practice sufficiently well as to achieve the intention of Parliament, ie to preserve an exemption from income tax for income accumulated prior to its introduction. This unsatisfactory situation persisted until examined as part of the wider review by the 1932 Ferguson Commission, leading to a termination date for the exemption finally being introduced in the ITAA 1934. Thus, the pre-commencement profits exemption finally ended 22 years after its creation, evidence that a simple concept can become complicated in practice because of the interface between accounting practice and taxation law.

15 Taxing Bachelors in America: 1895–1939 MARJORIE E KORNHAUSER

I would no more abolish the bachelor than I would the umbrella because it sometimes breaks in a gale, or a bicycle because it sometimes leads to accidents. All three depend greatly on how they are handled. . . Tax the bachelor to help support homeless women, but do not suppress him.1

A BSTR A C T Bachelor taxes have existed across the globe and throughout millennia. In modern income taxes they occur only indirectly, as by-products of favourable exemptions and tax rates for married couples. As recently as the twentieth century, however, bachelor taxes were direct, explicit taxes levied on bachelors as bachelors. From 1895 to 1939, American municipalities and states proposed these taxes with surprising frequency and newspapers consistently reported on them, as well as on foreign bachelor taxes. Often greeted with hilarity and rarely passed, serious concerns motivated these taxes. This paper suggests that social unease, not revenue needs, was the primary motivation for American bachelor taxes in this period. Decades of industrialisation, urbanisation, immigration and increased consumerism had created social tensions and dislocations by radically altering everyday living patterns and basic social institutions. The bachelor tax proposals and discussions during this period expressed many people’s discomfort with the changes. Since they believed marriage was the foundation of society and American democracy, they perceived any threat to marriage as threatening the fabric of America. Consequently, they viewed bachelor taxes as a remedy for the moral decay of the nation. In actuality, the taxes were mainly expressive in nature. Not only did most of them fail to pass, but even if they did pass, they were largely ineffective methods to increase marriages, 1 ‘Bachelors are Useful’, Boston Globe, 19 March 1899, 47 (letter from the poet Ella Wheeler Wilcox to New York Evening World).

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as even some contemporaries noted. The demise of explicit bachelor taxes did not end concerns about marriage and the moral state of society. These same concerns were part of the debates about mandatory joint returns in the late 1930s and early 1940s in the US. Similarly, they remain an important element of recent debates about marriage penalties and the tax treatment of families.

INTR ODU C TION

I

N 1827 A ‘highly numerous and respectable’ group of men met in a New York City hotel to organise a protest against a bill before the New York legislature that replaced a current tax on dogs with one on bachelors. The bill, they claimed, was ‘onerous and in direct violation of the great charter of their liberties’.2 In 1854, in Connecticut a legislator argued in the House of Representatives against a proposed bill to tax bachelors: such a bill was unnecessary, he claimed, because ‘There was a tax laid already upon a goose, and any man who had lived 25 years without being married could be taxed under that section’.3 These two bills were not unique. Bachelor taxes—that is, taxes directly placed on bachelors as bachelors—have existed around the globe and throughout the millennia, dating back at least to ancient Greece and Rome. More recently, diverse countries such as Argentina, England, France, Germany, Italy, and Turkey enacted bachelor taxes in the nineteenth and twentieth centuries. In the US direct bachelor taxes began in colonial times and continued well into the twentieth century, although they declined significantly after the Civil War.4 This chapter examines the ‘final hurrah’ of direct, explicit bachelor taxes in the US: 1895–1939. During this period, interest in bachelor taxes increased in comparison to the previous decades. States and municipalities proposed the taxes with surprising frequency and occasionally passed them. Usually they were levied on men only. Sometimes, but not always, they were coupled with taxes on childless couples or connected with provisions (tax or otherwise) favouring children. Although some contemporaries claimed that bachelor taxes were concentrated in certain sections of the country—some alleged the west, others the east5—states in all parts

2

Editorial, Connecticut Courant, 5 February 1827, 3. Senate, House of Representatives, ‘Connecticut Legislature’, Hartford Courant, 26 June 1854, 2. 4 JG McCurdy, Citizen Bachelors: Manhood and the Creation of the United States (Ithaca, NY, Cornell University Press, 2009) 50. 5 Editorial, ‘Taxing the Bachelors’, Washington Post, 24 June 1913, 6 (many western states trying to tax bachelors to encourage marriage). 3

Taxing Bachelors in America: 1895–1939 469 of the country proposed them. Although most of the taxes were head or poll taxes, a few were based on income.6 Income taxes today, of course, sometimes tax bachelors by means of provisions that favour married taxpayers, such as higher exemptions or lower rates. These indirect taxes are less obvious than a direct tax on bachelors, but in both cases, the result is to tax bachelors more heavily than married taxpayers. Astute commentators, however, have noted this less obvious tax in the US income tax as early as the Civil War income tax. Similarly, in the 1920s and 1930s, even as some commentators criticised direct bachelor taxes in Fascist Italy and Nazi Germany, others noted the existence of such taxes in the federal income tax. As one writer said in 1926, the fact that a law is not called ‘An Act to Impose Special Taxation Upon the Unmarried’ does not mean that such a tax is not imposed on bachelors by means of differential exemption and tax rates.7 In the 1930s, the income taxation of families at the national level increasingly gained greater attention, especially the focus on whether to enact mandatory joint returns. Bachelor taxes, on the other hand, were practically obsolete by the end of the decade. Unlike the well-told story of the income tax’s indirect bachelor taxes through marriage preferences, the story of explicit direct bachelor taxes 6 Eg ‘Men’s Club to Ask Tax on Bachelors’, Chicago Tribune, 11 April 1910, 5 (proposing both head and income taxes on unmarried men and women); ‘35% on Gross Income May be Tax on Bachelors’, Chicago Tribune, 4 February 1920, 1 (proposed Illinois tax on gross income of bachelors). Other countries placed special income taxes on bachelors. Eg J Clayton, ‘Marry or Pay Tax, Mussolini to Bachelors’, Chicago Tribune, 7 December 1926, 1 (progressive income tax on Italian bachelors between 25 and 65); ‘Bachelorhood Taxed’, New York Times, 15 March 1925, X20 (male and female bachelors over 30 in Bulgaria); ‘Income Tax Increase of 20% on Income, Levies Tax on Bachelors’, Washington Post, 11 May 1915, 13 (bachelor men and women over 28 in the German town of Reichenberg pay additional progressive income tax); ‘Single Blessedness Costly’, Boston Globe, 27 November 1913, 8 (France planning larger income tax on bachelors and ‘spinsters’). 7 Letter to Editor, ‘Our Own Tax on Bachelors’, New York Times, 15 December 1926, 26. See also ‘Taxation Article No IX: Income Taxes’, New York Times, 26 August 1865, 2; ‘Taxing the Bachelors’, above n 5; ‘Penalizing the Family Slacker’, Washington Post, 9 March 1922, 6; ‘Bachelors and Bananas’, Literary Digest, 5 July 1913, 5; ‘Ask Bonus for Babies’, Los Angeles Times, 23 June 1913, I1; Editorial Points, Boston Globe, 16 July 1919, 10 (exemptions in MA income tax bill burden bachelor). ‘Exchequers Prefer Bachelors in Topics of the Times, New York Times, 7 June 1930, 9 (‘In virtually every country, as a matter of fact, the unmarried man carries an extra burden under the fiscal laws. He may be stigmatized directly as a bachelor or may be hit indirectly by the exemptions granted to married men and heads of families’); but see Letter to the Editor, ‘Lays a Heavier Burden on Couples Living Together’, New York Times, 6 December 1913, 10 (income tax is ‘race suicide’ because it penalises married couples with children because they get only a $400 exemption while two single people living alone get $600 together). In the 1920s there were a few proposals in the US to explicitly place a heavier income tax burden on bachelors. ‘35% on Gross Incomes’, above n 6 (proposed Illinois constitutional amendment); ‘Long Wants More Taxes on Bachelors and Spinsters’, Boston Globe, 2 February 1923, 4 (Massachusetts Commissioner of Corporations and Taxation urged a bachelor tax on men and women in ‘comfortable’ circumstances to replace revenue last by increased exemption for couples with children).

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has been neglected. This obscurity is perhaps to be expected. After all, since the 1940s the notion of explicitly taxing bachelors simply for being bachelors has been all but forgotten, and since at least the late 1800s these taxes were frequently greeted with hilarity or sarcasm when they were proposed, and were occasionally even called ‘freaks’. The few taxes that were actually enacted into law were, as one reporter observed in 1907 (a peak period for such bills), soon forgotten and of little influence.8 Given this history, it would seem that bachelor taxes have rightly been ignored, since they appear to have made little mark when proposed and none on the present. I say ‘appear’ because this is a superficial view of explicit bachelor taxes. Despite the hilarity these bills encountered, despite their high rejection rate and despite the ineffectualness of those that did pass, there is a sober side to bachelor taxes. Proponents of the taxes viewed them seriously, and even some contemporary commentators who did not favour them still recognised that seriousness.9 Moreover, the seriousness expressed in this earlier time period has not disappeared but. rather, is expressed today, slightly transformed, in the battles about the proper income tax treatment of marriage and the family. This seriousness has several facets. First, not surprisingly when dealing with taxation, is a need for revenue. This need was mentioned in connection with bachelor taxes in US and abroad, especially in Europe, after World War I.10 As one reporter said in 1935, in the context of Mussolini’s bachelor taxes but applicable to any time or place: ‘When politicians and statesmen have taxed everything and everybody they can

8 ‘The Course of Legislation’, Chicago Tribune, 26 January 1907, 8. See ‘Freak Laws’, Boston Globe, 25 February 1900, 47 (bachelor bills are freak bills). 9 ‘Badger State Bachelors May Pay for Bliss’, Chicago Tribune 18 March 1921, 2; ‘Untaxing Pater Familias’ in ‘Topics of the Times’ New York Times, 29 July 1921, 8; ‘$50 Tax on Bachelors’, Washington Post, 28 July 1911, 1; ‘A Vicious Special Tax Proposition’, Washington Post, 22 January 1901, 6; ‘Trying to Tax Bachelors’, Washington Post, 5 February 1907, 11 (the bachelor tax bill proposed in Delaware started as a joke but became serious); ‘May Tax All Bachelors’, Washington Post, 3 March 1911, 1 (Minnesota legislature seriously considering $5 yearly levy on them?); ‘Tax Bachelors Here’, Washington Post, 15 December 1913, 1; CA Byers, ‘The United States Surplus of Bachelors’, Los Angeles Times, 5 May 1913, II4. 10 In the US see, eg WB Ker, ‘To Make Men Wed’, Boston Globe, 1 August 1909, SM 4; ‘Heavy Tax To Help Cupid’, Chicago Tribune, 7 August 1907, 3; ‘Lost His Nerve’, Washington Post, 5 February 1907, 8; ‘Oh, Bachelors! One’s Already Paid that Tax’, Los Angeles Times, 11 April 1934, 8; ‘It is Always the Daughters Who Look after Old Parents’, Boston Globe, 22 April 1934, B2. Bachelor taxes to raise revenues flourished abroad after World War I. See, eg D Dix, ‘Everybody’s Hand against the Poor Bachelor’, Boston Globe, 16 October 1932, A50 (Irish Free State); ‘Tax on Bachelors for Italian Baby Fund’, Boston Globe, 16 April 1933, A37; J MacCormac, ‘Taxes League State Adopted by Austria’, New York Times, 4 October 1931, 17; ‘Brazil to Levy Bachelor Tax’, Los Angeles Times, 21 May 1933, 4; ‘Bachelorhood Taxed’, New York Times, 15 March 1925, X20 (Bulgaria); ‘Greece Taxes Bachelors’, Los Angeles Times, 24 July 1929, A20.

Taxing Bachelors in America: 1895–1939 471 lay their hands on and still want more money, as they always do, the cry usually goes up, “Let’s tax old bachelors”’.11 But why tax bachelors instead of other people or things? What made them such easy targets of taxation? Some supporters of bachelor taxes in the early twentieth century based their support on theoretical tax grounds. Some presented equitable arguments, such as bachelors were not paying their fair share of taxes, which at that time consisted primarily of indirect taxes. Bachelors paid a smaller proportion of these than their married peers because they purchased fewer goods since they bought only for themselves and not their families. Sometimes the rationale, as in earlier bachelor taxes in the US and elsewhere, was that bachelors had a greater ability to pay since they were not supporting a family. (Some, however, argued that bachelors remained bachelors because they were too poor to marry.) Some based their support on a more general theory of civic obligation that dated to earlier times. Men owed various duties to the state that could be satisfied in various ways. Married men’s primary duty was supporting wives and children. Since single men were not burdened with this obligation, they had other duties, such as greater military obligations or taxes. Yet fiscal and civic reasons were not the sole, or even the primary, motivation for bachelor taxes. A 1926 New York Times editorial, for example, baldly stated that, even using ‘capacity to pay’ as the basis for taxation, ‘the bachelor is eminently taxable . . . for the bachelor, from the broadest social viewpoint, is not a productive enterprise’.12 This attitude reflected an underlying normative motivation for bachelor taxes: support for the institution of marriage.13 This motivation, also present in many earlier bachelor taxes, still exists and finds expression in the US (and elsewhere) in tax provisions that give marriage (and children) bonuses. For example, a 1998 Senate Resolution to begin phasing out the marriage penalty began with the statement that ‘Marriage is the foundation of the American society and the key institution preserving our values’.14 In the debates about the Bush 2001 tax cuts, some went even further and argued that the tax laws should positively benefit marriage.15 Although the precise nature of that treatment changes over time and place, the persistence of a preference for marriage (and therefore against bachelorhood) in the tax 11 A Wiggam, ‘Plans to Tax Bachelors Are Fraught with Peril’, Boston Globe, 8 September 1935, A45. In accord, LH Robbins, ‘Bachelors Have Paid High for Single Blessedness’, New York Times, 16 January 1927, SM10; ‘In Chase of the Celibate’, New York Times, 8 December 1926, 26. 12 ‘In Chase of the Celibate’, ibid. 13 ‘A Tax on Bachelors’, Boston Globe, 5 February 1907, 10; ‘Untaxing Pater Familias’, above n 9. 14 S Cong Res 86, 105th Cong (1998). 15 147 Cong Rec H1300 (2001).

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system illustrates the interrelation between taxation and societal values and the consequent futility of searching for an objective ‘neutral’ tax. This chapter suggests that societal concerns about the institution of marriage and about the economic and moral health of society were the primary reasons that major American newspapers increased their coverage of bachelor taxes during the period from 1895 to 1939. These concerns, in turn, were rooted in large social changes that had been occurring over several decades: urbanisation, industrialisation, consumerism, population changes and the changing role of women. These were global transformations, of course, and sometimes found expression in the tax treatment of bachelors and marriage in other parts of the world, but the history and culture of each country influenced the particular expression. In the US, for example, immigration and growing conservativism in the face of perceived radicalism were important drivers of bachelor taxes, whereas in Europe the need for soldiers was more prominent. Bachelor taxes in Fascist Italy and Nazi Germany were the most extreme and well-known examples of bachelor taxes from this time period.16 Twentieth-century American interest in, and usage of, bachelor taxes never came close to that which occurred in those two countries interest. Nevertheless, Americans expressed sufficient interest in these taxes that major American newspapers during this period devoted a surprising amount of space and emotion to detailing their progress—more so, for example, than occurred in the British papers.

METH ODOLOGY

This chapter is neither completely empirical nor completely impressionistic, but a mixture of the two. It is empirical in that the conclusions rest primarily on a large database of American, English and Irish newspaper articles that I analysed according to a variety of categories, such as age/gender of bachelors taxed, type of tax (poll/income) and purpose. Nevertheless, the chapter is impressionistic because, ultimately, I had no confidence in the statistical meaningfulness of the results. The data were too fuzzy for a variety of reasons, including—but definitely not limited 16 These taxes illustrate both the commonality of the causes and the particularity of their expression. In both countries there were also express positive rewards for marriage and children. Indeed, the taxes usually paid for the bonuses. The bachelor taxes (and marriage incentives) were designed to ameliorate a declining birth rate which, they believed, endangered national security by limiting the size of the military. OD Tolischus, ‘$415,500,000 Is Involved’, New York Times, 2 June 1933, 1; ‘France Draws Up Law to Encourage Larger Families’, Washington Post, 23 July 1939, X6. Germany was also motivated by a desire to get women out of the workplace and back into the home. OD Tolischus, ‘Woman’s Place in the “Manly” Nazi State’, New York Times, 10 September 1933, SM4; Washington Post, 6 June 1933, 6.

Taxing Bachelors in America: 1895–1939 473 to—the fact that many news items omitted basic information about the tax discussed. Despite the flaws in the data and data analysis, there are sufficient data to place this chapter above the mere anecdotal. There are at least five issues regarding the methodology of this paper. The first relates to definitions of the terms bachelor taxes and treatment in the US. For this chapter, bachelor taxes means a direct, explicit tax burden on bachelors for being bachelors, rather than the more hidden, indirect or implicit bachelor taxes that exist in income taxes as the flip side of marriage-friendly provisions (eg favourable rates, exemptions). Both types of tax provisions may be intended to promote marriage, but the direct bachelor tax is not only more explicit but also uses a stick in contrast to the marriage bonus’s carrot. Treatment means comments in American press about bachelor taxes anywhere because the commentary reflects American attitudes regardless of where the tax is. The second issue concerns the databases. I examined several different types of databases, but the principal category was newspapers: mainly US papers, but also the Irish Times, the London Times, and the Manchester Guardian and Observer. The largest database, and source of most of the conclusions of this chapter, consists of over 700 items in seven major American newspapers: The Atlanta Constitution, The Boston Globe, The Chicago Tribune, The Hartford Courant, The Los Angeles Times, The New York Times and The Washington Post. I also examined several local American newspapers and some contemporary periodicals and books. Newspapers, a main source of information in the period,17 are a good indicator of what topics a general public found interesting. As commercial enterprises, newspaper content would be designed to gain as much readership as possible. This would be especially true with items that were not the main news of the day, but rather secondary stories or filler—a category into which bachelor taxes often fell. Moreover, the frequency of publication would seem a more accurate reflection of general, casual public interest than books which were less frequently published, more expensive and had a narrower audience. A quick search of some general circulation periodicals (eg Harper’s, Literary Digest, Saturday Evening Post) and scholarly journals did not reveal a similar interest in bachelor taxes. Why this is so is not clear. The fact that the taxes were not a mainstream scholarly concern probably explains the lack of their presence in such journals. A more thorough search for articles on related topics, such as eugenics, might have revealed more oblique references to bachelor taxes. Similarly, a deeper search might have uncovered stories in general circulation magazines about or related to bachelor taxes. 17 See, eg MM Willey and SA Rice, ‘The Agencies of Communication’ in WF Ogburn (ed), Recent Social Trends (New York, McGraw-Hill, 1933) 167, 203–06.

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The third methodological issue concerns race and sexual orientation. The American bachelor taxes did not differentiate on these bases. Nevertheless, since the vast majority of them were never enacted, it is impossible to know whether they would have been differentially enforced despite their facial neutrality. The fact that the motivation for some of these taxes was a concern about marriage and propagation rates of a certain type of young people—and not the general population—suggests this might have occurred if the bills had passed. Some commentators believe that discussions of bachelors and bachelor taxes frequently express veiled disapproval of homosexuals.18 Nevertheless, due to space constraints, this chapter does not focus on this issue, but rather leaves it for subsequent research and discussion. As to race, this chapter confines itself to newspapers addressed to a general—and therefore primarily white—population. I did examine newspapers in several African-American newspapers and found very few articles on the topic. To the extent they existed, they mirrored generally the articles in the white press; indeed, some were excerpted from general (white-oriented) papers. I can only hypothesise that this population was not as concerned about the issue (or expressed it in other ways) as the standard white press. I have not looked at papers aimed at certain segments of the populations, such as Italians, who were at that time often referred to in terms of race, not ethnicity. The fourth methodological issue concerns the time period, 1895–1939. I chose this period because it covers great societal changes resulting from urbanisation, industrialisation, consumerism, population changes and the changing role of women. The year 1895 is a good starting place because, although these changes all began as early as the Civil War, they did not accelerate until the late nineteenth century. Moreover, newspapers do not mention bachelor taxes with any frequency until 1895. From then until the 1939 stop date, bachelor taxes are mentioned every year—sometimes only a couple of times, sometimes more than 30 times. There are a number of possible explanations for this. Perhaps the societal changes had not reached sufficient levels to produce the interest in bachelor taxes. Other events in the time period may have added to the pressures: the closing of the American frontier and immigration, for example. Moreover, the societal tensions were undoubtedly exaggerated by the pessimistic mood caused by economic depression (beginning with the Panic of 1893) and a series of labour strikes in 1894. The chapter included the 1930s as a ‘transition’ decade. Newspapers still discussed explicit bachelor taxes with some frequency (generally Italian and German), but societal issue and economic conditions differed significantly 18 McCurdy, above n 4, 156–57; G Chauncey, Gay New York: Gender, Urban Culture, and the Making of the Gay Male World, 1890–1940 (New York, New York University Press, 1998) 52–62.

Taxing Bachelors in America: 1895–1939 475 from 1895. Among other things, the income tax became the primary tax in this decade; by the end of the 1930s the focus on bachelor taxes in the US had shifted from explicit taxes to the more indirect tax emanating from the preferential income tax treatment of married taxpayers. Finally, by 1939 the threat of war and new economic and social conditions were producing new tensions in society and on the tax system. The final issue concerns the meaning of the newspaper articles about bachelor taxes. How much historical weight should they carry? On the one hand, it can be argued, not much. These articles, many of them short ‘fillers’ or just jokes, are not supported in other printed materials and often merely reflect caricatures of bachelors, not realities. Moreover, the caricatures and insults they hurled at bachelors were not new. Revolutionary war newspapers described bachelors in similar terms, and even then, the charges were not new.19 On the other hand, the consistency of the charges, and the fact that their intensity often increased in times of unrest (such as the revolutionary war period) suggests that they expressed some of the social uncertainties in times of change. Moreover, American newspaper discussions of bachelor taxes differ distinctly from British newspaper discussions.

R ESU LTS

From 1895 to 1935 over 700 news items on bachelor taxes appeared in seven major US newspapers. Some were long, some only a sentence or two. Some were humorous, some were serious, and some were both at the same time. Even filler items are meaningful, however, because newspapers used them only because they struck a chord within the general population that read them—especially when so many filler items are on the same topic. The same is true for the humorous items. Not all of the items were about the US, but a newspaper would only mention a foreign bachelor tax if it thought its readership would find it interesting. Moreover, many of the articles about bachelor taxes in other countries referred to them in reference to the US taxes or made comments about their suitability. The items in the American newspapers differed significantly from those in the English and Irish press. The latter items were primarily actual news items rather than anecdotes or jokes. The taxes discussed were mainly income taxes and not poll taxes. Moreover, the tone and content of the articles were rational and logical examinations of provisions that affected bachelor and married taxpayers differently—such as exemption amounts. This treatment was quite different from the emotionally laden (whether in seriousness or jest) American items. 19

McCurdy, ibid, 181.

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The number, content and tone of these items indicate that Americans had a continuing—albeit modest—interest in bachelor taxes, especially when contrasted to the items in the English and Irish papers. This chapter suggests that this interest sprang largely from underlying concerns about the state of society, generally, and especially marriage, rather than from revenue needs. US bachelor tax bills and laws in this period were primarily expressive in purpose rather than instrumental.

DISC U SSION

Changing Society America changed fundamentally between the late nineteenth century and the first third of the twentieth century. By the end of World War I, Americans lived, worked and thought in dramatically different ways than they had done previously. The switch from the economic prosperity of the 1920s to economic depression in the 1930s did not halt the transformations. More people performed wage labour (rather than agricultural work) and more lived in cities. Between 1890 and 1940, the percentage of the US population living in urban areas expanded from about one-third of the population to 56.5% in 1940.20 Both changes weakened the traditional patriarchal family. Wage labour meant that sons were less likely to follow their fathers’ occupations; women were more likely to work, and children were less dependent on their parents because they earned their own money and often did not even live with them. The cities weakened traditional norms by providing many recreational opportunities (not always seen as morally upright) for people outside the family home, including opportunities for homosexual and heterosexual men and women to meet casually and unchaperoned. Women’s changing societal roles also weakened patriarchal bonds. Increasingly, women had their own money and independence as they worked outside the home and went to college, and, in 1920, obtained the vote. Like the rest of society, but even more so, women went from producers of goods to consumers of goods, and increasingly there were more goods to consume. The need for wage labour, coupled with the ability to cross the Atlantic more swiftly and cheaply, contributed to the increased numbers of immigrants in the US. As immigrants poured into the cities, many people associated growing urban problems, such as overcrowding, crime, disease and poverty, with them. There were other sources of negative views of immigrants in this time period, such as their competition with 20 1990 Census of Population and Housing, Population and Housing Unit Counts United States, Table 4, available at http://www.census.gov/prod/cen1990/cph2/cph-2–1–1.pdf.

Taxing Bachelors in America: 1895–1939 477 native-born whites for jobs. Moreover, many saw immigrants as radicals inciting conflict between labour and capital. America has a long history of disliking immigrants on the grounds that they were radicals, dating back at least to the Alien and Sedition Acts. This aversion, however, increased during this period due to the fear the Russian revolution inspired and the frequency of labour strikes (often led by foreign-born workers)— especially violent ones such as the 1894 Pullman railroad car strike. This distrust of immigrants contributed to the support for bachelor taxes, as described later. All these modern forces—industrialisation, urbanisation, consumerism, increased immigration, women working and growing conservativism— created dislocations and stressed many traditional aspects of society, including the institution of marriage. Many believed that the new societal trends diminished the desirability of marriage and led to a decline in the number of marriages and an increase in the number of bachelors.

Marriage and Bachelor Taxes Bachelors, articles explained, failed their country on economic, civic and moral grounds. Economically, they tended to be frivolous and did not work as hard as married men. They also failed to stimulate economic growth by not spending as much as married men because they did not have to provide for wives and children. More frequently, the articles claimed that bachelors neglected their civic duties, although those duties often were not specified.21 Sometimes, the articles seemed to mean simply a monetary duty to pay their fair share of taxes. There were two rationales for this. Sometimes it meant that equity demanded bachelors pay more taxes because they had more disposable income than did married men who were responsible for their families. Other times, the fair share rationale meant that bachelors were remiss in this duty because they did not pay enough (indirect) taxes because, as bachelors, they did not spend enough.22 Neither rationale necessarily implied a punitive intent. Rather, like many earlier colonial bachelor taxes, they simply may have reflected a sense that bachelors and married men had different civic duties. Married men fulfilled their civic duty primarily by raising and supporting families; bachelors fulfilled theirs through higher taxes and military service.23 21 Editor’s Diary, ‘Why Bachelors Should Not be Taxed’, North American Review, 1 February 1907, 332; ‘Bachelor Tax to be Tested’, Boston Globe, 18 August 1907, 11; ‘Focus Eagle Eye on Unlucky Bachelors’, Los Angeles Times, 18 September 1921, V10. 22 See, eg ‘$50 Tax on Bachelors’, above n 9; ‘Topics of the Times’, New York Times, 29 July 1921, 8; PW Wilson, ‘Horne Hits Bachelor Tax’, New York Times, 27 December 1925, XX5. 23 McCurdy, above n 4, 52–58, 177.

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Frequently, however, proponents justified bachelor taxes on the grounds that bachelors failed moral duties as well as civic ones. Indeed, they often conflated the two, using language that applied to bachelors generally, but sometimes seemed to point specifically at homosexuals. As Wheeler, the UC president said, bachelors ‘do not take part in the normal work of society. They are abnormalities and abnormalities should pay taxes. The unit in society and the state is the family.’24 Since marriage, according to many, was a sacred institution and a pillar of society, by refusing to marry, bachelors failed in their civic, moral and spiritual duties. In 1911, for example, a Boston Baptist minister preached the importance of marriage. All sacrifices made to marry were useful, he said, because in this way ‘a man can become a good citizen and a useful agent of the Lord in bettering the world’.25 According to this view, taxes on bachelors were both an appropriate punishment for the failure to marry and an incentive to rectify the situation. Without necessarily disputing the merit of marriage, many contemporary commentators disagreed with the effectiveness of these taxes in terms of achieving their goal. Some noted that the tax was very small and bachelors would prefer to pay it rather than give up the freedom of their single ‘blessedness’. Others noted that in some regions where the tax was proposed it was physically impossible for all bachelors to marry because there were more men than women.26 Thus, although the taxes might succeed in raising revenues, many concluded the taxes would fail to promote marriage. The improbability that bachelor taxes would succeed in increasing marriages, however, only reinforces this chapter’s hypothesis that a bachelor tax was primarily an expressive bill (or law). It communicated societal unease about rapidly changing lifestyles and attitudes during this period, in particular (i) a growing consumer society meant young people preferring to spend money on themselves rather than using it in marriage; (ii) the changing role of women, resulting in more women focused on work and education rather than simply marriage; and (iii) changing social mores, including sexual ones, that many believed undermined marriage. The changes permitted gay culture to flourish in cities, allowed male–female companionship without marriage and increased the number of divorces (followed by alimony). Dorothy Dix, the popular reporter, expressed many of these concerns very well in 1927 when she wrote that many men did not think the cost of marriage was worth the price:

24

‘Wants a Tax on Bachelors’, Chicago Tribune, 26 February 1905, 1. ‘Tax and Hanging’, Boston Globe, 27 February 1911, 8. 26 ‘No Wives for 15,300,000 Men’, Chicago Tribune, 7 April 1901, 55 (census shows there were 1 million more men than women in the US); Robbins, above n 11. 25

Taxing Bachelors in America: 1895–1939 479 Like Mr Kipling’s hero, they decided that, in the last analysis, ‘a woman is only a woman, but a good cigar’s a smoke’. Also the golf and clubs and good clothes and the privilege of going and coming as one pleases are a certain and never failing source of pleasure, while a wife is a highly speculative risk.27

Dix was not alone in focusing on male bachelors. Most of the critiques of bachelors and the proposals to tax them focused solely on men because society viewed males as the dominant actors in marriage. Some critics, however, also wanted to tax women bachelors (spinsters) and a few taxes applied to both sexes. One ground for this—argued by some men and women—was equality. If women wanted equality, then they should be taxed equally. Some, however, pointed out that if working women were paid as much as men, a bachelor tax to support old maids (a common purpose) would not be needed; they would be able to support themselves when they grew old without the help of men.28 Others wanted to tax women bachelors because they blamed women as well as men for the alarming rate of bachelordom.29 Societal changes not only made it easier for men and women to socialise without marrying, but, they argued, some women were reluctant to marry. Women wanted to marry only men with enough money to provide sufficient consumer goods, such as the pretty dresses working women were buying for themselves with their wages. Perhaps, even more alarmingly, women were choosing to go to college and/or work instead of marrying. Some were even making more money than men! The result was, some believed, that men did not have enough money to marry, or were repelled or frightened by the new women and did not want to marry them.30 Some bachelor tax proposals revealed this societal unease about women working. A 1907 Chicago bill proposed taxing single men over 30 and 27 D Dix, ‘Why We Have a Bumper Crop of Bachelors’, Boston Globe, 16 December 1927, 43; ‘Tax and Hanging’, above n 25. In 1911, Mrs Charlotte Smith proposed a tax on bachelors to provide for spinsters and to encourage men to marry. She claimed that statistics showed that 60% of eligible men in Massachusetts never married, especially men of ‘small means’, because ‘in order to be popular at the club now it is necessary for a man to have one or two automobiles a yacht, and two or three mistresses, but no marriage’. ‘Urges $5 Tax on Bachelors’, Boston Globe, 15 February 1911, 1. Smith continued to propose a bachelor tax for several years. Some proponents of the tax believed that it would encourage marriage and thereby reduce the state’s burden to care for orphans and the poor, including old bachelors who could not support themselves and women who could no longer get jobs because businesses preferred young women. ‘Tax of $5 Urged for Bachelors’, Boston Globe, 12 March 1912, 12. 28 C Holt, ‘Women Willing to Pay Poll Tax if the Men Do’, Boston Globe, 18 February 1923, 1; ‘Proposed Girls Do the Wooing’, Boston Globe, 28 February 1911, 1; ‘Topic of the Times’, New York Times, 16 March 1909, 8. 29 Eg ‘Oppose Florida Bachelor Tax Bill’, New York Times, 20 May 1925, 39; Editorial Points, Boston Globe, 15 May 1925, 20. ‘Will Not Tax Bachelors’, Chicago Tribune, 12 June 1907, 2; ‘Ft Dodge Unwed Lambast Tax Law’, Chicago Tribune, 27 March 1907, 7. Cf ‘Why Bachelors Should Not Be Taxed’, above n 21 (only women should be taxed since they can always marry somebody, but men who want to marry are often turned down). 30 Eg A Whitaker, ‘Leap Year Standards’, Los Angeles Times, 15 July 1928, K15.

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allocated the revenues to unmarried working women who promised to get married.31 A 1928 bill in the New York legislature even proposed taxing the incomes of married women who worked (and whose husbands earned more than $2,000 a year) in order to ease unemployment (of men, obviously) and cause women to ‘manage their homes, rear their children and make better companions to their husbands’.32 A 1933 editorial agreed, stating that unemployment in America ‘would be almost solved’ if women who did not need to work returned to ‘their normal function as home-makers’.33 The bottom line was that bachelors—primarily men—were choosing not to marry and people feared the consequences for society. Bachelors, many believed, were selfish, frivolous and even ‘moral degenerates’.34 Respected people in established positions held these beliefs, not just marginal men or embittered old spinsters. In 1905, for example, President Benjamin Ide Wheeler of University of California called bachelors ‘bandits, guerrillas, and outcasts’.35 In 1912 a columnist called bachelors irreligious, selfish, lunatics and more: Celibacy is in reality a form of domestic anarchy. The anarchist would throw off the necessary restraints and discipline of civic life; the bachelor is keeping away from the wholesome restraints and discipline of wedded existence. Men who persist thus with a hardening of the heart often finish up with a softening of the brain. Anarchists are all mad-bachelors to a great extent. Therefore, tax him for his anarchy!36

Population Concerns and Race Suicide Bachelors, according to many, violated their biggest duty to the state: reproduction. By depressing population growth, they endangered the survival of the state. Measuring population growth is complicated by both reporting and statistical issues. Nevertheless, some general trends in the US caused some concern. For example, although the absolute size of the population wa continually increasing, the rate of the population growth had been declining since 1860. The rate of natural growth (births minus deaths, ignoring migration), however, showed a greater decline, especially after 1890.37 Moreover, although the rate of growth of the white 31

‘Heavy Tax to Help Cupid’, above n 10. ‘Taxes for other People’ in ‘Topics of the Times’, New York Times, 28 January 1928, 8. 33 Editorial, ‘Back to the Home’, Washington Post, 6 June 1933, 6. 34 Editorial Points, Boston Globe, 14 August 1902, 6; ‘Business Women Hit Bachelors as Selfish; Others Ascribe Condition to Want of Romance’, New York Times, 21 July 1927, 8; Wiggam, above n 11. 35 ‘Wants a Tax on Bachelors’, above n 24. 36 A Wheatley, ‘Tax The Bachelors!’, Los Angeles Times, 21 September 1912, II4. 37 Historical Statistics of the United States, Millennial Edition Online, Tables Aa15-21 and Aa22-35. Print edition available (New York, Cambrifge University Press, 2006). 32

Taxing Bachelors in America: 1895–1939 481 population generally exceeded that of the black population (at least until 1920), within the white population there were far more immigrants (and their descendants) than previously.38 The reality of the statistics, however, was not the only factor driving people’s concerns about population. Such concerns fell into two major categories: quantitative and qualitative. In Europe, starting with the Franco-Prussian War of 1870–71, the concern was primarily quantitative. The combination of declining fertility and wars led to smaller populations generally and especially a paucity of males. This was seen as a national weakness. A large military (consisting solely of men at that time) was needed to repel aggressors at the minimum, and at the maximum so that the nation could expand. Thus, a growing population was seen as a requisite not just for a strong nation, but for the nation’s survival. This need for ‘cannon fodder’39 was especially expressed in the years between the two world wars. Of course, quantitative and qualitative concerns could coexist, as illustrated in Nazi Germany, where the need for increased numbers of citizens was coupled with a particular concern for the quality of its population. Its laws reflected this desire for a larger, more Aryan population. Jews, for example, were not eligible for the marriage bonuses but they were subject to the bachelor tax.40 The US also required a larger population, not for cannon fodder, but to fill its factories and its vast lands. Immigrants traditionally were welcomed, therefore, not just on democratic principles, but also because they helped satisfy the economic demand for increased population—a demand that native-born Americans (no matter how prolific) could not meet. An American strand of nativism, however, coexists with—and contradicts— this welcoming immigration policy. By the late nineteenth century, this nativism contained a racial element opposing immigrants of non-AngloSaxon stock.41 Immigration discussions and actual policies from the late nineteenth century onwards reflected this nativism. The newspaper items in this period suggest that the activity regarding bachelor taxes also reflected this nativism—although sometimes it was a sub-rosa text. Careful examination of the earlier quotes in this chapter expressing concern about declining marriage/fertility rates generally reveals that the real subjects of concern were white, native-born, middle/upper class young men and women. The people being chastised for not marrying and reproducing consumed cigars and spent money on golf, clubs and clothes. 38 MR Haines, ‘Population Characteristic’ in Historical Statistics of the United States, Millennial Edition Online. 39 Editorial, ‘Disarm the Cradle’, Boston Globe, 13 February 1922, 10; Wiggam, above n 11; ‘“Doctor of Science”; Bachelor Tax Buncombe’, Washington Post, 25 March 1911, 11. 40 ‘Jews in Germany Question Subsidy’, New York Times, 3 June 1933, 3; ‘Tax Reductions for Jewish Minors Denied’, Los Angeles Times, 6 November 1938, 2. 41 J Higham, Strangers in the Land: Patterns of American Nativism 1860–1925 (New Brunswick, Nj, Rutgers University Press, 1955).

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They were women choosing to work rather than having to work. They focused on the college educated, who were primarily white and wealthy. G Stanley Hall, a psychologist and the President of Clark University, for example, believed that fewer college graduates were marrying because close contact in coeducation disillusioned young people about the other sex. Moreover, more marriages were occurring later in life, and that was a societal problem: And late marriages are one of the things which tend to the decay of civilization. When the normal man reaches 30 and is not married I begin to think that something is the matter with him. When he is 35 and unmarried I am almost convinced that something is the matter and begin almost to think it might be well to have a tax on bachelors. When he reaches 40 and is still unmarried I am convinced that something is wrong, that the man has neglected his duty, and should be classed with those who will not fight for their own country in time of war or pay taxes.42

Some commentators were even clearer, baldly stating that the problem was the number of immigrants compared to the number of native-born Americans of ‘quality’. A 1903 Washington Post editorial wrote that, although it was not arguing to bar immigration, it was important to understand the consequences for America’s future: Given a steady decline of the birth rate among Americans who have descended from the best European stocks and a continued influx of the worst European stocks, with their swarms of children, it must be only a question of years when the latter will dominate What could be expected of such domination?43

The mere numbers of immigrants, or even the percentage of foreign born to native born, does not explain the increased concern about the decline in marriage and fertility rates among the ‘better’ classes. After all, in 1860 the proportion of foreign born in the US was the highest it would be through 1920.44 A significant backlash against immigration, however, did not occur until the mid-1880s, triggered by the sheer numbers of immigrants and an economic depression. The Panic of 1893 (lasting until 1897) and the perception that the ‘closing of the American frontier’ limited opportunities further intensified social and economic concerns about society, and generally undermined confidence in the state of the union.45 Native-born Americans of many classes responded negatively to foreigners, especially non-Anglo immigrants from southern and eastern 42

‘Is for Bachelor Tax’, Chicago Tribune, 11 July 1903, 1. ‘Warning by Two Presidents. Washington Post, February 15, 1903, 18. In accord, ‘Is for Bachelor Tax’, ibid; ‘Wants a Tax on Bachelors’, above n 24. 44 Higham, above n 41, 14–17. MS Teitelbaum and JM Winter, The Fear of Population Decline (Orlando, FL, Academic Press, 1985). 45 See Higham, ibid, 68–90. In 1890, the census officially declared the frontier closed. RP Porter, H Gannett and WC Hunt, ‘Progress of the Nation’ in ‘Report on Population of the United States at the Eleventh Census: 1890, Part 1. Bureau of the Census’, xviii–xxxiv. 43

Taxing Bachelors in America: 1895–1939 483 Europe, whose numbers had been increasing for a number of years. They were easy targets, with their alien language, habits and religion, and became an easy focus for societal problems and their discontents. Among American-born workers, nativism was a response to the job competition (and low wages) and expressed also a concern about the major changes in society that industrialisation had wrought, including a sharper division between labour and capital than previously. A growing number of labour strikes, including the Pennsylvania coal strikes and especially the Haymarket riot in 1886, created general concern about the social order and about foreigners, who were often the leaders of the strikes and labour unrest. Reformers blamed immigrants for the problems of the cities where they congregated—poverty, crowding, disease and corruption; ‘militant Protestants’ saw them as ‘tools of Rome’. Patricians—especially in New England—viewed them as threats to the Anglo-Saxon traditions that made America strong, and all sorts of people saw them as ‘agents of discord and strife’ who could not be assimilated into American life.46 Fears about the declining Anglo-American population and an endangered democracy were tied to the perceived threat from alien immigrants. In 1891 the economist and President of MIT Francis A Walker stated that the declining birth rate in the US—which he noted when he was the superintendent of the census in 1870 and 1880—was occurring predominantly among native Americans and was in response to the wave of new immigrants. In effect, he argued that, in order to protect their way of life, they had fewer children because they knew their children could not compete with lower wages.47 Scientific theories about genetics, eugenics and race at the turn of the century added to these negative feelings about southern and eastern European immigrants. In 1907 the economist and reformer John R Commons said that the Anglo-Saxon race had been crucial to the development of American democracy. Education and some degree of assimilation, or Americanisation, was possible for the better sort of immigrant, but race and heredity were the more ‘decisive’ aspects of democracy. Moreover, assimilation could only occur if the immigrant were exposed to American ideals and the American way of life, and the crowded slums where most immigrants lived prevented that. Current societal conditions therefore exacerbated the racial problems of immigration rather than ameliorated 46 Higham, ibid, 77, 138. By 1896, southern and eastern European immigrants were outnumbering immigrants from the traditional sources of northern and western Europe, but among the entire US population immigrants from the latter countries still outnumbered the newer immigrants. Idem, 88. By mid-1890s, the general population was beginning to view these particular immigrants as a danger. Idem, 87. 47 Higham, ibid, 143; ‘Thinkers’ Convention: The Annual Meeting of the American Economic Association’, Washington Post, 27 December 1890, 6. See also FA Walker, ‘The Tide of Economic Thought’ (1891) 6 Publications of the American Economic Association 15; FA Walker, Discussions in Economics and Statistics (New York, 1899) 417–28.

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them with education and environment. One novel approach to solving the crowded urban problem, the bachelor problem and the immigrant problem was a suggestion in 1911 by Chicago’s Young Men’s Associated Jewish Charities to tax bachelors 30 years old and above. The money would be used to send Jewish immigrants ‘from crowded, unhealthy tenement districts to country farms’.48 In 1902, President Theodore Roosevelt wrote in a letter to Mrs John Van Vorst that ‘race suicide’ was the most important question facing the country and called on young men and women to become parents to prevent the decline of the country. The letter became the preface to her 1903 book, The Woman Who Toils, and helped stoke concerns about the quality of immigrants and the low Anglo-Saxon birth rates in America, although Rossevelt never specifically mentioned immigration or particular immigrants.49 A 1903 editorial in the Washington Post entitled ‘Warning by Two Presidents’ (Roosevelt and Elliot of Harvard University), commented: ‘If it were possible for The Post to be pessimistic as to the republic’s future, a cause could be readily found in our social statistics’.50 Echoing Roosevelt and Elliot, it found the source in the falling fertility rate—specifically the failure of the best Americans (descendants of the ‘British, the German, and Scandinavian stocks’) to reproduce in the face of ‘the continued influx of the worst European stocks, with their swarms of children’. President Hall of Clark University agreed—once in 1903 and again in 1905—and more explicitly alluded to the sort of people who needed to reproduce. Claiming that the low marriage and fertility rates of educated Americans would lead to ‘race suicide’, he thought a tax on bachelors would be a good idea.51 In 1905, President Roosevelt, before the National Congress of Mothers, again emphasised the societal importance of parenthood (especially motherhood) in creating children and raising them to be sound, honest and courageous citizens.52 University of California President Wheeler perhaps summed it up best: ‘In the long run what upholds the family will uphold the state. The State cannot exist without the home.’53

48 JR Commons, Races and Immigrants in America, vol 7 (New York, Macmillan, 1907) 5–7, 214–20. ‘Relief for Jews in Bachelor Tax’, Chicago Tribune, 15 February 1911, 1. See generally ch 6 in Higham, ibid. 49 See, Higham, above n 41, 142–48; MS Iseman, Race Suicide (New York, The Cosmopolitan Press, 1912) 5; EA Ross, ‘The Causes of Race Superiority’ (1901) 18 Annals of the American Academy of Political and Social Sciences 85; EA Ross, ‘The Value Rank of the American People’ (1904) 57 Independent 1061. 50 ‘Warning by Two Presidents’, above n 43. 51 ‘Attack on Co-education’, New York Times, 11 July 1903, 6; ‘Learning Will Kill Race’, Chicago Tribune, 16 January 1905, 7. 52 Theodore Roosevelt speech on motherhood (13 March 1905), available at http://www. nationalcenter.org/TRooseveltMotherhood.html. 53 ‘Wants a Tax on Bachelors’, above n 24.

Taxing Bachelors in America: 1895–1939 485 In the next several years, the terms ‘race suicide’ and ‘bachelor taxes’ were sometimes explicitly linked—sometimes with approval, sometimes not. Some believed that race suicide was a ‘faddism’ and a joke which would lead to a revival of the ‘ancient and ridiculous farce’ of bachelor taxes on both men and women.54 The Washington Post commented that the ‘desire to prevent race suicide’ was a ‘very good’ motive for bachelor taxes, but that the taxes may go too far.55 A mayoral candidate in San Diego proposed a poll tax on bachelor men over 25 as a way to prevent race suicide.56 Perhaps the most explicit linkage between race suicide and bachelor taxes occurred in 1911 with the submission of a bill in the Illinois State legislature to tax bachelors over the age of 35 $10 a year, with the money going to pay mothers for having children. The preamble to the bill, which gave the revenues from the bachelor tax to mothers, began by stating that the census showed that ‘race suicide is prevalent in the larger cities of Illinois’, especially among ‘those who are designated as the higher classes and with whom livelihood and luxury is more easily obtained and possessed, that paternity and maternity on a large scale have gone out of fashion’,57 so that ‘if present conditions are allowed to continue it can be shown with mathematical certainty that the families of the present, upper classes, with their share of the good qualities of our race, will simply cease to exist’. Since ‘good qualities tend to be inherited’, the bill aimed to encourage motherhood by giving them a bonus which would be paid to mothers. Some women, on the other hand, blamed Roosevelt’s race suicide talk for all the bills regarding bachelor taxes and premium for babies. Bachelor taxes, claimed Dr Anna Howard Shaw, the president of the National Woman’s Suffrage Association, were ‘coarse buncombe’: Undoubtedly a time will come when some women will deliberately choose motherhood as a vocation, and the government will reward them for their services in the state . . . But when the time comes for motherhood pensions the money should be raised by general taxation, not by a tax on bachelors.58

Despite the protests of these women—mainly suffragettes—the link between improving the quality of the race and bachelor taxes continued. There was ‘truth’ in what the eugenicists were saying, stated one commentator in 1921. The uneducated were producing large families, while the educated class, who had a ‘patriotic duty . . . to furnish the nation with hostages of fortune’, were not. A bachelor tax, he said, would help correct 54

‘Race Suicide Foolishness’, Washington Post, 7 September 1905, 6. ‘The Bachelor Tax’, Washington Post, 21 February 1909, E4. 56 ‘Woman Mayoralty Candidate Urges Tax on Bachelors’, Chicago Tribune, 29 August 1912, 3. 57 ‘Asks State Aid to Lure Storks’, Chicago Tribune, 21 March 1911, 1. 58 ‘Bachelor Tax Buncombe’, above n 39. 55

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the situation.59 In 1929, the President of the Eugenics Research Association suggested that a bachelor tax would help solve the problem of the best families producing the least number of children.60 By the 1930s, bachelor taxes mainly were discussed in the context of the very non-democratic Italian and German tax policies to encourage marriage and children. Moreover, income taxes became increasingly important in the US tax system, and the battle about the tax treatment of married and single taxpayers shifted focus from explicit taxes on bachelors to the consequences of tax rates and filing. That, however, is another story.

C ONC LU SION

Bachelor taxes have existed across the globe and throughout history. Today they survive mainly in an income tax as a by-product of favourable provisions for married couples (eg exemptions, tax rates). As recently as the early twentieth century, however, bachelor taxes were primarily direct, explicit taxes on bachelors, and not merely the result of some other tax or tax policy; rather, bachelors were the actual subject of the tax. This chapter examined bachelor taxes in the US from 1895 to 1939. During this period, newspapers showed a consistent interest in these taxes. Over 700 news items discussed bachelor taxes. Sometimes the items were about US taxes (actual or proposed). Sometimes (especially in the 1930s) they concerned foreign bachelor taxes, especially those in Fascist Italy and Nazi Germany. The American articles differed significantly in tone and content from articles in the English and Irish press of the same time period. Some might argue that these articles are of little consequence because many were humorous pieces and/or used centuries-old characterisations of bachelors. The historian John McCurdy, for example, remarked that it would be a ‘mistake’ to take nineteenth-century American newspaper and pamphlet descriptions of bachelors as selfish, frivolous and shirkers at ‘face value’. These portrayals, he cautioned, were stereotypes that did not represent the contemporary views of bachelors. These same stereotypes appear 100 years later in discussions of bachelor taxes. McCurdy is correct that they should be interpreted with caution, but it would be a mistake to ignore them completely. Stereotypes are used because they resonate emotionally with the audience. They contain nuggets of psychological/social truths, if not factual ones. The different tone and content of articles about bachelor taxes in America on the one hand and the English/ Irish treatment on the other reinforces their significance.

59 ‘Favors Tax on Bachelors’ in ‘Chats with Visitors’, Washington Post, 29 September 1921, 6. 60 ‘Now It Is Family Relief’, New York Times, 3 June 1929, 17.

Taxing Bachelors in America: 1895–1939 487 The nugget of truth, this chapter suggests, is that, from 1895 to 1939, bachelor taxes served an expressive, not instrumental purpose. The period’s persistent—albeit not huge—interest in bachelor taxes reflected a general malaise about the state of American society generated by decades of industrialisation, urbanisation, consumerism and demographic changes. These forces created societal tension even as they altered attitudes and actions in regard to everyday living patterns and basic societal institutions, especially marriage. Economically hard times, as frequently occurred in this time period, magnified the tensions. The chapter posits that this tension—not the need for revenue—was the primary motivation for interest in bachelor taxes. The news items—no matter how short or how amusing—communicated an unease about the declining centrality of marriage, the shifting morals of a consumer society more concerned with having fun than rearing children, the changing role of women and a concern that populations were unhealthily declining— especially the better portion of that society. The fact that many more bills were proposed than actually enacted also suggests that the purpose of proposing the bills was primarily expressive. Even in cases when revenue was the stated reason for a bachelor tax, the bachelor tax was never a ‘revenue-only’ tax. Societal conditions and attitudes, and not tax considerations, generated a sense that bachelors were a suitable object of taxation. Administratively, taxing bachelors was no easier—and, indeed, a great deal harder—than taxing all individuals. Occasionally, theoretical arguments were made that bachelors had a greater ability to pay than married taxpayers, but generally these arguments were secondary to the normative justifications propounded in American newspapers: bachelors deserved to be taxed because they were failing their moral, social and civic duty to settle down, marry and produce future citizens. Indeed, the failure of the ‘better class’ of young adults to marry and adequately reproduce undermined, according to some commentators, the very fabric of American democracy. The growing importance of the income tax as well as changing times eventually diminished interest in bachelor taxes—at least explicit, direct taxes on bachelor. By the end of 1930s, the income tax became the primary battleground regarding marriage bonuses/bachelor taxes and the focus switched to the carrot of rewarding marriage rather than the stick of taxing bachelors. Nevertheless, attitudes about marriage and its role in society continue to affect tax policy and reflect broader political and societal attitudes and values. Over 25 years ago, Boris Bittker claimed that ‘society’s assumptions about the role of marriage and the family’ were the most influential factor in choosing a taxable unit. Bachelor taxes/marriage bonuses, of course, are not the only example of the decisive role societal assumptions play in the tax system—ranging from basic issues (the choice of a rate structure) to individual provisions

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(education or energy credits). They are, however, one of the most clear and enduring reminders that the quest for a revenue-only, objective tax is as an arduous and dangerous quest. It is arduous because of the difficulty (theoretically and politically) of identifying and then eliminating every tax preference and loophole in the tax laws. The danger lies in the belief that success in eliminating loopholes is possible and that such success would make the tax laws objective. Societal preferences inevitably affect basic elements of any tax system: the tax base, the tax rate and the taxable unit. So long as we are aware of the societal aspect of the tax system, we can, to some extent, make adjustments or compensations for systemic biases. An illusion of objectivity, on the other hand, allows these biases to operate unobserved and unchecked, and, ironically, may make the tax laws more subjective, not less.

16 Dutch Tax Reforms in the Napoleonic Era ONNO YDEMA AND HENK VORDING

A BSTR A C T In the Netherlands of the late eighteenth century, under the protection of the post-revolutionary French, the so-called Batavian Republic had to unify the different taxation regimes of the previous independent provinces, and chose a system based on a contribution proportional to income. Finance Minister Gogel was charged with devising and implementing this new system, which would become effective in January 1806. Eventually the French taxation system was implemented in the Netherlands after its annexation into the French empire by Napoleon. This article describes the solutions to the effective problems that the new system of 1806 had to deal with and the choice of taxing presumed income instead of real income, and the consequences of introducing the French taxes in 1812. The authors further describe the later reflections on tax theory by Gogel. Since the new system was closely related to the taxes raised in France, reference is made to the publications on tax theory of Gogel’s French contemporary Jean Baptiste Say.

I N T R ODU C T ION

I

N 1810 ALEXANDER Gogel joined the French service under the ostentatious title of ‘Conseiller d’état général des finances’, with the task of introducing the French system of taxation in the Netherlands. His reputation as a tax reformer had, by then, already been established: as the Minister of Finance, he had introduced the General System of taxation in 1805.1 In this contribution, we will first outline the system that Gogel introduced in 1805, then turn to the most significant changes 1 T Pfeil, Op gelijke voet, de geschiedenis van de belastingdienst (Deventer, Kluwer, 2009) 75; AM Elias, ‘De invoering van het Franse belastingstelsel hier te lande in 1812, voorgeschiedenis en gevolgen’ in G Goossens (ed), Gielebundel (Deventer, Kluwer, 1990) 221v.

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implemented in 1812, when the French tax system was formally adopted in the Netherlands. In addition, we will describe the basic principles of taxation as perceived by Gogel himself. For the French perspective on tax principles, we will quote from the work of Jean-Baptiste Say. It is true that his work was not appreciated by Napoleon as (co-)tax legislator in France (and ultimately also in Holland), but in the France of his time Say did make a substantial contribution, also to the development of modern tax law. We realise that the reflections of Gogel and Say largely stem from sources written several years after the Dutch–French period. Given the fact that both parties were close to the action (or, as in the case of Alexander Gogel, at the centre of the action), it seems justified to relate to these sources mentioned for the period 1812–13, albeit with some reticence.2 A review of the history of taxation is not necessarily interesting. The damage has been done and the anecdotal significance is limited. What could be interesting is the underlying concept: that the basic ideas that were formulated at that time could be relevant to the present-day tax laws. Therefore we will end with the question whether the episode of tax history described here could be of value for the modern tax laws.

ALEXA NDER GOGEL

Alexander Gogel (1765–1821) came to Amsterdam at the age of 16, where in 1791 he became one of the partners in his own merchant house, Gogel, Pluvinet & Gildemeester. In Amsterdam Gogel saw at first hand the condition that the old Republic was in and he learned to recognise the French revolutionary range of thoughts. Early on it became clear to him that the democratic ideals of the revolution did not conform to the existing system of individual provinces and that a united state should be the future. After the revolution in 1795, during which the Batavian Republic was created, Gogel was appointed positions in various administrative bodies, such as the Municipal Committee of Finance in Amsterdam. Moreover, he became the co-editor of the magazine De Democraten (The Democrats) and he gave advice to several constitutional commissions—amongst other things, for the preparation of the first Unitarian Constitution of 1798 (also known as the first Constitution), which laid the foundations for an amalgamation of the regional government debt and a national uniform tax system. The introduction of such a system of taxation could not be delayed as the Constitution stipulated that 2 Cf JH Hofstra, ‘De belastingunificatie van 1805’ in JEAM van Dyck and ChPH Geppaart (eds), Smeetsbundel, opstellen aangeboden aan prof dr MJH Smeets ter gelegenheid van zijn afscheid als hoogleraar aan de Katholieke Hogeschool te Tilburg (Deventer, Kluwer, 1967) 235–36.

Dutch Tax Reforms in the Napoleonic Era 491 within one year after the first sitting of parliament, the Executive Body is to introduce a new system of taxation to fund the state budget, and in particular the payment of the annual interest and the repayments of the entire Republic.

Here we can read a reflection of the greatest problem of that time: the new Batavian Republic had inherited the debts from the virtually bankrupt old regency Republic. Moreover, the Constitution established the new criterion that: ‘This new tax system is to be arranged in such a way that the residents, where possible, would pay tax in relation to their means and this would be determined by comparing their possessions, income and where possible expenditures’.3 The choice was therefore made for a proportional burden of taxation, relying generally on the benefit theory. The distribution of the tax burden should serve to reflect each citizen’s interest in the performance of the state.4 Subsequently, after much hesitation,5 Gogel became a member of the Executive Body under the title of Agent of Finances in 1798, and with this he began his public career as one of the most influential members of government that the Finance Department had.

J E A N BA PT ISTE SAY

Jean Baptiste Say (1767–1832) was an economist and businessman, and one of the founders of the theory of political economy. Early on he became a member of the Tribunat, a state organisation that advised on legislation, and within that body he was head of the Finance Section. From 1821 he taught at the Conservatoire National des Arts et des Métiers and from 1830 at the Collège de France. He is best known for the so-called Say’s Law, which states that there can be no demand without supply because, by definition, total demand (purchasing power) and total supply (production) must be equal. His principal work is the Traité d’économie politique, the first edition of which was published in 1803. Say derived his inspiration for writing Traité from reading Adam Smith’s Wealth of Nations from 1776, and critics sometimes tend to describe his Traité as a popular interpretation of Smith’s ideas. Regardless of its merits,6 Napoleon asked him to change a number of passages of the Traité and, when Say refused, the Emperor prevented the publication of the planned second edition. Abroad, the work attracted the attention of Thomas Jefferson and James Madison 3

Art 210. For example, Anon, Ontwerp van een samenstel van algemeene belastingen over de geheele Bataafsche Republiek . . . (The Hague, 1801) 10–11, building on the Constitution of 1798. 5 J Postma, ‘Alexander Gogel: bouwer van de eenheidsstaat’ (2010) 12(1) Pro Memorie 65. 6 Alain Béraud recently stated in a review that, at the most, the reproach holds true for the edition from 1803: http://www.u-cergy.fr/beraud/traite.pdf. 4

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(both well-known presidents of the US). According to Madison, it was the best economic treatise ever written and Jefferson ensured that the work was translated into English.7 As a businessman, Jean-Baptiste Say ran a spinning mill with varying success. In that respect, he resembled Gogel, who in his later private life ran a washing blue factory, also with varying results.

GO GE L’ S TA X R EF OR M, 1799–1806

To return to Gogel: in 1799, in his function as Agent of Finances, Gogel developed a tax law which was passed by the Representative Body in 1801. The law was never enforced due to the coup of 1801; the subsequent Constitution of 1801 felt that the time was not yet ripe for the immediate introduction of a uniform system of taxation across the whole of the Republic.8 In 1805, Gogel finally got the opportunity to implement his plan for a uniform taxation for all provinces when he joined the government of Schimmelpenninck. To him, it was not just a matter of enforcing a theoretical ideal model for taxation, as the government was dealing with a shortage of 55 million guilders for a population of approximately 1.8 million. When Gogel proposed his general system of taxation as a last resort to ‘ensure the continuation of the system of the Republic under the powers of Europe’, then it was based on the actual situation that the Republic had few options remaining in the continuing financial crisis. The legislative body could only hope that ‘unity in the financial system (and) unity in all other measures . . . could save the sinking Republic from downfall’.9 The new system of taxation would become effective from 1 January 1806, uniformly in all regions of the Batavian Republic. This was the first taxation that would apply to the whole of the Netherlands as we know it today. According to Gogel, ‘by introducing general taxation’, all the existing barriers between the regions would cease to exist, and all purchases, sales, transit trade, business and processing industry would become ‘free’ of other taxes. What would be the result of this? Would it not mean an increase in the distribution of general prosperity and encouragement for industry, not just in certain places, but everywhere?’ Moreover, the smuggling practices would cease to exist as there would no longer be any difference in tariffs and, as a result of this, large savings in custom control would be achieved. Finally, introducing a uniform administration in all provinces would mean that

7 MN Rothbard, Classical Economics, An Austrian Perspective on the History of Economic Thought II (Auburn, 2006) 7. 8 Staatsregeling van 1801, Art 57. 9 Pfeil, above n 1, 40.

Dutch Tax Reforms in the Napoleonic Era 493 new taxes could be adopted more easily—a conclusion which he had borrowed from the practices in England.10

How to Tax Income? We have seen that the Constitution of 1798 had chosen to adopt a proportional tax burden on the means (tax-bearing capacity) of its citizens. This would follow from the Social Contract, such as ‘le contrat social’ that had been adopted from Rousseau. This contract would necessitate that, for tax legislation purposes, taxes should serve to fund the government’s core tasks, namely ‘personal protection’ and the ‘protection of Goods and Assets’, as explained by the Appelius committee on 9 July 1800 in its fundamental debate on Gogel’s first bill from 1799, and: ‘It speaks for itself that all owners should pay taxes in proportion to their assets. These taxes have been imposed primarily for their own needs.’11 This capital is actually based on the income that is continually generated by the citizens, as the value of these assets is determined by the ‘expected incomes’.12 With the present-day income tax system, the relationship of taxation to income is evident, but if the government imposes a tax on consumption then the underlying fiscal aim is still to achieve income, although indirectly via consumption.13 One of the specific problems of tax legislation in Gogel’s days was that the government had difficulty in determining actual incomes. The taxpayers also did not always know the size of their income, as bookkeeping was often unreliable; in addition, they also felt an amount of emotional resistance to revealing their income honestly. Any attempt to tax the actual income, if that were at all possible, would include thorough inquisitorial checks from the government. In his tax system of 1805, Gogel was not interested in the actual income, which was difficult to assess and would involve inquisitorial interactions with the contributor; in his legislation, the contributor’s capacity to bear taxes was estimated using objective and external indications of the taxpayer’s wealth, which were easy to determine. As the basis for taxation, Gogel chose, where possible, for external and calculable symbols of wealth, such as the rental value of a property, the number of hearths, the number of servants, expensive horses, etc. The tax assessments related to this could be determined with minimum costs and maximum clarity. Objec-

10 Cf HT Colenbrander, Schimmelpenninck en Koning Lodewijk (Amsterdam, 1911) 46–47. Gogel was also familiar with the English literature; he had read, for example, A Smith’s Wealth of Nations. JA Sillem, ‘De politieke en staathuishoudkundige werkzaamheid van Isaac Jan Alexander Gogel’ (diss, Amsterdam, 1864) 198. 11 ‘Rapport van de Burgers Repraesentanten Appelius, …’, 20. 12 Loc cit, 27. 13 Gogel, Memoriën, 399.

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tionable controls by the Treasury would be restricted to a minimum.14 In 1797, the minister had still advocated a progressive tax on actual income earned15 in an article in De Democraten. Having learned from his experiences of exceptional income taxes in his own country16 and strengthened by the experiences abroad (the progressive income tax of Pitt in England, for example, for the funding of the war against France), he was, however, abandoning the idea of taxing the actual amount of income earned. Evidently he had concluded that the revenues from taxes on income actually received were disappointing, while the social costs (levying of the taxes, controls, and fraud) were high.17 The effective levies would be described in his General System of 1805 as the so-called written and unwritten means.

Written Means Included in the written means (tax by means of assessment) is the land tax. This tax was based on the rental value of immovable property such as country estates and buildings. This was an important levy in a period when the agricultural sector formed one of the most important cornerstones of the national economy. A tax based on rental value means that to some extent the income can be estimated as a fixed sum; the rental value is after all a reflection of the income that can be fairly generated when it is rented out, after the deduction of all operating costs. Whether that income is actually achieved or not is irrelevant to the Treasury—as are any surplus profits that are made. In modern terms, the object of taxation is the earning capacity. Therefore the earning capacity is not the actual part of the income that is subject to taxation, but the capacity to generate income. Subsequently, the legislator would try to approach the tax-bearing capacity of the individual via direct consumption taxation, the ‘personal’ tax. This was intended as a wealth tax that would not affect the minimum incomes. The levy included, amongst others, a user’s tax for average and more expensive houses according to their rental value.18 ‘In the province of Holland, every house is taxed at two-and-a half-per cent of its value’, 14 T Pfeil, ‘“Tot redding van het vaderland”, het primaat van de Nederlandse overheidsfinanciën in de Bataafs-Franse tijd 1795–1810’ (diss 1998) 411–12. 15 Gogel (attributed’ in De Democraten (The Democrats) 40, 9 February 1797) 293–97. 16 Concerning this, JMF Fritschy, ‘De patriotten en de financiën van de Bataafse Republiek, Hollands krediet en de smalle marges voor een nieuw beleid (1795–1801)’ (diss, Leiden, 1988) 137. 17 Cf Pfeil, above n 1, 45. Hofstra’s comment, that income as a basis was deliberately ignored, appears in particular to have been an opinion of Hofstra as a politician. Hofstra, above n 2, 236. 18 In the old Republic, the owners of immovable property were affected by the land tax, at least in Holland.

Dutch Tax Reforms in the Napoleonic Era 495 a relatively high tax that would amount to more than a third of the rental value, according to Adam Smith. The English economist estimated the property tax to be ‘materially progressive’, based on income, as high income earners would spend relatively more on comfortable living.19 We find numerous proposals for a property tax after the Revolution of 1795, such as those of Johan Hora Siccama and Boudewijn van Rees, who, on 15 October 1798, had released a report to the Representative Body. In this report they proposed a levy of 2¼% on the value of the property. The starting point was that the quality of the property would provide a good indication of the tax-bearing capacity of the rate payer. In 1798 it was said that ‘But very few people who have a luxurious way of life would choose to live in a small confined dwelling purely to avoid paying tax’. and in 1800 the Appelius committee gave a thorough explanation of the background of this: ‘that the same taxation . . . could be viewed as an income tax; as the majority of people would preferably choose a [luxurious] property if their financial situation would allow this’.20 Therefore they tried to approach the income without being trapped by the fact that taxing income would necessitate inquisitorial controls which in the end would make working and entrepreneurship less attractive. Where the latter is concerned: The greatest difficulty with this measure appears to be that a tax imposed on income is a tax on enthusiasm for work, industriousness and hard work and therefore does not provide motivation, but is a suitable measure to curb this motivation.21

This drawback is not evident when the income is approached indirectly, as in the case of a property tax. Siccama and Van Rees assumed that this tax, combined with the remaining taxes in the proposed mix, would result in a proportional tax burden. The question is whether the percentage that is spent on living costs keeps pace with the increase in income. If this is not the case, as was apparently assumed22in Holland and also in France, and unlike Adam Smith presumed, then a correction seemed appropriate. The property tax that Gogel was to introduce in 1805 had for that reason 19 Smith, above n 10, 5.2. Cf Fritschy, above n 16, 138–39. Though the French legislator started from a converse assumption, cf Walsh, ‘A Letter on the Genius and Disposition of the French Government, including a View of the Taxation of the French Empire’ (February & May 1810) III The Quarterly Review 328; P Leroy-Beaulieu, Traité de la Sciènce des Finances (Paris, 1879) vol I, 160–61. 20 Rapport van de burgers JH Siccama en B van Rees, als door de commissie tot het ontwerpen eener constitutie voor ’t volk van Nederland . . . Verzocht en gecommitteerd . . . (The Hague, 1798) 74 (Rapport-Appelius). 21 Ibid, 66. Also expressed, for example, by the member of the National Assembly Hahn, Dagverhaal 420, 13 March 1797, 145. 22 The Appelius report considers that the housing tax is already proportional to income, and therefore there is no need for an additional Hearth money. Rapport-Appelius, above n 20, 77.

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a certain progression due to the fact that the lowest rental values were not liable for tax,23 and the tax on the remainder was accumulated from the hearth money—an additional progressive tax on larger homes that had more than two hearths (fireplaces). A different form of effective progression would develop on account of the fact that the value of the contents of the property would also be a basis for a levy in the form of a tax on ‘furniture’. In general, the advantage of having a consumption tax is that inquisitorial investigations could then be avoided; however, this did not apply to the hearth money and the furniture. Conversely, the value of the furniture was an acceptable indicator of an individual’s tax-bearing capacity: early nineteenth-century interiors often displayed wealth that bore witness to the prosperity of the family. In order to record this wealth, an inconvenient investigation would have to be carried out periodically. That is the reason why, in the case of the furniture tax, the option of a presumptive income tax assessment was agreed upon, whereby the tax would be redeemed at five times the rental value.24 At that time. the personal tax also included the long-standing levy on keeping domestic staff—another source of effective tax progressivity.25 Finally, taxes on keeping horses and owning carriages should also be mentioned.26 In his influential overview from 1883, Sickenga states that the name ‘personal tax’ refers to the object of the levy: this would mean an assessment on each individual, or rather on each economic unit, living alone or as a family, insofar as this economic unit was not completely insolvent. This turnaround was achieved by taxing consumption and therefore worked indirectly as a tax on the personal income of the taxpayers. This form of taxation would have the advantage that it could be registered annually for certain known external goods, where no tax return for income or capital was necessary: It banishes arbitrariness and is best suited to be levied from those who have the most wealth and are most able to pay, as well as to protect those who are less able to pay or cannot pay at all, from any obligation to pay tax.27

The patent right, the ‘right of patent on all forms of trade, commerce, professions and businesses and all other forms of wealth and/or pleasure’, was absent in Gogel’s tax law from 1799, first entering the stage in his 1805 tax reform. Various taxes were included in this patent right, the 23 Hofstra was also unimpressed by this, as the bar had been set very low. Hofstra, above n 2, 241. 24 Gogel, above n 13, 399. He was also of the opinion that in that period, at six times the rental value, the financial capacity would have been reached more easily. 25 A comprehensive description concerning this is in Rapport-Appelius, above n 20, 84v. 26 We do not elaborate here on the extent to which taxation also endeavoured to affect agriculture. For this refer to MWF Treub, Ontwikkeling en verband van de Rijks-, Provinciale en Gemeentebelastingen in Nederland (Leiden, 1885) 117; Hofstra, above n 2, 240. 27 Colenbrander, above n 10, 49.

Dutch Tax Reforms in the Napoleonic Era 497 most important of which was the payment of a licence to enable people to pursue certain professions. The aim of this licence was once again to achieve the ‘earning capacity’ and, by complying with certain criteria, the tariff was determined by estimating the income to be generated in a fair manner. Gogel had copied his patent right from France. When it was introduced there, the most important formal motive for this was that the licensing system would contribute to transparency in the economy.28 However, the fiscal motive also seemed to have contributed to this.29 In his later reflections on the taxes that he had helped to introduce, Gogel was self-critical, in particular over the patent tax: ‘after everything that I have seen happen, I am horrified at the idea, that in 1806 I had the foolish notion to bring this into force’.30 The actual objection to the levy is the arbitrariness of the system: ‘the law is so clever, so ingeniously detailed and so arbitrary that the amount that someone should pay for their livelihood is completely dependent on the approval of trained civil servants or of people who are not familiar with the intrinsic value of what takes place in the business’. Moreover, the tax would hinder the changeover to entrepreneurship. It would result in young people being deterred from starting a business—or result in others, who in addition to their regular daily work have an additional job, having to give this up or refrain from starting one altogether’.31 It must be admitted that Gogel’s own opinion of his own legislation and the legislation implemented afterwards by his successors is both open and honest: ‘A superficial insight into the financial laws and in particular those concerning the levying of indirect taxes, since known as excise duties, was sufficient to convince me that the measure was undesirable’.32 However, Gogel’s starting point was that taxes are a necessary evil, and ‘that from the various forms of evil one must choose the best’.33 Towards the end of the nineteenth century, it was argued in the literature and by the legislator that the patent right in combination with the personal tax placed a disproportionate burden on the middle classes.34 However, the tax existed for 87 years in the Netherlands, which on balance indicates that it was a workable instrument. 28 C Gomel, Histoire financière de la législative et de la convention II, 1793–1795 (Paris, 1902–05) 510–13. 29 At first sight the tariff seemed sizeable, but as it could be paid with ‘assignats’ (paper money)—virtually worthless securities (the reductions amounted to 95%)—the pressure was initially limited. Gomel, ibid, 512. 30 Gogel, above n 13, 464. 31 Ibid, 47. This does not correspond with the patent tax which was levied in Holland during the French period, see JG Dulaurens, Handleiding der contribuabelen, of verzameling Inhoudende de Grond-wetten . . . (Amsterdam, 1811) 79, Grondbeginselen betrekkelijk het Patent-regt en Tarief van hetzelve, Art 31: only one patent at the highest tax level was compulsory, after this the taxpayer was free to take on what he wanted. 32 Gogel, above n 13, 34. 33 Ibid, loc cit, 35. 34 Eg Anon, Iets over de toepassing eener belasting op de inkomsten in verband beschouwd met de afschaffing van die op het personeel en patentregt (Amsterdam, 1843)

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Unwritten Means The unwritten means (taxes without assessment) were particularly important for ensuring a constant flow of tax revenue. These included, in particular, the excise duties on salt, soap, milling (bread), slaughtering (meat), spirits and wine (drinking wine at that time was considered evidence of a low education),35 fuel such as coal, and tobacco. Since the revolution of 1795, the various authors of essays concerning a new taxation system had generally indicated that taxes on the primary necessities of life such as those levied during the old Republic were incompatible with the ideals of the revolution; in particular, the degressive effects of such taxes would interfere with the principle that taxes should be levied in proportion to means. In the period after 1795 there was a widespread view that taxes on basic necessities had to be abolished. The Constitution of 1798 had a similar approach and determined that ‘there can be no taxes levied on necessary food products’36 and also that all taxes on consumption, if this has already taken place, should be adopted and enforced in such a way that the same percentage can be levied from every person’s expenditure to the amount that he can afford to pay after the deduction of necessary costs.37

The Appelius Committee followed on from this in its comments on Gogel’s tax act of 1799,38 and two decades later Gogel would mention this in his memorandum with the words: ‘where possible, tax should be levied on that which transcends general necessity: that which belongs to luxury, and that which depends on the freewill of the people’.39 In accordance with these opinions, Gogel abolished numerous excise duties in order to meet the concerns that many contemporary authors had identified, but the excise duties that he did uphold he did for budgetary reasons, even though these were difficult to reconcile with his ideas on tax-bearing capacity at that time. ‘If it were possible to abolish these and similar taxes, then we would not advise for their continuation, and of course the state would not allow for the removal of such a large part of its income’.40 The fact is that these levies affect the whole population and have a relatively high yield, and if these are abolished it will have unavoidable budgetary conse9–10; Wetsvoorstellen van den heer Goeman Borgesius c.s. betreffende . . . afschaffing van het patentrecht . . . (Haarlem, 1890) 103. 35

Colenbrander, above n 10, 109. Art 210d. What these basic necessities would be is in effect left up to the outside observer. The Appelius report limits the list in any case to an absolute minimum. RapportAppelius, above n 20, 95. 37 Art 210c. 38 Loc cit, 28. 39 Ibid, 39. 40 Cf Colenbrander, above n 10, 47. 36

Dutch Tax Reforms in the Napoleonic Era 499 quences. Moreover, the question is whether such tax levies by definition place a disproportionate burden on low incomes (see below). Worth mentioning also is the inheritance tax, which the Appelius Commission referred to in Gogel’s bill of 1799 as ‘the most tolerable of all the taxes’. That is understandable, as the tax was only levied on succession in the case of second-degree relatives and unrelated parties.41 Finally, we mention the stamp duty on public acts (a tax on production), and the stamp duties on the sale of certain luxury articles such as hats, gloves, perfume, playing cards and newspapers (a tax on consumption). The first-mentioned category covered mainly commercial contracts, and tried to tax the potential profits of commercial activities. Stamp duties on luxury articles serve as counterparts to possibly degressive taxes elsewhere in the tax mix; ultimately, the whole system of taxation should lead to a tax that is proportionate to capital.

Implementation of the General System of 1805 After the acceptance of the proposal by the legislative body, a great deal of practical work had to be carried out by the Ministry of Finance. For each tax, a separate ordinance had to be issued with descriptions of the implementation of administrative regulations. This resulted in some taxes only being implemented several years later. Problems with application, for example, delayed the introduction of the stamp duty as the necessary stamps and forms still had to be produced.42 There also appears to have been considerable resistance to the new system from the civil service.43 Nevertheless, all in all, the General System proved successful. With an increase in tax revenues of 7.7 million guilders in 1806 and 9.6 million in 1807, the minister should not have been dissatisfied, especially in the light of the French blockade policy, the wars in Europe, and the economic recession for trade and industry.44 Under these economic conditions, an increase in revenues implied that the total tax burden increased as well, and the fact that the relative importance of the unwritten means was increased could imply that those with lower incomes were slightly more affected. Pfeill concludes in his recent study, and similarly Sillem in his dissertation of 1864, that Gogel’s tax system had taken the tax-bearing capacity of the citizens more into account than had been the case in previous governments,45 but Hofstra, who had been Minister of Finance for the PvdA (Labour Party) himself 41 42 43 44 45

Rapport-Appelius, above n 20, 132–33. Pfeil, above n 1, 40–41. Appelius to Minister Gaudin on 17 July 1811, Gedenkstukken, 1492. Pfeil, above n 1, 46. Ibid, 47–48; Sillem, above n 10, 187.

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in the period 1956–58, had not been convinced. Elaborating on the dissertation of Treub,46 he had established that the tax-bearing capacity could not have been the criterion for the system, which instead showed a reflection of the declining sympathy for large-scale landownership after the revolution, or for the needs of the farming community and the workers who were still confronted with taxes on their primary necessities in life. The system would reflect the thoughts of the citizens that there were sufficient workers available due to the structural unemployment in large parts of the country, and the absence of fear for the automatic wage increases that Adam Smith had mentioned.47 Even though Hofstra felt (and warned)48 that he had adhered to the standards of his time, he could hardly accommodate the concerns of Gogel for the less fortunate in society. Gogel was obviously so focused on being given the task of designing one system for general taxation that he had used the existing system too readily and had therefore, at the very least created the impression that he had not studied how the system should function in order to theoretically show sufficient coherency, and ensure justice in the actual distribution of the tax burden amongst the various groups.49

Gogel had apparently already anticipated that sort of comment, as he declared later that his tax laws from 1799 and 1805 were not based on ‘untested theories’ but on experience; these could probably be improved upon, but this would not involve any unexpected adverse consequences. This would be of more importance than any armchair suggestions. Anyhow, in one of his later memorandums, Gogel states that justice plays a key role in this. All tax systems in civil society, whether large or small, or governed by a monarch or a republic, should lead to the promotion of salvation, prosperity and satisfaction among all its members. They should never seek to benefit certain classes or seek exemption from taxes for particular classes or that these taxes should form a particular burden for others.—Equality of assets and means to pay and not equality of individuals should be taken into account by the tax authorities.

Here we see the principle of equality put into words that have not abated since the time of Gogel, though with a particular caveat: it is not about equality of condition. This is an important attitude that Hofstra in his political beliefs of 1967 could perhaps have taken note of—an attitude that has been repeatedly challenged in theoretical and political debates of the later nineteenth and twentieth century. Essentially, it should have 46 47 48 49

Treub, above n 26. Hofstra, above n 2, 243. Ibid, 241–42. Ibid, 242 (original emphasis). Cf Elia, above n 1, 226.

Dutch Tax Reforms in the Napoleonic Era 501 concerned equal opportunities, but Gogel wanted to acknowledge that the differences in tax-bearing capacity in society should nevertheless not become too great, in particular not when the productive income within society accumulates in just a few high income groups. Moreover, he kept a careful watch on the conditions of the lower income groups. Man has not been put on this earth by his creator to work from his early youth until his hour of death without having any pleasure. A sober living that is just adequate to keep him alive does not satisfy the aim of his presence: he must have something more to enjoy. The good Henry the Fourth had this idea in mind when he wanted every farmer to have a chicken in the pot on Sundays.

Gogel does not make a decision about how the government should take corrective action, but he considers that there is no place for this within the tax legislation.50 This means that the former minister chose neutrality in the levying of taxes. Taxes are primarily to be used for fiscal purposes, not as policy instruments. It must be admitted that Gogel advocates taxing those earning more: ‘The State is obliged not to deprive the working man of what he has earned from his fellow man for labour, but it should preferably tax employers [high earners]’.51 However, this did not mean ending the principles of the Constitution of 1798, which states that ‘all taxes [should] where possible be in proportion to the capital of all the inhabitants’. Although the incomes of high earners could be liable to taxation, the consumption tax should be for ‘that which transcends primary necessities;—that which is classed as luxury, and that which depends on the free will of the individual’.52 The government should also ensure that the middle classes are not taxed too heavily. When reflecting on the 1820 post-war tax system (for which he did not feel responsible as a retired politician), Gogel states that: The whole burden rests on the producing classes. Patents, stamps [proof of payment of taxes], registration fees, lastages, excise duties, import duties, postal services, in one word—everything except the land taxes are to be borne totally or in particular by this [middle class].53

For a large part, this resembles the modern era, where in the political arena the pressure on the middle class is also often emphasised. The fact is simply that in the majority of economies the lower income earners have little tax-bearing capacity and the group of higher income earners is too small to expect a considerable budgetary benefit from a high rate of taxation. The middle classes are in a position to ‘enjoy’ much more attention from the tax legislator. Quite often this leads to an excessive 50 51 52 53

Gogel, above n 13, 36–38. Ibid, 39. Ibid, 39–40. Ibid, 42.

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burden on the middle class, even though it is in the public interest, and, in the words of Gogel, ‘work should be encouraged and industry should not be deterred; businesses should remain free and have as few limitations as possible’.54 Gogel could not possibly have imagined a marginal income tax rate of 52% (now applied to middle-class levels of income in the Netherlands), but conversely, the present-day ministers can easily imagine the principles of the nineteenth-century minister: that work should be encouraged and that businesses should have as few limitations as possible. For that reason, they presented a Fiscal Agenda to Parliament in April 2011, in which a choice was made to make work and entrepreneurship more attractive by shifting the tax burden from income tax to a tax on consumption. According to the Fiscal Agenda, this fits in with the Dutch policy that taxation should interfere as little as possible with the economy, and in the case of international movements to lower the tax burden on labour.55 This would also have been consistent with the principles of the early eighteenth century legislator. Gogel elaborated further upon his principles when he stated that a government that is forced to take difficult taxation measures should comply with the principles of legal certainty so that everyone ‘[can] make some prior calculations’. This can be viewed from different perspectives, as our author also stated that ‘the laws [must] be clear and comprehensible’ and no ‘obligatory formalities’ must be placed upon entrepreneurs. We still recognise this problem in the harsh administrative commitments of present-day entrepreneurs. For the era that he was in public office, Gogel recognised his own shortcomings. When he considered the laws on taxation that he was partly responsible for, he stated that they were ‘so vague and so difficult that even I, with my many years of experience of the laws do not understand, or grasp, and if I had to implement them I would not know how’. This also applied to his own patent act, which we mentioned previously: ‘the Patent’s Act is a masterpiece of all defects; this act is incomprehensible for even the most benevolent official while the person with bad intentions who understands this act can torment the country’s residents’.56 The author of the report ‘Conseiller d’Etat Réal sur la mission en Hollande’ from 1811 agreed that the Dutch laws were complicated: C’est au reste une science très-difficile à acquérir que le système actuel des impositions hollandaises; et il faut bien que l’administration elle-même soit bien convaincu de cette vérité, puisqu’elle est obligée de faire imprimer chaque année et de distribuer, ou pour me servir de l’expression technique, d’insinuer au contribuable une instruction imprimée sans laquelle il est impossible, et avec 54

Ibid, 39. De Fiscale agenda: Naar een eenvoudiger, meer solide en fraudebestendig belastingstelsel, Hand II 32 740, no 1, 7–9, 14. 56 Gogel, above n 13, 43. 55

Dutch Tax Reforms in the Napoleonic Era 503 laquelle il est encore bien difficile, de faire la déclaration des impôts personnel, taxe sur les domestiques, chevaux de maître et de loyer, et taxe sur les places de feu. Cette instruction contient 40 pages in folio.57

Apparently the legislation of 1805 was weighed down by the same difficult detailed administrative regulations that Gogel would later criticise so profoundly. The final important point we would like to mention is the requirement that the implementation costs would be kept to a minimum. In the words of Gogel: ‘A tax where a disproportionate large part is used for administration costs and costs for collecting taxes, is wrong’.58 We can perhaps detect Adam Smith’s inspiration here, although the argument speaks for itself. The costs were partly for the government, but also for the ‘unfortunate who were obliged to pay’.59 Where the costs on the part of the government were concerned, Gogel achieved relative success: the administration costs of his taxation would ultimately be just over 8%, a much lower percentage than any provinces had previously had to pay to the administration under the old taxation system.60 All in all, it cannot be denied that Gogel’s tax legislation was successful. If Schimmelpenninck had taken Gogel into his government in order to quickly introduce a general system of taxation in the Republic and therefore solve the huge financial problems,61 then he had every reason to be satisfied with his choice. However, the new legislation did not last very long.

T H E I N T R ODU C TION OF F R ENC H TA X LAW (1810–13)

On 10 July 1810 the annexation decree was published whereby Holland lost its formal independence. The former kingdom, over which Louis Napoleon ruled with much appreciation from his subjects, became incorporated into the Empire. On the same day that Napoleon signed the decree, he sent instructions to Charles François Lebrun, Duke of Plaisance (1739–1824), to leave for the Netherlands. There, in his function as governor-general, he would have to interpret the material contents of the annexation. In this position he would manage the work of two intendants-general, including Alexander Gogel as fiscal specialist. The Emperor 57

Gedenkstukken, 176. Ibid, loc cit, 41. Ibid, loc cit, 43. 60 Colenbrander, above n 10, 50. It could also be different, as the practices round French taxes proved: ‘qu’en 1813 la France, composée alors de 130 départements, pour toucher 170 millions de l’enregistrement et des domaines, faisait payer 240 millions par les contribuables, c’est-à-dire 70 millions de frais de perception (41 pour cent)’. JB Say, Cours complet d’économie politique (Paris, 1840) 8.6, 411 note 1. 61 Gogel, above n 13, 43. 58 59

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summoned Gogel directly to Paris, where he appointed him as councillor to serve on the Finance section of Conseil d’Etat.62 Gogel did not derive much pleasure from this position; he wrote about this to a friend, the senior official Canneman, You know how I feel about this position etc . . . I do not need to tell you that I am discontent and have almost become ill from something that hundreds of people would have liked to have had but did not get. Refusing was impossible, and perhaps this would also have been disadvantageous for our poor country.63

In the new situation, the new French Minister of Finance would have responsibility. Gogel received, as previously mentioned, an ostentatious title, but the political reality was clear: ‘il prendra les ordres de notre Ministre des Finances’. The focus of this new position would be the introduction of the new (direct) taxation, but for the remainder of his tasks and responsibilities, his position in the Empire would be limited.64

Tax Unification The announcement of the abolition of the first national taxation system that the Netherlands had known was as follows: Any form of taxation in the departments of the Zuiderzee, Mouths of the river Maas, Mouths of the river Ijssel and upper IJssel, Frisia, the Western Eems and the Eastern Eeems will be replaced by national taxation on January 1st 1812.65

Because the Kingdom of Holland was annexed into the French Empire, it was inevitable that the French taxation system, which replaced Gogel’s

62 Gogel for that matter, was not idolised by everyone; on 30 July the French secret agent Gateau wrote about him and also Appelius (last mentioned was at the time the second most recognised outstanding fiscal specialist and Minister of Finance 1809–10 and 1824–28): ‘MM Gogel et Appelius, s’ils ne sont deux imbéciles, sont deux parfaits fripons’. Gedenkstukken, 37. 63 EJ Vles, Alexander Gogel (1765–1821), Financier van de staat in tijden van revolutie *Amsterdam, 2009) 189–90. 64 In a later certified state document it was called: ‘L’individu respectable, décoré du titre Intendant-Général, n’avait malheureusement, depuis 1812, aucune direction, aucune influence, les directeurs des contributions directes, de l’enregistrement, des douanes, des droits réunis, enfin tous les chefs de l’administration dans les départemens de la Hollande, n’avaient rien de commun acec cet Intendant-Général, ils n’en recevaient aucun ordre, et is se serait bien gardé de leur en donner. Tout le service public était organisé sur le pied français, et les différens agens de l’autorité correspondaient directement, comme en France, avec les autorités supérieurs qui étaient établis.’ Recueil de pièces officielles relatives au procès concernant la dette de Hollande (Paris, 1817) 85 ; cf FN Sickenga, Geschiedenis der Nederlandsche belastingen sedert het jaar 1810, I (Utrecht, 1883) 6, 12. 65 Verzameling van stukken betreffende de invoering van het finantieel stelsel van het rijk, in de Hollandsche departementen, en bijzonder betreffende de vereenigde regten (Amsterdam, 1812) 5.

Dutch Tax Reforms in the Napoleonic Era 505 taxes, would be introduced,66 even if it was only to connect with the French civil law (the Code Napoleon, for example) and the French commercial law, which became statutory laws in Holland.67 Apart from the question whether people were content with this, and with all the imaginable disadvantages that it could bring, it had the advantage that the border tolls with the French Empire would cease to exist. In July 1811, the Emperor remarked that he wanted to give the Dutch, who had to bear the same burden of taxation as the French, the same benefits as they had and it seemed absurd to him to keep a separate system of taxation now that Holland had become part of French territory; a system that would limit the country and would make a border between the two countries inevitable.68

The economic opportunities which would result from the abolition of the borders are evident for a small trading country such as Holland. Gogel had therefore endeavoured to adapt his own taxation system so that the toll borders could be removed quickly while, conversely, the much needed extra income from his tax system could remain secure. The Section of Finance was given the task ‘to compare the tax laws of Holland with those of France, and to indicate which [Dutch] taxes should be abolished and which ones maintained to achieve uniformity’. On 14 August 1810 the ‘section des finances du conseil pour les affaires de Hollande’ issued a report in the hope of safeguarding its own interests as much as possible, observant encore de niveler les impositions de manière que les anciens et nouveaux sujets de SM ne se trouveront ni les uns ni les autres endommagés par les différences que les impositions pourraient produire sur le produit du travail ou les prix des matières imposées.

The taxes on milling (bread), soap and wine would cease to exist as these taxes were unknown in France. Tobacco, an important export product, would therefore be taxed in Holland so that free importation could be allowed in France, where this product was heavily taxed. Unfortunately, the intention of the ‘financial wizard Gogel’69 did not hold true. For the French Ministry of Finance. the proposals did not serve to eliminate the toll border, partly due to the doubt that the Dutch administration could

66 Says also Gogel on 13 May 1811 to the Minister of Finance, Sillem, above n 10, 89. Cf also Elia, above n 1 221. 67 Gedenkstukken, 1446. 68 Loc cit, 1487. Cf ‘brief van directeur-generaal van de administratie van de droits réunis François aan Gaudin van augustus 1810, loc cit, 1446. 69 An expression that Gogel earned from his time under Louis Napoleon; see J van der Poel, Ter ere van mr Jean Henri Appelius 1767–1828 (Deventer, 1954) 34.

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provide enough safeguards for the enforcement of the new tax on this export product.70 It was originally the intention to introduce the French taxes a year earlier than 1812,71 but the introduction met with problems according to the Décret Impérial from 18 October 1810, as Gogel’s system would deviate too strongly from the French: ‘Considerant . . . que les départemens de Hollande ont un système d’imposition tout autre que celui de l’Empire; qu’on ne pourrait le changer pour introduire en 1811 le système francais, qu’en faisant supporter à nos finances une perte considérable’. The first question, therefore, is to what extent were there differences? In his article, Elias concluded: ‘On consideration of the French system, we cannot agree with the French statement that the tax system of the annexed territories is “tout autre” as that of the French Empire’.72 But the fact is that the underlying administrative regulations differed in many areas. The consequences of this could not be estimated directly in advance. Regarding the budgetary consequences, in 1810 Gogel lacked information: ‘Je ne possède ici aucune pièce relative à l’administration des finances de la France, ce qui me prive de la faculté de raisonner avec connaissance de cause’.73 A year later, according to the comprehensive report of the Conseiler d’Etat Réal sur la mission en Hollande, there was still no clarity concerning the budgetary consequences. The expectation was expressed that the yield would be lower under the French legislation. This implied that the tax burden would be lower, and that, of course, was considered to be a positive. Conversely, it would also cause a great problem; the French Emperor had previously threatened to cancel the national debt, and the legislation that Gogel had quickly introduced in 1805 was partly intended to avoid that doomsday situation.74 The only person who could say anything relevant about the consequences of the transition would be Alexander Gogel. There was, however, a certain amount of resentment for Gogel: it was said that he had made sure that no other tax expert had all the knowledge of the Dutch taxation system that he had introduced: ‘un voile mystérieux et impénétrable a, jusqu’à ce jour, dérobé à tous les regards des Hollandais et des Français, et même à l’oeil des préfets, le resultat des opérations financières de M. Gogel’.75 Concerning the practical implementation issues raised by the transition to French tax law, if it could be determined on the day of 18 October 1810 that it would not be technically feasible to introduce the French 70 Gedenkschriften, 1432–35; HT Colenbrander, Inlijving en opstand (Amsterdam, 1913) 10–11. 71 Sénatus-consulte of 26 April 1810: ‘A dater du 1 Janvier 1811, les contributions françaises seront établis dans les pays réunis’. 72 Elias, above n 1, 229. 73 Gedenkstukken, 1419. 74 Van der Poel, above n 69, 30–31. 75 Gedenkstukken, 175.

Dutch Tax Reforms in the Napoleonic Era 507 taxes on the following 1 January, then this would largely be due to the fact that the tax authorities in Holland would need to be familiarised with the technical ins and outs of the French system. There was still a great deal of work to be done, including the arrival of the French tax officials who would be needed to assist the transition. It was unclear if the assistance was appreciated; the French taxes were one thing, but the French tax officials were something completely different. In the words of Napoleon to a delegation of Dutch people on his birthday on 15 August 1810: Je vous donnerais dès à présent notre système qui vous convient parfaitement, mais vous de vous y connaissez pas encore, je devrais donc vous envoyer des Français pour vous instruire, et ce serait vous envoyer des gueux qui vous vexeraient.76

Essentially, the integration of Holland into the Empire was indeed an enormous task regarding the application of the French civil law, criminal law and, in particular, tax law. From an administrative perspective, the problems concerning implementation would form a challenge not to be taken lightly.77 This would also explain why Gogel was sometimes accused of reticence by the French.

An Overall Reduction of the Tax Burden The French government ministers at least intended an easy transition to their own tax regime, and this meant, amongst other things, a reduction in the tax burden: ‘allégemens tels, que les impositions que ces départmens auront à payer soient beaucoup plus faibles que celles qu’ils ont payées les années précédentes ’.78 Minister Gaudin expected that this compensation would make the acceptance of the French taxation system easier.79 The policy for tax uniformity would therefore cost the French government money. On this, Napoleon remarked that he ‘knew that his income would lose 12 to 15 million, but that it would make no difference’.80 There was 76 Colenbrander, above n 70, 13. An illustrative example of abuse of power by customs officials can be found in Gedenkstukken, 1462. Cf S Schama, Patriotten en bevrijders, Revolutie in de Noordelijke Nederlanden 1780–1813 (Amsterdam, 1989) 717. 77 Gedenkstukken, 1471, speech from Gogel on the installation of the imperial court in The Hague, 1 March 1811: ‘L’on ne peut dissimuler que l’introduction d’une multitude de lois, et surtout de formes aussi différentes de celles qui ont lieu dans ce pays, ne rendra la tâche difficile de ceux qui sont appelés à y concourir’. 78 Décret Imperial of 18 October 1810, considerans. 79 Gedenkstukken, 1489. 80 Words of similar meaning can be found in a letter from Minister Gaudin to Gogel dated 22 July 1811. Gedenkstukken, 1488. Schama, above n 76, 711, assumes that the delay in introducing the French tax system, also on the side of the French was also associated with the problem that the contributions from Holland could not be missed and that the decrease in taxation would therefore be difficult to reconcile.

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thus no reason to wait, apparently thought Jean Henry Appelius, who, like Gogel, was a government minister at the time of the Kingdom of Holland, because in a letter to Gogel on 16 July 1811 in which he quoted the emperor he remarked that since the nullification of the Dutch system has been decided, it is advisable to bring forward the introduction of the French system—whether in part—as soon as possible; firstly to reduce the burden of taxation, secondly for the customs [borders, trade] and thirdly because any form of objection would be to our disadvantage.81

This last item was perhaps an accepted argument, but the advantages of the tax cuts were obvious for the Dutch politician.82 According to the report of the Conseiler d’Etat of July 1811 concerning Holland, there was a widely shared sentiment in favour of adoption of the French taxes: ‘Tout la Hollande s’élève aujourd’hui contre le système des impositions que la régit encore: toute la Hollande réclame le système français’. According to the author, the single reason was an opportunistic desire for tax reductions: ‘L’intérêt seul fait à cet egard agir le Hollandais; il espère payer moins, et la perception sera moins vexatoire’.83 In order to achieve a lower tax burden, the taxes on furniture, soap, family, the small stamp on objects of trade and luxuries, amongst others, were abolished, while other taxes, such as the tax on personnel (including housing tax and tax on servants), on milling (wheat) and on spirits, were reduced. In total, the tax reduction cost the government 9.5 million guilders on a total of 42.8 million in revenue (ie approximately 22%). This is evidently a considerable tax reduction, which would particularly be felt in the primary necessities of life. Further tax cuts would follow in 1812.84 For many individual taxpayers, the tax cuts would have signified a net benefit and would therefore have made the acceptance of the new political situation easier. But there was a heavy price to pay. As mentioned, the reduction in the tax yields would have consequences for the ongoing obligations of the national debt.85 Just as the Batavian Republic had inherited a heavy burden of debt from its predecessor, the Empire had, in turn, taken over of the national debt of the Batavian Republic upon its annexation: ‘la Hollande offert aux regards de S.M. un état de finances déplorable. Un dette publique de quatre-vingt millions [francs] d’intérêts. Un déficit annuel de plus de trente-six millions . . .’ The actual merging 81

Gedenkstukken, 1487. Gogel was also accused of doing his best to delay the introduction of French taxation: ‘On accuse M Gogel d’avoir fait tout ce qui dépendait de lui pour retarder l’introduction du système Français. On assure qu’aujourd’hui encore il témoigne la même mauvaise volonté . . . il cherche à gagner du temps’. Gedenkstukken, 175 (July 1811). 83 Loc cit, 175. 84 Sickenga, above n 64, 14–15. 85 Letter from Gogel to the Minister of Finance on 13 May 1811, Sillem, above n 10, 95–97; cf Postma, above n 5, 79–80. 82

Dutch Tax Reforms in the Napoleonic Era 509 of the French and Batavian debts during the short time that Holland belonged to France did not take effect, but Napoleon’s intention that the annexation should not cost the Empire any money would not be feasible with such a large burden of debt86 and a reduction in taxation. Therefore the decision was made to ‘reduce the debt by two-thirds’, meaning that those who had invested in government bonds could lose two-thirds of their assets.87 This had been the intention for some time,88 but it must have been a heavy setback as the investors came from all social classes. Not only the wealthy merchant who had invested his profits in securities but also the chambermaid who had saved for her pension were affected by the reduction in their assets. Many cities and charities, which served a growing number of paupers, also saw their reserves affected by the measure.89 The French government justified this by, amongst other things, pointing to the fact that the government was in dire need. In effect, France took over a materially bankrupt estate that could not be financed, and the only conceivable consequence would ultimately be to write off the public debt before this was merged into the national debt of the Empire. In 1883, Sickenga acknowledged the significance of the tax obligations, but conversely he called ‘reducing the debt by two-thirds’ an act of violence.90 The description was partly dictated by a dose of patriotism on the part of the author, but those whom it had involved would have been of the same mind.91

Direct Taxation The new system of taxation à la Française was approximately as follows: first, there were the direct taxes; these appeared at first sight to be aimed primarily at taxing income. Sustainable incomes in society are essentially the source of every taxation according to Jean-Baptiste Say—’la veritable matière imposable, parce qu’ils renaissent incessament’92—and the same should also apply to the income tax. The taxpayer would sacrifice a part of his income in order to be able consume the other part, under the protection of the government. The question which then arises is whether the levy should be proportional or progressive. We have seen that in the Batavian Republic, at least in Gogel’s law, that the choice was made for a proportional tax burden. This seemed consistent with the ideal of 86

Colenbrander, above n 70, 21. Décret Imperial van 18 oktober 1810, Art 115: ‘La dette hollandaise est conservée dans son intégrité; mais l’intérêt en seray payé au tiers’. 88 Van der Poel, above n 69, 30–31; Hofstra, above n 2, 232. 89 Pfeil, above n 1, 77; Sillem, above n 10, 86, note 1. 90 Sickenga, above n 64, 9. 91 Schama, above n 76, 711. 92 Say, Cours 8.4, 395. 87

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equality of the political ideologists that had prevailed since the French Revolution. Say interpreted the services of the state as a good with a cost price, and therefore saw the state’s performance as equally important to all citizens regardless of the size of their income. Furthermore, he noted that taxation has a demoralising effect on work and enterprise, which makes progression less desirable. On the other hand, the sacrifice becomes more important as it becomes more tangible to the people, and, as more goods have to be given up, the greater the sacrifice will be. On balance, Say showed himself to be a proponent of the compensation theory: if indirect taxation has a degressive character insofar as this relates to the primary necessities of life, then a progressive direct taxation on income would compensate for this.93

Land Tax Regardless of its merits, with the limited options available to assess the income, the productive ground was the ideal target for levying tax with a proportional rate. In 1790, the ‘Assemblée Constituante’ had introduced a new general and proportional tax on the ownership of land (and buildings for agricultural purposes): the ‘impôt annuel de répartition’.94 This was a tax ‘par égalité proportionelle sur toutes les propriétés foncières, à raison de leur revenu net imposable’.95 The aim of this was to eliminate any form of arbitrariness that the ‘taille’ (direct land tax), the precursor under the ‘Ancien Regime’, had portrayed. What we see here is a tax connected not to the taxpayer but to an object. The levy was linked to the presumptive production potential of the ground ‘soit actuellement cultivées, soit incultes, mais susceptibles de ce genre de culture’.96 This productive potential was, in short, estimated on the basis of net income over the previous 15 years. Apart from the annually revised cadastral registration of the owners, the law consciously strived for a certain inertia where the assessment of taxable objects was concerned; for buildings for example, it was determined that they would only be subject to revaluation once every 10 years. A valuation that was estimated at some point and never changed would lead to improvements in the tax object;97 the results of the improvements are indeed exempt from tax. At the same 93

Loc cit, 395–96. Therefore it was an apportionment system. For this, see R van Breugel, Esquisse historique et élémentaire sur la contribution foncière et le cadastre (Brussels, 1828) 5. 95 See Sickenga, above n 64, 16. 96 Art 63, 56 Wet 3 frim. An VII, cf Sickenga, above n 64, 20v. 97 According to the political economist Batbie, arbitrariness arose in the annual revision of the tariff: ‘La mobilité des évaluations qui changaient, chaque année, était considérée comme un fléau dans les pays de taille personelle’. AP Batbie, Mélanges d économie politique (Paris, 1866) 280. 94

Dutch Tax Reforms in the Napoleonic Era 511 time, the reductions in value were resisted if no tax reduction was offered in exchange. Say recognised the effect that this would have for France, just as, for example, Ricardo had remarked on this for England.98 When there were lengthy intervals between re-evaluations, it was clear that the government wished to optimise the effect of a tax on presumptive incomes; the (negative) risk of operating losses was therefore the responsibility of the owners, just as the (positive) risk of surplus profits also remained integrally with the owner. After all, this was no personal taxation on the owner, but a tax on his property. To a large extent,99 the ‘contribution foncière’ satisfied the ideals of the physiocrats. Early economists, such as François Quesnay (1694–1774), in his daily life a court physician to Louis XV, had in the third quarter of the eighteenth century advocated transferring the basis of taxation to real estate, partly to make productive labour and entrepreneurship pay. The ‘contribution foncière’ had a counterpart in Gogel’s land tax. Numerous differences were apparent in the detailed administrative rules,100 but generally it refers to the same tax: the taxation of presumptive income.101 Regarding the land tax, Elias was correct when he remarked that the taxation system of the annexed territories was not ‘tout autre’ in comparison with that of the French Empire.102 But the transition to the French counterpart was not easy. At the time that Appelius indicated that if the French ‘droits réunis’, and the tax on the ‘portes et fenêtres’, the ‘enregistrement’ and the patents would have been introduced (for more concerning this see below), it should in fact have been left at that ‘because the land tax gave the most difficulties’. On 13 October 1811, Minister of Finance Gaudin informed the Emperor likewise that the introduction ‘présentait des difficultés’.103 This was not due to the fact that the French ‘contribution foncière’ was entirely different from the old Dutch land tax: the aim of the levy was the same, according to Gaudin.104 However, the administrative aspects could not be underestimated. To mention a few of the problems: the civil service did not speak (or read) sufficient French; the new laws had to be translated and published, the public had to be informed, in order to determine the levy the ground needed to be taxed 98 Say Cours 3.10, 212–14. In the relevant chapter in Ricardo’s On the Principles of Political Economy and Taxation, 1817 edn, Say’s comments in his Traité, 1814 edn, are quoted extensively. 99 Ignoring the question to what extent, according the physiocrats, the state should carry the losses and gains. 100 Sickenga, above n 64, 23 gives a comparison. 101 Dulaurens, above n 31, 15: Grondbeginselen, betrekkelijk den ophef of zetting der Grond-Belasting . . ., Arts 2–4. For immovable property see Art 32 (p 29). 102 For this see also Pfeil, above n 1, 75. 103 Gedenkstukken, 203–04. 104 Loc cit, 204: ‘Ce n’est pas que cette opération en elle-même n’ait une grande analogie avec celle qui s’exécute en France. Les formes en sont à peu près semblables, et le but en est absolument le même.’

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according to yield,105 and what was extremely complex was that the administration had to be organised in such a manner that the annual levy could be collected monthly, as was customary in France.106 The reporter called the monthly collection ‘un des grands avantages de notre système, et qui est déjà bien apprécié par tous les Hollandais’.107 This is in itself understandable, as this practice would in principle give some relief to the taxpayers, who were given the opportunity to pay in small, regular contributions instead of paying the total amount once a year. This fulfilled the requirement that several authors had formulated at that time, with Adam Smith being the prime example of this,108 when he said that tax must be paid at a time that is convenient to the person liable to taxation. The fact that the annual collection of the old Dutch land tax gave many owners problems was evident from a report from July 1811: Notre système fera disparaître une foule de lois vexatoires et quelques-unes dont la physionomie est tout à fait sauvage, et dont on ne peut deviner l’esprit, telle que celle qui ordonne la démolition de la maison qui, mise en Vente, ne produit pas un prix tou-à-fait égal aux impositions qu’elle doit.

The problem was a real one: of the approximately 23,000 houses in Amsterdam, 2,900 would be seized by the tax authorities, according to Gogel. That is one in eight! That is why the reporter called the Dutch rules of enforcement ‘des lois bizarres’.109 Any measure which would make the tax burden easier to bear, such as paying monthly, as was the case in France, would help. He could not understand why Gogel could not think along the same lines, but Gogel realised that the tax administration in Holland still had to undergo the necessary changes.110 For the time being, the national government of Holland still had to contend with major problems concerning the implementation.

Personal Taxation The ‘contribution personelle et somptuaire’ that was adopted in France in 1795 and introduced in Holland in 1812 pointed to the person liable to taxation as the target of the tax legislature. Gogel’s personal taxation found many parallels in this French counterpart; both taxes were aimed 105

Verzameling, above n 65, 7. Gogel to Minister Gaudin, 30 July 1811, Gedenkstukken, 1493–94. 107 Gedenkstukken, 176. 108 Smith, above n 10, 5.2: ‘III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it’. 109 Gedenkstukken, 176. 110 For this see the letter from Gogel to the Minister of Finance of 13 May 1811: the adaptation would mean that the land tax would have to be collected 12 times per year, instead of once per year, and this involved 12 times as much as much work and therefore a large increase in paperwork, officials and costs. Sillem, above n 10, 92. 106

Dutch Tax Reforms in the Napoleonic Era 513 at approaching income by means of external indications of tax-bearing capacity. In this sense, the French legislation was also not ‘tout autre’. In his reflection of the French taxes in Holland, Pfeil, however, identifies a point of difference with the personal tax of 1805: he views the new tax as a form of head tax.111 The French levy was equal to the average wage of three days’ work in the respective municipality. The result is compared with the amount for which the municipality it budgeted. If the yield is less, then the difference is recovered through a tax on furniture.112 This last levy was also intended as a wealth tax, in principle to tax those who did not pay a ‘contribution foncière’ or a patent tax.113 The apportionment system in the ‘contribution personelle’ is the most prominent change in relation to the personal taxation of 1805. We also see the apportionment system of taxation in the tax on doors and windows that Gogel’s tax system did not recognise. This tax, which was to be paid by the owner but borne by the occupant,114 was seen as a correction in the housing tax. Apparently it was again assumed that the share of the living expenses in the total consumption decreases as the income rises.115 In practice, the newly introduced tax on doors and windows also produced problems. Gogel would later remark that the counting of doors and windows that had taken place in 1810 already showed flaws and for that reason a reduction of 25% was given. In spite of the discount, the levy also led to adverse behavioural reactions. Even today, in old Dutch cities and villages, houses with bricked-up windows can still be found. Moreover, on the canals of Amsterdam there are city palaces from this period that have relatively few windows, which suggests that there could be a direct connection to the window tax. Gogel would later remark on this tax, They are nothing more or nothing less than irregular, indiscriminate taxes without guidelines, standards or limits and they cause problems when determining everyone’s share in the level of taxation . . . This sentiment has

111 Apparently inspired by Gogel in his second Memorandum of 1820, see Gogel, above n 13, 388. 112 Dulaurens, above n 31, 49: Grondbeginselen Betrekkelijk den aanslag van het Personeel en Mobilair, artt. 1–4. Minister Gaudin describes the system briefly in his letter to Gogel from 22 July 1811, Gedenkstukken, 1489. 113 Gomel, above n 28, 513–14. 114 Dulaurens, above n 31, 63, Grondbeginselen betrekkelijk de Belasting op deuren en vensters, Art 5, sub 3, 7–9. See also Handleiding der contribuabelen of verzameling Inhoudende de Grond-wetten, Decreten en Ministeriële Instructiën, betrekkelijk de directe belastingen . . . (Amsterdam 1812), with a few cases (eg 187). 115 The correction of the new tax on doors and windows was explained by Sickenga in 1883 as such; that the rental values in the larger cities were relatively high and that the burden of the housing tax therefore weighed heavily on the city dwellers. But conversely, the country dwellers have houses with more windows, whereby the equilibrium would be restored again. Sickenga, above n 64, 133–134.

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long been shared by the French, to whom we owe this burden: but they also dreaded the difficulties and worries that any change would bring about . . .’116

Jan-Baptiste Say experienced the inefficient effects of the taxation at an early age. In 1785 (he was 18 years old), he lived in an almost new house in Croyden, England, where one day a bricklayer came to brick up one of the windows as the owner of the house did not want to pay the tax that had recently been set. This led to ‘jouissance de moins’, while the treasury gained nothing from the tax.117 Gogel’s conclusion was unequivocal: ‘These taxes have no substantive foundation, they are unsuitable and should be replaced’.118 This was a very negative evaluation. From the fact that the Dutch tax legislator retained the tax after the French period, it does appear that he felt that the system did have a solid foundation. A different correction would have been intended with the ‘contribution mobilière’, with a wealth tax on hearths, expensive horses and carriages. This tax already existed in Holland under the law of 1805, but under the French regime the rate progression was ended.119 Together with taxes on luxuries such as horses and carriages, the taxes on personnel should have resulted in a proportional tax on the entire expenditure.120 Gogel would later have the consequences of the total mix of housing tax, hearth money, and furniture tax calculated for the various income groups and would determine that the results were ‘almost the same’.121 If this was also the case for the French period, when the system was more or less based on the same concept, then it was clear the mix worked well when there was a proportional burden of taxation.

Patents The patents were already included in the General System of 1805 according to the French model, so there is little new to mention. At first glance this was not such a bad tax after all. Actually, with this particular tax, the legislature in effect chose a presumption method to estimate the income of entrepreneurs and not the actual income earned. The risk that the taxpayer achieves a lower yield or a higher yield lies entirely with him. What is taxable is the earning capacity and, according to the Treasury, the citizen is responsible for finding optimum returns. Say rejected the patent law on the grounds that the difference was too large between the 116

Ibid, 46, see also pp. 257, 389–390 and 401–402. E Schoorl, ‘Jean-Baptiste Say: hoofdstukken uit zijn leven en economisch denken’ (diss, Amsterdam, 1980) 12. 118 Gogel, above n 13, 46, see also pp. 257, 389–390 en 401–402 119 Ibid, above n 13, 399. The ‘contribution mobilière’ was adopted in 1795 with strong progressive accents, see Gomel, above n 28, 513–14. 120 Sickenga, above n 64, 110 121 Gogel, above n 13, 400. 117

Dutch Tax Reforms in the Napoleonic Era 515 levy and the possibility of raising income from the patent.122 When the French taxation system was introduced, very little needed to be prepared in advance as the patent right had already been recognised in Holland. The rate obviously had to be brought up to the same level as the rate in the rest of the Empire.123

Indirect Taxation First of all we mention the united rights (Droits réunis). These included excise duties on wine, beer, vinegar, spirits, tobacco and salt. Around the middle of the eighteenth century, the physiocrats had rejected indirect taxation on consumer goods on theoretical grounds. The ‘Assemblée Constituante’ had abolished this taxation shortly after the revolution of 1789, evidently based on the terms of the saying ‘périssent les finances plutôt que les principes’. Gaudin would mention in his memoirs that ‘the tax legislator could not afford to dispense of these taxes for budgetary reasons’.124 But the principles of the revolution simply necessitated that the degressive effect of taxes on the primary necessities of life could no longer be accepted. At the time of the ‘Directoire’, however, these taxes had to be cautiously reintroduced, for the previously mentioned budgetary reasons. The revenue of the ‘contribution foncière’ declined steadily in the next few years and the needs of the war made it necessary for the gold mine of consumption taxes125 to be opened once again.126 When the degressive effect of taxes is avoided or mitigated, similar taxes also fit in with the ideology of the post- revolution. The taxpayers therefore paid in small instalments ‘insensiblement’127 or ‘sans s’en apercevoir’. According to Say, the tax is concealed in the price so that the pain of sacrifice fades in favour of the consumption: in that sense, the tax is borne voluntarily.128 Napoleon would incorporate the consumption tax permanently in his dual system of direct and indirect taxation as a compromise between the increasing 122

Say, Traité 1819, 3.8, 366. Letter from Minister Gaudin to the Emporer, 13 October 1811, Gedenkstukken, 205. 124 ‘L’Assemblée Constituante, avec les meilleurs intentions d’ailleurs, avait, de fait, prononcé la ruine des finances le jour où, sacrifiant les vrais principes et les conseils de l’expérience à de vaines abstractions, elle avait proscrit les droits sur les consommations . . .’ in R Schnerb, Deux Siècles de fiscalité Française XIXe–XXe siècle (Paris, 1973) 63. This pragmatism resembles Gogel’s comment that he was not very keen on ‘untested theories’ (see above). 125 The well-known title of the work of Christian Tenzel from approx 1685 was Entdeckte Gold-Grube in der Accise. 126 DMG Sutherland, ‘Taxation Representation and Dictatorship’ in WM Ormod (ed), Crises Revolutions and Self-Sustained Growth, chapters in European Taxation Fiscal History, 1130–1830 (Stamford, 1999) 420–22. 127 Say, Traité d’économie politique: ou Simple exposition de la manière dont se forment, se distribuent, et se consomment les richesses (Paris, 1803) 510. 128 Ibid, Cours 8.5, 404 ; Traité, loc cit. 123

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financial needs of the modern state and the attempts to conceal the tax as much as possible.129 Say also mentioned another aspect: ‘Vous êtes libres de vous y soustraire’, the taxpayers can avoid the tax by refraining from consuming.130 This corresponds with Gogel’s theory that the tax should be aimed at that which is more than a necessity, or considered a luxury, or that which depends on the free choice of the individual.131 With this taxation, the revolutionary ideal of freedom would once again be served because the taxpayers had the choice of refusing the taxed consumer goods.132 Finally, one may wonder whether the poorer citizens really felt the tax burden at all, even when it affected their basic needs. The person who pays the tax does not necessarily have to be the person who bears the tax. In 1776 Adam Smith had described the impact that such taxes had on wages, which suggested that the lower incomes would be compensated.133 In Holland, different authors would call these taxes socially unacceptable for the same reasons; the wages would automatically rise to a higher level and therefore the burden would be passed to the employers.134 This would be emphasised in the Appelius report.135 The British economist David Ricardo (1772–1823), with whom Say at one time had wanted to go into business,136 would in turn describe the effects.137 In 1803, Say spoke emphatically of the mechanism to transfer the responsibility: ‘everyone is trying to transfer the burden to someone else’.138 The levy presses more heavily on the income of the producer as the need for the consumption of the taxed product decreases. The competitive mechanism implies that other producers who use less in the production process can supply more cheaply. The first mentioned producer therefore cannot pass on the tax to his consumers. But note that, reversely, when living costs become cheaper because taxes on basic necessities cease to exist, a downward pressure on wages is created. The tax cuts will not directly benefit the minimum wage earners. This effect is regularly described in the primary sources, but the 129

Schnerb, above n 124, 69. Say, Cours 8.5, 404. 131 See above nn. 40 and 53. 132 Schnerb, above n 124, 68. 133 ‘Such taxes though they raise the price of subsistence and consequently the wages of labour . . .’ Loc cit. 134 GK van Hogendorp, Gedagten over ’s Lands finantien, voorgedraagen in Aanmerkingen op het Rapport tot een Stelzel van Algemeene Belastingen, uitgebragt den 9 July 1800; Ontwerp van Constitutie van 1797 (Amsterdam, 1802) I, 578; cf Fritschy, above n 16, 142. Anon, Brief van een’ Koopman, over de voordeelen eener heffing bij quotisatie van den kant der regeering (Amsterdam, 1803) 20–21. 135 Loc cit, 23–24. 136 Schoorl, above n 117, 45–46. 137 FK Mann, Steuerpolitische Ideale, Vergleichende Studien zur Geschichte der ökonomischen und politischen Ideen und ihres Wirkens in der öffentlichen Meinung (Stuttgart, 1978) 228. 138 Say, Traité, 489: ‘comme un principe général, que tout impôt retombe sur telle classe de la société ou sur telle autre. Il tome sur ceux qui ne peuvent pas s’y soustraire, parce que c’est une charge onéreuse que chacun éloigne de tout son pouvoir’. 130

Dutch Tax Reforms in the Napoleonic Era 517 consequence that it does not make any difference to low-income earners whether or not the basic necessities are taxed is not identified. At the time of Napoleon, when these charges were to be introduced in Holland, the tariffs were relatively moderate, according to Say.139 This corresponded with the maxim in the doctrine of finances: that a government that wishes to extract a great deal of revenue from society must start with low taxation. These taxes can then gradually be increased. It may be that the costs in the first year are higher than the revenues, but eventually these revenues will be substantial. One disadvantage of such taxes is that an extensive levying and control apparatus is needed. For the ‘Droits réunis’, approximately 20,000 tax officers had to be employed for that reason.140 The Emperor is thought to have smiled at the objection, but finally his tax machine would demonstrate its value. The tariffs did indeed undergo a sharp upward adjustment in the following decennia, particularly in the excise duties on drinks. For the time being. however, the introduction of the French taxes was central to the reduction in the tax burden. In the report of July 1811 it was remarked upon that the most important consequence of the new taxation system would be that the Dutch would start to eat more bread, in particular wheat bread: ‘L’impôt sur la nourriture a beaucoup contribué à bannir le pain de la table de l’économie Hollandais, et ce qui est aujourd’hui commandé par l’habitude ne fut peut-être d’abord que conseillé par l’économie’.141 The author of the report noticed a second advantage in the opportunities for French wine in the Dutch market; the excise duty on wine would more or less have worked prohibitively in Gogel’s system: ‘le droit sur le vin équivalait à la défense d’en boire’.142 However, this did not lead to a complete change in the eating and drinking habits of the Dutch. They still eat significantly less bread than Europeans in more southern countries such as France, and wine consumption still lags far behind the consumption of beer in Holland. The former Minister of Finance Appelius originally expected that the introduction of the ‘droits réunis François’ in Holland would be difficult, but the Director-General of the administration of ‘droits réunis François’ was able to reassure him, as he foresaw few problems.143 In fact, no insurmountable problems arose. There were subsequently the rights of registration that originated from the reward for government services rendered. These differed from the 139

Say, Cours 8.6, 410. Say believed that the number of tax officials could be reduced if the tax system could be organised correctly, as the experience in England would learn. Say, Traité 1803, 512. 141 Gedenkstukken, 176–77. 142 Gedenkstukken, 176. Say would also point out that the French duty on wine was too high: Cours 8.5, 404, note 1. 143 Gedenkstukken, 1487–92. Much to the pleasure of Minister of Finance Gaudin, loc cit, 1495, 205, who on 13 October could report to the Emperor that the implementation project was well on track. 140

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ordinances of 1805, particularly as the registration of all deeds was made compulsory: this involved both notarial deeds as well as private deeds. One (civil) advantage was the guarantee against the possible changes in the content and against backdating. An additional motive for the government, however, was the tax related to these deeds; this was proportional to the value of the transaction—corresponding to the old stamp duty that was introduced in Holland in 1624. Gogel gave a stern judgement on this levy in his memorandum on taxation and revenue in the Kingdom of the Netherlands in 1820: ‘Registration is one of the worst taxes that was ever invented—it still has its supporters, but these are primarily officials, and otherwise other parties who are involved in the revenues of the Treasury’.144 From a moral point of view, he particularly objected to the registration rights at public auctions, as it was an ‘adversity tax’. Another objection that he had was the obscure rules of implementation. Sickenga quoted the French authors Championniere and Rigaud, apparently from their famous Traité des droits d’enregistrement, ‘that in the maze of rules it is so difficult to find a way out and therefore there is plenty of abuse made of them’.145 Gogel could concur with this: What is the pivotal study of notaries and other public figures? Is it the clear development of the case on which the deed is based? Is it the well- formulated expression of the will of the contracting parties?—No!—Let each person answer and what will he say?—to save on the registration costs? Two Notaries will draw up an independent deed concerning the same case;—one of them understands the language and uses words that his confrère does not know,—now the deed drawn up by the first notary costs a fixed sum of a few five-cent pieces, while the other one has to pay one, two, three, yes even five percent on proportional fees even though both deeds are equally good and valid.146

For the former Finance Minister, the conclusion was clear. The transparency of acts was violated for fiscal reasons, acts were not registered to avoid paying extra tax and notarial acts were avoided for the same reasons, whereby the public legal certainty, which was initially the objective of the compulsory registration, was reduced. With a tariff of 1%, the French version was significantly more lenient and Councillor Duchatel wrote of this to the Minister of Finance Gaudin, saying that the introduction of the French legislation on this issue signified a major improvement for Holland.147 The registration of deeds by the tax authorities is still known today in the civil law. It is a means of determining the authentication of the date. However, nowadays there is no longer any tax connected to this; the modern registration fees are retributive taxes.

144 145 146 147

Gogel, above n 13, 50. Sickenga, above n 64, 139. Gogel, above n 13, 53. Gedenkstukken, 1445–46.

Dutch Tax Reforms in the Napoleonic Era 519 Also worth mentioning is the inheritance tax, which was part of the registration taxes. As far as the budget was concerned at the time, this tax was significantly more important than it is today. Under the old system in the Dutch provinces, the traditional idea of ‘family property’ dominated; therefore no tax was due by inheritance in second-degree descendants (children and grandchildren). In inheritance in the third degree, the inheritance was less obvious and a tax seemed justified. ‘By regarding every form of taxation as a punishment, which can only be justified by the needs that exist in society, I have always considered this tax to be one of the most tolerable’, according to Gogel.148 The main difference with the French tax, which had been levied in France since 1790, was that this tax had also been levied in first-degree succession.149 In this sense, the application of the French legislation would involve an increase in taxation, but on the other hand this tax would be relatively easy to bear. As JeanBaptiste Say would later explain, apparently disregarding the aspect of ‘family property’, it is a tax on an estate that does not yet form part of the assets of the taxpayer and one where payment is required at a moment that is convenient: ‘Cet impôt ne serait injuste et préjudiciable que par son excès’.150

Was ‘Tax Equity’ an Issue? Hofstra’s reproach of Gogel, ‘that he paid too little attention to the problem of justice’, would not easily have made an impression on Say. ‘Pour l’économie politique, l’impôt est une chose de fait, et non de droit.’151 Of course, he spoke as an economist and not as a lawyer. For him, however, and also for Gogel, but perhaps for slightly different reasons, taxes were without a doubt, evil: ‘lever un impôt, c’est faire un tort à la société’.152 Taxes have a negative effect on production costs and are therefore a hindrance to industrial progress. After all, they increase the price of the products and therefore reduce the demand of the consumers.153 148

Eg Commissie-Appelius, loc cit, 28; Gogel, above n 13, 55–56. Cf Gogel, ibid, Gedenkstukken, 1445; P de Reu, ‘De Belgische successiewetgeving in de eerste helft van de negentiende eeuw als spiegel voor de vorming van een belastingcultuur en een staatsidentiteit’ (2012) 12(2) Pro Memorie 174. 150 Say, Cours 8.4, 394. 151 Ibid, Traité 3.8, 330: ‘Qu’importe, par example, que l’impôt soit voté par le peuple ou par ses représentants, s’il y a dans l’état un pouvoir dont les opérations l’ont rendu tellement nécessaire, que le peuple ne puisse faire autrement que de le voter?’ Cf idem, Cours 8.4, 390. 152 Say, Traité 1841, 3.8, 504: ‘un tort qui n’est balancé par aucun avantage toutes les fois qu’on ne lui rend aucun service en échange . . . outre que c’est une injustice que de ravir au producteur le fruit de sa production, lorsqu’on ne lui donne rien en retour, c’est une distribution de la richesse produite beaucoup moins favorable à sa multiplication, que lorsque le producteur lui-même peut l’appliquer à ses propres consommations’. 153 Ibid, Traité 1803, 486–92. 149

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Some authors had argued that industry as a whole, and the working class in particular, are stimulated by taxation to produce more efficiently and, where appropriate, to work harder in order to compensate for the disadvantage. This would increase total prosperity.154 According to Say, industry relies not only on effort, but also on the capital that is generated from savings. Taxes lead to a reduction in demand and hinder saving. Once again, this puts the attempts to compensate into perspective.155 Say ultimately calls the idea of positive tax compensation an ‘absurdité’. Taxes only serve to destroy wealth.156 That is why ‘Le meilleur de tous les plans de finance est de dépenser peu, et le meilleur de tous les impôts est le plus petit’. The sad effect of heavy taxation is that the taxpayer becomes poorer without the government gaining anything from these taxes. After all, by paying taxes consumption reduces, and, as a result of this, production also declines. Ultimately there are three losers: the taxpayer, who consumes less ; the producer, who is able to produces less ; and the Treasury, which ultimately receives less revenue.157 The opposite effect occurs when there is a reduction in the tax burden:158 ‘Reaganomics’, though one and a half centuries ‘avant-la-lettre’. Essentially the economy would therefore benefit most from low taxation, which should then also be borne equally so that the effects can be felt as little as possible. It is clear, however, that distributive justice was also very important to Say. He spoke out strongly in favour of the principle that the tax legislator should tax according to financial capacity, in the sense that the rates should be progressive. Say remarked that, shortly after the Revolution, several writers, ‘et notamment ceux qui exerçaient une grande influence sur les décisions des assemblées législatives’, had a great aversion to progressive taxation.159 He recognised the timeless arguments that progressive taxation would discourage an increase in wealth, that it would be a premium for idleness and laziness, and that it would be a punishment for achieved success.160 But a sacrifice of 30,000 francs to a person who has an income of 300,000 weighs less heavily than a sacrifice of 30 francs to someone who has 300 francs. Say seeks support from Adam Smith, whom he too often defines as an advocator of progression,161 and proposes a ‘progression croissante’ in direct taxation which would then function as ‘une juste mais imparfaite compensation’ for the degression in the indirect taxation.162 In this context, Say stood by the point of view that Gogel had abandoned. For 154 155 156 157 158 159 160 161 162

For the Netherlands, eg the anonymous writer from 1801, 56. Say, Traité 1803, 464. Loc cit. Ibid, Traité 1819, 3.8, 337. Loc cit, 3.9. Cours 8.4, 395. Ibid, Traité 1819, 3.8, 348. Ibid, loc cit, 397. Ibid, loc cit, 396.

Dutch Tax Reforms in the Napoleonic Era 521 the remainder, it can be established that the tax progression in the direct taxation in Holland has never had a foothold since the General System of 1805, not even in the French period.163 Where Say is concerned, with his formulation of what is often called the ‘compensation theory’, he appears to have steered towards a proportional taxation throughout the whole of the tax mix. That fits with his argument that the desire to work and do business should not be restricted by tax legislation.164 In that sense, he shared the same vision as Gogel: that the compounding of levies should on balance lead to a proportional taxation. It therefore comes down to the total tax mix, which should be proportionate to income—or, if you will, as progressive as the politicians choose it to be.

T H E S I GNI FIC A NC E F OR MODER N TA X LEGISLAT ION

French legislation was only implemented in the Netherlands for a short period of time. The French left Holland in November 1813 and the new government quickly reverted to the General System of 1805. We have established that the French legislation bore a large resemblance to the General System, and was certainly not ‘tout autre’. It can therefore be considered that there are few lessons to be learned from this French incident in the fiscal history. The importance of the period lies elsewhere. During the relevant period, the tax legislator had considered alternative ways to establish the tax laws. The ideal of equality had taken on a new meaning and extensive discussions had taken place over the consequences of this, both inside the legislative state organisation and outside it. Moreover, thinking on techniques of presumptive taxation had developed further. In the Netherlands the legislator made a significant turnaround when introducing the Income Tax 2001. In the run up to 2001, a choice was made to broaden the basis of taxation in return for lower marginal rates. In effect, the legislature chose to place the negative risk from situations where the tax-bearing capacity is reduced more with the taxpayers, whereby it can make fewer claims to the positive risk. Furthermore, the legislature chose to base part of the income (income originating from non-commercial activities) on a forfeit or presumption instead of relating this to actual income earned. The risk that the taxpayer achieves a lower or higher return on investment lies completely with the taxpayer himself. According to the legislature, this involves taxing the

163

This would only change with the wealth tax of Minister Pierson in 1892. ‘Celui qui sait mieux rattacher les effets à leur causes, se garde de pousser l’impôt au point d’altérer les capitaux engagés dans les entreprises et de paralyser les efforts des travailleurs . . .’ Say, Cours 8.4, 397. 164

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earning capacity165 and stimulating the citizens to find optimum returns. The trend seems to continue in that direction. On 14 April 2011, the Ministry of Finance published the so-called Fiscal Agenda to decrease the tax on labour and increase the tax on consumption. Although this is the opposite of what Gogel had intended, it can be explained by changing circumstances; for instance, degressive tax is no longer an issue. The approach of the present-day Fiscal Agenda is to make work and enterprise more rewarding—something that Gogel had dedicated himself to. Just as Gogel had done when he introduced the patent tax in 1805 according to a foreign model, the present-day ministers also point to international movements, in this case at the European166 and global levels.167 Just as in the beginning of the nineteenth century, present-day fiscal legislators tend to measure tax-bearing capacity over time periods that extend a calendar year (though perhaps in future throughout a whole lifespan), with a view to stimulating optimal performances for businesses and for the citizens. The idea ‘that work is encouraged, and the willingness to work is not deterred; that businesses remain unrestricted and are limited as little as possible’ had in the post-war culture under the euphoria of the then economic recovery, been pushed to the background. But the new global economic situation and the inescapable social insights connected to this situation apparently necessitate a rethink.

165

Belastingplan voor de 21ste eeuw, Hand II 1997–1998, 25 810, no 2, 69. The Europact of 11 March 2011, which calls for ‘tax reforms, such as lowering taxes on labour to make work pay’. 167 IMF (2011), ‘The Netherlands 2011 Article IV Consultation: Preliminary Conclusions’. 166

17 Land Tax without Land and Land without Land Tax: A History of Land Tax in China YAN XU

A BSTR A C T Land taxation in China dates from the earliest periods of Chinese civilisation and until relatively recently has been the bedrock of its public finance system. This remarkably long history of land taxation is unique. This chapter considers how the development of land tax systems in China has a continuing relevance for Chinese public finance by demonstrating how various versions of the land tax fitted into the development of the general political and legal systems of the time. It shows that the development of the land tax systems had been concomitant with changes in the economic foundations and changes in the fortune of dynasties over the long history. Some patterns re-emerge over the millennia. The chapter examines the implications of the long history of land taxation in China for the political and legal system today in general and for the tax system in particular. It suggests that current land tax reforms will be able to break the historical pattern of effective reform disintegrating over time only if the lessons of history have been understood.

I NTR ODU C TION

L

AND TAXATION IN China dates from the earliest periods of Chinese civilisation until relatively recently has been the bedrock of its public finance system. The agricultural tax, a type of land tax in its modern name, had been applied to the Chinese peasants for over 4,000 years until its abolition in 2006. The recent introduction of property taxes to reduce wild swings in the housing market and to raise

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revenue is therefore less a break with the past than a return to tradition.1 Real property taxation in one form or another is likely to be part of the Chinese fiscal regime for a long time. This remarkably long history of land taxation is unique. This chapter considers how the development of land tax systems in China has a continuing relevance for Chinese public finance by demonstrating how various versions of the land tax fit into the development of the general political and legal systems of the time. Over the long history of taxation in China, two major changes to the tax system are particularly worth noting. One is shift in the focus of tax base from labour (persons) to wealth (primarily land), and, in recent times, to consumption. The other is an evolution of tax payment method from the provision of labour to transfer of goods to, finally, money. These changes reflect broader changes in Chinese economic development, which in turn prompted changes in the political and governance systems. There are, however, some patterns that re-emerge over the millennia. Reductions of tax burdens, elimination of informal charges, simplification of tax structures and strengthening of tax administration often follow a change in government as new dynasties cement their power and implement the measures to address the conflicts that helped contribute to the downfall of their predecessors. As dynasties age, however, the grandly designed systems set in place earlier begin to crumble, leading to the need for reforms. Reforms, sometimes truly sweeping in nature and initially helpful in solving certain problems, become more laxly enforced over the course of time, leaving room for a host of ad hoc measures to be adopted in their place. These measures are often accompanied by a decline in the tax administration powers of the central government, an increase in the tax burdens on small cultivators, the aggravation of land (wealth) accumulation in the hands of a small group of landlords, and a rise in corruption as tax administration becomes loosened and shifts to local players. This chapter discusses these issues and questions in the following three parts. The first part reviews the concept of land tax in the historical context of China, setting up a framework necessary for the subsequent discussions and analysis. The next part is a general survey of the historical land tax systems in China, which stretches from the very beginning of recorded Chinese history to the end of the land tax in recent modern times in the twenty-first century. Finally, the last part examines the implications of this history for the political and legal system today in general and for the tax system in particular.

1

See, eg ‘China’s Economy: Time for a Property Tax’, The Economist, 4 February 2012.

A History of Land Tax in China 525 T H E C ONC EPT OF LA ND TA X

Meaning of the Term The concept of land tax in China, in particular in ancient China, appears to be different from that in many other jurisdictions. Land tax elsewhere normally refers to a tax on the value of land, no matter how the annual value of land is measured, and, as such, it belongs to the part of a tax on property.2 In China, in very recent times, property taxation has been introduced to a selected number of large cities. This is conceptually and functionally much closer to a tax on land in other jurisdictions than a land tax in historical China. In the ancient period and the earlier modern period, however, land tax had distinctive and complicated features that rendered it a hybrid tax in terms of modern public finance concepts. To understand the concept and its development, one needs to look at the general historical settings of the state. An earlier study on the land tax in China divided the development of this tax into two periods.3 The first is the Feudal Period, which began with the time prior to the first feudal dynasty, the time of Huang Di (2697 BC) and ended with the collapse of the third and last feudal dynasty, the Zhou Dynasty (249 BC).4 The other is what the study calls a Period of Private Property, which lasted from the establishment of the first imperial dynasty (221 BC) to the overthrowing of the last imperial dynasty in 1911. This period is known as the Imperial Period of China, the term deriving from the absolute monarchy in place over the period. It also marked a period in which the political system recognised, and was built upon the recognition of, private property rights in land. The principal difference between the two periods is the system of land ownership and the method of payment, which will be discussed in the following section. During the Feudal Period, the term of land tax evolved from tribute (gong) in the first feudal dynasty (the Xia), to aid (zhu) in the second feudal dynasty (the Shang) and to universal contribution (che) in the third feudal dynasty (the Zhou).5 The change in the term reflected the development of the nature and functions of the levy—first a gift made to the government for establishing a well-organised institution to protect 2 J Tiley, ‘Aspects of Schedule A’ in J Tiley (ed), Studies in the History of Tax Law, vol 1 (Oxford, Hart Publishing, 2004) 81–97. The distinction is perhaps not as sharp as the different titles suggest as the value of land is based on the actual or imputed income it generates. 3 Han Liang Huang, The Land Tax in China (New York, Columbia University, Longmans, Green & Co, Agents, 1918) 19. 4 The close time of the Zhou Dynasty referred to by the author is different from the time used by contemporary studies. 5 Mencius, ‘Teng Wen Gong’. For a detailed discussion on the meaning of the three terms, see Zheng Xuemeng (ed), China’s Taxation History (Xiamen, Xiamen University Press, 1994) 5–12.

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people,6 secondly assistance provided to the government for the recognition and elaboration of the system of government and finally a universal compulsory obligation to the government.7 Land was distributed among individual households, who were required to cultivate certain parcels of land in common for the support of the king and his government. The land tax was assessed on the basis of gross produce, which means the tax was in effect a tax on income. During a later time in the last feudal dynasty, the Zhou, a separate tax on the ‘other property’ of a household, was introduced in addition to the land tax collected from the produce of land. The land tax was thus extended into a general property tax, which was similar to the general concept of land tax in many other jurisdictions. Other compulsory services were imposed on the basis of land that each household was assigned.8 The land tax in the Feudal Period combined the characteristics of conventional income tax and property tax that have been separately applied in other jurisdictions. The land tax in the second period—the Period of Private Property or, more conventionally, the Imperial Period—was based on the principle of individual ownership and land was taxed as the private property of the owners, although various attempts to restore the system of equal land distribution had been made to solve the abuses of land concentration by a class of large landowners from time to time during this period. The land tax contained a number of contributions and taxes, which were either incidental to the holdings of land or assessed independently but still under the general category of the tax. Assessment of the land tax varied from dynasty to dynasty—it was based on gross produce in some dynasties, such as the Qin and Han dynasties, but was assessed on the basis of labour (person) or the amount of land owned in other dynasties, and was even extended to a general property tax in certain periods of such dynasties as the Wei Dynasty during the Three Kingdoms and the Song Dynasty. Land surveys had been carried out with a variety of survey methods from dynasty to dynasty in order to measure the values of land a household had and thus to impose a tax on land, as well as other dues on the basis of land and the situations of the household. By the last imperial dynasty, in the middle of the seventeenth century, the ‘land tax’ featured at least four distinct elements:9 first, a land tax proper, based on the fertility of the 6 The term is interpreted by Zheng as a token of allegiance by the conquered tribes to the conqueror-leader to acknowledge their subordination to the conqueror. Ibid, 6. 7 Huang, above n 3, 30. These understandings would seem to be derived from the legendary stories of the prehistoric leaders. For example, Yu the Great was appointed by the legendary Emperor, Shun, to tackle a great deluge which inflicted enormous damages upon people and their land. After successfully restoring people to their flooded land, he became the leader of the surrounding tribes and founded the Xia Dynasty in 2070 BC. DE Mungello, The Great Encounter of China and West, 1500–1800, 3rd edn (Lanham, MD, Rowman & Littlefield Publishers, 2009) 97. 8 Huang, above n 3, 32. 9 Ibid, 86.

A History of Land Tax in China 527 land; secondly, a grain tribute, required of eight grain-tribute provinces; thirdly, a poll tax imposed on all the able-bodied males in the family unit; and fourthly, the surcharges that were attached to the land tax proper. As can be seen, the meaning of land tax in this period has changed from time to time. In some historical periods, the land tax was adopted to equate with a general property tax, applying to the wealth of (primarily the land possessed by) a household. In other periods, the land tax was mainly a tax assessed on the gross produce of the land but not the value of the land, which rendered the tax more like a tax on income rather than a tax on property. Nevertheless, since the tax was always attached to land, however it was based, it was generally and commonly referred to as a land tax in historical records, general understandings and scholarly researches. The following discussion of the historical land tax systems will note the different meanings of the term adopted and developed in various periods.

Landholding During the Feudal Period in China, only the aristocrats could hold land in domain or in fee.10 The king had the right to enfeoff estate and the serfs on the estate to nobility, his vassals, who could in turn enfeoff plots of land and associated serfs within their feudatory to their liegemen.11 The process continued in a hierarchical manner downwards to the bottom of the nobility, the intellectuals. Neither land nor serfs could be bought or sold. 10 CM Wilbur, Slavery in China during the Former Han Dynasty 206BC–AD25 (New York, Russell & Russell, 1967) 18. 11 Feudalism in its most classic sense refers to a medieval European political system, consisting of a set of reciprocal legal and military obligations among the warrior nobility, involving three key concepts: lords, vassals and fiefs. In ancient China, a fully articulated and completed feudal process similar to a Medieval European feudal system occurred during the late Shang and Zhou times. In Zhou, the new version of Heaven, ‘the Mandate of Heaven’, was created to teach the ruler’s periphery people to be loyal. The Zhou ruling represented Heaven onto Earth as a feudal political order: the king’s position in the divine hierarchy having been fixed just below the Heaven’s lowest rank. Vassals were sent out into the periphery to establish fiefs of various sizes on behalf of their overlord, the king, in order to symbolise the authority of the king. However far away, they would remain loyal to their king for both religious and practical reasons. A serf in the feudal China was an un-free peasant, who had to work on the land for their overlords. Although there is no decisive consensus among scholars on the meaning of ‘slave’ in China, the Chinese meaning and its conceptual background of the term is not close to those in other parts of the world and at other times, and it is distinguished from a serf. The sale of free people has never been legally recognised in China, though it was regularly practised. Slavery was legally abolished in China after the end of the last imperial dynasty. China is not historically known as a slave-based economy, as certain states and regions in history have been. See E Kaplan, An Introduction to East Asian Civilizations: The Political History of China, Japan, Korea and Mongolia from an Economic and Social History Perspective (Bellingham, WA, East Asian Studies of the Western Washington University, 1997) ch 4; see also Wilbur, above n 10, 60, 85, 90.

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The feudal system of landholding meant land was held but not owned, and was held for and ultimately belonged to the community at large.12 Even though the king and the enfeoffed vassals had the right to enfeoff the land, they represented certain superior legendary figures to govern the territory of the enfeoffed land and to look after their people, and thus the land governed by them not belonged to them as private property. Each individual common man who reached certain age to become able to work was allotted a piece of land and he was required to revert the land to the community when he was unable to make full use of it. During the second period, the Imperial Period, the absolute ownership of land by the sovereign was retained,13 but this absolute ownership, expressed in various decrees, edicts, memorials and official documents, operated only in theory. Private land ownership first emerged in the late Feudal Period, and was recognised in the first imperial dynasty. Unlike in most of the feudal time, land in the imperial time could be bought, sold, mortgaged or leased without intervention by the government.14 Although certain fields of land were designated as public land throughout the various dynasties, this only amounted to a small portion of all arable areas of land, and the government had never controlled any extensive public domain.15 Grants of land by the emperor to his princes and nobles unusually involved a comparatively large amount of land, but such grants were never comparable to those held by the feudal estates in Europe. Even in feudal China grants of land could not be compared in size with those in feudal Europe. As the state heavily relied on an agrarian economy, the land policy was always to encourage the development of agriculture and to put under cultivation as much of the arable land as possible. The only conditions of private landholding in historical China were the payment of an annual tax and, in case of transfer, a registration fee to the government. The terms used in the transfer of land were similar to those applied in the transfer of ordinary property.16 The recognition of private ownership of land in parallel with the nominal absolute ownership indicates that the government’s power to tax was not based on the ownership of land but, rather, the theory of government—to support the government for its maintenance and functions. The emperor’s ownership of waste land and reverted arable land, which had been abandoned by the original owner or had became ownerless for various other reasons, only meant that the emperor’s 12 The feudal process in the late Shang and Zhou times differed in detail from the much later European and Japanese feudal process, though it was similar to a medieval European feudal system. 13 A well-known expression in China states that ‘[a]ll the land under heaven is the property of the sovereign; all the dwellers on the land are the subjects of the king’. 14 Huang, above n 3, 71–72. 15 Ibid, 73. 16 Ibid, 72.

A History of Land Tax in China 529 government held the land as a trustee for the general public, not as an absolute owner. It is in all this regard that the private land ownership in historical China can be seen as analogous to the quasi-absolute ownership found in any other jurisdictions.17 The recognition of private landholding in law and in practice was considered beneficial to the community and it reflected the political thinking that no greater amount of land should be held than could be cultivated. Large landholders were therefore required to lease out holdings to small farmers who could cultivate the land. Failure to do so would incur the penalty of confiscation of the land by the government. The tenants of land should pay rents to their landlords either in money at a fixed amount per year or in produce at a fixed proportion of the principal crop. The landlords were responsible for the land tax. Rents paid by the tenants to the landlords were generally higher than the land tax paid by the landlords to the government, which meant that the landlords could shift the tax burdens onto their tenants. Large landlords were perhaps the only beneficiaries of the government’s provision of preferential treatments, and when tax rates were increased or extra charges were introduced they could pass their burdens onto the tenants. Only on the rare occasions when the government adopted explicit measures to force through the flow of benefits could tenant-cultivators enjoy the benefits of preferences or rate reduction. The policy of landholding was of considerable importance to the economic development of the state, and had a tremendous influence on the imposition of land tax in practice as well as on the shaping of such societal characteristics as the large size of agricultural population, the absence of slavery, the smallholding of land for cultivation, and the intensive farming of land.

R E V I E W O F T H E H ISTOR IC A L LA ND TA X S Y ST EMS IN C H INA

For most of China’s history, the system of land ownership constituted the basis for land tax, the largest and most fundamental revenue source, and for many other taxes and impositions. Reforms in the land system always entail reforms in taxation. The development of the land tax systems had been concomitant with the changes in the economic foundation and the ups and downs of dynasties over time. As noted earlier, there were primarily two changes in the land tax systems: the focus of the tax base and the method of tax payment. The first two-fifths of China’s 4,000 year history are known as the Feudal Period, while the final three-fifths 17

Ibid.

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comprise the Imperial Period and, for a relatively short time in Chinese history, the Republic Period, which includes the about 40 year rule of the Nationalist Party and another period of over 60 years of Communist Party rule.

The Feudal Period (2070–221

BC)

Taxation came into being with the creation of the state. The central development during the earliest historical period, the Feudal Period, were the parallel shifts in the tax base and the form of taxation. Initially, ‘taxation’ was levied on serfs, who paid taxes by way of a contribution to the government of their services, with each individual providing equal services without regard to differences in the wealth generated by the land tilled by each serf. Following the effective privatisation of land (including the public fields formerly reserved for the government’s benefit), a system of taxation based on the relative value of land controlled by the serfs (as measured in output from the land) was adopted, with tax liabilities satisfied by payment in kind from the produce of the land. This shift demonstrates that, at the very primitive economic stage, commonly owning land and working jointly for wealth generation would be necessary, but, with economic development, private ownership of land and a corresponding tax encouraging cultivation could lead to greater productivity. It is said that the tribute grain had been set in the first feudal dynasty, Xia (2070–1600 BC), but the Classic of History had no such particular record.18 The Shang Dynasty (1600–1046 BC) adopted a land tax system called Jing Tian in Chinese, known in English as the ‘well-field system’ to extract revenues, in the form of grain and other products, to meet the needs of the feudal state. The interpretation of the system had long been unclear and controversial. According to Mencius, the system operated as follows: a large square of land was first divided into nine small ones, and the eight outer ones were then allocated equally to eight households of serfs.19 The central one was public land and the other eight could be 18 The Classic of History (Shangshu), also called Shujing or simply Shu in Chinese, is a compilation of documentary records with regard to events in the ancient history of China. It is one of the Classics of Confucianism. The Chinese classic texts refer to the pre-Qin Chinese texts, especially the Confucian Four Books and Five Classics (Si Shu Wu Jing). Any political discussion in imperial China was required to refer to this background. 19 Mencius, ‘Teng Wen Gong’. Mencius further remarks that this is a rough outline, and it is up to the ruler to make adjustments. A study maintains that the well-field system seems to reflect three related principles: sufficiency, equality and government obligation. ‘Sufficiency’ means that each person should have an amount of land that is sufficient for his material well-being and also his ethical life. ‘Equality’ refers to the amount of land to be allocated should be the same for every person who is a commoner (officials receive more land because they make a greater contribution to society). ‘Government obligation’ implies that it is the duty of the government to ensure the land demarcation is properly drawn and the division

A History of Land Tax in China 531 regarded as quasi-private land or privately controlled land. Each household had the right to use its assigned land, but all of the eight households were first required to complete work on the public plot before cultivating their private land, meaning that the land tax was paid in labour. The profits from the public plot belonged to the state, while the profits from each private plot went to the corresponding household. Part of the central square was reserved for the dwellings of the eight households, so that the amount to be cultivated in common accounted for four-fifths of the central square, and thus the rate of the tax applying to the each eight households amounted practically to a tithe.

The well-field system was adopted as a general system of landholding and taxation, and it was a significantly important social and economic institution at the time. It prevailed over the tribute grain system in that the tax was always the produce of the central square cultivated in common, not a fixed amount of tribute on the basis of the average produce of several years.20 Moreover, under the well-field system, the burden of taxation was probably not as keenly felt by the people as under the tribute system. Apart from the land tax, there were a variety of tributes payable by the households of serfs, which were presumed to be contributions produced by certain skills and crafts. These payments were calculated together so as to keep the overall amount under a certain level.21 This reflected the government’s tax policy of keeping such payment within a moderate limit. The land tax in the Zhou Dynasty (1045–256 BC) was similarly based on the well-field system. Unlike the Shang Dynasty, the land tax in the Zhou Dynasty was usually paid in kind. This change was made to resolve of land according to the well-field system is equal. J Chan, ‘Is There a Confucian Perspective on Social Justice?’, Department of Politics and Public Administration of the University of Hong Kong Working Paper Draft (2007). 20 This means the tribute grain was a presumptive levy. The burden would be higher in the bad harvest years but lighter in the good harvest years. 21 Wu Zhaoxin, History of the Tax System of China (Taipei, Taiwan Shangwu Press, 1965) 8–9.

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the working efficiency problem in public land in the old method, that is, serfs had no incentives to work hard in the public land.22 The change was facilitated by the development of production, though it broke up the fixed demarcation between the public and private land. All plots of land were now to be farmed uniformly before harvest and, upon harvest, certain plots of land were specified as public plots and the produce of these plots was accordingly collected as land tax. The unit of land measurement was the mu, which was smaller than the modern mu. Unlike the Shang, land was assigned to each family with reference to the fertility of the land. Land was classified into three types: best, good and medium. It was then distributed according to either the class of the land or the number of family members—the more able-bodied males, the better the quality of land.23 Scholars, artisans and merchants were also allotted an amount of land equivalent to one-fifth the amount of normal able-bodied male peasants. The tax rate was in theory a tithe of the gross produce, but in practice it varied from land to land, as the quality and types of produce of specific land were different. Princes in Zhou were entitled to rule over a certain territory of land, which was classified into first-, second- and third-class estates. The firstclass estates needed to share with the king half of the land taxes collected by them, while the other class estates were only required to share a respectively smaller portion of the land taxes with the king. This was presumably the earliest application of progressive taxation in China and perhaps in the world. In addition to land tax, other taxes collected in the feudal Zhou Dynasty included forced labour duty (ding), transit duty and tax upon opening businesses, temporary military taxes and penalties.24 Although the ding was not a major tax, it became a poll tax from the Han Dynasty, adding extra heavy burdens to common people. The transit duty and tax upon opening businesses were imposed on merchants mainly for the purposes of restraining the growth of commerce and migration of people so as to keep farmers from abandoning land as well as generate additional revenues. The penalties were imposed to punish lazy farmers, which is somewhat different from the conventional function of penalties in modern tax laws. The tax policy adopted in Zhou was equalisation; that is, the burden of the land tax should be assessed in line with, inter alia, the quality of 22 The change may only resolve the working efficiency problem to a limited extent because some workers may not work as hard as others, and supervising and measuring each worker’s productivity would entail high administration cost. The change cannot prevent the ‘freerider’ problem from occurring in a public ownership system. 23 Zhu Zi Comments on Four Books, ‘Comments on Teng Wen Gong’. However, according to Rites of Zhou (Zhou Li), different types of the land tax was imposed according to whether the land nears the imperial capital or other centres of administration. Land reserved for the government bore no tax. Land nears the cities was taxed lighter than that was farther away. 24 Wu, above n 21, 14–20.

A History of Land Tax in China 533 land, the number of family members in a household and the production materials, such as cows and iron plows, a household had.25 Localities and professions should also be taken into account when allocating the tax burdens of individuals.26 Another policy was to impose only a light tax on peasants. The major reasons were, first, a light tax was considered conducive to encouraging, and keeping, peasants to work on the land—the most essential economic resource for the state—and secondly, a light tax would increase the welfare of peasants, who constituted the overwhelming majority of the population, and this, in turn, helped maintain the stability of the political system and the society. However, this light taxation policy was no more than wishful thinking, as peasant cultivators in reality faced a heavy burden from the other charges and forced labour duties attached to land. During the Spring and Autumn Period (770–476 BC), the powers of the King of Zhou were decentralised and weakened by local military leaders, who began to assert their power and vie for hegemony. In the Warring States Period (475–221 BC), the King of Zhou was largely a figurehead and held little real power. Strong regional warlords defeated weaker ones and consolidated those defeated domains into states, and gradually seven major states rose to prominence.27 A local administrative system relying on appointed meritocrats was established in some states, indicating that the nature of a feudal society was undergoing change. The basis of the well-field system was shattered during these periods due to the emergence of private land from reclamation of land by common farmers and the encroachment onto public land by the overlords. The collapse of the well-field system was also facilitated by the rapid increase in productivity with the widespread use of iron tools and animal power, the development of irrigation, steady population growth and increased expenses of wars. Some states took initiatives to reform the well-field system to make it more compatible with a changed economic and social environment. The reform launched in the state of Qin by the reformer Shang Yang, the chief adviser for Duke Xiao of Qin, is the most well known and thorough of all the reforms.28 Shang Yang assisted the duke in privatising land and allowing private land ownership of common people, hence land could be sold and bought freely.29 To develop the state, the duke abolished the well-field system and allowed the people to take up 25 Rites of Zhou; see also Sun Wenxue and Liu Zuo, History of Thought in Taxation in China (Beijing, China Finances and Economics Press, 2005) 23. 26 Ibid. 27 These states are Qi, Chu, Yan, Han, Zhao, Wei and Qin. 28 Fan Shuzhi, Brief Introduction of China’s History (Joint Publishing (HK), 2000) 74–75; see also Record of the Warring States (Zhan Guo Ce). 29 Records of the Historian (Shi Ji), Biography of Lord Shang (vol 68); Book of Lord Shang (Shang Jun Shu); Book of Han (Han Shu), Treaties on Food and Money (vol 24); and Sun and Liu, above n 25, 57.

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as much land as they could cultivate, as Shang Yang advised that the well-field system limited the full utilisation of the productivity of people and that the demarcation of land by setting up boundaries wasted some of the land. A land tax paid in kind was introduced to the people,30 and thus formally transformed the serfs into free or employed peasants, who no longer owed their overlord stated amounts of labour but only a tax to the state (or a tax via rents to a landlord). Under the private land ownership, the subject of the tax became the owner, not the land, as under the well-field system.31 In order to further promote more productive agricultural activities, Shang Yang abolished primogeniture, broke up large clans into comparatively nuclear families and imposed a double tax on households having more than one son.32 To attract people from other states to Qin, he provided an exemption from land tax for 10 years for immigrants who cultivated wasteland and guaranteed an exemption from military service as well.33 To make people concentrate on agriculture, he imposed heavy taxes on merchants and those who idled away from cultivation.34 Shang Yang believed in legalism, which emphasised the importance of strict laws in governing people.35 He also changed the administration of the state by incorporating smaller villages into prefectures and devolving power from the aristocracy to meritocracy,36 and required the aristocracy to pay taxes.37 Shang’s reform laid a solid foundation for the ruler of the Qin state, economically and politically, to unify all other states and establish the first, albeit short-lived, imperial dynasty, the Qin Dynasty (221–207 BC).

The Long Imperial Period (221

BC–1911 AD)

The overall tax policy during the long imperial period was—at least in theory—to impose taxation at a low level (and practice economy of government) and to give precedence to agriculture over commerce and trade. However, specific policies varied from dynasty to dynasty.38 The period can basically be divided into four phases: (1) from the Qin Dynasty to the Han Dynasty; (2) from the Period of the Three Kingdoms to the 30

Book of Lord Shang, Order to Cultivate Waste Lands. Ma Duanlin, Comprehensive Investigation of Literature (Wen Xian Tong Kao), Land Tax (vol 1). 32 Records of the Historian, Biography of Lord Shang (vol 68). 33 Book of Lord Shang, Encouragement of Immigration. 34 Book of Lord Shang, Order to Cultivate Waste Lands; External and Internal Affairs. 35 See generally Book of Lord Shang. 36 Records of the Historian, Annals of Qin (state) (vol 5) and Yearly Chronicle of the Six States (vol 15). 37 Book of Lord Shang, Order to Cultivate Waste Lands. 38 Wu, above n 21, 1–7. 31

A History of Land Tax in China 535 Tang Dynasty; (3) from the Five Dynasties and Ten Kingdoms to the Yuan Dynasty; and (4) the Ming and Qing Dynasties. All the phases contain some elements in common, though each has distinct features of its own. From the Qin Dynasty to the Han Dynasty (221

BC–220 AD)

The Qin and Han Dynasties comprised a very important period in China’s history, one that exerted far-reaching influences on the country in the following two millennia. The most fundamental elements of Qin and Han rule, including language, measurements, government structures, administrative zoning, ruling ideology, and economic and social policies, remained almost unchanged throughout all the following dynasties, and still continue to influence today.39 Land taxation in this period was based on the system of private land ownership. The focus of the tax base was labour. Tax rates were generally low, but the conditions of small and tenant peasants were no better than in the feudal period. Land accumulation by large landlords became severe from the middle of the dynasty period. The first emperor of Qin, Shi Huang, realised that the structure of the prior feudal system eventually led to a weak king and chaos. To avoid such a fate, he built an empire with tightly centralised institutions that did not rely on the loyalty of tributary dukes but on a group of professional bureaucrats whose appointment was based on merit rather than hereditary rights.40 He abolished the existing aristocracy and reorganised the bureaucracy based on a similar system to that used by the Qin state during the Warring States Period. His centralised unitary state divided the local areas into administrative units down from prefectures, to counties and to hundred-family units,41 which laid the basis of the system of prefectures and counties that has endured to this day. This government structure was considered useful for effective tax collection, military conscription and systematic social control. The emperor abolished the feudal system of landholding and established private land ownership, while at the same time strengthening the central power. However, his harsh rules, including heavy and excessive taxes42 and forced labour duties,43 led to his own demise. Owing to the severity of the taxes, there appeared for the first time in China’s history a class of large landlords consisting of rich merchants 39 Gu Yanwu, Records of Daily Study (Ri Zhi Lu) vol 17; Gu Yanwu, Complete Works of Tan Sitong. 40 Chun-shu Chang, The Rise of the Chinese Empire (Ann Arbor, MI, University of Michigan Press, 2007) 43–44. 41 Ibid. 42 According to the Book of Han, the average taxes on land, poll tax, and iron and salt monopolies in Qin amounted to 20 times per person as much as in the former part of the Zhou Dynasty. 43 The Book of Han also recorded that the amount of forced labour duties was 3 months, while in the preceding dynasties it was only 3 days.

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and wealthy traders who bought the land from small cultivators who were unable to afford the heavy taxes.44 There was a significant wealth gap between the rich and the poor during the Qin Dynasty. The Han Dynasty (206 BC–220 AD), which followed the short-lived Qin Dynasty, was, in many aspects, a reaction to the harshness of the Qin rules. Having observed the collapse of the Qin Dynasty, the Han emperors incorporated a more moderate philosophy, Confucianism, into their system of governance. Confucianism for the first time became the state’s ruling political ideology and it underpinned all following dynasties until the end of Imperial China.45 The economic theory of Confucianism emphasised that agriculture was the root of the economy and society, and engagement in commerce would draw people away from the basic pursuit of life and contaminate their morality. Consistent with this thinking, the tax policy was to apply a light tax on peasants but a heavy tax on merchants. Another policy was to keep government spending within the tax revenues. These policies constituted a basic state policy that impacted on all of the following political regimes.46 To recover a badly disrupted economy,47 the first Han emperor, Gaozu, reduced the government control over civilian lives.48 He continued the private land ownership and reduced the land tax rate to one part in fifteen of crop yields, lower than the notional Qin tithe, and reduced the labour duties from three months to three days per annum. The emperor required officials to pay tax on their salaries at certain fixed levels,49 and declared that the expense of government must be limited to a moderate scale.50 In 167 BC the land tax was abolished entirely under the reign of Emperor Wen,51 but in 155 BC it was restored to half the earlier rate, namely, ‘1 out of 30’, under the reign of Emperor Jing.52 This tax rate became the

44

Ma, above n 31, Land Tax (vol 1). Although Confucianism is no longer officially part of CCP and Chinese government’s policy since 1949, it does not disappear from people’s thinking and it remains influential on the ideology entrenched in Chinese society. In recent years, Confucianism has emerged in new forms tailored by modern Confucian scholars to combine the revival of Confucian values with the transformation of its doctrines in terms of other traditions. The Chinese government also has taken effort to revive and promote Confucianism not only domestically but internationally. 46 Book of Han, Treaties on Food and Money (vol 24); Records of the Historian, Biography of Li Yiji and Lu Gu (vol 97); see also Sun and Liu, above n 25, 106. 47 The negative consequences of the harsh Qin rules on the state’s economy and people’s living posed tremendous financial difficulties to the first Emperor. Book of Han, Treatise on Food and Money (vol 24) and Records of the Historian, Equalisation (vol 30). 48 Ma, above n 31, Land Tax (vol 1). 49 This tax was perhaps the world’s earliest income-type tax. 50 Ma, above n 31, Land Tax (vol 1). 51 The Emperor issued an Edict in the thirteenth year of his reign. It said that agriculture was the root of the Earth and for the purpose of supporting agricultural development the land tax should be removed. Book of Han, Annals of Emperor Wen (vol 4). 52 Book of Han, Annals of Emperor Jing (vol 5). 45

A History of Land Tax in China 537 statutory rate for the rest of the Han Dynasty period.53 The basis of land tax during Han was presumably gross produce. Though there is no clear record on the system of land classification in the first part of the Han Dynasty, land classification and the imposition of different rates based on the classification were recorded in the late part of Han. Benefiting from the light land tax and other favourable policies, the majority of farmers indeed enjoyed a period of rest and recuperation in the first 70 years of Han, bringing a general prosperity and an ever-increasing flow of taxes to the government. The government’s control over merchants was, however, tighter and harsher than that over common farmers. The emperor did allow trade and commerce, but he applied strict restrictions, including heavy taxes on merchants in response to what he saw as the decadence of the Qin merchants. Merchants were also denied the right to hold office, at least in theory, and prohibited from investing in farm land, which was, though not entirely effective, tough, as there was almost no any other important form of capital investment at the time. The social structure was already complicated in the first part of the Han Dynasty, known as Former Han (206 BC–9 AD). In-between the two higher classes—the officials and aristocrats—and the lower classes, consisting of convicts and slaves, was the majority of the population called ‘commoners’. This group included all the farmers, artisans, shopkeepers, merchants and the like.54 The taxes of the common people varied greatly according to their profession and place of residence.55 Aside from the land tax, a poll tax was imposed on the average adult commoners and children.56 Usually, the poll tax was 120 coins per annum for most adults aged from 15 to 56 and 20 coins for children aged between 7 and 14 years.57 Merchants paid double poll taxes,58 heavy market dues and assessments on accumulations of all property they owned, including coins and

53 At the beginning of the reign of Emperor Guangwu, he levied the land tax at tithe to meet the emergent expense of warfare. Nevertheless, he returned the tax rate to ‘1 out of 30’ in 30 AD, the former level. Book of the Later Han, Annals of Emperor Guangwu (vol 1). 54 Wilbur, above n 10, 33. There was a difference among farmers. Apart from free farmers, there were many tenant farmers (dian nong) who often had to sell their own land to a rich person and worked their own fields as tenants. The third group was landless persons, usually refugees (liu min) who were employed as field workers (gu nong) to work on land of a landowner. 55 Wilbur, above n 10, 33. 56 Ibid; see also Zheng, above n 5, 46–48. Zheng’s study shows that there were four types of poll-tax in Han, depending on the individual’s age and the purpose of the imposition. The first one was levied on adult commoners, the second one on children. The third one was a payment substitute for the labour duty of providing service in prefecture each month by people of the right age. The last one was a payment for the frontier duty. These types of taxes place a heavy burden on common people. Zheng, 46–58. 57 Ma, above n 31, Population (vol 10). 58 Ibid.

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goods.59 Artisans paid taxes on the amount of transactions of particular crafted goods during a given period of time. The levy of three days of labour services was commutable at the rate of 300 coins per man. The poll tax became a heavy burden on the common people, but it did make a significant contribution to the government revenue. With the unification of north China into a single empire and the increasing use of coined money, international trade in certain essentials, such as iron and salt, and luxuries, including fine silks, furs and gold, was developed and flourished, fostering the prosperity of the Han economy.60 Nevertheless, land acquisitions by elite families gradually drained the tax base. Small landowner-cultivators were not always able to pay taxes because of the unexpected harvest-reducing natural disasters and unstable incomes from selling harvest. Many of them fell into debt and had no alternative but to sell land to large landowners and then to work as farming tenants. An important part of the best-irrigated land was hence gradually accumulated into a small group of large landowners, usually nobles, officials, merchants and gentry, who owned land for investment and rented it to share-cropping tenants. The tenant-cultivators usually had to pay as much as half of their produce to the landowners as rentals, and thus the low rates of land tax benefited only the rich landlords.61 Since the government records could not be amended to reflect changes of land ownership in a timely manner, those landlords who acquired land from other farmers could easily evade taxes. Some large landowners, such as scholars and officials, were even exempt from paying the taxes. The government had to tax the remaining independent farmers more strictly to make up the lost taxes, which caused more farmers to become bankrupt and thus become tenant farmers for large landlords.62 Meanwhile, imprudent spending by government and emperors, as well as huge expenses from the warfare against the Xiongnu invasion,63 threatened the government revenue. The improvement in agricultural techniques, farming methods and low tax rate 59 This imposition was employed to prohibit merchants, usurers and regraters from lending money or goods at interest, especially at an exorbitant high rate. Zheng, above n 5, 62–63. 60 Commerce flourished during the reign of Emperor Wu. Iron tools and weapons were widely used for agriculture and military purposes. The weaving of silk fabrics also excelled in this period. The economic development facilitated trade beyond border boundaries of Han. Meanwhile, to seek allies to defend against Xiongnu’s invasion, the Emperor Wu twice sent diplomatic missions led by Zhang Qian to the western regions, which initiated the Silk Road. The Silk Road later served as the route not only for the international trade of goods but for the transmission of knowledge and culture between East and West. 61 Huang, above n 3, 39. 62 Zheng, above n 5, 41. 63 From the beginning of Han, China had been subjected to frequent plundering raids by the Xiongnu, a warlike, nomadic people who penetrated deep into the frontier prefectures of Han, looting, slaughtering and kidnapping. The Han’s emperors launched vastly expensive campaigns in order to hold this frontier region within the Chinese political orbit. Wilbur, above n 10, 103–08.

A History of Land Tax in China 539 benefited large landlords, not ordinary small farmers. Although Emperors Cheng and Ai attempted to break up landed estates, they failed not only because of the objections of their affinal relatives and officials, but also because of the impracticability of the policy of controlling the amount of land a family could own under the presupposition of private land ownership. The Former Han thus reached a stage where the officials and the landlords were indivisible, and where the personal stakes of those who administered the government and enjoyed the benefits compelled them to refuse any reform that changed the substructure of their wealth. The severe land annexation and other related economic and political problems led to the success of Wang Mang64 in taking the throne and briefly interrupted the Han empire with the establishment of the shortlived Xin Dynasty (9–23 AD). Wang undertook extensive and substantial reforms to solve the problem left by Former Han, among which the most important was perhaps land reform. To eliminate the harmful amassing of land, he abolished private land ownership and strictly prohibited the selling and purchasing of land, and ensured that every farmer had an equal share of land to cultivate.65 This reform, along with other reforms, such as imposing high taxes on wealthy households with unfree private servants and introducing a property tax and income tax at the rate of 10% of profits for professionals and skilled labour,66 predictably never gained support from landholding families, as the policies clearly favoured small farmers but punished large landlords. After his short reign, the Han Dynasty was reinstated (the second two centuries of Han rule are known as Later Han), but the emperor’s power declined again amidst land annexation by wealthy landowners, external invasions and internal feuds between consort clans and eunuchs.67 In short, although certain progress was made to the tax system in the Han time, the difficulties with the implementation of the system were never solved. Land annexation and its accompanying problems, such as excessive taxes on small peasants, tax evasion by large landlords and revenue loss of the government, had been one of the biggest challenges 64 Wang Mang was a member of the consort families of the emperor. Book of Han, Biography of Wang Mang (vol 99). The orthodox historical literature considered him a usurper but later on more objective study thought of him as a critical reformer in directly challenging the privileges and interests of elite and wealthy groups. 65 Book of Han, Biography of Wang Mang (vol 99). 66 Book of Han, Treaties on Food and Money (vol 24) and Biography of Wang Mang (vol 99). 67 Unlike Former Han, in which emperors depended on individual followers to govern the empire, emperors in Later Han had to rely on imperial consorts who came from the wealthiest clans and landowners, and eunuchs who were from lower levels of society but attained substantial power. In the last period of the Dynasty, the weak reign of child-emperors gave chances to consorts and eunuchs to quarrel for power over the state. JK Fairbank and M Goldman, China: A New History (Cambridge, MA, The Belknap Press of Harvard University Press, 2006) 59; see also Fan, above n 28, 119–22.

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for the government. Where formal tax revenues fell short of expenditures, informal impositions came to the fore, which caused more unfair and heavy burdens on the common people. That tax payment was attached to the person made the system rather unequal. Variations in the rules on taxation, including forced labour duties, were not uncommon. While the light tax policy could be implemented properly at the beginning, it became nominal in the middle and to the end. From the Period of the Three Kingdoms to the Tang Dynasty (220–907 AD) During the second period, the focus of the tax base began to shift from labour to wealth and the payment method gradually moved from in kind (commodity) payments to monetary payments. During the Period of the Three Kingdoms (220–280 AD), the Jin Dynasty (265–420 AD) and the Southern and Northern Dynasties (420–581 AD), the state underwent an era of rule by warlords. After nearly four centuries of political fragmentation, during which the north and south of China had developed independently, the Sui Dynasty (581–618 AD) managed to reunite the country. Although its duration was short, the Sui government established many institutions that were to be adopted by its successor, the Tang Dynasty (618–907 AD). The Tang Dynasty opened a new age of prosperity not only in the economy, but also in the Chinese civilisation. The Tang, like the Han, kept the trade routes open to the West and the South, and the Silk Road, the most important pre-modern route for trade and cultural exchange between East and West, reached its golden time. The land system adopted in the early to middle Tang times was called the equal-field system,68 which meant that all land officially owned by the government was allotted to individual households according to their ability to supply labour, ie able-bodied males (ding).69 A certain portion of land could be inherited, although land would revert to the state to be reassigned upon one’s death.70 This land system was intended to prevent aristocratic families and the gentry from accumulating large amounts

68 According to studies, the equal-field system was adopted in the last of the Sixteen Kingdoms and inherited by the following Sui Dynasty. See Fairbank and Goldman, above n 67, 77. 69 Under Tang laws, males were categorised into five groups according to their ages: birth (huang), child (xiao), juvenile (zhong), able-bodied (ding) and old (lao). Closely related to taxation is the stipulation of ages of able-bodied males and juveniles. In the early times, juveniles were males aged from 16 to 20 years and able-bodied males were aged from 21 to 60. There were some variations afterwards. From the middle Tang onwards, the age for able-bodied males were postponed to 25 years and the age for old males were brought forward to 55. Nothing was changed until the end of Tang. Zhang Zexian, Tax History in the Tang and Five Dynasties (Beijing, Zhonghua Book Company, 1985) 2. 70 Institutional History of Tang (Tang Hui Yao), Taxation (vol 83).

A History of Land Tax in China 541 of land, and also aimed to foster agricultural growth and ensure social stability through allocating land to the common people for living. A tax system was accordingly based upon this system of equal distribution of land. It is known as the system of zu-yun-diao, a system consisting of threefold taxes:71 a field tax paid in grain on those who had fields; a household tax paid in silk on those who had household registrations; and a corvée on those who were adult males.72 Tax rates were moderate and fixed at certain amounts,73 but administrators at the local level would be fastidious about the quality of payment goods. The corvée for every able-bodied cultivator was 20 days, with two additional days in the intercalary month, and such forced service was commutable at the rate of three feet of silk of a certain specification per day.74 The provision of services exceeding the required amount would lead to the exemption of one or both of the other two payments. By effectively registering the population, higher tax revenue was achieved. Similar to that of the previous land tax systems, this Tang land tax system used labour on agricultural land as the tax base. The use of labour as the base unit for tax purposes was logical, given its ability to serve as a stable source of revenue and to simplify tax administration provided the government could effectively register households. It had a regressive effect as a household with a large landholding, but only one able-bodied male paid the same taxes as another household having one able-bodied male but much less land. The land tax applied only to the common farming population. Government officials above a certain level, scholars, aristocrats, females, old males and filial sons were exempt from it.75 The equal-field land system was abandoned after the An Shi Rebellion (755–63 AD) in the middle of the Tang period since centralised control of the government was heavily weakened and government records, including a population record for effective taxation and military conscription, were poorly maintained and disrupted by the rebellion. Rich households with adult males successfully avoided taxes by joining the government or becoming Buddhist monks, but poor households saw no such way out and had to assume more taxes as they were shifted from the rich households.76 Land began to be bought and sold, and land reversion upon one’s 71 Old Book of Tang, Treaties on Food and Money (vol 48). Households were divided into taxable and non-taxable for tax purposes. Usually, aristocratic families and officials were non-taxable households. 72 Three decrees on the threefold taxes system were issued in different times in the early Tang. The basic mechanism was the same but details varied. Zhang, above n 69, 4. 73 Old Book of Tang, Treaties on Food and Money (vol 48). 74 Ibid. 75 Ibid, 5, 8. The merchants may be subject to the land tax, along with other taxes applying to them only. 76 Sima Guang, A Comprehensive Mirror to Aid in Government (Zi Zhi Tong Jian) vol 226.

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death was no longer enforced. Large areas of land became concentrated in the hands of the rich, who paid only the same amount of taxes (or perhaps less) as small and landless peasants, which resulted in the loss of taxable land and revenue for the government and increased the burdens on the common peasants. To restore the economy and to recover government revenues, Yang Yan, chancellor under Emperor Dezong (780–805 AD), introduced substantial tax reforms to the law of land ownership and the tax system. By recognising the failure of the old system of land and taxation, Yang Yan allowed free trade of land and introduced a new tax edict which incorporated the previous threefold taxes into one formal tax with two components: a poll tax on households and a wealth tax. The generally applied tax edict was called ‘two taxes’ perhaps because it was collected from farmers in two instalments,77 though technically it was also two taxes in terms of the base.78 Tax assessment was based on the level of wealth, such as land, houses, production equipment and jewellery, but not on the taxable labour (numbers of able-bodied male) in a household, as was the case in the previous systems.79 Other than these payments, all the previous field tax, poll tax and corvée, as well as other miscellaneous and harsh taxes, were abolished.80 Taxes were calculated on the money basis, but could be converted into goods and paid in kind where that made payment more convenient for the taxpayers. The tax reform was a significant improvement in taxation in that it changed the nature of the base of the tax from labour to wealth. This change, to a degree, embodied the ‘ability to pay’ principle, and the provision that taxes should be differentiated according to wealth made the tax system progressive. The reform also made officials, nobles and merchants liable for a general income tax at graudated rates based on the class of household.81 The tax reform was aimed at controlling the accelerating pace of land accumulation and to reduce the number of poor households fleeing because of their inability to pay their taxes. The development of social productivity made this change possible as it provided enough stable and concentrated wealth to be taxed. As some historians have maintained, the significant turning point in China’s history in terms of changes of social structure and class relationship was the middle Tang 77 One instalment is in summer and the other is in autumn based on the Chinese lunar calendar. Zhang, above n 69, 5–8; Old Book of Tang, Biography of Yang Yan (vol 118). See also Wu, above n 21, 59–62. 78 Zhang, above n 69, 119–25. See also Ye Zhenpeng (ed), Fiscal and Tax Reforms in China’s History (Beijing, China Economics and Finance Press, 1999) 370–78. 79 Ibid. Old Book of Tang, Biography of Yang Yan (vol 118). This standard was, however, criticised as being too difficult to apply for valuation. Ye, above n 78, 375. 80 Sima, above n 76. However, various surtaxes and charges were later on imposed again. The compulsory labour duty did not fade away. It still continued as a separate part of providing services for the government. 81 Old Book of Tang, Treaties on Food and Money (vol 48).

A History of Land Tax in China 543 period.82 The mutation of the tax system from ‘threefold taxes’ to ‘two taxes’ is seen as an important symbol of the turning—the focus of taxation was now moved to wealth from labour, and the tax payment method evolved from labour into commodity and at the same time began to move to money. The conscription method was also transformed from the compulsory labour duty attached to the land tax based on labour to professional soldiers who were recruited and paid by the government.83 This change greatly liberalised the working population and fostered the economic development. The total tax revenue to be collected was fixed at a level of expenditure84 and then evenly allocated to each prefecture government according to the amount of land and population, as well as the economic conditions. Therefore the tax rate varied across regions. Large regions with more productive land and a smaller population would carry a lighter tax than those densely populous regions with less land. No extra taxes were allowed to be collected. This measure suggests that the government was aware of the role of budgeting in managing the public finances.85 In early Tang, the effective central control enabled the government to monopolise the taxing power and the prefectures were responsible for collections only. There was no division of central and local functions and finances, even though there was local adjustment of rules. However, with the rise of military governors after the An Shi Rebellion, the central government had to give away part of the taxing power to the local government as a compromise to ensure receipt of a guaranteed portion of the revenue that would otherwise be completely concealed from the centre. Tax revenues were divided into three parts: one for the centre; one for the regions, with a military governor who usually governed several prefectures; and the final one for the prefectures themselves.86 The fiscal decentralisation recognised the fact that the part withheld by the local government was what the local government should have for its finance. The formula for revenue sharing at least ensured the portion of the central revenue, and saved the cost of the centre distributing revenues locally. On the other hand, it in effect legalised local fiscal control and weakened the centre’s ability to effectively reign over the state, leaving future troubles to the government. 82

Zhang, above n 69, 4. Ye, above n 78, 406–09. 84 It was set at the expenditure level of the year 779, which was the year the government had the largest tax revenue, and also the year the government had the highest land and population registration numbers after the An Shi Rebellion. Ye, above n 78, 373. 85 Ma, Land Tax (vol 3). When one considers the period of these reforms, one can see how sophisticated the Chinese tax system was, compared, for example, with existing systems previously in Europe at this time. 86 Ye, above n 78, 391–93. This revenue allocation method continued till the Song Dynasty. Zhang, above n 69, 177. 83

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Nevertheless, the new tax system bore fruit and the empire’s financial situation was quickly improved. The tax reform can be conceived as one of the most remarkable advancements in tax history in both China and the world as a whole at the time. Though hailed by the common people,87 the tax reform was very unpopular among aristocrats and officials, who found that their previous privilege of exemption from taxation had been completely lost. The policies ultimately backfired on Emperor Dezong and his reformer, Yang Yan. The Tang Dynasty fell in 907, with more arbitrary informal impositions on common farmers, widespread land annexation, unfair tax exemption of the elite group, and tax evasion by wealthy landlords and merchants at the end, just like the previous dynasties. The fiscal decentralisation contributed to the weakening of the central power. From the Five Dynasties and Ten Kingdoms to the Yuan Dynasty (907–1368 AD) There were a number of disturbances to the political system during the third period of the imperial land tax history, but the period also witnessed significant developments in the economy and culture. The nature of land taxation was largely the same as before, and the efforts taken to remedy the shortcomings, coupled with the laissez-faire land policy, could not generate the desired outcome, owing to, among other things, the opposition of vested interest groups. The Five Dynasties and Ten Kingdoms Period after the Sui and Tang Dynasties (907–60 AD) was characterised by political disunity and consequently there was little development of taxation. The Song Dynasty (960–1279 AD) unified and gained power over most of China, and brought about another great period in which China was ‘ahead of the rest of the world in technological innovation, material production, political philosophy, government and elite culture’.88 However, in 1127 AD, with the powerful invasion of the Jurchen Jin Dynasty, China was divided between the Southern Song Dynasty, the Jin Dynasty and the Tangut Western Xia Dynasty. The Southern Song still managed to continue its spectacular material growth, and its rapid increase in foreign trade brought large amounts of revenue to the government for almost the only time before the nineteenth century.89 The increase in commerce also increased the use of paper money, which had first appeared in Tang. Trade and salt taxes became more prominent and reliable revenue sources than the traditional land tax.90

87 88 89 90

Old Book of Tang, Treaties on Food and Money (vol 48); Ma, Land Tax (vol 3). Fairbank and Goldman, above n 67, 88. Ibid, 92. Ibid.

A History of Land Tax in China 545 Unlike the previous dynasties, the Song government adopted a non-restriction policy on land annexation from the very beginning. It encouraged people to reclaim land by granting them land ownership insomuch as they paid a land tax, and it even induced the military governors to release their military power to invest in land for their descendants.91 Because of the policy and relatively good protection of private land ownership, land annexation developed into an unprecedented level during the early Northern Song period (960–1126 AD). Large land owners withheld information about the land they really owned, thereby evading tax payment, which led the government to more strictly assess and tax small and even landless farmers. A considerable size of arable land was wasted since many small farmers became bankrupt due to the excessive unequal taxes. While large private landowners became richer, the government became poorer, with continuing drops in government revenues, and successive deficits and widespread inflation.92 The government issued a decree to limit the amount of land that officials could hold, but it was useless as no one, including the emperor, was willing to implement it. To resolve this problem and other severe economic and social problems, Wang Anshi, Chancellor of the Emperor Shenzong (1067–85 AD), launched a comprehensive socioeconomic reform known as New Policies. Under New Policies, a new tax law, ‘standardising land and equalising taxes’,93 was enacted. It did not alter the basis of the two-tax system; rather, its major aim was to polish the system to make its implementation more equal.94 The ‘standardising’ meant that land was assessed on the basis of a standard square unit,95 which was then graded into five classes. Each grade of land was subject to a different rate of the gross produce of the land, which was the ‘equalising’. Barren land and land in joint use, such as mountain forests, tombs and ponds, were exempt from taxation. Land was distinguished between public land, farming land and urban land. The public land was subject to rents, the farming land was subject to the land tax and the urban land was subject to a tax on the use of buildings and the land.96 Taxes were collected in a variety of commodities, but silver began to be used from the reign of Emperor Shenzong in the eleventh century. To enforce the new law, Wang launched a substantial land survey to sort out and update the badly maintained land

91

Sima Guang, Sushui River Record (Historical Record of the Song Dynasty) vol 1. The recorded land by the government was 5.25 trillion qin in 1021, but it quickly dropped to only 2.15 trillion qin in 1049. The government lost substantial revenues. Ye, above n 78, 427. 93 Song Annals, Treaties on Food and Money (vol 174). 94 Sima, above n 91. 95 One square was extended to one thousand feet in all four directions, equal to 41 qin and 66 mu and 160 feet. Song Annals, Treaties on Food and Money (vol 174). 96 Ibid. 92

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and household registrations, a step that could help lower the tax burden on ordinary farmers and make untaxed farmland subject to taxes.97 In addition to the land tax, a tax was introduced on the transfer of land, whether by sale, inheritance or gift, in the Song time.98 A general property tax was later introduced by Wang Anshi. The tax was based on land and other properties at a graduated rate, and it applied mainly to wealthy households. Land was thus subject to not only the regular land tax but also the property tax.99 The new law won wholehearted support from the emperor and common farmers, but its implementation had many problems, including, but not confined to, bureaucratic mismanagement and the lack of funds and competent professionals to do a thorough land survey at the time when Song was under frequent invasion from neighbouring countries. The new land tax law swung between suspension and reimplementation. It did not economically yield expected outcome. Although Wang’s tax reforms ultimately failed due to fierce opposition from powerful conservatives and renewed foreign invasions, his theories in public finance and taxation are received by contemporary historians as being remarkably close to modern concepts of the welfare state and planned economy. At the end of Southern Song, local governments were under financial strain because of the increased expenditure burdens that had shifted from the central government and the reduction in the retained part of the local revenues. Ordinary people once again became the source of income for the local governments. Informal taxes and charges and heavy labour duties came back, as had happened in the past. The Mongol invasion and conquest brought both the Jin Empire and the Southern Song Dynasty to an end. The Mongol Yuan Dynasty (1271–1368 AD) was the first time the whole of China had been ruled by a ‘foreigner’, in view of the majority of Han Chinese in the populace. There was not much development of or change in taxation during the Yuan Dynasty. Ultimately, the Han resistance pushed the Mongolian conquerors back to the steppe and replaced the Yuan Dynasty with the Ming Dynasty (1368–1644 AD). The Ming and Qing Dynasties (1368–1911

AD)

The shift in the focus of the tax base from labour to wealth and the change of the payment medium from labour to money was completed during the Ming and Qing period. Nevertheless, the problems with the land tax systems, such as the inequality of the tax burden, land accumu-

97 98 99

Wu, above n 21, 82. Ibid, 107–08. Huang, above n 3, 51–52.

A History of Land Tax in China 547 lation and corruption in collection, remained almost unchanged, subject only to brief periods of abatement. The Ming Dynasty Unlike the earlier dynasties, which had relied on both commerce and agriculture to drive the economic development, the Ming empire was less interested in trade and commerce than in agriculture, owing largely to the ruling ideology of the founding emperor, Hongwu (1328–98 AD). That is, to secure the durability of the empire and to reduce the considerable regional imbalance in economic development that had existed before Ming, it was considered best to keep all regions on the same agricultural footing for fear that some regions might grow disproportionally to threaten the empire’s political unity.100 Hongwu also aimed for extreme frugality because he was convinced that profit itself was evil; that mercantile interests conflicted with those of society and the state; and that the state itself also needed to refrain from ‘enriching itself’ as any gain to the government meant a loss to the people—a naive view.101 Consequently, there was a greater emphasis on agriculture and a stricter control over trade, which led China to a state of limited seclusion until the twentieth century. At the beginning of Hongwu’s reign, one of his primary tax policies was to relieve peasants’ burden so as to rehabilitate the empire after the harsh rule of the Mongols. The Ming government derived most of its revenues from land tax and monopolies of salt and tea. Its land tax followed the previous ‘two taxes’ system, but with an extra payment included in the tax base.102 Tax assessment was based on a general fiscal unit and taxes were usually paid in kind, but some money-like substitutes were also accepted as valid money to facilitate payment.103 By the middle of the fifteenth century, silver was extensively used as the chief type of payment of the land tax.104 This move of tax payment from commodities to money was a continuing progress, but it was not until the Qing Dynasty that tax payment and administration were changed completely to money. 100 R Huang, Taxation and Governmental Finance in Sixteenth Century Ming China (London, Cambridge University Press, 1974) 1–2. 101 Fairbank and Goldman, above n 67, 132–37. 102 This one was a horse payment collected for the exclusive use of the ministry of war. Wu, above n 21, 138; Huang, above n 100, 255. 103 For instance, the land taxes in Yunnan Province were customarily paid in precious metals and mercury, and even cowrie shells. In other regions, sorghum, millet and beans were accepted at discount rates. Wu, above n 21, 129–130; Huang, above n 100, 39. 104 Ming Annals, Treaties on Food and Money (vol 81); Huang, above n 3, 53. Silver was also used in private transactions. Huang maintained that the use of silver in tax administration was not planned and adopted by choice. There were several drawbacks with the use of silver, but one important advantage was the absence of inflation. The long-term price structure in silver in the sixteenth century was remarkably stable. Huang, above n 100, 80.

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Since land and household information was directly related to tax revenues, the government took particular care over land and household registrations. During the reign of Hongwu, a comprehensive land survey and population census was undertaken and the results were recorded in a Yellow Book (on population) and a Fish Scale Book (on land). The Yellow Book recorded people’s residence, name, age, land and wealth (if any), and categorised registered households into four types:105 general population, hereditary military families, artisans and saltern households.106 The vocational registration was designed to maintain the army and to service the government. The state simply demanded that each type of household provide a specialised type of service. There was a possibility of changing the registered status, but not of saltern households. The population registration was made so broad that few people could escape from the labour service obligation—except aristocrats, government officials and qualified scholars at certain levels, together with their family members, who were partially or totally exempt from labour duties. The Fish Scale Book of land records derived from the fact that the topographical charts which outlined the contours and boundaries of every plot of land under cultivation resembled a fish skin in appearance.107 It was designed to overcome technical difficulties inherent in any attempt to establish a general standard for land classification, whereby all the cultivated acreage in the state could be compiled in a few categories without disparity. Both land and household registrations were to be reviewed once a year and remade once every 10 years. Strict punishments were introduced for those cheated on registering including officials. However, the strict implementations of the land and household registrations were gradually loosened. Land annexation became increasingly severe, and large landowners and wealthy households evaded taxes by bribing officials to conceal or under-report their land and wealth. Extra levies were imposed one after the other to make up the unpaid or underpaid taxes that were shifted from large landlords to small cultivators, many of whom had to abandon their homes to avoiding excessive taxes. By the middle of Ming, the state was in some disarray. To address the tax and finance problems, in particular those relating to the labour service levy, a tax reform called the ‘Single Whip Reform’ was introduced by Zhang Juzheng, Chief Grand Secretary of Emperor Wanli (1563–1620 AD). The first step was to correct and update the land and household information through a thorough land and household survey. The use of silver 105 Huang, above n 100, 333. However, the Ming state never insisted on rigid social stratification. No decree was ever issued to effect class segregation. 106 Saltern households must be officially registered. Once it was registered, the household remained so perpetually. Saltern households did not need to provide ordinary service levy. Huang, above n 100, 192–93. 107 Veritable Records of the Ming, Taizu of Ming.

A History of Land Tax in China 549 for tax payments made it possible to consolidate various kinds of payment for the levy108 into a single payment at a uniform annual rate. The consolidated payment could further be incorporated into the commuted portions of the regular land taxes and thus tax assessment could be based uniformly on the general fiscal unit and be collected unvaryingly in silver.109 The reform meant that the levy taxes were now based on the amount of land (wealth), and whoever owned land had the tax liability. Large landowners hence had to pay more taxes than those having less land. This reform eased the administration of the labour service levy and alleviated the tax burdens on ordinary individuals. Although this was a step forward in China’s tax history and had positive effects on both the revenue and the economy at the time, it was destined to remain limited in scope.110 One limitation was that the reform only modified the procedure of tax collection; it did not simplify the basic tax structure. In the late sixteenth century, the tax base became much broader and the general rates were complicated by the addition of other surtaxes and charges.111 While tax administration appeared solid and well constructed at the top, it was in fact ramshackle at the lower levels.112 Government officials’ accountability in fiscal matters grew, as in the rest of the power structure113 and as in the earlier dynasties. The fiscal policy adopted in the early years of the dynasty, to ‘live within the empire’s means’, had little effects in the middle to late periods. Rising expenses of border wars, administrative overheads and palace entertainments led to government deficits. There was no separation between government revenues and emperors’ incomes. Additional, informal surtaxes were introduced to meet increasing demands for a broader range of government activities. Ordinary people once again assumed a rather heavy tax burden. The mining tax, one of the most onerous surtaxes, has been identified as a critical factor causing the fall of the Ming Dynasty.114 The Ming tax system had a long-term influence on its successor, the Qing Dynasty (1644–1911 AD) and has even influenced modern China in many aspects. The Manchu invasion and takeover of China in the mid-seventeenth century created the Manchu Qing Dynasty, the last empire of China. ‘Foreigners’ once again controlled the Han nationality. 108 According to Huang, there were four types of service levy. The first was a service of tax collection and delivery, as well as supplying raw materials. The second was a full-time and year-round labour service. The third was to provide equipment and service for postal stations. The last was militia service. Huang, above n 100, 112. Another study shows that the labour service levy only contained the first two types, plus services under certain emergencies. Wu, above n 21, 143. 109 Ming Annals, Treaties on Food and Money. 110 Huang, above n 100, 119. 111 Ibid, 141. 112 Ibid. 113 Ibid. 114 Ma, Taxation of Merchandise (vol 16).

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The Qing Dynasty The major fault of Qing, some researchers argue, is that it followed the old map too closely.115 Qing quickly adopted the Confucian norms of traditional Chinese government. The emperors attempted to tighten up administrative discipline and avoided major institutional reforms, particularly with respect to fiscal practices. The Ming tax system was hence inherited in Qing.116 In keeping with previous dynastic cycles, the tax policy at the beginning of Qing was to reduce ordinary farmers’ tax burdens by abolishing informal taxes and charges arbitrarily imposed in late Ming, reducing tax evasions of large landlords and wealthy households, and equalising taxes and labour service levies among people. The central government recompiled a general law on tax and labour service levies, while local governments reconstructed the Yellow Book and Fish Scale Book for more accurate land and household information for tax purposes. However, the importance of household registration for taxation declined from 1712, when the Emperor Kangxi adopted a tax policy of ‘permanent settlement’, ie permanently freezing the number of taxable heads (able-bodied males) in taxation by reference to the census of the year of 1711, and thus a fixed poll tax for all times.117 One of the major reasons for such a policy was that household registration was an onerous task for both the officials and the common people: the career prospects of officials were linked to household registration and tax collection, and bribery and fraud on registration by officials and large and powerful households would simply place a greater burden on the normal people. Another reason the emperor gave was that, while the population was increased, the land from which the people obtained their income was not enlarged in line with the population, and therefore no further taxes should be imposed.118 This policy in effect lowered the tax on people and laid the basis for a subsequent tax reform which merged the poll tax into the land tax and then imposed the tax according to the amount of land (wealth) owned. Hence more land meant more taxes. The reform was formally started by Emperor Yongzheng in 1723 and did not finish until 1883—a long process, fraught with difficulties and struggles.119 This tax reform was considered another significant improvement in taxation since it eventually completed the process of changing the imposition of taxes on the basis of labour to that of taxes on the basis of wealth, and from labour payment 115

Huang, above n 100, 322. Record of the Emperor Shizu, vol 9. 117 The Draft of History of Qing, vol 121; Record of the Emperor Shengzu, vol 240. However, Huang’s research suggested the amount of land tax in the Qing was based on the returns of 1713. Huang, above n 3, 89. 118 Record of the Emperor Shengzu, vol 249. 119 Ye, above n 78, 569–76. 116

A History of Land Tax in China 551 to monetary payment. The reform simplified the tax system, relieved tax burdens for cultivators who had no or little land, encouraged population growth and movement, and fostered economic development.120 Another reform launched by Yongzheng was to formally incorporate the widespread additional, informal charges, called ‘meltage charge’, on the loss of exchange (from unminted or low-quality silver to the fine silver required by the Ministry of Revenue) during tax collection into formal taxes, while eliminating all other arbitrary charges attached to that practice. The meltage charge of the payment in silver was similar in nature to the wastage charge of the payment in grain. These extra charges increased over the course of time and became rather burdensome to people, but they were an important source for the maintenance of the local administration and the officials, given the unrealistically low salary scale and scarce local administrative funds in Qing. The revenue from the incorporation, called ‘money for nourishing honesty’, was used to supplement official salaries and administration expenses.121 By this policy, serious problems such as corruption associated with extra charges were resolved to a certain extent.122 However, similar problems in imposing those informal charges later reoccurred, and were never effectively eliminated. Throughout Qing, the land tax was a rather complex structure. As mentioned earlier, the land tax mainly had four components: a land tax proper, collected at a moderate rate of the gross produce of the land; a poll tax, which was merged into the land tax by the permanent settlement; grain tribute, which was required of eight grain-tribute provinces as part of tax but later became a significant levy on land; and surcharges, which were added one after another, legal and illegal, after the land tax reform. The rates of these levies were extremely complicated, varying from region to region and even from one piece of land to another, causing tremendous problems in tax administration, inequality of payment and corruption in collection. Indeed, many attempts and measures made to improve the tax system in the early part of the dynasty were not retained in the later years. This was the same as many preceding dynasties. The two Opium Wars in late Qing (1840–1911 AD) made the imperial treasury bankrupt twice, due largely to the huge amounts of indemnities incurred in the wars and a large outflow of silver from the opium trade. The continuing domestic rebellions and Western encroachments led Qing, once again, to engage wildly in the imposition of exorbitant taxes and levies. While old problems remained unsolved, new problems, such as unequal tax treatment between foreign and domestic merchants, emerged. 120 Zhou Yumin, Public Finance and Social Changes in Late Qing (Shanghai, Shanghai People’s Publishing House, 2000) 13; Ye, ibid. 121 Zhou, above n 120, 13–21; Ye, ibid, 553–63. 122 Ibid.

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Indirect taxes, primarily the percentage of money payment levied on goods passing through inland barriers, the salt gabelle and the customs, began to rival the land tax in revenue importance in this period.123 Abuse of taxing power across levels of the government aggravated the inconsistency and disunity problems of the tax regime, which adversely affected the fiscal system of the following Republic of China directly.

The Republic of China (1912–49) The Republic of China ended around 2,000 years of imperial rule. The Republic, dominated by numerous warlords and divided by foreign invading powers, experienced tremendous political and social difficulties from its founding. The economy was entering the early stages of industrialisation and modernisation, yet the tax regime remained rough, capricious and unstable owing to continuous political and social upheaval. The taxing power was notionally centralised, but powerful local warlords had considerable de facto power to impose a variety of informal taxes and charges at their wish. Common people and small and medium businesses were overburdened by the inordinate taxes. To reduce arbitrary taxes and to unify the tax regime and strengthen central tax revenues, the central governement decided, in 1921, to establish a dual-track tax system which formally assigned taxes into national and local—primarily provincial—levels.124 This assignment was not realised until 1928. It may be regarded as a kind of fiscal decentralisation resulting from relatively weak central power that could not effectively control taxation. However, the assignment only addressed central and provincial governments, without any consideration of governments below the provincial level. Consequently, sub-provincial governments were beset with financial troubles, as were the provinces since their legal revenue sources could hardly meet local demands, including soaring war expenses. The land tax had long been the most important central tax in China’s tax history, and such special status did not change until the dual-level tax assignment. For the first time, land tax became a local tax, and constituted the most important formal tax revenue for local governments. However, the implementation of the tax was problematic. The land tax law enacted by the central government was too vague to apply and in practice it lacked any binding force. The tax varied ‘greatly from county to county and bore little relationship to the value and productivity of the land’.125 Although various attempts to reform the land tax were made before the 123

Zheng, above n 5, 648. Ibid, 691; Wu, above n 21, 311–13. 125 LE Eastman, The Abortive Revolution: China under Nationalist Rule, 1927–1937 (Cambridge, MA, Harvard University Press, 1974) 198. 124

A History of Land Tax in China 553 fall of the Qing Dynasty and during the Republic, the land tax reform almost never achieved the anticipated outcome. There were always extra charges and illegal impositions attached to the land tax. The burden from these informal charges doubled or even tripled the formal tax burden. Much like before, the poor had to assume taxes that had shifted from the rich; and the drop in government revenue led the government to further increase the tax burden on the poor. Apart from the land tax applied to peasants, a formal schedular income tax system that was based on the English income tax law was introduced to tax businesses and individuals earning salaries. However, the income tax system could not be properly put into practice because of, inter alia, the lack of an effective information system and the complexity of the rules. In short, although new features began to emerge in the tax system during this period, the tax problems were similar to those of the previous periods. Corruptions, deceit, fraud, evasion, speculations and brutal coercion in taxation were widespread. Tax resistance was as common a feature of the rural economy in the Republican period as it had been before. During the Civil War, although peasants in the Nationalist areas did not rise up, they made a ‘real, perhaps even decisive . . . indirect’ contribution to the Communist victory.126

The People’s Republic of China (1949–Present) The establishment of the People’s Republic in 1949 set the stage for the construction of a tax system compatible with a new political environment. The tax system has undergone dramatic changes alongside the eventful growth path of the state’s politics, economy and society. The most important reform after the adoption of the ‘open door’ policy in late 1978 and the reorientation towards a market economy was the 1994 tax reform, which established the revenue system that is still in force today. Modern taxes, such as the income tax and value added tax, become much more important than the traditional land tax, which was known as the agricultural tax in this period. The agricultural tax was imposed in such a way that in effect amounted to a capitation tax on the peasants, irrespective of the produce of their land or the economic conditions of their families. The tax burden was synonymous with the status of the subject of the tax—as long as a person was identified as a peasant, he was liable for the tax. The imposition of the tax gave rise to a tremendous series of problems in practice. The tax was eventually abolished on 1 January 2006. 126 LE Eastman, Seeds of Destruction: Nationalist China in War and Revolution, 1937–1949 (Stanford, CA, Stanford University Press, 1984) 85.

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China’s rapidly developing market economy based on industrial production and, increasingly, individual consumption seems far removed from the agrarian society in which the state’s land taxes developed. There may, however, be some very important lessons from history for today’s policymakers as a new form of property taxation is adopted and further tax reform takes place. The history of land taxation in China reveals a number of important lessons. First, history shows that badly designed property taxes can impede economic development while better designed taxes can enhance growth and national welfare. Private ownership of land and taxes imposed on produce outputs rather than labour inputs will increase total production. Similarly, taxes on outputs can facilitate specialisation and enhance productivity—professional farmers and professional soldiers are both better at their jobs than farmers providing military service. Tax based on the value of land can encourage the most productive exploitation of the property. Secondly, history shows that, for reforms to be successful, enforcement must be maintained to ensure the sustainability of efficient taxes. Once enforcement becomes lax, taxes are unlikely to achieve their potential benefits, however sound the policy behind the taxes may be. Thirdly, the tax structure must not be too complicated. Land tax floundered as it became increasingly intricate, burdened with multiple variations and additional charges, and shifted from a uniform impost to one with different rates and discrepancies across regions and even within the same region. Subjecting land to different tax rates in light of the fertility of land and the class of the households might be a way to achieve fairness, but too many classes and too many rates generated considerable difficulties for both the tax authorities and the taxpayers, with the problems exacerbated by the lack of standard measurements and valuation methods and sufficient competent personnel at the time.127 The extreme complexity of the land tax structure led to arbitrary and crude administration, as well as inequality of tax burdens and tax evasion. Simplifying the tax structure, including tax rates, can improve both administration and compliance. Fourthly, the tax must be administrable and effectively supervised. Tax laws and policies were often administered well in the early to middle periods of dynasties, but the administration become lax over time. Tax rolls, including land and household records, were not maintained or updated regularly. Central tax officials who might have monitored the 127 As one scholar has put it, assessing the land tax in historical China was as complex as assessing individual income tax is today in modern America. Huang, above n 100, 82.

A History of Land Tax in China 555 effectiveness of local administration were largely unaware of the exact amounts of tax collected, including various surtaxes and charges from each region in each year—a shortcoming that facilitated arbitrary administration, evasion and corruption. Developing and maintaining a strong tax administration, particularly at the local level, well supervised from above is crucial to the success of a tax. Fifthly, land surveys, along with household registration, can be onerous tasks for both officials and taxpayers. If surveys and registration are necessarily elements of revised land taxes, they should be designed to minimise the administrative and compliance burden. Sixthly, systems must be put into place to insulate the reform process from vested interests seeking to avoid taxes. With the introduction of private ownership of land, a process of property accumulation commenced. Ownership of large areas of land became concentrated in the hands of a small class of landholders, including, not surprisingly, officials able to alter tax policy, and before long land tax systems were modified to shift the burden to the poorer tenants and small holders. The line between government and private vested interest groups became blurred and tax revenues fell as the wealthy got wealthier. Eventually, the land tax system became untenable and a change of government (dynasty) would occur, resulting in dispossession of landholders—a kind of redistribution of wealth—and the adoption of a more equitable tax system notionally based on wealth (mainly land). The pattern is repeated time and again, with variations to the life cycle depending on the design and implementation of the taxes. The pattern shows that, for reform of land tax to succeed, the policy-makers must not be in a position to personally benefit from changes to the tax laws. The overarching lesson, perhaps, relates to the connection between failed tax reform and change of regime. A wealth gap may be an inevitable consequence of private property rights, but taxation, if designed appropriately, can play a significant role in wealth redistribution that reduces wealth differences and inequality in taxation. Historically, some reforms have addressed the issue to a certain degree and led to the improvement in revenue collection and the alleviation of inequality in taxation. Generally, however, they have not addressed the root of the issue—the power and privilege of the vested interest groups and the collusion between them and government officials. Failure to segregate policy-makers from vested interest groups and to implement tax policies that facilitate redistribution from vested interests will give rise in the first instance to dissent and protest, and eventually to a change of government. The creation of a socialist state in 1949 marks the most recent response to the growing disparity in wealth that had not been addressed effectively by the tax system. As in past times, in the initial stages of the new regime, accumulation by a small minority was followed by dispos-

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session and nationalisation. Half a century later, private ownership of property became possible once again and, in recent decades, extremes of wealth ownership have once again become a feature of Chinese society. Property accumulation may once again threaten political stability unless the phenomenon can be addressed. Recent property tax initiatives could be the first stage of a reform programme to address the issue by tempering the continuing shift in wealth to property owners, if not redistributing that wealth. Whether a reform agenda could succeed will depend to a large extent on whether the lessons of history have been understood, particularly the need to segregate the tax designers and administrators from the vested interests who will seek to undermine the reform. It is unclear to what extent officials and landholders overlap in today’s China but, to the extent that this is a fact, reform will only succeed if those officials are denied any ability to divert the reform. The historical pattern of effective reform disintegrating over time can be avoided if the government can find the political will to enact and effectively administer a property tax that addresses the wealth accumulation concern before it leads to change. It remains to be seen whether the current initiative can break the pattern of the last four millennia.