Studies in the History of Tax Law Volume Volume 10 9781509939879, 9781509939909, 9781509939893

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STUDIES IN THE HISTORY OF TAX LAW These are papers from the 10th Cambridge Tax Law History Conference, which took place in July 2020. The papers fall within the following basic themes: –– –– –– –– –– –– –– ––

UK tax administration issues UK tax reforms in the 20th century History of tax in the UK The UK’s first double tax treaty The 1982 Australia-US tax treaty The legacy of colonial influence Reform of Dutch excises, and Canadian tax avoidance.

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Studies in the History of Tax Law Volume 10

Edited by

Peter Harris and

Dominic de Cogan

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK 1385 Broadway, New York, NY 10018, USA 29 Earlsfort Terrace, Dublin 2, Ireland HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2021 Copyright © The editors and contributors severally 2021 The editors and contributors have asserted their right under the Copyright, Designs and Patents Act 1988 to be identified as Authors of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/ open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2021. A catalogue record for this book is available from the British Library. A catalogue record for this book is available from the Library of Congress. ISBN: HB: 978-1-50993-987-9 ePDF: 978-1-50993-989-3 ePub: 978-1-50993-988-6 Typeset by Compuscript Ltd, Shannon

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Preface

T

hese are the papers for the tenth Tax Law History Conference organised by the Centre for Tax Law, which is part of the Law Faculty of the University of Cambridge. The Conference was planned for July 2020, as usual, but in light of the global pandemic it was not possible to hold the conference in person. Many of the contributors presented their papers at a virtual conference held on 20 July 2020, which was very enjoyable although also very different from what the presenters and regular attendees are used to. Despite the difficulties, we are happy that the tradition of making the papers available in this form continues, maintaining the high standards our publishers set themselves. We thank those who contributed papers and also those who participated in other ways. This was another successful conference, despite the circumstances. The contributions are again to a high academic standard and it was particularly pleasing to welcome some new contributors who can hold their heads up with those of the faithful. The conference continues as an important part of academic tax law life in both the UK and the many other jurisdictions again represented. The ongoing success has been such that there are plans for a Tax Law History XI, scheduled for July 2022. We usually use this part of the Preface to acknowledge the ongoing legacy of our founder, the late Professor John Tiley. That influence is as strong as ever, but this year we would also like to acknowledge the passing in January 2020 of one of our original participants, Jeremy Sims. Jeremy served as a General Commissioner of Income Tax for many years, and combined his interest in tax and in history in his loyal participation in the Cambridge conference. He was one of the few colleagues to have attended every conference since its inception in 2002, and in 2008 he contributed a piece on seventeenth-century poll taxes. His gentle good humour and support for the cause of the history of taxation will be greatly missed. Again, we owe sincere thanks to Sally Lanham at the Faculty of Law for her ongoing assistance in running the conference. Thanks also to Lucy Cavendish College, who were very flexible when we needed to adjust the arrangements at a late stage. We hope to be back with them ‘as usual’ for the 2022 rendition. Cambridge February 2021

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Contents Preface�����������������������������������������������������������������������������������������������������������v List of Contributors������������������������������������������������������������������������������������� ix 1. The Revolt of Boudica and the Iceni – A Roman Tax Revolt (or not)?��������������������������������������������������������������������������������������������������1 Jane Frecknall-Hughes 2. The Lead Ore Tithe and the ‘Poor Miners of the Peak’: The Lead Ore Tithe in Derbyshire in the Sixteenth to Eighteenth Centuries�����������������������������������������������������������������������������25 Barbara A Abraham 3. Receivers-General of Taxes in the Initial Income Tax Period: Illustrated by Henry Austen, Receiver-General for Oxfordshire���������������53 John Avery Jones 4. An Innovation in Tax Administration: The Licensing of Dogs�����������������81 Chantal Stebbings 5. Forms and Formalities������������������������������������������������������������������������� 105 Richard Thomas 6. The Impact of the Two World Wars on the UK’s Tax Law��������������������� 137 John HN Pearce 7. Hole and Plug�������������������������������������������������������������������������������������� 167 Philip Ridd 8. 1988 and All that: The Fundamentals of UK Capital Gains Tax are Changed���������������������������������������������������������������������������������� 199 David Collison 9. The 1926 Double Income Tax Agreement between Great Britain and the Irish Free State������������������������������������������������������������������������ 227 Sunita Jogarajan 10. Much Ado about Non-discrimination in Negotiating and Drafting of the 1982 Australia–US Taxation Treaty�������������������������������������������� 253 C John Taylor 11. Tax Reform for Innovation: Dutch Tax Policy in the Thorbecke Era (1850–72)�������������������������������������������������������������������������������������� 287 Henk Vording

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Contents

12. Lex Aotearoa: A Moment of Intersection, the 1952 Commission of Inquiry into the Taxation of Maori Authorities������������������������������������ 313 Shelley Griffiths 13. Countering Tax Avoidance in Canada before the General Anti-Avoidance Rule��������������������������������������������������������������������������� 333 Colin Campbell and Robert Raizenne 14. The Colonial Taxation Policy, Income Tax and the Modern Japanese Empire���������������������������������������������������������������������������������� 363 Shunsuke Nakaoka 15. The British Colonial Income Tax Model: Lessons from Cyprus������������� 389 Ntemis Ioannou 16. ‘An Embarrassing Precedent’: The British India–Mysore Double Tax Arrangement of 1919��������������������������������������������������������������������������� 407 Christopher L Jenkins

List of Contributors Barbara Abraham, Past Master of the Worshipful Company of Tax Advisers John Avery Jones CBE, Retired Judge of the Upper Tribunal Tax and Chancery Chamber, former Visiting Professor, London School of Economics Colin Campbell, Associate Professor, Faculty of Law, Western University David Collison, Chartered Tax Adviser, former Chairman of CIOT Education Committee and Vice-President of Eura-Audit International Jane Frecknall-Hughes, Professor of Accounting and Taxation, Nottingham University Business School Shelley Griffiths, Professor, Faculty of Law, University of Otago Ntemis Ioannou, Tax Partner, Cyprus, Oxford MSc in Taxation Christopher Jenkins, Research Fellow, Clare Hall, Cambridge, Special Adviser to the Attorney General Sunita Jogarajan, Professor, University of Melbourne Shunsuke Nakaoka, Professor, Kokushikan University John HN Pearce, ex HMRC, Associate of the Institute of Taxation, PhD, University of Exeter Robert Raizenne, Adjunct Professor of Law, McGill University Philip Ridd, Law Reporter, formerly Solicitor of Inland Revenue Chantal Stebbings, Professor of Law and Legal History, Law School, University of Exeter C John Taylor, Emeritus Professor, UNSW Richard Thomas, Retired Judge of the First Tier Tribunal (Tax Chamber), formerly Inspector of Taxes Henk Vording, Professor of Tax Law, Leiden University

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1 The Revolt of Boudica and the Iceni – A Roman Tax Revolt (or not)? JANE FRECKNALL-HUGHES

ABSTRACT

B

oudica (or Boudicca, also Boadicea and Boudicea) is famed as a queen of the Celtic Iceni tribe, who in 60–61 AD led an uprising against the forces of the Roman Empire occupying Britain. Boudica was the wife of the Icenian leader, Prasutagus, who on his death divided his wealth between his two daughters and the Emperor Nero. Decianus Catus, the local provincial finance officer, considered that all the property should belong to Rome, although a levy on death of one-twentieth might more usually apply (admittedly, arguable). The outcome was that Roman forces seized the Icenian kingdom, stripped and flogged Boudica and raped her two daughters – a brutal outrage even by the standard of the times, precipitating the uprising, in which she was joined by the Trinovantes, a neighbouring tribe. Two main Roman historians wrote accounts of the rebellion: Tacitus (in the Agricola and the Annals) and Dio Cassius (in his Roman History), with the latter referring also to the general severity of Roman taxation as an underlying cause of rebellion. Particularly resented, it seems, was a tax on cattle by reference to the number of head (the scriptura), but the British tribes were subject to other taxes, like customs, land and property duties, and also had their grain requisitioned to feed the occupying Roman troops. Indeed, it is suggested that Decianus may have been sent to Britain to implement a new taxation system. This chapter will examine the revolt of Boudica in the light of the Roman taxation prevailing at the time. Other revolts against Roman taxation will be considered to provide a wider context for these events, as will the writings of Tacitus and Dio Cassius. However, the chapter will also consider the existence of Icenian wealth in more detail as a possible underlying cause of the Romans’ seizure of Prasutagus’ property.

2  Jane Frecknall-Hughes INTRODUCTION

‘Taxes appear to have formed one of the causes of the revolt of the Iceni, and are mentioned as oppressive in the harangue of Boadicea to her forces before the battle with Suetonius.’1 Burg2 also attributes the revolt in part to resentment against taxes imposed by the Romans – land and property taxes, customs duties, requisitions of grain to feed Roman troops and the scriptura, a tax levied on cattle by number of head. If a cattle owner could not pay this tax, he had to sell his cattle or borrow money at exorbitant rates to enable him to do so. Burg3 also comments that the provincial finance officer (procurator) was ‘greatly hated’ as he had been sent to Britain ‘initially to establish and supervise a new system of taxation’. While much of the foregoing may be true, evidence for it is, at best, scanty. Studies on Roman taxation and finances in general are: rather scattered … primarily due to the lack of broad evidence, which causes a fragmentation into several research fields that cannot be easily combined … where the exiguous literary evidence has to be compared with epigraphical, papyrological, and numismatic sources, using the full range of methods of analysis.4

The relevant materials for this chapter are extensive, in that they include all of the above sources, and the various secondary histories of the Roman Empire, Roman Britain, the Boudican revolt5 and studies on Roman provincial administration. However, this chapter is mostly concerned with the ‘exiguous literary evidence’ in regard to Boudica6 and the revolt of the Iceni, concentrating on the causes of the revolt. There are three main Roman sources for the revolt – Tacitus’ Agricola 14.3–16.2 and Annals 14.29–38 (both concise, but the second account is longer), and Dio Cassius’s Roman History 62.1–12.7 Tropes therefore 1 S Dowell, A History of Taxation and Taxes in England From the Earliest Times to the Present Day, vol 1 (New York, August M Kelly, 1965) 4. 2 DF Burg, A World History of Tax Rebellions (London, Routledge, 2004) 30–32. 3 ibid 30. 4 S Günther, Taxation in the Greco-Roman World: The Roman Principate (Oxford Handbooks Online) 2, www.oxfordhandbooks.com. 5 See, eg variously and recently: S Baker, Ancient Rome: The Rise and Fall of an Empire (London, BBC Books, 2007); M Beard, SPQR: A History of Ancient Rome (London, Profile Books, 2015); G de la Bédoyère, The Real Lives of Roman Britain (New Haven, Yale University Press, 2016); G de la Bédoyère, Roman Britain: A New History (London, Thames & Hudson, 2013); A Goldsworthy, Pax Romana: War, Peace and Conquest in the Roman World (London, Weidenfield & Nicolson, 2017); SP Kershaw, A Brief History of the Roman Empire (London, Robinson, 2013); D Mattingley, An Imperial Possession: Britain in the Roman Empire 54 BC–AD 409 (London, Penguin Books, 2006); P Salway, A History of Roman Britain (Oxford, Oxford University Press, 1993); P Salway, Roman Britain: A Very Short Introduction (Oxford, Oxford University Press, 2000); 6 The generally accepted version of her name is now ‘Boudica’: see PR Sealey, The Boudican Revolt Against Rome (Princes Risborough, Shire Publications, 1997) 13; K Jackson, ‘Queen Boudicca?’ (1979) 10 Britannia 255. 7 The texts used in this chapter are Tacitus, Agricola, trans M Hutton, rev RM Ogilvie (Loeb Classical Library, 1970) – hereafter Agricola; Tacitus, Annals 1–3, trans J Jackson (Loeb Classical Library, 1931), Annals 4–6 and 11–12, trans J Jackson (Loeb Classical Library, 1937), Annals 13–16, trans J Jackson (Loeb Classical Library, 1937) – hereafter Annals; Dio Cassius, Roman History 61–70,

The Revolt of Boudica and the Iceni – A Roman Tax Revolt (or not)?  3 associated with Roman and Greek historiography, such as the inclusion of indirect and direct speeches by leading protagonists (which the authors could never have heard), different source materials, different views of women in power,8 of ‘barbarian tribes’ and client kings,9 etc, must also be taken into account, as well as the damnatio memoriae10 of the Emperor Nero after his reign – and also the possibility, often mooted, that Tacitus, who wrote during the reign of Domitian, interpreted events through a ‘Domitian-tinted’ lens, coloured by the terrors associated with his reign.11 Assuming that taxation had a part to play in the events of 60–61 AD, it was not unusual for there to be revolts against Roman taxation, even if taxation was not always an explicit cause. One of the underlying causes of the Pannonian– Dalmatian War12 of 6–9 AD, for instance, was the tension resulting from the ‘transformation from native to colonial rule and specific abuses in the system of colonial administration’, with tribute being mentioned as a ‘specific irritant’.13 Dyson comments that while these provinces may have been too underdeveloped

trans E Cary (Loeb Classical Library, 1925) – hereafter Roman History. Dio’s text is in Greek, which language was used by some Roman historians. The Roman historian, Suetonius (who lived 69–130 AD – not to be confused with the governor of Britain at the time of Boudica’s revolt) mentions in ch 39 of his Life of Nero the sacking of two important towns in Britain, and a great slaughter of citizens and allies, which would also appear to relate to Boudica’s revolt, but no further details are given. The text of the Life of Nero used is in Suetonius, Lives of the Caesars, vol 2, trans JC Rolfe (Loeb Classical Library, 1914). 8 See F Santoro L’Hoir, ‘Tacitus and Women’s Usurpation of Power’ (1994) 88(1) Classical World 5, 7, where it is suggested that for Tacitus, Boudica ‘exemplifies the barbarian dux femina’. 9 Tacitus’ views on the system of client kings is expressed in Agricola 14.3: they existed so that the Roman people haberet instrumenta servitutis (‘should have instruments of servitude’). However, K Hopkins, ‘Élite Mobility in the Roman Empire’ (1965) 32 Past and Present 12, 23 makes the point that the Romans generally promoted the integration of provincial peoples into Roman society, allowing them over time to ‘climb the ranks’, although society was structurally differentiated. Leading provincials were ‘gradually assimilated to the Roman aristocracy’, with 3% of the Senate being of provincial origin by the time of Domitian, at the end of the first century AD. Claudius particularly elevated the Gauls. Hopkins comments (22) that tax-gathering was a method used to control the aristocracy. 10 The condemnation of the memory of a Roman emperor, usually by the Senate. Domitian was also subject to this. 11 R Niblett, ‘Review Article: Images of Boudicca’ (2006) 37 Britannia 489, 491, reviewing R Hingley and C Unwin, Boudica: Iron Age Warrior Queen (London, Hambledon Continuum, 2005); MJ Trow and T Trow, Boudicca: The Warrior Queen (Stroud, Sutton, 2003); R Hunt, Queen Boudicca’s Battle of Britain (Staplehurst, Spellmount, 2003). 12 Also referred to variously as the Pannonian–Dalmatian uprising, the Great Illyrian Revolt, the Bato uprising and the Bellum Batonnianum. 13 SL Dyson, ‘Native Revolts in the Roman Empire’ (1971)20 (2/3) Historia: Zeitschrift fur Alte Geschichte 239, 251, citing Roman History, 55.29.1 and 56.16.3. Dyson also comments (239) that revolts against Rome were not always part of ‘the initial resistance to the Roman advance, but [occurred] among people who [were] regarded as conquered and in the process of Romanization’. Burg, above n 2, 453, lists 11 revolts against Roman taxation prior to that of Boudica. PA Brunt, ‘The Revenues of Rome’ (1981) 71(1) Journal of Roman Studies 161, 170 also comments on taxation as a cause of revolts against Rome, ‘though we cannot tell how far it was resented as a mark of subjection, or because assessment or exaction was unjust and brutal … rather than because it was intrinsically onerous’.

4  Jane Frecknall-Hughes to allow the imposition of taxation, ‘it seems by no means impossible that the Romans thought the time had come to attempt some form of financial impositions’.14 The same may have been true of Britain. This chapter, then, sets out to investigate the clues in the literary sources and what they can tell us specifically about taxation and its possible role in the Boudican revolt. The remainder of the chapter is structured as follows. The next section looks at the underlying reasons for the revolt as offered by Tacitus and Dio Cassius. The chapter continues by examining Roman taxation generally before considering various portrayals of Boudica herself, and then looking at issues of Icenian wealth. The final section offers concluding remarks. WHY DID THE REVOLT OCCUR?

Very little may be confidently known about Boudica. It is sometimes difficult too to trace statements made about the revolt to specific evidence.15 As stated above, the main classical sources are the Agricola and Annals of Tacitus and the Roman History of Dio Cassius. Tacitus (c 56–c 120 AD) is regarded as a more authoritative source and one close in time to the events that occurred. He was married to the daughter of Julius Agricola, who was responsible for much of the Roman conquest of Britain – and Agricola began his military career as a tribune, serving from 58 to 62 AD under Suetonius Paulinus, the Roman governor of Britain at the time of Boudica’s revolt (see below). As a member of Suetonius’s staff, Agricola would almost certainly have taken part in crushing Boudica’s uprising.16 Dio Cassius (c 155–235 AD) lived at a greater remove from the rebellion, living and serving under the Nerva-Antonine and Severan dynasties. Moreover, much of his work survives courtesy of one or more epitomators. The rebellion occurred nearly 20 years after the initial conquest of south-east Britain under the Emperor Claudius in 43 AD. There had been failed invasion attempts by Julius Caesar in 55 and 54 BC, but prior to that the Britons had

14 Dyson, above n 13, 251. 15 This is often evident in major works about Boudica and the revolt, eg DR Dudley and G Webster, The Rebellion of Boudicca (London, Routledge & Kegan Paul, 1962); G Webster, Boudica: The British Revolt Against Rome AD 60 (London, BT Batsford, 1978); JM Scott, Boadicea (London, Constable, 1975); V Collingridge, Boudica (London, Ebury Press, 2005). CG Gillespie, Boudica: Warrior Woman of Roman Britain (Oxford, Oxford University Press, 2018) is more ­extensively referenced to original source materials. 16 For details of the academic debates on the sources for Tacitus’ and Dio’s accounts, see E Adler, ‘Boudica’s Speeches in Tacitus and Dio’ (2008) 101(2) Classical World 173, 194, fn 56. The precise year(s) and thus the duration of the revolt are debated – see KK Carroll, ‘The Date of Boudicca’s Revolt’ (1979) 10 Britannia 197. Adler also suggests (194, fn 56) that Tacitus ‘may have had access to Suetonius Paulinus’ memoirs’. J Overbeck, ‘Tacitus and Dio on Boudicca’s Rebellion’ (1969) 90(2) American Journal of Philology 129, 142 specifically suggests that Agricola would have been Tacitus’ source for the rebellion – with a pro-Suetonius bias.

The Revolt of Boudica and the Iceni – A Roman Tax Revolt (or not)?  5 been exposed to Roman influence and culture via trade, especially with Europe. The Claudian invasion was achieved partly by military action, partly by taking advantage of tribal disunity and encouraging certain tribal leaders to become client kings, including, apparently, the Icenian leader, Prasutagus, who retained control of his kingdom until his death. Tacitus describes him as longa opulentia clarus (‘renowned for his long-standing wealth’), which Dyson interprets as meaning that he prospered under Roman overlordship.17 In terms of these source materials, there are discrepancies, noted by many academic authors. Adler, for instance, in regard to the revolt’s origins, notes Tacitus commenting on Prasutagus naming his two daughters and the Emperor Nero as his heirs, ‘presumably as a way to protect his descendants’.18 However, upon Prasutagus’s death: Roman centurions pillaged his realm; slaves laid waste to his household; his widow Boudicca was whipped; and his daughters were raped … [T]he praecipui (‘chief men’) among the Iceni had their ancestral estates confiscated. As a result of these actions, Tacitus informs us, Boudicca led a revolt against the Romans.19

Gowing20 makes the point that Tacitus often ‘exposes the emperors’ inadequate or occasionally fraudulent handling of client kings’, suggesting that Nero dealt deceitfully with Prasutagus, and had he dealt with him ‘fairly and sensibly’, the implication is that ‘the revolt of Boudicca would never have occurred’.21 Bulst22 suggests that Prasutagus excluding his wife from rule might indicate that she, and possibly her relatives, were anti-Roman, and that his daughters (no longer children23) might become wives of client kings appointed by the Romans. Braund,24 however, considers the will of Prasutagus in the context of legacies left to Rome by client kings: it was not always entirely clear what was being

17 Dyson, above n 13, 258, citing Annals 14.31.1. 18 Adler, above n 16, 176. Annals 14.31.1 uses the phrase tali obsequio ratus regnumque et doumum suam procul inuria fore (‘thinking by such deference his kingdom and household would be beyond injury’). 19 Adler, above n 16, 176, summarising Annals 14.31.1. CM Bulst, ‘The Revolt of Queen Boudicca in A.D. 60’ (1961) 10(4) Historia: Zeitschrift für Alte Geschichte 496 comments that the death of Prasutagus must have been quite sudden, or otherwise Suetonius Paulinus, the Roman governor, would not have left to campaign against the Druids on the other side of the country. 20 AM Gowing, ‘Tacitus and the Client Kings’ (1990) 120 Transactions of the American Philological Association (1974–2014) 315, 327. ‘The term “client kings” denotes a range of monarchs and quasi-monarchs of non-Roman peoples who enjoyed a relationship with Rome that was essentially harmonious but unequal. These were rulers under the patronage of the Roman state, but the less abrasive language of friendship … was the norm. The Roman state called such kings “king and ally and friend”, in a formal recognition by the senate. Grand ceremony seems often to have accompanied such recognitions, under republic and Principate alike’ (Oxford Reference, ‘Client Kings’, www.oxfordreference.com/view/10.1093/oi/authority.20110803095617744). 21 Gowing, above n 20, 120. 22 Bulst, above n 19, 498. 23 Annals 14.31.1, 14.35.1. 24 D Braund, ‘Royal Wills and Rome’ (1983) 51 Papers of the British School at Rome 16.

6  Jane Frecknall-Hughes bequeathed, or how. He draws a distinction between wills during the Republican era (with the populus Romanus as the legatee) and those under the Empire (with the emperor as legatee). There are two particularly telling examples. Herod the Great of Judaea, in the rule of Augustus, was specifically granted permission to designate his own successor in a situation ‘dogged by palace intrigue in which the succession to the ageing king was the dominant issue’,25 as he had numerous potential male heirs. The very granting of such permission is itself an indication of the extent to which royal successions were controlled by the emperor in the Early Empire. Such a grant is unparalleled and, although no king is as well-attested as Herod, it seems to have been at least unusual.26

The intrigues continued and it seems that several wills were made, with Augustus ultimately being left a legacy, as was his wife, the imperial children, Roman friends and freedmen.27 Also relevant are the circumstances surrounding the death of Massinissa of Numidia, who died in 148 BC. Before he died, he asked Scipio Aemilianus to visit him to discuss the succession, although he had died before Scipio arrived. Scipio was then serving in Africa as a military tribune in the Third Punic War. He was the adoptive grandson of the Roman general, Scipio Africanus, who had installed Massinissa as king of Numidia following Rome’s victory at the end of the Second Punic War (218–201 BC), which had convulsed the whole region, so was an ideal arbiter. While Massinissa did not bequeath anything to Rome, he had several sons and was involved in an ongoing conflict with Carthage. It seems that Scipio’s decisions on the succession were followed, although the extent to which he was allowed individual choice is unknown.28 Intervention by or permission from Rome as regards client king succession might have been expected under the Principate. Braund points out that we do not know how Nero and Prasutagus’s d ­ aughters were to divide their inheritance as Tacitus is silent on this. It could be that the king envisaged the succession of his daughters (or one of them) to the throne, as is often assumed. But it is equally possible that, like Nicomedes IV of Bithynia, Prasutagus had bequeathed his kingdom to Nero and provided for his daughters in legacies. There seems to be no way around this problem, but one point deserves attention. In Tacitus’ account of the revolt of Boudica and its origins, Tacitus does not say that Nero’s agents were wrong to take the kingdom: this is not made an issue. Rather, Tacitus attacks the brutal manner of the annexation. Tacitus’ line of attack must be some slight indication that Prasutagus had bequeathed his kingdom to Nero and that annexation was in itself justified.29

25 ibid 38. 26 ibid. 27 ibid 39. 28 ibid 35–37. 29 ibid 43–44. Nicomedes of Bithynia died in 74 BC and left his kingdom to Rome, but no more than this is known.

The Revolt of Boudica and the Iceni – A Roman Tax Revolt (or not)?  7 Webster30 takes the view that, following the example of Herod,31 the estates of a client king would become imperial property on death, so Decianus Catus was operating with approval, if not direct instruction, in taking over the entire estate. He certainly would have needed to take a full inventory – and probably ‘considered himself and his staff free to help themselves to any juicy pickings’.32 The immediate occasion for the treatment of Boudica and her daughters is unclear. Webster suggests a possible resistance, and the fact that the Romans would still have considered the Iceni as barbarians and would have disregarded the client king status, which Webster regards as ‘an odd arrangement, made only, one presumes, in return for notable services at the time of the invasion’.33 The treatment of Boudica’s daughters was that meted out to women as spoils of war. Tacitus also comments on the Trinovantes joining the revolt, being particularly enraged by the treatment meted out to the local population by Roman veterans, recently settled near Colchester, who drove them from their homes, and the money raised locally to build a temple to the deified Claudius and fund its priests’ extravagance. Rome apparently had decided to change tack administratively in terms of the Icenian kingdom, although no apparent reason is provided for this. Dyson suggests that, perhaps after their experience with Cartimandua, Queen of the Brigantes, ‘the Romans had had their fill of female rulers’.34 However, the Roman relationship with the Iceni had not been altogether smooth as, under the governorship of Ostorius Scapula (47–52 AD), they had been involved in a planned revolt. As Prasutagus continued to rule, he was clearly held not to be responsible.35 Dyson also notes36 the view that the continued Roman antipathy to the Druids may have contributed towards the revolt. The absence of the Roman army under the Roman governor, Suetonius Paulinus, conducting a campaign against the Druids on Anglesey, perhaps determined the time of the revolt, but nothing more. Bulst37 opines that, on the death of Prasutagus, the

30 Webster, above n 15, 86–89. 31 ibid, citing Josephus, Jewish Wars, 2.1–6 in endnote 1 to ch 5. 32 ibid 88. It is interesting to note that Burg, above n 2, 30, says that Decianus Catus had been sent to Britain ‘initially to establish and supervise a new system of taxation’. He cites as one of his sources Dudley and Webster, above n 15. However, Dudley and Webster only suggest that this was ‘possibly’ the case. 33 ibid 87. For Tacitus’ views on client kings, see also above n 9. 34 Dyson, above n 13, 259. Cartimandua, as a client ruler, had had to be defended against an uprising by her divorced husband. 35 Annals 12.31.1–2. 36 Dyson, above n 13, 260, citing Dudley and Webster, above n 15, 53. He also comments on the phrase Monam insulam ut vires rebellibus ministrantem (‘the island of Mona (Anglesey) as providing help to the rebels’) in Agricola 14. 5 as a possible basis for this, but thinks the rebels here are more likely to be the Welsh tribesmen who were opposing Suetonius, not the Iceni. Niblett, above n 11, comments that Hunt, above n 11, and Trow and Trow, above n 11, suggest that the Druids were actively involved in planning and executing Boudica’s revolt, although neither Tacitus nor Dio Cassius mentions them. 37 Above n 19, 506ff.

8  Jane Frecknall-Hughes Romans tried to expand the territory under their direct influence, and while the annexation of client kingdoms in this way was not unfamiliar, this did not necessarily mean that the rebellion was unavoidable. Dio Cassius gives three reasons for the revolt: (i) Decianus Catus’ confiscation of money that the Emperor Claudius had previously given to tribal leaders; (ii) the recall by the younger Seneca of 40 million sesterces he had loaned to the Britons; and (iii) the remarks made by Boudica herself. Both Tacitus and Dio have Boudica giving speeches, but at different points in the narrative. While the speeches themselves will not be historically accurate orations (see above), their content is, nonetheless, illuminating. In Tacitus, in an indirect speech, Boudica says that she is avenging libertatem amissam, confectum verberibus corpus, contrectatam filiarum pudicitiam (‘her liberty lost, her body tortured by the lash, the tarnished honour of her daughters)’.38 She continues: Eo provectas Romanorum cupidines, ut non corpora, nec senectam aut virginitatem inpollutam relinquant. Roman cupidity had progressed so far that not their very persons, not age itself, nor maidenhood, were left unpolluted.

Adler comments39 that ‘Boudica fashions her familial maltreatment at the hands of the Romans into a more general argument concerning the provincial misconduct of an imperial power’, reminiscent of a statement by Roman historian, Sallust, in the Epistula Mithridatis, which Adler cites:40 Namque Romanis cum nationibus populis regibus cunctis una et ea vetus causa bellandi est: cupido profunda imperi et divitiarum (EM5) For the Romans there is a single age-old cause for instigating war on all nations, peoples and kings: a deep-seated lust for empire and riches.

Greed is seen as the motivation for Roman expansion, which Adler suggests is a ‘damning indictment’41 by Tacitus, feeling that Boudica’s speech ‘All in all … is a complex, compact excoriation of Roman imperialism’.42 Some similar themes emerge from Dio’s version of Boudicca’s speech: For what of the most shameful, the most distressing sort have we not experienced since these people have taken themselves to Britain? Have we not been robbed entirely

38 Annals 14.35.1–2. 39 Adler, above n 16, 181. 40 ibid 181–82, citing Hist. 4.69M and stating at 181, fn 35 that the citation is from the text of A Kurfess (ed), C Sallusti Crispi Catilina, Iugurtha, fragmenta ampliora (Leipzig, 1976). 41 ibid 182. 42 ibid 183. Adler notes that elsewhere in Tacitus speeches are used to express dissatisfaction with Roman rule: unnamed Britons and Calgacus specifically in the Agricola (15 and 30–32 respectively); and the Batavian prince, Civilis, in Histories (4.14.17).

The Revolt of Boudica and the Iceni – A Roman Tax Revolt (or not)?  9 of most of our greatest possessions, and do we not pay taxes on the rest (telē kataballomen)? Besides pasturing and farming for them, do we not pay yearly tribute (dasmon etēsion) for our bodies? … By how much would it have been better to be slain and die than to endure while subject to a head tax (kephalas hupoteleis)? And yet why did I say this? For, among them not even dying is scot free, but you know how much we pay even for our dead; with other people, death frees even those who are enslaved, but with the Romans alone the dead live on for gain.43

Adler comments that Dio is casting Boudica as a ‘noble savage’, ‘unaccustomed to the slothful and effete ways of the civilised’,44 using the ‘indignities of Roman tax collection in its specificities, conjuring a picture of pre-Roman Britain as a Valhalla free from taxation’.45 The Romans have taken away everything. Bulst46 suggests that the treasures taken away were ‘considerable – if crude’, but this seems unlikely (see later). Boudica is described in Dio’s account: she has plentiful tawny hair and is wearing a twisted gold necklace (a torque).47 As indicated earlier, academic authors often comment on the discrepancies between Tacitus and Dio. Townend,48 for instance, notes that Dio’s version of the revolt contains few details that are the same as those of Tacitus,49 except for a list of omens, and the name of the procurator, Decianus Catus,50 with considerable divergence occurring in the description of the revolt, possibly because of the use of different source material. A particular difference is the recall of loans by Seneca. Townend comments: A noteworthy item in Dio is the attack on Seneca for lending forty million sesterces to the Britons and then demanding them back – a practice of which Tacitus was aware that Seneca was accused,51 although he makes no mention of it, nor of Seneca himself, in connection with Britain.

43 Roman History, 62.3. I have used here the translation in Adler, above n 16, 187. The phrases in regard to taxation are in italics, with the Greek words transliterated. Brunt, above n 13, 163 suggests that Dio Cassius is referring, in Boudica’s reference to paying for the dead, to the poll tax being payable ‘in full or in part on those who had died within the year’, as happened in Egypt. 44 Adler, above n 16, 190. 45 ibid 190–91. 46 Above n 19, 500. 47 Roman History, 62.2.4. Bulst, above n 19, 508 suggests that this means that Dio Cassius had ‘good sources’, but it might equally be the use of a ‘stock’ or stereotypical image for a barbarian queen. 48 GB Townend, ‘Some Rhetorical Battle-Pictures in Dio’ (1964) 92(4) Hermes 467, 468. 49 ibid, referring to Annals 14, 29–37. See also Overbeck, above n 16. 50 ibid, citing Roman History 62.2.1 and Annals 14.32.1–2, and Roman History 62.2.1 and Annals 14.32.3–7, respectively. 51 ibid, citing at fn 1 from Annals 13.42.4, in relation to Suillius’ attack in 58: provincias immense faenore hauriri (‘the provinces sucked dry by his limitless usury’). PF Bang, ‘Trade and Empire – in Search of Organizing Concepts for the Roman Economy’ (2007) 195 Past & Present 3, 44, fn 113 comments on evidence provided in Cicero’s correspondence ‘which document[s] Roman investment in private loans which underpinned provincial payment of taxes [which] could be exploited to twist the arm of victim communities and ensure their payment, if need be by military force’.

10  Jane Frecknall-Hughes Bulst suggests that the recall of loans by Seneca is feasible if Nero had developed a plan, albeit temporary, to abandon Britain entirely.52 Overbeck53 notes that Tacitus attributes the revolt to the Iceni’s resentment at the treatment of their leaders after the death of Prasutagus, with the Trinovantes54 (and others) making common cause owing to their ill treatment by Roman veterans who were settled amongst them, whereas Dio blames primarily the financial exactions of Decianus Catus and Seneca. Overbeck acknowledges that there must have been financial extortions, but feels that the role of Seneca should be played down as Dio was ‘unremittingly hostile’55 to him, though he feels the story about Decianus Catus has a ‘convincing ring’56 and is supported by Tacitus, citing Annals 14.32: qua clade et odiis provinciae quam avaritia eius in bellum egerat trepidus procurator Catus in Galliam transit. Unnerved by the disaster which his rapacity had goaded into war, the procurator Catus crossed to Gaul.

Dio Cassius57 says that Catus had reclaimed grants that Claudius had made to the tribal leaders which the Senate had formally confirmed. Overbeck feels that Tacitus was guilty of ‘inexcusable sloppiness’ in not including more about Catus and Dio in his hostility to Seneca and for not giving more detail about the way in which the death of Prasutagus was handled.58 During the course of the revolt, Boudica and her army destroyed Camulodunum (Colchester) and its people, both Roman and British, burning the town to the ground. Again there is debate about the sequence of events. Lawson comments on the following item59 in Dio Cassius’s account: One of the most disturbing elements of the classical accounts, however, is the behaviour of Boudicca’s army with respect to women on the other side – both Roman and Briton. Stories of their breasts being sliced off and s[e]wn into their mouths and of their bodies being skewered, if true, would rank among the most horrific of atrocities committed against female victims of war.

Ultimately Boudica’s army was totally defeated by Suetonius, who had returned with his troops from Anglesey. The fate of Boudica herself is unknown, with Tacitus saying she took poison and Dio that she died of a disease. Likewise, it is unknown where she was buried and what happened to her daughters. 52 Above, n 19, following CE Stevens, ‘The Will of Q. Veranius’ (1951) 1(1) Classical Review 4; Suetonius, Life of Nero, 18. 53 Above n 16, 139–41. 54 See also Bulst, above n 19, 502. 55 Above n 16, 140. 56 ibid. 57 Roman History 60.23 and 62.2. 58 Above n 16, 141. 59 S Lawson, ‘Nationalism and Biographical Transformation: The Case of Boudicca’ (2013) 19(1) Humanities Research 101, 106.

The Revolt of Boudica and the Iceni – A Roman Tax Revolt (or not)?  11 ROMAN TAXATION GENERALLY

There seem to have been several systems of tax collection in the late Republic and early Empire, which ran concurrently and/or overlapped: tax farming, local tax farming and lump sum payments (see later). Rathbone60 comments on a revolt in the area of Thebes (which seems to have been caused by the imposition of a poll tax), also saying that ‘Roman taxation under the Republic is another topic which requires thorough re-investigation’.61 While there was a structured system of taxation, it was not uniform or coherent: ‘diversity, not consistency’ seemed to prevail.62 As Clark63 says, prior to the major administrative and financial reforms introduced by the Emperor Diocletian in the third century AD, ‘the tax system of the Principate was a patchwork of rules, privileges, and structures … supported by three main sources of revenue: tributum soli, tributum capitis, both regular taxes, and a host of irregular taxes’,64 which built on the ‘piecemeal incorporation of established polities with their own institutional frameworks into the Republican empire’65 as provinces were absorbed during Rome’s expansion (chiefly borne by the peasant farmer66), with ‘State expenditure … [being] determined more by how much the state could collect than its needs’.67 As Günther comments,68 ‘A main characteristic of Roman rule in the provinces was letting traditional systems continue as long as they worked and were adaptable to Roman necessities’. It is therefore difficult to be definitive about specific taxes collected in Britain, or the means by which they were collected. The way in which monies came into Rome cannot be ascertained with any certainty.69 Taxes, in cash and kind,70 did find their way to the city, and cash was 60 D Rathbone, ‘Egypt, Augustus and Roman Taxation’ (1993) 4 Cahiers du Centre Gustave Glotz 81, 88. 61 ibid 94. 62 R Duncan-Jones, Structure and Scale in the Roman Economy (Cambridge, Cambridge University Press, 1990) 85. See also JA Boek, Taxation in the Later Roman Empire: A Study on the Character of the Later Antique Economy (MPhil Thesis, University of Leiden) 42ff. Brunt, above n 13, 161–62 likewise attests to diversity of taxation methods under both Republic and Empire. 63 PE Clark, Taxation and the Formation of the Late Roman Social Contract (PhD Dissertation, University of California, Berkeley, 2017) 4. See also RI Frank, ‘Ammianus on Roman Taxation’ (1972) 93(1) American Journal of Philology 69. 64 See later for a more detailed discussion of prevailing taxes. The tributum soli was a tax on land (but could be more wide-ranging – see Brunt, above n 13, 166) and the tributum capitis was at root a poll tax. 65 Clark, above n 63, 6. 66 CD Delorm Jr, S Isom and DR Kamerschen, ‘Rent Seeking and Taxation in the Ancient Roman Empire’ (2005) 37(6) Applied Economics 705. 67 Clark, above n 63, 14. 68 Günther, above n 4, 3. 69 See F Millar, ‘Italy and the Roman Empire: Augustus to Constantine’ (1986) 40(3) Phoenix 295, 298. 70 Boek, above n 62, 45 comments that taxes could be paid in cash and kind. For instance, the tributum soli was paid in money by Spain, (most of) Africa, Syria, Cilicia, Judaea and Messene, but in kind by Egypt, Sicily, Sardinia, Asia Minor, Phrygia, Thrace, Cyrene, Pontus, and the lands of the Frisii and Batavi (citing Duncan-Jones, above n 62, 188–93, especially fn 52), although the categories

12  Jane Frecknall-Hughes certainly stored in the treasuries.71 Millar comments that in Rome money was spent on public buildings and aqueducts (new buildings and repairs), on a small number of state officials’ salaries and on the emperors’ occasional liberalitates (instances of generosity), but most recurrently on the military units stationed in Rome (Praetorian and Urban Cohorts and the Vigiles – firefighters and ‘police’): hence regular and steady supplies from taxes would be needed.72 Boek73 notes that the tributum soli in kind from the provinces provided ‘the army, the plebs frumentaria [plebs in receipt of the state grain dole] of Rome, the bureaucracy and the imperial court with cereals’ (some of the latter possibly being sold in the free market), with the tributum soli in cash expended on buying ‘military equipment, the provisioning of the army (if stationed in a province with poor agricultural resources), donativa [gifts of money] for the army and people of Rome [and] the construction of public buildings for the capital’, with occasional material assistance to specific communities if a particular crisis arose. Hopkins74 sees the early Empire as comprising three spheres: (i) the outer ring of provinces where defensive armies were stationed (which undoubtedly included Britain at the time of Boudica);75 (ii) an inner ring of relatively rich taxexporting provinces (like Spain, southern Gaul, northern Africa, Asia Minor, Syria and Egypt); and (iii) the centre – Italy, Rome, the seat of the Court and the central government, which, like the frontier armies, ‘consumed a large volume of taxes’.76 Hopkins proposed a view of the Roman economy whereby gradually, from 200 BC onwards, ‘the imposition of money taxes and of money rents, and their expenditure at a distance from their source, contributed to the gradual creation of complex networks of trade’, with the whole economy becoming integrated in the first two centuries AD.77 He suggests that significant growth in long-distance seaborne trade in the Western Mediterranean occurred from 200 BC, accompanied by a similar growth in the distribution of coinage, in support of an underlying proposition that taxation was important for the

were not mutually exclusive. ‘Baetica in Spain, for example, sent (tax-)grain to the soldiers who were serving in Mauretania during the reign of Claudius, whilst, on the other hand, the tributum soli on vine and olive yards in Egypt was assessed in money.’ Clark, above n 63, 10, comments that there was ‘no single form of tributum soli’. 71 See Millar, above n 69; on the logistics of tax collection and transportation for Egypt, see also Boek, above n 62, 57ff. 72 Millar, above n 69, 299. 73 Above n 62, 54. 74 K Hopkins, ‘Taxes and Trade in the Roman Empire (200 BC–400 AD)’ (1980) 70 Journal of Roman Studies 101. 75 Requiring financial resources, from taxes: see R Pulliam, ‘Taxation in the Roman State’ (1924) 19(9) Classical Journal 545. 76 Above n 74, 101. 77 ibid 112. It must be noted that there is considerable contention about how the Roman economy actually worked. See also MI Finley, The Ancient Economy (London, Penguin, 1985); Duncan-Jones, above n 62; R Duncan-Jones, Money and Government in the Roman Empire (Cambridge, Cambridge University Press, 1994); Bang, above n 51.

The Revolt of Boudica and the Iceni – A Roman Tax Revolt (or not)?  13 Roman economy and that ‘exacting taxes in money stimulated trade’.78 Transferring surplus taxes from richer provinces to poorer ones (for example, to pay troops there) meant that ‘tax-exporting’ provinces had to export goods to obtain the cash needed to pay taxes. He comments that there is ‘no exact evidence’79 of general tax rates in this period, with estimates of total state revenue being difficult to calculate and unreliable. Discussing various scholars’ views on the size of the population, he suggests that the population was in the region of 54 million (accepting the estimate of KJ Beloch80) and that the effective tax rate was less than 10 per cent of gross product, working out at a rate of 33 kg of wheat equivalent per person (or 15 sesterces, in monetary terms), which Hopkins suggests is a low rate, although Brunt would disagree, drawing particular attention as well to the ‘extraordinary levies, with which Nero is said to have exhausted the provinces’.81 Hopkins comments that Roman taxes had been levied in the early phase of imperial expansion to pay for expenses, usually military, with there being myriad small contributions. Fulford comments that the ‘acquisition of Egypt, the control of the Mediterranean and the other fertile areas which bordered it’ provided the means for Augustus and his successors to expand into Europe.82 Combined with the use of cost-efficient and logical transport routes (especially by sea and river), goods could be relatively easily transported, including grain from the Mediterranean region, which ensured a guaranteed supply, in case other, cereal-producing but less politically stable, provinces failed to deliver. Fulford also comments that collecting food locally was expensive, taking time, manpower and resources such as vehicles and traction animals, and did not allow for troop concentration. However, maintaining a supply route to the northern frontier must have been extremely costly – and ‘the retreat from northern Britain after Agricola, in order for Domitian (AD 84–96) to prosecute his campaigns on the Danube’83 demonstrated this. He concludes that Rome’s ability to control

78 Above n 74, 116. 79 ibid. 80 ibid 118, citing Die Bevölkerung der Griechisch-Römischen Welt (1886). No publisher is given, but WorldCat.org indicates that this work was originally published in Leipzig. 81 Above n 13, 170, citing Suetonius, Life of Nero, 38. MEK Thornton, ‘Nero’s New Deal’ (1971) 102 Transactions and Proceedings of the American Philological Association 621, 624, however, on the basis of coinage issue, makes a case for Nero being ‘faced with a severe economic crisis, taking strong measures to restore prosperity to an economy plagued by a painful and long-lasting economic depression’, interpreting Nero’s early attempts to abolish portoria and the later lavish entertainments and spectacles (chariot races, games, gladiatorial shows and presents to the people) described by Suetonius, Life of Nero, ch 11 as actions by a ruler concerned to provide food and jobs in an economic depression, rather than attempts to curry support. 82 M Fulford, ‘Territorial Expansion and the Roman Empire’ (1992) 23(3) World Archaeology 294, 301. 83 ibid 302. The corn supply to Rome was often referred to as the annona. It is likely that grain collected in Britain was used there, rather than exported, owing to the difficulties of crossing either the North Sea or the Channel.

14  Jane Frecknall-Hughes and manipulate subsistence resources from the core of the Empire to the borderlands was significant and: enabled a relatively mild exploitative regime to persist overall and to provide an important means of accommodation with native societies. Without the necessity of plundering local resources to excess, Rome was able to win over native élites and use them and the resources under their control to promote Romanization and the construction of a provincial urban network.84

This sits somewhat awkwardly with the more traditional view of provincial administration and is at odds with what happened in terms of the Iceni, given the accounts of both Tacitus and Dio. Provincial administration was relatively simple in concept: provinces had been regarded as areas for exploitation following military conquest, with provincial governors using their governorships to recoup prior expense on developing their political careers and to get rich. Taxes could be low because services provided were ‘rudimentary’,85 with less able individuals allocated to these governorships (the most élite governors being generally reserved for areas of Italy), resulting in a ‘low penetration by central government’ and ‘local autonomy’.86 While the system was efficient and effective in terms of costs, tax-raising capacity was not easily expanded, and taxes were not well distributed. Rathbone87 refers to the ‘settlement of 27 BC’, under Augustus, whereby the Empire ‘was divided into “senatorial” and “imperial” provinces’, with the governors of the latter (mostly from the Senate) being appointed by the emperor. Senatorial provincial governors had quaestors to supervise financial matters, but imperial provinces shared financial administration between the governor and an equestrian procurator Augusti. Imperial provinces were most commonly border provinces, considered important strategically. Britain was an imperial province. It was the most northerly of Rome’s provinces, with fighting regularly occurring, and, indeed, was never fully conquered, with a force of 50,000 men in place after the first phase of the conquest.88 The procurator was not subordinate to the governor, but was generally appointed separately, with a brief to look after the emperor’s private fortune (patrimonium). As a result, though, as Hopkins remarks: Because the central government had few representatives of its own in the provinces, it devolved the collection of taxes and the distribution of the tax-load on to intermediaries, who were typically prosperous land-owners and local town-councillors (decuriones). The central government in the High Empire [70–192 AD] had no direct relationship with individual tax-payers. As I understand it, the central government

84 ibid. 85 Hopkins, above n 74, 120. 86 ibid 121. 87 Above n 60, 99. 88 See R Hingley, ‘The Romans in Britain: Colonization of an Imperial Frontier’ in CD Beaule (ed), Frontiers of Colonialism (Gainesville, University Press of Florida, 2017) 89, who also argues for a more intermittent process of Romanisation.

The Revolt of Boudica and the Iceni – A Roman Tax Revolt (or not)?  15 simply fixed the total amount of tax which each town and its surrounding area should pay; local town-councillors then arranged who should pay what, on the basis of a public declaration of the value of each property. There was ample room for abuse, since political power was concentrated in the hands of those who could benefit most from a maldistribution of the tax-load.89

Hopkins goes on to say that those financially oppressed by the tax load could appeal, sometimes successfully, to the emperor to achieve justice, citing the appeal of tenants of an imperial estate in North Africa.90 Bribery and corruption were systemic. Hopkins further notes: As a consequence, there was little to stop poorer peasants from paying a disproportionate share of taxes; taxation was regressive. And we should expect there to have been substantial differences between (a) what peasants paid in tax and (b) what rich land-owners paid on similar land, and between (c) what tax-collectors collected and (d) what they transmitted to the central government.91

His argument is that if taxes were increased, this would threaten the status of the intermediaries, so the lower the rate of tax, the more individuals were able to make high profits and the less effective was any state oversight of individual profiteering. While this appears to relate to the High Empire, there is no clear start date for such a system. However, Hopkins cites tax farming as a special case of individuals making profits, and this worked very similarly (and probably coexisted, to a degree). The Roman government had in the past auctioned the rights to provincial tax collection, so securing its revenue in advance and transferring associated risks to individuals, although this tendency decreased at the end of the Republic and in the early Principate. A tax farmer would pay a ruler a fixed amount for the right to collect taxes in a given area/district, and would then keep any profit made if more than the fixed amount were collected – and would likewise bear any loss if less were collected. It was a system ripe for abuse (collectors had more incentive to maximise profits than if they were paid fixed salaries)92 and not admissible of much oversight: development in administrative capacity lagged behind the growth of the size of the state, and

89 Above n 74, 121. 90 ibid fn 61. Per Hopkins: ‘A famous plea survives from the tenants of an imperial estate in North Africa; they had already appealed to the emperor’s local agent (procurator), but he was in cahoots with the administrator or lessor (conductor) of the estate: “… a collusion which he has practised uninterruptedly not only with Allius Maximus, our oppressor, but also with almost all the lessors, against the law, to the detriment of your treasury. The result is that he has refrained from investigating, for many years, our petitions, supplications and our appeals to your divine rescript; more than that he has yielded to the wiles of the said Allius Maximus, lessor, … to such an extent that he has sent soldiers into (our estate) and given orders that some of us be seized and tortured, and others … be beaten with rods and cudgels although they are Roman citizens” (ESAR iv, 98 = CIL VIII.IQ570, c. 25902 and 25943)’. 91 ibid 121. 92 E Kiser and D Kane, ‘The Perils of Privatization: How the Characteristics of Principals Affected Tax Farming in the Roman Republic and Empire’ (2007) 31(2) Social Science History 191, 193.

16  Jane Frecknall-Hughes communication and travel were poor.93 Moreover, there was an expansion in the Roman élite holding land in the provinces. Hopkins comments, in line with his earlier argument: It was a symptom of the integration of the imperial economy that rents, mostly money rents, were transmitted long distances from provinces, principally to the imperial capital where the élite consumed most. Transmitted rents and taxes had a similar impact on trade, but they were competing for a limited surplus. The higher rents were, the lower taxes had to be.94

Tax farming meant that profits were made by intermediaries who belonged to the Roman élite, but who were not soldiers involved in conquest or senators.95 It was a system which disintegrated in the later Empire, which saw a ­predominance of taxes paid in kind.96 Kiser and Kane97 point out that the fact that tax farming was exploitative in the late Republic led to it being abolished for certain taxes in the Empire, with other taxes being more centrally controlled. They also make clear that it was more useful for some taxes than for others. They outline the following as the main types of taxes in the Republic:98 • Tributum soli (property tax), levied on all Italian citizens until 167 BC, assessed on all forms of property, land, houses, slaves and personal effects, as declared in the census taken every five years. After 167 BC, Italians no longer paid direct taxes but paid indirect ones. • Tributum capitis (poll tax). • Customs levied in Italian ports. By the end of the Republic, the provinces were the source of most Roman revenue, and different taxes applied: • Stipendium, a lump sum levy on cities. • Decumae, a tithe on crops. • Scriptura, pasture dues. Millar99 also notes in addition: • Regional tolls. • A five per cent tax on the value of slaves at manumission (collected by publicani (tax farmers/collectors)).

93 ibid 194. 94 Above n 74, 122. 95 ibid. 96 ibid 122–23. 97 Above n 92, 191. 98 ibid 194–95, citing GH Stevenson, Roman Provincial Administration (Westport, CT, Greenwood, 1975); and AHM Jones, The Roman Economy (Totowa, NJ, Rowman & Littlefield, 1974). 99 Above n 69, 302.

The Revolt of Boudica and the Iceni – A Roman Tax Revolt (or not)?  17 • A five per cent tax on inheritances (introduced by Augustus). (This was collected by publicani up until the second century AD, but in the second and third centuries, in different Italian regions, procuratores also seem to have been involved.) • A one or half per cent tax on sales (abolished by Caligula). • A four per cent tax on the sale of slaves (only for the first century). Millar further notes, very significantly, the pressure to leave part of one’s estate to the emperor, mentioned specifically in Petronius’s Satyricon, which was written in the reign of Nero:100 Quid multa? coheredem me Caesari fecit, et accepi patrimonium laticlavium. I need only add that my master made me joint residuary legatee with Caesar and I came into an estate fit for a senator.

Kiser and Kane101 also point out that the use of tax farming depends on the characteristics of the taxes themselves, with collection of indirect tax (customs, sales, excises) lending itself more readily to tax farming than direct taxes on land, production or individuals. They give three reasons for this: (i) indirect tax revenue is more mobile and less predictable, so more variable over time and more difficult to monitor; (ii) measurement and collection difficulties are more severe for indirect than direct taxes, meaning that bribery is easier; and (iii) assets taxed directly, such as land, have a high capital element, so the overtaxation inherent in tax farming can lead to longer-term adverse effects. However, contrary to most early modern states, Rome under the Republic used tax farming for both direct and indirect taxes. In addition, Kiser and Kane look at the characteristics of principals, that is, the rulers ultimately directing the imposition and collection of taxes, in relation to tax farming. While, as we have seen, there was a long history of tax farming in both Republic and Empire, the nature of it changed over time. It was more exploitative in the later Republic, as the vested interests of the Senate increased, particularly in the development of ‘large tax farming companies that sold stock in a manner similar to modern corporations’.102 In the earlier Republic, tax farmers were from the provinces and from the equestrian order. Senators would customarily be elected as provincial administrators, serving only a short term, before returning to the Senate. As it could be the same individuals allocating and dealing with tax farming and actually profiting from it, they had no great interest in controlling the exploitation – what Kiser and Kane term a ‘revolving doors’ situation.103 100 ibid. The quote and translation are from Petronius, Satyricon, 76, trans M Heseltine and WHD Rouse, rev by EH Warmington (Loeb Classical Library, 1913) 177. 101 Above n 92, 195. 102 ibid 203. 103 ibid passim. The authors also comment, at 203, on Cicero’s allegation in 70 BC that Verres, sent by the Senate to govern Sicily, and subsequently prosecuted for serious misconduct in office, notably

18  Jane Frecknall-Hughes The early Empire moved away from tax farming, although Kiser and Kane argue that this was a gradual decrease rather than it being eliminated, as was originally thought. The reduction in tax farming and in the use of publicani was attributed to Augustus, as an introduction of provincial censuses and land registers altered the tax basis from an unpredictable proportional levy (commonly a percentage of yield) to a fixed levy based on assessed property.104 Although the early emperors removed many entrenched officials of the senatorial class, and broke their stranglehold over public offices, nevertheless tax farming was still used – for silver mine taxes in Spain, customs and transport taxes, new sales taxes in Italy under Augustus, etc – but the very large tax-farming companies ‘were brought under tighter control’,105 being replaced under the Severan emperors (193–225 AD) by smaller companies of some two or three partners. Imperial bureaucracy did achieve better control of finances and provinces, and reduced extortion. Augustus’ use of slaves and freedmen as imperial administrators, consolidated by Claudius, produced an administration staffed by individuals who had great dependence on the emperors, which was very different from Republican government. Overall a picture emerges of mixed methods of tax collection, probably driven by practical considerations more than anything else. Rathbone106 comments that the taxation of Egypt, the ‘first’ imperial province, set a model for the taxation of subsequently acquired provinces. The basic system of taxation in the province (demonstrably complex) was adopted with what can only be described as a ‘Roman overlay’, including imposition of a poll tax and adoption of pre-existing local taxes, with central control exercised over direct taxes (eg land tax), dependent on census, despite ‘a gradual emergence of self-administering town councils’.107 However, it is certainly arguable that what applied in Egypt, well established as a Roman province by the time of Boudica, might not have applied in a province at the outer edges of the Empire, which had not been fully pacified. In terms of the taxes affecting Boudica and the Iceni, in reference to the above and the evidence in Tacitus and Dio, these, then, are likely to have been the tributum soli (property tax), tributum capitis (poll tax, payable even on those who had died), decumae (tithe on crops), scriptura (pasture dues) and customs dues, where applicable – all combined with a possible expectation of having to leave half of an estate to the emperor. extortion and corruption, was a stockholder in a tax-farming company, being practically a socius (partner/co-partner), although senators were not allowed to run farms directly. This supports the bribery and corruption noted by Hopkins, above n 74. 104 See AHM Jones, The Roman Economy: Studies in Ancient Economic and Administrative History, PA Brunt ed (Oxford, Basil Blackwell, 1974) 165; Boek, above n 62, 55. Perhaps the best-known instance of the provincial census is that referred to in the Gospel of St Luke (2.1–3), Authorised Version, where Joseph (and Mary) had to return to Bethlehem, to be registered for tax purposes. This account is the only one in the New Testament which refers to this. Brunt, above n 13, 171–72 provides detailed evidence of provincial censuses. 105 Kaiser and Kane, above n 92, 207. 106 Above n 60, 88. 107 ibid 98. See also Boek, above n 62.

The Revolt of Boudica and the Iceni – A Roman Tax Revolt (or not)?  19 IMAGES OF BOUDICA

Despite the paucity of material about Boudica, it has ‘scarcely prevented a great many authors, from classical times to the present, from writing extensively not only about her exploits and place in history, but also about her character’.108 Lawson109 traces the development of Boudica’s image over time, and there is much interest in this approach generally.110 In addition to the accounts of Tacitus and Dio Cassius, there is only one other apparently independent source: the sixth-century De Excidio Britanniae, written by Saint Gildas,111 which refers to a ‘treacherous lioness’ (in reference to the murder of Roman governors), who may or may not be Boudica. Some, however, do see a reference to Boudica in the Venerable Bede’s eighth-century Historia Ecclesiastica’s mention of two towns being sacked, although she is not named.112 Lawson makes clear that it was the works of Tacitus and Dio Cassius becoming available in the Renaissance that gave Boudica an established place in British history, from which much else developed. In a fascinating review of perceptions and depictions since then, she notes the particular interest shown in the reigns of Elizabeth I and Victoria, and in Margaret Thatcher’s premiership, with relevance for the suffragette and feminist movements, gender issues, nationalism, etc.113 During the reign of Victoria, Thomas Thorneycroft was commissioned to create the now wellknown statue of Boudica, later placed on the Embankment, near Westminster Bridge, although it was not finally erected until 1902. Boudica is shown standing on a scythed, Roman-style chariot, with a tiara-type ‘crown’, a spear held aloft in her right hand and her left arm raised, wearing something akin to a

108 Lawson, above n 59, 103. In fn 11, Lawson also cites the range of material (‘scholarly analyses, semi-scholarly accounts, novels and juvenile literature’), many being published since 2000 alone, eg: M Johnson, Boudicca (London, Duckworth Press, 2002); J Waite, Boudica’s Last Stand: Britain’s Revolt Against Rome, AD 60–61 (Stroud, The History Press, 2011); MC McCullough, Boudicca (Maitland, FL, Xulon Press, 2011); N Fields and P Dennis, Boudicca’s Rebellion AD 60–61: The Britons Rise Up Against Rome (Oxford, Osprey Publishing, 2011); B Williams, Boudicca: Great Women Leaders (London, Heinemann, 2010); T Bradman, The Story of Boudicca (London, Wayland, 2008); M Aldhouse-Green, Boudicca Britannia: Rebel, War Leader and Queen (Harlow, Pearson-Longman, 2006); S Busby, Boudicca: Warrior Queen (London, Short Books, 2006); JE Roesch, Boudica: Queen of the Iceni (London, Robert Hale, 2006); S Ross and S Shields, Down with the Romans (London, Evans Brothers, 2006); A Gold, Warrior Queen: The Story of Boudicca, Celtic Queen (New York, New American Library, 2005); MJ Trow, Boudicca: The Warrior Queen (Stroud, The History Press 2005); R Sutcliffe, Song for a Dark Queen (New York, Crowell, 1979); M Scott, Dreaming the Eagle (Toronto, Seal Books, 2003); Hunt, n 11; A Harrison, Boudicca: Furie of the Celts (Lincoln, Neb, Writer’s Showcase, 2000). 109 ibid. 110 See also K Pettigrew, ‘Foreign Women in Latin Literature: The Representation of Boudicca’ (Electronic Thesis and Dissertation Repository 1249, 2013) https://ir.lib.uwo.ca/etd/1249. 111 Lawson, above n 59, 109. See also EA Thompson, ‘Gildas and the History of Britain’ (1979) 10 Britannia 203. 112 Lawson, above n 59, 109. 113 See also Niblett, above n 11.

20  Jane Frecknall-Hughes diaphanous nightgown, with her daughters, bare breasted, on the chariot footplate. No one is holding any reins to control the chariot’s horses. On the statue’s plinth is written: BOADICEA BOUDICCA QUEEN OF THE ICENI WHO DIED A.D. 61 AFTER LEADING HER PEOPLE AGAINST THE ROMAN INVADER

We are thus invited to see her as a deliverer. There is some degree of resemblance to the Statue of Liberty, and the statue of Justice atop the Old Bailey, both under construction around the same time, so there may have been something of a stock image of the ‘mythical woman’ in artists’ minds at the time. Boudica is much more likely to have worn the dress and/or armour befitting a British chieftain – the latter possibly a combination of leather and/or metal if involved personally in battle. If she wore any ornamentation, it would most likely have been a gold torque (the ‘twisted necklace’ Dio describes). Not everyone is convinced by imagery, however, and opinions vary. Lawson,114 for example, cites Sir Winston Churchill’s view of the revolt as: probably the most horrible episode which our Island has known. We see the crude and corrupt beginning of a higher civilization blotted out by the ferocious uprising of the native tribes. Still, it is the primary right of men to die and kill for the land they live in, and to punish with exceptional severity all members of their own race who have warmed their hands at the invader’s [h]earth.

Lawson comments that the image of Boudica as a passionate freedom fighter is now by and large predominant.115 ICENIAN WEALTH

The comment of Tacitus that Prasutagus was longa opulentia clarus (‘renowned for his long-standing wealth’), together with Dio’s description of Boudica wearing a torque, may provide some clues as to why Decianus Catus was so eager to obtain the assets of Prasutagus and the Icenian leaders: they were, possibly, very, very wealthy. While Dyson interprets longa opulentia clarus116 as meaning that Prasutagus prospered under Roman overlordship, it need not necessarily mean this: his wealth could have been of much longer standing (longa is open to

114 Above n 59, 118, citing Sir WS Churchill, A History of the English-Speaking Peoples (London, Dodd, Mead & Company, 1965) 27. 115 ibid. 116 See above n 17.

The Revolt of Boudica and the Iceni – A Roman Tax Revolt (or not)?  21 interpretation). Britain had a reputation as an almost mythical island of wealth, on the edge of the Empire. As Stevens comments:117 The mysterious island beyond the world’s end with its mirage of yet more distant islands held in thrall was turning out to be an ordinary frontier province with tedious frontier bickerings. The treasure island of the west was producing some silver indeed, but the principal mining areas had been attacked in vain or not yet reached at all, and the gold was still far away.

One thing that might suggest Icenian wealth is the hoards of precious materials, especially gold torques, that have been found buried in the area where the Iceni lived in Norfolk, particularly in and around Snettisham.118 The findings are summarised by Joy,119 who also refers to much of the earlier, seminal work on the subject: Over the past sixty years a series of spectacular discoveries have been made on a wooded hillside just outside the village of Snettisham in north-west Norfolk (Clarke 1955; Stead 1991). Fourteen separate hoards, the majority dating to the second and first centuries BC, have been unearthed containing gold, silver and bronze metal artefacts, such as neck rings (known as torcs), bracelets and finger rings … Sixty complete torcs have been found at Snettisham, and 158 more are represented by fragments. To put this in context, fewer than fifty are known from the rest of Britain (mostly from north-west Norfolk) and only 275 complete precious metal torcs are recognized from the whole of continental Europe (Hautenauve 2005). They seem to have been particularly significant in Norfolk in the later Iron Age, but went out of circulation after 60 BC, a date that coincides with the first minting of coins in the region (Chadburn 2006, 371; Marsden 2011, 53). It is probable therefore that many torcs were melted down to mint coins. For some reason the Snettisham torcs were instead carefully placed in hoards.

Similar hoards have been found elsewhere in East Anglia.120 While the word ‘hoard’ may have a different significance today from in Celtic times,121 the 117 Above n 52. In support of silver, Stevens cites epigraphical evidence and makes clear that the ‘far away’ gold referred to was that mined at Dolaucothy in Carmarthenshire. 118 See, eg C Johns, The Snettisham Roman Jeweller’s Hoard (London, British Museum Press, 1997). 119 J Joy, ‘Hoards as Collections: Re-examining the Snettisham Iron Age Hoards from the Perspective of Collecting Practice’ (2016) 48(2) World Archaeology 239, 243–44. The works cited here by Joy are as follows: RR Clarke and RHM Dolley, ‘The Early Iron Age Treasure from Snettisham’ (1955) 20(1) Proceedings of the Prehistoric Society 27; IM Stead, ‘The Snettisham Treasure: Excavations in 1990’ (1991) 65(248) Antiquity 447; H Hautenauve, Les Torcs D’Or du Second Âge du Fer en Europe: Techniques, Typologie et Symbolique (Rennes, Association du Travaux du Laboratoire d’Anthropologie de l’Université de Rennes 1.4, 2005); A Chadburn, Aspects of the Iron Age Coinages of Northern East Anglia with Especial Reference to Hoards (PhD Dissertation, University of Nottingham, 2006); A Marsden, ‘Iron Age Coins from Snettisham’ in JA Davies (ed), The Iron Age in Northern East Anglia, BAR 549 (Oxford, British Archaeological Reports, 2011) 49. 120 eg Ipswich – see E Owles, ‘The Ipswich Gold Torcs’ (1969) 43(171) Antiquity 208. 121 See, eg AP Fitzpatrick, ‘Gifts for the Golden Gods: Iron Age Hoards of Torques and Coins’ in C Haselgrove and D Wigge-Wolf (eds), Iron Age Coinage and Ritual Practices, Studien zu Fundmünzen der Antike, Bd 20 (Mayence, 2005) 157.

22  Jane Frecknall-Hughes reason for placing objects in the ground has been, and continues to be, much debated. There are many possibilities, namely that the items were votive offerings to the gods; were family heirlooms buried for safekeeping; were evidence of population migration; or were treasures buried in times of trouble, to prevent capture as war booty, which the owners intended to retrieve.122 Later generations are familiar with the idea of burying things in times of danger for safekeeping, with the intention to retrieve them later. The diarist Samuel Pepys, for instance, famously ‘arranged for his money to be buried when the Dutch fleet entered the Thames estuary in 1667’.123 Much has been written in discussion of these possibilities, and about the positioning of particular items in the ground, but without definitive answers as to exactly who buried them, or why or when. Joy124 comments that it is unlikely that the hoards were all collected or buried for the same reasons, and also that it is difficult to know how old some of the items are.125 While many hoards contained coins that can be dated,126 these coins can only possibly suggest the earliest burial date, not the age of particular artefacts, and on the basis of the evidence from coins, ‘the majority of the hoards at Snettisham were probably deposited over a relatively short period from the later second century to 60 BC. Burial of hoards continued on a smaller scale into the first century AD.’127 It is clear that torques were worn by high-status individuals and were the equivalent of ‘crown jewels’,128 especially the ‘great torque’ found at Snettisham, now in the British Museum. They required a high level of metal-working skills to produce, which existed nowhere else in the world at the time, and were never produced again.129 Potter suggests that there was probably a Royal centre at 122 See, eg M Millett, ‘Treasure: Interpreting Roman Hoards’ in S Cottam, D Dungworth, S Scott and J Taylor (eds), TRAC 94: Proceedings of the Fourth Annual Theoretical Roman Archaeology Conference, Durham 1994 (Oxford, Oxbow Books, 1995) 99; Stead, above n 119; HEM Cool, ‘The Significance of Snake Jewellery Hoards’ (2000) 31 Britannia 29; Fitzpatrick, above n 121; IH Longworth, ‘Essay: Snettisham Revisited’ (1992) 1(2) International Journal of Cultural Property 333. 123 Stead, above n 119, 463. 124 Above n 119, 244. 125 ibid 248. AP Fitzpatrick, ‘The Snettisham, Norfolk, Hoards of Iron Age Torques: Sacred or Profane?’ (1992) 66(251) Antiquity 395 comments on this too, making the point that a given burial could occur for multiple purposes, although acknowledging that torques are not usually present in deposits that are more obviously votive. 126 Many coin hoards appear to have been buried at the time of the Boudican revolt – see A Chadburn, ‘A Hoard of Iron Age Silver Coins from Fring, Norfolk, and Some Observations on the Icenian Coin Series’ (1990) 60(3) British Numismatic Journal 1, 5; DF Allen, ‘The Coins of the Iceni’ (1970) 1 Britannia 1. 127 Joy, above n 119, 244. 128 This is the view expressed in the Time Team programme, Boudica’s Lost Tribe: A Time Team Special (Channel 4, 4 May 2011). Stead, above n 119, 459, comments that ‘Classical literature, too, refers to torques worn by humans: at Telamon, for instance, where the Celtic warriors were said to have gone into battle adorned with little more than torques (Polybius 2.29). Other writers note that both men and women wore gold torques (Diodorus Siculus 5.27.3), whilst in Britain the only evidence for the wearing of a torque is by a queen, Boudicca (Dio Cassius 62.2.4). Excavations in Celtic cemeteries abroad have shown that many human corpses, especially women, went to the grave wearing torques’. 129 Time Team, above n 128.

The Revolt of Boudica and the Iceni – A Roman Tax Revolt (or not)?  23 Snettisham, pre-dating the Roman conquest, with an established tradition of superior metal-working.130 Owles131 comments that the East Anglian torques represent ‘a staggering degree of wealth concentrated in the hands of the Icenian nobility’. She also comments on the possible origins of the gold, as a result of trade with the Roman world after Caesar’s conquest of Gaul, although some of the items found may be much older than this.132 Many of the Snettisham torques were broken, some deliberately, which may indicate that they were being recycled, but also that they could not have been worn – say, as the spoils of war – while others were repaired and/or linked with pieces of further torques.133 Did, therefore, Decianus Catus mount a ‘smash and grab’ raid on Icenian wealth, either for himself or in the name of Nero, given the possibly difficult financial time of Nero’s reign (see above)? Was the Roman action in seizing Icenian assets the catalyst for much to be buried so that it could not be seized? If this is so, then it perhaps raises questions about whether what was found at Snettisham was the entirety of the Icenian ‘crown jewels’ or just part of it, the remainder being taken by the Romans or yet to be found. Sealey134 also comments that ‘The Iceni are remarkable for having produced four sites with coin moulds, more than for any other tribe in Britain’, which suggests they were very active in producing coins, regardless of how many or few coins may have been found subsequently in hoards – although coin and metalwork hoards in East Anglia are significant, being ‘buried at the time of the Boudican revolt in an effort to save portable wealth from the Romans’.135 Coins were sometimes buried in pots. Sealey136 also suggests, from the archaeological evidence, that much wealth was buried during the Boudican revolt, so it would appear that the tribe’s wealth is something which might need further consideration in the context of reasons for the revolt occurring. CONCLUDING REMARKS

The accounts of the Boudican revolt given by Tacitus and Dio do give us (more than) hints that wealth, finance and taxation played their part in events.

130 T Potter, ‘A Roman Jeweller’s Hoard from Snettisham, Norfolk’ (1986) 60(229) Antiquity 137, 138. 131 Above, n 120, 211. 132 Joy, above n 119, 248 comments on the ‘Grotesque Torc’ found at Snettisham being at least 100 years old when it was buried. It was also much repaired, hence its soubriquet. See also J Joy, ‘A Power to Intrigue? Exploring the “Timeless” Qualities of the So-Called “Grotesque” Iron Age Torc from Snettisham, Norfolk’ (2019) 38(4) Oxford Journal of Archaeology 464. 133 Fitzpatrick, above n 121, 168, comments that ‘The systematic breaking and interlinking of torques is only found at Snettisham’. 134 Above n 6, 10. See also Chadburn, above n 126. 135 ibid 45. 136 ibid 47–51.

24  Jane Frecknall-Hughes The underlying resentment of a local population at Roman impositions is clear. Dio’s account is explicit as to the confiscation of money given to the tribal leaders, the recall of loans by Seneca (acknowledged by Tacitus), the p ­ asturing and farming taxes (scriptura and decumae, most likely), yearly tribute (­tributum soli) and poll tax (tributum capitis). Customs duties could also have been payable. There was, moreover, the general Roman rapaciousness embodied especially by Decianus Catus. The question as to why Seneca had loaned money to local leaders is unanswered: was it to help pay Roman taxes? Tacitus is more explicit on the issue concerning the Roman veteran colony (taking away land) and the money raised locally to fund the building of the temple to Claudius and its priests’ extravagance. In addition, he gives more detail about the will of Prasutagus. The quote from Petronius indicates that there was an expectation that half of an estate should or might be bequeathed to the emperor (which expectation Prasutagus met), although he did not appear to consult Rome about succession, possibly not thinking that this would be necessary. The terms of the will are not especially clear in terms of his daughters’ situation – co-heirs with the emperor or being left legacies. The reason for him not naming his wife as a successor also raises a number of questions. It was not unheard of for British tribes to have a female ruler, Cartimandua as ruler of the Brigantes being an example, but perhaps the reason is as simple as Prasutagus wanting his own bloodline to succeed. Regardless of the circumstances, Decianus Catus’ actions in taking all the assets, not only of Prasutagus, but also of other leaders, and the appalling treatment meted out to Boudica and her daughters, were ‘the final straw’. As the provincial finance officer, he seems to have been responsible for a decision to change utterly the status quo of Icenian client kingship to that of a people conquered in war. Was this driven by the very great wealth that the Iceni clearly possessed, the full extent of which is probably only hinted at by what has been found buried? We may never know why, but the above speculation about the importance of Icenian wealth may shed a little more light at least on the Boudican revolt and its reasons.

2 The Lead Ore Tithe and the ‘Poor Miners of the Peak’: The Lead Ore Tithe in Derbyshire in the Sixteenth to Eighteenth Centuries BARBARA A ABRAHAM

ABSTRACT

T

his chapter examines the contentious lead ore tithe in Derbyshire in the sixteenth to eighteenth centuries, an era in which the Derbyshire lead mining industry was of national importance. From 1266 the Derbyshire lead field formed part of the Duchy of Lancaster’s estates, a separate royal holding whose income directly benefited the monarch. It was in the Crown’s interest to encourage lead mining to generate royalties, and this also profited the local miners. An inquisition in 1288 established that ‘free mining’ and other local mining customs had existed in Derbyshire since time immemorial. Mining customs were upheld and disputes settled by Barmasters, supported by Barmote Courts, with juries drawn from local mining communities. The Barmaster was responsible for measuring ore and paying royalties to the Crown, but had no obligation for the lead ore tithe. Tithes had been payable by law in England since the tenth century on one-tenth of the annual increase in renewable land profits, for the support of the church. In earlier times, lead ore had been tithable, but by the sixteenth century the lead ore tithe was ‘due only by Custom in such parishes as it hath been Paid time out of mind’.1 After the Dissolution of the Monasteries, many more laymen acquired

1 G Hopkinson, The Laws and Customs of the Mines within the Wappentake of Wirksworth (1644) reprint (Nottingham, Thos Forman, 1948) 14, https://pdmhs.co.uk/docs/mining-laws/­ hopkinson.pdf.

26  Barbara A Abraham the rights to receive tithes and the lead ore tithe became increasingly resented by miners, who perceived that they received nothing in return. The lead industry was quite heavily taxed, and for the ‘poor miners’ the lead ore tithe was a tax too far. In the 1600s, the Derbyshire lead miners vigorously contested the lead ore tithe, paying nothing or token amounts, and accumulating funds to defend tithe ore lawsuits. They lobbied king and Parliament, and fought numerous cases through the courts, achieving some success against clergy and lay tithe holders. A BRIEF INTRODUCTION TO TITHES

A tithe (from Old English teogoþa ‘tenth’) is a one-tenth part of something, paid as a contribution to a religious organisation or as a compulsory tax to government. Historically tithes were due and paid in kind, such as agricultural produce. Traditional Jewish law and practice has included various forms of tithing since ancient times, with many references to tithes in the Old Testament. The early Christian church in the West adopted tithing, and the practice was ratified by the Council of Tours in 567 and the Second Council of Mâcon in 585.2 In England, the practice of paying tithes had existed since the seventh century.3 The obligation to pay tithes was included in various tenth- and eleventh-century royal statutes, and the legal validity of tithing was confirmed by Edward I in the Statute of Westminster II of 1285. Thus, the payment of tithes moved from moral to legal obligation and became a matter of secular as well as ecclesiastical law. Tithe was payable in kind and the ‘tenth part of the increase, yearly arising and renewing from the profits of lands, the stock upon lands, and the personal industry of the inhabitants’ was owed to the church.4 Tithes were based on ecclesiastical law under the jurisdiction of church courts, but over the centuries considered here recovery was increasingly sought in secular courts. Once severance of the tithe from the ground had occurred, tithes could be classified as lay debts and chattels, with recourse to secular courts. Contentious litigation grew from the late sixteenth century, with escalating disagreements about jurisdiction over tithes between the royal and ecclesiastical courts during the sixteenth and seventeenth centuries. Determining the scope and legitimacy of tithing customs became a particular source of discord.5 By the 2 A Lewis, ‘When Is a Tax not a Tax but a Tithe?’ in J Tiley (ed), Studies in the History of Tax Law (Oxford, Hart Publishing, 2007) 236. 3 ibid 239. 4 RH Helmholz, Oxford History of the Laws of England: The Canon Law and Ecclesiastical Jurisdiction from 597 to 1640s (Oxford, Oxford University Press, 2003) 433: Helmholz quotes Blackstone’s Commentaries on the Laws of England, 1765–70, ii24, but notes that the words perfectly fit canon law’s definition. 5 ibid 460.

The Lead Ore Tithe and the ‘Poor Miners of the Peak’  27 seventeenth century, secular courts generally dealt with questions of tithability and issues relating to tithes commuted into money payments.6 Lewis discusses the involvement of secular courts, and particularly of the Court of Equity in the Exchequer, in tithe litigation from the sixteenth century onwards: the Exchequer Court was largely devoted to revenue and fiscal issues, with tithe litigation forming a significant part of its activity.7 Three Divisions of Tithe Tithes were divided into three types: predial (from Latin praedium ‘farm’), mixed and personal. 1. Predial tithes are such as arise immediately from the soil, as corn, grain, hay, wood, and all sorts of fruit and herbs. Predial tithes are to be paid without any deduction of the costs or charges of cultivation. 2. Mixed tithes are such as do not proceed immediately from the ground, but are produced mediately by animals which are depastured or kept upon the ground, as colts, calves, wool, lambs, milk and eggs. They are called mixed tithes, because they are partly predial and partly personal and are to be paid without any deduction or abatement, on account of the labour and expense of their production. 3. Personal tithes are such as arise wholly from the labour and industry of man, as tithes of mills and fishing or, more properly speaking, of the labour and industry of millers and fishermen, because these tithes are properly payable of the profits made by millers and fishermen in their respective occupations. Personal tithes are not due of common right but only by the special customs and usages of particular parishes.8 Lewis compares the distinction between personal and predial tithes – where the former, but not the latter, permitted an allowance for expenses – with the difference between self-employed earnings and employment income under the modern UK tax regime.9 The Tithe on Lead Ore In general, tithes were not payable in respect of minerals and things which were not of the increase, but of the substance of the earth. But by particular

of

6 N

Adams, ‘The Judicial Conflict over Tithes’ (1937) 52 The English Historical Review 1. above n 2, 246. 8 These descriptions of the three categories are taken from W Eagle, A Treatise on the Law Tithes (London, Saunders & Benning, 1830) 38. 9 Lewis, above n 2, 242. 7 Lewis,

28  Barbara A Abraham custom, any mineral substances may have been subject to the payment of tithes. In Derbyshire, tithes were thus payable for lead ore. The pretence for claiming tithe is said to have originated in the once prevalent notion that metallic ores are in a constant state of growth and increase in the veins. The tithe of mines could be either in the nature of a predial tithe, by the dish or drill, in its natural state, without any deduction for expenses, or as a personal tithe, with an allowance for labour and other incidental charges.10 In the thirteenth and fourteenth centuries, there were differences of opinion about the tithability of minerals: by canon law, minerals, including lead, were subject to tithe, but under common law in England they were held to be exempt, unless made payable by some special custom. Adams gives several instances of tithes paid on minerals during those centuries, including lead ore in Derbyshire and Bangor, tin from the royal tin mines of Devonshire and iron from the Forest of Dean.11 Custom, or customary law, was an established element of the legal obligation to pay tithes, with much wider application than the lead ore tithe.12 The validity of customs frequently led to tithe disputes. In most tithing situations, custom operated to provide some sort of easement in the payment of tithes but, for the lead ore tithe, the liability to tithe ore depended on proving the custom in a particular locality. In 1701, a Private Bill was brought by several Low Peak parsons, ‘The Case Relating to the Bill for Preventing Vexatious Suits’, in an attempt to establish a statutory liability to lead ore tithe across the whole of Derbyshire. A pamphlet relating to this bill presented the contemporary case for the clergy. This admitted that the payment of tithe ore was not found in ordinary tithing tables, nor was due of common right, but claimed that it was not a novel or unknown duty and had been paid for centuries, and it was right that miners should pay it because ‘in searching for Lead Oar there … vast quantities both of Pasture, Meadow, and Arable Land, are turned into heaps, and made Barren, which would otherwise yield a good Tyth in another kind’.13 The question of whether the lead ore tithe was predial and payable gross or personal and payable net of expenses incurred in its mining was disputed during the sixteenth to eighteenth centuries. The most widespread practice seemed to be a hybrid position that tithe ore was due as dressed ore, that is, after it had been washed, allowing a modest deduction for the costs of washing, but without any allowance for other mining costs.14

10 This paragraph draws heavily on W Bainbridge, A Treatise on the Law of Mines and Minerals (London, Butterworths, 1856) 554. 11 Adams, above n 6, 18. 12 Helmholz, above n 4, 454. 13 BL Add MS 6677, f20. 14 See ‘Bakewell Tithe Disputes’ below.

The Lead Ore Tithe and the ‘Poor Miners of the Peak’  29 Table 2.1  Historical Context – Timeline Dates of reign

King/queen

1509–47

Henry VIII

1547–53

Edward VI

1553–58

Mary I

1558–1603

Elizabeth I

1603–25

James I

Historical events

Key developments relevant to lead ore tithe

1536–41 Dissolution of the Monasteries

1545 High Peak tithes from Lenton Priory to Sir Francis Leeke

New export duty on smelted lead of 8/- per fother 1605 Gunpowder Plot

1607 Lead export duty to 20/- per fother 1612–27 Bakewell tithes disputes 1621–33 Vicar of Wirksworth tithe disputes

1625–49

Charles I

1642–51 English Civil War

1641 Derbyshire Miners’ Petition to the Long Parliament 1641 Export duty on lead reduced: 48/- to 20/- per fother

1649–60

1660–85

Interregnum: Commonwealth of England then Cromwell’s Protectorate Charles II

1650 Oliverian Survey of Church Livings (Lichfield) 1659 Rector of Ashover tithe dispute The Restoration 1665–66 Great Plague in London & Eyam

1685–88

James II

1688–1702

William III & Mary

1702–14

Anne

1714–27

George I

1689 Bill of Rights 1689 The Toleration Acta

1670s Rector of Matlock tithe dispute 1676 Brown v Vermuden Wirksworth ‘class action’ 1701 Private bill re lead ore tithe introduced by Low Peak parsons

(continued)

30  Barbara A Abraham Table 2.1  (Continued) Dates of reign

King/queen

Historical events

1727–60

George II

Approx 1760 onwards: ‘Industrial Revolution’

1760–1820

George III

1773 Arkwright’s Cromford Cotton Mills

Key developments relevant to lead ore tithe

1780 1/40 tithe payment agreed re Wirksworth

1776 Adam Smith: Wealth of Nations 1783–1801 PM Pitt the Younger; 1799 introduced Income Tax 1789–99 French Revolution a 

Act granted religious liberty but tithes remained payable to the Anglican Church.

THE DERBYSHIRE LEAD INDUSTRY

The lead mining region of Derbyshire approximates to the area known today as ‘The White Peak’, a limestone plateau dissected by limestone dales. The limestone had mineral-rich fissures, especially of galena (lead sulphide – PbS), the most commonly found lead ore, and there had been lead mining in this area since before Roman times. The Romans were in Derbyshire from about 69 to 400 CE and mined there, leaving behind several inscribed ingots of lead. Records indicate that Repton Abbey owned lead mines in the area in the 800s until the Danes seized the mines and destroyed the abbey in 873. Lead mining and smelting was widespread by the time of the Domesday Book (1086). Lead was an essential material from Roman times up until the twentieth century. Its uses included roofing, water storage and piping, plumbing, pewter utensils, gunmetal, lead shot and ammunition. The destruction of the monasteries by Henry VIII resulted in a glut of lead from religious houses that depressed lead prices in the mid-sixteenth century, but by the early seventeenth century the lead industry had recovered and was second in importance only to wool in the national economy – and Derbyshire was the primary source of lead ore. There was a thriving export trade as well as home market, and lead was one of three staple products, together with wool/cloth and tin. There was a proliferation of smaller mines in earlier periods and many miners combined mining with subsistence farming, with the annual farming

The Lead Ore Tithe and the ‘Poor Miners of the Peak’  31 cycle taking precedence so that mining activity was fitted into the quieter periods of the agricultural year. Throughout the centuries under consideration, some miners continued to divide their time between agricultural work and mining. By the beginning of the sixteenth century, most lead deposits that could be extracted from the surface had been exhausted, and it had become necessary to sink ever deeper shafts and to tunnel underground, which, in turn, necessitated drainage works. Deeper mining and large-scale drainage schemes required capital investment and, as time went on, larger mines became common and led to the formation of companies to consolidate ownership of mines. Lead mining in Derbyshire reached its peak in the seventeenth and eighteenth centuries. Although investment continued through the nineteenth century, returns reduced. The gradual decline of the industry after the late eighteenth century resulted from exhausted veins, higher production costs of deeper mining and, increasingly, the availability of cheaper imported lead ore. The ‘industrial age’ of the eighteenth and nineteenth centuries led to technological developments, such as the construction of soughs and the use of engines to pump water away from mines, and much improved smelting techniques. At its height, the Derbyshire lead mining industry engaged tens of thousands of people and there was a clear social hierarchy amongst the mining communities, from the owners or lessees of the mineral rights at the top, followed by the mine owners, lead merchants and Barmote Court officials. Next came the miners, who were held in relatively high esteem, with the most experienced and respected serving as jurymen at the Barmote Courts. Bottom of the list were the general labourers underground and the surface workforce. Normally it was men who did the heavy work down the mines, with boys carrying out lighter tasks, while women and children did much of the surface ore dressing.15 The term ‘miners’ embraces the breadth of roles engaged in mining, from owners of mines to lead merchants, who sometimes also owned mines, to the men who did the actual mining, who were mostly waged workmen rather than ‘free miners’, and the term is generally used in this broad sense in this chapter. Legal Framework and Administration of the Derbyshire Lead Industry The structure of the old lead industry in Derbyshire, from the mining of ore to the sale of smelted lead, grew out of the ancient (pre-1066) claim of the monarch to all mineral rights. The Derbyshire lead deposits remained a royal possession after the Norman Conquest and royalties from mined lead continued to benefit the Crown for centuries afterwards. The Crown could only realise value from the possession of mineral deposits to the extent that the minerals were mined

15 J Barnatt and R Penny, The Lead Legacy (Bakewell, Peak District National Park Authority, 2004) 13.

32  Barbara A Abraham and thus brought into the commercial sphere. The lead deposits in Derbyshire were widely spread over inhospitable countryside, and it was often difficult, and sometimes dangerous, to gain access to underground deposits and bring them to the surface. For many centuries – until the need arose for capital investment by commercial enterprises – it was in the Crown’s interests to encourage lead mining, and fundamental to this was the right of ‘free mining’, permitting anyone to mine lead ore anywhere, with a few specific exceptions, and profit from their efforts, subject to paying royalties to the Crown. The Duchy of Lancaster was created in 1265, when Henry III gifted certain baronial lands to his son, then, a year later, added the estate of Robert Ferrers, the rebel Earl of Derby, followed by the ‘honour, county, town and castle of Lancaster’, together with the title of Earl of Lancaster (elevated to Duke of Lancaster in 1351). Further lands and estates were added later to the inheritance. One of Henry IV’s first acts as king in 1399 was to stipulate the conditions in which the Lancaster inheritance should be held, specifying that it should be held separately from all other Crown possessions, and should descend through the English monarchy as a private estate.16 Most of the land in Derbyshire that was rich in lead ore – the lead field – formed part of the Duchy of Lancaster’s possessions, and the conditions attaching to the Duchy inheritance provided a powerful incentive to the monarch to protect the income from lead mining. The industry structure was designed to facilitate the collection by the Duchy of the king’s royalties. In practice, the king’s royalties were generally farmed out, so that the miners paid them to the ‘king’s farmer’. In 1288, Edward I ordered an inquisition into local mining practices to be held at Ashbourne in Derbyshire. It is thought that this was the result of challenges to the custom of free mining by local landowners. A quo warranto (‘by what warrant/authority?’) was an inquiry into whether a claimed custom or right was well founded: it did not grant rights, but rather codified pre-existing popular practice established ‘time out of memorie of man’. The Ashbourne Quo Warranto considered whether the right of free mining did indeed exist in ‘the Peak’ and confirmed 14 customs associated with free mining. The jurymen, ‘good and lawful men from the district’, swore on oath that they had enjoyed the liberties set down ‘from time immemorial throughout all the estates of the lord King in the Peak until now’ in accordance with ‘ancient mining custom’.17 The Ashbourne Quo Warranto proved very powerful over the centuries as written proof that free mining had been the custom in the Derbyshire lead field since time immemorial (determined as 1189, according to legal convention). It is notable that Edward I refers to the miners in the Quo Warranto as ‘my miners of the Peak’ (minoritores mei de Pecco). The terminology of the Quo Warranto



16 See 17 D

further www.duchyoflancaster.co.uk. Gordon, ‘The Quo Waranto – A New Translation’ (1988) 10 Bulletin of PDMHS 220.

The Lead Ore Tithe and the ‘Poor Miners of the Peak’  33 enabled the miners to identify themselves as the king’s miners working in the king’s field and the confirmation of their rights by a long dead monarch … created the impression that the right of free mining was the creation of royal authority … This allowed the miners in their complaints to higher authorities to cast attacks upon their rights as assaults upon royal justice.18

The 14 customs set out in the 1288 Quo Warranto were modified and extended over the centuries. By the time of the Great Barmote Court held in Wirksworth in 1557, the 14 provisions had expanded to 33, and by 1665 there were 59 customs recorded for Wirksworth.19 In 1644, George Hopkinson, a lawyer and member of the Inns of Court, wrote a treatise on the customary mining laws of Wirksworth Wapentake, which appears to be the first published study of the subject.20 Later, in 1661, Hopkinson was appointed steward of Wirksworth Barmote. In 1653, another steward of Wirksworth Barmote set out the Low Peak mining customs in 292 lines of rhymed couplets in The Rhymed Chronicle of Edward Manlove concerning the Liberties and Customs of the Lead Mines Within the Wapentake of Wirksworth, Derbyshire.21 Whilst of questionable poetic merit, this provided an accurate rendition of the customs, and the verse format presumably assisted the miners in memorising them. The customary laws of the High Peak, the Low Peak, Stoney Middleton and Eyam, Ashford, Litton and Tideswell were published in 1734 by George Steer as The Compleat Mineral Laws of Derbyshire.22 Hopkinson confirms the all-important custom of free mining: It may seem strange and Repugnant to the Common Law which saith … It is not Lawfull for any Man to Enter into the Land of another without his Licence. That a Miner should Dig, and get Lead ore, in another Mans soil, yea, and have an Inheritance in the mine therein without the owner of the soil, his Licence, or given any Recompence or satisfaction for the same. And yet that is most Clearly the Custom.23

Despite George Hopkinson’s explicit confirmation of the custom of free mining, the Hopkinson family did not respect the custom in practice, and George and his brother William ejected free miners from Hopkinson-owned land in the 1640s and 1650s, and again in 1678.24 Any man who could demonstrate to 18 A Wood, ‘Custom, Identity and Resistance: English Free Miners and Their Law, c.1550–1800’ in P Griffiths, A Fox and S Hindle (eds), The Experience of Authority in Early Modern England (Basingstoke, Macmillan, 1996) 257. 19 A Wood, The Politics of Social Conflict, The Peak Country 1520–1770 (Cambridge, Cambridge University Press, 1999) 140–42. See also JH Rieuwerts, History of Laws and Customs of Derbyshire Lead Mines (Sheffield, Office Liaison,1988) 22. 20 Hopkinson, above n 1. 21 E Manlove, The Rhymed Chronicle of Edward Manlove Concerning the Liberties and Customs of the Lead Mines Within the Wapentake of Wirksworth, Derbyshire (London, 1653). 22 G Steer, The Compleat Mineral Laws of Derbyshire (London, Henry Woodfall, 1734). 23 Hopkinson, above n 1, 8. 24 Wood, above n 19, 293.

34  Barbara A Abraham the Barmaster that he had found a significant source of ore was allowed to open a mine and retain title to it for as long as he continued to work it. Within the king’s field, mining took precedence over land ownership, and no land owner or farmer could interfere with lead mining, although many attempted to impose restrictions. The Derbyshire mining customs originally evolved to benefit the Crown, as lord of the mineral rights, by encouraging mining so as to maintain the production of lead, but they also benefited the miners by allowing them to generate an income, if rarely a full livelihood, independently of their employment by farmers or other employers. In premodern times it was extremely unusual for men of comparatively low rank to have any economic independence. The Derbyshire lead field was divided into two areas of jurisdiction, the High Peak and the Low Peak, also known as the High Peak Hundred and Wirksworth Wapentake, both within the king’s field of the Duchy of Lancaster. Within the Hundred and the Wapentake, the smaller administrative areas for lead mining were known as liberties, with a liberty usually corresponding to a parish, although not always identical. The High Peak Hundred was dominated by two high-ranking aristocratic families, the Cavendishes, Earls then Dukes (from 1694) of Devonshire, and the Manners, Earls then Dukes (from 1703) of Rutland, whereas the land in Wirksworth Wapentake – by the seventeenth century the major source of lead ore in Derbyshire – was owned by a combination of aristocratic and major landowners, together with many smaller landowners, including lesser gentry and yeomen who either worked in or financed the mines.25 Customary Law in Derbyshire Behind both the Peak’s customary mining laws and the lead ore tithe was the legal concept of ‘custom’. Medieval treatises described the English legal system as the ‘law and custom of England’,26 and England’s common law could be described as general customs applicable nationwide. Custom is a local exception to the general law of the realm; it is essentially local common law.27 Entirely consistent with this, Hopkinson states in his 1644 treatise on the mining customs that he ‘will only treat of such Customs … which seem to be diverse from or unknown to the said Common Law’.28 Customs of the countryside in England which differed from general custom (or common law) were only accepted by the courts if they had originated 25 A Wood, ‘Social Conflict and Change in the Mining Communities of North-West Derbyshire c1600–1700’ (1993) 38 International Review of Social History 37. 26 A Kiralfy, ‘Custom in Medieval English Law’ (1988) 9 Journal of Legal History 26. 27 AC Loux, ‘Persistence of the Ancient Regime: Custom Utility and the Common Law in the Nineteenth Century’ (1993) 79 Cornell Law Review 185. 28 Hopkinson, above n 1, 4.

The Lead Ore Tithe and the ‘Poor Miners of the Peak’  35 before 1189.29 Customary law arose from the immemorial usage of the community30 of a clearly defined local area, and it must meet a test of ‘reasonableness’. When custom was litigated, the existence of an ancient custom was a question of fact for the jury, most often proved by the oral testimony of older members of the community, and it had to be demonstrated by the person asserting the custom. The burden of proving that a custom was unreasonable lay with those who challenged the custom and was a question of law for judges to determine. The legal foundation underlying custom was not well established in the medieval period but, by the seventeenth century, the four elements of the judicial doctrine of custom as local common law were in place.31 Once the existence of a custom had been proved as a fact, the judge applied the tests of antiquity, continuity, certainty and reasonableness: 1. Antiquity: the custom must have originated before 1189. 2. Continuity: the customary right or licence must have been exercised without interruption. Any significant interruption in the exercise of a customary right created a presumption that the custom never existed or was not truly a custom at all. 3. Certainty: common law required that local custom be certain, applicable only in a definite district and limited in scope so that local exceptions did not encroach on common law. 4. Reasonableness – the custom must be reasonable, or at least not unreasonable. Custom was by definition contrary to the common law but custom that conflicted with any fundamental principle of the common law could be declared unreasonable.32 Local customs derived from popular practices and belonged in the realm of oral tradition; they were usually tested through oral testimony from members of the local community. There is perhaps a fundamental conflict between courts of law, which seek to operate in the realms of certainty and proof, and the potentially ephemeral nature of oral evidence. As noted previously, the Derbyshire mining customs benefited from the written proof afforded by the 1288 Ashbourne Quo Warranto that they had existed from time immemorial, but they were still susceptible to attack. In 1726, Sir John Statham, a lawyer and a surveyor for the Duchy of Lancaster, stated that the miners’ rights were ‘all pompous pretence’: the customary laws were oral and never in writing, the Barmote Court was not a Court of Record so ‘no record or footsteps remain’, and it was impossible to give authorities ‘other than what occurs to everyone’s memory’.33

29 Kiralfy, above n 26, 26. 30 Loux, above n 27, 183. 31 ibid 192. 32 These four tests are drawn from Loux, above n 27, 191–95. 33 L Willies, ‘The Working of the Derbyshire Lead Mining Customs in the Eighteenth and Nineteenth Centuries’ (1988) 10 Bulletin of PDMHS 152.

36  Barbara A Abraham The customs protecting and regulating ‘free mining’ survived for more than 700 years but, in their final two centuries, they were ill-suited to cope with the consolidation of the ownership of mines and mineral rights into company structures. They were finally incorporated into statute law in 1851 and 1852 for the High Peak and the Low Peak respectively, which was rather late in the day, as by then the lead mining industry was in steady, indeed terminal, decline.34 The Barmaster and the Barmote Court The Barmaster and the Barmote Courts constituted an ancient system of jurisdiction governing the lead mining region of Derbyshire. The Ashbourne Quo Warranto refers to the responsibilities of the ‘bailiff, who is called the Berghmayster’ and to the Berghmot, which ‘should be held from three weeks to three weeks at the mine’,35 so clearly the system was well established by 1288. (‘Berghmot’/’Barmote’ from Saxon bergh ‘mountain’ and mot ‘assembly’.) As Hopkinson records, ‘And the whole Execution of the Laws of the Mine is committed unto and Entrusted with the Barrmaster’; he also sets out 13 points concerning the Barmaster’s office, the first being that ‘the Barrmaster is made by the King’, which he expands: ‘he being Lord of the said Mines in Right of his Duchey of Lancaster’.36 The Barmaster and the Barmote Courts had wide-ranging responsibilities, including awarding mining rights, overseeing disputes and ensuring that royalties due to the Duchy of Lancaster were collected. By the beginning of the fifteenth century, two Great Barmote Courts with wider powers to deal with more serious issues were in place, meeting twice yearly at Easter and Michaelmas, one at Monyash for the High Peak and the other at Wirksworth for the Low Peak. These had 24 jurors, and were run by the Barmaster with the assistance of a steward, who was a lawyer and whose impartiality was important. Deputy Barmasters adjudicated in disputes and enforced compliance with the customs of the mines. Their duties extended to acting as the coroner in the case of fatal accidents at the mines. The Barmote jury was not conceived as an impartial, random collection of people. Rather, Barmote jurors were drawn from the mining community, and jurymen were required to be knowledgeable in mining matters and bring practical experience to bear in adjudicating disputes and trials.37 There were frequent disputes between miners and landowners over miners’ rights to free mining, the possession of mines and the payment of duties, and, whilst most were settled by Barmote Courts, plenty of cases proceeded to the 34 High Peak Mining Customs and Mineral Courts Act 1851 and Derbyshire Mining Customs and Mineral Courts Act 1852. 35 Gordon, above n 17, 220. 36 Hopkinson, above n 1, 13–14. 37 R Slack Lead Miners’ Heyday: The Great Days of Mining in Wirksworth and the Low Peak of Derbyshire (Chesterfield, 2000) 17.

The Lead Ore Tithe and the ‘Poor Miners of the Peak’  37 Court of the Duchy of Lancaster. Important judgments of the Duchy Court in the sixteenth century established it as the superior court over the Great Barmotes and as the final court of appeal for Peak mining matters for the next century.38 Initially miners resented what they saw as a usurpation of power from the Barmotes to the Duchy Court, but over time they accepted the jurisdiction of the Duchy Court, which appears to have given a fair hearing to mining customs. Subsequently, mining cases were pursued through other courts, including the County Assizes, Chancery and the Court of the Exchequer. Tithing matters could be heard by ecclesiastical courts, with the Consistory Court of Lichfield Diocese hearing numerous lead ore tithe cases.39 The Derbyshire Lead Miners: The ‘Poor Miners of the Peak’ Customary laws relied on proving precedent and common usage, and older miners would be called to give evidence through oral testimony of events and practices from many years previously. Wood suggests that this gave the miners a sense of their own history and identity as a separate interest group in north-west Derbyshire.40 The Barmote Courts enjoyed extensive freedom of action and were popular with the miners, who regarded them as the source of their peculiar liberties, resenting the encroachment by other sources of authority and law upon the jurisdiction of the Barmote. At a time when power lay with the aristocracy and landed gentry, the miners who helped to run their industry through the Barmote juries acquired a taste for democracy. The ideal role of the Barmaster, according to the miners, was to ensure that ‘noe man had more power than another’41 and to ‘doe right to them that be opprest’.42 Enthused by a sense of their democratic rights and perhaps overestimating their own power and importance, the miners of Wirksworth petitioned Charles I to give Wirksworth two representatives in Parliament: That the saide Towne is both a market towne and, and very ancient, and hath for many hundred years beene famous for the leade Mynes neare adjoining thereunto: That many thousands of your Majesties Myners live in and neere unto the said Towne, and that your Majestie is Lord, both of the saide Towne, and also of that whole hundred. That the Barmoote Corts are kept, and the mynerall controversies heard and determined in your Majesties hall in that Towne, and by your Majesties officer called a Barmaster.43 38 Wood, above n 19, 141. 39 Tithe case records of Lichfield Diocese Consistory Court are held at Staffordshire Record Office. 40 Wood, above n 25, 41. 41 Quoted in ibid 34. 42 Manlove, above n 23, l 170. 43 Quoted by Slack, above n 37, 6.

38  Barbara A Abraham The petitioners complained that ‘the said myners have not voyces either in choosing the knights of the shires, or the Burgesses of any Burrough for Parliament’.44 Their petition was unsuccessful. TAXES AND DUTIES ON LEAD

Lot Lot was effectively a royalty paid in kind to the king and was the thirteenth dish of ore in each measuring. It is clearly set out in the Quo Warranto: And of the ore won in work of this kind on his estates, the King as Lord of the land shall have the thirteenth dish, which is called the Loth, as has hitherto been the custom. In return for this however, the Lord King shall find for the miners free access to convey and carry their ore as far as the king’s highway, in such a way as they have been accustomed.45

As ore was brought from a mine it was measured by the dish and the Barmaster collected every thirteenth dish. For the payment of lot, the miners had ‘liberty to work the ground within the Wapentake, and to have timber also in the King’s wastes … and egress and ingress from the highways to their Grooves or Mines’.46 By the early eighteenth century, it appears that in the High Peak and Ashford, north of the River Wye, lot was paid on the twentieth dish.47 Cope The Quo Warranto does not mention the payment of cope, but does set out the king’s pre-emption right, which gives rise to the duty: ‘Regarding the ore which is won, the jurors say that the Lord King shall have the right to buy at the mine before all others, provided he give as much as the others.’48 Cope (‘cope’: obsolete meaning ‘to buy, exchange, bargain’ – OED) was payable on the ore not purchased by the king. This was a payment made notionally to prevent pre-emption by the owner of the mineral rights. The mining customs were clear that the king’s cope was paid in return for the miners’ right to sell to whomever they wished and was payable by the ‘Merchant, Buyer or Miner, that carries away the ore’.49 Cope was paid at sixpence a load – a load equalled nine dishes – in the king’s field, but the Duke of Rutland charged ninepence a load at his Hazelbadge lead mines.50

44 ibid

25.

45 Gordon,

above n 17, 220. above n 22, 88. above n 33, 156. 48 Gordon, above n 17, 220. 49 Steer, above n 22, 91. 50 Willies, above n 33, 157. 46 Steer,

47 Willies,

The Lead Ore Tithe and the ‘Poor Miners of the Peak’  39 The Barmaster’s responsibility for collecting cope obliged him to keep records of the names of ore buyers. The deputy Barmasters kept records of all changes of title and of the amounts of ore measured and the amounts of lot ore and cope collected at their regular reckonings at the mines. The lot and cope accounts involved quite complicated calculations and information collected included the period covered, the name of miner or mine, the amount of ore mined, the number of dishes of lot ore received, the amount of ore sold to each buyer and the sum of money chargeable to each buyer for cope. Many such records have survived. The nature of the lead field – numerous small mines spread over remote countryside – created the opportunity for small-scale evasion of lot and cope, and it would be remarkable if there had not been instances of evasion. For example, farmers of lot and cope in the Low Peak part of the king’s field made 10 separate complaints to the Duchy Court between 1520 and 1580 that smelters and miners were evading payment.51 There were various challenges over the centuries to the liability to lot and cope, but generally the miners acknowledged their obligations to the king’s farmer, and deputy Barmasters were deployed regularly at the mines to collect the dues. In theory at least, failure to pay lot and cope could result in the seizure of the offender’s mines. Export Duty on Lead Elizabeth I imposed a tax on exports of lead of eight shillings a fother. (A ‘fother’ was a measure of smelted lead; the exact volume or weight of a fother varied across the country, but was around 22½ hundredweight in Derbyshire.) The duty was increased by James I to 28 shillings and by Charles I to 48 shillings per fother in 1635, which had the effect of depressing both ore prices and the wages of mine workers.52 The miners were very aware of the sums raised for the king from lead exports: in evidence to the Exchequer Court in 1622 they argued that, if the mines closed, the king would lose his revenue from them, also the ‘benefit of his Custome, for all the lead there gott and made and transported by sea being for every fodder of lead 28s., amounting to £10,000 a year’.53 A petition headed by Lionel Tynley of Holmesfield, a wealthy Derbyshire mine owner and lead merchant, and supported by as many as 20,000 names, including 1912 miners, was placed before a Commons committee in 1641, which recognised that it was ‘a matter of great moment to the miners of the Peak’, and promptly agreed to reduce the duty to 20 shillings per fother of lead.54 51 D Kiernan, The Derbyshire Lead Industry in the Sixteenth Century (Chesterfield, Derbyshire Record Society, 1989) 3. 52 Slack, above n 37, 32. 53 N Kirkham, Lead Ore Tithe, Supplement No 9 (Derbyshire Archaeological Society, 1965) 12. 54 BL Add MS 6677, f48

40  Barbara A Abraham DERBYSHIRE MINERS AND THE LEAD ORE TITHE

Despite challenges over time to the liability to lot and cope and inevitably instances of evasion, the miners understood and accepted the basis for these two taxes: lot was the royalty paid for free access to lead ore, and cope was the payment to override the Crown’s pre-emption right and sell on the open market. There was also a rigorous system for collecting lot and cope by deputy Barmasters’ regular attendance at the mines. The position was entirely different for the lead ore tithe. Before the Dissolution of the Monasteries, most tithes were due to clergymen or to religious houses, although some tithes were already in private hands. Religious houses’ rights to tithes were sometimes sold on, usually to local gentry, whereas local clergymen usually retained their rights. At least as far back as the 1570s, the Derbyshire miners had resisted payment of the lead ore tithe, paying either nothing or considerably less than 10 per cent.55 The glut of lead in the second half of the sixteenth century depressed lead prices and made lead mining unattractive. According to Wood, lead mining virtually died out in the High Peak,56 and consequently, during that era, the value of the lead ore tithe there would have been insignificant. However, by the beginning of the seventeenth century, demand for lead and consequently prices were booming, and the lead ore tithe was potentially very valuable. The payment of tithe on lead ore was due only by custom ‘in such parishes as it hath been Paid time out of mind’.57 The onus was on the tithe holder, whether clergyman or layman (‘improprietor’), to prove the custom of payment of tithe ore in a particular parish. As for other customs, it first had to be proved that the custom of payment existed in a particular locality and then that the custom was ancient, uninterrupted and not unreasonable.58 Apart from the disputatious and often protracted process of proving the custom, tithe holders were further disadvantaged by the lack of any administrative mechanism to collect the tithes. The Barmasters were appointed by and were responsible to the king’s farmer or to the holder of the lease of lot and cope, and they were reluctant to collect any other dues. There were thousands of mines scattered over extensive tracts of moorland and Barmasters were not obliged to inform the tithe collectors as to when and where they would be measuring ore, nor were they obliged to measure tithe when they measured lot. The evidence given in tithe cases records that there were occasions when Barmasters routinely set aside the tenth dish for the lead ore tithe, but this appears to have been the exception rather than the rule. Without the Barmaster’s or miners’ cooperation, it was difficult for tithe collectors to obtain the ore

55 Kirkham,

above n 53, 1. above n 19, 240. 57 Hopkinson, above n 1, 14. 58 Helmholz, above n 4, 454. 56 Wood,

The Lead Ore Tithe and the ‘Poor Miners of the Peak’  41 without infringing mining customs. The use of force and affrays were forbidden at mines, and no one was allowed to go to a mine and seize ore which they thought belonged to them. Taking or stealing ore was punishable by the stocks or pillory if it amounted to less than 1 or 1½ pence and was considered a felony above that value.59 In 1628, in the Bakewell tithe ore case, Martin Hallam of Bradwell, Barmaster of the king’s field of the High Peak, deposed ‘It is not the office of the Barmaster to measure any lead ore at the request of the Defendants or their predecessors nor to give the 10th dish in nature of tithe’.60 He referred to the Quo Warranto, in which no other duties were mentioned except lot and cope. However, by the time Hopkinson published his treatise in 1644, the position appeared less clearcut. Hopkinson sets out the twelfth duty of the Barmaster as follows: ‘And he shall see that the King and Church have their Duties and that the King Have his Lot and Cope …’ and comments on this: But that he shall see the Church have her Dutys have been much controverted and Denied by many. The tyths or tenths of lead ore, which Parsons and Improprietors claim in right of their Churches Being not due in kind, as other Growing Tythes are due but only by Custom in such parishes as it hath been Paid time out of mind &ca. But yet it seemeth not against reason, that were the Law Determines, that Tythes are due, there the Barrmaster who is the only publick officer of Justice and governour of the mines should see the same duly paid …61

(It should be noted, though, that back in the 1620s, before the Hopkinsons became establishment figures in Wirksworth, they were allies of the Reverend Richard Carrier, vicar of Wirksworth, who was notorious for his aggressive, sometimes violent, methods of collecting lead ore tithe.62) Mining was hard and dangerous work and, as the search for ore took place increasingly deep underground, injuries were commonplace and deaths also occurred. Also, in sinking shafts below ground, it was difficult to predict whether or not a rich seam of ore would be found, so miners hoped prayers would bring them good luck. Before the Dissolution of the Monasteries, it was the duty of religious establishments receiving lead ore tithe to pray for the miners morning and evening. Manlove, evidently sympathetic to the miners, reminds the clergy of their duty to pray for the miners: Provided always, that to Church and Lord, They pay all duties Custome doth afford, For which the Vicar dayly ought to pray For all the miners that such Duties pay. 59 Kirkham, above n 53, 26. 60 Quoted in ibid 6. 61 Hopkinson, above n 1, 14. 62 ‘William Hopkinson and the Hopkinsons of Ible, Bonsall and Wirksworth’, www. derbyshirehistoricbuildingstrust.org.uk/post/william-hopkinson-and-the-hopkinson-s-of-iblebonsall-and-wirksworth; Slack, above n 37, 27.

42  Barbara A Abraham And reason good, they venture lives full dear In dangers great; the Vicars tyth comes clear; If miners lose their lives, or limbs, or strength, He loseth not, but looketh for a Tenth: But yet methinks if he a Tenth part claim, It ought to be but a Tenth of clear gain, For miners spend much moneys, pains, and time, In sinking shafts before Lead ore they find, And one in Ten scarce finds, and then to pay One out of Ten, poor miners would dismay, But use them well, they are laborious men, And work for you, you ought to pray for them. And sute for oar must be in Barghmoot Court63

Whatever the miners’ attitude to paying tithe may have been before the Reformation, by the end of the sixteenth century and throughout the seventeenth century they refused to acknowledge any obligation to pay tithes either to parsons or to improprietors, and there were continual legal disputes and sometimes physical confrontations. Undoubtedly tithes were an important source of income in maintaining churches in less prosperous parishes, but, by the seventeenth century, respect had diminished for local clergy, who were sometimes seen as greedy to exploit their livings for personal gain. Opposing the Bill brought in 1701 by several Low Peak parsons, the miners argued that Barmasters ‘are officers under the Crowne and are paid their salaries by the farmers of the lott and cope’, and that if the bill were passed they would become ‘subject to the country Parsons whose charity, God knows, to the Myners will bee as cold as the season is here’.64 The validity of the custom of paying tithe ore needed to be proved by the tithe holder, parish by parish. There were some 20 parishes/liberties in Wirksworth Wapentake and 37 in the High Peak Hundred, although not all would have been significant ore producers by the seventeenth century. There are records of lead ore tithe disputes in over a dozen parishes of the Derbyshire lead field. Whether or not the custom of paying lead ore tithe applied in a particular parish required depositions of evidence by those with detailed local knowledge of past practice. The miners were familiar with the practice of giving oral testimony from their experience of Barmote Courts, and some would have served as Barmote jurors. Time after time, when a tithe holder went to court to establish a right to lead ore tithe, the local miners were prepared to defend their position with self-confidence. Meetings of Barmote members, whether at Barmote Courts or during assessments at the mines, provided a forum for miners to discuss what was going on and develop strategies to oppose the lead ore tithe across the region.

63 Manlove, 64 Quoted

above n 23, ll 87–103. by Slack, above n 37, 65.

The Lead Ore Tithe and the ‘Poor Miners of the Peak’  43 In proving the existence of the custom of payment of a tithe ore in a parish, there were often conflicting accounts. Miners countered testimony of the payment of lead ore tithe with the argument that any ore given or sums paid were paid not as a customary obligation, but voluntarily for prayers to be said: ‘in former tyme wee have given of good will certen lead oare to be prayed for both before our work and after, in respecte we work in p’ll of our lives’.65 Alternatively, they claimed any lead ore given to rectors was given to the persistent clergymen ‘for their quiet and not as duty’, that is, to avoid legal action.66 It is not clear how often courts found such reasons for payment sufficiently persuasive to break a customary pattern of tithing, but in the Matlock and Ashover tithe ore cases the miners’ arguments appear to have prevailed. The ‘poor miners’, as they are invariably described in tithe and other cases, always argued that they could not afford to pay the tithe and that this could lead to them abandoning mining, to the detriment of the Duchy and the king. There were plenty of witnesses willing to testify that only very rarely did they realise 10 per cent net profit. The miners were undoubtedly seeking to draw attention to the political and economic consequences of making lead mining unattractive through too heavy a tax burden. However, customs had to be ‘reasonable’ to be valid, and affordability may have influenced what judges deemed reasonable. Certainly tithe holders used counter-arguments to address the poor miners’ claims. In 1617, John Gell argued in the Bakewell tithe case that if the miners were more thrifty, they could afford to pay a tenth tithe: Are not the laborers & myners for the most part given over to unthriftiness and to be lavish and idle in expence, doe they not often bargaine and sell awai the proffitt of their labors before they have gotten it, to maintain their idle expences to their greate losse, and might not otherwise manie of them growe riche, and most of them live well, and maintaine themselves honestlie.67

Miners’ allegiances were divided during the Civil War and they were more than willing to play political interests off against each other. Slack recounts how the lead ore tithe became a negotiating pawn between Charles I and the parliamentary forces led by Cromwell.68 Control of Derbyshire was important because of the revenue raised from the lead industry and because lead was used in the manufacture of gunmetal and ammunition. One thousand miners joined the king’s force at Uttoxeter, after being recruited by Sir Thomas Bushell, mining engineer and speculator. The miners were offered a sign-on bonus as well as weekly pay and relief from lot and cope. The miners replied to the king’s declaration with a petition in which they declared their willingness to continue paying lot and cope ‘being your Majesties ancient and undoubted right’, but pleaded



65 Kirkham,

above n 53, 16. by Slack, above n 37, 64. 67 Kirkham, above n 53, 10. 68 Slack, above n 37, 33–36. 66 Quoted

44  Barbara A Abraham for the abolition of tithes – ‘the greatest grievance your petitioners have long undergone, is the exacting and taking of Tythes, Tenths, and customary duties of leade-oare, which (your petitioners are informed, by learned Councell) is not due by Law’.69 The king agreed to do away with the lead ore tithe, but lost the war and was executed in 1649. Miners’ Fighting Fund Not only did the miners collectively have the confidence and knowledge to defend themselves against tithe holders’ suits, they were also prepared to set aside funds for legal fees for their defence. This was a major source of annoyance to tithe holders, who expressed irritation that the miners claimed not to be able to afford to pay tithe ore but freely put aside sums to challenge tithe lawsuits. It is hard to avoid the conclusion that the tithe holders’ resentment was at least partly based on class preconceptions: the miners as working men normally would not or could not resort to litigation. In 1615, witnesses for the Leekes complained that the miners, a number of whom were named, had ‘paid money towards the maytenance of this suit’. An example was given of six miners who had contributed £9 10s of their own money, and they were collecting money from other miners. As late as 1691, the miners made a common purse to fight tithes. In the Low Peak parsons’ 1701 Bill, the clergymen claimed that the miners had spent over £12,000 in the previous 80 years in lawsuits.70 There are no unambiguous references to any obligation to pay lead ore tithe in the mining customs, but the customs for Ashford Lordship incorporated an obligation to contribute to the costs of opposing a tithe ore suit: It is ordered and set down by the Jury, That every Miner working and getting Ore within this Lordship, shall pay for every Load he or they get threepence, towards the paying of such Charge as is already spent, and shall hereafter be spent in the Suit, for the Tythe Ore, which is claimed; and the same three-pence shall be paid by him to the Barrmaster, or his Deputy, with the Cope and the same Payment to continue so long as shall be needful for discharging the same Suit.71

Bakewell Tithe Disputes In her 1965 publication Lead Ore Tithe, Kirkham undertook a detailed analysis of the struggles in the 1600s by Sir Francis Leeke (and subsequently his son, also Sir Francis Leeke, who became Lord Deincourt), owner of two-thirds of the

69 BL

Add MS 6677, f52. above n 37, 65. 71 Steer, above n 22, 47. 70 Slack,

The Lead Ore Tithe and the ‘Poor Miners of the Peak’  45 lead ore tithe in the parishes of Bakewell, Tideswell and Hope, and John Gell, who owned the remaining third, to recover their tithes.72 Leeke’s two-thirds had originally been granted to Lenton Abbey by William Peveril, but passed to Leeke following the Dissolution of the Monasteries. The remaining one-third had been in the hands of the Dean and Chapter of Lichfield Cathedral and the Gells had been tithe collectors before, it is presumed, purchasing the rights. The tithe disputes in these three parishes were pursued over a period of more than 15 years through a variety of courts, and during the judicial journey most arguments for and against the liability for tithe were rehearsed by the parties. In 1612, Leeke served a Bill in the Exchequer Court on the Bakewell miners, which eventually led to depositions of evidence at Bakewell in September 1615. Kirkham gives a detailed account of these depositions by miners, Barmasters and tithe gatherers. Witnesses testified that tithes had not been paid for periods of years and that when lead ore was offered, miners ‘lay forth for the tythe the worst of the lead oare’ for when the tithe gatherer came, which ore the latter was glad to take ‘or els they must have gone without’. The deputy Barmaster to Lord Cavendish said he himself had refused to pay tithe except what he laid out. The elderly John Hancock, a mine maintainer and former tithe gatherer, testified that in the 1560s miners refused to pay any tithe at all, and tithe gatherers had been glad to ‘take what they could get … and what the Miners willingly gave them’. A number of witnesses for Leeke said that they believed ore was concealed by miners, and that the king as well as the church did not get their dues. A Barmote juryman said that at measuring the Barmaster measured nine dishes, and then the tenth for tithe, and then measured on to the thirteenth, which he set aside for the lot.73 Witnesses stated that most miners could not afford to pay both lot and the one-tenth tithe on the gross amount of ore mined. The former deputy Barmaster of Ashford Liberty testified: not one of the miners in Twenty weare able to maintain themselves and their families by working in the mines and pay all the duties and costs, not one miner in twenty made 1/10 of clear gain, after deducting all manner of charges.74

The miners argued that Leeke and Gell ought to have their one-tenth tithe ore undressed ‘as it is drawn out of the mines’, and not dressed ore as measured for lot by the Barmaster. But the tithe holders asserted that tithe ore had always been cleaned and dressed at the miners’ charge, allowing 1d a dish for this, and so it had been paid by a deed from the Dean and Chapter of Lichfield dated 1252.75 Despite the miners’ robust testimony, the Court of Exchequer gave a provisional order in 1616 in favour of Leeke. There had been 300 years of litigation



72 Kirkham, 73 ibid

4–6. 74 ibid 11. 75 ibid 12.

above n 53; this section is heavily indebted to Kirkham’s research.

46  Barbara A Abraham between Lenton Abbey and the Dean and Chapter of Lichfield about the original grant of tithes to Lenton, so there would have been written documentation evidencing the past payment of tithe ore, which may have been accorded higher value than the miners’ oral testimony, which covered around 50 years. It is not clear whether the involvement of a member of the aristocracy influenced the outcome. Between 1612 and 1627, the disputes followed a convoluted passage through a succession of courts, with Gell’s case sometimes taking a different route from the Leekes’. In the years following the Court of Exchequer’s 1616 provisional order there were two verdicts at the Court of Common Pleas, a decree at the Exchequer Court, and certificates from the Archbishop of Canterbury and the Lord President of the Council, all concurring that lead ore tithe was due. By November 1620, the suits of both Leeke and Gell were before the Privy Council, which, by order of the king, ordered that the whole cause should be dismissed. In 1621, the Lord Bishop of Lincoln, Lord Keeper of the Great Seal, confirmed Gell’s entitlement to one-third of the tithe and that this applied forever, not only to the defendants, but to all miners in the three parishes, and no further trial would be allowed to the miners. Despite the apparent finality of the rulings by the Privy Council and the Lord Bishop of Lincoln, in 1622 a group of Bakewell miners presented their Bill in the Exchequer Court requesting reversal of the 1616 ruling, using somewhat esoteric arguments. This was countered by Leeke the son, and the Court confirmed the tithe due to him.76 However, the miners were tenacious and their response to the emphatic series of defeats was to propose a Bill in the House of Commons to abolish tithes. This was a bold move by the miners, evidencing their willingness to engage beyond their own locale and take their issues to the highest levels of politics. The Bill was twice read, committed and reported, and thrown out in 1624. A printed account about the Bill says that tithe had been paid from time immemorial in the High Peak, had only been refused lately ‘through the particular interest of powerful miners’ and that decrees for the tithe owners had been given in many courts. But, ‘notwithstanding these Verdicts and Decrees, neither the Leekes nor Gell could get possession of the lead ore tithes’ nor ‘enjoy the same’, so they petitioned the king. The Lordships certified that John Gell had prevailed in his suits at law, and the tithe was established. Later Gell obtained a decree in Chancery, ratified in 1627.77 By 1632, Lord Deincourt was so wearied by the ‘litigious’ miners that he sold his share of the tithe lease to the Countess of Devonshire.78 Further research is needed to establish just how much tithe ore was actually paid over the years, but the Oliverian Survey of the ‘Tythe of Lead Ore in



76 ibid

18–21. 21. 78 Wood, above n 19, 236. 77 ibid

The Lead Ore Tithe and the ‘Poor Miners of the Peak’  47 the Jurisdiction of Bakewell’ taken in April 1650 describes the tithe as ‘of great profit’ and ‘worth more than one thousand pounds’.79 As a postscript, John Gell supported parliamentary forces against the king in the civil war and raised a regiment to defend Derbyshire, using tithes due to him from the High Peak parishes to support the parliamentary cause. Despite being on the winning side, Gell’s conduct during the war in Derbyshire was investigated by a parliamentary committee from 1645. He was accused, inter alia, of tax evasion on business activities and large-scale corruption.80 Wirksworth Tithe Disputes Another protracted tithe dispute took place in the parish of Wirksworth in the 1620s and 1630s, of which Slack gives a detailed account.81 Richard Carrier, Vicar of Wirksworth, petitioned the Privy Council in 1615 to establish his right to lead ore tithe, and also brought a suit in the Court of the Exchequer, leading to a petition by the miners to stay the suit in that court and bring it before the Privy Council, where Leeke and Gell’s suits were being heard. In 1621, Carrier brought a Bill before Chancery naming 300 Wirksworth miners, and a decree in his favour was made in 1622. As a result of the miners’ claim that the 1622 decree only applied to the miners named in the Bill, Carrier brought a new Bill against four named miners in 1628 and obtained another decree in his favour in 1630.82 Other tithe holders, even if they had established their entitlement before the courts, experienced continuing difficulties in collecting the tithes due, but Carrier gained a particular advantage in 1623, when his father-in-law, Thomas Parker, inherited the 31-year lease of the lot and cope and the Barmastership in Wirksworth Wapentake. Carrier and his wife administered Parker’s lease for him and Carrier or his deputies were present, as of right, when ore was measured for the collection of lot. Carrier, his wife and deputy Barmasters were prepared to resort to violence to extract payments, as revealed in a number of court cases, and the miners often met violence with violence. Amongst others, Carrier clashed with the Gells of Hopton, one of the most influential families in the lead trade, and John Gell was equally willing to use violence. Gell, as a tithe holder in Bakewell, Tideswell and Hope, pursued his tithe claims vigorously through the courts, but in Wirksworth, as a mine owner, he owed tithes to Carrier and was as reluctant as the miners to pay them. In 1627, after complaints from miners, the Duchy Court ordered Carrier and his deputies to measure ore on request and without insisting on payment of tithes as a precondition. At the same time,

79 Oliverian Survey of Church Livings, vol 1 1649–50, fs 40–41 (Staffordshire Record Office LD30/4/7/1). 80 Slack, above n 37, 38–39. 81 ibid 26–28; this paragraph is heavily indebted to Slack’s research. 82 Kirkham, above n 53, 22.

48  Barbara A Abraham the Star Chamber, Charles I’s court in London, began investigating allegations that Carrier coerced and intimidated miners and Barmote juries. Pending the outcome of the Star Chamber’s investigation, Carrier was allowed to continue collecting lot and cope, but forbidden to attend Barmote Court meetings until a provisional ruling in 1631 effectively ended Carrier’s career. ‘For the riots & forceable taking of guifter ore’, Carrier, his wife and four others were committed to Fleet Prison and heavily fined.83 In 1676, the notable Brown v Vermuden84 case was heard by the Lord Chancellor. Sir Cornelius Vermuyden/Vermuden came from the Netherlands in 1621 to drain the East Anglian fens, which earned him a knighthood.85 In Derbyshire, he was brought in as a partner in the Dovegang Mine to use his expertise to drain the flooded mine. Thomas Brown, a successor to Richard Carrier as Vicar of Wirksworth, sought to enforce the lead ore tithe established by Carrier, but Vermuyden86 argued that he was not bound because he had not been a party to the earlier suit. The Lord Chancellor held that Vermuyden and all the other mine owners and workers were bound by the original decree even though they were not individually named in the suit, ruling that ‘if the defendant should not be bound, suits of this nature … would be infinite and impossible to be ended’. This case is frequently cited as the first example of a class action, although there has been much discussion about how far the Chancellor’s judgment was a radical legal departure which could justifiably be regarded as the first class action. Marcin suggests that similar groupings of cases, basic versions of the class action, may have occurred previously in lower courts or even in Chancery, but concludes that Brown v Vermuden is justly recognised as the ‘first fully litigated decision sustaining a class action’.87 Yeazell, on the other hand, examines (and ultimately rejects) the contention that the Carrier case was not so much a lawsuit as a declaration of the custom that lead ore tithe was payable in Wirksworth, and that the Chancellor in the Brown case was reasserting that declaration of custom.88 Rector of Ashover Suit Ashover lay in Scarsdale Hundred, outside the king’s field, and had never been governed by the Barmote Court system. There had been conflict over the lead

83 Slack, above n 37, 26–29: Carrier enforced the payment of ‘gifter ore’, a small payment (every 72nd dish) to the Barmaster for measuring the ore. 84 Brown v Vermuden (1676) 1 Ch Cas 272, 22 Eng Rep 796. 85 Slack, above n 37, 30. 86 It is not clear whether this was Sir Cornelius Vermuyden or his son, also Cornelius Vermuyden. 87 RB Marcin, ‘Searching for the Origin of the Class Action’ (1974) 23 Catholic University Law Review 516. 88 SC Yeazell, ‘Group Litigation and Social Context: Toward a History of the Class Action’ (1977) 77 Columbia Law Review 884.

The Lead Ore Tithe and the ‘Poor Miners of the Peak’  49 ore tithe between the clergy and miners of Ashover since the end of the sixteenth century and there are records of tithe disputes heard in Lichfield Diocese Consistory Court from 1602 to 1605. Immanuel Bourne, Rector of Ashover, came to the parish in 1621. He embarked on a series of lawsuits and took a number of tithe cases to Lichfield Consistory Court between 1630 and 1639. In 1657, he brought a claim to establish his right to tithe ore in kind representing a full one-tenth, and to establish that he had not compromised his rights by accepting smaller monetary sums. This led to a case in the Exchequer Court with a series of depositions of witnesses taken at Ashover.89 The examination of the witnesses on the question of the payment of tithe revealed considerable disparity in the way payment had been made in the past, where it had been made at all. Payment had been made in ore, smelted metal or some form of compensation. A servant to John Hancock, Bourne’s predecessor as Rector of Ashover, testified that the miners never paid tithe ore in kind, but most ‘did without compulsion from yeare to yeare compound with the said Mr Hancock’. The parties met on neutral ground in Bakewell in 1659, with the defendants still refusing to pay, and shortly afterwards a jury at Derby found in favour of the miners.90 Bourne was an unpopular, litigious individual. However, his belief in his entitlement to tithes was based on religious conviction, and in 1659 he published A Defence and Justification of Ministers Maintenance by Tythes.91 Rector of Matlock Suits In 1672, the Rector of Matlock, John Chappell, claimed lead ore tithe in a case in the Exchequer Court, but the decision went against him on a technicality (that tithable ore had not been properly defined). Chappell brought a second case92 in 1676, this time in the Court of the Duchy of Lancaster. Chappell claimed tithes had been paid to his predecessors but that the miners refused to pay him, and he cited Leeke, Gell and Carrier’s successful cases. Chappell’s description of tithe gathering in Matlock was contradicted by the evidence given by the miners. Not for the first time, the miners made the point: That the payment of the said duty will bee disadvantage to his Majesty for that itt will discourage myners to get & seeke for leade oare and will not make them any

89 Immanuel Bourne v Samuel Taylor, Thomas Cowper, Edward Hodgkinson (1657) E 134/1657/ Mich33, PRO. 90 This paragraph relies heavily on SR Band, ‘An Ashover Lead Mining Tithe Dispute of the Seventeenth Century’ (1996) 13 Bulletin of PDMHS 53. 91 I Bourne, A Defence and Justification of Ministers Maintenance by Tythes and of Infant Baptism, Humane Learning, and the Sword of the Magistrate (London, John Allen, 1659). 92 Chappell v Spateman, Wigley, Abell, Cokayne, Haslam, Younge, Cocker and Hayward (1675) DL 4/117/8, PRO. Summary available at http://discovery.nationalarchives.gov.uk/details/r/C5920190.

50  Barbara A Abraham profit, oare not being to bee gott but at very greate charge in tymber soughing or drayning the water att greate labour & industry93

The Duchy Court, which might well be expected to be sympathetic to the miners, ruled in their favour. A century later, in 1776, the then Rector of Matlock again brought a Bill into the Duchy Court, but the verdict and costs were again given against him.94 Private Bill by the Parsons of Ashover, Matlock, Darley, Bonsall and Carsington In 1701, the clergy of Ashover, Matlock, Darley, Bonsall and Carsington (including Obadiah Bourne, Rector of Ashover and son of Immanuel Bourne) together presented a Private Bill to Parliament to try to establish their rights to lead ore tithe in ‘An Act for preventing multiplicity of vexacious suits, and for settling the tythes of lead oare in the said County’. This referred somewhat bitterly to the earlier decision against the Rector of Matlock: So also a certain Noble Lord, who upon like particular Issue, was pleased to try for his Impropriate Tyth of Lead Ore, Assizes at Derby; had Justice done to him by a Verdict for his Right; while the succeeding Jury on the very next day, were pleased (for Reasons best known to themselves) to give a Verdict against the Parson’s right.95

Slack recounts the lobbying undertaken by the parsons and their opponents, the miners, of Parliament and of the Derbyshire aristocracy. The miners marshalled their arguments in a robust defence of their position. The parsons tried to emphasise that the Bill would only apply to the lead ore tithe in Derbyshire and not to other minerals in other counties, but it appears that there were worries that, if the Bill passed, a precedent might be set for a wider liability to tithes on minerals. The Committee of the Commons examining the bill represented the mining areas of the country, including Devon and Cornwall, and was dominated by mining interests, and this proved decisive in their rejection of the Bill.96 Lead Ore Tithe in the Eighteenth Century In the late seventeenth century and eighteenth century, the two leading aristocrats of the region, the Dukes of Rutland and Devonshire, expanded their ownership of mining rights across the Peak and thereby changed the power dynamics.



93 Slack,

above n 37, 64. above n 53, 24. 95 Quoted by Band, above n 90, 57. 96 Slack, above n 37, 66. 94 Kirkham,

The Lead Ore Tithe and the ‘Poor Miners of the Peak’  51 Following the Restoration, the Duke of Rutland purchased the manors of Darley and Youlgreave, together with the lease of lead tithes for Youlgreave Parish. The Duke of Devonshire bought the lease of the Duchy’s lot and cope in the king’s field of the High Peak Hundred. Subsequently he acquired from the Earl of Northampton the lease of the lot and cope in the king’s field of Wirksworth Wapentake, giving him control over the entire king’s field, as well as Ashford Lordship and the lead tithes of Bakewell, Hope and Tideswell. The miners had long experience of exploiting conflicting interests within the lead industry for their own benefit, but this concentration of power in the Duke of Devonshire severely reduced their scope for playing off different interests within his sphere of influence.97 In other parishes, tithe disputes continued during the eighteenth century, and it remained difficult for tithe holders, even those with decrees to enforce payment, to collect tithe ore without cooperation from the miners. In 1780, the maintainers of the Wirksworth mines met with the parsons of Wirksworth, Bonsall and Cromford and between them they agreed that instead of one-tenth, the lead ore tithe should be one-twenty-fifth. However, when the working miners heard of this, they refused to pay more than one-fortieth, and the parsons accepted this.98 The liability to lead ore tithe was finally brought to an end by the mining statutes of 1851 and 1852.99 CONCLUSION

The payment of lead ore tithe had no statutory basis, but was payable only by custom in certain parishes in the county of Derbyshire. Likewise, lot was another tax payable in kind on lead ore that was due only according to custom, but, in contrast to the lead ore tithe, the institutions of Barmaster and Barmote Court supported the collection and enforcement of lot and cope. Lot had been collected by custom for at least 700 years before it was finally incorporated in legislation in 1851 and 1852, demonstrating that taxes payable only by custom could be effective without the power of statutory force.

97 This paragraph is heavily indebted to Wood, above n 19, 296–97. 98 Slack, above n 37, 66. 99 Neither the 1851 nor the 1852 Act (above n 32) includes any mention of lead ore tithe, and they both specifically exclude any Custom or Practice other than those mentioned in the Acts. The High Peak Mining Customs and Mineral Courts Act 1851, s 16 reads ‘the Mineral Laws and Customs of that Part of the said Hundred over which the Jurisdiction of the said Great and Small Barmote Courts is hereby declared to extend shall be such as are mentioned and comprised in this Act, and no other alleged Custom or Practice shall be valid’, and the Derbyshire Mining Customs and Mineral Courts Act 1852, s 25 reads ‘the Mineral Laws and Customs of the said Soke and Wapentake, and Manors or Liberties, shall be such as are mentioned and comprised in this Act, and no other alleged Custom or Practice shall be valid’.

52  Barbara A Abraham Taxes are rarely popular, but the lead ore tithe was singularly resented by the miners of the Peak, and was in many ways a tax too far on lead. Witness evidence and economic studies of the lead industry support the miners’ claim that they did not usually realise an overall 10 per cent net profit from their mining activity. Also, by the seventeenth century, the clergy were no longer held in high public esteem, so they, as well as improprietors, were not considered deserving recipients of a punishing tax that impoverished the ‘poor miners’. The lead ore tithe was further hindered by having no collection mechanism. The Barmote Court system served the interests of the Duchy of Lancaster and depended upon free mining being financially attractive so as to generate payments of lot and cope. The unaffordable lead ore tithe was potentially a threat to future mining activity, so the Barmaster and Barmote Courts had no incentive to assist in its collection. Only when the roles of Barmaster and tithe holder were combined was there an effective means of collecting tithe ore. The sixteenth to eighteenth centuries were tumultuous ones in England – politically, culturally and economically – including such momentous occurrences as the Dissolution of the Monasteries, the Civil War, the Age of Enlightenment and the start of the Industrial Revolution. Against this background, the Derbyshire lead industry prospered to the benefit of the local lead miners. The element of financial independence afforded by free mining and their participation in the self-governance of the Barmote system gave the Derbyshire miners a precocious sense of their democratic rights and remarkable self-confidence to fight their battles against the lead ore tithe through the legal and political systems.

3 Receivers-General of Taxes in the Initial Income Tax Period: Illustrated by Henry Austen, Receiver-General for Oxfordshire JOHN AVERY JONES*

ABSTRACT

R

eceivers-General of Taxes for a county already existed for land tax and the assessed taxes when income tax was added to their duties on its introduction. Their role was to collect taxes paid to local Collectors of Taxes, often in notes issued by local banks, and convey it to the Exchequer. In many ways they were by then an anachronism being subject to appointment by patronage, allowing profits to be made by appointing a deputy to do the work and retaining the tax until the end of the quarter and also a permanent balance of £6500. Shortly after the abolition of income tax, the most objectionable features were reformed in 1822. Jane Austen’s banker brother Henry, Receiver-General for Oxfordshire, who was bankrupted when owing £44,445 in taxes, provides an illustration of some of the problems faced by the Exchequer in obtaining payment of the taxes collected. INTRODUCTION

This chapter examines the role of Receivers-General of Taxes (Receivers) in the collection of income tax and other direct taxes in the early nineteenth century.1 * I am grateful to Professor Chantal Stebbings and Richard Thomas for discussions on tax history, and to Professor Jan Fergus for information about Jane Austen and her family. 1 By coincidence, another author, Fiona Martin, Professor of Taxation Law, University of New South Wales, has written about a similar topic in ‘Collection and Administration of Taxes During the Reign of King George III: the Example of Jane Austen’s Brother, Henry, Receiver-General of Taxes for Oxfordshire 1813–1816’ [2019] British Tax Review 651. Although there is some overlap,

54  John Avery Jones The Receiver appointed for each county (or, in some cases, part of a county2) formed the link between the local parish Collectors of Taxes (Collectors) and the Exchequer. The need for such a person was, at least originally, because of the need to collect money from numerous local Collectors based on parishes – there may have been a total 15,000 of them3 – often paid by taxpayers in notes issued by local banks,4 which were not acceptable to the Exchequer, and transmit the funds to the Exchequer in London in acceptable form. Collection of income tax built upon the existing collection methods for land tax and the assessed taxes (on windows, inhabited houses, carriages, menservants, horses, dogs, hair powder and armorial bearings),5 both of which used non-officials as Collectors, who were appointed by the General Commissioners6 for a year for those taxes7 (or by the parish, subject to the District Commissioners’ approval, for the assessed taxes). Collectors were commonly the same persons as the Assessors of Taxes (Assessors),8 and if they did both they received a poundage of 3d in the pound of tax collected.9 They were typically local retired tradesmen, but not always good at keeping accounts.10 I shall use Henry Austen, Jane Austen’s brother, as an illustration of the absurdity of the system of collecting taxes through Receivers. He was Receiver

our approaches are different as my focus is solely on Receivers-General and the information about Henry Austen’s bankruptcy is derived from my archival research. 2 Fourteen counties had two Receivers-General and Yorkshire had four. 3 Minutes of Evidence taken before the Select Committee on Receivers General of Land and Assessed Taxes (HC 1821, 667) (Evidence) 164. The figure was given by a Commissioner of the Board of Excise in connection with evidence whether the excise collector could collect taxes as well. Presumably he had made enquiries about the total number of Collectors of direct taxes. There were, for example, 421 Collectors in one half of Norfolk which had its own Receiver (ibid 45). 4 The Restriction on Cash Payments Act 1797 (37 Geo 3 c 45) removed the Bank of England’s obligation to pay gold for its banknotes and, as Bank of England notes circulated mainly in London, led to country banks issuing their own banknotes. Banking partnerships were then limited to six partners by (1708) 7 Ann c 7. 5 Assessed taxes brought in considerable revenue: in 1815, gross receipts for Great Britain were £6.5m, compared with income tax £14.6m, death duties £1.2m and land tax £1.2m (customs and excise duties and other indirect taxes totalled over £50m): Finance Accounts of Great Britain (HC 1815, 135, 4). 6 General Commissioners for income tax and District Commissioners for other taxes. For convenience they will generally be referred to as Commissioners. To avoid confusion, the Commissioners for the Affairs of Taxes will be referred to as the tax office (see n 32 below) except in references to a particular commissioner. 7 For income tax, the General Commissioners. If no collector was appointed, the Surveyor could act until one was appointed (1803) 43 Geo 3 c 99 (1803 Management), s 18. 8 Assessors made assessments of the assessed taxes and income tax under Sch A and B (both of which related to land) only. 9 (1800) 39 & 40 Geo 3 c 49, s 6. Others receiving a poundage for land tax were Receivers 2d, clerks to the Commissioners 1.5d (increased to 2d if high incidental expenses, otherwise 1d, (1806) 46 Geo 3 c 65 (1806), s 211), so that the maximum total poundage was 7.5d in the pound (3.125%). There was provision for the appointment of Sub-Collectors in Scotland who received 1.5d (45 Geo 3 c 95, s 3) but generally this chapter does not deal with special provisions applying to Scotland. 10 See n 59, below.

Receivers-General of Taxes in the Initial Income Tax Period  55 for Oxfordshire and a partner in the banking partnership of Austen, Maunde and Tilson,11 in which some of the tax was deposited. At the time in question, the first instalment of income tax was due on 5 January 1816, with a grace period of 21 days thereafter, and was paid by taxpayers to the Collectors.12 Around the end of January, Henry received from the Collectors the extremely large sum of about £58,000,13 which, even if everything had gone to plan, the Exchequer would not expect to receive until just before 5 April (apart from the permanent balance of £6500 that was allowed to remain constantly outstanding). He was free to deal with this money as working capital of his bank in the meantime. However, things did not go to plan and he was made bankrupt on 16 March 1816, owing a balance of £44,445 of taxes that he had collected and not paid over, of which £22,743 was in an account in the name of the Receiver in his bank. The bank had been hit by the ending of the Napoleonic War14 as it relied on earning commissions for handling payroll as the army agent of several militia regiments which had dropped significantly in the year to 5 January 1816.15 Further, the provincial partnerships in which Henry was a partner owed debts to the bank, having suffered from a depression in agricultural prices which affected their customers. As the bank could not pay this balance to the Exchequer, it was obliged to stop payments, leading to the bankruptcy of Henry and the other bank partners and the use of writs of extent by the Crown against all of them to claim priority for the Crown’s debt, as will be described.16 It is difficult to conceive of a more inefficient system of tax collection – one resulting in substantial delay in the Exchequer receiving taxes, high risk and substantial cost. At the time, excise was collected far more efficiently.17 Following the report of a Select Committee in 1821, the system of Receivers was indeed substantially reformed in 1822, not long after the abolition of income

11 I shall refer to them as the bank. 12 In practice, not all the half-year’s income tax was paid on time and typically tax came in over eight or nine quarters, with higher amounts in the quarters following the half-yearly due dates and smaller amounts in subsequent quarters representing late payments by taxpayers. The £58,000 would represent payment of land tax, assessed taxes and income tax for earlier periods as well. 13 This was not exceptionally high; quarterly payments by Henry to the Exchequer in 1815 were £38,413, £45,500, £58,000 and £59,903 (extracted from The National Archives (TNA) E 181/39–45). To put this figure in perspective, the following was the annual income of some wealthier Jane Austen characters: £4000 Henry Crawford, £5000 Bingley, £10,000 Darcy and £12,000 Rushworth. After his bankruptcy Henry took Holy Orders, and his first post was curate of Chawton at a stipend of 52 guineas (£54.6) pa. 14 The Battle of Waterloo and the Congress of Vienna were both in June 1815, and the Treaty of Paris, which redrew the boundaries of France following Napoleon’s (second) abdication, was signed on 20 November 1815. 15 In the years to 5 January 1814, 1815 and 1816, the total militia costs were £3,719,114, £2,514,882 and £655,000 respectively (Finance Accounts of Great Britain (HC 1813–14, 77, 231–32; HC 1814–15, 159, 247; HC 1816, 135, 247–48)). 16 See the heading ‘Writs of Extent’ in the text at n 131 below. 17 See the heading ‘Reform of the System for Making Payments to the Exchequer’ in the text following n 165 below.

56  John Avery Jones tax in 1816, for its continuing application to the land and assessed taxes.18 I shall concentrate on the income tax period and merely note how it was later reformed to deal with the worst aspects. After looking at how Receivers were appointed, how they profited by appointing deputy Receivers, their duties and how they were remunerated, I shall examine the remedies available to the Crown in collecting the tax from defaulting Receivers: principally writs of extent. APPOINTMENT OF RECEIVERS

A Receivership was a potentially lucrative appointment that relied on patronage, as did many appointments at the time,19 for which an appointee would pay his predecessor or another person who helped him be appointed. Even the Receiver of (only) assessed taxes for part of Westminster who was removed from office owing a large amount of tax managed to arrange that his successor paid him half the profits of the office, amounting to £700 to £750 pa.20 In another case, the Receiver for Norfolk, who was appointed because he was the Lord Lieutenant’s brother-in-law, paid £500 pa to the son of the local MP for the MP withdrawing his application for the appointment. The MP claimed unconvincingly that it was payment to his son for being willing to be Deputy Receiver (although another deputy was appointed).21 And the Receiver for Dorset paid £1000 pa to the former holder (and, after the abolition of income tax, £400 to his

18 Report of the Select Committee on the Duties of the Receivers General of Land and Assessed Taxes (HC 1821, 630) (Report). The legislation is (1822) 3 Geo 4 c 88 (1822). 19 Both of Henry’s brothers, Francis (Frank) and Charles Austen, benefited from the patronage of Admiral Gambier by gaining promotion. Gambier was a relative of the wife of another brother, James, as recorded in Letters 14–16 in D Le Faye, Jane Austen’s Letters, 4th edn (Oxford, Oxford University Press, 2011) (Letter x). Readers of Mansfield Park will be familiar with William Price’s promotion to Lieutenant through the patronage of Henry Crawford’s uncle, who was an admiral. 20 CR Broughton, Receiver-General of assessed taxes for part of Westminster, was removed with arrears of £52,000 following an extent against him on 15 September 1815 (Return of Extents issued by Court of Exchequer for Recovery of Taxes and Debts (HC 1815–16 (1916) 193, 4). He assisted in some way the appointment of his successor Mr SN Barber, to whom he had been introduced by a Mr Wilkin, Receiver-General of the ‘shilling and sixpenny duty’ (on salaries and pensions), who also seems to have some connection with the tax office, for which Barber paid Broughton half of the profits of the office, amounting to £700 to £750 pa. The story of the appointment is told by both of them in their evidence to the Committee (Evidence, above n 3, 64, 72). 21 Reduced to £250 following the abolition of income tax. The appointee, the person who was appointed his deputy and the MP all gave evidence to the Select Committee. The appointee said that he agreed to make the payment to the MP’s son for the MP relinquishing his claims for the appointment (Evidence, above n 3, 80). The Deputy supported this statement (ibid 47). The MP said that he wanted to secure the office of Receiver for his son and never had any intention of holding the office of Receiver for himself. But the Lord Lieutenant to whom he applied said that he wanted to procure the office for his brother-in-law, so he then asked if his son could be appointed deputy (ibid 82). The MP’s version is unconvincing. If a payment were to be made for appointment as a deputy it would be made to the Receiver not by the Receiver to someone else.

Receivers-General of Taxes in the Initial Income Tax Period  57 widow after his death) for resigning so that a new appointment could be made.22 Thus, out of the Receivers for nine counties giving evidence to the Select Committee, three of them continued to make payments for patronage, and there may have been others where a payment was made at the beginning. The Committee said that they were satisfied ‘that the Government were not in any case cognizant [of] these transactions’,23 although it turned a blind eye to them. Payment for patronage was an accepted part of life at the time. Henry Austen was initially appointed Deputy Receiver for Oxfordshire by the Receiver, The Hon John Spencer, son of Henry’s patron, Oxford contemporary and Lieutenant-Colonel of the Oxfordshire militia regiment in which Henry had served, Lord Charles Spencer, who was the brother of the 4th Duke of Marlborough.24 Henry was subsequently appointed Receiver on 24 July 1813 upon John Spencer fleeing the country to evade his creditors (including Henry for £650025). Henry made two loans under seal of £2000 each in March 1810 and April 1813 to Lord Charles Spencer repayable when required, which by their dates might be related to his appointment as Deputy26 and then Receiver. It is interesting that the loans to Lord Charles were under seal, as this suggests that they cannot have been loans that were never intended to be repaid: having a document under seal incurred stamp duty of £4, so why go to the expense unnecessarily?27 Even if the loans were related to Henry’s appointments, there was nothing unusual about them. Following Henry’s bankruptcy in March 1816, his successor as Receiver was John Henry Tilson,28 the elder brother of his (now also bankrupt) former banking partner James Tilson, who, like Lord Charles Spencer, was Lieutenant-Colonel of the Oxfordshire militia. The Oxfordshire Receivership therefore remained within a small circle, regardless of whatever happened to the holders of the office.

22 Evidence, above n 3, 94. After the abolition of income tax, the profits were £696 pa (ibid 93), out of which he was paying more than half to the former holder’s widow of £400 pa. 23 Report, above n 18, 5. 24 See www.histparl.ac.uk/volume/1790-1820/member/spencer-charles-1740-1820 for an obituary. John Spencer’s appointment as Receiver was obtained through Pitt’s patronage. 25 This may be in connection with the Receiver’s permanent balance (see the heading ‘The Duties of the Receiver’ in the text at n 34 below). 26 There is no official record of when Henry became Deputy because there was no direct relationship between the Deputy and the Crown. It must have been before 30 April 1811, when Jane Austen gives Henry’s address in Oxford in a letter to their sister Cassandra (Letter 72, above n 19), possibly because she wanted to write to congratulate him on the appointment, although the appointment could have been closer to the date of the first loan and she wanted his address for another reason. The timing of the letter was such that Henry would have been in Oxfordshire collecting the assessed taxes shortly after the end of the 21-day grace period for tax payments after 5 April 1811. See also the text around n 80 below. 27 As a bond: 48 Geo 3 c 149, sch 1. 28 Account of Appointments under Board of Taxes, 1816–17 (HC 1817, 292). He must have been a model Receiver, as a much later Act ((1826) 7 Geo 4 c 28) released certain of his estates from the Crown’s security so that he could sell them. He is mentioned in Evidence, above n 3, 139 as unusually even requiring security from bankers to the dismay of the banker giving evidence. He was obviously not taking any chances.

58  John Avery Jones DEPUTY RECEIVERS

It was common for the Receiver to appoint a Deputy to do all the work, for which the Receiver paid him a fee, with the Receiver keeping a profit at the expense of the Exchequer without doing any work other than swearing the correctness of the accounts.29 Deputies were appointed by 38 of the 66 Receivers in England and Wales at the time of the Select Committee in 1821, and there is no reason to suppose that it was different before the abolition of income tax. The Deputy was under no direct obligation to the Crown, so all the risk remained with the Receiver. He was appointed by the Receiver by a document under seal and the Commissioners were given notice of the appointment; the tax office would also be aware of his name.30 Sometimes the Deputy gave security to the Receiver to protect him, and in one case (the Eastern part of Somerset) provided the sureties for the Receiver to save creating a chain of security. In another case (Staffordshire), the Deputy joined in the bond with the Receiver.31 There was provision in the income tax legislation for the appointment of Deputy Receivers for towns and cities at the request of the General Commissioners and with the approval of the tax office. The Deputy gave security to the Receiver and accounted to him weekly. The remuneration was agreed between the General Commissioners with the approval of the tax office,32 but was not to exceed 1.5d in the pound (0.625 per cent).33 There is no evidence that Henry Austen appointed such a Deputy for the City of Oxford. When he was Deputy Receiver, he was such for the whole county under the normal provision for Deputies, but there is no information about how much he was paid. The Select Committee recommended the abolition of Deputies; this was adopted by the subsequent legislation in 1822.34

29 Evidence, above n 3, 138. 30 ibid 5, 15, 16; 1803 Management, above n 7, s 48. 31 Evidence, above n 3, 138; but see n 114 below. 32 The origins of the Commissioners for the Affairs of Taxes (referred to herein as the tax office) can be traced back to the Agents for Taxes, who were established in 1665 and later called the Commissioners for Taxes. In 1711 they were reconstituted as the Office for Hides, but regained their old title in 1718 when the hide duties were discontinued. They then dealt with the land tax and the assessed taxes. In 1785 Pitt transferred to them a miscellaneous collection of duties upon carriages, wagons and horses from the Stamp and Excise Offices (25 Geo 3 c 47). In addition came Pelham’s window tax, Pitt’s shop tax, commutation duty and subsequent additions to the assessed taxes, plus income tax (information originally provided by John Jeffrey-Cook). They merged with the Board of Stamps (dating from 1694) to become the Commissioners of Stamps and Taxes in 1834 (4 & 5 Will IV c 60 s 8). They subsequently merged with the Board of Excise in 1849 (12 Vict c 1) to become the Board of Inland Revenue (the Board of Excise were demerged and amalgamated with the Board of Customs in 1908), and the Boards of Inland Revenue and of Customs and Excise merged in 2005 (Commissioners for Revenue and Customs Act 2005) to become Her Majesty’s Revenue and Customs. 33 1806, above n 9, s 145. There is a form of oath for the deputy not to disclose information in sch F. 34 Report, above n 18, 7; 1822, above n 18, s 2, No 1, r 3.

Receivers-General of Taxes in the Initial Income Tax Period  59 THE DUTIES OF THE RECEIVER

Until the abolition of income tax in 1816, it was due in January and July, the assessed taxes in April and October,35 and the land tax quarterly. Taxpayers were expected to pay their taxes to the Collectors within 21 days after each quarter day. The Collectors would not hold money for long, but might nevertheless deposit it with a bank, even though bankers did not pay interest for periods of about 14 days.36 The Receivers made quarterly visits to their county shortly after the end of the 21 days, accompanied by two other persons for security,37 at points within 10 miles of several Collectors’ residences.38 This greatly reduced the number of collection points required for the 421 Collectors in half of Norfolk to 10, although going round them all took 11 days each quarter, a total of 44 days and 852 miles in a year.39 There was, as might be expected, a wide variation – dependent on the nature of the county – in the time taken to visit all the collection points in the fairly small sample of Receivers from seven counties (plus Westminster and Middlesex, which did not involve visits as the Collectors came to them) giving evidence to the Select Committee. The half of Norfolk was the highest and Bedford was the lowest, taking four days each quarter to visit three collection points (covering 148 Collectors), a total of 500 miles in a

35 (1808) 48 Geo 3 c 141 (1808) No III, Third (for payment to the Collectors) and No V, First (for payment by the Collectors to the Receiver); the Act took effect from 31 December 1808. Previously the assessed taxes were collected quarterly (44 Geo 3 c 161, s 23) and the 1808 changes were as a result of income tax. It seems that, following the abolition of income tax, quarterly collection still applied in some districts (Report, above n 18, 4). The 1808 Act was described by the First Commissioner for the Affairs of Taxes, William Lowndes, as ‘a kind of temporary act, but which never having been repealed, it is still the law, and under that law the receipts are half-yearly: Evidence, above n 3, 15. Presumably this was because income tax had been repealed by then and so there were no quarterly payments (except for land tax) due in January and July, although the Act also applied to the assessed taxes, but not land tax. The October quarter date was 10 (rather than 5) October, this being Michaelmas day (29 September) adjusted for the 11 days by the Calendar (New Style) Act 1750 (24 Geo 2 c 23): 1808 No III, Third and No V, First. These provisions of the 1808 Act did not apply to Scotland (s 6); I have not researched provisions applying to Scotland. 36 Evidence, above n 3, 132. The Commissioners could require the Collector to give security for the assessed taxes (1803 Management, above n 7, s 13), but it seems that this occurred only if they were appointed by the parish with the disapproval of the Commissioners, or in London (Report, above n 18, 4; Evidence, above n 3, 11); there was no power to demand security for land tax or income tax. 37 1803 Management, above n 7, s 58, otherwise if there was a loss they could not claim against the Hundred. 38 1803 Management, above n 7, s 50. 39 Evidence, above n 3, 45. One suspects that the large distances for half of Norfolk were caused by the Deputy Receiver, a Norwich banker, making separate visits from Norwich rather than staying away on his rounds. The Cambridge Receiver, C Pemberton, also took 10 days, presumably travelling to and from Cambridge where he lived, plus three days going to London, but he only went twice a year (ibid 60). The Receiver for Dorset, who received similar poundage to Oxfordshire and with the counties having a similar area, took 10 days to go round the smaller number of nine collection points. The poundage and remuneration for the year to 4 January 1816 for Dorset and Oxfordshire respectively was £186 and £195 (land tax), £390 and £444 (assessed taxes) and £250 and £270 (income tax); and the areas of the counties are 2653 and 2605 km2.

60  John Avery Jones year (including one trip to London).40 The Receiver gave the Collector a written receipt which was exempt from stamp duty.41 Receivers were expected to transmit the amount collected to the Exchequer by the end of each quarter, but were permitted to retain a permanent balance of £6500 (later reduced to £4000 after the abolition of income tax); with 66 Receivers, this meant that the Exchequer was permanently short of £429,000.42 For example, for the quarter 5 January to 5 April, the Receiver would do his rounds at the end of January at the end of the 21-day grace period. By about 15 March he would send in a sworn quarterly account of what he had received,43 and subsequently a supplementary account if he received anything else; the tax office would receive copies of these. The Exchequer would direct that the amount in hand (other than the permanent balance) be paid by 5 April.44 The legislation applying to both the assessed taxes and income tax required the Receiver to pay the sums received to the Exchequer ‘as soon after the Receipt thereof as conveniently can be done, and at such times and in such Manner as shall be directed under the Authority of this Act’, which was the Treasury.45 The ‘as soon … as conveniently’ seems to have been ignored in practice, or at least interpreted as meaning within six weeks (and in practice rather longer, until two or three days before the end of the quarter46). The tax office was also informed weekly of the amounts paid to the Exchequer.47 The Receiver would also make some payments out of the tax collected, or allow the deduction of them, including the remuneration of the Clerk to the Commissioners,48 payments to Surveyors (the forerunner of the Inspector,49 who

40 Only in the April and October quarters (in which the due date for assessed taxes fell), income tax having been abolished; two days in the other quarters. He would probably also have spent 5 days in the other quarters when income tax was in force (Evidence, above n 3, 35, 37, 38). 41 1808, above n 35, No V, First; (1813) 53 Geo 3 c 142, s 8 (land tax). The normal stamp duty on receipts was between 2d and 10s depending on the amount: (1815) 55 Geo 3 c 184. 42 This can be compared to the tax yield in n 5 above. 43 (1805) 45 Geo 3 c 71 preamble; Report, above n 18, 6. 44 Evidence, above n 3, 146, 157. He also informed the tax office of the amount four or five days before the end of the quarter (ibid 6). It seems odd that the Exchequer called on Henry’s bank to collect money as early as 15 March 1816. It is possible that they had not received a satisfactory answer to how much would be paid by 5 April. 45 1803 Management, above n 7, ss 54, 61. 46 In the quarter ended 5 April, if the Receiver collected taxes during the last week of January (5 January plus 21 days of grace takes one to 26 January) and the tax must be paid to the Exchequer by 5 April. 47 Evidence, above n 3, 6. 48 ibid 158. 49 An Inspector superintended around 14 or 15 Surveyors (ibid 19). There were 17 Inspectors at the time of Lowndes’ evidence (ibid 167). The 1808 Act, above n 35, in addition authorised the appointment by the Treasury of 10 Inspectors General for England and Wales and set out their duties (s 5); there were three at the time of the Committee, most of whom were barristers (ibid 168). Their powers extended to the Assessor, Collector and Clerk to the Commissioners, whose failures they reported to the Commissioners for their decision, and they could require the Commissioners to state a case for determination by the Court of Exchequer. This was the normal method of appealing (see n 62 below), which was later adopted for income tax appeals from the Commissioners to the courts,

Receivers-General of Taxes in the Initial Income Tax Period  61 was then the Surveyor’s overseer, and an official of the tax office) on their 10 per cent share of surcharges they imposed50 and under a number of other statutory provisions.51 At the time of payment, the Collectors gave the Receiver a detailed schedule of defaulters. This also went to the Commissioners within three days with an affidavit that the sums had been demanded and were unpaid.52 The schedule of defaulters remained with the Commissioners for 40 days, during which time they had the power to issue warrants to collect the unpaid taxes; they could extend the 40 days on certifying to the tax office that there was a reasonable cause for non-payment and that they had reason to believe that payment would be made in a reasonable time.53 In practice, this produced payment in four-fifths of cases as it avoided the cost of the next process.54 The schedule of those remaining outstanding was then sent to the Receiver, who sent it via the tax office to the Exchequer.55 When transmitted to the court, the schedule was the authority for the Barons of the Exchequer to issue process against the defaulter as a debt to the Crown on record.56 The other reason why a Receiver did not receive the tax was that the Collector had received it but was in arrears in paying it over (these will be referred to as arrears to distinguish them from taxpayer defaulters). In these circumstances, the Commissioners had extremely wide powers to issue process against Collectors, including the power to imprison them and seize their assets without

initially by the Queen’s Remembrancer Act 1859 for appeals to the Court of Exchequer, and then to the High Court in 1874: C&IR Act 1874, s 9 (extended to the Court of Appeal and House of Lords by C&IR Act 1878, s 15). 50 1806, above n 9, s 172. The Surveyor made a surcharge on discovering that the taxpayer had been omitted to be charged, had been underrated by an assessment or had not made a return. He certified the default and the full amount of duty to the Commissioners, who were required to sign and allow the surcharge and to correct the original assessment, from which the Surveyor received 10%. The taxpayer had a right of appeal. If the surcharge was confirmed the penalty was triple the tax ((1810) 50 Geo 3 c 105, r 20). If the Surveyor failed to attend the appeal, the taxpayer was entitled to compensation, which was fixed by the Commissioners and paid by the Receiver out of the taxes collected (1808, above n 35, s 4). 51 These include valuation costs of determining the annual value where incurred through no fault of the taxpayer (1806, above n 9, s 95), abatement of Sch D profits (s 139), allowances and exemptions (s 180, Seventh), repayment of double assessments (s 197), repayment of errors (s 206) and charitable exemptions allowed by the Special Commissioners (s 207). Evidence, above n 3, 21. 52 1808, above n 35, No V, First; 1803 Management, above n 7, ss 39, 42, 44 (the oath included particulars of those who had become bankrupt), 45. Although not clear from the legislation, the Surveyor received the detailed schedule of defaulters, which he sent to the Inspector (Evidence, above n 3, 158). If no schedule was delivered, the Receiver gave the Court a certificate of the amount and Collector concerned which was authority for the Court to issue process by way of distringas ordering the sheriff to distrain on the Collector’s goods to secure compliance (1808, above n 35, No V, Third). 53 1808, above n 35, No V, Second. 54 Report, above n 18, 6; Evidence, above n 3, 33. 55 Report, above n 18, 4; 1806, above n 9, s 144. 56 1808, above n 35, No V, Second. Being a debt on record, it needed no further proof.

62  John Avery Jones any judicial control.57 The tax office frequently encouraged the Commissioners to take this action.58 A Birmingham banker gave evidence to the Committee that Collectors were sometimes illiterate and unable to keep proper accounts, leading to mistakes and much correspondence.59 A Somerset banker, who was also a magistrate and General Commissioner, said ‘I know the difficulty there is of getting the money into the hands of the receiver general’. This seems to relate to payments by the Collector to the Receiver rather than payments by taxpayers to the Collector, as he explained that the presence of a magistrate or Commissioner attending the Receiver, or if the Receiver was a person of influence and consequence, ‘frequently hastened’ the collection of the taxes.60 He was quoting the words of the legislation that the Receiver was ‘hereby empowered and required to call upon and to hasten the Collectors to make the Payments of all Sums received by them of such Duties as aforesaid’; and in default the Commissioners could levy distress on the Collector and sell his goods.61 Effective checks were in place at each stage of the collection process. The Commissioners made the assessments and made two copies, one for the Collector as his authority to collect the taxes and the other for the Surveyor, who therefore knew how much the Collector should collect.62 The Surveyor attended the Receiver when he was collecting and reported the amount collected from the Collectors and the details of defaulters to the Inspector, who sent it to the tax office, which accordingly knew the amounts collected and the defaulters, and could keep a check on the Receiver as well.63 The legislation also directed the Surveyor to assist the Receiver in adjusting the accounts of payment and defaulters, and the Collector in making out the schedules of defaulters, which meant that the Surveyor was kept informed.64 The possibility of collusion existed between the Collector and Surveyor to suppress the sum actually collected, which should

57 Evidence, above n 3, 9, 10. Their power is in 1803 Management, above n 7, s 52, which is similar to the power of the Crown to apply for a writ of extent in the Court of Exchequer (see the heading ‘Writs of Extent’ in the text at n 131 below) but without any judicial intervention applicable to the Commissioners’ power. The power survived in ITA 1918, s 179 and seems to have been dropped as obsolete in the 1952 consolidation. 58 Evidence, above n 3, 9. As a result, the tax outstanding had been reduced from an average of £70,000 pa to under £5000 (this was after the abolition of income tax). 59 ibid 135–36. 60 ibid 125, although another banker had no experience of this (ibid 138). An Inspector and a Surveyor both agreed that a Receiver could hasten collection (ibid 154). 61 1803 Management, above n 7, s 49. 62 1803 Management, above n 7, s 12; Evidence, above n 3, 11. This is the first that the Surveyor knows about the assessment. The Surveyor could declare dissatisfaction with the assessment by the Additional Commissioners and require an appeal by way of case stated to the Commissioners against it: 1806, above n 9, s 120, also s 122 (additional Commissioners’ power to refer questions to the Commissioners before making an assessment). The taxpayer could also appeal the assessment to the Commissioners by giving notice to the Surveyor: s 125. 63 1808, above n 35, No V, Fourth. Evidence, above n 3, 17, 20, 21. 64 1808, above n 35, No V, Fourth. Strictly, the Surveyors did not have any jurisdiction over land tax but, in practice, the system of control was similar.

Receivers-General of Taxes in the Initial Income Tax Period  63 be prevented by the Commissioners’ checks;65 and also between the Surveyor and the Receiver so that the whole sum may not be paid to the Exchequer.66 Since the Surveyor was involved in both possible methods of collusion, the involvement of the Inspector overseeing the Surveyor was a further safeguard. At the end of the year, the Commissioners made two further copies of the assessments on parchment, being more durable, one for the Receiver and the other for the tax office, which passed a copy to the King’s Remembrancer.67 The Receiver filed his copy of the assessments with the auditor’s office when passing the accounts within two years (one year for land tax68) after the end of the year of assessment, together with the schedules of defaulters provided by the Commissioners and the affidavits by the Collectors for the causes of non-payment, whether insolvency or another cause; this absolved the parish. In addition, a further schedule was filed if there were arrears of tax received by the Collector but not paid to the Receiver, for which the parish remained answerable.69 The balance on the King’s Remembrancer’s copy should be the same as the Receiver’s tally receipts (it is astonishing that the Exchequer were still issuing tally sticks as receipts for taxes until 182670), plus the schedules of defaulters and arrears. As William Lowndes, the First Commissioner for the Affairs of Taxes, said in evidence: ‘I have no hesitation in saying, that if the taxoffice will pursue the course now adopted, the receivers general can never cheat the country of one farthing.’71 The roll, which is a summary of the above, was sworn to before a Baron of the Exchequer (ie a Judge of the Court of Exchequer).72 It then went to the King’s Remembrancer’s office and thence to the Clerk of the Pipe,73 who issued the quietus upon it, which was the authority for the King’s Remembrancer to release the Receiver’s bond (see below). This occurred about three months after the Receiver swearing the account.74 Horatio Leggatt (the Solicitor for the 65 Evidence, above n 3, 166 gives an example where the Commissioners and their clerk did not check on the Surveyor properly. 66 ibid 159, 165. 67 1803 Management, above n 7, s 46 as amended by (1805) 45 Geo 3 c 71, s 2; 1806, above n 9, s 144 (Sch D); Report, above n 18, 3. The post of King’s (or Queen’s) Remembrancer was founded by Henry II in 1154 and still exists, being held by the Senior Master of the Queen’s Bench Division. 68 If the receiver was late in filing his land tax return for good cause, the tax office could authorise the Receiver to charge the parish ((1805) 45 Geo 3 c 71, s 4). 69 1803 Management, above n 7, s 45; 1806, above n 9, ss 189–90; Evidence, above n 3, 9. 70 See the Appendix for an example of one issued in 1820 to GR Minshull, Receiver for Bucks (Evidence 55). Burning tally sticks after their abolition in 1826 caused the fire that destroyed the Palace of Westminster in 1834. 71 Evidence, above n 3, 21. 72 ibid 27. 73 The pipe rolls are the financial records of the Exchequer and are so called because of the pipe shape of the original parchments on which the records were written. The records are complete from the 12th century to 1833, when the Pipe Office was abolished. 74 Evidence, above n 3, 28. In practice, this seems to have taken longer. Leggatt, giving evidence to the Select Committee in April 1821, said that all the quietuses for 1817 were ready but in some cases had not been applied for.

64  John Avery Jones Affairs of Taxes)75 saw no reason for the account to go through these offices76 and the Select Committee recommended that the audit should be conducted by the tax office rather than the Exchequer.77 The legislation continued the role of the Auditor but removed the involvement of the other departments.78 Henry Austen made quarterly visits to Oxfordshire, going to 17 collection areas, which included the university as well as the City of Oxford.79 Evidence of his being in Oxfordshire around the end of the 21-day grace period after the tax quarter days can be found in Jane Austen’s letters. These include: Letter 71 of 25 April 1811, when he was Deputy Receiver ‘Henry leaves Town on Sunday afternoon’ [28 April 1811], with Letter 72 giving his address in Oxford; Letter 80 of 4 February 1813, in which she says that she had a letter from Henry written on Sunday [31 January] from Oxford;80 and a diary kept by one of his nieces, saying that on Sunday 30 April 1815 ‘Uncle H[enry] set off early for Oxfordshire’.81 All these dates are just after the 21-day grace period following the 5 January and 5 April due dates. And in Letter 95 of 3 November 1813, by which time he was Receiver, when he was recovering from an illness Jane Austen wrote that she hoped that the weather would enable him to go out every day that week ‘as the likeliest way of making him equal to what he plans for the next. – If he is tolerably well, the going into Oxfordshire will make him better, by making him happier.’ He would normally go near the beginning of November,82 but it seems that because of illness he postponed this until about Sunday, 7 November 1813. There does not appear to be any record of how long his visits took, but there is a slight indication, as Jane Austen records in Letter 82, written on Tuesday, 14 February 1813, that ‘Henry was to be in Town again last Tuesday [9 February]’, suggesting that if he had arrived in Oxford just before 31 January

75 Booth & Leggatt were in practice in Cavendish Street, but Leggatt was paid a fixed salary and had no interest in fees charged to the other party, which went to the department; he did not carry on any other practice as a solicitor (Evidence, above n 3, 33), which makes it strange that he was in a partnership. The Solicitor of Stamps was first appointed in 1829 and became the Solicitor of Inland Revenue in 1849 when the Board of Inland Revenue was established. 76 Evidence, above n 3, 30. 77 Report, above n 18, 8. 78 1822, above n 18, ss 6, 9. 79 The areas, which largely corresponded to the Hundreds, were: Oxford University, City of Oxford, Ploughley, Banbury North, Bloxham, Banbury Boro., Chadlington & Banbury South, Wootton, Bampton, Bullingdon, Thame, Dorchester, Ewelme, Lewknor, Pirton [now Pyrton], Binfield, Langtee & Henley and Woodstock Boro. 80 Letters, above n 19. However, Letter 98 of 5–8 March 1814, which says that ‘Henry finds he cannot set off for Oxfordshire before the Wednesy which will be ye 23d’, does not fit in with tax payment dates, so he was presumably visiting someone. 81 D Le Faye, A Chronology of Jane Austen and her Family (Cambridge, Cambridge University Press, 2013) gives that date, quoting Fanny Knight’s pocket books. Fanny Knight was the eldest child of Jane and Henry Austen’s brother Edward, who had been adopted by his distant cousin Thomas Knight, from whom he inherited the Steventon, Chawton and Godmersham estates, and he took the name Knight in 1812. 82 21 days after 10 October: for the reason for this date, see n 35 above.

Receivers-General of Taxes in the Initial Income Tax Period  65 (as in Letter 80 above) and left on 9 February, he had spent seven working days (including Saturday) collecting tax. However, it is possible that he arrived earlier than 31 January, as 27 January was the earliest date he could start his collection, although the other references above that he went to Oxfordshire on 28 and 30 April (both Sundays) in different years suggest that sometimes he did not arrive immediately after the end of the 21-day grace period; there is no information about his movements before 31 January 1813.83 The Receiver for Dorset, who received similar poundage to Oxfordshire for a similar area, took 10 days to go round nine collection points and travelled 120 miles each quarter.84 The best one can say is that it is likely to have taken Henry 7–10 days. REMUNERATION OF RECEIVERS

Receivers were paid a poundage of 2d (0.83 per cent) in the pound for land tax and 1.5d (0.625 per cent) for assessed taxes, and a fixed amount, typically £200 to £300, depending on the size of the county’s receipts, as an ‘allowance for expenses’ for income tax.85 As has been mentioned, Receivers were allowed to retain a permanent balance of £6500 and the interest they earned on this. They retained the tax collected for six weeks, sometimes making two or three payments to the Exchequer in the course of a quarter.86 In practice, it seems that they mostly paid the money over two or three days before the end of the quarter in which they received it.87 They paid significant expenses out of their poundage, including their clerk (£60 to £10088), the fees for the bonds discussed below (£70 plus £25 stamp duty), postage89 and stationery (£20 to £30), the fees and expenses of audit and passing the accounts by a Baron of the Court of

83 One further clue to his Oxfordshire visits being about seven days is Letter 128, above n 19, of 26 November 1815, where Jane Austen writes to her sister Cassandra ‘when he goes to Oxford I should go home & have nearly a week of you before you take my place’. This might be his 31 October visit delayed because of his illness, now proposed for 18 December, which seems to have taken place slightly earlier as Jane Austen records in Letter 133 that she is leaving town early on Saturday (16 December 1815). 84 Evidence, above n 3, 92, which is after the abolition of income tax but the same journeys were required for the assessed taxes, so this should not make any difference. The poundage and remuneration for the year to 4 January 1816 for Dorset and Oxfordshire respectively was £186 and £195 (land tax), £390 and £444 (assessed taxes), and £250 and £270 (income tax); and the areas of the counties are 2653 and 2605 km2. 85 Account of Poundage received by Collectors of Land Tax, and Balances in hands of Receivers General in 1815 (HC 1817, 269). Receivers in Wales, Monmouth, Cumberland and Westmorland received 3d in the pound ‘conduct money’. Report, above n 18, 4–5. I have not found the authority for this allowance in legislation. 86 Evidence, above n 3, 7. 87 ibid 22. 88 In one case £150: ibid 47. 89 Postage was at the time paid by the recipient, but there would be no cost for post from the tax office.

66  John Avery Jones Exchequer within two years after the end of the tax year (£50),90 fees on paying money into the Exchequer, including tallies (£4 to £11), and banker’s commission (£5 to £1091).92 These total at least £234. In addition, there was travel, which one Receiver quantified as 2s per mile and 2 guineas for a night in an inn.93 The range of a Receiver’s profits in different counties contained in the evidence to the Select Committee was extremely wide. The Committee’s Report said that the gross profit was between £261 and £2577 and the net profit was between £65 and £2082, which the Committee found inconclusive, being based on a small sample; these would have been higher when income tax was payable.94 If one excludes Middlesex and Westminster as being atypical because the Collectors travelled to the Receiver rather than the other way round, and also because there were separate Receivers of land tax and assessed taxes, the evidence to the Committee showed that for many counties the poundage was barely sufficient to pay the expenses; counties earning higher poundage did better as the expenses were similar.95 What mattered more was the ability to earn interest on the permanent balance and current balances. An amount similar to the poundage could be earned on the permanent balance; at 4 per cent this would amount to £260, and some Receivers made more than this.96 Matthew Winter, the Secretary to the Commissioners for the Affairs of Taxes, who took the lead in proposing reforms to the Committee, estimated that at 3 per cent

90 According to Leggatt’s evidence, the total fees were £115, but of these £73 are paid out of public funds: Evidence, above n 3, 28. This includes £37 for assessed taxes less £15 paid by the public (originally because the land tax poundage was low and the Receiver was not expected to pay the whole of the fee for, originally, the window tax in addition). There must be other fees involved as the total is about £50 (ibid 14, 90); one Receiver included a 10 guineas gratuity to the auditor (ibid 99). 91 A 5 guineas gratuity to bankers’ clerks in two cases (Evidence, above n 3, 39 and 56) and £10 in another (at 53). It was £43 in one case (at 90). 92 ibid 28, 39, 47, 53, 56, 63, 90, 93, 99. 93 ibid 39. 94 These figures do not appear to relate to the evidence given to the Committee (see nn 95–99 below), and may have come from another list, except that the £2082 can be identified as Middlesex for assessed taxes (Report, above n 18, 99). There were some very small Receivers’ areas, such as the Isle of Wight. 95 The figures for poundage and expenses where there was no deputy were: Bedford £363 and £307 (Evidence, above n 3, 39); half of Berkshire £389 and £300 (ibid 51, 53); Buckinghamshire £315 and £273 (ibid 56); Cambridge £590 and £273 (ibid 60); and Westminster (part, assessed taxes only) £940 and £218 (ibid 63, although he did not make any charge for office costs of his own bank estimated at £100). Where there was a deputy, the figures were: half of Norfolk £816 (Receiver) and £403 (Deputy) (ibid 47); Eastern part of Somerset £1151 and £591 (ibid 90, Receiver, the Deputy would also have unspecified expenses); and Dorset £696 (ibid 93, out of which he paid £400 to the widow of his predecessor) and £300 (plus any interest in excess of £300 on the permanent balance) plus unspecified expenses. 96 Interest on the permanent balance: Bedford mostly invested in 3% Consols, although he also mentioned £300 pa (Evidence, above n 3, 36); Buckinghamshire £300 (ibid 56); half of Berkshire £100 (on £2000 of it as he left funds with bankers) (ibid 52); Cambridge £240 (ibid 60); half of Norfolk (for the Deputy, a banker) £270 (at 4.5%, out of which the Receiver was paid 3.5% (£210)); the evidence was based on a permanent balance of £6000) (ibid 47–48); Eastern part of Somerset 4%, £160 (ibid 90); Dorset 4%, £256 (ibid 93); and Westminster (a banker, assessed taxes only) 4%, assumed £240 (ibid 63). This can be compared to the poundage in n 95.

Receivers-General of Taxes in the Initial Income Tax Period  67 the Exchequer would save £10,785 if Receivers were not permitted to retain the permanent balance and £72,965 if they were not permitted to retain the balance during the quarter.97 Treasury Bills provided an uncertain return for investment of the current balances as all the Receivers were buying and selling them in the market at the same time, which moved the price against them on both occasions, one Receiver saying that he had purchased them at a 9s premium and sold at a 2s discount.98 By 1820, it had become difficult to earn significant sums on the current balances; the only Receivers who did so were bankers, nearly all of whom gave a figure for a return of 4 per cent.99 The current balances were an attraction to a banker, who could use them as working capital. Ward noted that by the end of the eighteenth century ‘bankers were the largest single group among the receivers, their appointment testifying both to the increased importance of their profession, and to the greater public confidence in it’.100 However, no bankers (or persons in trade) were appointed Receivers after 19 July 1816, no doubt to prevent the risk associated with using the tax as working capital; this may have been as a result of Henry Austen’s bankruptcy (and perhaps that of other bankers).101 The rise in banking also made Receivers less necessary, as will be seen below. The total financial return in 1821 (therefore not including income tax) for the Receivers in counties where there was no deputy was: Bedford £389, half of Berkshire also £389, Buckinghamshire £342 and Cambridge, which had a higher poundage, £557.102 Henry Austen’s Receivership of Oxfordshire was comparable to that of Dorset or Cambridge in terms of income, with poundage of £639 for assessed and land tax, and a fixed payment for income tax of £270, making a total of £909. In addition, assuming a return of 4 per cent, he (or the bank) could have earned £260 pa on the permanent balance and about £930 pa on the

97 Evidence, above n 3, 159, 161. 98 ibid 36. The Receiver for Bedford in three consecutive years made profits of £99 and £52 and a loss of £52 on Treasury Bills. 99 The Receivers’ returns on their current balances, which varied according to the amount of tax collected in the county: Bedford £33 pa on average in Treasury Bills (see n 98 above) (Evidence, above n 3, 36); half of Berkshire £200 pa (lending with government stock as security); Bucks no current profit, although profits were made in the past (ibid 56); Cambridge £45 (for 1820, nothing in the previous year, which may account for the evidence of the First Commissioner for the Affairs of Taxes that unusually this Receiver accepted only Bank of England notes which he paid to the Exchequer immediately through a bank (ibid 7, 60); half of Norfolk £526 (for the Deputy, a banker, at 4%); Eastern part of Somerset £1058 (the Deputy was a banker who paid 4% to the Receiver before the profits were split) (ibid 90); Dorset 3% £300 (ibid 93); and Westminster (a banker) who assumed 4% £510, although saying ‘I do not think it has made quite so much’ (ibid 63). 100 WR Ward, the English Land Tax (Oxford, Oxford University Press, 1953) 165. 101 Evidence, above n 3, 15. The tax money could not be kept separate as it would have been paid by the Collectors in bank notes issued by local banks, and the Receiver would need to arrange with the local banks to exchange them for bills on London (ibid 38). There was no objection to bankers as sureties (but at least one of the sureties had to be landowners) or as Deputy Receivers (since the risk remained with the Receiver) (ibid 14). 102 ibid 39, 50, 53, 56, 60.

68  John Avery Jones current balance.103 As mentioned, his expenses might have been at least £235, assuming he (rather than the bank) paid a clerk, plus his travelling expenses, which might have been of the order of £145,104 making a total of £380. As has been mentioned, 38 of the 66 Receivers in England and Wales operated through a Deputy. The evidence of the split of profits between the Receiver and his Deputy respectively: Norfolk £963 (after paying £250 to the son of the local MP, as mentioned above) and £183; Eastern part of Somerset £1231 and £577 (less unspecified expenses); Dorset £696 (out of which he paid £400 to the widow of his predecessor) and £300 (plus any interest in excess of £300 on the current balance and less unspecified expenses); Westminster (part, for land tax only) £995105 and £350 (less the amount paid to his clerk); Middlesex (assessed taxes only) £2082 and £1270 (less expenses).106 The split illustrates the way the Receiver made a considerable profit at the expense of the Exchequer while the Deputy made the visits and did all the work, although the Receiver retained the risk of default by the Deputy. The Select Committee was unimpressed with the remuneration system for Receivers, noting that: the system is susceptible of considerable improvement; their net profits are extremely variable, and by no means fairly proportioned to the duties to be performed amounting in many instances to much too large a remuneration; the mode too, by which that remuneration is derived, is liable to very serious objections.107

The Committee proposed that Receivers should be remunerated by a fixed salary between £300 and £600 pa (Mr Winter had suggested £500108), plus payment of all expenses except for stamps, fees and audit, for which they were currently liable.109 They also proposed that the ability to hold permanent balances should be progressively withdrawn, and that no Deputies should be allowed except for sufficient cause, such as illness. The number of Receivers should be reduced from 66 to no more than 44, as suggested by Lowndes, who slightly increased Mr Winter’s suggestion of 41.110 No compensation would be paid for the loss of a receivership (except in cases of peculiar hardship).111 There should be a single 103 During 1815 he collected £201,816 of taxes and the return is the equivalent to holding the year’s receipts for six weeks. 104 In a year, Henry Austen might have travelled 450 miles to and from Oxford and, say, 400 miles within Oxfordshire (£85), plus 28 nights’ accommodation (see the text at n 84 above) (£59). 105 Not stated in the evidence, but estimated from the figures given. 106 Evidence, above n 3, 46–49 (Norfolk), 90 (Somerset), 93 (Dorset), 42 (Westminster, land tax), 99–100 (Middlesex, assessed taxes, the figure for the Deputy, a banker, being what the bank made on the current balance at 3% or £1690 at 4%). 107 Report, above n 18, 6. 108 Evidence, above n 3, 160. Mr Winter estimated the total travelling expenses of all Receivers to be £7500. 109 Report, above n 18, 7. The proposed single Receiver for London, Middlesex and Westminster might be paid more in view of the magnitude of the receipts. 110 Evidence, above n 3, 160. 111 Report, above n 18, 8.

Receivers-General of Taxes in the Initial Income Tax Period  69 Receiver for London, Middlesex and Westminster who paid receipts to the Bank of England daily.112 All of these recommendations were swiftly adopted in 1822. The Receiver’s salary was to be set by the Treasury between the recommended limits; the Treasury was authorised to pay an allowance for expenses of travelling and subsistence; no Deputies were allowed without sufficient cause; the tax office set the times and places for the Receiver to attend; the Receiver needed to be accompanied by only one person instead of two; and Receivers for 18 listed counties were to be abolished on the death of the current Receiver and his county added to adjoining counties.113 BONDS TO SECURE THE RECEIVER’S LIABILITY FOR TAXES COLLECTED

The risks associated with Receivers meant that they were required to give security to the Exchequer each year for the payment of the taxes collected by a bond given jointly by the Receiver and two sureties, at least one of whom must own land.114 The bond was expensive, with an annual fee of about £70 plus £25 stamp duty.115 The amount of the bond was an estimate of the highest quarterly amount that the Receiver would hold at any one time (including the permanent balance).116 As expected, this resulted in considerable variations between counties in the evidence given to the Select Committee, ranging from bonds for £30,000 for Bucks to £94,000 for the Eastern part of Somerset, with higher figures for Middlesex (£120,000) and Westminster (land tax only, £100,000), which were special cases.117 All of these would have been higher before the abolition of income tax. The bond was released after the accounts were passed, with the result that about three bonds were always outstanding. The need for an annual bond was apparently derived from land tax, which was renewed each year until it was made perpetual in 1799,118 but this had the advantage that a surety was released after that year’s accounts were passed and he

112 ibid 7. 113 1822, above n 18, ss 2, 8, 10. 114 The Solicitor to the Commissioners for the Affairs of Taxes makes enquiries into the proposed sureties ‘with a considerable degree of delicacy’ which involves obtaining a confidential report from a third party such as the surety’s solicitor (Evidence, above n 3, 29). No Deputy Receiver was then a surety (ibid 34); however, it appears that the Deputy Receiver for Staffordshire had been one in the past (ibid 138). 115 The precise cost is given in Evidence, above n 3, 12 and is higher than £70 for London, Middlesex and Westminster (£87) and for Scotland (£77) (ibid 39); stamp duty (ibid 161) under (1815) 55 Geo 3 c 184, sch 1 was at the highest band, previously £20, which would have applied to the two earlier bonds in n 124. 116 Evidence, above n 3, 14. 117 ibid 40, 57, 88, 97. 118 Although the Committee did not mention income tax since by then it had been abolished, being an annual tax it also required annual bonds.

70  John Avery Jones could therefore cease to be a surety for the future if he wanted.119 The Select Committee, however, recommended that the bond should be made perpetual and, in view of the revised payment arrangements, they proposed that the amount be reduced considerably.120 The legislation for land tax (year-end 24 March121) required the Receiver to pass his accounts in the Court of Exchequer before 5 April 12 months after the end of the year of assessment in order to be allowed to return arrears that could be collected from the parish. The bond specified the term of the bond to end on the last day of the Michaelmas term preceding to allow time for this. The legislation for the assessed taxes and income tax (both with a 5 April yearend) provided a period of two years after the end of the year of assessment for passing the accounts,122 but the date in the bond remained the same as for land tax. In practice, for all taxes the accounts were passed by the end of the two years notwithstanding that, compared to the date in the bond, this was four months late for the assessed taxes and income tax and 16 months late for land tax, which meant that all bonds were in law liable to forfeiture, although this was ignored.123 Henry Austen’s bonds still outstanding at the date of his bankruptcy were two (1813 and 1814) for £73,000 and one (1815) for £80,000.124 To be comparable with the bonds in the evidence to the Committee, which was after the abolition of income tax, these might have been of the order of £50,000 if they had continued after income tax. Henry’s sureties were his brother Edward, his uncle James Leigh-Perrot125 and his second cousin TP Hampson.126 When they were called upon to pay, they agreed to share the liability two-thirds for Edward and one-third for Leigh-Perrot, letting off Hampson, the more distant relative. Taking the Receiver together with the sureties, the Crown’s position was secure. Leggatt gave evidence that in the previous 30 years there had been no loss to the Crown while tax of £337m had been paid to the Exchequer. Earlier, Ward

119 Evidence, above n 3, 21. 120 Report, above n 18, 7. 121 The land tax year end on 24 (not 25) March can be seen on its abolition by FA 1963, s 68(4). For other taxes the year end was 25 March (the quarter day on which accounting periods ended), which became 5 April after adjustment for the 11 days by the Calendar (New Style) Act 1750 (24 Geo 2 c 23). Land tax payment dates were not changed by this Act perhaps because the amount was constant every year, and it was similar to rent payment dates, which were not affected by the Act (and which still use the old quarter days). 122 1803 Management, above n 7, s 55. 123 Evidence, above n 3, 22. 124 The bonds, which were renewed each year, were for joint totals of £73,000 (24 July 1813 and 9 August 1814), and £80,000 (17 August 1815). The formal declaration to the Court of Exchequer for the 1813 accounts was made on 4 April 1816 and presumably the bond for that year would in normal circumstances have been rescinded shortly thereafter. 125 He was the brother of Henry Austen’s mother, Cassandra. The ‘Perrot’ was added to his name on his inheriting an estate from his great-uncle, Thomas Perrot. 126 Strictly he was Sir Thomas-Philip Hampson 7th Baronet, but preferred to be called Mr, even in the legal document of the bond to the Crown.

Receivers-General of Taxes in the Initial Income Tax Period  71 recorded that between 1715 and 1770 over £82,500 had been irrecoverably lost by Receivers.127 This seems to have been before bonds were required. In practice, upon an insolvency, the Crown would issue a writ of extent (see below), under which all the Receiver’s assets are seized. The Crown would try to collect any balance from the Receiver’s assets first and only then call upon the sureties for any balance after a reasonable time, which was two years in Henry Austen’s case. There was therefore some loss of cash flow to the Crown during the process, as the Crown could not charge interest, leaving the sureties with the real problem of collecting the balance, for which they could use the Crown’s remedies. The Receiver was liable to pay interest on outstanding tax only from the passing of the accounts, which would normally be two years after the end of the year of assessment, although if security was given for outstanding tax, interest would accrue on this;128 the sureties were not liable for interest in any circumstances, but presumably they were expected to pay in a short time after the demand or risk receiving a writ of extent.129 Henry Austen’s case shows how the Crown’s position was safeguarded by the sureties, leaving them with the lengthy problem of trying to realise the remaining assets.130 Parliament adopted the Select Committee’s recommendations in the subsequent legislation with some changes. Bonds were to be taken before, and filed with, the tax office unless it was necessary for the bond to be filed with the Court of Exchequer for the purpose of making it a debt of record for legal purposes, in which case the tax office would do this. Bonds remained annual, presumably so that the sureties could be more easily changed, but renewals were to be free of the £25 stamp duty. No fees were to be charged for the auditing and passing of accounts. Bonds were to be delivered up without further procedure following a certificate by the Auditor, which was the authority of the court to deliver up the bond to the Receiver.131 WRITS OF EXTENT

Defaulting Receivers-General The Crown’s main remedy against Receivers who did not pay over the tax they had collected was the issue of a writ of extent in the Court of Exchequer.

127 Ward, above n 100, 110. The loss in 1715 was caused by Sir Harcourt Master investing his whole tax debt of over £37,000 in South Sea stock (ibid 102). 128 Report of the Select Committee on the Mode of Issuing Extents in Aid, HC 1817, 505 (Extents Report or Extents Evidence) 37; [Receivers] Evidence, above n 3, 17, 25. 129 Evidence, above n 3, 26. 130 See the heading ‘Writs of Extent’ in the text at n 131 below. 131 1822, above n 18, ss 2 (No 1, r 8), 7, 9.

72  John Avery Jones This writ dated back to a statute of Henry VIII132 under which the Crown could seize the whole of the land, goods and chattels of the debtor, including debts due to the debtor, and also imprison the debtor in the Fleet prison;133 and then, in turn, by issuing further writs of extent, seize the debts due to a debtor of the Crown debtor and imprison him, and so on. The writ of extent overrode everything else, such as bankruptcy laws on a subsequent bankruptcy (and had priority if both were on the same day), thus giving the Crown absolute priority and making it an extremely effective remedy. The Crown applied by affidavit to the Court of Exchequer without notice to the debtor for a commission (generally comprising a clerk in the King’s Remembrancer’s office and the under-sheriff or his clerk, who received a guinea each) to appoint a 12-man Inquisition (similar to a jury). The members of the Inquisition comprised the office-keeper (or porter)134 and decent persons in reduced circumstances who loitered in the Sheriff’s office in the hope of receiving the remuneration of one shilling each, although the person applying for the Writ might give an addition in more complicated cases, and sometimes included ‘persons of an exceedingly low class of life’.135 They determined the amount of indebtedness, in practice merely relying on the affidavit,136 which the Sheriff reported to the court, although this step was not necessary against the Receiver himself because the bond was a debt of record. The Baron of the Exchequer endorsed the affidavit with a fiat for the issue of the writ of extent. The writ of extent ordered seizure by the Sheriff to whom it was addressed of all the assets within his bailiwick137 and, if included in the order, imprisonment of the debtor. Another Inquisition by the Sheriff listed and valued the assets, with the aid of an appraiser if appointed by the person applying for the writ of extent, which the Sheriff reported to the court. The sale of the assets seized required a separate court order. The Sheriff took a very large poundage on the sum ‘levied or collected’ of 1s 6d (7.5 per cent) in the pound on the first £100 and 1s (5 per cent)

132 (1541) 33 Hen 8 c 39. For the origins, see E West, The Law and Practice of Extents (London, Butterworths, 1817) 1, https://books.google.co.uk/books?id=vDhfAAAAcAAJ. 133 Imprisonment may not have meant that the debt could be paid, but it encouraged the debtor to disclose all his assets. In one case, the evidence showed that it was used as a means of putting pressure on the prisoner for his wife to give up an incumbrance on the estate that had been sold. ‘Mr Sweet wrote to me that … they would detain me in prison, in hopes of forcing Mrs Tate to give up her dower in the estate … I was at length liberated, under an agreement that Mrs Tate should give up her dower upon having an equivalent paid to trustees for her use, and that they should take ten thousand pounds in full of all demands’: Extents Evidence, above n 128, 93. (The background is that before the Dower Act 1833 (3&4 Will 4 c 105), dower (the widow’s right to a life interest in one-third of the husband’s realty) remained an encumbrance on the land even after its disposal.) 134 Extents Evidence, above n 128, 23, 29. A witness referred to the person ‘employed in putting coals on the fire’, who may have been the office-keeper, and said that the jury did not appear to be competent to consider the evidence. 135 ibid 29. 136 Extents Report, above n 128, 5. West, above n 132, 22. It seems that in practice the order for the commission was not taken to the Baron until after the inquisition to find the debt (ibid 22). 137 Extents could be issued to Sheriffs of different counties at the same time (West, above n 132, 59).

Receivers-General of Taxes in the Initial Income Tax Period  73 on the excess.138 The Attorney General consented to the payment by the Sheriff to the person taking out the writ. The Use of Writs of Extent against Henry Austen Henry Austen’s case demonstrates the practical working of writs of extent. As has been mentioned, on 15 March 1816, after the Exchequer had been paid £13,270 from the Receiver’s account in the bank, he owed a balance of £44,445 of tax that he had collected at the end of January, of which £22,743 was still in the bank, which was obliged to stop payments.139 On the same day, the following events all happened: the Crown applied by affidavit for writs of extent against the partners of the bank and, separately, Henry; the Court ordered an Inquisition by the Sheriff as to the amount of the bank’s debt (this was not necessary for Henry’s debt because the sureties’ bonds to the Crown made it a debt of record); the 12-man Inquisition found the amount, in practice relying on the affidavit, which the Sheriff reported to the Court;140 the Court issued immediate141 writs of extent in respect of Henry and the bank partners; and a Docquet for a Commission of Bankrupt142 was struck against the bank’s partners, who were made bankrupt on the following day.143 The normal bankruptcy procedure followed, but is less relevant as the Crown took most of the assets under the writ of extent in priority over the bankruptcy.144 The sorry state of 138 (1716) 3 Geo 1 c 15, s 3; Extents Evidence, above n 128, 20. 139 ‘Yesterday the banking and agency house of Messrs Austin (sic), Maunde, and Co. (sic) Henrietta-Street, Covent-garden, we regret to state stopped payment’, The Times, 16 March 1816, 4. Stopping payments was not an act of bankruptcy. 140 These papers are in TNA E 144/70, 77, 79. 141 Immediate extents are issued when it is necessary to move quickly to prevent the debt being lost; in other circumstances the Crown proceeds by scire facias (a form of action dating from 1285 in which the defendant could plead a defence), with the extent being the final process (West, above n 132, 18). 142 This involved the creditor swearing an affidavit of the debt before a Master in Chancery and executing a bond to the Lord Chancellor. 143 London Gazette, 16 March 1816, 519, No 17119; Morning Chronicle and Morning Post, both 22 March 1816. It was necessary for the Crown to obtain the extent before (or on the same day as) the bankruptcy to obtain priority over it: West, above n 132, 115 (citing authority). 144 The partners in the Bank had to make full disclosure of their assets to the Commission of Bankrupt, and the creditors proved their debts on 19 March 1816; the assignees (trustees in bankruptcy) were chosen at a second meeting on 27 April (London Gazette, ibid). The assignees were Joseph Silver of Bedford Street, Covent Garden, laceman (Bedford Street adjoins Henrietta Street, where the Bank’s premises were situated), and Richard Taylor of Charlotte Street, Bloomsbury, army clothier, who was also a debtor for £675 under an 1811 promissory note payable on demand (£830 less £200 repaid, plus interest) paid on 6 March 1819, presumably both being creditors and chosen by the creditors. It is possible, therefore, that they were depositors in the Bank as an encouragement to the Bank ordering from them. The Commission certified to the Lord Chancellor that they had complied with the legislation and gave notice that certificates discharging them from their liabilities would be allowed unless cause was shown to the contrary by 8 June (London Gazette, 18 May 1816, 956, No 17137). See the text at n 164 below for the dividends eventually paid. The bankruptcy records have not survived.

74  John Avery Jones bankruptcy law at the time is detailed by a Select Committee on Bankruptcy Law in 1817–18, which made many recommendations for change; the law was substantially amended in 1824.145 The writ of extent against Henry read: George the Third by the grace of God … to the Sheriff of the County of Middlesex146 Greeting [after reciting the sureties’ bonds] Do Command you that you omit not by reason of any liberty but that you enter the same and take the said Henry Thomas Austen and keep him safely in our prison until he hath fully satisfied us the said debt and that as well by the oaths of good and lawful men of your bailiwick … by whom the truth may the better be known as by all other ways means and methods you do diligently enquire what lands and tenements and of what yearly values the said Henry Thomas Austen had in your bailiwick on the said twenty fourth day of July in the said fifth third year of our reign [1813147] on which day he first became a Debtor to us … or at any time since and also what goods and chattels and of what sort and value and also what debts credits specialties and sums of money the said Henry Thomas Austen now hath or any other person or persons in trust for him hath … to be carefully appraised and extended and to be taken and seized into our hands that we may retain them until we shall be fully satisfied our said debt …

As there is no record of Henry and his partners being committed to the Fleet prison148 and as bail did not apply,149 the explanation must be that the Sheriffs of both Middlesex and Kent reported that none of them was found within their bailiwicks. Further writs of extents could have been issued to other Sheriffs, but once the first one had been returned by the Sheriff, this required a motion in court and an affidavit of special circumstances, which the Crown may not have thought worthwhile.150 Or was it because of their influential friends that the Sheriffs did not look very hard for them? There followed a number of Inquisitions valuing the assets at the figures below and subsequently ordering their sale. The values are those found by the Inquisition, but should not be taken to be reliable for a number of reasons. Although some of them are realistic, with the proceeds of sale making slightly more,151 others are a nominal £5 for items not easily valued or nil (a legacy), and

145 Report of the Select Committee on the bankruptcy laws (HC 1818, 276), evidence (HC 1818, 127, 277), plus evidence taken in the previous parliamentary session before the Committee was able to report (HC 1817, 468). The law was amended by Bankruptcy (England) Act 1824. 146 Extents for Henry were issued initially to the Sheriffs of Middlesex and Kent and later the County of Southampton; and for the Bank, initially to the Sheriff of Middlesex and later to the Sheriffs of Kent and (in relation to Maunde’s legacy see text at n 161 below) Hereford. 147 This is the date of the first outstanding bond by him and the sureties: see n 124 above. George III’s regnal years ran from 25 October; the 53rd year ran from 25 October 1812 to 24 October 1813. 148 Their names are not included in TNA PRIS 1/30, which lists those committed to the Fleet prison between 24 January 1816 and 1 February 1817. 149 West, above n 132, says at 73 that bail did not apply, ‘the Extent being an execution, and not mesne process’, and that the Statute of Bail bonds (23 Hen 6 c 9) did not apply to the Crown. 150 West, above n 132, 59. There were subsequent later extents, see n 146 above. 151 The Court orders for sale required that they should not be sold for less than the valuations.

Receivers-General of Taxes in the Initial Income Tax Period  75 even for debts thought to be bad the full amount of the debt is included. There is also some double counting – some deliberate, where the same asset is seized for the account of both Henry and the bank, presumably so that the Crown’s priority is preserved against Henry in case the bank paid off its indebtedness which was less than the whole, and some perhaps inadvertent, where the sureties seized assets that the Crown had already seized. The Inquisitions and further writ of extent were as follows:152 16 March 1816 (for the account of Henry) re Bulkley153 indebted by two promissory notes: £955. 17 March 1816 (for the account of the bank) two Inquisitions re debts due to it and bills of exchange: £38,657. 25 March 1816 (Henry) re the lease of his house and contents and debts due to him: £16,790. 25 March 1816 (bank) re its lease and contents, judgments in its favour, and the other partners’ assets: £6545. 8 July 1816 (Henry) Extent in the second degree against the Earl of Moira154 for 3 bills of exchange total £3000.155 28 October 1816 (bank) Extent in the second degree against John Lewis for a debt of £513 and Inquisition on 15 May 1817 valuing two properties owned by him at £3000 (the debt is included in the second item above).156 12 February 1817 (bank) ordering the Bank of England to appear relating to the Bank’s balance there: £60.157 18 February 1818 and 17 April 1818 (Henry) re agreement between him and Frank relating to the purchase of stock of Westminster Life Insurance Society: no figure as the valuation is included in the next item below.

The proceeds from these seizures reduced the balance owing from £44,445 to £19,964 (split between the bank £9314 and Henry £10,650, although, of course,

152 All these are in TNA E 144/77 and also E 144/70 and E 144/79 unless otherwise stated. In two cases I have capitalised an annual value of land at 5% to give the capital value. 153 Unfortunately the National Archives file (E 144/81) containing the extent against Bulkley is recorded as missing. 154 He was formerly a favourite of the Prince Regent and ran up enormous debts, over £100,000 in 1804. He was in the running to head a Whig government after Percival’s death, but negotiations for this broke down. He had been appointed Governor-General of India in 1812, which was no doubt advantageous for evading his many creditors. These bills were issued in Portsmouth just as he was leaving for India; he arrived in Madras on 11 September 1813. 155 TNA E 144/79. The Court of Exchequer held in proceedings against the acceptor of these bills that the discounting of them was usurious. The proceedings are reported at The King v Ridge (1817) 4 Price 50, 146 ER 390 (a reprint of the Price report from a US source published in 1835 with different page numbers is available at https://books.google.co.uk/books?id=iEEZAAAAYAAJ, 30; a report of the first instance decision is at: https://books.google.co.uk/books?id=CMsHAAAAIAAJ, 286; see also The Times, 16 July 1816, 3). 156 TNA E 144/79, 86. 157 TNA E 144/82.

76  John Avery Jones Henry was liable for the total)158 by February 1818, when the sureties paid this balance to clear the whole of the liability. Although the Crown lost some interest during this period, it was well secured by the sureties’ bonds. The sureties then spent the next 23 years collecting the assets that were difficult to realise. At the beginning, they obtained an order of the Court of Exchequer to use the Crown’s remedies, including writs of extent, against Henry and the bank partners (and hence against people owing debts to them).159 They used writs of extent and Inquisitions as follows: 17 April 1818 (Henry) Inquisition valuing stock in Westminster Life Insurance Society (following from 18 February 1818 above): £500. 29 January 1819 (Henry) re Equitable Life policy on Henry’s life: £5. 22 June 1819 new Extent (bank) to Sheriff of Kent with retrospective effect. 22 June 1819 new Extent (Henry) to Sheriff of Southampton (County) with retrospective effect. 2 July 1819 (bank) re various debts including those from the partners: £9,925, and debts due to the provincial banking partnerships in Alton, Petersfield and Hythe in which Henry was a partner £10,261.160 All these partnerships became insolvent and the other partners were bankrupted before or around the same time as the Bank. 2 July 1819 (Henry) re property in Hythe and various debts due to him: £4,580. 2 July 1819 (bank) re debts due to the Bank from provincial banking partnerships (£6,090) and debts due to those partnerships (£12,354). 29 November 1819 (Henry) relating to further debts due to provincial partnerships £448. 1829 Further Extents (which I have not found) are mentioned in correspondence re Bulkley and Lord Crewe. 24 February 1829 new Extent (bank) to Sheriff of Hereford retrospectively seizing a legacy due to Maunde (a bank partner) following the death of the life tenant which had previously wrongly thought to have lapsed as he had predeceased the life tenant (not valued).161

It took the sureties until 1837 to recover the whole of Henry Austen’s balance and until 1841 to clear the bank’s balance, in the course of which they incurred considerable legal costs.162 The reason why this took so long was that payment

158 £21,248 of this (not broken down between Henry and the bank) is recorded as received in three payments by 18 March 1817 in Finance Accounts of Great Britain for the year ended 5 January 1817, (HC 1817, 98, 95) and a further £3233 must have been received to make up the figure paid by the sureties. The breakdown is provided by the opening figure in the sureties’ accounts in Edward Knight’s papers in Hampshire Record Office 18M61 Box F/6 (HRO). 159 TNA E 127/61, Easter Term 1818 at 310 and 311. West, above n 132, 13 cites Magna Carta for their right to do this (9 Hen 3 c 8). 160 These should not be regarded as assets of the Bank but as support for the debt the provincial partnerships owed to the Bank. 161 TNA E 144/96. 162 The sureties’ accounts are in HRO, above n 158.

Receivers-General of Taxes in the Initial Income Tax Period  77 depended on factors outside the sureties’ control. In one case they had to wait until the death of the life tenant in 1827 for legacies to Henry Maunde and Richard Maunde (who had sold his legacy to Henry Maunde and Henry) to be paid; in another, for the son of the debtor (John Crewe, 2nd Baron Crewe) to attain his majority in 1834 so that a resettlement of the estate could release capital to repay the debt by the sale of timber; and in two cases they had to wait for properties to be sold in about 1825 (John Lewis163) and 1828 (Bulkley’s Hawkhurst estate). By 1841, in respect of the bank, the sureties had reduced the balance to £800, which, together with about 70 per cent of their costs of £1473 allowed on taxation, was paid by the Assignees (trustees in bankruptcy) of the bank. After paying this, the Assignees repaid 51.45 per cent of the depositors’ and note holders’ balances (amounting to over £5000) in 1843, including Jane Austen’s estate, which received half of her bank balance of £25 7s.164 In respect of Henry, in 1837 Frank purported165 to purchase three worthless bills of exchange issued by the Earl of Moira which cleared the whole of the sureties’ outstanding balance (£1989) plus a small contribution to their costs. In the end, the sureties’ unrecovered liability amounted only to costs of £2226. More importantly, they lost considerable income during this long period. REFORM OF THE SYSTEM FOR MAKING PAYMENTS TO THE EXCHEQUER

The Committee recommended that advantage should be taken of the improved state of banking. The excise provided an interesting contrast in efficiency of collection. The country was divided into 59 excise collections, each headed by a senior officer, and a similar number (66) of independent Receivers for direct taxes. Traders would pay the excise collector on his visit to the nearest market town and the collector appointed a country banker to receive the money from him at a smaller number of places.166 The bankers would give a bill of exchange on London for payment within an agreed number of days, which varied with the

163 He was in the King’s Bench debtor’s prison when the extent was issued against him on 28 October 1816 (TNA E 144/79); that debt was not a tax debt or he would have been in the Fleet prison. The sureties’ solicitor said ‘He has Property but rather than give it up lies in jail’ (letter of 28 December 1820 in HRO, above n 158). 164 London Gazette, 14 March 1843, 87, No 20204 (debts already proved); final opportunity to prove debts (17 March 1843, 926, No 20205) dividend of 6s 8d in the pound; 2 May 1843, 143, No 20220 (debts already proved); 9 April 1844, 1234, No 20333 (final opportunity to prove debts) dividend of 3s 4d. 165 ‘Purported’ because, since the discounting of the bills had been held by the Court of Exchequer to be usurious (n 155), either the bills were void as being inseparable from the usurious discounting or still existed without the Bank and parties claiming through the Bank (the sureties and Frank, who had notice of the usury) being able to claim against the issuer or acceptor of the bills because their title depended on a void transaction. 166 Evidence, above n 3, 73 onwards, 140. There was a single Receiver-General of Excise in London.

78  John Avery Jones distance from London but not exceeding 30 days.167 The bankers provided the sureties, but these were not required to be renewed annually.168 The excise collection was faster, cheaper and more secure than the direct tax system of Receivers. The Committee explored with some of the witnesses the possibility of the excise collectors also collecting direct taxes, but they did not recommend this in their report. They considered that the tax office could make an arrangement with bankers similar to the excise. The banker would attend the Receiver and receive the money, and would be responsible for payment to the Bank of England and providing the tax office with a record. The Bank of England would account to the Exchequer weekly. The detail of the changes is not contained in the Act, but there is provision for the Treasury to make a contract, or for the Commissioners to contract with the Receiver, for the payment of the taxes to the Exchequer, which seems to envisage the system used for excise. In the absence of such a contract, the legislation enabled regulations to be made for the Receiver to pay the sums received to an authorised person who would attend the Receiver.169 The Committee did not propose the abolition of Receivers, even though some of the questioning of witnesses raised this and generally their answers saw no difficulty in doing so. As mentioned, the Committee proposed that Receivers should be remunerated by a fixed salary between £300 and £600 pa. Being a Receiver no longer enabled profits to be made by appointing a Deputy, so the Receiver had to do the work for a reduced remuneration and would lose the ability to make a return on permanent and temporary balances. And if arrangements similar to those adopted by the excise were adopted, the Receiver would have little control over the money. Essentially, the Committee’s recommendations were to reduce the risk and increase the control of the tax system by officials. When income tax was introduced, it was necessary for it to be run independently of government to make it acceptable to taxpayers, as was already the case for the land tax and assessed taxes. That still applied to the Commissioners, the assessment procedure and the Collectors. However, extending it further was inefficient and put the collection at risk, which resulted in large security being required from Receivers. Receivers were finally abolished in 1891, after which taxes were paid directly to the Revenue’s account at the Bank of England.170

167 The Excise had agreed with bankers for periods of 7 days (for Ware and Wellingborough), 15 days for Liverpool (ibid 75, previously it was 30 days), 20 days for Norwich and Somerset (ibid 48, 125), 21 days for Birmingham (ibid 132), and 30 days for Northumberland and Scotland (ibid 75–76). These were much shorter periods than bankers would normally require; the Deputy Receiver (of taxes) for Norfolk, a banker, said that the usual period for remitting money from Norwich to London was 30 days, and the same for a Somerset banker (ibid 47, 128). Banks applied to the Excise by tender to do this; all the respectable bankers in England were invited, which meant that there was full competition (ibid 74, 125). 168 ibid 75. 169 1822, above n 18, s 2, No 1, r 5. 170 The Public Accounts and Charges Act 1891.

Receivers-General of Taxes in the Initial Income Tax Period  79 APPENDIX

Explanation of a Receiver-General’s Exchequer tally stick receipt171



171 Evidence,

above n 3, 55.

80

4 An Innovation in Tax Administration: The Licensing of Dogs CHANTAL STEBBINGS

ABSTRACT

B

efore the rise of income tax, the assessed taxes on luxuries constituted the leading direct tax in Britain, yielding a significant proportion of the public revenue. They were administered by local lay commissioners and their own officers in line with the orthodox system of direct taxation. By the middle of the nineteenth century, the revenue authorities of central government were determined to eradicate localism in tax administration in order to ensure efficiency and uniformity, but struggled against deep-seated cultural and social norms in this respect. To effect any change, they necessarily adopted a piecemeal and pragmatic approach. One such initiative, in 1869, which proved to be of particular significance was the conversion of the assessed taxes into excise licences. This was the first major formal breach of localism, and it followed an immensely successful reform two years previously involving the eighteenthcentury dog tax. Selecting this tax for its particular characteristics, and exploiting social attitudes to dogs, its recasting constituted the first stage in a bold and innovative plan of reform by the revenue authorities in tax administration which looked far beyond the assessed taxes. This gives the dog tax a special place in the history of tax administration. INTRODUCTION

In the period between the decline of the land tax and the rise of income tax, the assessed taxes on luxury items constituted the leading form of direct tax in Britain, yielding an important proportion of the public revenue.1 1 In the year ended April 1819 the revenue from the assessed taxes was £6,135,426, some five times more than the land tax, equalling the revenue from stamps and not far off the revenue from customs. Only excise outstripped them all, at £19,058,925: Abstract of the Net Produce of the Revenue of Great Britain (HC 1820, 9) xi 399.

82  Chantal Stebbings The imposition of an assessed tax on dogs, whether sporting, working or companion animals, was squarely within the accepted orthodoxy of eighteenthcentury taxation. Such animals were regarded as a luxury, and the taxation of luxuries was the principal way in which tax revenue was raised on the basis of ability to pay while protecting the poor. Widely accepted, the dog tax was a tax of its time and of circumscribed importance in terms of its substance. It was certainly socially and culturally significant, providing valuable insights into the changing place of animals in British society and its psyche, and it had major regulatory undertones.2 In its legal and fiscal form, however, it was relatively uncontroversial and straightforward. Although the principles and machinery underlying all the assessed taxes endured in their contribution to the structure of the new income tax of 1799 and its subsequent forms, it could be assumed that the dog tax, along with most of the other specific and minor assessed taxes, would ultimately leave no discernible trace as it lost its relevance and effectiveness, both theoretical and practical, in the face of the new form of taxation in the nineteenth century. The dog tax, however, was central to a major reform in tax administration: the conversion, in the middle of the nineteenth century, of all the existing assessed taxes into excise licences. The administration of taxes, and in particular their collection, while a somewhat neglected subject of research, was of material importance to the public revenue. This chapter examines the unique contribution of the dog tax to the legal machinery of tax administration as it evolved into its modern form, the reasons why such an administrative reform going to the very heart of the orthodox localist basis of direct taxation was deemed necessary or indeed possible, and the extent to which the reforms were part of a preconceived plan by the revenue authorities of central government or were merely the fortunate outcome of an opportune moment. THE TAX ON DOGS

The tax on dogs was first imposed, as an assessed or, more correctly, an establishment tax, in 1796.3 Proposals for a dog tax were not new, however. Since dog ownership was widespread, the taxation of dogs was a matter of some moment to the general public, both rural and urban, throughout the eighteenth and nineteenth centuries, both in Britain and on the continent. It was widely discussed in newspapers and pamphlets of the later eighteenth century4 and provoked a

2 IH Tague, ‘Eighteenth-Century English Debates on a Dog Tax’ (2008) 51 The Historical Journal 901. 3 Duties on Dogs Act 1796 (36 Geo III c 124). 4 See, eg The National Archives (TNA) HO/42/24/211 f 521, where George Robinson of Billingley in Yorkshire set out proposals for a tax upon dogs; SEK, ‘Proposal for a Tax on Dogs and Guns’ (April 1795) 27 Town and Country Magazine 123.

An Innovation in Tax Administration: The Licensing of Dogs  83 number of humorous petitions purportedly written by dogs against proposals to tax them.5 The extensive ownership of dogs in Georgian England, estimated to be some 100,000 animals in the capital alone,6 caused widespread problems, and each played its part in the ultimate enactment of a dog tax. George Clark reflected a widely held view when in 1791 he observed that ‘There is nothing clearer than that Dogs are, upon the whole, pernicious and destructive animals: – there is nothing more reasonable than that the number of them ought therefore to be lessened’.7 The reasoning was that the imposition of a tax would encourage owners unwilling to pay the tax to destroy their dogs and would allow the killing of stray, untaxed dogs, and that this reduction in their number would be beneficial.8 Indeed, such was the nuisance caused by dogs that regulation was the prime imperative behind the tax, with revenue being an incidental bonus. The problems caused by dogs were considerable. A grave concern among the public throughout the nineteenth century was the prevalence of rabies and this gave rise to a desire to ensure dogs were controlled in number or behaviour by law.9 This fear of ‘canine madness’ was a major and persistent factor and made the dog tax, as the window tax would become 60 years later, a matter of public health.10 Attacks by uncontrolled dogs upon children, pedestrians and horse riders in the towns was another issue of considerable concern,11 and in the countryside attacks upon livestock constituted a very real problem. The destruction of an estimated 40,000–50,000 sheep and lambs a year in 179112 not only affected the revenue of farmers, but was of especial gravity in the context of national food shortages.13 Similarly, a regular complaint was that

5 See, eg Towzer, ‘A Letter from Farmer Trueman’s Dog Towser, to Squire Heaviside’s Dog Ponto, in Relation to the Act Said to Be Preparing to Lay a Tax on that Useful Animal’, The Magazine of Magazines (February 1751) 100; An Old English Mastiff, ‘Observations on the Intended Tax upon Dogs’ (1791) 23 Town and Country Magazine 270. See also Anon, untitled article in (1755) 64 The Connoisseur 379; Anon, ‘The Dogs Petition’ (1786) 7(161) The Weekly Entertainer 109. See also the petition reprinted some years later, Anon, ‘The Dog Tax’ (1826) 7(197) The Mirror of Literature, Amusement and Instruction 334. 6 See T Almeroth-Williams, City of Beasts: How Animals Shaped Georgian London (Manchester, Manchester University Press, 2019) 187. 7 G Clark, An Address to Both Houses of Parliament: Containing Reasons for a Tax upon Dogs etc (London, printed for Johnson, St Paul’s Churchyard, 1791) 15. 8 See EC Jun, ‘Dog Tax’ (1862) 3 The Relinquary 117. 9 See C Dickens, ‘Dogs and Dog Law’ (1886) 37 All the Year Round 426. 10 Clark, above n 7, 9–10. See generally JD Blaisdell, ‘An Ounce of Prevention Causes a Ton of Concern: Rabies and the English Dog Tax of 1796’ (2000–01) 10 Veterinary History NS 129; C Loraine Smith, ‘Letter’ (1792) 62 The Gentleman’s Magazine 1143. Tague, above n 2, 903. 11 Clark, above n 7, 12. 12 ibid 14–15. 13 Following the abolition of the dog tax (and all assessed taxes) in Ireland in 1823, dogs became a serious problem, with widespread attacks on sheep. A conservative estimate was the killing of some 8000 sheep a year: HC Deb 29 March 1865, vol 178, col 458 per Sir Frederick Heygate. In 1865 a licence was proposed as a local tax on the continental model rather than an imperial tax as in England, but ultimately a licensing scheme along the lines of the English one was adopted: see HC Deb 29 March 1865, vol 178, cols 459–61 per Sir Frederick Heygate and cols 463–64 per Sir Robert Peel. See also HR, ‘The Dog Tax in Holland’ (1878) 31 The London Reader 64.

84  Chantal Stebbings dogs consumed food, such as bread, oats and offal, that would normally form part of the diet of the poor.14 Poaching was another problem which resulted from an uncontrolled dog population, and that brought the ancient and complex game laws into the dog tax debate. These laws severely restricted the ownership and use of sporting dogs in order to preserve hunting in its widest sense for the wealthy landowners and to prevent poaching. One faction believed that the laws could be reformed and tightened in order to inhibit the poor from owning dogs and thereby prevent their participation in poaching, though others thought that a dog tax could more effectively prevent poachers from keeping the very means of their illegal activity. The imperatives within the debate were complex on this issue, and the dog tax question, insofar as it pertained to the game laws, revealed profound divisions in English society.15 The prevention of poaching was still being cited as a reason for the dog tax as late as the middle of the nineteenth century.16 More nebulous, though undoubtedly material in determining the form the dog tax adopted when it was finally enacted, was the influence of the changing place of domestic animals within society. The role of dogs as cherished domestic companions rather than simply as working or sporting animals was both recognised and valued by the end of the eighteenth century.17 Within this context, the contribution that a dog tax might make to the public revenue was a relatively minor issue, but the consensus that imposing a tax on dogs would ensure a reduction in their number meant that a Bill to tax dogs in 1796 fell on receptive ears.18 Ultimately it failed because it was far too extreme in its detail, amounting, as Stephen Dowell observed, ‘to a proposition for a general massacre’.19 Just one month later, however, more moderate legislation reflecting an extensive and nuanced debate imposed an assessed tax on dogs.20 The tax was cast firmly in the orthodox mould of commodity taxation, conforming to the fundamental principle which governed such taxation in eighteenth-century Britain; namely, the tax on dogs was a luxury tax. Luxury was regarded as ‘the proper subject of a tax even in times of profound peace’.21 The notion of dogs as luxuries had pervaded most aspects of the preceding debate and, importing a moral dimension, was central to the ultimate decision

14 HC Deb 5 April 1796, vol 44, p 364 per John Dent. The premise was that the poor could not, and should not, keep dogs, because they could not afford it and they made bad decisions: Tague, above n 2, 911–13; Clark, above n 7, 13. 15 Tague, above n 2, 904–09. 16 First Report of the Commissioners of Inland Revenue (HC 1857 sess 1, 2199) iv, 65, 101. 17 Tague, above n 2, 917–19. See also (25 April 1796) 44 Parliamentary Register 509–10 per William Windham. 18 HC Deb 5 April 1796, vol 44, pp 364–66 per John Dent. 19 S Dowell, A History of Taxation and Taxes in England, 4 vols (London, Longmans, Green and Co, 1884) vol 3, 294. 20 Duties on Dogs Act 1796 (36 Geo III c 124). 21 In relation to the dog tax: Publicola, ‘Tax Proposed on Dogs, and Places of Diversion’ (1762) 32 The Gentleman’s Magazine 21.

An Innovation in Tax Administration: The Licensing of Dogs  85 to impose the tax. As with all the assessed taxes, there was no consensus as to what constituted a luxury. One view was that if an article could not be shown to be a necessity, it was a luxury. In 1791, George Clark expressed it thus: we all know that taxes ought to be laid on luxuries only; and that the keeping of Dogs is generally a species of luxury no one will attempt to deny. The fact is notorious, that there are more Dogs kept in this country from fancy, or for pleasure, than from necessity; and those which are not necessaries are luxuries.22

He continued: Dogs are no doubt faithful domestics and cheerful companions: they certainly have their uses. But this by no means makes them necessaries, except there be added the consideration of the safety of a man’s person or property, which in some cases may depend upon them; but which is oftener the case in pretence than in fact.23

This was, however, problematic, because, as in most matters of taxation, only the extremes were clear. Hunting with hounds was undeniably a costly luxury, involving heavy expense in terms of feeding, staffing and accommodation, so there was widespread agreement that hounds and other sporting and hunting dogs should be taxed accordingly.24 On the other hand, some occupations, notably animal husbandry, rendered the ownership of a dog a necessity. Between obvious luxury and undoubted necessity, however, lay somewhat opaque situations, as with watchdogs and turnspit dogs, which were undeniably useful but arguably not absolutely necessary; with dogs kept with no obvious utility beyond companionship; or where numerous dogs were kept with no clear need.25 And even William Pitt considered that a single dog could be considered as an article of convenience rather than an object of luxury.26 The Duties on Dogs Act 179627 astutely divided chargeable dogs into three categories, namely, sporting dogs, companion dogs and packs of hounds, and the rates differed accordingly and also to some extent in relation to the number of animals owned. A person who possessed a sporting dog, which category was defined as comprising greyhounds, hounds, pointers, setters, spaniels, lurchers and terriers, was charged five shillings, and any person who had two or more dogs of any breed was charged five shillings for every dog kept.28 A person who kept only one dog, and that dog was of a non-sporting breed, was charged three shillings,29 but only if he or she was assessed to the house and window taxes, and persons who kept packs of hounds were allowed to compound for the pack at 22 Clark, above n 7, 6 (original emphasis). 23 ibid 7. 24 Tague, above n 2, 912–13. 25 For a discussion of watchdogs in Georgian society, see Almeroth-Williams, above n 6, 187–211. See also Philo Patriae, ‘Curious Proposals for a Tax upon Dogs’ (1778) 40 The Weekly Magazine 107. 26 HC Deb 4 December 1797, vol 4, p 318 per William Pitt. 27 Duties on Dogs Act 1796 (36 Geo III c 124). 28 ibid s 1. 29 ibid.

86  Chantal Stebbings £20 a year.30 The sole exemption was for puppies under the age of six months,31 but by implication poor owners of single dogs also escaped the charge.32 The tax was to be paid by the person who ‘kept’ the dog.33 This scheme was clearly directed at dogs as luxury articles of the wealthy and, as far as possible, without entering the debate as to dogs as necessities, it ensured that the poor fell outside the charge. The subsequent legislative history of the tax showed little fundamental change. In terms of substance, the only change of importance was the introduction in 1824 of an exemption for dogs bona fide and wholly kept and used in the care of sheep on small farms,34 a change required because the policy of the original Act inevitably resulted in an absence of provision for dogs regarded as necessities. The exemption was extended in 1834 to include dogs used to drive cattle as well as sheep in any setting,35 but was abolished in 186736 to intense opposition, particularly from taxpayers in the north of England and in Scotland, who regarded it as an unfair burden on farmers.37 It was reintroduced in 1878, providing that up to two dogs kept or used for the sole purpose of tending cattle and sheep on a farm, or in the exercise of the calling or occupation of a shepherd, were exempt.38 The exemption was continued in 1906,39 but it soon faced calls for its repeal. Originally this was because it was found that farmers were abusing the exemption by claiming it for many more dogs than they strictly needed. A rabies outbreak in 1918, however, provoked intense pressure for repeal when a number of cases of the disease were found in stray sheepdogs in South Wales, dogs whose ownership could not be established.40 Nevertheless, a Bill in 1920 did not succeed, and the provision remained unchanged.41 The rate of the dog tax increased steadily until the middle years of the nineteenth century. In 1812 it stood at £1 for greyhounds, 14 shillings for other 30 ibid s 7. 31 ibid s 2. 32 ibid s 1. This became explicit: Assessed Taxes Act 1812 (52 Geo III c 93) Sch G. 33 Duties on Dogs Act 1796 (36 Geo III c 124) s 1. The person who possessed a chargeable dog was liable to pay the tax even if he did not own the animal, unless the owner could be found and charged. See, eg TNA IR 12/3, Case No 2487, County of Pembroke, Division of Dewsland (1858). 34 Exemption from the House Tax Act 1824 (5 Geo IV c 44) s 5. 35 Assessed Taxes Act 1834 (4 & 5 Will IV c 73) s 10. See also Land Tax Redemption (Investment) Act 1853 (16 & 17 Vict c 90) Sch G. 36 Dog Licences Act 1867 (30 & 31 Vict c 5). The only exemption mentioned is that for dogs under six months of age. In 1869 it was provided that the shepherd’s employer rather than the shepherd himself should pay the duty, though the licence was to be granted in the name of the shepherd: Revenue Act 1869 (32 & 33 Vict c 14) s 38. 37 HC Deb 27 April 1874, vol 218, cols 1189, 1192. 38 Customs and Inland Revenue Act 1878 (41 & 42 Vict c 15) s 22. Provision was made for large sheep farms requiring more than two dogs: ibid s 22(3). Dogs used by the blind were exempted (ibid s 21), as were hounds under 12 months of age who had never been used in a pack (ibid s 20). 39 Dogs Act 1906 (6 Edw VII c 32) s 5. 40 TNA MAF 35/356, ‘Memorandum on Dogs Bill 1920’. There was also concern that stray dogs spread other infections, notably tapeworms, among sheep: ibid, ‘Minute of Agricultural Committee of County Council for the East Riding of Yorkshire, 19 January 1921’. 41 Dog Licences Act 1959 (7 & 8 Eliz II c 55) s 4.

An Innovation in Tax Administration: The Licensing of Dogs  87 sporting dogs and ownership of two or more of any breed, eight shillings for one non-sporting dog and £36 for a pack of hounds.42 The highest rate was reached in 1840, with the four classes standing at £1 2s, 15s 4d, 9s 8d and £39 12s, before a uniform duty of 12s per annum for all chargeable dogs, no matter their use or breed, was introduced in 1853.43 The duty was set at 7s 6d in 1878.44 The tax maintained a consistent yield, remaining steady in the region of £200,000 per annum throughout the 1850s and early 1860s.45 Of the eight assessed taxes in existence in the mid-1860s, it was the fifth highest earner. Inhabited houses brought in the greatest revenue at £898,274, followed by horses, carriages and servants. Only armorial bearings, horse dealers and hair powder brought in less.46 THE PROBLEMS OF ADMINISTRATION

Administratively, the dog tax should have been straightforward, and it is true that it raised no greater problems in its administration than the other assessed taxes. There were few legal questions of difficulty, merely the usual problems of definition, as to whether a dog was a sporting dog or a companion dog, and even where the definition was by breed, the prevalence of cross-breeding made correct identification impossible. It often came down to a question of appearances.47 There were also potential difficulties in determining the age of a dog in relation to claiming the exemption for puppies under six months, although the onus of proof lay on the owner.48 There were, however, material difficulties which made the substance of the tax impossible to implement efficiently, and these arose from the exemption for working dogs. To claim the exemption, the dog had to be bona fide and wholly kept and used in the care of sheep or cattle. Most of the many cases on the dog tax which appear in the reports of the appeals against the determinations of the local commissioners concerned such claims.49 The provision was interpreted strictly 42 Assessed Taxes Act 1812 (52 Geo III c 93) Sch G. 43 Land Tax Redemption (Investment) Act 1853 (16 & 17 Vict c 90) Sch G. There was a cap at £39 12s for packs of hounds and £9 for any number of greyhounds (ibid). 44 Customs and Inland Revenue Act 1878 (41 & 42 Vict c 15) s 17. 45 First Report of the Commissioners of Inland Revenue, above n 16, 65, 99; Second Report of the Commissioners of Inland Revenue (HC 1857–58, 2387) xxv, 477, 504; Third Report of the Commissioners of Inland Revenue (HC 1859 sess 2, 2535) xiv 451, 476; Fourth Report of the Commissioners of Inland Revenue (HC 1860, 2735) xxiii 235, 252; Eighth Report of Commissioners of Inland Revenue (HC 1864, 3403) xxx, 423, 447. 46 Eighth Report of Commissioners of Inland Revenue, above n 45, 423, 447. 47 TNA IR 12/2, Case No 1809, County of Somerset, Division of Frome (1842); ibid Case No 1635 (1841). 48 Duties on Dogs Act 1796 (36 Geo III c 124) s 2. 49 See, eg TNA IR 12/2, Case No 1060, County of Lancaster, Hundred of Leyland (1835). See also ibid Case No 1236, County of Glamorgan, Division of Kibbor (1838); ibid Case No 1237, Hundred of Leyland, County of Lancaster (1838), where small tradesmen tried to claim the exemption; ibid Case No 1468, County of Warwick, Hundred of Hemlingford (1840).

88  Chantal Stebbings by the revenue authorities and the judges to be intended for the relief of large farmers where dogs were absolutely necessary to care for their own sheep or cattle. The number of sheep or cattle was always material. They did not need to be very numerous, the exemption applying, for example, to an individual keeping 24 cows,50 but it would not apply where just three or four animals were owned. If an individual was not a farmer, but of some other occupation, and yet kept a dog exclusively to drive a significant number of sheep or cattle, as many butchers and tradesmen might, he was within the exemption.51 So a butcher who owned 38 acres of land and considerable livestock was allowed the exemption for his dog used to drive the sheep and cattle between pastures and to market,52 but one who owned no land and claimed exemption for a dog kept for driving sheep and cattle to market was denied it on the basis that he used the dog for the purposes of trade.53 The livestock had to be sheep or cattle, so a claim for the exemption for asses and mules used to carry coal for sale failed.54 Similarly, if the dogs were used for working churning machinery on a farm, driving crows from growing crops or protecting land from trespass by the stock of others, for example, the exemption was denied.55 Such administrative difficulties were, however, inherent in any tax, and though irritating and time-consuming, they did not go to the viability of the tax and the fiscal and legal authorities were well used to addressing them. There were, however, two major problems of much greater significance, which justified the observation made during a parliamentary debate in 1869 that ‘If ever there were taxes which were inconvenient, and, to all appearance, without system, both from the way in which they were imposed, and the manner in which they were collected, it was the assessed taxes’.56 The first problem lay in the legislative scheme for assessment and collection. The taxes on dogs and other dutiable commodities were chargeable not in respect of articles kept in the year of assessment, but on the articles kept at any time in the previous year. Taxpayers were to make a return of the largest number of dogs they kept in the past year ending 5 April.57 So, taking the tax year 6 April 1801 to 5 April 1802, the duties chargeable were for articles kept between April 1800 and April 1801. This caused real practical problems because the system made any changes in one’s establishment difficult to recall with 50 TNA IR 12/2, Case No 1288, County of Southampton, Division of New Forest, West (1838). 51 TNA IR 12/2, Case No 1469, Division of Wellingborough, County of Northampton (1840); ibid Case No 1772 (1842). A night watchman of flocks was held to qualify: TNA IR 12/2, Case No 1469, Division of Wellingborough, County of Northampton (1840). 52 TNA IR 12/3, Case No 2188, County of Hereford, District of Leominster (1850). 53 TNA IR 12/3, Case No 2164 (1850). 54 TNA IR 12/3, Case No 2455 (1857). 55 TNA IR 12/3, Case No 2324 (1853); ibid Case No 2430 (1856); ibid Case No 1190, County of Denbigh, Division of Mochnant (1837); ibid Case No 1638 (1841). 56 HC Deb 8 April 1869, vol 195, col 423 per Mr Assheton Cross. 57 Duties on Dogs Act 1796 (36 Geo III c 124) s 4. Servants, carriages, horses, horse dealers, hair powder and armorial bearings were assessed in the same way.

An Innovation in Tax Administration: The Licensing of Dogs  89 accuracy in the return. An individual having owned a horse or dog, for example, for any period of time within the year would be chargeable for it, even if it had been sold or died within a few days or weeks.58 Many taxpayers simply could not remember the exact dates of the purchase, sale or death of an animal. The system thus depended on the ability of every taxpayer to recall minor domestic events, and on their honesty in including such items in their return. Many incomplete returns were made, either deliberately or through genuine inadvertence. Evasion, due in no little part to the high rate of 12 shillings per dog from the middle of the nineteenth century, was inevitable in that it was almost impossible to check the accuracy of the return by tracing articles suspected not to have been declared. So troublesome were the assessed taxes returns to complete that many taxpayers did not even bother to complete the form of notice requiring a return delivered to them by the assessor, often simply signing it and marking it ‘same as before’.59 Added to that were the inevitable deaths, insolvencies, bankruptcies and removals abroad or to another parish, all of which made efficient assessment impossible and caused considerable loss to the public revenue through untaxed but chargeable articles. ‘[E]veryone,’ observed an Assistant Chief Inspector in 1866, ‘seems to think it fair to get off as cheaply as possible in the matter of Taxes.’60 The collection process brought its own problems. Not only was the return required one year after the beginning of the liability, the duty was not collected until a year and half after that, and then only the first moiety. The second moiety was collected after two years. This prolonged process was troublesome to the taxpayer, and to the revenue authorities, because it again gave opportunity for deaths, bankruptcies and removals to intervene and to deprive the public revenue of its due. In short, the system was complicated and inconvenient for everyone concerned, and the collection of the tax in instalments inevitably increased the costs of administration. This archaic method of assessment and collection, described as ‘very cumbrous and troublesome’61 because of the acute difficulties caused by the distance in time between the incurring of liability, the assessment and then the collection, could yet have been addressed and remedied to a large extent were it not for the inherent weaknesses of the localist administrative system. This constituted the second major problem with the dog tax, and it was deep-seated and apparently intractable. When the dog tax was first introduced in 1796, the legislation provided that it was to be administered in the same way as the duties on horses.62 This imported 58 See, eg TNA IR 12/3, Case No 2431, County of Carmarthen (1856). 59 TNA CUST 45/292, ‘Objections to the Conversion of Assessed Taxes into Licences, by the Assistant Chief Inspector, 7 August 1866’. 60 ibid. 61 HC Deb 9 March 1866, vol 181, col 1836 per William Gladstone. 62 Duties on Dogs Act 1796 (36 Geo III c 124) ss 3, 5; Excise Act 1785 (25 Geo III c 47); Duties on Horses and Carriages Act 1789 (29 Geo III c 49) s 9.

90  Chantal Stebbings the localist system in its full measure. The day-to-day administration of the dog tax and all the assessed taxes was in the hands of lay local commissioners, appointed by Act of Parliament to execute the Land Tax Acts. They were ultimately responsible for making the assessments and for hearing all appeals against them. They appointed a number of parochial officers to assist them. These were assessors for their division, whose task it was to distribute and then gather in the returns, to charge all liable individuals to tax and deliver the assessments to the commissioners every year. The commissioners also appointed, on the recommendation of the assessors, two or more individuals to act as collectors for the division. The collectors’ task was to gather in the revenue according to the final assessments, deduct their remuneration and remit the balance to the government collectors and thence to the Exchequer. In theory, and originally in practice, the system was effective: assessors possessed the necessary local knowledge to arrive at a correct assessment of individuals in their parish, and the commissioners, possessing similar knowledge and any necessary legal advice from their clerk, were able to check and supervise the charges made.63 They appointed collectors from whom they could demand security for the proper carrying out of their duties. It was, however, the case, as the Chancellor of the Exchequer, Robert Lowe, observed in his budget of 1869, that the taxes were ‘in amateur hands’,64 those of ‘persons who have not been brought up to the business of tax-collecting’.65 This was not problematic in relation to the commissioners themselves, at least in relation to the assessed taxes which raised few procedural or legal questions of difficulty, nor in relation to their appellate functions. The commissioners were for the most part educated individuals, being minor gentry, successful professional and commercial men, satisfying a substantial property qualification and familiar with the economic situation in their localities, if not the technicalities of tax administration. This local knowledge had always been regarded as the most important feature of the localist system, ensuring the administration of the direct taxes was carried out with a real understanding of local conditions to ensure fair assessment, even of those who failed to make the proper returns. The problem lay with the assessors and collectors the commissioners appointed. It is true that many of them, though amateurs, were experienced individuals who had often been engaged in tax administration for a number of years, and in some cases reflecting long family traditions of involvement in such activity. Most were honest and diligent, making and collecting accurate assessments of tax. A significant number of assessors, however, were uneducated, usually tradesmen in towns or small farmers in the countryside, and, in the

63 This was particularly so after 1810, when the government surveyor was given powers to scrutinise the assessments for accuracy: Sixth Report of the Commissioners of Inland Revenue (HC 1862, 3047) xxvii 327, 345. 64 HC Deb 8 April 1869, vol 195, col 374. 65 ibid.

An Innovation in Tax Administration: The Licensing of Dogs  91 view of the Board of Inland Revenue, were ‘wholly unfit for the appointment’.66 In rural districts, they were too often ‘so illiterate they can scarcely read and write’.67 The calibre of assessors and collectors was of very real concern, and the revenue authorities were certain that it was responsible for the inefficiencies in the levying of the dog tax. Some failures to collect the due amount of the dog tax and other assessed taxes were caused by inattention. Some individuals ensured a reasonable and honest income through full-time occupation as collector of the direct taxes. One collector in the City of London in the middle of the nineteenth century acted as the collector of the land tax, assessed taxes and income tax for three wards, and was also the collector of poor rates for half the City.68 Most, however, had other occupations, and this often meant they could not devote themselves to their assessing and collecting duties as they should, with inefficiencies leading to default in collecting the full amount of tax due. The evidence shows that in practice the assessors rarely applied their local knowledge to calculate an accurate initial assessment, almost invariably relying instead on the returns or past assessments, even if they knew the charge was insufficient.69 Collectors could also become insolvent, which led to defalcations. Many failures were also due to simple incompetence, but some were due to duplicity. Frequently this was the exploitation of the common practice of individuals acting as both assessor and collector.70 As the assessors for the assessed taxes were unpaid in their role as assessors but paid by a poundage of three pence on the amount they gathered as collectors, they clearly had a personal interest in getting as large an assessment as possible. The union of the two offices in one individual at best gave rise to a conflict of interest between the public revenue and their customers,71 at worst afforded a considerable opportunity for sharp practice.72 There was evidence that ‘great frauds’ were committed in wealthy districts.73 For example, it seems that tradesmen acting as collectors could, and did, use 66 TNA CUST 45/292, ‘On the Proposition to Alter the Mode of Collecting the Duties of Assessed Taxes’. 67 Sixth Report of the Commissioners of Inland Revenue, above n 63, 327, 345. 68 Report from the Select Committee on Inland Revenue and Customs Establishments (HC 1862, 370) xii, 131, q 2473 per Edward Welsh, surveyor of taxes. 69 Local knowledge tended to be used for supplementary assessments, as when, for example, a collector had frequently observed an individual using and walking two dogs in the previous winter and, having not been included in the first assessment, provided the information to ensure the individual was properly assessed for them. TNA IR 12/3, Case No 2802, County of Northumberland, Division of Norland and Islandshires (1868). 70 Report from the Select Committee on Inland Revenue and Customs Establishments, above n 68, 131, q 167 per Charles Pressly, chairman of the Inland Revenue Department; Eighth Report of Commissioners of Inland Revenue, above n 45, 423, 454, quoting the draft report of the 1862 Select Committee. 71 It was understood that many assessors/collectors used their official papers to advertise their trade or occupation: Eighth Report of Commissioners of Inland Revenue, above n 45, 423, 454, quoting the draft report of the Select Committee 1862. 72 Second Report of the Commissioners of Inland Revenue, above n 45, 477, 505. 73 Fourth Report of the Commissioners of Inland Revenue, above n 45, 235, 307.

92  Chantal Stebbings the taxes they collected as capital in their businesses until they had to remit them at the proper time. They did not hold the money in their own hands for very long, but nevertheless they did have the opportunity to use it for their own purposes until remittance.74 The practice of tax collecting could give rise to frauds by individuals outside the formal system. For example, a certain William Cruickshank, a merchant in Stonehaven fallen on hard times, sought to ease his family’s extreme poverty by pretending to be a collector of the dog tax. He was sentenced to seven years’ transportation for collecting 12s 6d under false pretences.75 There did exist a measure of self-regulation in that as the assessors had to be inhabitants of the parish for which they acted, peer pressure would ensure they did not make vexatious charges, but the only material control on the activities of the assessors and collectors came from the local commissioners who appointed them. However, although local commissioners were well suited to judging the appropriateness of assessments laid before them, the Board of Inland Revenue did not consider them able to ensure that the process of assessment and collection functioned efficiently or properly.76 The commissioners had the power to demand security for the amount of duty assessed, but they often did not insist on it, and then if the collector defaulted with the money, through dishonesty or inefficiency, the parish had to be reassessed and in effect paid the taxes twice over.77 This was a common occurrence in the middle years of the nineteenth century, and it put a heavy burden upon taxpayers through no fault of their own, and naturally caused intense resentment. It was addressed to some degree by an Act of 1854, by which the Board was empowered to demand security from collectors and, if this was refused, to appoint collectors themselves and discharge the parish from all liability.78 There was a limited element of central supervision in that the government officers on the ground, the surveyors, had some statutory duties in relation to the administration of the assessed taxes, but their powers were greatly restricted by the ideological and legal supremacy of the localist system. The Instructions to Surveyors of 1855 stated that ‘It is a very essential part of the duty of a Surveyor to watch the collection of the Taxes’.79 The Board placed a considerable expectation on the surveyor, requiring him to supervise minutely and comprehensively, and according to a strict timetable, what the collector did and ensure the full revenue was collected and remitted. Any default ‘will … be considered as a

74 Report from the Select Committee on Inland Revenue and Customs Establishments, above n 68, 131, qq 169–77 per Charles Pressly. 75 TNA HO 17/13/18. His petition in 1829 against the sentence was successful. 76 Second Report of the Commissioners of Inland Revenue, above n 45, 477, 505. 77 Report from the Select Committee on Inland Revenue and Customs Establishments, above n 68, 131, qq 282–83, 430–35 per Charles Pressly. 78 Taxes Collection Act 1854 (17 & 18 Vict c 85). 79 Board of Inland Revenue, Instructions to Surveyors on That Part of Their Duty Which Relates to Taxes (London, HMSO, 1855) 81.

An Innovation in Tax Administration: The Licensing of Dogs  93 proof of great inattention on the part of the Surveyor, and expose him to the severest censure of the Board’.80 The surveyor, however, had no real power. He could only point out irregularities, remind the collector of his duties, instruct him and inform the local commissioners of any dereliction of duty so they could take action in imposing a penalty, appointing replacement collectors,81 or begin the process of recovering arrears from the parish. In short, the surveyor could do little more than urge, persuade and cajole. The Board of Inland Revenue had long understood that while the localist system of administering the direct taxes had the advantages of cheapness, of reflecting deep-seated constitutional and cultural values in taxation of consent and of voluntary taxation by one’s peers,82 it was seriously inefficient. The ‘imperfect, though elaborate, machinery’ which both permitted frauds and allowed the perpetrators to escape responsibility,83 the weak provision for selfregulation and the minimal degree of central supervision gave rise to problems of assessment and collection which were ‘evils of a most serious nature’.84 Indeed, as the Chancellor of the Exchequer was to observe in 1869, the machinery had little more than ‘antiquity to recommend it’.85 It was nothing less than a ‘vicious organisation’ which impeded the Board in the execution of its statutory duty to manage the taxes efficiently and according to law to ensure a constant revenue stream.86 The Board was convinced that the absence of any meaningful control of the amateur and sometimes dishonest local assessors and collectors by central government constituted the real problem with the direct taxes in Britain. It was all too aware that the ‘good sense and good taste’ of the local officials kept any abuses to the minimum,87 but that this could not be guaranteed and keenly felt that it should not be open to irresponsible individuals to paralyse the action of the Executive in one of its most important functions, that, namely, of gathering into the Exchequer the taxes which Parliament has sanctioned for the authorized expenditure of the year.88

There would be no problem, observed the Board in 1862, if the assessors and collectors ‘acted under the same sense of responsibility for the interests of the Revenue, and with the same devotion to the duty of maintaining those interests,

80 ibid 86. 81 Under the Taxes Act 1803 (43 Geo III c 99) s 40. 82 See HC Deb 8 April 1869, vol 195, col 374. 83 Fourth Report of the Commissioners of Inland Revenue, above n 45, 235, 307. For frauds by collectors and assessors, mainly in relation to income tax, and the reassessment of parishes, see Report from the Select Committee on Inland Revenue and Customs Establishments, above n 68, 131, qq 2424–28, 2461 per Edward Welsh, surveyor of taxes. See also IR 60/13 61–62. 84 HC Deb 8 April 1869, vol 195, col 376 per Sir Robert Lowe. 85 ibid col 374. 86 Fifth Report of the Commissioners of Inland Revenue (HC 1861, 2877) xxxi, 109, 127. 87 ibid 127. 88 Sixth Report of the Commissioners of Inland Revenue, above n 63, 327, 354.

94  Chantal Stebbings as the trained and disciplined officers appointed by the Government’.89 But they did not, and the Board had ‘no control whatever’ over the assessors and collectors of taxes.90 It was, said the principal secretary, a ‘great misfortune’,91 ‘a very anomalous state of things’.92 As the Inland Revenue Commissioners observed in their Annual Report of 1857–58, it ‘constantly tasks our ingenuity to provide against its inherent dangers’.93 They had to deal with ‘the insensible loss to the Revenue occasioned by carelessness and ignorance’.94 The Board, therefore, wanted to ensure that the administration of the assessed taxes was placed in the hands of government officers as ‘agents of the State’,95 controlled by the executive and unable, accordingly, to thwart the intentions of the Exchequer and of Parliament through inefficiency or simple fraud. THE DOG TAX INNOVATION: THE CONVERSION TO AN EXCISE LICENCE

Reform of the lay collection process was a major preoccupation of the Board of Inland Revenue in the middle years of the nineteenth century, and was given a real impetus and urgency by the growing appreciation that the future of the public revenue lay in another direct tax, the income tax, and not in the Georgian luxury taxes. The Board had been taking limited initiatives in this direction, some of which clearly demonstrated that such a solution, at least in very specific instances, was possible and effective. In Scotland, for example, there were no parochial collectors, and the assessed taxes were entirely in the hands of government officers, being assessed by the surveyor and collected by the distributors of stamps. This had operated for some years with great success and, it seems, acceptance by the taxpayers, leading one witness to observe in 1862 that the Scots ‘evidently do not trouble themselves about the constitutional principle’.96 There were minor changes of process too, as where the appointment of collectors by the Board was allowed where the local commissioners were unable to find collectors who could provide the required security.97 But these instances were few and strictly circumscribed. In terms of any major adjustment to the localist system, its importance and the consequent sensitivity of any interference with it led the Board of Inland Revenue to proceed with 89 ibid 344. 90 Report from the Select Committee on Inland Revenue and Customs Establishments, above n 68, 131, q 162 per Charles Pressly. 91 ibid q 1508 per Thomas Dobson. 92 ibid q 1514. 93 Second Report of the Commissioners of Inland Revenue, above n 45, 477, 505. 94 ibid. 95 Fifth Report of the Commissioners of Inland Revenue, above n 86, 109, 126. 96 Report from the Select Committee on Inland Revenue and Customs Establishments, above n 68, 131, q 1640 per Thomas Dobson, principal secretary of Board of Inland Revenue. See also Sixth Report of the Commissioners of Inland Revenue, above n 63, 327, 352. 97 Third Report of the Commissioners of Inland Revenue, above n 45, 451, 477.

An Innovation in Tax Administration: The Licensing of Dogs  95 extreme caution. The Board first considered a voluntary transfer of management of the assessed and income taxes to officers of central government. That scheme was not pursued because it was realised it would lead to an absence of uniformity, and so was rejected as impracticable.98 But the Board wanted to ascertain the views of the local commissioners as to the principle of administrative reforms to the land, assessed and income taxes, and so in 1860 it wrote to them to that effect, emphasising that ‘some alteration is imperatively required’99 because the system enabled frauds on the public revenue to be perpetrated, and ensured that those responsible escaped punishment. The Board stressed that it did not seek to interfere with the powers and duties of the local commissioners, for ‘it would be difficult to devise a better mode of ensuring fairness and impartiality’,100 but wished to concentrate its reforming efforts on appointing the assessors and collectors of the direct taxes, namely the land, assessed and income taxes, to ensure that the taxes ‘would be more effectually, more speedily, and more economically collected’.101 Assessments would be made more carefully, defalcations would cease, the opportunities for fraud would be significantly diminished and the enormous amount of paperwork would be reduced. All this, too, without infringing ‘the great principle upon which the present system is founded’.102 The response was decisive: ‘the majority of the commissioners are adverse to any change’, reported the Board, and ‘the terms in which that adverse opinion is conveyed are so strong and decided as to lead to the conclusion that any measure of the kind would encounter the most vehement opposition in Parliament’.103 Indeed, the clerks to the commissioners ‘did not condescend to argue the point at all’.104 ‘The answers were so numerous against the alteration,’ said Charles Pressly, ‘that the Chancellor of the Exchequer did not deem it expedient to attempt an alteration of the law.’105 An even narrower proposal to place only the collection in the hands of government officers and addressing the question of the liability to make good the defalcations of the local collectors on the taxpayers, which was embodied in a Bill of 1864,106 failed on its third reading. The Board, having calculated a potential saving of some £50,000 pa in the expenses of management, was very disappointed.107 The Bill, it said, was ‘foiled at the last moment’.108

98 Fourth Report of the Commissioners of Inland Revenue, above n 45, 235, 256. 99 ibid 307. 100 ibid. 101 ibid 308. 102 ibid 309. 103 ibid 257. 104 Report from the Select Committee on Inland Revenue and Customs Establishments, above n 68, 131, q 1511 per Thomas Dobson. 105 ibid q 287 per Charles Pressly. 106 Bill to Alter and Amend the Laws relating to the Collection of the Land Tax, Assessed Taxes, and Income Tax 1864 (HC 1864, 96) i, 449. 107 Eighth Report of Commissioners of Inland Revenue, above n 45, 423, 453. 108 Thirteenth Report of Commissioners of Inland Revenue (HC 1870, 82) xx, 193, 208.

96  Chantal Stebbings The proposals of 1860 and 1864, though moderate, had to be abandoned, but the Board had no intention of giving up. Accepting that the total, or even partial, abolition of the localist system for all direct taxes was impossible, the Board adopted a different strategy, which was both innovative and radical. It understood that rather than attempt to effect changes in the localist system itself, it could make significant progress if it could take all the assessed taxes out of the localist system altogether and place them in the hands of officers of central government. This could be done if the assessed taxes were converted into a duty which by its very nature did not import the localist system of administration. Only by sidestepping the localist system entirely could government supervision be ensured, and the only possible duty was the excise licence. Excise licences were well known, numerous and varied in character. Tradesmen and dealers in various commodities such as beer, spirits, coffee, tea, pepper, tobacco and wine were required to be licensed, as were auctioneers and owners of refreshment houses. There also existed licences in the nature of a duty on commodities used in a trade or business, such as the licence on postmasters, which was in effect a duty on the number of horses and carriages they used. Crucially, excise licences were wholly administered by the central Board of Inland Revenue because the local administrative system simply did not apply to this category of taxes. Status as a duty of excise imported the comprehensive and exclusive control by officers of central government. The overall context was undoubtedly conducive to this reform, because a central theme of official discussion of tax administration in the 1860s was the lessening of barriers between the different taxes and their administration. The conversion of an assessed tax to an excise licence promoted this ethos, and, more importantly, was a development with a good chance of success. The Board’s first step was to select a tax to lead this strategy, and for this it looked to the dog tax. In 1867, it converted it from an assessed tax to an excise licence.109 George Hunt, Secretary to the Treasury while Disraeli was Chancellor of the Exchequer, was ‘the parent of the scheme’.110 Henceforward all regulations applicable to excise duties and licences applied to the duties on dogs. The Act of 1867 reduced the rate from 12 shillings to five shillings on the basis that where the tax was low, there would be less incentive to evade it and greater support for it as a tool of regulation and control.111 It was also thought that a low rate rendered exemptions unnecessary, and that this would also remove opportunities for evasion.112 Accordingly, the sheepdog exemption was abolished, leaving only the exemption for puppies under six months of age.113 109 Dog Licences Act 1867 (30 & 31 Vict c 5). 110 HC Deb 8 April 1869, vol 195, col 405. 111 HC Deb 28 February 1867, vol 185, cols 1197–98 per George Hunt. See also HC Deb 9 March 1866, vol 181, col 1835 per William Gladstone. 112 HC Deb 23 April 1868, vol 191, col 1191. 113 Dog Licences Act 1867 (30 & 31 Vict c 5). Proposals that each licensed dog should carry a ticketed collar showing the duty had been paid were rejected on the basis of impracticality: HC Deb 28 February 1867, vol 185, cols 1200–02.

An Innovation in Tax Administration: The Licensing of Dogs  97 This, along with the removal of any breed or purpose classification, was intended to ensure that a large number of dogs would be brought into charge, and as a result the revenue would be unaffected. A penalty of £5 was imposed for keeping a dog without a licence or failing to produce a licence for examination by officers of the revenue or police.114 The traditional method of church door notices was employed to inform taxpayers where they could obtain the licences,115 and the excise officer granting them was to keep a register of licences, which was to be open to inspection by a justice of the peace or officer of police.116 The conversion of the dog tax to an excise licence also solved the problem of a complicated assessment and collection timetable. Excise licences were issued on 1 January and payment was to be made at that point and in advance, because the taxpayer paid for the year in which the chargeable commodity was kept rather than having to make a return at the end of the previous year when it was kept. By obtaining the tax for the dogs kept at the time the application for the licence was made, all problems of inaccurate returns or straightforward evasion were obviated. Experience had shown that under this simple and efficient system there were few problems collecting the duty. Furthermore, it was well known that the excise was the most professional of all the revenue departments, and the other departments of stamps and taxes both aspired to the same levels of efficiency and expertise.117 Most administrative reforms the Board of Inland Revenue desired were modelled on practice in the excise, and from the mid-nineteenth century the Board took every opportunity to transfer functions to the excise where administrative efficiency was at stake. In one simple action, therefore, all the problems and grievances relating to the dog tax were addressed, and centralised administration was introduced as a natural and unquestionable consequence. The evidence suggests that there were a number of factors which led the Board to select the dog tax for this entirely novel treatment, lying in its particular characteristics and the social context of the time. Procedurally, the tax exemplified the practical difficulties of collection under the local amateur system. Fiscally, it raised a respectable and consistent amount of revenue, but not so much that were the reform to fail the results would be catastrophic for the public finances.118 It was also a tax which had a clear potential to yield more in that it was well known that extensive evasion and inherent difficulties of collection meant that only a fraction of dogs liable to the tax were actually assessed. Politically, its

114 Dog Licences Act 1867 (30 & 31 Vict c 5) ss 8, 9. As with all excise penalties, this could be reduced to 25 shillings at the discretion of the magistrates and, upon application to the Board, even more. 115 Dog Licences Act 1867 (30 & 31 Vict c 5) s 7. 116 ibid s 6. 117 Ninth Report of Commissioners of Inland Revenue (HC 1865, 3550) xxvii, 105, 132. 118 Though William Gladstone was not prepared to forgo even a small revenue: HC Deb 9 March 1866, vol 181, col 1835.

98  Chantal Stebbings regulatory function, wherein, as Stephen Dowell observed, its real importance lay,119 was failing utterly, which made its reform desirable and urgent. This was especially so since the nuisance and danger caused by an uncontrolled dog population reached their height in the middle years of the nineteenth century. The public fear of another outbreak of rabies in particular could be exploited to ensure popular acceptance of the reform, by promising a more effective control of dogs in the sense of bringing more of them into charge through a more efficient administrative process. Finally, and crucially, the Board was convinced that this innovation would be so successful that not only would it open the door to converting all the other assessed taxes, it would also demonstrate to the public the benefits of centralised tax administration. The dog tax was, in other words, the ideal tax in the mid-1860s for the Board of Inland Revenue to promote its abolition of the localist system of tax administration when the direct approach had failed. Other than some concern and dissent within the revenue departments, notably the Office of the Chief Inspector, who believed that there was no advantage to be gained from such a reform,120 and objections relating to the removal of the sheepdog exemption, the conversion of the dog tax to an excise licence, though ‘a complete novelty in practice’,121 was soon affirmed as a ‘very successful measure’.122 It was, in fact, an administrative triumph, and Dowell proclaimed that ‘No alteration in the form of a tax was ever more successful’,123 a rare instance of the successful reform of a tax possessing both fiscal and police provisions, a notoriously difficult exercise. It was widely accepted by the taxpaying public, pleased at a reduction in the rate and to be relieved of a cumbrous process and unpleasant altercations with collectors. Over 400,000 more dogs were licensed in just eight months in 1867 than had been taxed under the old system in the whole of 1866.124 Some 817,970 licences were issued, and £204,492 duty charged.125 When the figures were available for the whole of 1868, they revealed an increase of over half a million dogs licensed as compared with dogs taxed in 1865–66.126 In total, in 1868 nearly a million dog licences were issued, raising nearly the same amount of revenue as the old assessed tax had, despite the tax having stood at 12 shillings and the licence duty at five shillings.127 Obviously the significant reduction of the rate played its part in increased registration, but it also became clear that the local assessors and collectors had failed to uncover these chargeable animals, and the success of the reform was largely due to the assistance of the police.128 This ensured that the new form of the tax as a licence

119 Dowell,

above n 19, 293.

120 TNA CUST 45/292, ‘Objections to Proposal for Converting Assessed Taxes into Licence Duties’. 121 Eleventh

Report of Commissioners of Inland Revenue (HC 1867, 3927) xxi, 503, 516. Report of the Commissioners of Inland Revenue (HC 1868–69, 4094) xviii, 607, 617. 123 Dowell, above n 19, 301. 124 Twelfth Report of the Commissioners of Inland Revenue, above n 122, 607, 617. 125 Eleventh Report of Commissioners of Inland Revenue, above n 121, 503, 516, 517. 126 Twelfth Report of the Commissioners of Inland Revenue, above n 122, 607, 617. 127 ibid 617. 128 Eleventh Report of Commissioners of Inland Revenue, above n 121, 503, 516. 122 Twelfth

An Innovation in Tax Administration: The Licensing of Dogs  99 was more than a financial success, and played a significant role in addressing the problem of unregulated dogs129 despite earlier fears that a substantial reduction in the duty would allow the dog nuisance to increase, as had happened in Ireland.130 In practice, the number of stray dogs decreased in both urban and country areas, especially in the latter. In terms of its impact on the tax establishment, the conversion of the dog tax allowed the Board to do away with a number of surveyorships, saving £3000 pa.131 The simplification of accounts resulting from the change to annual rather than quarterly payments also allowed further retrenchment of staff, which would save on salaries, travel and other expenses.132 In purely practical terms, the success of the tax was helped by the cooperation of the officers of the Postmaster-General, who acted as agents for the Board of Inland Revenue to receive the duty at Money Order Offices.133 The success of the reform came at some administrative cost. The reform occasioned ‘an enormous amount of trouble’134 to the revenue authorities all over the country, mainly in terms of increased prosecutions. This was partly due to the fact that the old tax had been so badly administered that it had become largely unknown to many dog owners, and so the excise licence duty, when it was introduced, in effect amounted to a new and therefore unfamiliar tax.135 The abolition of the sheepdog exemption gave rise to widespread discontent among poorer farmers and shepherds, to whom sheepdogs were indispensable and to whom the duty constituted a real burden.136 THE CONVERSION OF ALL ASSESSED TAXES INTO EXCISE LICENCES

With the success of the dog tax conversion, the Board could then move to the unrolling of its strategy, namely the abolition of all the assessed taxes and their reintroduction as excise licences, ousting localism entirely and bringing in total central government control. It did so in 1869. Since the Chancellor of the Exchequer, Robert Lowe, described as ‘a hard, fierce man with a gift for enmity’,137 wanted the assessed taxes to be collected ‘in a more prompt and

129 The new dog licence was combined with increased police powers. See Dowell, above n 19, 301, fn 2. 130 HC Deb 28 February 1867, vol 185, col 1197 per Mr Marsh. 131 Thirteenth Report of Commissioners of Inland Revenue, above n 108, 193, 343. 132 ibid. 133 Twelfth Report of the Commissioners of Inland Revenue, above n 122, 607, 617. See also Seventeenth Report of the Postmaster General on the Post Office (HC 1871, 438) xvii, 793, 812–13. 134 Twelfth Report of the Commissioners of Inland Revenue, above n 122, 607, 617. 135 In 1884, 894,738 licences were issued and £335,527 revenue raised: Twenty-eighth Report of the Commissioners of Inland Revenue (HC 1884–85, 4474) xxii, 43, 83. 136 HC Deb 23 April 1868, vol 191, col 1179 per Sir William Stirling-Maxwell and cols 1188–89 per Mr McLaren. 137 John Maloney, ‘Gladstone’s Gladstone? The Chancellorship of Robert Lowe, 1868–73’ (2006) 79 Historical Research 404.

100  Chantal Stebbings business-like manner’,138 it was a politically propitious time to complete the execution of the Board’s scheme and apply the dog tax model to all other taxes in that class.139 Lowe repealed the assessed taxes on servants, carriages, horses, horse dealers and armorial bearings.140 On and after 1 January 1870, new duties of excise were to be paid in relation to every male servant, certain carriages, all horses and mules, armorial bearings and horse dealers.141 In order for this reform to work and the taxes to be sustainable, the new excise duty had to be uniform and much simpler than the old assessed taxes. The tax on hair powder, which raised a mere £925 a year, was abolished altogether; that on armorial bearings was effectively raised to make it worth its while; the tax on fourwheeled carriages was reduced, and pony carriages were to be taxed according to weight rather than the number of wheels; the cost of licences for horse dealers was made uniform in London and outside; the duty on male servants was made uniform and all exemptions abolished; and the duties on stage coaches, horses and hackney carriages were reduced and simplified.142 The licences would be granted prospectively, in January every year, anticipating future expenditure on chargeable items during the year. Taxpayers would be required to make a simple return of chargeable items in their possession on that date, deliver the form to the proper officer, pay the whole duty based on those items in a single payment during January rather than in two instalments at the end of the assessment period, and be given a licence authorising them to keep and use the articles declared in the return.143 The licences would expire on the following 31 December. Exemptions were claimed in the return. Penalties were imposed for not delivering a return or delivering an incorrect one. This new system under the management of officers of excise who, said Lowe, ‘thoroughly understand their business’144 would save ‘great expense and trouble’.145 By making these changes to the system of administration in 1869, Lowe established the nucleus and the germ of a thoroughly sound and sensible mode of collecting taxes – one which will not only yield a much larger sum to the Revenue, but which will be infinitely easier and less troublesome to the tax-payer.146

138 HC Deb 8 April 1869, vol 195, col 376. 139 The inhabited house duty was not included in this reform. 140 Revenue Act 1869 (32 & 33 Vict c 14). 141 ibid s 18. 142 HC Deb 8 April 1869, vol 195, cols 391–97. 143 The duties were to be paid upon licences taken out by the employer of the servant, the keeper of the carriage, horse or mule, the user of the armorial bearings or the individual who carried on the trade of horse dealer: Revenue Act 1869 (32 & 33 Vict c 14) s 18. If a person should increase the number of taxable articles, a supplementary declaration would need to be made: Revenue Act 1869 (32 & 33 Vict c 14) s 23. 144 HC Deb 8 April 1869, vol 195, col 376. 145 ibid col 379. 146 ibid col 398.

An Innovation in Tax Administration: The Licensing of Dogs  101 He was convinced that the effect of the reform would be beneficial to the taxpayer and public revenue alike. He stressed that as far as the Exchequer was concerned, it amounted to no less than a windfall. It would save some £23,000 pa in poundage to clerks to local commissioners and collectors, £5000 in incidental expenses to clerks, savings in some Inland Revenue staff and in the considerable costs of stationery and printing – in all, some £70,000.147 The reforms in the collection of the assessed taxes, along with similar adjustments of collections of the land tax, inhabited house duty and income tax, would bring in some £3,350,000, which sum permitted the Chancellor to repeal and reduce taxes and still ensure a surplus. Income tax was reduced by a penny, the corn, fire insurance, hair powder, tea vendors’ and cab mileage duties were abolished altogether, and yet a significant surplus was assured. The reforms were lucrative and immediate, providing a simple and just solution to a long-standing problem of inefficiency in tax collection and widespread evasion. They constituted, he said, ‘a great administrative reform’.148 As Lowe observed in correspondence about his plan with William Stephenson, the chairman of the Board of Inland Revenue at that time, some three days after he had introduced it in his budget speech, the ‘results are so wonderful that I can’t help suspecting some fallacy. Pick a hole in them if you can.’149 Certainly Lowe’s proposal was met with delighted surprise after a gloomy assessment of the country’s financial situation in the early part of his budget speech in April 1869. The Times congratulated him on ‘the triumph of having introduced the most ingenious Budget of the present century. He had to tell a wretched story, and, behold! it is triumphant.’150 Indeed, his budget speech ‘had all the elements of a sensational Drama’.151 All this the result of ‘a stroke of Administrative Reform so wholly unexceptionable’ that the Opposition could claim it as their own.152 Lowe, and Hunt before him, were proved correct. As with the dog tax conversion, that of the remaining assessed taxes proved a great success for the public revenue. The government had estimated that half the due amount would be collected (£600,000), but in fact nearly the full amount was collected in the first three months.153 That reform, along with some administrative reforms to the income tax, resulted in the total revenue for 1869–70 exceeding that of the previous year by nearly £3 million.154 As Lowe observed, the reform to the collection

147 The board predicted that the conversion of the assessed taxes alone would save £100,000 a year; £23,000 would be saved in poundage to clerks; £5000 in travelling expenses of clerks; £25,000 in salaries; £8000 in meetings and surveys; and £6000 in paper and printing: The Times, 9 April 1869, 4. 148 HC Deb 8 April 1869, vol 195, col 382. 149 TNA CUST 45/292, ‘Letter from Robert Lowe to William Stephenson, 11 April 1869’. 150 The Times, 9 April 1869, 7. For an assessment of Lowe’s budget, see BEV Sabine, ‘Great Budgets VII: Lowe’s Budget of 1869’ [1973] British Tax Review 100. 151 ibid. 152 ibid. 153 HC Deb 11 April 1870, vol 200, cols 1608–09. 154 ibid col 1609.

102  Chantal Stebbings of the assessed taxes was effected ‘without the slightest pressure’,155 and the sums collected were evidence that taxpayers were willing to pay under the new system. ‘It has been found,’ he said, ‘that the direct method of paying once for all, not for articles used a year and a-half ago, but for articles now in use, makes shorter work, and is, therefore, pleasanter.’156 There is little recorded popular resentment of the reform. Taxpayers might regret the change on grounds of familiarity, but were persuaded by a number of factors: the ease of collection once a year instead of twice and by professional revenue officers ‘who really understand their business’,157 the lowering of the rate, the simplification of the process, the uniformity of professional administration and the end to their liability for the defalcations of dishonest collectors. The new arrangement did not increase the burden on those who were in the habit of paying their taxes anyway, but did catch those who were not, for whatever reason. It was also clear that the early concerns as to the lack of the local knowledge which parochial officers had always prided themselves upon proved unfounded. The efficiency and drive of revenue officers combined with their professionalism ensured they gained any relevant local knowledge swiftly and accurately. Even the removal of the local commissioners as the appellate tribunal for taxpayers challenging their assessment did not give rise to vocal opposition. This was so despite the commissioners being perceived, albeit largely incorrectly, as acting on the basis of fairness rather than the letter of the law, and that under the new arrangements appeals would be heard by magistrates determining cases in strict accordance with the law. Certainly fears with respect to the number and type of appeals before magistrates were seen to be unfounded when the dog tax conversion was carried out, for the magistrates were then seen to deal swiftly and efficiently with large numbers of complaints against owners of dogs.158 The third step in the Board’s strategy to limit the role of localism in the administration of the direct taxes was for it to utilise the success of the assessed taxes conversion. With taxpayers becoming accustomed to centrally administered direct taxes, and a public and irrefutable confirmation of the Board’s view that local tax administration was inefficient and central administration was better for taxpayer and revenue alike, it could press with greater authority for the more general reduction of localism in the other direct taxes. CONCLUSION

Though a minor impost in terms of revenue, the dog tax possessed significance in its own right, derived from its position as one of a handful of taxes which had 155 ibid col 1610. 156 ibid. 157 The Times, 9 April 1869, 4. 158 TNA CUST 45/292, ‘Memorandum on the Proposition to Alter the Mode of Collecting the Duties on Assessed Taxes’.

An Innovation in Tax Administration: The Licensing of Dogs  103 an unambiguously regulatory purpose of real importance. As late as 1896, the police authority could still observe with some truth that the dog licence fee ‘was fixed rather with the object of exterminating worthless and ownerless dogs than to augment the Exchequer receipt’.159 The control of the dog population, with its problems of disease and injury to people and stock, was the reason for its first introduction and potent justification for its retention and longevity. This was so even though its regulatory effectiveness was limited160 and it was an immensely troublesome tax, to the extent that the Chancellor of the Exchequer observed in 1874 that [t]o settle a proper system of taxation on dogs, taxing those that ought to be taxed, and not taxing those that should not be taxed, was something like the attempt to balance an egg on its end, which even Columbus could not do till he broke the egg.161

Its recasting as an excise licence – an obvious solution once it had been conceived – ensured it was one of the most enduring of the Georgian luxury taxes. Purchased at the Post Office every January, at the point of abolition in 1987 it cost 37p. The responsibility for levying the duties came to lie with the local authorities, and they, not the national Exchequer, received the proceeds.162 When the dog licence was finally abolished, after nearly 200 years as an impost and 120 years in the form of a licence, and when dogs had ceased to be regarded as proper objects of taxation, its underlying rationale as a control mechanism was confirmed by the immediate introduction of an exclusively regulatory statutory framework.163 It is in its contribution to tax administration, however, that the special place of the dog tax lies in the history of tax law. The success of its conversion from an assessed tax to an excise licence in 1867 undoubtedly led to the application of the model to all the assessed taxes in 1869, but it was not, as has been thought, serendipitous. It was not the isolated conversion to an excise licence of a minor impost with special characteristics, within a diminishing class of taxes, to sustain it because of its important regulatory functions, then, in the light of its success, to be followed by the opportune conversion of similar taxes a few months later. Nor was it an experiment in the sense of seeking to discover whether a proposed course of action would be successful and then, when it had proved itself, applying it to all the other assessed taxes. Correspondence between the Chancellor

159 TNA MEPO 2/8820, Handwritten note to the ‘Memorandum: Proposal that the Police should issue Dog Licences’ (24 November 1896). 160 In the years following the administrative reforms and the increased licensing of dogs, the nuisance of loose and uncontrolled dogs in large numbers persisted, harassing people in villages and towns and chasing and attacking sheep in the countryside: HC Deb 27 April 1874, vol 218, cols 1189–202. 161 ibid col 1201. 162 See Local Government Act 1888 (51 & 52 Vict c 41) s 20; Finance Act 1908 (8 Edw VII c 16) s 6. 163 Provisions relating to the control of dogs were included in the Environmental Protection Act 1990, ss 149–51 and the Dangerous Dogs Acts 1989 and 1991. Note, however, that separate legislation for the control of dangerous dogs had been enacted shortly after the conversion of the tax: Dogs Act 1871 (34 & 35 Vict c 56).

104  Chantal Stebbings of the Exchequer and the Board of Inland Revenue, the internal reports of the revenue boards, what was said and, indeed, what was unsaid, and the pattern of legislative reform show that the conversion of the dog tax was neither of these. The entire process, of which the conversion of the dog tax was just the first step, was a bold and preconceived plan, executed with confidence, which formed part of a long game by the Board.164 Its politically and pragmatically driven aim was to reduce to an absolute minimum local lay involvement in the administration of all the direct taxes and to replace it with central government control. Even only insofar as it succeeded with the assessed taxes, it constituted much more than a simple change in the machinery of collection. It established something far more profound and significant in the history of tax administration. It amounted to a complete restructuring of those imposts and marked the beginning of the end of localism in tax administration. The ultimate aim, though one left largely unsaid, was to ensure that an entirely different tax, the income tax, would be brought within the control of central government. The revenue authorities were acutely aware that localism could only hinder the full potential of the income tax as the impost of the modern age. The success of the assessed tax conversion gave weight to their struggle against deep-seated cultural and social norms in this respect by demonstrating to the taxpaying public the advantages of centralised administration, but it would prove no easy task: income tax had achieved public acceptance precisely because it was administered under the orthodox localist system that the assessed taxes had enjoyed for decades. Tensions between the management imperatives of the revenue authorities and the popular attachment to local tax administration proved tenacious. The profound problems inherent in the orthodox model of tax administration, which the dog tax had both revealed and, indeed, provided a solution to, persisted in relation to the income tax. The dog tax embodied the first step; it would take another hundred years for the process to be complete,165 a testimony to the immensely strong attachment of British taxpayers to the orthodoxy of localism in tax administration and a confirmation, if such were necessary, of the considerable obstacle facing the revenue boards in their quest for enduring efficiency. That does not diminish the significance of the dog tax reform of 1867 to the history of tax administration. The Board understood that it was a key event,166 and that the subsequent conversion of all the assessed taxes made the year 1869–70 ‘memorable in the history of [the] Department’.167 As Robert Lowe observed, the dogs were the ‘pioneers’.168 164 TNA CUST 45/292. ‘Memorandum on the Proposition to Alter the Mode of Collecting the Duties of Assessed Taxes’. 165 The culmination was the removal of the assessing functions of General Commissioners of Income Tax some 100 years later by the Income Tax Management Act 1964. 166 Eleventh Report of Commissioners of Inland Revenue, above n 121, 503, 515. 167 William Stephenson opened the 1870 Annual Report – a major retrospective – with the observation that the year 1869–70 ‘will be memorable in the history of this Department’. Thirteenth Report of Commissioners of Inland Revenue, above n 108, 193, 207. 168 HC Deb 8 April 1869, vol 195, col 379.

5 Forms and Formalities RICHARD THOMAS

ABSTRACT

T

he processes leading to the making and then determination of an assessment to income tax and capital gains tax by an officer in HM Revenue & Customs and their predecessors are still set out, 50 years after its enactment, in the Taxes Management Act 1970 (TMA 70).1 These processes in their current form date back to 1965 (replacing similar processes performed by a number of different people), but they are supported by a number of sections in the penultimate part of TMA 70 (headed ‘Miscellaneous and Supplemental’) which are of ancient lineage, some capable of being traced back to the first half of the nineteenth century (and in one case even earlier). This chapter examines those provisions, how taxpayers and the assessing authorities communicated with each other in relation to statutory notices and requirements, and the form that those communications took. For the most part, the provisions of the law governing these matters have not unduly troubled the courts. Recent years, though, have seen a substantial increase in the reported decisions of the tribunals and courts about them, some of them by the author of this chapter. The opportunity to hear some of the cases where the provisions were in point led to the author researching the long history of some of them – a study which suggests that the courts have not fully understood the context and historical development of the more modern versions of some of the provisions. THE ASSESSING AUTHORITIES

The reference above to ‘assessing authorities’ is deliberate. Since 1965, it has been the function of an inspector of taxes, and more recently an officer of HM Revenue & Customs (HMRC), to make assessments of income tax and to deal



1 Taxes

Management Act 1970 (TMA 70).

106  Richard Thomas with all the consequences. Before then, things were different. The income tax procedures as they stood from 1803 to 1965 were extremely complex.2 There was not just the taxpayer and a single officer. Various roles were played by the General Commissioners, the Additional Commissioners,3 the assessor and the clerk to the Commissioners on the one hand, and, to an extent, the Surveyor of Taxes, later Her Majesty’s Inspector of Taxes, and his staff on the other. And depending on the Schedule under which the tax was charged, the procedures and the people involved differed. Avery Jones identifies 29 steps (some being alternatives).4 The administration of collection of the tax was also complicated, with collectors generally being appointed by the General Commissioners (in England and Wales at least) and often being the same person as the assessor rather than being state employees. THE LAW ON COMMUNICATIONS BY THE ASSESSING AUTHORITIES

The Act of 1842 and Its Predecessors In examining what the assessing authorities were expected to do by way of communication in the nineteenth century, the statutory text chosen is the Income Tax Act 1842,5 enacted on the reintroduction of the income tax by Robert Peel after a gap of 26 years. As the 1842 Act is to a very substantial degree a writing out of the Income Tax Act 1806,6 which was itself very similar to the 1805 and 1803 Acts, the latter where income tax in its current form essentially starts, the wording of the 1842 Act also explains what was happening from 1803 to 1816. But it is also necessary to look at some ‘management’ Acts that were in force during the period from 1803 as they supplemented 1842 Act. Notice to Deliver Returns Communication with a taxpayer began in relation to a tax year when the assessor, appointed for a parish or place by the General Commissioners for the relevant division for the year, was required to give Notice to every Person chargeable to [income tax] or leave such Notice at his Dwelling House or Place of Residence, or on the Premises to be charged by such 2 This statement did not apply to the procedures for the graduated taxes on income, supertax, replaced by surtax, applying from 1910 to 1973. 3 Where the assessment was under Sch D, which applies to all income exempt from ownership and occupation of land in the UK, and income from offices (and from 1922 employments). In particular, Sch D covered income from trades and profession, interest and fixed income from capital and income from abroad. 4 JF Avery Jones, ‘Administrative Income Tax Legislation: A Century of the Revenue Following the Letter (but Not the Spirit) of the Legislation’ (2015) British Tax Review 28, 34–43. 5 Income Tax Act 1842 (5 & 6 Vict c 35) (1842 Act). 6 Income Tax Act 1806 (46 Geo III c 65) (1806 Act). There were some new management provisions, notably in relation to the Special Commissioners and to Ireland.

Forms and Formalities  107 Assessment …, requiring every such Person to prepare and deliver, in manner directed by this Act, all such Lists, Declarations, and Statements as they are respectively required to do by this Act,7

One of the lists etc was a statement of the income assessable under Schedule D (return), and it is on Schedule D assessments that this part of the chapter concentrates. As a backup to these ‘particular’ notices, the assessor was required to cause notices to the same effect to be ‘affixed on or near to the door of the church or chapel and market house or cross (if any) of the city, town, parish, or place’ for which the assessor acted (‘church door notices’, as they were called), calling on all those in the parish chargeable to the tax to ‘make out and deliver’ various lists etc to him. The affixing of the notices was ‘deemed good Service of such Notice’.8 But if the assessor neglected to give particular notice to any person to whom it should have been delivered, the surveyor could cause a notice ‘to be delivered to or served on’ that person.9 Making the Assessments From the time set down for the delivery of returns, there was a great deal of toing and froing between the various persons involved in the assessing process – apart from the taxpayer – which culminated in the assessor, the Additional Commissioners10 or (in some Schedule A cases) the surveyor making assessments, in the sense of fixing the amount of taxable income and the tax payable. But this was not the end of the process, as the assessments were only definitive once the General Commissioners had ‘signed and allowed’ them. The surveyor might object to the amount assessed by the Additional Commissioners and the matter would be referred to the General Commissioners. In such a case, the surveyor was required to give notice in writing of his objection to the party assessed or leave it, or cause it to be left, at the party’s ‘last or usual Place of Abode’.11 In other cases, the Additional Commissioners delivered the assessments to the General Commissioners, but no assessment was to be ‘delivered’ to the taxpayer until the expiration of 14 days after the assessment was delivered to the General Commissioners and the surveyor had had ‘notice’.12 7 1842 Act, above n 5, s 48 (emphasis added to the relevant terms discussed here and below). One of the lists etc was a return of income assessable under Sch D (return). 8 ibid s 47 (original emphasis). Evidence given by Inland Revenue officials to the Royal Commission on the Income Tax in 1919 was that church door notices were relied on only where penalty proceedings were taken for failure to make a return. 9 ibid s 57. 10 The Additional Commissioners were local people knowledgeable in matters of trade who were responsible for making assessments under Sch D. 11 1842 Act, above n 5, s 116 read with Taxes Act 1803 (43 Geo 3 c 99) s 21 (1803 Act). 12 ibid s 117.

108  Richard Thomas Appeals Where a taxpayer appealed against an assessment or an objection to an assessment made by a surveyor, the General Commissioners appointed days for hearing appeals and the assessors were to cause notice of the days appointed to be given to the respective appellants.13 Church door notices again served as a backup.14 The General Commissioners were empowered on receipt of the appeals to require the appellant to provide information and documents by way of precept ‘delivered to or left at the last or usual place of abode’ of the person.15 Again, a church door notice served as backup. Surcharges Taxpayers might also, if they failed to deliver their return, be surcharged by the surveyor, who had to ‘give [notice] or cause to be given to every person surcharged, or to leave or cause to be left at his or her last or usual place of abode’.16 Collection Once the assessments were made and allowed and had become final, the Commissioners had their clerk prepare duplicates and delivered one such to the collectors for each parish, together with warrants for collecting the tax. Each collector was required to ‘make demand of the sums contained in the duplicate from the parties charged, or at the places of their last abode, or on the premises charged with the assessment’.17 The Taxes Management Act 1880 and the Interpretation Act 1889 The Taxes Management Act 1880 (TMA 80)18 was a consolidation of the management provisions in the 1842 Act together with such of those in the Management Acts of 1803, 1808 and 1810 as remained.19 Section 16(e) TMA 80 13 ibid s 118. 14 ibid s 114. 15 ibid s 120. 16 50 Geo III c 55, Rule 4 (1810). 17 1803 Act, above n 11, s 12. This remained the location of the requirement for the collector’s demand until it was replaced by TMA 80 (see n 18). It is now TMA 70, s 60. 18 Taxes Management Act 1880 (TMA 80). The Act was drafted by AV Dicey and is remarkably modern in some respects. Section 2 starts: ‘This Act is divided into parts, as follows …’ This type of formulation did not appear again in tax law until Capital Allowances Act 2001, s 1, the first Tax Law Rewrite Act. 19 Many of the provisions of the earlier management acts also related to the assessed taxes and land tax. TMA 80 includes provisions about those taxes, by which time they were in vestigial form (the only assessed duty being inhabited house duty).

Forms and Formalities  109 generalised the various service rules that have been described above thus: ‘All notices or forms required or allowed to be served on any person may be either delivered to such person or left at the usual or last known place of abode of such person.’ And for the first time in tax law, section 16(f) made some provision about postal service: A notice to a person to be given by a surveyor [but no other person or body] may be served and sent by post by a prepaid registered letter, and in proving such service or sending it shall be sufficient to prove that the letter containing the order, notice, or document was properly addressed, registered, prepaid, and posted;

In 1880, the notices that were given by a surveyor were of: • any objection to an amended return;20 • any objection to a schedule submitted by a taxpayer; and21 • surcharges.22 Surveyors were also allowed ‘to cause’ a notice to be given to a person to make and deliver a return if the assessor had neglected to do so.23 They further acted as assessors in the Metropolis (London).24 In 1889, the first comprehensive Interpretation Act was passed.25 Section 26 applied to any Act passed after its commencement which authorised or required any document to be served (or given etc) by post. Unless that Act showed a contrary intention, service was deemed effected by properly addressing, prepaying and posting a letter containing the document. It also provided that service was effected at the time at which it would be delivered in the ordinary course of post (unless the contrary was proved).26 Section 26 of the Interpretation Act 1889 therefore did not apply to section 16(f) TMA 80.27 LATER TAX PROVISIONS ABOUT SERVICE

The first fundamental change to the locally administered income tax system came in the Finance (1909–10) Act 1910, which brought in the graduated supertax on total incomes in excess of £5000. This tax was the responsibility of the 20 1842 Act, above n 5, s 118. 21 ibid s 121. 22 TMA 80, s 63(2). 23 ibid s 43(1). 24 ibid s 43(2). 25 Interpretation Act 1889. 26 ‘This section in effect generalised a provision as to service by post found in Table A of the Companies Act 1862 and other Acts’, C Ilbert, Legislative Methods and Forms (Oxford, Clarendon Press, 1901) 351. 27 Given the terms of the last part of s 16(f), the first ‘leg’ of s 26 of the Interpretation Act 1889 was redundant.

110  Richard Thomas Special Commissioners (Specials), with the local surveyor not playing any part. The Specials were given the powers of a surveyor in relation to assessment.28 Section 72(8) of the 1910 Act empowered the Commissioners of Inland Revenue to make regulations in relation to the management of supertax. The first regulations made in 191029 provided for the Specials to serve a notice to make a return and a notice of assessment on a person, and any person assessed was entitled to give notice of appeal to them. The final paragraph of the Regulations said that any notice to be served on any person may be either delivered to them, left at their usual or last known place of abode or sent by post by prepaid registered letter addressed to the person at their usual or last known place of abode, and that service by post was deemed sufficient for the regulations. In 1922, the words ‘by prepaid registered letter’ were replaced with ‘by letter’. Legislation about postal service next appeared in section 36 of the Finance (No 2) Act 1915:30 Any notice or other document to be given, served, sent, or delivered, under the Income Tax Acts may be served by post in such cases as the Commissioners of Inland Revenue direct by regulations to be made by them for the purpose. Any notice or other document to be given, served, sent, or delivered to or on an employed person may be served by post at his place of employment.

This was the first tax provision about service to fall within the scope of section 26 of the Interpretation Act 1889. The first sentence greatly expanded the scope of who could use post beyond the surveyor and the Specials. The second sentence is notable for extending the place of service by post to a place of employment, probably in reaction to the increased number of employees being liable to be assessed on wages as a result of World War I. Regulations were also made in 192031 to allow weekly wage earners to be assessed quarterly by the surveyor under Schedule D and they also provided for the notice of assessment to be sent to the person at his place of employment or at his usual or last known place of abode. They also sanctioned service of any such notice by post. Regulations under the first sentence of section 36 of the Finance (No 2) Act 1915 were first made on 11 April 191732 and authorised two classes of document to be served by post: a particular notice given by an assessor under section 48 of the 1842 Act to prepare and deliver the various returns; and a notice of assessment or charge and of the day appointed for appeals. 28 ibid s 72. The Special Commissioners were civil servants within the Inland Revenue. 29 Statutory Regulation & Order (SR&O) 1910/666. 30 Finance (No 2) Act 1915. 31 SR&O 1920/1991. The special reference to postal service in these regulations was probably necessary because it was assumed that ‘the Income Tax Acts’ in s 38 did not include secondary legislation. It is still the case that secondary tax legislation that involves notices to taxpayers has its own postal service provisions – see, eg reg 216 of the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682). Had the 1920 regulations limited themselves to service at the place of employment, the second sentence of s 36 would have covered them as it was not limited to provisions about service in the Income Tax Acts. 32 Regulations of 11 April 1917 (1917 regulations).

Forms and Formalities  111 All income tax (including supertax) law on service was consolidated in the Income Tax Act 1918.33 It is worth noting that section 99(2), requiring returns to be delivered, unlike its predecessors dating back to at least 1803, uses the term ‘personally’ in relation to the method of service of a notice by the assessor, confirming what previously had to be inferred from later parts of the relevant provision.34 Section 36 of the Finance (No 2) Act 1915 became section 220(8), with the first sentence consolidated as an enabling power. DEVELOPMENTS AFTER 1918

Statute and Regulation A series of regulations between 1922 and 193935 gave the Specials powers in relation to supertax and surtax to serve notices by post in relation to anti-avoidance legislation. They also allowed requests by either General Commissioners or the Specials in accordance with rules about deceased estates to be made by post and for notices by a surveyor to employers for information about payments to employees to be sent by post to the last known place of business or place of abode for non-corporates or to the secretary of a company at the registered office. The Income Tax Acts were again consolidated in 1952, with section 220 of the Income Tax Act 1918 becoming section 515 of the Income Tax Act 1952.36 That section provided in relation to service: 515. – (1) A notice or form which is to be served under this Act on a person may be either delivered to him or left at his usual or last known place of abode. (2) A notice under sections nineteen to twenty-four of this Act may be given either personally, or by leaving a notice at the dwelling-house, place of residence or place of business of the person chargeable, or on the premises to be charged by the assessment. (3) A notice to a person to be given by a surveyor may be served by registered post. … (6) Notwithstanding anything in this section – (a) any notice or other document to be given, served, sent or delivered under any of the provisions of this or any other Act which relates to income tax may be served by post in such cases as the Commissioners of Inland Revenue direct by regulations to be made by them for the purpose; and (b) any notice or other document to be given, served, sent or delivered to or on an employed person may be served by post at his place of employment.



33 Income

Tax Act 1918. doubt this was one of the results of the Act being drafted by Parliamentary Counsel. 35 SR&O 1922/1329; SR&O 1928/610; SR&O 1936/1103; SR&O 1938/1637; SR&O 1939/1292. 36 Income Tax Act 1952. 34 No

112  Richard Thomas Subsection (2) for the first time used ‘place of business’.37 Subsection (3) derived ultimately from section 16(f) TMA 80. The effect of subsection (6)(a) and of regulation made in 1952 seems to be that the notices described in subsection (2) could be served by post. Regulations were made under the Income Tax Act 191838 revoking the 1917 regulations (limited to certain notices given by the assessor). They provided that all notices and other documents relating to Income Tax could be served by post by any inspector, collector or assessor. After the Income Tax Act 1952, only two further regulations were made under section 515(6)(a). In 1965, all previous surtax regulations were revoked, and in their place the Commissioners of Inland Revenue (who had assumed responsibility for surtax from the Special Commissioners) could use the post to give notices about surtax to taxpayers.39 And in 1967, regulations40 extended service by post to capital gains tax. On the introduction of corporation tax: • The Finance Act (FA) 1966, Schedule 6, paragraph 13 applied section 515(1) and (3) to corporation tax. • Paragraph 24(1) of that Schedule provided that service on a company of any document under or in pursuance of the Corporation Tax Acts could be effected by serving it on the secretary (if a body corporate) or on a liquidator, or, in the case of a non-corporate body or a corporate body where there was no secretary, the treasurer or acting treasurer. • Paragraph 26 provided that all Corporation Tax documents could be served by post. The service provisions of the Income Tax Act 1952 and of the 1952 and later regulations were consolidated again, and finally, in TMA 70 as section 115: (1) A notice or form which is to be served under the Taxes Acts on a person may be either delivered to him or left at his usual or last known place of residence. (2) Any notice or other document to be given, sent, served or delivered under the Taxes Acts may be served by post, and, if to be given, sent, served or delivered to or on any person by the Board, by any officer of the Board, or by or on behalf of any body of Commissioners may be so served addressed to that person – (a) at his usual or last known place of residence, or his place of business or employment, or

37 This may have been a rather belated codification of the decision in M’Lean, discussed below in the text at n 54, given the immense knowledge of the income tax possessed by Sir John Rowlatt, drafter of the Income Tax Act 1952. 38 SI 1952/653 (1952 regulations). They were made under s 220(8) of the Income Tax Act 1918 in March 1952 and came into force on 6 April 1952, the day the Income Tax Act 1952 also came into force. 39 SI 1965/433. 40 SI 1967/150.

Forms and Formalities  113 (b) in the case of a company, at any other prescribed place and, in the case of a liquidator of a company, at his address for the purposes of the liquidation or any other prescribed place. (3) In subsection (2) above ‘prescribed’ means prescribed by regulations made by the Board, …

Section 115(1) changed the term ‘place of abode’ in section 515(1) of the Income Tax Act 1952 back to ‘residence’ for non-postal delivery only,41 and omitted the provisions of section 515(2) applying to the assessor. That subsection had used dwelling house, place of residence and place of business for personal service, and these were then moved into section 115(2). That subsection combined the provisions of section 515 simply permitting service by post and the 1952 regulations with provisions specifying the place of postal service, something that previously had to be inferred from the list of places where personal service was permitted. Section 115(2)(b) was new, but there never have been any regulations made under section 115(2). However, paragraph 24(1) of Schedule 6 FA 1966 (service on secretary of body corporate good service on company) became section 108 TMA 70,42 and at the time of enactment the Companies Act 1967 was in force, which included: 437 Service of documents on a company (1) A document may be served on a company by leaving it at or sending it by post to the registered office of the company.43

This would appear to permit service by an officer of the Board at the registered office either by hand or by post in any case where it might be said that that office was not the place of residence or of business of the company. Analysis of and Conclusions on the Provisions for Communications to the Taxpayer It is not necessarily a wise author who tries to find a logical and coherent use of language in statutes of the early nineteenth century, before the establishment of the Office of Parliamentary Counsel. But with some assistance from the professionally drafted TMA 80, some suggestions about what the provisions about the methods and places of communication can be at least exposed to scrutiny. Two factors must be borne in mind when examining the way in which the assessing authorities communicated with taxpayers and vice versa in the period between 1803 and 1915. 41 ‘Residence’ had last appeared in the 1842 Act, above n 5. 42 Section 108(1) seems to be HMRC’s preferred way of serving statutory notices on companies, including bodies corporate. 43 This became s 725 of the Companies Act 1985 and is currently s 1139 of the Companies Act 2006.

114  Richard Thomas First, the constituency of people with income tax liability that needed assessing was small, consisting chiefly of those owning or occupying land or having a trade or profession and whose incomes exceeded a threshold. In practice, the income tax did not apply to labourers and many artisans. Second, the geographical unit to which the obligations of the assessor and collector applied was the parish. This was essentially the land occupied by a village or part of a town with a church. Thus, distances, except in very remote areas such as Northern Scotland, were also small. In this connection, church door notices delineated the people required to deliver returns to the assessor: such a notice was ‘to all Persons resident’ in the parish.44 Particular notices were either (i) given to every person chargeable to tax in respect of any property situated in or profits arising in the parish or (ii) left at his or her dwelling house or place of residence, or on the premises to be charged,45 all within the parish limits.46 Some further guidance about the target of the notices is given in section 106 of the Income Tax Act 1842. This is headed ‘In what Districts the Duties are to be charged’, and divides people chargeable into: (i) householders not engaged in trade etc; (ii) persons engaged in trade etc; and (iii) persons neither householders nor in trade. People in the first category were chargeable in the parish in which their dwelling house was situated; those in the second category, in the place where the trade etc was carried on;47 and those in the third category, where they ‘ordinarily reside’. For traders, Rule 5 of the Rules applying to Cases I and II of Schedule D also related to this question: … every Person shall be chargeable in respect of the whole of [the] Duties [under Schedule D] in one and the same Division, and by the same Commissioners, (except in Cases where … the same Person shall be engaged in different Concerns relating to Trade or Manufacture in divers Places, in … which Case[] a separate Assessment shall be made in respect of each Concern at the Place where such Concern if singly carried on ought to be charged as herein directed …

As section 48 of the 1842 Act made clear, there were two distinct ways of actually effecting proper service of a particular notice to make returns: (i) giving it to the person; and (ii) leaving it somewhere associated with the person. 44 1842 Act, above n 5, s 47. 45 This formulation would apply to liability to tax under Schs A and B. Normally the occupier of any land was charged to tax, unless they were a tenant of land with an annual value of less than £10 or under a short-term lease. Tenants in occupation who paid the tax could recoup it from the rent they paid. 46 1842 Act, above n 5, s 48. 47 In the case of the trade of ‘Manufacture of Goods, Wares, or Merchandize’, the place of assessment was the place of manufacture, wherever sales took place. In the case of two places of trade, there were provisions to avoid double assessment, although returns were required in each place (ibid, s 110).

Forms and Formalities  115 The first is the traditional method of service, followed in court proceedings of all types at the time and later,48 by putting the notice into the hands of the person residing in the parish to whom it is addressed. That ‘giving’ is delivering personally can be seen later on in section 98 of the 1842 Act,49 where it goes on to say: … and if any Person residing within any Parish or Place at the Time such general Notice as aforesaid shall be given, or to whom such Notice shall be personally given, or at whose Dwelling House or Place of Residence the same shall be left, … shall refuse or neglect to make out such Lists …

The second method was leaving the notice at the ‘dwelling house or place of residence’, or (for Schedule A) at premises charged with tax in the parish. Why both ‘dwelling house’ and ‘residence’ for the ‘leaving’ leg of the method of service? A dwelling house is undoubtedly a type of residence, so is it just nineteenth-century torrential drafting or does ‘residence’ have a wider meaning than a building in which a person resides in the sense that their private and family life, eating and sleeping etc, is conducted there, the place where they are ‘at home’ or ‘dwell’? It is convenient at this point to mention the term ‘place of abode’, which does not appear in section 48 but does feature in several other places in the 1842 Act. The summons to the Additional Commissioners in section 19 of the 1842 Act has only ‘place of abode’, rather than ‘dwelling house’ or ‘residence’, as a place of non-personal service, and the same is true of returns under section 51 of the income of others – name and place of abode are what are required and of the entries in the assessment books. ‘Last or usual’ place of abode is the location specified for the service of the General Commissioners’ precept for information and for the surveyor’s objections.50 These are the only two instances in the 1842 Act of a reference to what was a previous abode, and seems to cater for the possibility that a taxpayer served with a notice at their place of residence had left before these two notices fell to be given. By contrast, section 50 of the 1842 Act, requiring a return of ‘Lodgers or Inmates’, requires the ‘place of residence’ of those not permanently resident in the dwelling house of the person required to make the return. It seems, then, that ‘abode’ and ‘place of residence’ would cover any place where a person was to be generally found even if not their dwelling house. Section 16(e) TMA 80 tidied this up by simply saying that service on a person could either be (personal) delivery or leaving at ‘the usual or last known place

48 That service of summons in court proceedings required personal service can be seen from the Civil Law Procedure Act 1852 (c 76) at s 17: ‘The Service of the Writ of Summons, wherever it may be practicable, shall, as heretofore, be personal; but it shall be lawful for the Plaintiff to apply from Time to Time, on Affidavit, to the Court out of which the Writ of Summons issued, or to a Judge.’ 49 See text at n 7, above. 50 1842 Act, above n 5, ss 120, 121.

116  Richard Thomas of abode’. Thus, ‘last known’ became a general location even for service of a particular notice to deliver a return. The question that comes to mind here is: can a ‘residence’ or ‘place of abode’ cover premises which are not themselves dwelling houses but places of business or trade, given that the persons within the purview of an assessor of a parish include those carrying on a trade in the parish wherever their dwelling house. This is, of course, of particular relevance to bodies of persons, especially bodies corporate, who were within the charge to income tax.51 The question is answered by the case law. In The Attorney General v Borrodaile,52 the Crown laid information before the Court of Exchequer seeking to recover a penalty under the 1806 Act from William Borrodaile ‘for omitting to make a joint return to the property-tax as directed by that act’. Borrodaile was the precedent acting partner in a shipowning venture, the ship being chartered to the East India Company. The issues in the case are not relevant to this chapter, but it is referred to because the report recites the information laid, which includes: ‘[the assessor] … gave the said defendant, and left at the house where the said trade was carried on, in the ward aforesaid [of Langbourn in the City of London], the usual notice’.53 Attorney-General v M’Lean54 was a case about the assessed taxes. Mr M’Lean had not made a return of a male servant, carriage, horses and dogs in the parishes of St Marylebone and St Bride (Fleet Street). At trial in the Exchequer Court for penalties for failure to make returns under section 25 of the Assessed Taxes Act 1803,55 which required persons ‘residing or being’ in a particular place to make a return to the assessor for that place, the Court of Exchequer held that Mr M’Lean had been rightly penalised. Martin B said: With regard to the word ‘reside,’ it is to be observed, that inasmuch as all persons in England are to be assessed to these duties where they are liable, and the object of the Act is to obtain them from all persons who are liable, it is, so far as the Crown is concerned, wholly immaterial whether the defendant makes the return where he sleeps or where he spends the day in the conduct of his business. If, therefore, it were necessary to give judgment upon the meaning of the word ‘reside’ alone, without the words ‘or be,’ there would, I think, on the authority of Blackwell v England (8 E & B 541), be strong ground for contending that one who spends the day at his shop attending to his business, and may there be seen and conversed with on matters of business, and does not choose to be communicated with elsewhere, is ‘residing’ there, much more than at the place where he sleeps at night, but does not wish anyone to call on him, and where, if anyone does call, he cannot see him during the day. 51 The return of trading profits by a body of persons, even if made by the individual responsible for doing it, the chamberlain, was required to be done at the place where it would be charged if acting on its own behalf – Rule 5 of Rules applying to Cases I and II of Sch D. 52 Attorney-General v Borrodaile (1814) 1 Price 148; 145 ER 1359. 53 Emphasis added. 54 Attorney-General v M’Lean (1863) 1 H & C 750. 55 Assessed Taxes Act 1803 (43 Geo 3 c 161).

Forms and Formalities  117 Although the words used here were ‘reside or be’, it was held that a place of business was a residence, and as the terms ‘residence’ and ‘abode’ seem interchangeable in the Income Tax Act 1842, it is reasonable to suggest a place of abode in the parish includes a place of business. Section 16(e) TMA 80 (place of abode) was litigated in Berry v Farrow & another.56 Bankes J held that the registered office in the City of London of a company of which Berry was the manager but which did no business and where he attended ‘on rare occasions’ was not the ‘usual or last known place of abode’ of Mr Berry and thus an assessment on him on the basis of which a collector’s demand was founded was invalid. Bankes J said: The question I have to decide is what, having regard to the scope and intent of the Act, is the meaning of the expression ‘usual or last known place of abode’ as used in s. 16? It is, I think, clear that the object of the notice is to give the person charged an opportunity of challenging the correctness of the assessment by appealing against it, and a construction should therefore be adopted which would include some place at which the notice would be likely to be brought to his attention. I cannot lay down a rule of construction which shall be applicable to all companies and all company officials … upon the facts of this case I cannot come to the conclusion that 32, Gresham Street was in any real sense the plaintiff’s place of abode, either from the business or domestic point of view.

A place of business to which a person frequently resorts and which is not also their domestic residence can thus be a ‘place of abode’ just as much as a wholly domestic place. And although none of the cases cited relate to a body corporate (in Borrodaile it was a partnership and in Berry an employee of such a body), unless a corporation’s place of business counts as an abode or residence, the purposive construction adopted by Martin B in M’Lean would be put at nought.57 As to the service rules for corporation tax (now in section 108 TMA 70), it would seem that they give an alternative method of service to direct service on the company at its place of abode or business (as permitted by section 115), namely to the secretary or treasurer. The place of service on that officer is not mentioned.58 Service on a company has, however, been the subject of a recent case. In Spring Salmon & Seafood Ltd, re petition for judicial review,59 the company petitioned the Court of Session for judicial review of a notice of enquiry into its tax return given by HMRC. The notice to be valid had to be given by a certain date, and was given to the company secretary at its business offices in Reading, England. 56 Berry v Farrow & another [1914] 1 KB 632. 57 It is interesting to note that in Clause 412 of the Codification Committee’s draft Bill (1936) (Cmd 5131) ‘place of business’ is used only in relation to a company. 58 The effect of the Companies Act service provisions (now Companies Act 2006, s 1139) seems to be to permit service on the company itself at its registered office even if that is not its place of abode or place of business. 59 Spring Salmon & Seafood Ltd, re petition for judicial review [2004] ScotCS 39, [2004] STC 444.

118  Richard Thomas The company maintained that the notice had to be given to it at its registered office in Scotland, because in section 115(2) only paragraph (b) applied to companies and, in the absence of regulations having been made under that subsection, the provisions of the Companies Act 1985 had to apply, those permitting service only at the registered office. Denying the petition, Lady Smith agreed with HMRC that section 115(2)(a) applied to all persons, including bodies corporate. That meant that the business address of the company fell within section 115(2)(a) as a ‘place of business’. She denied the relevance of the Companies Acts provisions, which, she held, were in any event merely facilitative, not mandatory. Was the Royal Mail Used for Communications with Taxpayers? The previous sections of this chapter show not only the methods of personal service, including deemed personal service effected by leaving the notice at premises, but also the locations which might be served. They also show the very slow development of references to service by post in income tax law, which started in 1880 and were made wholly general only in 1952. Readers of this chapter who are based in the UK will probably be accustomed to dealing with HMRC or their predecessor by post. An efficient and cheap postal system was established in the UK in 1840, so the question that clearly arises is whether between 1803 and 1816, and after 1842 when income tax was reintroduced, the postal system was used at all for statutory income tax communications from the assessing authorities. A further question is if it was, for how long that had been the case, and, if not, for how much longer that remained the case. Allied to this question is whether the methods of service set out in the Income Tax Act 1842 (and previous Acts to similar effect) actually encompassed postal service and whether or not that was the general view then, it was used in practice. Although it is not possible to be certain,60 the circumstantial evidence is that service and delivery of the tax documents required by an enactment was not effected by post at any time between 1803 and 1816, but that there is some evidence that it was used from 1842 before its authorisation in 1880 and later Acts. This is said for three main reasons. The first is that legislation in force from 1803 to 1880 relating to the service and delivery of documents was essentially unchanged. In the period from 1803 to 1816, it would have been unthinkable for the postal system to be used.61 First, it was extremely patchy. Within London and in other large towns there was generally a relatively cheap postal service, but sending letters to and from places 60 The closure of various institutions, including in particular the National Archives, in much of 2020 has meant that the conclusions must be tentative. 61 Reliance here has been placed inter alia on ‘Britain’s Post Office’: H Robinson, Britain’s Post Office (Oxford, Oxford University Press, 1953).

Forms and Formalities  119 outside London was much more expensive. The post could be very slow and unreliable. Many inhabitants, especially of rural areas, did not have an official address either.62 And in the first two decades of the nineteenth century, letters were not pre-paid and could be refused by anyone unwilling to pay the high postage, so that the postal system could not be entrusted with the task that could or would otherwise be performed by a locally based official.63 The second reason is the construction of the legislation applying to the service of documents in the relevant period. Use of the postal system would make it difficult for the assessor whose responsibility it was to deliver the returns to ‘make out an Alphabetical List, and deliver the same to the Inspector or Surveyor of the District, containing the Names of all Persons to or on whom such Notices have been delivered or served in pursuance of this Act’, and to swear on oath to the General Commissioners that it had been done.64 If the assessor had posted any notices, it is difficult to see how he could have sworn such an oath. Nor is any recognition of the universal cheap postal system – the famous ‘penny post’, which came into effect in February 184065 – to be found in the Income Tax Act 1842 or in any subsequent act relating to the income (or assessed) taxes until 1880. However, many other enactments in the 1840s did recognise that the postal system was suitable for delivery of official and important documents. Examples include the Railway Regulation Act 1840,66 which required railway companies to ‘make up and deliver’ returns of traffic figures, charges and accidents ‘at or sent by the Post to’ the Board of Trade, and section 8 of the Railway Regulation Act 1842,67 under which a notice could be served requiring a return of accidents to the Board at [o]ne of the terminal Offices of any Railway Company or the Secretary or Clerk of the said Company, or by sending the same by Post addressed to him at such Office, shall be deemed good Service upon the said Company.

62 This was still said to be the case in country areas in evidence to the 1919 Royal Commission: Minutes of Evidence (RCME) 22,331 (Cmd 615). 63 Novels published after 1842 but referring to pre-1840 periods include comments on the price of postage for the recipient. See, eg ch 5 of Charles Dickens’s Martin Chuzzlewit, where Tom Pinch muses on a letter he has written to his sister in London and says ‘postage from such a distance being a serious consideration, when one’s not rich’. An endnote in the Penguin English Library edition (1968) says postage between London and a village near Salisbury before 1840 would have cost the recipient 9d. In Felix Holt: The Radical, George Eliot talks in the Introduction of ‘those days [it is set in 1832] there were pocket boroughs, … three-and-sixpenny letters’. 3s/6d was 42 pence (compared with one penny after 1839). 64 1842 Act, above n 5, s 57. 65 Postage Act 1839 (c 52). The preamble recited that ‘Whereas it is expedient that the present Rates of Inland Postage on Letters should be reduced to one uniform Rate of a Penny charged on every Letter of a given Weight’ and s 1 provided that before its coming into operation a warrant was to be published in the London Gazette. That warrant brought the penny post into operation on 9 January 1840 on all letters not exceeding half an ounce (14 grams) in weight, ‘without reference to the number of sheets or pieces of paper, or enclosures, of which the same may be comprised, or to the distance or number of miles the same shall be conveyed’. 66 Railway Regulation Act 1840. 67 Railway Regulation Act 1842.

120  Richard Thomas The fact that these Acts postdate the penny post is not, it seems, coincidental. Many other Acts after 1839 involving regulation, including a number of ‘Clauses Acts’, had provisions relating to service by post. For example, the Companies Clauses Consolidation Act 184568 (essentially Model Articles of Association) had clauses permitting service by a company on its shareholders: Notices requiring to be served by the company upon the shareholders may, unless expressly required to be served personally, be served by the same being transmitted through the post directed according to the registered address or other known address of the shareholder.69

A further factor of note is the extreme geographic localism of the system for getting returns, making assessments (including appeals) and collecting tax which existed from 1803 to 1965. As noted above, serving notices to deliver returns and of assessments was carried out on the basis of the parish by the assessor, and tax was demanded by the collector, both of whom (if not the same person, as they often were) were appointed for the parish and lived (and worked, where not retired) in the parish.70 It was highly convenient and a saving on costs (especially before 1840) if the duties of the assessor were executed by personal delivery at the door of the taxpayer or by leaving the notice at the premises following a walk from his office. Similarly, the collector (often the same person as the assessor) could ‘walk his round’ to make demand and collect any tax, or would receive the taxpayer in his office. Of the other parties involved in the process, the General Commissioners and their clerk were appointed for a division based on the pre-Conquest arrangements for public meetings, the hundred.71 In a number of large towns, including London, there were divisions for areas smaller than the hundred72 and there were also divisions for certain ancient establishments, such as the two ancient English universities (Oxford and Cambridge) and the Inns of Court. The local presence of the Board of Inland Revenue was the surveyor. If the surveyor objected to a return or wished to surcharge a taxpayer, he was under an obligation to serve or cause a notice to be served of the additional amounts proposed to be assessed. The offices of the surveyor were spread around the country, mostly on the basis of population, but also so as to give remote areas of sparse population a local presence.73

68 Companies Clauses Consolidation Act 1845 (CCCA). 69 ibid s 136. 70 Evidence to the 1919 Royal Commission said that there were over 15,000 parishes. 71 Hundreds were called wapentakes in some Northern counties and lathes in Kent. 72 Note that in Borrodaile (see text after n 52, above) the assessor was for the Langbourn ward of the City of London. 73 In the time of the author’s career, there were tax offices in, among others, Wick, Dunoon, Buckie, Ulverston, East Dereham, Porthmadog and Enniskillen, with two in Haverfordwest.

Forms and Formalities  121 There is, however, evidence that the post was used in some circumstances. Stebbings74 reports from a minute of the Board of Inland Revenue in 1850 that after the introduction of the penny post in 1840, use of the post had been adopted enthusiastically by the tax tribunals. This was, though, in the context of the Special Commissioners, who were based in London but sat in some provincial towns which could be a long distance from taxpayers wishing to appeal. It was said in the Inland Revenue’s evidence to the 1919 Royal Commission that use of the post enabled appeals to be settled without personal appearance, presumably by writing to the surveyor. Official instructions to surveyors of 1855 show that the surveyor was to pay the postage or carriage of all letters or parcels which he sent on official business. These would not have been letters etc to, for example, Head Office (of the Inland Revenue) or to other surveyors, as these were sent on Her (or His) Majesty’s Service75 without postage. According to the instructions of 1886, the surveyors could use the postal system to issue letters to defaulters or when ‘Return Papers’ were being sent out, and that where a surveyor acted as collector, correspondence with a taxpayer and the sending of demand notes was to be done by post. This, of course, was after the enactment of TMA 80, which authorised the surveyor to use registered post. Evidence to the 1919 Royal Commission by senior Inland Revenue officials and by assessors and collectors also showed use of post, including by assessors, though this was said to be recent and postdated the 1917 regulations.76 It was also stated that first (but not second) demand notes by the collector were given by post, which was not something that had been authorised by the 1917 regulations. An assessor stated that precepts for accounts were sent by registered post. There thus seemed little need for use of post for official notices to taxpayers, mostly given by assessors, in contrast with the other Acts mentioned above, which could be of nationwide reach, and little evidence of its use by officials concerned until 1917. The instructions to surveyors could well refer to the type of correspondence on returns which was not part of the statutory system. As to the demand notes that were to be posted, it may be the case that as the legislation did not refer to service or giving notice it was thought that section 16(f) TMA 80 was not a limitation on such service. And it was probably the localism of the assessor’s role in particular that delayed the general authorisation of postal service for tax purposes, as it was not until the disruption of the First World War that the income tax notices that this part of this chapter has concentrated on could be delivered by post,

74 C Stebbings, The Victorian Taxpayer and the Law (Cambridge, Cambridge University Press, 2009) 167. 75 On Her Majesty’s Service. 76 RCME, above n 62, 23,059 ff.

122  Richard Thomas and 1952 before a general provision for postal service for income tax was introduced. Non-local taxes such as surtax and the wartime duties had adopted postal service much earlier. Postal Service at What Address? It is noteworthy that when section 26 TMA 80 first permitted postal service by the surveyor, it did not, as many of the mid-century Acts did, make it clear at what address the notice was to be ‘directed to’ (to use the phraseology of those Acts). And when the assessor was also allowed to use the post in 1917 no address was prescribed, a situation which remained until 1970. It must therefore have been assumed until 1970 that the address for posting a notice to make a return would be the usual or last known place of abode, that is, the place where leaving rather than personal service was allowed. Regulations relating to taxes imposed on a nationwide basis, such as supertax, did in some cases specify the address, and for individuals that was the usual or last known place of abode. TMA 70 saw a subtle change over the Income Tax Act 1952 and the regulations made under it. It had to cater both for the abolition of the assessor’s role in serving notices as set out in section 515(2) of the Income Tax Act 1952 and a decision to incorporate the regulations in primary legislation. It retained in section 115(1) the primary method of personal service and the extension77 of that to deemed personal service by leaving at the ‘usual or last known place of residence’ (which under the case law would include a place of business). Personal service would no longer be by the assessor, whose office had been abolished in the Income Tax Management Act 1964.78 The most likely person to use personal service after 1964 would be the collector, who had to make demand under section 60 TMA 70 at the ‘last or usual place of abode’ (wording still slightly at odds with section 115(1)). All references to postal service were in section 115(2) TMA 70 and thus removed from the regulations. Notices so served were to be ‘addressed’ to the person at their usual or last known place of residence, or at their place of business or place of employment. Whether this wording means that it is open to HMRC to serve a valid notice by post to a last known place of business which the taxpayer no longer occupies or owns, given that the Barons of the Exchequer Court said in M’Lean that place of residence and of business are the same thing, was decided in the taxpayer’s favour in Re a Debtor (No 1240/SD/91), ex parte the debtor v Commissioners of Inland Revenue Commissioners.79 The judge,

77 In Berry, above n 56, Bankes J described the service by ‘leaving’ as an extension of the normal rule. 78 Income Tax Management Act 1964. 79 Re a Debtor (No 1240/SD/91), ex parte the debtor v Commissioners of Inland Revenue Commissioners [1992] STC 771.

Forms and Formalities  123 WA Blackburne QC,80 had to deal with the point that the notice given to the debtor under section 55(9) TMA 70 of the amount of tax due (a notice required to be given by the inspector following determination of an appeal) might not have been properly given. The notice was sent by post to the debtor at the address of a flat in London. The debtor said in evidence that he had never received the notice; that the flat had not been his place of residence but only of business, his residence being in another flat; and that a bank had taken possession of the business flat three months before the purported date of issue of the notice. On the basis of this evidence, the judge held that the business flat was not the debtor’s ‘usual or last known place of residence’, so the notice was not validly served and the statutory notice of debt to found the bankruptcy had to be set aside. Implicitly, then, he decided that ‘place of business’ in section 115(2) meant one current at the time. The Role of the Service Provisions of Interpretation Acts Following the enactment of section 36 of the Finance (No 2) Act 1915, the Interpretation Act 1889 began to have a role in income tax matters, which is continued by the Interpretation Act 1978.81 Section 26 of the Interpretation Act 1889 had two effects: it deemed good service by post if the letter was properly addressed as well as prepaid and posted, and it deemed delivery to have been on the date it would have been delivered in the ordinary course of posting. The deeming of delivery is important if a person claims not to have received a relevant notice at all, and the first tax case that the author could trace which involved the Interpretation Acts was R v General Commissioners of Income Tax for Tavistock, ex parte Adams.82 The appellant denied having received notice of a meeting of the General Commissioners. The inspector could not show by the use of postage books etc that it had been sent, only what the procedures in the office were. Lord Parker CJ held on the authority of R v County of London Quarter Sessions Appeals Committee, ex parte Rossi83 that if the notice simply did not arrive it was not deemed served, and the appellant could therefore seek to disprove service under section 7 of the Interpretation Act 1978. The judge held that the appellant had proved ‘to the contrary’ that the notice had not been served, a decision he said he came to with reluctance because it was a mere technicality. Lord Parker added that anyone seeking to prove that he did not receive a notice also had to show that it was not received by somebody on his behalf



80 Later

Blackburne J. Act 1978 (IA 1978). 82 R v General Commissioners of Income Tax for Tavistock, ex parte Adams (1969) 46 TC 154. 83 R v County of London Quarter Sessions Appeals Committee, ex parte Rossi [1956] 1 QB 682. 81 Interpretation

124  Richard Thomas who had authority to receive it and deal with it (Mr Adams was away from the address he gave for correspondence where his wife lived: Lord Parker said that receipt by her would have been receipt by him in the case).84 The deeming of the time of delivery is relevant where there are sanctions for, or other disadvantageous effects of, not meeting a time limit. It has to be said that sanctions for failing to file a return on time or for making a late appeal were very rarely enforced until the introduction of self-assessment in 1996, which probably accounts for the comparatively large numbers of cases, especially before the First-tier Tribunal (Tax Chamber) (FTT), which have been concerned both with whether HMRC had served a notice to file or whether a return had been delivered on time. Dealing with these cases extensively is not really a matter for a historical account, but statements made by judges in three relatively recent cases were to an extent the impetus for this chapter because they seem not to have considered the historical antecedents of section 115 TMA 70. In Spring Salmon,85 Lady Smith had said: I would, however, add that section 115 is not, in my view, prescriptive. It certainly sets out a means by which the Inland Revenue can put effective intimation [ie notification] beyond doubt but these are not the only means by which intimation may be achieved. I see no reason why, for instance, effective intimation would not be achieved by handing a notice of enquiry to a company director in the course of a meeting.

In Tinkler v HMRC,86 the FTT found as fact that a notice of enquiry into Mr Tinkler’s return had not been properly given as it was sent to an address which was not the last known residence. This finding was not appealed. The case also addressed the issue whether notice to an agent was sufficient: the Upper Tribunal (Tax and Chancery Chamber) (UT) held that it was, citing Spring Salmon, but only if the agent was duly authorised to receive it, and that service on such an agent was equivalent to service on the taxpayer, there being nothing in section 9A TMA 70 (notices of enquiry) to exclude service on an agent.87 In Romasave (Property Services) Ltd v HMRC88 (Romasave), the UT also held that the postal notice provision under consideration was permissive, not exhaustive, as to the methods of postal notification available (the UT instanced only section 1139(1) of the Companies Act 2006, but also seemed to be considering service on a duly authorised agent by post). This was, however, a VAT 84 In R (Broomfield and others) v HMRC [2018] EWHC 1966 (Admin), [2018] STC 1790, Lewis J dealt with proving the contrary under s 7 of the Interpretation Act 1978. He held that in a ‘last known residence’ case, the recipient ‘must show that the notice or document was not delivered to the address to which it was, properly, addressed’. 85 See text after n 56. 86 Tinkler v HMRC [2016] UKFTT 170 (TC). 87 The Court of Appeal, however, held, reversing the UT, that the agent did not have authority to receive a notice and did not deal with the question whether a notice that was only properly notified to an agent was valid service. This aspect may be considered by the Supreme Court. 88 Romasave (Property Services) Ltd v HMRC [2015] UKUT 254 (TCC).

Forms and Formalities  125 case, and the relevant provision, section 98 of the Value Added Tax Act 1994,89 though superficially similar to section 115(2) TMA 70, is not comparable once the context is examined, including the existence of section 115(1), the nonexercise of section 115(3) and the historical development of service provisions leading up to the enactment of section 115. CONCLUSIONS ON SERVICE ON TAXPAYERS

What seems clear from all the above is that, from 1803 to 1917, the norm for all official communications relating to income tax was personal service, ie to the taxpayer themselves, which extended90 to include leaving the notice at a place of abode or residence. This norm can be seen in the Land Tax Acts – section 16 of the Land Tax Act of 1696 provided for collection of the tax by the collectors: And the same Collectors or such other Collectors as shall be appointed by the Comissioners in this behalfe shall demand all and every the Summ and Summs of Money which shall be taxed or assessed as aforesaid … Which said Demands shall and may be made of the Parties themselves if they can be found or else att the place of their last abode or upon the Premisses charged with the Assessment.91

Although Acts from 1803 onwards at times changed the wording for the place where the ‘leaving’ method of service was allowed, to include dwelling house and residence, and ‘usual or last known’ later appeared as a qualification of the ‘leaving’ place, and although ‘residence’ was given a wide construction in M’Lean and Berry to include a place of business, there was no suggestion in the cases that some other place of service, for example with a solicitor, was acceptable. Where service by post of important income tax documents was permitted first in 1880 for notices by the surveyor, the requirement was that the letter was to be ‘properly addressed’. That could only be a reference to the provisions in, or incorporated in, the Income Tax Act 1842 about places of residence or abode. That was confirmed in the 1910 regulations allowing the Special Commissioners to serve notices for supertax by post addressed to the person ‘at their usual or last known place of abode’, adding that service by post was deemed sufficient for the regulations. The 1917 regulations authorising delivery by post of the assessor’s notice to deliver a return and of notices of assessment and the date for hearing appeals did not specify a location for delivery, nor did the 1952 regulations authorising

89 Value Added Tax Act 1994, c 23. 90 See n 77. 91 8 & 9 Gul III c 6. See also s 38 of the Duties on Income Act 1799: ‘[assessor shall] give Notice to every Householder within the Limits of the Places for which such Assessors shall so act, or leave the same at his or her Dwelling House’.

126  Richard Thomas all notices from inspectors of taxes and assessors to be posted, but the regulations must have been intended to limit the place of address to those allowed to the assessor and surveyor for personal service. However, the use of the word ‘may’ was seized on in Spring Salmon as indicating that section 115(2) TMA 70 was not exhaustive. But ‘may’ is also used in subsection (1) and it can hardly be suggested that service of notices at all is optional. What each of the subsections is doing is offering a choice of methods or locations at which effective service may be made, but nothing in the history or the wording of section 115 suggests that the list of methods or places can be ignored as long as the notice might be said to have come to the attention of the intended recipient. In Tinkler and Romasave, it was pointed out, correctly, that service that did not comply with section 115 (and, it could be said, section 108) TMA 70 could not be deemed properly effected by section 7 of the Interpretation Act 1978, and so the burden of proof would be on HMRC to show that the notice was served. This is cold comfort to a taxpayer who, because they did not in fact see a notice, was not able to appeal against what might be very serious monetary demands. It is why Parker CJ was wrong in Adams to suggest that service on Mrs Adams from whom Mr Adams was separated would have been good service. Lord Parker seemed to regard the arguments of counsel for Mr Adams as mere technicalities, despite the serious outcome for Mr Adams had he lost.92 It is also notable that where an alternative method of service for bodies corporate is allowed, it is specifically provided for by section 108(1) TMA 70. The specific rules for companies (place of business for direct service or to the secretary under section 108) seems to call into question whether section 1139 of the Companies Act 2006 is ousted by them. Lady Smith seemed to think the Companies Act provisions were not relevant in Spring Salmon.93 It is also the case that both Spring Salmon and Tinkler were concerned with a notice the ignoring of which had no consequences for the recipient and which need not be in writing. Lady Smith contrasted the situation with notices which require service on a person to engage that person in matters, the informing of, or failure to comply in time with, which could have very serious consequences.94 The conclusion that might legitimately be drawn from all this is that, whatever the position might be in other areas of law, service by post was closely circumscribed as to the types of sender and types of notice, and equally as to the places to which a postal communication to a taxpayer might be addressed. 92 Counsel was Marcus Jones, a thorn in the Inland Revenue’s (and Establishment-minded judges’) flesh for many years through his taking of ‘technicalities’. 93 At [29]. 94 In HMRC v Mabbutt [2017] UKUT 289 (TCC), the Upper Tribunal held that an error in the year of assessment on a notice of enquiry could be excused as it was a less formal matter than a notice of assessment.

Forms and Formalities  127 The tax law has closely followed, either by necessary implication or expressly, the places where personal service may be deemed effected. The use of specific limitations to stated addresses where postal service is used does not prejudice HMRC because they can now invoke Interpretation Act 1978 in all cases. THE LAW ON COMMUNICATING WITH THE ASSESSING AUTHORITIES

Delivery of Returns The lists, declarations and statements required included ‘Returns of the Amount of Annual Value or Profits’ so far as applicable to the persons served. They were required to be ‘delivered to’ the Assessor of the same Parish or Place, but where a return of profits chargeable under Schedule D was to be made and the assessor’s notice said that an office was open for the receipt of returns and a proper person was appointed to receive them, ‘delivery shall be made at that office to that person’.95 The relevant term remains ‘delivery’ to this day.96 Appeals A taxpayer who thought himself aggrieved by an assessment made by the Additional Commissioners or an objection to an assessment made by any surveyor, could, on giving 10 days’ notice in writing to the surveyor, appeal to the General Commissioners.97 This is still the requirement today.98 Other Requirements to Communicate Taxpayers might also claim exemptions and allowances, and to do so every person claiming to be entitled to such exemption had to ‘deliver or cause to be delivered to the Assessor’ a notice of a claim for the exemption.99 If the taxpayer was given a precept for information and documents, he was required to ‘deliver’ it to the General Commissioners (which would be done through their clerk).100 If a taxpayer wished to appeal to the Special Commissioners, he had to ‘give notice in writing’ to the surveyor.101



95 1842

Act, above n 5, s 49. 70, s 8(1). 97 1842 Act, above n 5, s 118. 98 TMA 1970, s 31A(1). 99 1842 Act, above n 5, s 164. Claims are now ‘made’ to HMRC. 100 ibid s 118. 101 ibid s 130. 96 TMA

128  Richard Thomas Analysis of and Conclusions on the Provisions for Communications to the Assessing Authorities In relation to all of these communications by taxpayers, the place where delivery or giving should take place was clearly stated in notices, so it is hardly surprising that there should have been no body of case law which deals with alleged failure to deliver communications at all. And until relatively recently, there was no case reported concerning failures to deliver notices to the tax authorities within the time specified. This latter absence may well be due to the relaxed attitude taken by the authorities to failures of a few days or even weeks.102 It is also notable that the Inland Revenue did (and HMRC do) not seem to object to requirements (implied or express) in the law to deliver to a specific officer. What constitutes a proper delivery of a return (and hence good service if relevant) depends on the requirements in the notice given by the assessor, but where the notice stated that the assessor had an office open for the receipt of returns and a proper person had been appointed to receive them,103 then ‘delivery’ seems to connote actually giving the return to that person rather than leaving it at the place of residence or abode. This is consistent with section 16(e) TMA 80, although the question arises whether section 16(e) actually applied to notices given by taxpayers, as not only are the various words used (especially dwelling house) not entirely apt to apply to, in particular, the surveyor, who, unlike the clerk and the assessor, would not have what might be recognised as a place of business, but ‘delivery’ is not necessarily equated with ‘service’. As to whether the assessor could be given statutory notices by post, the same factors applied as in the consideration above of whether communications to a taxpayer could or would have been by post. The places where delivery was required to be made was either in the same parish (as with the assessor and collector), often in an office set up for the purpose, or to an office in a town in or near the hundred. Those with sufficient income to be within the scope of income tax would probably have servants and the use of carriages and possibly trains (after 1841) to get them to the nearby town where the clerk to the Commissioners or the surveyor had their office. However, the 1886 Instructions to Surveyors refer to them reimbursing assessors and collectors for unstamped letters and parcels which they received on official business. It is certainly possible that in some instances the clerk to the Commissioners and the surveyor received statutory notices by post, even if no authority for that

102 There is an example of this attitude in R v Special Commissioners of Income Tax (ex parte Magill) (1979) 53 TC 135, the first late appeal case traced, where the inspector said in affidavit that his office did not regard a letter as a notice of appeal and that consequently ‘my Office took no steps in relation to Section 49(1) of the Taxes Management Act 1970 to deal with the letter as an application for a late appeal and to consent to it as such (as they would have normally done where the assessment was then only seven weeks old)’. 103 1842 Act, above n 5, s 49.

Forms and Formalities  129 existed. Indeed, the 1855 Instructions to Surveyors refer to them, not the assessor, being reimbursed for unpaid letters and parcels received on official business. As to whether the law sanctioned use of post by a taxpayer, no primary or secondary legislation has ever applied to a communication by a taxpayer. The result of this seems to have been that a taxpayer could not and cannot invoke the Interpretation Act in their favour. However, and as a result of increasing stringency over delivery of returns in particular since the introduction of self-assessment in 1996, very many published decisions of the Specials and the FTT have considered the application of section 7 of the Interpretation Act 1978 in relation to notices by the tax authorities.104 They have also in some cases applied section 7 to delivery of documents by taxpayers, which is incorrect and a mistaken reading of section 115 TMA 70. The FTT has also held that section 7 does not apply, albeit for the wrong reason. Section 84(2) FA 2003 permits service by post in Stamp Duty Land Tax (SDLT) cases without specifying the sender. But section 84(3) goes on to specify what counts as being ‘properly addressed’ for the purposes of section 7 of the Interpretation Act 1978, though only for notices etc given by HMRC. This suggests that section 84(2) only applies to HMRC. However, in Stephen Pariser v HMRC,105 a case concerning SDLT, the FTT held that section 7 of the Interpretation Act 1978 did not apply, because section 84 FA 2003 provided ‘sufficient contrary intention’. This seems wrong not only because it does not apply anyway for the reasons above, but also because section 84 does not show any contrary intention: quite the opposite. LOSS AND DESTRUCTION OF DOCUMENTS

The real interest in Pariser is the invocation by the FTT of section 82 FA 2003. This provides: Loss or destruction of, or damage to, return etc (1) This section applies where – (a) a return delivered to the Inland Revenue, or (b) any other document relating to tax made by or provided to the Inland Revenue,

has been lost or destroyed, or been so defaced or damaged as to be illegible or otherwise useless.

(2) The Inland Revenue may treat the return as not having been delivered or the document as not having been made or provided. 104 Occasionally the FTT has, usually of its own motion, wrongly applied s 7 of the Interpretation Act 1978 to instruments which are not Acts, eg regulations relating to PAYE or the Construction Industry scheme. 105 Stephen Pariser v HMRC [2010] UKFTT 460 (TC).

130  Richard Thomas The FTT held that the combined effect of sections 82 and 84 was what showed the ‘contrary intention’ mentioned in section 7 of the Interpretation Act 1978. In discussing whether posting had been proved for the purposes of that section, the FTT said: 36.  There was no evidence led to show that the letter had been mislaid by the Royal mail [sic] or by HMRC and we so find. 37.  Even if it had been shown (which is not the case here) the position would have been covered by section 82 FA 2003. This allows HMRC to treat a return as not having been delivered if it has been lost or destroyed.

Section 82 FA 2003 was copied out from TMA 70, where it appears as section 112, so alongside sections 108 and 115 in Part 11 of that Act. But unlike section 115, which can be traced back in part to the Land Tax Acts of the seventeenth century, section 112 is of relatively recent origin, being originally enacted as section 61 FA 1920. It might reasonably be regarded as the Irish Republican Army’s (IRA’s) contribution to British tax law.106 When introduced into Parliament, the Chancellor of the Exchequer, Austen Chamberlain, said of it: This is a Clause for making provision in cases where assessments and returns have been lost, destroyed, or damaged and is necessitated by the events which have occurred in Ireland,107 in which certain documents required in connection with assessments to Income Tax have been lost. Without this Clause the tax cannot be collected.

He was asked by Lt-Cdr Kenworthy MP: In the case of these lost or destroyed Income Tax papers, are you going to take the basis of the last year’s return or the last available returns, or are new forms to be sent out to be filled up? … I see no objection or difficulty in having fresh Income Tax Papers sent out in Ireland, collected, and sent over to this country.

To which Mr Chamberlain replied: The position is that in the course of the attacks that were made three offices of inspectors of taxes were burnt down and the whole of their contents destroyed.108 In many other cases books, assessment returns, income accounts and other records 106 Because the section became law before the establishment of the Irish Free State, s 61 FA 1920 came into Irish law, where it still stands as s 863 of the Taxes Consolidation Act 1997. 107 The island of Ireland entered into a Union with Great Britain in 1801, but was not within the Income Tax Acts from 1803 to 1842. In 1853 it was brought within the scope of income tax, but the parochial and local system of assessors and General Commissioners did not apply, the Specials being the assessing body. There were offices of the surveyor throughout the country. 108 In January 1919, 27 Sinn Féin MPs assembled in Dublin and established Dáil Éireann (a revolutionary Irish parliament). They proclaimed an Irish Republic and attempted to establish a unilateral system of government. For three years, from 1919 to 1921, acting largely on its own authority and independently of the Dáil assembly, the IRA, the army of the Irish Republic, engaged in guerrilla warfare against the British army and paramilitary police units. On 5 April 1920, The Times reported that between 9 and 10 o’clock on 4 April the Dublin Fire Brigade was called out to four separate office buildings in the city, three being the offices of the surveyors of taxes and one of a collector

Forms and Formalities  131 were destroyed or damaged or carried off. In some cases the reconstruction of existing records is possible. Information exists in duplicate and missing documents can be reconstructed. In other cases, however, that cannot be accomplished unless we can proceed afresh as if no steps had been taken, beginning again from the beginning. The Clause gives that power, but of course protects the taxpayer against having to pay twice over, though he may be called on to make a return twice over in respect of his liability to the tax in the single year … This is a piece of necessary machinery.

What the Chancellor said about protecting the taxpayer from paying twice is in the proviso to section 112(1) (which is in much more old-fashioned terms109 than section 82 FA 2003). The question that arises is whether this provision serves any useful purpose now. The section is clearly not limited to destruction or damage by forced raids and setting fire to documents. It might be useful if, for example, a building floods or catches fire from some other cause. There were in fact bombings of tax offices in Manchester by the IRA in 1992. And in the digital age it might be used if, for example, servers are destroyed and backups have not been made or are unobtainable. In Pariser, though, it was used to reinforce the decision that a notice had not been delivered to HMRC. An officer of HMRC had given evidence that they had not received it, which, given the inability of the taxpayer to show that it had done so and the inapplicability of section 7 of the Interpretation Act 78, should have been sufficient to find for HMRC. However, the FTT also held that even if HMRC had in fact received the notice, section 82 FA 2003 would have caused the FTT to find for them, it seems on the basis that the notice must have been received and then lost within HMRC. It is difficult to see why the taxpayer should be penalised for that even if it were true. FORMS

Bureaucracies need forms, the tax assessing and collecting authorities as much as the Circumlocution Office.110 The Acts from 1803 to 1842 contained little where most of the documents were destroyed along with the office furniture. The Times commented that the large part of the income tax in Dublin had already been collected, but it was certain that the Department would suffer immense inconvenience from the destruction of a large mass of important records and returns. The Irish Independent reported on 14 May that a series of raids on 12/13 May 1920 on some 30 tax offices located in 17 counties was a coordinated effort to make the country ungovernable. In most cases the documents were piled into sacks and carried off. 109 In having a proviso, for one thing, and a reference to ‘abatement’. 110 The fictional (just) Government Department in Little Dorrit by Charles Dickens. The head of the Office, Mr Tite Barnacle, tells the hapless Arthur Clennam: ‘The Department is accessible to the – Public.’ Mr Barnacle was always checked a little by that word of impertinent signification, ‘if the – Public approaches it according to the official forms; if the – Public does not approach it according to the official forms, the – Public has itself to blame’. Clennam is referred to a fourth official in the Office, who says: ‘Why, you’ll – you’ll ask till they tell you. Then you’ll memorialise that Department (according to regular forms which you’ll find out) for leave to memorialise this Department.’

132  Richard Thomas about the form of the communications described above, save for the contents of the various returns to be made and delivered. Each of the Acts contains a schedule (usually Schedule G) stating what is required to be returned under various headings, eg: VII. – By or for every Person carrying on any Trade, Manufacture, Adventure, or Concern in the Nature of Trade, to be charged under Schedule (D.) The Amount of the Balance of the Profits thereof, upon a fair and just Average of Three Years, or for such shorter Period as the Concern has been carried on.

Schedule G to the 1803 Act did, however, contain tables showing how the various returns should be completed. The Assessed Taxes and Income Tax Act, 1846111 provided in section 1 that all ‘Assessments, Duplicates, Charges, Warrants, Orders, Notices, and other Proceedings’ were deemed effectual for all purposes if in the official form as set out in the Schedule to the Act. However, neither the returns nor the notices given by the assessor to make them were among the documents included in the 81 examples in the Schedule. Section 2 provided that no ‘Assessment, Charge, Warrant, or other Proceeding’ used for tax purposes was to be rendered void by reason of a mistake, defect or omission, provided that the person charged or affected was designated to common intent and understanding and if the proceeding was in substance in conformity with the meaning and intent of the taxing Acts. It is likely that particular notices were included as ‘other proceedings’. Section 15 TMA 80 re-enacted and varied section 1 ATITA so that subsection (1) provided that the 21 forms in Schedule 2 (or forms to like effect, varied if need be) could be used and were sufficient in law. Subsection (2) said that all assessments (and notices of assessment) and other documents used for assessing and collecting purposes must be in a form prescribed and supplied or approved by the Board, and such documents were valid and effectual for all purposes without further facts or evidence being required. Section 2 ATITA became section 15(5) TMA 80. Section 55 TMA 80 provided specifically for ignoring errors in assessments and charges. The validity of such a document was not affected by a mistake as to the name of the taxpayer, the description of the profits or the amount of the tax charged, nor was validity of the document affected by any difference between what was on the notice of assessment or charge and what was on the General Commissioners’ certificate. In the case of charges, the notice and the certificate had each to contain ‘in substance and effect the several particulars on which the charge was made’, with provision for hearing a dispute by the General Commissioners. Sections 15(1), (2) and (5) and 55 TMA 80 were consolidated without substantial change as sections 215 and 216 of the Income Tax Act 1918 then as

111 Assessed

Taxes and Income Tax Act 1846 (9 & 10 Vict c 56) (ATITA).

Forms and Formalities  133 section 514 of the Income Tax Act 1952 and finally as sections 113(3) and 114 TMA 70. Section 113(1) was new and required returns to be in a form prescribed by the Board, with a requirement put on the Board to have regard to the desirability of securing that no person was required, so far as possible, to make more than one return a year. It replaced the General Commissioners’ precept to the assessor. Section 113(3) TMA 70 re-enacted section 1(2) ATITA and successors (assessing documents in prescribed form to be valid and effectual). Section 114 TMA 70 re-enacted section 55 TMA 80 and successors as to mistakes and the validity of assessments. The provisions about mistake have also been the subject of case law. In Fleming (HM Inspector of Taxes) & anor v London Produce Co Ltd,112 Megarry J said: I shall not attempt an exegesis of the subsections [those now in section 114 TMA]. I would be slow to accept that they provide an impervious cover for gross errors. One may observe the form of para. (a) of subs. [(2)]: what this saves from impeachment is a mistake in an assessment ‘as to’ the name or surname of a person liable, and so on. This suggests that, for example, something recognisable as the true name of the person liable must appear in the assessment, and only if it does is any mistake as to that name cured by the subsection. Faulty spelling is an obvious example … The likelihood of the recipient being deceived or misled would also be an important factor … One may ask whether an assessment of £80,000 on L.P. as agents for Kaiapoi is so gross and misleading an error as to be incapable of cure under s. 514 merely because the income assessable is described as ‘Agents’. In my judgment, one has only to ask the question for it to answer itself.

This case is therefore one on the wording of section 114(2) as to errors in the description of the profits. In Bath and West Counties Property Trust Ltd v Thomas (H M Inspector of Taxes),113 Walton J dealt with the validity of a Schedule D assessment that described the profits as ‘short term gains’ where it was agreed by the parties that the profits were trading profits. He held that there was no mistake within section 114(1) TMA 70 capable of being cured as the inspector had intended to assess as he did. Nor could it be said that the assessment was ‘in conformity with the common intent and understanding’ of the parties, as that involved ‘the objective understanding of persons skilled in tax law’.114 In Hart (H M Inspector of Taxes) v Briscoe et al,115 an assessment on the wrong trustees where there was an advance into a sub-settlement was held cured by section 114(1): no one had been misled, as all agreed.

112 Fleming (HM Inspector of Taxes) & anor v London Produce Co Ltd (1968) 44 TC 582. 113 Bath and West Counties Property Trust Ltd v Thomas (HM Inspector of Taxes) (1977) 52 TC 20. (No relation.) 114 The inspector succeeded in the High Court on other grounds. 115 Hart (HM Inspector of Taxes) v Briscoe et al (1977) 52 TC 53.

134  Richard Thomas In Baylis (H M Inspector of Taxes) v Gregory,116 the Court of Appeal held that an assessment for the wrong year was a gross error because ‘The relevant fiscal year of assessment is an integral, fundamental part of the assessment itself’,117 which could not be saved by section 114(1), even though there was no misleading of the taxpayer, who realised it was a mistake. Other non-binding cases have also held that Slade LJ’s words about an incorrect year on a tax assessment being fundamental also applied to a penalty where certain dates were wrongly stated. However, in Donaldson v HMRC,118 Lord Dyson MR seemed to row back from the distinction between fundamental or gross errors and others which could be cured. The section 114 issue there was about an omission in a penalty assessment which did not state the period over which a penalty was incurred. The omission was curable by section 114(1) because the appellant could work out what the period was and could not have been misled or confused. The court implied that the mistake could not be ‘gross’ or ‘fundamental’ (a reference to Baylis). It is difficult to see how this decision is compatible with that in Baylis, where the wrong year on the assessment was also agreed not to have misled but was not curable, as the dates in question in Donaldson were the only dates required to be shown on the notice of penalty assessment, so appear to be as fundamental as the year of assessment in Baylis. It thus seems to leave other penalty assessments where a year of assessment is required to be shown not curable by section 114(1), but this particular one is. All the cases mentioned or referred to above were about section 114(1) or (2)(a). A much stranger case is Pipe v HMRC,119 one which relied on section 114(2)(b) to validate a penalty determination (ie assessment). In that case, a determination of penalties gave incorrect dates over which daily penalties accrued. Henderson J agreed that if the question was whether section 114(1) cured the defect in the notices, the mistake about the dates would be too gross or fundamental (as in Baylis). However, an ingenious argument by counsel for HMRC saved the day for them. The relevant officer of HMRC had written to the appellant pointing out an error in the ‘penalty notices’. The notice of appeal contained no grounds, and the representative for the appellant had at the hearing only put the notice in issue, although it was accepted that the appeal was against the determination of penalties. Section 114(2)(b) applied to cure an error where a notice of assessment varied from the actual assessment. The appellant had not put the correctness of the assessment in issue and had not challenged the officer’s description of the error as being in the notice. Henderson J agreed with this analysis, holding that the appellant’s acceptance that there was a mistake in the penalty notice meant that the

116 Baylis

(HM Inspector of Taxes) v Gregory (1985) 62TC 1. Slade LJ in the Court of Appeal. 118 Donaldson v HMRC [2016] EWCA Civ 761. 119 Pipe v HMRC [2008] EWHC 646 (Ch). 117 Per

Forms and Formalities  135 underlying assessment was for the correct dates. Thus, the difference was not to be ‘impeached’. The approach of all the courts to section 114(1) and (2)(a) and their predecessors seem clear and unremarkable. An error in a document issued by the tax authorities, particularly an assessment to tax or penalties, will be curable or not according to whether it is a fundamental or gross error or not. An error as to tax years and periods of time and dates will usually be fundamental. Even if not fundamental or gross, an error will not be curable if it misled, or possibly could have misled, the recipient. The decision of Henderson J in Pipe, though, seems very strange. It ignored the fact that section 114(2)(b) is of ancient lineage and that what might have been a concern in 1846 or earlier is of no relevance in the twenty-first century. This is because in the stated case it was said that the notice of determination was on an SA521 form. As with assessments at the time, it is clear from HMRC’s Enquiry Manual120 that this was a computer-issued form and that there cannot be a discrepancy between the determination and the notice. This has also been the case for many years, probably since 1965, when all assessing became the responsibility of the inspector of taxes. When the author started work in the Inland Revenue in 1971, assessments were made by having a multipage carbon-backed set of forms typed. The top copy onto which the keys of the typewriter deposited ink was the notice of assessment. Another copy was the actual assessment, which was bound monthly into books containing a certificate at the top signed and so ‘made’ by an inspector. Another copy (duplicate) went to the collector and another was the file copy. It would have been impossible for the assessment and the notice to vary unless an inspector manually amended the notice. In the period between 1803 and 1965, the Additional Commissioners or the assessor made the assessments by writing in the assessment book, and what they wrote was meant to be copied out to be included in a notice to the taxpayer. It is quite possible that at this time a variance could creep in by accident. Section 114(2)(b) as it then was ensured that if there was a variance the assessment itself stood. But this activity of making the assessment in private, as it were, and notifying the result to the taxpayer gives rise to another question. How would any taxpayer know that there was a variance? It is possible that they knew from calculating their own liability when submitting a return what the assessment should be, so that if the notice of assessment or of demand shows a different figure they could query it. In the later days of inspectors’ typed assessments, the only possible variance would be between the return figures and those entered on the working sheet for the assessment or mistyped from the working sheet.



120 www.gov.uk/hmrc-internal-manuals/enquiry-manual.

See, eg para 4570.

136  Richard Thomas But that would not give a variance between assessment and notice, only between return and assessment. It was undoubtedly for this reason that section 114(2)(b) was not in point in the reported cases. The purpose of section 114 was to avoid ‘lawyer’s quibbles’, which was how Megarry J characterised the argument in Fleming. The approach of HMRC and Henderson J in Pipe seems to be classic lawyerly quibbling in the face of a clear and fundamental error about dates about which there could be no quibbling.

6 The Impact of the Two World Wars on the UK’s Tax Law JOHN HN PEARCE

ABSTRACT

T

his chapter investigates the proposition that the two world wars had a major impact on the UK’s tax law, and takes two further propositions as its points of departure. The proposition that wars increase the powers of government leads to an investigation of the form of tax law; and here the view is taken that the impact of the two world wars was modest. The proposition that wars involve great expenditure leads to an investigation of the content of tax law; and here the view is taken that the two world wars had a major impact. INTRODUCTION

Burke wrote that ‘war never leaves where it found a nation’;1 and Trotsky has been credited with the statement that ‘war is the locomotive of history’.2 These two statements may be taken to indicate support for the proposition that the two world wars in which the UK participated during the first half of the twentieth century had a major impact on the country’s tax law. A different point of departure, however, may suggest a different conclusion. AH Manchester’s work, A Modern Legal History of England and Wales 1750–1950,3 contains no entries in the index pointing towards the two world wars. Those wars are mentioned in the text;4 but the subjects particularly 1 Quoted in J Marlowe, Late Victorian: The Life of Sir Arnold Wilson (London, Cresset Press, 1967) 339. 2 For the origins and early history of this statement, see P Clarke, The Locomotive of War: Money, Empire, Power and Guilt (London, Bloomsbury, 2017) 1–3. 3 AH Manchester, A Modern Legal History of England and Wales 1750–1950 (London, Butterworths, 1980). 4 ibid 38, 48, 344.

138  John HN Pearce examined in that work are those encountered in traditional histories of English law; and those subjects are not those where the two world wars made their most significant impact. If, therefore, the impact of the two world wars on the UK’s law is judged by reference to the subjects examined in traditional histories of English law, those wars did not have a major impact on that law. This conclusion, in its turn, may be taken to indicate support for the proposition that those wars did not have a major impact on the UK’s tax law. This chapter investigates the proposition that the two world wars had a major impact on the UK’s tax law. It is not obvious, however, what evidence needs to be adduced to enable it to be said that this proposition has been established – or, on the other hand, in what circumstances it may be said that there has been a failure to establish this proposition. The investigation undertaken, however, has led to a decision to divide this chapter into two parts. Each part begins with a different well-known proposition relating to the impact of war, and uses that proposition as the starting point for an investigation into features of the UK’s tax law. The first part of the chapter starts from the proposition that wars increase the powers of government, and goes on to investigate the form of the UK’s tax law. The second part begins with the proposition that wars cost money, and goes on to investigate the content of the UK’s tax law. This approach may have the disadvantage of discussing tax law only after other topics have themselves been discussed, but it may also have the advantage of enabling a number of different topics to be examined. INCREASED GOVERNMENT AND THE FORM OF TAX LAW

Introduction: Increase in the Powers of Government It has been said that each of the great European wars of modern times, ‘and many of the lesser ones, have taught the governments concerned how to mobilize the resources of their territories and their subjects; and the lessons learned in wars have never been forgotten’.5 ‘In the eternal dispute between government and liberty, crisis means more government and less liberty.’6 It has also been said that the ‘most important distinction in our whole national political system is the distinction between the Government and the non-Government’;7 and, if this distinction is taken as the point of departure, 5 M Oakeshott, Lectures in the History of Political Thought (Exeter, Imprint Academic, 2006) 386. ‘It is of the nature of modern war to cause a sensational increase, both of range and of intensity, in the authority exercised by the state over economic life.’ RH Tawney, ‘The Abolition of Economic Controls, 1918–1921’ (1943) 13 Economic History Review 1, 23. 6 CT Carr, Concerning English Administrative Law (New York, Columbia University Press, 1941) 92. 7 E Boyle, ‘Who Are the Policy Makers?’ (1965) 43 Public Administration 251, 255. Sir Edward Boyle was a Cabinet Minister during the early 1960s.

The Impact of the Two World Wars on the UK’s Tax Law  139 the two world wars were capable of having a major impact upon the form of the UK’s law. ‘In a time of war,’ Bonar Law told the House of Commons in 1917, ‘the executive Government must be given more rather than less power than in ordinary times, or it cannot carry out the work in which it is engaged.’8 However precious the personal liberty of the subject may be, there is something for which it may well be to some extent sacrificed by legal enactment, namely national success in the war or escape from national plunder or enslavement.9

War, according to Scrutton LJ, speaking shortly before the end of the First World War, could not be carried on according to the principles of Magna Carta – there had to be some modification of the liberty of the subject in the interests of the state.10 ‘The greater the emergency, the wider the delegation of legislative power, and the more incomplete the statute book.’11 The increased power of the executive government during the two world wars to which Bonar Law referred may be seen in two developments relating to the form of the UK’s law: the codes of emergency legislation to which the two world wars gave rise; and the increase in the importance of subordinate legislation vis-à-vis primary legislation. These developments, and the extent to which they were reflected in the UK’s tax law, will now be investigated. Codes of Legislation The two world wars each had a major impact on the form of the UK’s law, because each gave rise to extensive codes of legislation, made under statutes which conferred emergency powers upon the executive for the duration of hostilities.12 Carr wrote of the emergency legislation enacted during the First World War that: Here the initial parliamentary legislation was slight, a mere pronouncement that His Majesty in Council had power to issue regulations during the war for securing the public safety and the defence of the Realm. In submitting a brief Bill to the House of Commons on August 7th, 1914, the Home Secretary made a speech of barely a

8 HC Deb 4 April 1917, vol 92, col 1395. 9 R v Halliday (ex p Zadig) [1917] AC 260, 271–72 (HL) (Lord Atkinson). 10 Ronnfeldt v Phillips (1918) 35 TLR 46 (CA) 47. The judgments in that case were delivered on 29 October 1918. 11 CT Carr, Delegated Legislation: Three Lectures (Cambridge, Cambridge University Press, 1921) 18. 12 Carr, at the beginning of the Second World War, pointed out that, during the previous 30 years, there had been four major instances of Acts enabling codes of regulations to be made. One instance was the Restoration of Order in Ireland Act 1920 (10 & 11 Geo 5 c 29), and a second was the Emergency Powers Act 1920 (10 & 11 Geo 5 c 55). The third and fourth instances consisted of the primary legislation giving rise to the codes in force during the two world wars. Carr, above n 6, 71–72.

140  John HN Pearce hundred words which merely indicated the desirability of having some speedy means of trying offences ‘in cases of tapping wires or attempts to blow up bridges.’ From this grain of mustard seed sprang a goodly forest of regulations … [T]he statute book here gives no hint of the legislation which it empowered. Who could have foreseen at the beginning that the Defence of the Realm Regulations would have embraced the acquisition of factories, the appropriation of materials, such as hay, wool or flax, the control of food supply and food production, the disposal of securities, the felling of timber and the taking over of mines, railways, shipping and the liquor industry? Who would have guessed that those regulations would be extended to prohibit the holding of dog-shows, the sale of opium or the whistling for cabs in London, – all in the name of the defence of the Realm?13

The code of emergency legislation brought into existence during the First World War, furthermore, had one feature that would be regarded as extraordinary today: the enabling statutes, the Defence of the Realm Acts, contained no express authority for His Majesty in Council, when making Defence of the Realm Regulations, to delegate those legislative powers further. ‘Yet this subdelegation or re-delegation was common and resulted in copious orders, the grandchildren of the Act, which were sometimes more important to the obedient citizen than the regulations which were themselves the children of the Act.’14 These were circumstances in which it could have been argued that the maxim delegatus non potest delegare (a delegate is not able to delegate) applied, with the consequence that all the subsidiary orders were ultra vires and void; but Carr, who noted this point, was not aware that any challenge along these lines was ever made.15 Emergency legislation was also brought into existence at the time around the beginning of the Second World War. Carr wrote that: The Emergency Powers (Defence) Act 193916 … was passed in a few hours on August 24 by 457 votes to 4. Parliament met again on August 29 to hear a review of the situation. On September 1 eighteen important statutes, making emergency provision … went through. The advent of war caused six more to be passed on Sunday the 3d; by the 7th some forty statutes, mostly of a sweeping kind, had been passed, and, though the pace was too hot to last, more followed in the next few weeks.17

The code of emergency legislation brought into existence during the Second World War was able to meet the ultra vires argument that might have been brought earlier. A specific and comprehensive provision was inserted for the Defence Regulations to empower any specified authorities or persons to make orders, rules and by-laws for any of the purposes for which the regulations might



13 Carr, 14 Carr, 15 ibid. 16 2

above n 11, 18. above n 6, 88.

& 3 Geo 6 c 62. above n 6, 72–73.

17 Carr,

The Impact of the Two World Wars on the UK’s Tax Law  141 have been made.18 Carr commented that the draftsman ‘has not left any doubt about it, and, although draftsmen often insert words ex abundanti cautela, his express provision here indicates that he thought the grandchildren might otherwise be illegal’.19 A further statute, the Emergency Powers (Defence) Act 1940,20 was enacted during May 1940. ‘That Act was passed in one afternoon … All that anybody said was that the Act ought to have been passed much earlier.’21 The 1940 statute provided that: The powers conferred on His Majesty by the Emergency Powers (Defence) Act, 1939 … shall … include power by Order in Council to make such Defence Regulations making provision for requiring persons to place themselves, their services and their property at the disposal of His Majesty as appear to him to be necessary or expedient for securing the public safety, the defence of the Realm, the maintenance of public order or the efficient prosecution of any war in which His Majesty may be engaged, or for maintaining supplies or services essential to the life of the community.22

This statute, it has been said, ‘is the highwater mark of the voluntary surrender of liberty’.23 The ambit of the codes made under emergency legislation for the purposes of the two world wars was accordingly capable of being exceedingly extensive; and Jennings took the view that ‘In large measure the legislative powers of Parliament have been superseded by the legislative powers of the Crown under the Emergency Powers (Defence) Acts’.24 The impact of that emergency legislation on tax law, however, was virtually non-existent. During the First World War, the emergency legislation did not apply, on its face, to tax law, and was not so applied. During the Second World War, however, one of the specific emergency statutes enacted in 1939 was concerned with income tax. The Income Tax Procedure (Emergency Provisions) Act 1939,25 which received the Royal Assent on 7 September 1939, was described

18 2 & 3 Geo 6 c 62, s 1(3). 19 Carr, above n 6, 88–89. 20 3 & 4 Geo 6 c 20. 21 Carr, above n 6, 20. 22 The Economist summarised this statute by stating that ‘the Government takes control of everybody and everything. It is the complete conscription of persons, labour and capital’: quoted in GK Fry, The Politics of Crisis: An Interpretation of British Politics, 1931–1945 (Basingstoke, Palgrave, 2001) 200. According to Carr, this statute was sometimes popularly referred to as the Everything and Everybody Act: Carr, above n 6, 19, fn 20. 23 Carr, above n 6, 20. On the other hand, it has been said that the 1940 statute ‘hardly extended the powers given by the Act if it extended them at all. It was passed rather as a defiance to an aggressor who had swept into his domain the whole of Western Europe, save the British Isles and the Iberian Peninsula, than as a means of acquiring additional powers. It put into a legal formula the “blood and tears and sweat” that Mr. Churchill had promised as the British contribution to the war effort’: WI Jennings, The Law and the Constitution, 3rd edn (London, University of London Press, 1943) xxv–xxvi. 24 Jennings, above n 23, xxix. 25 2 & 3 Geo 6 c 99.

142  John HN Pearce in its long title as ‘An Act to make temporary provision for the performance by other Commissioners or persons of any of the functions of the General Commissioners, the Additional Commissioners, or the Assessor for any division area or parish’. The Act provided (in part) that the Commissioners of Inland Revenue might, by order, ‘authorise all or any of the things which, but for the order, would fall to be done’ by the assessor or by the Additional Commissioners to be done instead by the surveyor – and, accordingly, permitted a temporary transfer of functions from the local administration of income tax (assessors and Additional Commissioners) to officials of central government (surveyors of taxes). The Inland Revenue, however, as far as is known, made no attempt, at any time, to exercise the powers conferred by the 1939 Act. The reason, it is conjectured, is that the department did not wish to effect a transfer of functions in favour of central government for the period of the Second World War only: it wished to effect such a transfer of functions on a permanent basis.26 The 1939 statute remained unactivated; the emergency that was the occasion of its passing was declared to be at an end on 1 February 1946;27 and the Act itself was repealed in 1950.28 The Inland Revenue did strengthen its position vis-à-vis the local administration of income tax during the Second World War, but this strengthening was achieved by enacting different legislation in the tenth schedule to the Finance Act 1942.29 This legislation was prepared after the Inland Revenue had consulted with representatives of the Clerks to Commissioners on what one Inland Revenue official described to another as ‘sundry proposals for easing and/or saving work’;30 and the legislation was commended to the Commons on the basis that: As a result of this Schedule, such steps as can be cut out will be cut out by agreement with all the parties concerned … The whole system under which Income Tax arises is very deeply rooted in our history, and it is not a thing which, in the middle of the war, one can uproot and replace by an entirely different system … We must ask the Committee to … accept the fact that this is the result of arrangement and agreement of all parties concerned and is an instalment towards the better collection and assessment … of the … Income Tax.31

The Inland Revenue may indeed have had a long-term objective to replace the local administration of income tax with a centralised administration of that

26 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). 27 SR & O 1946/163. 28 See the First Schedule to the Statute Law Revision Act 1950 (14 Geo 6 c 6). 29 5 & 6 Geo 6 c 21. 30 The National Archives (TNA) IR 76/43. 31 HC Deb 14 May 1942, vol 379, col 1986. The speaker was the Financial Secretary to the Treasury, Captain Crookshank.

The Impact of the Two World Wars on the UK’s Tax Law  143 tax, but that objective was not pursued during the Second World War only: it was also pursued long before that war, and it was also pursued after it. The Second World War merely constituted one chapter in the Inland Revenue’s long march towards achieving its objective. The codes made under emergency legislation that were such a feature of the UK’s law during the two world wars, therefore, had no significant impact on the UK’s tax law. The limited amount of emergency legislation that related to tax law was never utilised and, after the end of the Second World War, the legislation was repealed. If the proposition that the two world wars had a major impact on the UK’s tax law is to be established, it must be established by investigating other matters. Primary and Subordinate Legislation The two world wars were also notable for making another major impact on the form of the UK’s law: during both world wars, subordinate legislation grew in importance vis-à-vis primary legislation. From 1896 to 1911, the average annual total of general statutory rules and orders was about 188. Then, during the First World War, there was a great expansion. In 1918, 1204 general instruments were made, with a further 1091 being made in 1919. As early as 1920, when 82 Acts of Parliament received the Royal Assent but 916 general statutory rules and orders were officially registered, it was remarked that ‘In mere bulk the child now dwarfs the parent’.32 The 1920s saw fewer general statutory rules and orders being made, although more than in the years before the First World War. The average annual total of general statutory rules and orders made during the period from 1920 to 1929 was about 503. The Second World War then saw another great expansion: 644 such instruments were made in 1937, but 1901 in 1942. More than 1000 general statutory rules and orders (and then general statutory instruments)33 were made every year from 1939 to 1952 inclusive. The 1950s then saw fewer general statutory instruments being made, but more than during the interwar years. The average annual total of general statutory instruments made during the period from 1953 to 1958 was about 717.34 The two world wars, therefore, did not leave the

32 Carr, above n 11, 2. 33 The Statutory Instruments Act 1946 (9 & 10 Geo 6 c 36) repealed the Rules Publication Act 1893 (56 & 57 Vict c 66) and made further provision as to the instruments by which statutory powers to make subordinate legislation were to be exercised, replacing statutory rules and orders with statutory instruments. The Act came into operation on 1 January 1948. 34 Statutory Rules and Orders and, later, Statutory Instruments have been published for 1890 and all subsequent years. From 1894 onwards, following the enactment of the Rules Publication Act 1893, the volumes published distinguish between instruments of a general and a local character, with only instruments in the former category being printed and published in full. It is nevertheless unexpected to find that the published volumes for each year provide no convenient statements of the

144  John HN Pearce subject of the quantity of subordinate legislation in the places where they had previously been found. The sequence of movements in the annual number of general statutory rules and orders and general statutory instruments, furthermore, accords perfectly with the ‘displacement effect’ by Peacock and Wiseman in their work on the UK’s public expenditure.35 Within the more specific area of tax law, however, the proposition that the two world wars saw an increase in the importance of subordinate legislation vis-à-vis primary legislation may only be accepted subject to a major qualification. The qualification is that, as regards the making of subordinate legislation, different areas of tax law were treated differently. Matters relating to the charge to tax were treated differently from matters of administration. The imposition of taxation was a matter where deeply entrenched constitutional understandings existed. Following the constitutional conflicts of the seventeenth century, and well before the twentieth century, it had become very firmly settled that the legal basis of the right to tax and the liability to pay was parliamentary authority; that, within Parliament, the primary role in the imposition of taxation was taken by the House of Commons; and that, within the House of Commons, the initiative in financial matters rested with the Crown. Against the background of those deeply entrenched understandings, the imposition of taxation by subordinate legislation would constitute a major departure of an unexpected nature – a departure that did not march well with established practice. Anything resembling such a departure could expect to be noticed. Thus, shortly after the First World War, the case of A-G v Wilts United Dairies Ltd36 was decided against the Crown; and it was later said that the decisions both of the Court of Appeal and the House of Lords in that case had been much influenced by the knowledge of the struggle to prevent the levying of taxes without the express sanction of Parliament.37 There is also evidence that, during the Second World War, the understanding that taxation should be imposed in primary legislation and not in subordinate legislation continued to be carefully observed. The purchase tax legislation, when originally introduced in 1940, was attacked because it gave the Treasury power to vary the basic rates and alter the categories. This matter was dealt with

total number of instruments falling within each of these two major categories. It is also unexpected to find that no comprehensive list of the number of instruments made each year exists – although various series of figures exist. Figures for the years from 1895 to 1929 (inclusive) are in Committee on Ministers’ Powers, Memoranda submitted by government departments in reply to questionnaire of November 1929 and minutes of evidence taken before the Committee on Ministers’ Powers, vol 2, Minutes of Evidence (London, HMSO, 1932) 204 (Carr’s evidence); those for the years from 1937 to 1945 (inclusive) are in Select Committee on Procedure, Third Report (HC 1945–46, 189) 243 (Carr’s evidence); and those for the years from 1946 to 1958 (inclusive) are in JE Kersell, Parliamentary Supervision of Delegated Legislation (London, Stevens, 1960) 169. 35 AT Peacock and J Wiseman, The Growth of Public Expenditure in the United Kingdom (Oxford, Oxford University Press, 1961). For the displacement effect, see text before nn 59 and 128 below. 36 A-G v Wilts United Dairies Ltd (1921) 37 TLR 884 (CA), (1922) 38 TLR 781 (HL). 37 A-G for Canada v Hallet & Carey Ltd [1952] AC 427 (PC) 451 (Lord Radcliffe).

The Impact of the Two World Wars on the UK’s Tax Law  145 by amending the proposed legislation so that the rates ‘can no longer be changed by Treasury Order followed by confirmation of this House, but alteration must be made by substantive legislation’.38 One writer has expressed the view that it was ‘astonishing that a constitutional argument of this kind should have been seriously raised only a few weeks after the sweeping Emergency Powers legislation of May 1940’;39 but it is possible to take a more charitable view of the conduct of those who raised (and succeeded with) this point. The deeply entrenched constitutional understandings relating to the imposition of taxation remained in existence after the Second World War. The view was expressed, shortly after that war, that ‘Such a matter as imposing a charge upon the subject is one which according to sound constitutional theory ought to be kept in the hands of Parliament’.40 The Select Committee on Statutory Rules and Orders, set up in 1944, was required to draw the special attention of the House of Commons to subordinate legislation on a number of grounds, the first of which was that the instrument imposed a charge on public revenues. By the end of the 1958–59 Session, only one instrument had been reported under this head.41 It was also the case that, during the first half of the twentieth century, such legislation as made provision for subordinate legislation affecting the charging of taxation was not enacted in the context of the two world wars. Following the financial crisis of 1931, customs duties imposed by subordinate legislation were authorised first by the Abnormal Importations (Customs Duties) Act 1931,42 then by the Import Duties Act 1932.43 The justification given for legislation of this type was that a tariff system could not be operated without subordinate legislation, for it was considered essential to the success of such a policy that machinery should exist under which protective duties could be imposed (or removed) or increased (or reduced) more rapidly than was possible by enacting a statute.44 The justification given, therefore, was specific to a particular policy, and was based on a perceived necessity to enact legislation quickly. Matters relating to tax administration, on the other hand, could be handled very differently; and during the First World War, the quantity and scope of subordinate legislation dealing with tax matters rose significantly. Section 28(3)

38 BEV Sabine, British Budgets in Peace and War, 1932–1945 (London, George Allen & Unwin, 1970) 178–79. 39 RS Sayers, Financial Policy 1939–45: History of the Second World War: United Kingdom Civil Series (London, HMSO/Longmans, Green & Co, 1956) 51, fn 6. For ‘the sweeping Emergency Powers legislation of May 1940’, see the text around nn 20–23 above. 40 H Molson, Delegated Legislation (reprinted in PM Briers and others, Papers on Parliament: A Symposium (London, Hansard Society, 1949) 105.) 41 Kersell, above n 34, 47 and 49, fn 16. 42 22 & 23 Geo 5 c 1. 43 22 & 23 Geo 5 c 8. 44 Carr, above n 6, 40; Lord Hemingford, Back-Bencher and Chairman (London, John Murray, 1946) 164.

146  John HN Pearce of the Finance (No 2) Act 191545 gave the Commissioners of Inland Revenue the power to ‘make regulations generally with respect to the assessment and collection of income tax under this Act in the case of weekly wage earners, and with respect to the procedure to be adopted for the purpose’.46 That same statute also contained the legislation relating to the excess profits duty; and, in this context, Stamp noted ‘three very important departures’.47 One departure was that the statute delegated to the department the power to make rules for procedure after the leading provisions had been set out in the statute itself. A favourable attitude to the extension of subordinate legislation was also displayed, shortly after the First World War, in the Report of the Royal Commission on the Income Tax in 1920. The Royal Commission considered it important that, whilst those portions of a new Act dealing with the liability of the taxpayer should be fully set out, ‘the less important administrative matters’ (the machinery for assessment and collection, for example) ‘might with advantage be dealt with in the new Act in a less particularized manner than in the old, leaving the details to be covered by statutory regulations’48 – but this possibility was not pursued. During the Second World War also, legislation was enacted containing wide powers to make subordinate legislation relating to tax administration. The Income Tax Procedure (Emergency Provisions) Act 1939 was concerned with subordinate legislation and procedural matters;49 and it was during the Second World War that the primary legislation enabling the PAYE Regulations to be made was enacted and the Regulations themselves were brought into existence.50 The legislation relating to purchase tax also contained wide powers to make subordinate legislation, for it was provided that the Commissioners of Customs and Excise may make regulations providing for any matter for which provision appears to them to be necessary for the purpose of giving effect to the provisions of this Part of this Act and of enabling them to discharge their functions thereunder …51

The position in the middle of the twentieth century was summarised in a document which stated that the Board of Inland Revenue have power under various Finance and other Acts to make Regulations. These Regulations relate entirely to points of machinery and procedure. They differ, 45 5 & 6 Geo 5 c 89. 46 The Inland Revenue’s ‘Notes on Clauses’ explained the position by stating that ‘The regulations to be made under this sub-clause arise out of the necessity of compressing the operations of assessment and collection, hitherto requiring a whole year, into the compass of three months’ (TNA T 171/127). 47 J Stamp, ‘Recent Tendencies towards the Devolution of Legislative Functions to the Administration’ (1923) 2 Journal of Public Administration 23, 33–34. For the other departures, see text around nn 108–10 below. 48 Royal Commission on the Income Tax, Report (Cmd 615, 1920) 89 [401]. 49 See text around nn 25–28 above. 50 The making of the PAYE Regulations is considered below. See text around nn 115–20 below. 51 Finance (No 2) Act 1940 (3 & 4 Geo 6 c 48) s33(1).

The Impact of the Two World Wars on the UK’s Tax Law  147 therefore, markedly from the type of delegated legislation made by many Departments which often creates substantive law. There are of course serious constitutional objections to giving the Executive undue power in the determination of tax liability.52

The growth in subordinate legislation during the two world wars, therefore, was a significant feature of the UK’s tax law only to a limited extent. Subordinate legislation was not appropriate for charges to tax, although more subordinate legislation was undoubtedly made on matters relating to tax administration. More generally, the form of tax law had constitutional implications; and when this consideration is borne in mind, it is not, perhaps, surprising that the impact of the two world wars on the form of tax law was modest. INCREASED EXPENDITURE AND THE CONTENT OF TAX LAW

Introduction: The Funds Required for the Two World Wars Wars cost money; and, more particularly, the UK’s participation in the two world wars required funds on scales that were unprecedented.53 In the decade before the First World War, the expenditure of the UK government rose from slightly less than £150 million in the fiscal year 1904–05 to £192 million in 1913–14.54 Then, during the First World War, there was a great expansion. In the year 1916–17, government expenditure was £2696 million; and, during the five years from 1914–15 to 1918–19, government expenditure totalled £9593 million.55 It has been stated that the expenditure of the UK government during the six years from 1914–15 to 1919–20 exceeded its expenditure during the period from 1688 to 1913.56 After the First World War, the expenditure of the UK government fell back, but remained higher than before that war: from 1923–24 until 1937–38, government expenditure fluctuated between £748 million and £910 million. The Second World War then saw another great expansion: in the fiscal year 1944–45, government expenditure amounted to £6174 million;

52 TNA T 171/427, ‘Enquiry into the taxation of income: review of the field’ [161]. This substantial document was prepared by Cockfield in the Inland Revenue and sent to Plowden at the Treasury with a covering note dated 4 February 1950 (ibid). 53 Following the Budget Speech delivered on 21 September 1915, The Economist commented that ‘Those who listened to Mr. McKenna opening his first Budget … could not complain that he was … trying to conceal the black truth by statistical jugglery or political rhapsodies. It was a plain, unvarnished statement of an unparalleled revenue, an inconceivable expenditure, and an unimaginable deficit, followed by a list of fresh taxation which imposed, as he said, an unprecedented burden on the country’: The Economist (London, 25 September 1915) 463–64. 54 BR Mitchell, British Historical Statistics (Cambridge, Cambridge University Press, 1988) 589–90. 55 B Mallet and CO George, British Budgets: Second Series: 1913–14 to 1920–21 (London, Macmillan, 1929) 368. 56 Sir J Stamp, Taxation during the War (Oxford, Oxford University Press, 1932) 133.

148  John HN Pearce and during the six fiscal years from 1939–40 to 1944–45, government expenditure totalled £28,030 million. After the Second World War, the expenditure of the UK government again fell back, but nevertheless remained higher than during the interwar period: in 1950–51 that expenditure was £3417 million.57 The two world wars did not leave the quantity of government expenditure in the places where they had previously been found.58 Peacock and Wiseman, writing over half a century ago, gave the title ‘displacement effect’ to the sequence of movements in government expenditure described in this paragraph.59 Funds for waging war may be obtained by a number of different means. If a state is to wage war using funds from within its own territory which it has newly and lawfully acquired, it may obtain those funds in three different ways. The state may obtain funds by borrowing; by taxation; and by expanding the money supply – and in practice, of course, the state may well obtain funds through all three routes. The expansion of the money supply will not be considered in this chapter, but increased borrowing and increased taxation each had a significant impact on the UK’s tax law. Increased Government Borrowing To a major extent, the UK’s participation in the two world wars was financed by borrowing. Thus, during the Second World War, the six fiscal years from 1939–40 to 1944–45 saw government expenditure totalling £28,030 million, with government revenue totalling £14,228 million (50.8 per cent of total expenditure).60 57 Mitchell, above n 54, 590–92. 58 ‘Some historians speak of a ratchet effect by which an inflated wartime budget fails to return to its pre-war level … The ratchet does not occur universally, but it does appear quite often, especially in states that have not suffered great losses in the war at hand. It occurs for three reasons: because the wartime increase in state power gives officials new capacity to extract resources, take on new activities, and defend themselves against cost-cutting; because wars either cause or reveal new problems that call for state attention; and because the wartime accumulation of debt places new burdens on the state’: C Tilly, Coercion, Capital, and European States, AD 990–1992 (Oxford, Blackwell, 1992) 89. 59 AT Peacock and J Wiseman, The Growth of Public Expenditure in the United Kingdom (Oxford, Oxford University Press, 1961). The displacement effect is described in particular at xxiv. See also text before n 128 below. Graphs that show the sequence of movements described may be found in S Broadberry and P Howlett, ‘The United Kingdom during World War I: Business as Usual?’ in S Broadberry and M Harrison (eds), The Economics of World War I (Cambridge, Cambridge University Press, 2005) 211, showing UK government spending as a percentage of gross domestic product at constant prices from 1870 to 1965; in AJP Taylor, English History 1914–1945 (Oxford, Oxford University Press, 1965) xxvii, showing the expenditure of public authorities as a percentage of the national income from 1880 to 1950 (where the underlying figures are those in UK Hicks, British Public Finances: Their Structure and Development 1880–1952 (Oxford, Oxford University Press, 1954) 11); and in R Middleton, Government versus the Market: The Growth of the Public Sector, Economic Management and British Economic Performance, c.1890–1979 (Cheltenham, Edward Elgar, 1996) 89, showing total public expenditure as a percentage of gross domestic product at current market prices from 1900 to 1979. 60 Mitchell, above n 54, 584, 592.

The Impact of the Two World Wars on the UK’s Tax Law  149 The deficit, accordingly, was £13,802 million (49.2 per cent of total expenditure) – a sum that needed to be borrowed. It was, however, during the First World War that the extent of government borrowing was particularly pronounced, as Table 1 demonstrates.61 Table 6.1  Revenue and Expenditure: 1913–14 to 1920–21 Tax revenue, Non-tax Total Fiscal year £m revenue, £m revenue, £m

Total expenditure, £m

Deficit (for borrowing), £m

1913–14

163.0 (82.6%)

35.2 (17.8%)

198.4 (100.4%)

197.0 (100.0%)

(surplus)

1914–15

189.3 (33.8%)

37.4 (6.7%)

226.7 (40.5%)

560.5 (100.0%)

333.8 (59.6%)

1915–16

290.1 (18.6%)

46.7 (3.0%)

336.8 (21.6%)

1559.2 (100.0%)

1222.4 (78.4%)

1916–17

514.1 (23.4%)

59.3 (2.7%)

573.4 (26.1%)

2198.1 (100.0%)

1624.7 (73.9%)

1917–18

613.0 (22.7%)

94.2 (3.5%)

707.2 (26.2%)

2696.2 (100.0%)

1989.0 (73.8%)

1918–19

784.3 (30.4%)

104.7 (4.1%)

889.0 (34.5%)

2579.3 (100.0%)

1690.3 (65.5%)

1919–20

999.0 (60.0%)

340.6 (20.4%)

1339.6 (80.4%)

1665.8 (100.0%)

326.2 (19.6%)

1920–21

1031.7 (86.3%)

394.3 (33.0%)

1426.0 (119.3%)

1195.4 (100.0%)

(surplus)

The percentages shown are percentages of total expenditure.

Of the government expenditure of £9593 million incurred during the five fiscal years from 1914–15 to 1918–19, therefore, government revenue covered only £2733 million (28.5 per cent of the total). The deficit of £6860 million (71.5 per cent of government expenditure) constituted funds requiring to be borrowed. In his work Studies in British Financial Policy 1914–1925, published in 1952, EV Morgan stated that: To those who have passed through the sterner days of the Second World War, the taxation we have described seems very light, the deficits relatively very large, and the complacency with which the situation was regarded by successive Chancellors, little short of fantastic. Similar criticisms were common enough at the time. The Economist was a consistent advocate of heavier taxation, and so were a number of regular speakers in Parliament. Why, then, did successive Governments vie with one another in the half-heartedness with which they tackled the budgetary problem?62

61 The 62 EV

figures in Table 6.1 are those given in Mallet and George, above n 55, 368. Morgan, Studies in British Financial Policy 1914–1925 (London, Macmillan, 1952) 94.

150  John HN Pearce The answer, Morgan thought, ‘lay partly in the technical difficulties of increased taxation, partly in the general climate of opinion, and partly in the lack of understanding among Ministers and their advisers of the true principles of public finance’.63 The Cambridge economist, AC Pigou, was another who held the opinion that taxation during the First World War could and should have been higher: In my opinion, the Government has committed a very serious mistake in taxing so little and borrowing so much. When young men are compelled to give their lives, I see no reason why old men should not be compelled to give – and not merely asked to lend – their money; and I do not believe that, had the Government dared to make that claim, it would have been widely resented or opposed.64

Shortly afterwards, Pigou went on to refer to ‘the level of taxation in general’, which might be ‘very greatly increased’. ‘I believe that that ought to be done, and that it has been and still is a patriotic duty to press the Government to impose more and always more taxation.’65 The unprecedented government borrowing during the First World War had important consequences for the UK’s tax law. Towards the end of that war, one of the memoranda brought into existence in connection with the preparation and enactment of the consolidating Income Tax Act 191866 was entitled ‘Brief History of the Income Tax’; and, towards the end of this document, it was stated that: There is one recent development which is of great moment in the history of the Tax because it encroaches deeply upon a principle which since 1803 has been perhaps the most vital in the whole scheme of Income Tax, the principle of taxation at the source. Owing to the pressure of war expenditure, national borrowing has had to be effected on a quite unprecedented scale and the gravity of the crisis has been held to justify (in so far as public borrowing is concerned) an ad hoc departure from the system of paying the interest under deduction of tax. Obviously it is desirable to appeal to the small investor as well as to the wealthier classes; and as the Income Tax has recently been graduated so as to mitigate its severity in the case of smaller incomes, there would be an added attraction about a loan the interest on which could be assessed in the hands of the recipient at the appropriate rate of duty. By this arrangement the potential investor would be specially encouraged to lend his money for he would be saved the necessity of having to obtain his Income Tax relief by repayment of tax deducted at the source, a process which inevitably involves having to ‘stand out’ of his money for some little time. Of course it was recognised that the departure from taxation at the source involves very considerable risk of the leakage of revenue; but the circumstances of the times are very exceptional and the State in its capacity as borrower was prepared to modify



63 ibid. 64 AC

Pigou, ‘The Economics of the War Loan’ (1917) 27 Economic Journal 16, 20.

65 ibid. 66 8

& 9 Geo 5 c 40.

The Impact of the Two World Wars on the UK’s Tax Law  151 its machinery of taxation in so far as the change might tend to facilitate the success of its loans. Most of the recent changes in the Income Tax are normal developments upon the lines of the natural and historical growth of the Tax; but this is not a true development, rather is it a temporary step backwards, taken not from choice but by the compelling force of circumstances.67

One category of investor whose interests were accommodated by a decision that the interest on certain government securities should be paid without deduction of income tax was accordingly the small investor in the UK who purchased War Loan. There was also, however, another category – to which the Inland Revenue referred in its evidence to the Royal Commission on the Income Tax in 1919: [W]hen financial pressure grew greater, and when more particularly it became necessary to look abroad for money, it was felt essential for non-Revenue reasons to raise loans the interest on which would not only be paid without deduction of Income Tax, but would, if the securities were in the beneficial ownership of persons who were not ordinarily resident in this country, be free from all liability to the tax.68

This income tax exemption in favour of residents abroad may be regarded as a still more significant development than the payment of interest on War Loan to small investors without deduction of income tax. The Inland Revenue, in 1919, advanced the propositions that income tax extended ‘broadly’ (first) to ‘all income arising in the UK, by whomsoever it may be enjoyed’, and (secondly) to ‘all income accruing to a person residing in the UK, without regard to the place where it may arise’.69 The exemption in favour of residents abroad, therefore, did not only involve payment without deduction of tax at source; it also involved a derogation from the general principle that the charge to UK income tax extended to all income arising in the UK. During the First World War, therefore, the borrowings of the UK government had the consequence that general income tax principles became subject to significant derogations.70 Support for the proposition that these developments were viewed at the time as steps backwards that were only temporary may be obtained by investigating the process leading to the enactment of the consolidating Income Tax Act 1918. This legislation was substantially recast during its passage through Parliament;

67 TNA IR 75/89, foll 1–9, 8–9, ‘Brief History of the Income Tax’. This document was produced in 1917 or 1918. 68 Royal Commission on the Income Tax, Appendices and Index to the Minutes of Evidence (London, HMSO, 1920) 62 [10]. 69 ibid 4 [3]. 70 ‘It may here be observed that the interest payable on the bulk of the British Government securities which have been issued during the war occupies an exceptional position. It was necessary during the war to attract money from every possible quarter – British and foreign – and in order to attain this object it was decided (a) to pay interest on certain War Loans without deduction of Income Tax, and (b) to exempt from liability to tax interest on those securities when they are in the beneficial ownership of a person who is not ordinarily resident in the United Kingdom’: ibid 8–9 [34].

152  John HN Pearce and it was only at this late stage that Part IV of the Act (‘Special Provisions’) was brought into existence. It was this part of the Act that contained the provisions relating to securities issued free of tax to residents abroad (in section 46), and those relating to the payment of interest on War Loan without deduction of tax (in section 49). The then Solicitor of Inland Revenue, who had taken the leading role in the preparation of this legislation, later wrote that: Part IV contains matter conveniently grouped under the head ‘Special Provisions.’ These sections embody the enactments passed in consequence of the war, and their collection under one head is convenient both for purposes of reference and also for the purpose of repeal, when the time comes for their disappearance from the Statute Book.71

Immediately after the First World War, therefore, these provisions may well have been regarded as temporary derogations from general income tax principles, to be repealed when circumstances permitted – but those derogations remain. The Relative Absence of New Taxes Borrowing was one major domestic source of funds available to the UK government. The other major source was taxation. Increased funds from taxation might be obtained through two different routes: by introducing new taxes; and by increasing the revenue obtained from existing ones. In the case of new taxes, the overall generalisation to be made is that the UK government only introduced a modest number of them. One author, writing shortly after the First World War, considered that one striking feature of British financial policy during that war was the small number of sources from which the increased revenue was drawn. More than half of all came from the income and excess profits taxes. Moreover, the government was content on the whole to increase the rates of existing taxes – with the very notable exception of the excess war profits tax – rather than experiment with new and untried sources of revenue. In this respect the English differed from the French and Italians.72

The author took the view that ‘Taking it all in all, the English tax policy showed no bold originality, but proceeded along well known lines with cautious steps. Under Chancellor McKenna only was a really vigorous use made of the taxing power.’73

71 HB Cox, ‘Origin and Growth of Income Tax’ (1919) 1 Journal of the Society of Comparative Legislation and International Law 42, 52. 72 EL Bogart, Direct and Indirect Costs of the Great World War (New York, Oxford University Press, 1920) 40. 73 ibid 40–41.

The Impact of the Two World Wars on the UK’s Tax Law  153 Events taking place at the beginning of the Second World War may be analysed in the same way. An excess profits tax was introduced; but the Chancellor of the Exchequer, Sir John Simon, was cautious in other respects and relied on existing taxes, and particularly on increases in the rates of income tax and reductions in allowances. Keynes was extremely critical of this course of action, arguing that an opportunity had been lost ‘to lay new foundations which would prepare the way for important further developments’.74 Three major significant taxes were nevertheless introduced during the two world wars: the excess profits duty in the First World War; and excess profits tax and purchase tax in the Second World War. The principle of the excess profits duty, according to the Chancellor of the Exchequer, Reginald McKenna, in his Budget speech introducing the duty on 21 September 1915, was ‘to get money for national purposes from more persons who at the moment can best afford to pay’.75 The rationale for the duty was well set out, some years later, by Lord Hanworth MR: I desire to observe at the outset that we are dealing with what is known as and what was imposed as the Excess Profits Duty, its name indicating that it was a duty upon excess profits; it was designed, as we all know, to try to secure to the Revenue a portion of the profits being made in the course of the War which were said to be enhanced by the circumstances of the War and being so enhanced, to be beyond the sum which the subject was entitled to keep free of taxation, inasmuch as he ought not to be entitled to make a larger profit due to the misfortune of the nation at large in being at war.76

Excess profits duty worked on the basis of comparing pre-war profits with the profits in wartime periods, with any excess of the latter over the former being charged to tax; and profits were calculated, with certain exceptions and subject to certain deductions, on the same principles as for income tax.77 The duty, later described as ‘the great tax invention of the war’,78 has been considered to have been ‘spectacularly successful as a revenue generator’.79 In the fiscal year 1918–19, £285 million was raised: an amount comprising more than 36 per cent of the UK’s tax revenues of £784 million. This amount was not far behind the £291 million generated by income tax and supertax; and, if income tax and supertax are considered separately, excess profits duty was, that year, the most valuable single tax possessed by the UK government.80

74 M Daunton, Just Taxes: The Politics of Taxation in Britain, 1914–1979 (Cambridge, Cambridge University Press, 2002) 177. 75 Quoted in FW Hirst and JE Allen, British War Budgets (Oxford, Oxford University Press, 1926) 94. 76 Birt, Potter & Hughes Ltd v IRC (1927) 12 TC 976, 990 (CA). I owe this reference to P Ridd, ‘Excess Profits Duty’ in J Tiley (ed), Studies in the History of Tax Law, vol 1 (Oxford, Hart Publishing, 2004) 101–02. 77 Mallet and George, above n 55, 330. 78 Stamp, above n 56, 132. 79 Broadberry and Howlett, above n 59, 217. 80 Mallet and George, above n 55, 390, 400.

154  John HN Pearce The rationale for the introduction of excess profits tax early in the Second World War was similar to that applying earlier in the case of excess profits duty. ‘We intend’, Neville Chamberlain had said even before the outbreak of war, ‘that a system shall be introduced to deal with all profits arising out of war and not merely with profits arising out of armaments.’81 The legislation charging the tax was contained in Part III of the Finance (No 2) Act 1939;82 and, once again, the tax worked on the basis of comparing pre-war profits with wartime profits.83 This tax made a very substantial contribution to tax revenues during the Second World War. Its greatest contribution was in the fiscal year 1943–44, when it raised £482 million. However, total tax revenues for that year were £3262 million, with income tax and surtax raising £1353 million between them.84 Excess profits tax was accordingly responsible for 14.8 per cent of total tax revenue, as against the 41.5 per cent contributed by income tax and surtax combined. The contribution made by excess profits tax during the Second World War, therefore, was less striking than that made by excess profits duty during the first. The introduction of purchase tax had a different background. It was later written that the situation immediately before the Budget Speech delivered by Sir John Simon on 23 April 1940 plainly called for both increases in old taxes and the introduction of new devices. Even looking at the problem from the traditional angle of taking more revenue, innovation was imperative. As Lord Stamp had said, all the first-rate expedients for taxation being already in operation the country was thrown back on second-rate expedients. But the problem was also being looked at from the point of view of direct checks to inflation. This consideration operated in two ways: the Chancellor wished to avoid increases of those taxes which, by their effect on the cost-of-living index, would constitute a spur to demands for wage and other income increases, and secondly he sought to check by heavy taxation the pressure of purchasing power which was both intensifying rationing problems and drawing resources towards the production of luxuries.85

Simon’s Budget Speech envisaged the introduction of purchase tax; but legislation providing for purchase tax was only enacted following a later Budget Speech made by Sir Kingsley Wood on 23 July 1940, who stated that: I have already stressed … the urgent and imperative need both to limit civilian consumption and also to obtain a new source of income, and I myself have reached the clear conclusions that a further tax on personal expenditure must form a necessary part of my present financial proposals.86 81 Quoted in Sabine, above n 38, 158. 82 2 & 3 Geo 6 c 109. 83 For an article on excess profits tax, see P Ridd, ‘Excess Profits Tax Litigation’ in J Tiley (ed), Studies in the History of Tax Law, vol 2 (Oxford, Hart Publishing, 2007). 84 Sayers, above n 39, 493. 85 ibid 36. 86 Quoted in Sir J Crombie, Her Majesty’s Customs and Excise (London, George Allen & Unwin, 1962) 129.

The Impact of the Two World Wars on the UK’s Tax Law  155 This passage has enabled the statement to be made that the tax ‘had from the first a double object’.87 The tax nevertheless produced substantial sums. The yield was £98.5 million in its first full year of operation (one-seventh of the total Customs and Excise revenue),88 and reached £508 million in 1945.89 Increased Funds from Existing Taxes: Introduction Despite the introduction of new taxes, the UK government’s tax receipts during the two world wars were principally dependent upon increased amounts being raised from the taxes in existence at the beginning of those wars. Those taxes, however, were not equally well placed to produce increased funds. Income tax was very well placed to produce increased funds: its yield was responsive both to economic growth and to inflation; and, as incomes increased, more individuals would come within the scope of the charge to tax. Estate duty was less well placed: the value of estates would rise in line with economic growth and inflation, but there could be no expectation that there would be a consistent increase in the number of chargeable estates. Customs duties, excise duties and stamp duties were also less well placed: they were responsive to economic growth, but, with duties charged at fixed rates, their yields would not rise in line with inflation. It is not surprising to find, therefore, that, during the two world wars, the yield from income tax and the taxes whose calculations followed on from the income tax calculation increased greatly. In the fiscal year 1913–14, those taxes raised 28.9 per cent of tax revenue; by 1918–19, those taxes (which now included excess profits duty) raised 73.4 per cent of tax revenue90 – the greatest ascendancy of income tax and of those taxes whose calculations were linked with it among the taxes raised by the UK government. A similar, though less dramatic, rise may be observed during the Second World War, with a rise from 41.8 per cent in 1938–39 to 57.2 per cent in 1944–45.91 From the point of view of those concerned with tax administration, the two world wars produced changes in the relative importance of particular taxes. The impact of the two world wars on the UK’s existing taxes is such that a distinction may be made, for those wars had consequences arising from increased rates of taxation and consequences arising from the operational need to secure the increased amounts charged. These two matters are now considered.



87 ibid. 88 ibid.

89 Sabine,

above n 38, 173. and George, above n 55, 390. 91 Sayers, above n 39, 493. 90 Mallet

156  John HN Pearce Existing Taxes: Consequences Arising from Increased Rates The obvious and primary route to obtain increased receipts from existing taxes was to increase the rates at which those taxes were charged. This was done in many cases. The rate at which excess profits duty was charged was raised during the First World War;92 the rate at which excess profits tax was charged was raised in 1940;93 and rates of estate duty were raised shortly after the outbreak of the Second World War and again in 1940.94 But more might have been done. Estate duty rates were raised from 16 August 1914 (shortly before the outbreak of the First World War) and from 1 August 1919 (after its end) – but rates were not raised during the war itself.95 Most importantly, however, the rates at which income tax was charged rose during the two world wars. In 1913–14, income tax was charged at the standard rate of 1s 2d in the pound (5.8 per cent) and supertax was charged at the rate of 6d in the pound (2.5 per cent), giving a grand total of 1s 8d in the pound (8.3 per cent). In 1918–19, income tax was charged at the standard rate of 6s 0d in the pound (30 per cent) and supertax was charged at a top rate of 4s 6d in the pound (22.5 per cent): a grand total of 10s 6d in the pound (52.5 per cent).96 During the interwar years, the standard rate of income tax fell – but not to the levels seen before the First World War. From 1922–23 until 1937–38, income tax was charged at a rate between 4s 0d (20 per cent) and 5s 0d (25 per cent) in the pound.97 Then, during the Second World War, income tax rates rose once again. In 1937–38, income tax was charged at the standard rate of 5s 0d in the pound (25 per cent) and surtax was charged at a top rate of 8s 3d in the pound (41.3 per cent): a grand total of 13s 3d in the pound (66.3 per cent). In 1945–46, income tax was charged at the standard rate of 10s 0d in the pound (50 per cent) and surtax was charged at a top rate of 9s 6d in the pound (47.5 per cent): a grand total of 19s 6d in the pound (97.5 per cent).98 After the Second World War, the standard rate of income tax fell once again – but not to the levels seen during the interwar period. From 1946–47 until 1950–51, income tax was charged at the rate of 9s (45 per cent) in the pound.99 The sequence of movements in the standard rate of income tax, therefore, provides an excellent example of the displacement effect as described by Peacock and Wiseman.100 Increased rates of taxation had an important impact on the UK’s tax law. Those increased rates gave rise to tax avoidance; tax avoidance gave rise to 92 Mallet and George, above n 55, 404. 93 Sayers, above n 39, 515. 94 ibid 517. 95 Mallet and George, above n 55, 401. See also text around nn 62–65 above. 96 Mallet and George, above n 55, 395, 399. 97 Mitchell, above n 54, 645. 98 Sayers, above n 39, 513–14. 99 Mitchell, above n 54, 645. 100 For the displacement effect, see n 59 above. For a graph showing the sequence of events described in this paragraph, see Daunton, above n 74, 14.

The Impact of the Two World Wars on the UK’s Tax Law  157 anti-avoidance legislation; and avoidance and anti-avoidance legislation gave rise to complex litigation. The overall result was that the UK’s tax law became bulkier and more complicated. These are all subjects that have been much discussed.101 As regards tax avoidance itself, it has been said: Although of respectable antiquity, the art of tax avoidance did not really come into its own until after the First World War, for it was not until then that the rate of taxation was sufficiently high to make the tax saving outweigh the expense and inconvenience of tax avoidance measures. But by 1920 it was generally realised that high taxation had come to stay and a large number of ingenious devices have since been invented and perfected to enable the well-advised taxpayer to pay less than he otherwise would. Naturally, the increase in taxes occasioned by the Second World War encouraged the practice still further, particularly in relation to income tax, surtax and estate duty, which in the top levels can take 95 and 80 per cent. respectively of the income or capital concerned.102

As regards anti-avoidance legislation, the Royal Commission on the Taxation of Profits and Income, which issued its final report in 1955, considered that, as a matter of analysis, there was a major distinction to be made: The choice seems to lie between the enactment of some general provision which nullifies or controls the effect of transactions that violate the suggested principle, and the enactment of specific provisions which identify with precision the kind of transaction that is to be struck at and prescribe with corresponding precision the consequences that are to follow for the purposes of tax assessment.103

Anti-avoidance legislation of the first, more general, kind was a feature of two of the taxes introduced during the two world wars: the excess profits duty in the First World War and the excess profits tax in the second.104 In the cases of income tax and estate duty, however, anti-avoidance legislation was of the more specific type. The explanation why some taxes fall into the first category and others into the second, it is conjectured, may lie in the circumstances in which the original legislation was enacted. Excess profits tax and excess profits duty were both introduced in times of war. At such times, the government may well find it easier to obtain parliamentary approval for vigorous initiatives. In time of peace, on the other hand, the government may well consider discretion to be the better part of parliamentary valour.

101 Material on this subject includes GSA Wheatcroft, ‘The Attitude of the Legislature and the Courts to Tax Avoidance’ (1955) 18 MLR 209; P Harris, ‘The Profits Tax GAAR: An Aid in the “Hopeless” Defence against the Dark Arts’ in P Harris and D de Cogan (eds), Studies in the History of Tax Law, vol 8 (Oxford, Hart Publishing, 2017); and the chapter by P Ridd in the present volume. 102 Wheatcroft, above n 101, 210. 103 Royal Commission on the Taxation of Profits and Income, Final Report (Cmd 9474, 1955) 306 [1020]. This distinction is investigated in the chapter by P Ridd in this present volume. 104 For the legislation relating to excess profits duty see Finance (No 2) Act 1915, s 44(3). For the legislation relating to excess profits tax see Harris, above n 101, 240–42.

158  John HN Pearce The tax avoidance litigation that resulted added complicated case law to complicated avoidance transactions and the existing complicated anti-avoidance legislation. Tax avoidance cases arose for decision both in times of war and in times of peace; but in a chapter investigating the impact of the two world wars on the UK’s tax law, attention may be drawn to the possibility that (among many other factors) the general approach of the judiciary in tax avoidance litigation may have been influenced by whether, at the time the judgment was delivered, the country was at war or at peace. Two well-known passages may be contrasted. In his judgment in Ayrshire Pullman Motor Services v IRC, delivered on 3 December 1929, the Lord President (Clyde) said: No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow – and quite rightly – to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer’s pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Revenue.105

The tone of the Lord Chancellor, Lord Simon, was very different in his speech in the House of Lords in Latilla v IRC, delivered on 11 February 1943: My Lords, of recent years much ingenuity has been expended in certain quarters in attempting to devise methods of disposition of income by which those who were prepared to adopt them might enjoy the benefits of residence in this country while receiving the equivalent of such income, without sharing in the appropriate burden of British taxation. Judicial dicta may be cited which point out that, however elaborate and artificial such methods may be, those who adopt them are ‘entitled’ to do so. There is, of course, no doubt that they are within their legal rights, but that is no reason why their efforts, or those of the professional gentlemen who assist them in the matter, should be regarded as a commendable exercise of ingenuity or as a discharge of the duties of good citizenship. On the contrary, one result of such methods, if they succeed, is, of course, to increase pro tanto the load of tax on the shoulders of the great body of good citizens who do not desire, or do not know how, to adopt these manoeuvres. Another consequence is that the Legislature has made amendments to our Income Tax code which aim at nullifying the effectiveness of such schemes.106

The overall result of tax avoidance, anti-avoidance legislation and tax avoidance litigation was that tax law became ever more complicated. Existing Taxes: Consequences of the Need to Secure Increased Amounts If existing taxes were to produce increased funds, it was completely foreseeable that additional provisions would be required to ensure that the funds demanded

105 Ayrshire 106 Latilla

Pullman Motor Services v IRC (1929) 14 TC 754, 763–64. v IRC (1943) 25 TC 107, 117.

The Impact of the Two World Wars on the UK’s Tax Law  159 would be secured. In the case of excess profits duty, Stamp recorded that the Finance (No 2) Act 1915 ‘made three very important departures in the matter of delegation’.107 One of those departures (that the statute delegated to the department the power to make rules for procedure after the leading provisions had been set out in the statute) has already been mentioned.108 One of the other departures was the conferring of powers to an independent Board of Referees, who became entitled, by order, to substitute its own percentage for a class of trade or business for the percentage given in the statute. ‘This was done because the point to be settled was considered to be a highly technical one, requiring precise commercial knowledge.’109 The final departure was that the statute conferred a number of discretions on the Commissioners of Inland Revenue, such as a discretion to decide the length of an accounting period in individual cases, or the amount to be allowed as managerial remuneration. It was in the case of income tax, however, that the need to secure increased amounts had the most far-reaching results. During the two world wars, there was legislation lowering the amount of total income required before income tax became chargeable. At the beginning of the First World War, the exemption limit was £160; from the fiscal year 1915–16, it was £130.110 At the beginning of the Second World War, the exemption limit was £125; in 1940–41, it was £120; and from 1941–42 until 1945–46, it was £110.111 The result was an increase in the number of taxpayers, for, in the case of income tax, the two world wars did not only have the consequence that people had to pay more. They also had the consequence that more people had to pay. The number of those chargeable to income tax (it was officially estimated) increased from slightly fewer than one million to slightly more than that number in the years between 1900 and the First World War.112 Then, during the First World War, the number of those charged to income tax rose rapidly. In the fiscal year 1919–20, it was estimated that there were 3.9 million of them.113 The number of those charged remained below this figure for the remainder of the interwar period; but, during the Second World War, there was a still more dramatic expansion, as Table 2 demonstrates.114

107 Stamp, above n 47, 33–34. 108 See above, text around n 47. 109 Stamp, above n 47, 34. For the Board of Referees, see generally D de Cogan, L Oats and M Billings, ‘The Board of Referees: “A Most Useful Addition to Fiscal Machinery”’ in P Harris and D de Cogan (eds), Studies in the History of Tax Law, vol 7 (Oxford, Hart Publishing, 2015) 107. 110 Mallet and George, above n 55, 395. 111 Sayers, above n 39, 513. 112 During March 1914, the estimates provided, in replies to parliamentary questions, were 950,000 payers of income tax in 1903–04; 1,150,000 in 1912–13; and 1,150,000 in 1913–14. See HC Deb 3 and 4 March 1914, vol 59, cols 225 and 434. 113 Mallet and George, above n 55, 398. 114 Sources for Table 6.2: for the years 1938–39 to 1941–42, Inland Revenue, Ninetieth Report of the Commissioners of His Majesty’s Inland Revenue for the year ended 31st March 1947 (Cmd 7362, 1948) 67; for the years 1942–43 to 1946–47, Inland Revenue, Ninety-fifth Report of the

160  John HN Pearce Table 6.2  Estimated Number of Individuals Charged with Income Tax: 1938–39 to 1946–47 Number charged with income tax (thousands)

Numbers charged as a percentage of the mid-year population of the UK

1938–39

3800

8.0

1939–40

4100

8.5

1940–41

6000

12.4

1941–42

10,200

21.2

1942–43

13,000

26.9

1943–44

13,500

27.7

1944–45

14,500

29.6

1945–46

15,250

31.0

1946–47

14,000

28.5

Fiscal years

The Second World War, therefore, had the important consequence that income tax ceased to be a ‘class tax’ and became a ‘mass tax’.115 The government, accordingly, was now demanding income tax from those who could not be relied on to have funds readily available with which to pay. During the Second World War, this state of affairs prompted developments of very great importance for income tax law and practice.116 On 3 May 1940, a senior Inland Revenue official wrote that: If it should prove necessary to increase the income tax payable by small incomes the question of practicability is whether the tax could be collected. There must come a point at which you are asking the man of small income to pay too much for he will not have saved the money to meet the bill. We are calling on the married man of £500 this year to pay £60 odd in instalments of over £30 on the 1st January and over £30 on the 1st July. We shall certainly not find it easy to collect. If his bill jumped to £100 involving £50 every six months, I think you will agree that it would be well nigh hopeless to expect him to pay. He could only do it if the £100 were spread over many moons. Any attempt to deal with the ‘£5 to £12 per week man’ through the income tax is only possible by the adoption of deduction at the source and giving the Revenue powers to make compulsory a scheme of deduction …117

Commissioners of Her Majesty’s Inland Revenue for the year ended 31st March 1952 (Cmd 8726, 1953) 39. The figures for the percentage of the mid-year population of the UK have been calculated from the population statistics given in CH Feinstein, National Income, Expenditure and Output of the United Kingdom 1855–1965 (Cambridge, Cambridge University Press, 1972) Table 55, col 1. 115 For this terminology, see CC Jones, ‘Bonds, Voluntarism and Taxation’ in Tiley, Studies in the History of Tax Law, vol 2, above n 83, 428. 116 The events during the Second World War which led to the introduction of the PAYE scheme are considered in more detail in JHN Pearce, ‘The Road to 1944: Antecedents of the PAYE Scheme’ in J Tiley (ed), Studies in the History of Tax Law, vol 5 (Oxford, Hart Publishing, 2012) 200–17. 117 TNA T 160/927 (F.12728). Gregg to Hopkins, 3 May 1940.

The Impact of the Two World Wars on the UK’s Tax Law  161 A little later, during the summer of 1940, an official wrote that: The raison d’être for the introduction of a scheme of deduction at the source is to be found in the fact that employees cannot pay their tax and the Revenue will not be able to collect it, unless payment is spread over the year. This can only be done by a system under which the tax is deducted weekly or monthly by the employer and paid over to the Revenue. It will impose the duty of deduction on the employer and will involve a great deal of work both for him and for the Revenue. But it is the only way by which collection of the tax can be secured.118

This was the approach that lay behind the devising and introduction of a new scheme and the legislation authorising it. The new cumulative scheme for the deduction and collection of income tax from current earnings that the Inland Revenue devised was the PAYE scheme, which the Chancellor of the Exchequer, Sir Kingsley Wood, promoted in 1943. On one occasion, at a meeting with representatives of the British Employers’ Confederation, the Chancellor said that he would speak frankly to … the Confederation in a manner which might not be possible in a public speech. He would say in the House of Commons that the Government had been pressed on all sides to introduce a pay-as-you-earn scheme … There were two compelling reasons why it was essential to introduce a scheme, and to do so at once. The first reason was that we must make the change to a pay-as-you-earn scheme well in advance of the end of the war. There could be no doubt that if the war came to an end with the present income tax system for wage earners in force there would be considerable difficulty and trouble. The second reason was that it seemed to him most important that the present conditions under which the wage earners as a whole were making a contribution to the affairs of the State through direct taxation, should be maintained. But for these reasons, he would have been tempted to leave this big reform in the income tax system, applicable to many millions of workers, until after the war … [He] had great anxieties of his own which would have made him wish to leave the matter over because of the great strain under which the Inland Revenue machine was already working.119

The exigencies of war accordingly had a major impact upon the timing of the introduction of the PAYE scheme, which was brought into operation on 6 April 1944.120

118 TNA T 171/354 (Part C). Deduction at source of the income tax due in respect of salaries and wages, 10 July 1940. 119 TNA T 171/366, item 9. Note on interview with representatives of the British Employers’ Confederation, 17 September 1943. 120 The relevant legislation consisted of the Income Tax Employments Act 1943 (6 & 7 Geo 6 c 45); the Income Tax (Offices and Employments) Act 1944 (7 & 8 Geo 6 c 12); and the Income Tax (Employments) Regulations 1944 (SR & O 1944/251).

162  John HN Pearce THE TRANSITIONS FROM WAR TO PEACE

Some of the wartime changes investigated in this chapter were not retained after the end of military hostilities, but others remained. The changes that were not retained included the wartime codes of legislation. The code of legislation imposed during the First World War was dismantled rapidly after that war. One feature of what was done – the abolition of economic controls – was the subject of a famous article by Tawney, which was published during the Second World War.121 Tawney’s article, however, was not politically neutral. Criticism (however justified) of the dismantling of economic controls imposed during an earlier war permitted the inference that, following the conclusion of the Second World War (then in progress), those controls should be retained. Many wartime controls were indeed retained by the Attlee government, only to disappear during the 1950s under Conservative governments. Some taxes introduced during the wars disappeared soon afterwards. Excess profits duty ‘was based, save in exceptional cases, on pre-war rates of profit and was therefore inherently an emergency tax that could not be continued for an indefinite period without the existing defects and hardships becoming intolerable’.122 After the end of the First World War, Excess Profits Duty was abolished. Similar considerations applied in the case of excess profits tax, introduced during the Second World War, and abolished after it. By way of contrast, the future of purchase tax was a matter for discussion at the end of the Second World War. In advance of his 1945 Budget Speech, the Chancellor of the Exchequer (Sir John Anderson) was advised that: The tax is a delicate instrument, which could probably never have been set in being except in a time of war. If it is to be retained permanently – and there are many grounds in favour of this – it needs to be handled meanwhile with care. Any sharp raising of the rates, even if otherwise practical politics in the near future, would appear to be a hazardous Parliamentary proposition. In its present graduated form it is capable of exercising a considerable restraint upon home consumption, especially of non-essentials, and our present recommendation is that, until necessity otherwise requires, it should be left just as it is.123

The Chancellor of the Exchequer did not even mention purchase tax in his Budget Speech;124 and the tax remained in existence to await decisions by later governments. By way of further contrast, the successful introduction and operation of the PAYE scheme was viewed as a great achievement, both at the time and

121 RH Tawney, ‘The Abolition of Economic Controls, 1918–1921’ (1943) 13 Economic History Review 1. 122 Mallet and George, above n 55, 332. 123 Quoted in Sayers, above n 39, 131. 124 ibid.

The Impact of the Two World Wars on the UK’s Tax Law  163 subsequently. It has been conjectured, however, that the very success of the PAYE scheme may subsequently have operated to hinder reform of the structure of income tax.125 Douglas Houghton, speaking many years later, called PAYE a ‘money-spinner’. ‘Could any conceivable anti-evasion measures match the scale and effectiveness of this one-armed bandit?’126 It was Houghton’s view that there could not be the slightest doubt that the retention of PAYE had enabled successive governments after the Second World War to tax earnings far more heavily than would otherwise have been possible. ‘If ever there was a gift handed to bureaucracy on a plate in wartime for permanent use thereafter, PAYE was certainly it.’127 The changes introduced during the two world wars were accordingly reversed in part (but only in part) following the arrival of peace. In these circumstances, the remarks of Peacock and Wiseman on the ‘displacement effect’ in public expenditure are considered apposite. Those authors wrote that: [M]ajor wars … may create a displacement effect, shifting public revenues and expenditures to new levels. After the disturbance is over new ideas of tolerable tax levels emerge, and a new plateau of expenditure may be reached, with public expenditure again taking a broadly constant share of gross national product, though a different share from the former one … People will accept, in times of crisis, methods of raising revenue formerly thought intolerable, and the acceptance of new tax levels remains when the disturbance has disappeared. It is harder to get the saddle on the horse than to keep it there. Expenditures which the government may have thought desirable before the disturbance, but which it did not then dare to implement, consequently become possible. At the same time, social upheavals impose new and continuing obligations on governments both as the aftermath of functions assumed in wartime (eg payments of war pensions, debt interest, reparation payments) and as the result of changes in social ideas.128

CONCLUSION

This chapter has investigated the proposition that the two world wars had a major impact on the UK’s tax law. It is appropriate to conclude by stating a view as to whether or not that proposition may be accepted. There are certainly points that may be made in favour of the proposition that the two world wars did not have a major impact on the UK’s tax law. The form

125 ibid 111. 126 D Houghton, ‘The Futility of Taxation by Menaces’ in A Seldon, AR Ilersic and Barry BracewellMilnes (eds), Tax Avoision: The Economic, Legal and Moral Inter-relationships between Avoidance and Evasion (London, Institute of Economic Affairs, 1979) 96. 127 ibid 97. 128 AT Peacock and J Wiseman, The Growth of Public Expenditure in the United Kingdom (Oxford, Oxford University Press, 1961) xxiv.

164  John HN Pearce of that law did not change greatly: tax law was hardly affected by the codes of emergency legislation introduced during those wars, and was affected only to a moderate extent by the increase in subordinate legislation. It may also be urged that some changes made should be linked with developments other than the occurrence of the two world wars. Thus, at the beginning of the twentieth century, British public opinion may be said to have been opposed to large-scale government; by the middle of the twentieth century, however, that was no longer the case. Tawney described the demand for rapid de-control after the First World War as ‘the last spasm of nineteenth-century individualism, striving to recapture on its deathbed the crude energies of its vanished youth’.129 In 1943 and 1944, by contrast, pressure from MPs (who, in their turn, were responsive to the views of trade unions and public opinion generally) stood behind the expansion of the PAYE scheme.130 Other major developments took place in accordance with time scales that were not determined by the two world wars. One major change related to the structure of income tax. At the beginning of the twentieth century, income tax was essentially a flat rate tax; by the middle of that century, it was unquestionably a graduated tax. The process may be regarded as beginning with the introduction of differentiation in favour of earned incomes in the Finance Act 1907;131 being advanced with the introduction of graduation in the Finance (1909–10) Act 1910;132 and being completed by legislation in the Finance Act 1920133 and the Finance Act 1927.134 The two world wars did not play a decisive role in this development.135 The two world wars may also be said to have played a role of limited importance in another major development in income tax law and practice: the replacement of local administration by central administration. This was a gradual process, which had begun well before the Second World War and was not complete until well after it. The legislation enacted in the Finance Act 1942136 was only one episode in a much longer process.137 The view is nevertheless taken that the two world wars did have a major impact on the UK’s tax law. That impact is considered to have grown out of the requirement for funds on scales that were unprecedented. This requirement led

129 Tawney, above n 121, 19. 130 Pearce, above n 116, 215–16. 131 7 Edw 7 c 13. 132 10 Edw 7 c 8. 133 10 & 11 Geo 5 c 18. 134 17 & 18 Geo 5 c 10. 135 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’: Royal Commission on the Income Tax, Report (Cmd 615, 1920) 2, [9]. On this development, see generally JHN Pearce, ‘The Rise and Development of the Concept of “Total Income” in United Kingdom Tax Law: 1842–1952’ in Tiley, Studies in the History of Tax Law, vol 2, above n 83. 136 See text around nn 29–31 above. 137 On this development, see Pearce, above n 26.

The Impact of the Two World Wars on the UK’s Tax Law  165 to borrowing and (in order that funds might be obtained from lenders) to modifications in the principles underlying income tax law. The requirement also led to some new taxes; to higher rates of taxation; and to the tax avoidance, antiavoidance legislation and tax avoidance litigation that followed. The requirement also led to new law to ensure that the vast sums required were secured – and thus to the PAYE scheme. Some of these developments were reversed after military hostilities ended; but other developments endured. In the development of the UK’s tax law, as in the growth of its public expenditure, the view is taken that the two world wars had a ‘displacement effect’.138 The view is also taken, however, that the major changes in the UK’s tax law, made under the impact of the two world wars, should be understood in terms of being changes in degree as opposed to being changes in kind. The constitutional aspects of the imposition of taxation remained unaffected by the two world wars. What did become possible were particular initiatives that were more numerous, and more far-reaching, than those that would generally have been possible in peacetime. Those initiatives, furthermore, were such as to enable the government to gain at the expense of the non-government. War, Lloyd George declared in his Budget Speech delivered on 17 November 1914, ‘is a time when men know that they are expected to give up comforts, possessions, health, limb, life – all that the State requires in order to carry it through its hour of trial’.139 As Sabine remarked in the final sentence of his work on British budgets from 1932 to 1945: ‘It is in the nature of taxation that its victories are more easily achieved in war than in peace.’140 The matters investigated in this chapter also permit one final reflection. The economist Joseph Schumpeter wrote that: The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare – all this and more is written in its fiscal history … He who knows how to listen to its message here discerns the thunder of world history more clearly than anywhere else.141

This is not the first time that this passage has been quoted during the series of tax history conferences founded by John Tiley, or in the published volumes that have followed them.142 There can, surely, be no way of establishing satisfactorily that the thunder of world history may be heard more clearly in fiscal history than in any other type of history. This chapter does suggest, however, that, in the case of the participation of the UK in the two world wars, the thunder of history may be more clearly discerned in the country’s fiscal history than in its legal history. 138 See text before n 128 above. 139 Quoted in Mallet and George, above n 55, 36–37. 140 Sabine, above n 38, 303. 141 Quoted in M Littlewood, ‘John Tiley and the Thunder of History’ in P Harris and D de Cogan (eds), Studies in the History of Tax Law, vol 9 (Oxford, Hart Publishing, 2019) 56. 142 Littlewood, n 141 above.

166

7 Hole and Plug PHILIP RIDD

ABSTRACT

T

he topic of tax avoidance is an intriguing one, not least because there is no settled meaning of ‘tax avoidance’ and, however it is viewed, attitudes to it vary across society, including Members of Parliament and the judiciary, who have been much occupied with the topic and who will, of course, have had their own personal concerns. This study relates to the UK and takes the twentieth century as its time frame. An examination of tax avoidance in the twentieth century would be a massive undertaking. This study is therefore restricted to avoidance of income tax and surtax (originally supertax), with which Parliament chose to deal, if at all, by specific counteraction (the so-called ‘hole and plug’ method) rather than by a general anti-avoidance provision. The study is further restricted by concentrating on a few of the major enactments, but with the addition of one which raised the thorny issue of retrospective legislation. The study will examine the action taken by Parliament, with particular reference to the attitudes to tax avoidance disclosed by Members of Parliament during the course of debates of the relevant Bills, and it will also consider case law to see how judges approached the selected anti-avoidance provisions. INTRODUCTION

‘There’s a hole in the bucket, dear Liza, dear Liza, there’s a hole in the bucket, dear Liza, a hole.’ So sang Harry Belafonte in 1959. Many Chancellors of the Exchequer have peered into the Treasury bucket and detected a hole. Sometimes they have taken remedial action, but it is to be borne in mind that on other occasions they have not done so and, moreover, they have also sometimes created opportunities by which reliefs from tax may be obtained. This chapter will address, within certain parameters, what was happening in the twentieth

168  Philip Ridd century so far as concerned tax avoidance in relation to the Chancellor’s major money-spinners, income tax and surtax (previously supertax).1 In the present century, attitudes to tax avoidance have hardened in the UK. Parliament has passed a general anti-abuse provision2 and various tax avoiders have been pilloried by a parliamentary committee and by the media. Tax avoidance is, of course, an age-old subject but, as tax rates on income were relatively low before the First World War despite the introduction of supertax by the Finance (1909–10) Act 1910, tax avoidance assumed a much enhanced significance once the rates escalated during that war, and remained high thereafter. The excess profits duty imposed by the Finance (No 2) Act 1915 included, albeit almost buried in the hinterland of Schedule 4 (Rule 5, Part I),3 an anti-avoidance rule which cancelled the effect of any transaction or operation which would artificially reduce profits for excess profits duty purposes.4 But income tax and supertax had no such wide-ranging rule despite a recommendation made by the Royal Commission of 1920.5 Instead, Parliament preferred to proceed by what is known as the ‘hole and plug’ method. During the twentieth century, many and various specific topics were dealt with in several Finance Acts from 1922 onwards and, as it would be impossible to deal with all of them, a few of the major enactments have been selected for this chapter, but with the addition of one which raised the thorny issue of retrospective legislation. The chapter will consider the action taken by Parliament, with particular reference to the attitudes to tax avoidance disclosed by Members of Parliament during the course of debates of the relevant Bills, and it will also consider case law to see how judges approached the selected anti-avoidance provisions. THE INDEFINABLE

‘Houston, we have a problem.’6 The problem here is that there is no accepted and clear definition of ‘tax avoidance’. Nowadays, ‘tax avoidance’ is taken to 1 The writer wishes gratefully to acknowledge guidance derived from A Likhovski, ‘Formalism and Israeli Anti-Avoidance Doctrines’ in J Tiley (ed), Studies in the History of Tax Law, vol 1 (Oxford, Hart Publishing, 2004) 339–77; P Baker, ‘A Book Review of The Saving of Income Tax, Surtax and Death Duties by Jasper More’ in J Tiley (ed), Studies in the History of Tax Law, vol 2 (Oxford, Hart Publishing, 2007) 223–34; and in particular P Harris, ‘The Profits Tax GAAR: An Aid in the Hopeless Defence against the Dark Arts’ in P Harris and D de Cogan (eds), Studies in the History of Tax Law, vol 8 (Oxford, Hart Publishing, 2017) 221–55, together with general guidance given by Dr John Pearce and Richard Walters. 2 Finance Act 2013, Part V, ss 206–15. 3 Note also the prohibition in s 44(3) on the use for avoidance purposes of any fictitous or artificial transaction. 4 The limited case law on that provision was considered in P Ridd, ‘Excess Profits Duty’ in Tiley, Studies in the History of Tax Law, vol 1 (n 1) 119–20. 5 (1920) Cmd 615 [635]. 6 This famous phrase is in fact inaccurate – see https://apollo13.spacelog.org/people/#jackswigert-cmp.

Hole and Plug  169 connote lawful activity and ‘tax evasion’ is taken to denote unlawful activity, but this was not always so: in days gone by, ‘avoidance’ and ‘evasion’ were used interchangeably, the words being synonymous as a matter of ordinary language. The discarding from mind of unlawful activity is easy enough, but it is insufficient to resolve the problems of definition. It might reasonably be hoped that the government would have a good grasp of the issue: what it offers is ‘Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended’.7 That somewhat refined approach may be contrasted with dictionary definitions such as ‘Tax avoidance is the use of legal methods to pay the smallest possible amount of tax’8 and ‘The reduction by legal methods of the amount of tax that a person or company pays’.9 Neither of those definitions can withstand criticism in that ‘smallest amount’ is, obviously, going too far by its use of the superlative and ‘person or company’ is wrong in that a company is a person and the phrase does not leave room for an unincorporated body of persons such as individuals who comprise the trustees of a trust. Moreover, both definitions envisage payment of something, but it is possible to prevent a tax bill arising at all. Against any protest that these are mere pedantic quibbles, the defence is that of all things it is dictionaries which should be clinically accurate. Adjusting those dictionary definitions might produce ‘the taking of steps to reduce the amount of, or eliminate, a prospective tax bill’ or ‘doing something to reduce the amount of, or eliminate, a prospective tax bill’. Even then, there might be a worry that a reduction or elimination might be achieved by omitting to do something rather than doing something, but that might be a concern of no practical consequence. The adjusted dictionary definition bears a close relation to the definiton favoured by the 1955 Royal Commission,10 viz ‘… some act by which a person so arranges his affairs that he is liable to pay less tax than he would have paid but for the arrangement’.11 Now, whether the government definition or the adjusted dictionary/Royal Commission definition is favoured, we are still in murky territory. The government definition depends on it being possible in any instance to identify what the rules of the tax system are and what Parliament intended by them, a task which may sometimes defeat even an intellectual Hercules, and then determining whether the taxpayer concerned has indulged in ‘bending’. In any event, there must surely be examples of activity which would be considered as tax avoidance without it being possible to identify a relevant rule of the tax system. 7 See www.gov.uk/guidance/tax-avoidance-an-introduction#what-tax-avoidance-is. It is supplemented by ‘It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law’. 8 See www.collinsdictionary.com/dictionary/english/tax-avoidance. 9 https://dictionary.cambridge.org/dictionary/english/tax-avoidance. 10 Royal Commission on the Taxation of Profits and Income Final Report (Radcliffe Commission) (Cmd 9474, 1955). 11 ibid [1016] in ch 32, the chapter concerned with tax avoidance.

170  Philip Ridd The purpose of a gift of an asset from one spouse to another may be to reduce or eliminate a prospective tax bill;12 the purpose of a gift to a youngster by a parent or a grandparent may be to reduce or eliminate a prospective bill for death duties; yet, in either instance, HM Revenue & Customs (HMRC) would be unlikely to be slow to categorise the gift as tax avoidance despite it seeming impossible to apply the government definition. But, while the government definition is, arguably, too narrow, the adjusted dictionary/Royal Commission definition might be said to be too wide in that taking advantage of a relief which Parliament has specifically made available is not tax avoidance, at least not in the sense of something to which the authorities might reasonably take exception. Lord Templeman contrasted ‘tax avoidance’ and ‘tax mitigation’, the latter involving the taking advantage of a relief which Parliament has specifically made available, and in so doing he was plainly seeking to distinguish between what is bad and what is good.13 Yet the distinction may not be sound. The identification of a ploy which might be called ‘a good tax wheeze’ does not automatically lead to counteraction by Parliament and, if Parliament proves to be tolerant of the use of such a ploy, it is not comfortable to conclude that adverse criticism is justified. Another consideration is that an object may be achieved by two methods, one of which would attract a greater tax bill than the other. An example of this occurred in Duchess of Argyll v Beuselinck.14 The Duchess made a contract with a Sunday newspaper for the publication of memoirs from her extremely racy life, and one outcome was a tax bill far greater than that which would have resulted if the contract had taken a different form. The Duchess’s action for negligence taken against a solicitor, Oscar Beuselinck, failed because his participation was for purposes other than tax, he being a specialist defamation lawyer, but for present purposes the point is simply that there were two ways of doing things, one ‘tax efficient’, to use a phrase common in the world of tax, and the other ‘tax inefficient’. Now, there will be situations in which two different methods of doing things are both straightforward; in other situations, one way may be more straightforward than the other, and it may sometimes be that the tax-efficient method could reasonably be described as ‘contrived’; moreover, a contrived method might involve an element of artificiality. This may be thought to demonstrate that Lord Templeman’s distinction, although presented in characteristically forthright terms as clear cut, is, at best, blurry and might even be regarded as unhelpfully simplistic. A more fundamental difficulty derives from the fact that it is lawful conduct which is being considered and any adverse criticism has to be based on a concept such as morality, which is difficult to align with taxation.



12 See,

eg R v Inspector of Taxes, Reading, Ex parte Fulford-Dobson [1987] QB 978. Revenue Commissioner v Challenge Corporation Ltd [1987] AC 155, 167–68. 14 Duchess of Argyll v Beuselinck [1972] 2 Lloyd’s Rep 172. 13 Inland

Hole and Plug  171 We have certainly stumbled into a slough,15 whether or not of despond, and no satisfactory method of extrication rushes to mind. For present purposes, what is important is to recognise that people will vary not only in their attitude to tax avoidance, but also in identifying what is, and what is not, tax avoidance. Moreover, an activity which is widely regarded as tax avoidance may be acceptable to some, but unacceptable to others. Various terms are bandied about in this connection, of which ‘plain vanilla’, ‘aggressive’, ‘abusive’ and ‘not within the spirit of the legislation’ are examples. It is submitted that all of these terms are imprecise and of no real assistance. It may be said that, in addressing a situation in which a tax bill has been reduced or eliminated, the ultimate question is whether or not those concerned have ‘gone too far’, and the application of an epithet such as ‘aggressive’ or ‘abusive’ is no more than an indication that the user of the epithet would give a positive answer to that question. It seems probable that an officer of HMRC is more likely to give a positive answer than a private tax practitioner, but, during the peak of highly artificial tax avoidance schemes in the 1960s and 1970s, it was not uncommon to hear a private practitioner lamenting on the lines that the purveyors of complex and contrived schemes ‘have gone too far and are spoiling it for others’. THE JUDICIAL ATTITUDE TO TAX AVOIDANCE

For the larger part of the twentieth century, the judicial attitude to tax avoidance might be summarised as ‘It is nothing to do with us’. This goes back to the general approach to tax in the Victorian era epitomised in Partington v Attorney-General,16 in which Lord Cairns said: If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.17

In the context of tax avoidance there are three familiar observations. In IRC v Fisher’s Executors,18 Lord Sumner said: The highest authorities have always recognized that the subject is entitled so to arrange his affairs as not to attract taxes imposed by the Crown, so far as he can do so within the law, and that he may legitimately claim the advantage of any express

15 It is comforting that the Tax Law Review Committee of the Institute of Fiscal Studies considered that tax avoidance could not be defined ‘in any truly satisfactory manner’: report of 1 November 1997 – 10.1920.co.ifs.1997.00. 16 Partington v Attorney-General (1869) LR 4 HL 100. 17 ibid 122. There may be earlier dicta to the same effect, but Lord Cairns’s observation is the one usually cited. 18 IRC v Fisher’s Executors [1926] AC 395.

172  Philip Ridd terms or of any omissions that he can find in his favour in taxing Acts. In so doing he neither comes under liability nor incurs blame.19

In IRC v Duke of Westminster,20 Lord Tomlin said: ‘Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be.’21 In Ayrshire Pullman Motor Services v IRC,22 Lord Clyde said: No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow – and quite rightly – to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer’s pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the revenue.23

Another familiar quotation is the opening of the speech of Lord Simon LC in Latilla v IRC,24 by which he voiced disapproval of the activities of tax avoiders, saying that there was ‘no reason why their efforts, or those of the professional gentlemen who assist them in the matter, should be regarded as a commendable exercise of ingenuity or as a discharge of the duties of good citizenship’.25 It should, however, be borne in mind that he then took the traditional approach by observing of the issue to be decided: Nevertheless, if the Crown is unable to bring the scheme of 1933 within the range covered by section 18 of the Finance Act 1936, the appellant must succeed. The issue turns on a comparison of the particular arrangements now before us with the language of the section.26

In the last quarter of the twentieth century, there was a hardening of attitude in the form of the Ramsay doctrine, as neatly encapsulated by Ribeiro PJ: ‘The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.’27 The exact scope of the modern doctrine has been much debated,28 but, in the present context, it suffices to say that this did not involve a complete sea change of

19 ibid 412. Lord Sumner spoke to the same effect in Levene v IRC [1928] AC 217, 227, remarking that the tax avoidance activities incurred ‘strictly speaking, no moral censure’. 20 IRC v Duke of Westminster [1936] AC 1. 21 ibid 19. 22 Ayrshire Pullman Motor Services v IRC (1929) 14 TC 754. 23 ibid 763. 24 Latilla v IRC [1943] AC 377. 25 ibid 381. 26 ibid 382. 27 Collector of Stamp Revenue v Arrowtown Assets Ltd (2003) 6 ITLR 454 [35]. 28 See, eg P Ridd, ‘Through Ramsay Spectacles’ in P Harris and D de Cogan (eds), Studies in the History of Tax Law, vol 9 (Oxford, Hart Publishing, 2019) 243–77.

Hole and Plug  173 attitude towards tax avoidance, as evidenced in the speech of Lord Wilberforce29 in WT Ramsay Ltd v IRC,30 when he reiterated the familiar principle that: A subject is entitled to arrange his affairs so as to reduce his liability to tax. The fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides. It must be considered according to its legal effect.31

CLOSE COMPANIES

In the consolidation of 1988, the provisions relating to close companies merited a part.32 Those provisions may be traced back to various Finance Acts, the first being that of 1922, the origins of which will now be examined to see how MPs reacted to the Chancellor of the Exchequer’s initiative. The subsequent case law will then be scrutinized, but only to see whether the judges gave the provisions what may be described as a fair run. The proposition that a company had, in law, corporate personality and was to be treated as distinct from its members was already well established,33 and it cannot have been a surprise when the Chancellor sounded his alarm bell about the use of companies to obtain tax advantages. This occurred in the Budget presented by Sir Robert Horne on 1 May 1922. He spoke of action to deal with ‘certain instances of legal avoidance of Income Tax and Super-tax which have recently become so prevalent as to produce inequalities in the incidence of taxation as between different taxpayers’.34 He instanced revocable trusts and one-man companies, adding ‘in other directions, which I need not particularise, various devices are being adopted in order to avoid the intention of the law’.35 The immediate responses to the speech did not refer to that proposal, but later comments indicated that, while there would be no outright opposition, the Chancellor might experience a rough ride in Committee, particularly in relation to the interaction with corporation profits tax36 and the effect on ‘genuine cases’.37 In the initial stage of Committee, there was a concentration on the two points just made,38 concerns about whether the provision would be workable39 and,

29 Lord Fraser of Tullybelton gave the only other reasoned speech and nothing in his speech contradicted what Lord Wilberfore said. 30 WT Ramsay Ltd v IRC [1982] AC 300. 31 ibid 323. 32 Income and Corporation Taxes Act 1988, Part XI, ss 414–30. 33 Salomon v A Salomon & Co Ltd [1897] AC 22. 34 HC Deb 1 May 1922, vol 153, col 1033. 35 ibid. 36 ibid col 1284 (Mr Perring). 37 ibid cols 1958, 1960 (Major Hills). 38 ibid col 1226 (Mr Herbert and Mr Samuel), col 1236 (Mr Macquisten), col 1237 (Sir Halford Mackinder). 39 ibid col 1228 (Mr Samuel).

174  Philip Ridd perhaps surprisingly, worries that the provision would be ineffective because it would not extend to foreign companies40 and would not apply where a member of a company was a limited liability company.41 The Chancellor declined to back down altogether, but agreed to put forward an alternative wording.42 The redraft ran to over 900 words. With some of the subclauses summarised, it ran: (1) 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 or other period ending on any date subsequent to the fifth day of April, nineteen hundred and twenty-one, for which accounts have been made up, distributed to its members in such manner as to render the amount distributed liable to be included in the statements to be made by the members of the company of their total income for the purposes of super-tax, a reasonable part of its actual income from all sources for the said year or other period, the Commissioners may, by notice in writing to the company, direct that for purposes of assessment to super-tax, the said income of the company shall, for the year or other period specified in the notice, be deemed to be the income of the members, and the amount thereof shall be apportioned among the members: Provided that, in determining whether any company has or has not distributed a reasonable part of its income as aforesaid, the Commissioners shall have regard not only to the current requirements of the company’s business, but also to such other requirements as may be necessary for the maintenance and development of that business. [(2) Assessment to be on the member in the name of the company and tax payable by the company, and existing rules for collection applied. (3) Charge initially on member but, if tax not paid within prescribed time, company liable. (4) Any later distribution not to be included in member’s income. Repayment of tax as needed to prevent double taxation.] (5) This section shall apply to any company – (a) which has since the fifth day of April, nineteen hundred and nine, been registered under the Companies Acts, 1908 to 1917; and (b) in which the number of shareholders computed as hereinafter provided is not more than 50; and (c) which has not issued any of its shares as a result of a public invitation to subscribe for shares; and (d) which is under the control of not more than five persons. For the purposes of this sub-section – In computing the number of shareholders of a company there shall be excluded any shareholder who is not a beneficial owner of shares or who is an employee of the company, or is the wife or the unmarried infant



40 ibid

col 1223 (Mr Herbert). col 1228 (Mr Samuel). 42 ibid col 1235. 41 ibid

Hole and Plug  175 child of a beneficial owner of shares in the company; A company shall be deemed to be under the control of any persons where the majority of the voting power or shares is in the hands of those persons or relatives or nominees of those persons, or where the control is by any other means whatever in the hands of those persons; The expression ‘relative’ means a husband or wife, ancestor, or lineal descendant, brother, or sister; The expression ‘nominee’ means a person who exercises his voting power or holds shares directly or indirectly on behalf of another person; Persons in partnership and persons interested in the estate of a deceased person or in property held on a trust shall, respectively, be deemed to be a single person. (6) In this section the expression ‘member’ shall include any person having a share or interest in the capital or profits or income of a company, and the expression ‘employee’ shall not include any governing director, managing director, or director. [(7) Computational rules as set out in First Schedule.] (8) The provisions of this section shall apply for the purposes of assessment to supertax for the year 1922–23 and any succeeding year of assessment.’43

The debate in Committee concentrated largely on technicalities, though one member spoke strongly against the clause.44 Workability was a main issue, one member being concerned that the Revenue would be unable to cope,45 and others concerned that the Special Commissioners lacked the required expertise.46 It was even suggested that open court with a jury should be involved.47 But in Committee and on Report, ministers made only limited concessions. A preamble was inserted. The dates in (1) and (9) above were changed to 1922 and 1923–24 respectively, and the date in (5)(a) was changed to 1914. A subclause was inserted at (5) for the repayment of corporation profits tax, so that (5)–(8) above became (6)–(9). The Solicitor General, Sir Leslie Scott, commented that ‘there is a sort of decency in regards to the amount of the general burden that each person ought to bear’,48 but Sir J Butcher asserted that it is ‘not immoral to avoid tax’.49 Mr Samuel mentioned three methods of avoiding tax, but the Solicitor General asked him not to go into details, although he added that he would be glad to hear about them privately.50 Within this small compass, we therefore see an anti-avoidance provision which was recognised to be far from foolproof; mention of other avoidance devices which were permitted to flourish, though advertising of them was



43 HC

Deb 27 June 1922, vol 155, col 1867. cols 1888–90 (Mr Macquisten). 45 ibid cols 1899–900 (Colonel Niall). 46 ibid col 1884. Mr Joynson-Hicks even referred to a ‘Star Chamber inquiry’. 47 ibid col 1901 (Mr Reid). 48 ibid col 1923. 49 ibid col 1931. 50 HC Deb 13 July 1922, vol 156, col 1509. 44 ibid

176  Philip Ridd discouraged; and a confusion about the propriety or impropriety of tax avoidance. Any intelligent observer would have predicted that action would be taken in future Finance Acts to strengthen the provision. Correspondingly, no close company participator will have been quaking in his boots, as it will have been noticed, for example, that taking money out by way of loan would be an easy way to escape a direction. A protracted game of cat and mouse had plainly started but, rather than following that game through, attention will now be turned to the reaction of the judges. It is possible to trace over 70 cases in which the close companies legislation was considered. If hopes were entertained that the judges would try to constrain the operation of the legislation by a process of restrictive construction, those hopes were dashed. The counterpart of taking the line that it is no business of the courts to control tax avoidance is that it is not for the courts to undermine parliament’s efforts to stem the tide. In FPH Finance Trust Ltd v IRC,51 Lord Russell of Killowen, in the only reasoned speech, recognised that the wide and comprehensive statutory wording should be construed broadly,52 and the courts were conscious that there was no shortage of devices designed to outwit the legislation.53 That is not to say that the judges looked on the legislation with any great favour. In Lionel Sutcliffe Ltd v IRC,54 Rowlatt J protested that section 31 of the Finance Act 1927 was a ‘crying scandal’ by reason of its ‘utterly unintelligible form’, commenting that ‘people of this country are taxed by laws which they cannot possibly understand’ and condemning section 31 as the ‘worst example in the Statute book’.55 In Himley Estates Ltd and Humble Investments Ltd v IRC,56 the judges’ views on ‘or where the control is by any other means whatever in the hands of those persons’ in section 21(6) of the Finance Act 1922 were reflected in the headnote to the report, which stated ‘The terms of the definition clause before the Court censured as unintelligible and ridiculous’.57 Of the several cases which reached the House of Lords, one deserves particular note. In Thomas Fattorini (Lancashire) Ltd v IRC,58 the taxpayer investment company had borrowed money from a bank to buy shares in other companies on the basis that any dividends received would accrue to the bank, and that is what happened in the two years in issue, years in which the company had no other income. The Special Commissioners, acting administratively, made a direction

51 [1946] AC 38. 52 ibid 50. 53 See, eg Asquith LJ in De Walden v CIR (1947) 30 TC 345, 360–61. 54 (1931) 14 TC 171. 55 ibid 187. 56 Himley Estates Ltd and Humble Investments Ltd v IRC [1933] 1 KB 472. 57 ibid. 58 Thomas Fattorini (Lancashire) Ltd v IRC [1942] AC 643. Incidentally, two of the Law Lords made complimentary remarks about the argument put by counsel for the taxpayer company. This was Patrick Donovan, who was formerly a member of the Inland Revenue Solicitor’s Office and eventually became a Law Lord.

Hole and Plug  177 under section 21 of the Finance Act 1922, then, acting judicially, discharged it, the Board of Referees restored it,59 Macnaghten J overruled the Board, the Court of Appeal overruled Macnaghten J and the House of Lords overruled the Court of Appeal. All five Law Lords considered that there was no evidence to support the Board’s finding that the company had not within a reasonable time distributed a reasonable part of its income for either of the periods in question, although it was accepted in principle that the company was not precluded from declaring a dividend, for example, by borrowing the necessary funds to do so. There was some concern about the onus of proof in section 21 cases. Viscount Simon LC and Lord Porter said nothing. Lord Atkin, who described the section as ‘highly penal’,60 considered that the onus was at all times on the Revenue. Lord Wright, who described the section as ‘penal in character’ and as imposing a ‘very severe penalty’,61 shared that view. Lord Macmillan’s view was, however, that the burden was initially on the taxpayer but, if met, shifted to the Revenue. Lord Atkin had in mind that the section would apply to the whole of a company’s income even if ‘the reasonable part’ was a small one.62 While that is so, it is questionable whether, in a case in which ‘the reasonable part’ was the whole of a company’s income, application of the section could properly be described as penal: capability, rather than inevitability, appears to be the correct position. In fact, the recognition of the legislation’s penal character, as described by Lord Atkin, was not new; Lord Sands noted it in David Carlaw & Sons Ltd v IRC,63 but considered it explicable as otherwise fishes might have escaped the government net;64 and in London and Northern Estates Ltd v IRC,65 Rowlatt J, on the same point, described the legislation as of a ‘very sweeping character’ and spoke of apportionment of all of the profits as a ‘very remarkable characteristic’;66 in Carnarvon Estates Co v IRC,67 Maugham LJ recorded the Attorney General as having stated that the legislation was ‘of punitive character’.68 For present purposes, what is to be noted is, first, that the recognition was neutral in the sense that it did not promote any special approach to the task of statutory construction and, secondly, perhaps astonishingly, the point was not one made by MPs when the Finance Bill of 1922 was under examination. Although the observations about the onus of proof being on the Crown throughout were made by only two of the Law Lords, they were taken to be



59 Surprisingly,

it was far from unusual to find the Board of Referees restoring a direction. 655, 656. 61 ibid 662. 62 ibid 655. 63 David Carlaw & Sons Ltd v IRC (1926) 11 TC 96. 64 ibid 121. 65 London and Northern Estates Ltd v IRC (1931) 16 TC 128 66 ibid 135. 67 Carnarvon Estates Co v IRC (1935) 19 TC 643. 68 ibid 658. The Attorney-General at that time was Sir Thomas Inskip QC. 60 ibid

178  Philip Ridd correct in the subsequent cases, notably by Jenkins LJ in A&J Mucklow Ltd (in liquidation) v IRC,69 although he played down the significance of the onus by observing that ‘the reasonableness or unreasonableness of [withholding distribution] is not susceptible of direct proof short of, so to speak, a plea of guilty by the company. It is an inference of fact to be made from the primary facts …’70 In IRC v Kered Ltd,71 Sir Wilfrid Greene MR observed: It appears that a certain number of taxpayers, subjects of His Majesty, who found it consistent with the dignity of inhabitants of a free country, to do so, then proceeded to adopt a method of getting round the [close company tax] provisions …

However, he then kicked the observation into touch by remarking that ‘the only matter with which we are concerned is the administration of these Acts’.72 An underlying lack of sympathy for the taxpayer might even extend to situations in which the taxpayer had not taken such action as the statutory provisions set out to nullify, as made clear by Lord Carswell LCJ in Brennan v Deanby Investment Co Ltd.73 On the whole, the verdict must be that the judges administered the close company tax provisions without fear or favour in accordance with the judicial oath. TRANSFER OF ASSETS ABROAD

In the 1936 Budget, the Chancellor of the Exchequer, Neville Chamberlain, outlined several proposals to counter tax avoidance, one of which related to transfer of assets abroad.74 In his immediate response, Mr Attlee, for Labour, made no reference to those proposals, but described the Budget as one ‘which will ultimately lead us to war’.75 Sir Archibald Sinclair, for the Liberals, singled out one of the proposals and expressed approval.76 Many of the subsequent responses addressed the topic of rearmament. The first two days of the Budget debate contained no reference to the proposals, though Mr Dalton commented that ‘tax dodging has become an elaborate fine art’.77 The third day produced outspoken remarks from Sir Arnold Wilson, who commented that avoidance of

69 A&J Mucklow Ltd (in liquidation) v IRC [1954] Ch 615. 70 ibid 648. At first instance Harman J described the close companies legislation as a ‘dark legislative jungle’: (1954) 35 TC 251, 264. For lovers of obscure Latin apophthegms, consider Harman J’s statement that ‘the reasonable company like the reasonable man is not chimaera bombinans in vacuo’ (ibid). 71 IRC v Kered Ltd [1939] 1 KB, 402. 72 ibid 419–20. 73 Brennan v Deanby Investment Co Ltd (2001) 73 TC 455, 462. 74 HC Deb 21 April 1936, vol 311, cols 45–46. 75 ibid col 61. 76 ibid col 63. 77 HC Deb 22 April 1936, vol 311, col 267.

Hole and Plug  179 tax ‘is not only legal but … is proper’:78 he then attributed the conduct of tax advisers to ‘the ruthless way in which the screw is put on by the Inland Revenue Commissioners’, asserting that this had an effect on the morals of taxpayers who responded ‘Tit for tat. You have plundered us, as we think unfairly, and we will get back on you as best we can.’79 Perhaps strangely, he then said that he did not approve, but added a suggestion that ‘a department of mercy might be attached to the Inland Revenue’.80 No one reacted to that speech. Mr Pritt observed that avoidance of tax was being dealt with too mildly.81 Mr Dalton said that Labour were anxious to assist seeing that ‘holes are stopped up’.82 Mr Silverman expressed approval of stopping ‘very glaring examples of evasion of just responsibility’.83 In the Finance Bill, the proposed provisions to deal with transfer of assets abroad appeared as clause 16 and Schedule II. Clause 16 may be summarised as follows. The preamble recited that the purpose of the provision was to prevent avoidance of income tax by persons ordinarily resident in the UK by transfer of assets, either alone or in conjunction with associated operations, by which income became payable to non-resident or non-domiciled persons. By (1), where such a transfer occurred and ‘such an individual’84 had the power to enjoy, whether immediately or in the future, the income of the transferee, the income would be deemed for tax purposes to be that individual’s but, by a proviso, the subsection would not apply if the transferor were to satisfy the Special Commissioners that the transfer and associated operations had been effected mainly for some purpose other than tax avoidance. (2) defined associated operations. (3) defined the circumstances in which there was ‘power to enjoy’. (4) provided that in determining power to enjoy, regard should be had to the substantial result and effect of the transfer and associated operations, accruing benefits to be taken into account irrespective of the nature or form of the benefits. (5) provided wide ranging definitions. (6) set up Schedule II to supplement the section. (7) implemented the section for 1935–36 and subsequent years. On the second reading of the Bill, clause 16 was given some consideration. Mr Benson said much to the effect that the Chancellor was not doing enough about avoidance of tax and he specifically mentioned the Duke of Westminster case.85 The Chancellor, observing that a fine mesh was needed and that that led to the complexity of the clauses, replied that the Bill dealt with ‘the three classes of avoidance which are most in vogue and from which the revenue is at



78 HC

Deb 23 April 1936, vol 311, col 411. He prayed in aid Macbeth and Simon de Montfort. 80 ibid. The Adjudicator’s Office, created in 1993, springs to mind in this connection. 81 HC Deb 27 April 1936, vol 312, col 661. 82 ibid cols 672–73. 83 ibid col 757. 84 The reason for quoting those words will emerge later. 85 HC Deb 20 May 1936, vol 312, col 1235. Duke of Westminster v IRC [1936] AC 1. 79 ibid.

180  Philip Ridd the present time losing the largest amounts’.86 Mr Thurtle also raised the Duke of Westminster’s case,87 but he was followed by Sir John Wardlaw-Milne, who more generally downplayed the Chancellor’s concerns, observing that only 6,142 people had incomes of over £10,000 per annum; he was in favour of countering avoidance of tax, but maintained that the tax provisions should be clear; he was then severely critical of the Board of Referees, who, he said, had found in favour of the taxpayer in only 14 of the 402 cases which they had considered in the last eight years, adding that appeals were expensive.88 Mr Graham White supported him.89 Somewhat later, the Attorney-General, Sir Donald Somervell, disassociated the government from criticism of the Board of Referees.90 Mr Pethick-Lawrence considered that a wider attack on avoidance should be considered.91 In reply, Mr Morrison, the Financial Secretary to the Treasury, defended the clause, during the course of which he asserted, delphically, that tax avoiders ‘clothe that transaction with a legal form which is distinct from its true form’.92 In Committee, Mr Morrison also stood firm against Major Hills, who disliked the burden of proof being upon the taxpayer and who, along with Sir John Withers, wanted non-domiciliaries to be excluded from the scope of the clause.93 Mr Benson, supported by Mr Pethick-Lawrence, suggested that the word ‘mainly’ in the proviso paved the way for avoidance.94 Mr Lewis, supported by Mr Samuel, objected on principle to retrospective legislation.95 On third reading, Mr Pethick-Lawrence supported the Chancellor, saying that when anyone, by means of dodging, endeavours to get out of a liability that would naturally and properly fall on his shoulders, he imposes heavier burdens on others and it is our business to prevent him from taking advantage of such methods …96

The Chancellor, responding to criticisms that the proposed legislation did not go far enough but ‘left untouched a great body of tax avoidance which was still going on’, stated that legislation was difficult, but ‘we may be driven’ to act: he said that the proposed legislation ‘covered all the principal known forms of tax avoidance which are of any serious importance’, leaving aside those not ‘sufficiently extensive or sufficiently subversive of the revenue as to make it

86 ibid cols 1256–57. 87 ibid cols 1268–71. 88 ibid cols 1271–75. 89 ibid cols 1281–89. 90 HC Deb 1 July 1936, vol 314, col 483. 91 HC Deb 20 May 1936 vol 312, col 1314. 92 ibid cols 1324–25. 93 HC Deb 15 June 1936, vol 313, cols 673–77. 94 ibid cols 682, 691. This proved to be a sound point: the word ‘mainly’ disappeared in the course of amendments made by s 28 of the Finance Act 1938. 95 ibid cols 721, 725–26. 96 ibid col 810.

Hole and Plug  181 essential that they should be tackled’.97 The Duke of Westminster, who was not mentioned, will, no doubt, have been pleased that his activities were not considered of ‘serious importance’.98 The only amendment of any consequence was the insertion of a proviso which dealt with the retrospection point by excluding income tax for 1935–36. A fair overall verdict would be that the process of the enactment of section 18 involved no significant fuss. For many years, the Inland Revenue enjoyed a good run in the courts in section 18 cases. In Sassoon v IRC,99 the Court of Appeal, disagreeing with an obiter comment of Macnaghten J in MacDonald v IRC,100 held that ‘taxation’ in the proviso to section 18(1) included death duties; it was held that there was no reason for cutting down the meaning of ‘taxation’ by judicial construction, a liberal interpretation being required; incidentally, Scott LJ mentioned section 21 of the Finance Act 1922 as ‘the first legislative attempt to defend the national income from what Parliament regarded as improper attempts by individuals to shirk their fare share of fiscal responsibility’;101 he spoke of Parliament’s endeavours to ‘preserve the principle of equality in the burden of taxation’.102 Howard de Walden (Lord) v IRC103 produced the reference to ‘burnt fingers’ which was subsequently much cited. Lord Greene MR, in judgment of the court, said: The section is a penal one, and its consequences, whatever they may be, are intended to be an effective deterrent which will put a stop to practices which the legislature considers to be against the public interest. For years a battle of manoeuvre has been waged between the legislature and those who are minded to throw the burden of taxation off their own shoulders on to those of their fellow subjects. In that battle the legislature has often been worsted by the skill, determination and resourcefulness of its opponents of whom the present appellant has not been the least successful. It would not shock us in the least to find that the legislature has determined to put an end to the struggle by imposing the severest of penalties. It scarcely lies in the mouth of the taxpayer who plays with fire to complain of burnt fingers.104

Latilla v IRC105 was also productive of a famous passage. Viscount Simon LC said: My Lords, of recent years much ingenuity has been expended in certain quarters in attempting to devise methods of disposition of income by which those who were

97 ibid cols 819–20. 98 Until 1946, when Parliament intervened by s 28 of that year’s Finance Act. 99 Sassoon v IRC (1943) 25 TC 154. 100 MacDonald v IRC [1940] 1 KB 802. 101 Sassoon, above n 99, 156. Scott LJ was Sir Leslie Scott, who, as mentioned earlier, was the Attorney-General who helped to pilot through the 1922 Act. 102 ibid 157. 103 Howard de Walden (Lord) v IRC [1942] 1 KB 389. 104 ibid 397. 105 Latilla v IRC [1943] AC 377.

182  Philip Ridd prepared to adopt them might enjoy the benefits of residence in this country while receiving the equivalent of such income without sharing in the appropriate burden of British taxation. Judicial dicta may be cited which point out that, however elaborate and artificial such methods may be, those who adopt them are ‘entitled’ to do so. There is, of course, no doubt that they are within their legal rights, but that is no reason why their efforts, or those of the professional gentlemen who assist them in the matter, should be regarded as a commendable exercise of ingenuity or as a discharge of the duties of good citizenship. On the contrary, one result of such methods, if they succeed, is, of course, to increase pro tanto the load of tax on the shoulders of the great body of good citizens who do not desire, or do not know how, to adopt these manoeuvres. Another consequence is that the legislature has made amendments to our income tax code which aim at nullifying the effectiveness of such schemes. The question in the present appeal is whether section 18 of the Finance Act 1936, has the result of checkmating the design of avoiding income tax and surtax which was the main purpose of certain highly artificial dispositions made in 1933.106

In Corbett’s Executors v IRC,107 Scott LJ, in the judgment of the court, noted that in previous cases the Court of Appeal had rejected any narrow or technical construction of the language of [section 18]’.108 In Herdman v IRC,109 Lord Macdermott CJ said: ‘The section is drafted in comprehensive terms and there can be no doubt it was intended to cast a wide net.’110 In Congreve v IRC,111 Bambridge v IRC112 and Philippi v IRC,113 it had been established that ‘such an individual’ might be anyone who might benefit from the transfer of assets abroad. That wheel came off the Revenue’s bus in Vestey v IRC (Nos 1 and 2),114 in which the House of Lords held that ‘such an individual’ referred to the transferor, overruling the previous case law, invoking the 1966 change of practice115 to overrule its own decision in Congreve. It is unnecessary to delve deeply into the complex details of the Vestey case. It is sufficient to say that it concerned capital sums paid to some beneficiaries under a discretionary accumulation settlement; the main provision on which the Revenue relied was section 18(1A) of the Finance Act 1936 (section 412(2) of the Income and Corporation Taxes Act 1970), which, like section 18(1), included ‘such an individual’; and the Revenue had to accept that, if it were right, the consequences

106 ibid 381. 107 Corbett’s Executors v IRC (1943) 25 TC 305. 108 ibid 314–15. 109 Herdman v IRC (1969) 43 TC 394. 110 ibid 405. 111 Congreve v IRC [1947] 1 All ER 168. 112 Bambridge v IRC [1954] 1 WLR 1460. At first instance Harman J observed: ‘Death, as we know, is an awfully big adventure, but even the Crown admits that it is not an associated operation’: (1955) 36 TC 313, 322. 113 Philipppi v IRC [1971] 1 WLR 684. 114 Vestey v IRC (Nos 1 and 2) [1980] AC 1148. 115 Practice Statement (Judicial Precedent) [1966] 1 WLR 1234.

Hole and Plug  183 would be so extensive116 that modification would be necessary by an administrative practice foregoing tax legally exigible.117 In IRC v Pratt and others,118 Walton J held that section 412 did not apply in the case of multiple transferors whose respective interests could not be separated out to enable a percentage of the interest transferred to be attributed to each transferor. As in the Vestey case, a difficulty for the Revenue was that the legislation lacked the machinery provisions which would have been required if the Revenue’s fundamental submission had been sound. Again, the verdict must be that the judges administered the tax provisions concerning transfer of assets abroad without any penchant for restricting their operation, and the element of rowing back, as represented by Vestey, seems beyond rational criticism. SECTION 28 OF THE FINANCE ACT 1960

In 1960, Parliament took action to deal with various forms of tax avoidance, notably dividend stripping.119 A warning had been given on 13 December 1955 when the Financial Secretary said: Finally, the dividend strippers have been given notice to quit … the Economic Secretary has also put it on record that if clever people should discover ways and means of getting round this legislation, which is squarely directed against dividend stripping, the Government will not hesitate to stop any such loophole by further legislation, and to make such legislation retrospective.120

In the Budget speech, which was delivered on 4 April 1960, the Chancellor of the Exchequer, Mr Derick Heathcoat-Amory, proposed legislation to deal with dividend strippers and bond washers, referring to ‘fresh devices involving the manipulation of stocks and shares with the object of depriving the Revenue of its proper tax’ and asserting that safeguards previously used to ‘protect legitimate business’ were ‘being twisted for the purpose of avoidance’: he stated that there was a need for wider powers because previous limited action had been ‘carefully studied in order to find a new way of cheating the Revenue’. The Chancellor then outlined the envisaged legislation, concluding with an observation that the measure would benefit ‘the great body of fair-minded honourable businessmen’.121

116 ‘Monstrous injustice’ – per Walton J [1979] Ch 177, 202. 117 A notable example of a pulling up by the bootstraps argument. 118 IRC v Pratt and others (1982) 57 TC 1. 119 ‘Further and more radical action’ would be more precise. An explanation of dividend stripping, given by Lord Denning, may be found in Ridd, above n 28, 272–73. 120 HC Deb 13 December 1955, vol 547, col 1022. 121 HC Deb 4 April 1960, vol 621, cols 57–58.

184  Philip Ridd In his response, the leader of the opposition, Mr Gaitskell, welcomed all of the measures ‘for the protection of the Revenue’.122 Also welcoming the measures, Mr Pargiter suggested that the Chancellor should go further than he proposed.123 Mr Mackie took exception to the word ‘cheating’, preferring ‘tax evasion’, but, in confirming his aversion to it, observed that it was now ‘more important to have a good chartered accountant than a good manager’ and that ‘things have come to a bad pass’.124 Sir Douglas Glover, also averse to ‘cheating’, said that it is a national pastime not to pay more tax than the State is legally entitled to have. I do not call that tax avoidance, but the intelligent manipulation of one’s income. One does not want to pay a penny more than the State, by its legislation, has given itself the right to exact.

He added: ‘I would accept a minor degree of tax avoidance to ensure the freedom of the individual rather than allow administration by diktat to grow …’125 Exchanges between Mr Loughlin and Sir Douglas Glover then followed, Mr Loughlin favouring ‘proposals to tighten up measures to prevent tax evasion’ and commenting that ‘the idea that all things are possible within the law is not a good moral philosophy’, and Sir Douglas Glover saying that he supported the Chancellor’s proposals.126 On the second day of the Budget debate, Mr Harold Wilson supported the proposed measures but went on to mount a detailed attack on the government’s limited reaction to tax avoidance, which he attributed to there being ‘too many Tory crusts dipping into this gravy’.127 The President of the Board of Trade, Mr Reginald Maudling, responded at length, but largely ignored the topic of tax avoidance.128 Mr Diamond thought that the Chancellor’s figures on tax avoidance were wrong and he favoured a ‘sort of tax advisory committee … to see … that the dishonest citizen is prevented from paying less than his fair share’; curiously, Mr Diamond observed that ‘the Chancellor has finally been persuaded to adopt a method of anti-tax-avoidance which is not very acceptable to anyone in this Committee’, but declared himself satisfied with the extent of the Chancellor’s proposals.129 Mr Douglas Houghton supported the Chancellor.130 On the third day of the Budget debate, Mr Green, declaring that he was against the Revenue having ‘any blanket powers’, said that a Draconian clause, a severe clause, over tax evasion or avoidance is all right, provided that it is explicit … People are perfectly entitled legally to avoid taxes if they can

122 ibid

cols 77–78. col 90. 124 ibid col 141. 125 ibid cols 143–45. 126 ibid cols 149–50. 127 HL Deb 5 April 1960, vol 621, cols 208–14. 128 ibid cols 226–40. 129 ibid cols 244–46. 130 ibid col 258. 123 ibid

Hole and Plug  185 contrive it so. An explicit clause or series of clauses to prevent evasion will have my whole-hearted support. What I should find it very difficult, I think impossible, to support would be a clause allowing some other body – not the legislature, not the judiciary – to decide whether or not the person intended to evade …131

Mr Pannell considered that ‘the principle of all taxation is equity’.132 The Chancellor, concluding the debate, said that ‘tax dodging’ and ‘fiddling and dodging’ were practised only by a minority. but ‘people are deliberately twisting and distorting the law out of all recognition’ and a ‘general power’ was necessary to deal with ‘blatant devices’.133 The main provision which resulted was section 28 of the Finance Act 1960, as supplemented by section 43, an interpretation section applicable to Part II of the Act, the part in which section 28 appeared. The two provisions, which were of immense length, will now be described. Sections 28(1) and (2), which defy summary, were as follows: (1) Where – (a) in any such circumstances as are mentioned in the next following subsection, and (b) in consequence of a transaction in securities or of the combined effect of two or more such transactions, a person is in a position to obtain, or has obtained, a tax advantage, then unless he shows that the transaction or transactions were carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments, and that none of them had as their main object, or one of their main objects, to enable tax advantages to be obtained, this section shall apply to him in respect of that transaction or those transactions: [A proviso then excluded transactions completed before 5 April 1960] (2) The circumstances mentioned in the foregoing subsection are that – (a) in connection with the distribution of profits of a company, or in connection with the sale or purchase of securities being a sale or purchase followed by the purchase or sale of the same or other securities, the person in question, being entitled (by reason of any exemption from tax or by the setting off of losses against profits or income) to recover tax in respect of dividends received by him, receives an abnormal amount by way of dividend; or (b) in connection with the distribution of profits of a company or any such sale or purchase as aforesaid the person in question becomes entitled, in respect of securities held or sold by him, to a deduction in computing profits or gains by reason of a fall in the value of the securities resulting from the payment of a dividend thereon or from any other dealing with any assets of a company; or



131 HL

Deb 6 April 1960, vol 621, cols 665–66. col 666. 133 ibid cols 690–91. 132 ibid

186  Philip Ridd (c) the person in question receives in consequence of a transaction whereby any other person – (i) subsequently receives, or has received, an abnormal amount by way of dividend; or (ii) subsequently becomes entitled, or has become entitled, to a deduction as mentioned in paragraph (b) of this subsection, a consideration which either is, or represents the value of, assets which are (or apart from anything done by the company in question would have been) available for distribution by way of dividend, or is received in respect of future receipts of the company or is, or represents the value of, trading stock of the company, and the said person so receives the consideration that he does not pay or bear tax on it as income; or (d) in connection with the distribution of profits of a company to which this paragraph applies, the person in question so receives as is mentioned in paragraph (c) of this subsection such a consideration as is therein mentioned. [The subsection continued with lengthy provisions which defined its scope.]

Section 28(3)–(12) will now be summarised. Subsections (3)–(5) provided the machinery for counteraction, which involved consideration being given by a special tribunal to determine whether there was a prima facie case for proceeding; (6) provided a right of appeal to the Special Commissioners; (7) set up the special tribunal; (8) and (9) gave details about appeals; (10) provided a clearance procedure; (11) defined ‘abnormal dividend’; and (12) declared that the powers conferred by the section were not to be limited by any other tax provision and provided that an assessment under the section could not be made later than six years after the year to which the tax advantage related. Section 43 included at (4): (f) ‘securities’ includes shares, ‘shares,’ except where the context otherwise requires, includes stock, and references to dividends include references to interest; (g) ‘tax advantage’ means a relief or increased relief from or repayment or increased repayment of, income tax or the avoidance of a possible assessment thereto, whether the avoidance or reduction is effected by receipts accruing in such a way that the recipient does not pay or bear tax on them, or by a deduction in computing profits or gains; … (i) ‘transaction in securities’ includes transactions, of whatever description, relating to securities, and in particular (i) the purchase, sale or exchange of securities, (ii) the issuing or securing the issue of, or applying or subscribing for, new securities, (iii) the altering, or securing the alteration of, the rights attached to shares.

It is worth noting straight away that within section 28 only subsection (1) remained unamended during the parliamentary process, but this was due to government refinements rather than to watering down as the result of opposition to the severity of the clause.

Hole and Plug  187 In Committee, Mr Enoch Powell said that he was in favour of the utmost vigour and effectiveness in the safeguarding of the revenue and the prevention of tax dodging. But vigour and effectiveness in doing that are not the same as arbitrariness and unfairness in the methods by which the House of Commons attempts to do so.

He opined that ‘legislation … must be fair, must be seen to be fair and must be felt to be fair’, and continued by expressing concerns about the burden of proof.134 The Attorney General, Sir Reginald Manningham-Buller QC, in moving a new subclause (2), confirmed that an ordinary liquidation was not caught because it was not a ‘transaction in securities’.135 Mr Douglas Houghton referred to cynicism of the great mass of taxpayers who say that the whole thing is riddled with fiddles; the attitude of the ordinary taxpayer who believes that those who are better off and better advised can swindle the revenue left, right and centre.

He remarked that the Australian general anti-avoidance provision introduced in 1959 was ‘worth watching’.136 Sir Kenneth Pickthorn was worried that the business world would not be ‘able to find out how to behave properly’.137 Mr Mitchison observed that there is no sharp line between saying of someone or another ‘He is a good citizen’ or ‘He is a bad citizen’. These things are matters of degree, and the pride of the community ought to be that it raises the standard of what is accepted as tolerable behaviour in its commercial activities and in the dealings of its citizens with those who collect taxes for public purposes and for the common good.138

A discussion about the special tribunal was widened out by Mr Anthony Crosland, who said: When the Royal Commission examined our tax avoidance methods and compared them with methods in most other countries, it concluded that we were exceptional in always trying to lay down in detailed and explicit Clauses precisely what could not be done. The Royal Commission remarked that, in contrast, its survey of the tax systems of several other countries suggested that the usual course was to approach the problem on the lines of some more general declaration of principle governing tax avoidance. When the Royal Commission reported on the relative advantages or disadvantages of the two approaches, at that time on the advice of the Inland Revenue it recommended that the more radical approach adopted in most other countries, including many in the British Commonwealth, was not necessary. The Revenue at that time was satisfied with the powers that it had. Today it is clearly not satisfied with the powers that it has had or the methods that we have been using so far, and



134 HC

Deb 25 May 1960, vol 624, cols 478–82. col 511. cols 515–16. 137 ibid col 521. 138 ibid cols 536–37. 135 ibid 136 ibid

188  Philip Ridd that is why we are debating the Clause at the moment. I see considerable logic in the thought that if we are to move over so far only in the one Clause dealing with these devices – dividend stripping, bond washing and so on – but nevertheless it may be necessary on other occasions to move over to the new principle of the more general declaration of principle rather than the detailed and explicit description, then the idea of a tribunal, which is common in most other countries, may have some part to play.139

The Attorney General concluded with the astounding assertion that ‘this clause is precise and definite’.140 The Bill involved a recommittal, but nothing emerged in relation to section 28 and nothing of note emerged on Report.141 IRC v Parker142 concerned debentures issued in 1953 and redeemed in 1961. The Law Lords were split 3–2 because, while there had been a tax advantage, the minority (Lord Morton of Henryton and Lord Hodson) took the view that it had been obtained in 1953 and was then complete. For present purposes, the main point is that the Court of Appeal, in considering that section 28 was directed only at dividend stripping, were held to have taken too narrow a view of the provision: Viscount Dilhorne and Lord Wilberforce said so expressly,143 and by implication Lord Guest may be taken to have agreed. An incidental point is that counsel for the taxpayer relied on a dictionary definition of ‘avoidance’ in relation to ‘the avoidance of a possible assessment’ as follows: ‘The action of making void or of no effect; voidance, invalidation, annulment (Esp. in Law)’ and ‘the action of avoiding or shunning anything unwelcome’.144 The issue in IRC v Brebner145 was whether the transactions concerned had been carried out for purely bona fide commercial reasons without having as a main object the gaining of a tax advantage. The taxpayer was successful at all levels. In the leading speech in the House of Lords, Lord Upjohn observed: [W]hen the question of carrying out a genuine commercial transaction, as this was, is reviewed, the fact that there are two ways of carrying it out – one by paying the maximum amount of tax, the other by paying no, or much less, tax – it would be quite wrong, as a necessary consequence, to draw the inference that, in adopting the latter course, one of the main objects is, for the purposes of the section, avoidance of tax. No commercial man in his senses is going to carry out a commercial transaction except upon the footing of paying the smallest amount of tax that he can.146 139 ibid cols 590–91. 140 ibid col 643. 141 Mr Enoch Powell criticised the draftsman’s grammar, saying that in ‘none of them had as their main object’ the word ‘are’ should be ‘its’, but the Attorney General noted that views on grammar may differ and thought that the clause would not read ‘very happily’ if the change were made: HL Deb 5 July 1960, vol 626, cols 599, 603. 142 IRC v Parker [1966] AC 141. 143 ibid 160 and 176 respectively. 144 Oxford English Dictionary, 1933 edn, vol I, 587. 145 IRC v Brebner [1967] 2 AC 18. 146 ibid 30.

Hole and Plug  189 In Cleary v IRC,147 the Revenue first succeeded in the Court of Appeal and sustained that success in the House of Lords. The High Court decision was criticised by Viscount Dilhorne (with whom Lord Guest and Lord Devlin agreed) as having been based on an interpretation which ‘would narrow the section considerably’.148 Lord Upjohn was disturbed by the drafting, saying: [Section 28(2)(d)] is a difficult paragraph and the difficulties are not diminished by the great breadth of the language used by the draftsman in paragraphs (i), (ii) and (iii). They cannot possibly be described as definition clauses; they are ‘artificial inclusion’ clauses. I say ‘artificial’ because the draftsman has paid no attention to the proper use of language in relation to companies and their finances which has been accepted by lawyers and accountants alike for a very long time.149

In Hague v IRC,150 Danckwerts LJ observed that ‘Section 28 is a very remarkable piece of legislation and far from easy to construe’.151 In Greenberg v IRC,152 the main issue was whether section 28 applied to a dividend-stripping scheme initiated before 5 April 1960 but not carried out and completed in every particular until after that date. It was held that ‘carried out’ in proviso (i) to section 28(1) meant ‘fulfilled’ or ‘implemented’ rather than ‘effected’, with the consequence that section 28 applied. While all five Law Lords gave speeches, it is a passage from Lord Reid’s speech which needs to be quoted. Having concluded that each payment of an instalment of the price of a share was to be considered as a separate transaction relating to securities, he continued: I must confess that I do not like being forced step by step to a conclusion of this kind. At first sight to call each payment of one instalment of the price of a share a separate transaction relating to securities seems farfetched. We seem to have travelled a long way from the general and salutary rule that the subject is not to be taxed except by plain words. But I must recognise that plain words are seldom adequate to anticipate and forestall the multiplicity of ingenious schemes which are constantly being devised to evade taxation. Parliament is very properly determined to prevent this kind of tax evasion and, if the courts find it impossible to give very wide meanings to general phrases, the only alternative may be for Parliament to do as some other countries have done, and introduce legislation of a more sweeping character which will put the ordinary well-intentioned person at much greater risk than is created by a wide interpretation of such provisions as those which we are now considering.153

In Wiseman v Borneman,154 Lord Wilberforce commented on section 28: As appears from its face, and also from such cases under it as have reached the courts, it is a section of considerable severity. It places in the hands of the Commissioners of

147 Cleary

v IRC [1968] AC 766. 782. 149 ibid 789. 150 Hague v IRC [1969] 1 Ch 393. 151 ibid 411. 152 Greenberg v IRC [1972] AC 109, the report covering the allied case of Tunnicliffe v IRC. 153 ibid 137. 154 Wiseman v Borneman [1971] AC 297. 148 ibid

190  Philip Ridd Inland Revenue a means, which they are under a duty to use, to take action against any taxpayer who is in a position to obtain or has obtained a tax advantage. So pervasive is the present tax system that, in the world of commerce or investment, only the naïve or the incompetent would make decisions without regard to tax considerations, yet, on the face of the section, every such decision is exposed to attack, or at least may require justification.155

In Joiner v IRC,156 the taxpayer was unable to sustain in the courts his success before the Special Commissioners. The Court of Appeal even went so far as to hold that a liquidation was a ‘transaction in securities’, but the Law Lords were doubtful about that157 and decided the case on conventional grounds. Lord Wilberforce, alluding to the Parker and Greenberg cases, reaffirmed the principle that in the section 28 context the traditional rule that clear words are required to impose a tax had given way to a requirement ‘that expressions which might otherwise have been cut down in the interest of precision were to be given the wide meaning evidently intended’.158 IRC v Goodwin159 was, like Brebner, a case in which the taxpayers succeeded in establishing that the transactions concerned had been carried out for purely bona fide commercial reasons without having as a main object the gain of a tax advantage. In the High Court, Walton J distinguished ‘commercial’ from ‘financial’, but the distinction did not survive scrutiny in the Court of Appeal or the House of Lords. In Anysz v IRC,160 Browne-Wilkinson J remarked: ‘Although the provisions are not to be narrowly construed, the courts were wary about giving them an extended ambit.’161 He considered that the result of the case might be harsh, but commented: ‘I think this is the unfortunate consequence which may be suffered by those who indulge in deliberately artificial devices of great complexity which have tax avoidance as their sole objective.’162 In Balen v IRC,163 Stamp LJ described section 28 as ‘a formidable weapon in the armoury of the Inland Revenue’ and commented on the Revenue’s counterstatement in the case as ‘a monument to the thoroughness, skill, care, patience

155 ibid 319. 156 Joiner v IRC [1975] 1 WLR 1701. 157 Viscount Dilhorne, in expressing a firm view that a liquidation was not a ‘transaction in securities’, applied the Hansard exclusionary rule to prevent consideration of the view to that effect which he (then Reginald Manningham-Buller QC) had, as Attorney General, given in the debates on the Finance Bill 1960: ibid 1709. 158 ibid 1705–06. Taken literally, the remark would seem to suggest that in the past the courts had adopted precise meanings in preference to meanings evidently intended, but whether Lord Wilberforce meant to go as far as that is debatable. 159 IRC v Goodwin [1976] 1 WLR 191. 160 Anysz v IRC (1977) 53 TC 601. 161 ibid 626. 162 ibid 629. 163 Balen v IRC (1978) 52 TC 406.

Hole and Plug  191 and precision of the long-suffering officials whose duty it is to combat tax avoidance’.164 IRC v Garvin165 was a case in which the Revenue failed at all levels. It involved an interpretation issue relating to the word ‘whereby’, but it cannot be said that the favoured interpretation (equivalent to ‘by which’ and connoting a causal connection) was of a restrictive nature. Lord Wilberforce rejected one of the taxpayer’s contentions because it would emasculate the provision.166 Lord Bridge of Harwich referred to previous authorities167 which dispensed with ‘the principle that the subject is not to be taxed except by plain words’ and established a need to give ‘such a wide interpretation to the language used as may be necessary to give effect to the evident intention of Parliament’.168 Trustees of the Sema Group Pension Scheme v IRC169 was another case in which the Revenue lost, but not by virtue of a restrictive construction of the statutory provisions. Indeed, Jonathan Parker LJ, giving the only substantive judgment in the Court of Appeal, referred to previous authorities and specifically rejected a submission which relied on a restrictive construction.170 In Laird Group plc v IRC,171 the House of Lords held that payment of a dividend is not a ‘transaction in securities’ and confirmed that the same is true of a liquidation. In the Court of Appeal, in which the decision was in favour of the Revenue, Sir Andrew Morritt V-C referred to previous authorities as having established that it was ‘not permissible to infer some limitation on the very wide words by reference to any supposed mischief at which the legislation was aimed or by reference to the particular transaction set out in the definition [of ‘transaction in securities’], adding: ‘In my view it is also impermissible to limit the scope of application of the definition for fear, conscious or subconscious, that a wide interpretation may lead to injustice.’172 In the House of Lords, Lord Millett, who made the only substantive speech, did not specifically pick up on that remark. As has been apparent, the Revenue’s success rate in section 28 cases was not notably high, but that cannot be attributed to any inclination on the part of the judges to restrict the wide ambit of the provision. On the contrary, as evidenced by what Lord Reid said in the Greenberg case, even the then traditional approach to interpretation was dispensed with in an effort to secure the proper working of the provision.

164 ibid 420. 165 IRC v Garvin [1981] 1 WLR 793. 166 ibid 799. 167 Greenberg, above n 152; Joiner, above n 156. 168 Garvin, above n 165, 802–03. 169 Trustees of the Sema Group Pension Scheme v IRC (2002) 74 TC 593. 170 ibid [84]–[89]. Note also the striking comment, at [94], that ‘To put it crudely, if a statute defines references to a cow as including references to a horse, it does not follow that “horse” in that context means a horse with horns’. 171 Laird Group plc v IRC (2003) 75 TC 399. 172 ibid 461.

192  Philip Ridd COMMODITY FUTURES

In his Budget Speech on 11 April 1978, the Chancellor of the Exchequer, Denis Healey, stated: Lastly, a word about tax avoidance. This has emerged recently in a new form which involves marketing a succession of highly artificial schemes – when one is detected, the next is immediately sold – and is accompanied by a level of secrecy which amounts almost to conspiracy to mislead. The time has come not only to stop the particular schemes we know about but to ensure that no schemes of a similar nature can be marketed in future. So the provisions I shall be introducing this year to deal with artificial avoidance by certain partnerships dealing in commodity futures will go back to 6th April 1976, that is, before the date when the intention to legislate was announced in a parliamentary Answer. My proposed measures against avoidance by means of land sales with the right to repurchase will go back to 3rd December 1976, the date foreshadowed in a parliamentary Answer …173

During the Finance Bill proceedings, no one suggested that the particular schemes should be allowed to flourish, but the proposed measures did not pass without question because of their retrospectivity. There was some clamour against retrospective legislation as a matter of principle,174 but the general opposition line did not go along with that, instead taking the opportunity for what amounts to damage limitation. That resulted in the ‘Rees rules’175 as follows: First, warning must have been given to the taxpayer of the intention to legislate in this way and the warning must have been precise in form. Second, the problem at which the warning has been directed should immediately be referred to what is known as the tax reform committee for consideration – that is the committee that meets between the professions and the Inland Revenue. Third, if the committee can devise an appropriate legislative provision the draft clauses should be published immediately so as to give a second clear intimation to those who are likely to be affected. Finally, such a clause must without fail be introduced in the following Finance Bill.176

Joel Barnett, Chief Secretary to the Treasury, agreed with those rules.177 A rather different approach was formulated in 1992 when the Treasury Minister, Stephen Dorrell stated: Where it is discovered that the tax law does not have the effect that the Government and taxpayers generally thought it had, there are circumstances in which it is right to introduce legislation to restore the position retrospectively to what it was thought to be. This is done only in exceptional circumstances and where the Government consider such action is necessary to protect the interests of the general body of taxpayers.178

173 HC

Deb 11 April 1978, vol 947, cols 1202–03. Robert McCrindle at HC Deb 27 April 1978, vol 948, cols 1764–66. 175 Rees being Peter Rees QC. 176 As set down by Sir Geoffrey Howe at HC Deb 12 July 1978 vol 953, col 1641. 177 ibid col 1646. 178 HC Deb 29 June 1992, vol 210, cols 378–79. 174 eg

Hole and Plug  193 While that statement may at first appear clear, probing reveals it to be full of mystery.179 However, as the topic of retrospectivity180 is not central to this chapter, I will return to the main point. The discussion of the clauses which ended up as sections 31 and 32 of the Finance Act 1978 was wide-ranging. Sir Geoffrey Howe, the Shadow Chancellor, while remarking that the citizen is not entitled by dishonest or illegal means to evade taxes which are imposed, continued: But it has generally been believed, and rightly so, that the citizen is entitled to avoid taxes which are imposed in the sense that he is entitled to adjust his affairs so as to minimise his burden within the law that is for the time being in force. There are many judicial and other observations to that effect.181

Sir Geoffrey further remarked that: The difficulties arise when we begin to consider the extent to which some avoidance is more or less legitimate than others. Proper avoidance – the Chief Secretary has blessed it explicitly on many occasions in the House and in practice – is acceptable to everyone. It is the adjustment of one’s affairs by making exempt transfers ​under capital transfer tax, by making covenants to charity, and by all the other steps that one takes in order to take advantage of licensed loopholes. But there is a point when avoidance can be regarded as improper and unacceptable, deserving to be looked at critically, and deserving to be stopped up because it amounts to a defiance of or an escape from the underlying intention of the legislature. It is there that the difficulty arises. Where does that point arise? Can it be argued that something is manifestly an improper avoidance?182

It is correct that the Chief Secretary considered some tax avoidance to be acceptable. Ian Gow referred to this when he said: In Standing Committee the Chief Secretary said: ‘I want to say at the outset that there is a major difference … between what might be called ordinary tax avoidance and schemes of this character.’183 I do not think that it is possible to make a distinction between types of tax avoidance schemes. The only test is whether the Government of the day have been able to draft their legislation with sufficient skill to meet their intentions. It is up to the Government so to frame their own legislation as to ensure that it catches for tax those people that it is intended to catch.184

179 How is it discovered that the law is not what it was generally thought to be? By a court decision? Presumably an Opinion of Counsel would not be sufficient. If by court decision, then the successful litigant must, by definition, be some very astute person who has an inkling that the general thinking may be unsound. How often does that sort of thing happen? Once in a blue moon? We do not often encounter the likes of Thomas Gibson Bowles – Bowles v Bank of England [1913] 1 Ch 57. 180 For full updating, see the A Seely, ‘Retorspective Taxation’, Commons Briefing Paper SN 04369, https://commonslibrary.parliament.uk/research-briefings/sn04369/. 181 HC Deb 12 July 1978, vol 953 col 1632. Mr Cronin and Mr Renton spoke on the same lines at col 1654 and col 1659 respectively. 182 ibid cols 1632–33. 183 Standing Committee A, 6 June 1978, col 727. 184 HC Deb 12 July 1978, vol 953, cols 1662–63.

194  Philip Ridd The Chief Secretary did not resile from his previous statement, but again contrasted the schemes being considered with ‘the normal tax avoidance affairs of an individual taxpayer’.185 The last major contribution to the debate under examination was made by Peter Rees QC. He challenged the Chief Secretary’s remark that tax avoiders deliberately flout the intention of Parliament, observing that that intention could be derived only from statute and asserting that ‘It is, in a sense, begging the question to suggest that tax avoidance is constituted where people flout the intention of Parliament. That cannot as readily be gleaned as the Chief Secretary would have us believe.’186 He then observed: ‘What is avoidance in one era becomes accepted fiscal practice in another’,187 and he illustrated that by reference to golden handshakes. He also mentioned that he had invited the government to consider the possibility of a general anti-avoidance provision, but noted that the Chief Secretary’s response was lukewarm almost to the point of frigidity.188 CONTROLLED FOREIGN COMPANIES

Chapter VI of the Finance Act 1984 was headed ‘Controlled Foreign Companies’. Its objective was to bring into the UK tax net some or all of the profits of a company which was resident outside the UK but was controlled by persons resident in the UK. That may sound simple, but its achievement required 10 lengthy sections supplemented by three schedules. The Budget Speech, delivered by the Chancellor of the Exchequer, Nigel Lawson, on 13 March 1984, made no mention of the proposed legislation, so it was not alluded to in the ensuing debate. On second reading, the Chief Secretary to the Treasury, Peter Rees QC, mentioned the proposed legislation, noting that it was the result of advance consultation. For present purposes, that is highly significant because it well nigh eliminated scope for controversy during the parliamentary process. The lead clause (80), subsequently section 82, went through unamended. The next clause, side-noted ‘Limitations on direction-making power’, was amended to prevent a direction being made if, in the relevant accounting period, a controlled foreign company met ‘the public quotation condition set out in Part III of [Schedule 17]’, a part introduced by amendment. Other than that, the changes were minor. There were considerable government-sponsored amendments, in Schedule 17 in particular, and the explanation for this lies in the fact that consultations with the representative bodies continued during the passage of the Bill.



185 ibid

col 1645. cols 1675–76. 187 ibid. 188 ibid col 1677. 186 ibid

Hole and Plug  195 This is evidenced in the course of an exchange on Report between Sir William Clark and the Economic Secretary to the Treasury, Ian Stewart, which ran: Sir William Clark: I should like to ask my hon. Friend for confirmation that discussions are going on with interested parties about controlled foreign companies. I hope he will assure me that discussions are continuing. There is growing concern that this rushed legislation on controlled foreign companies could affect our export potential. It is vital that the talks should continue. I understand that they are taking place, but perhaps my hon. Friend will confirm that. Mr Ian Stewart: I have had extensive consultations with representative bodies and other interested parties on the legislation, as I undertook to do between the Committee stage and Report. I compliment my hon. Friend the Member for Croydon, South (Sir W. Clark) and my hon. Friends the Members for Beaconsfield (Mr. Smith) and for Lewisham, West (Mr. Maples) on the constructive parts that they have played. The Amendment Paper contains a number of amendments relating to the control of foreign companies. They do not change the import of the legislation, but clarify it in several cases where it was not regarded as entirely clear. We have introduced an extra door, a way in which a company can be excluded from legislation, in amendments Nos. 179 and 180, if it is quoted on a recognised stock exchange. We have widened the door for the acceptable distribution test in amendments Nos. 169 to 172. We have improved the exempt activities test with amendments Nos. 119, 120 and 121. Those are important clarifications. The legislation will retain its full impact in the way that the Government intended, but will not prove needlessly onerous in genuine and bona fide cases. I am able to give my hon. Friend the assurance that he wishes. Sir William Clark: I am sorry, but I did not quite understand my hon. Friend. The assurance that I asked for was that discussions with interested parties were continuing. Mr Ian Stewart: Discussions had to be completed before the Report stage, in time to introduce the amendments before the House. They reflect our full discussions. With legislation as complicated as this, which it must be to fulfil the primary purpose and at the same time be fair and not unduly onerous to the business community, there are likely to be cases where certain matters may need to be considered to see how the legislation works in practice. I shall be only too pleased to consider with the representative bodies and any others any points of practical difficulty which may arise after this stage. I hope that my hon. Friend will not hesitate to draw to my attention any cases of that kind of which he is aware.’189

It is perhaps something of a tribute to use of the consultation process not just that the legislation resulted from an easy passage through Parliament but that there has been only one case on it which has reached the courts. This was Bricom Holdings Ltd v IRC,190 which raised an intricate technical issue beyond the scope of this chapter. 189 HC Deb 11 July 1984, vol 63, col 1326. 190 Bricom Holdings Ltd v IRC (1997) 70 TC 272. The Court of Appeal (Lords Justices Millett, Otton and Beldam) upheld the decision of the Special Commissioners (Judge Stephen Oliver QC and Dr John Avery Jones) in favour of the Revenue.

196  Philip Ridd Use of consultations processes may offend the democratic purist on the footing that it discourages Members of Parliament from doing their proper job of keeping a close eye on the doings of the government, but in complex matters of the details of taxation there can be no doubt that the use of consultation processes serves the public interest and, which is quite sufficient, does not discourage, let alone prevent, the raising of fundamental concerns if Members of Parliament have an objection to the nature of government proposals. CONCLUSION

Is it surprising that, for income tax and surtax, twentieth-century governments did not go for a general anti-avoidance provision (GAAR)? In considering how to answer that question, it must be recalled that GAARs were not unknown animals both in the UK and elsewhere.191 It certainly looks odd that use of a GAAR in wartime, or with war imminent, was confined to taxes other than income tax and surtax.192 There can be no certain answer to the question posed. One possibility may be aligned to the comment about ‘too many Tory crusts dipping into [the] gravy’,193 but that would not be a full explanation because Labour governments did not go for a GAAR: indeed, it is striking that much of the twentieth-century anti-avoidance legislation was implemented by nonLabour governments. A more likely, but perhaps linked, possibility is that no serious thought was given to a GAAR despite various attempts on the part of the Inland Revenue to promote a GAAR because ministers could not face the fuss which would have been made in Parliament.194 As has been seen, targeted measures did not cause a significant fuss in Parliament; it would have been difficult for any MP to have declared that a particular method of tax avoidance was some form of precious jewel not to be thrown away; but a GAAR might have been quite another thing, generating passionate protests about attacks on liberty, probably with references to fascist and communist regimes. The hole and plug method is capable of being defended on the simple line that the proof is in the pudding – put in two words, it sufficed. Against that, it may be said that many people and enterprises were enabled to thrive, or thrive to a greater extent, because they were astute enough to be able to do so by avoidance schemes which successive governments were not willing to tackle, so that inequality in sharing the burden of taxation was maintained. But perhaps that is

191 See Harris, above n 1. 192 Apart from excess profits legislation, there was the National Defence Contribution of 1937, which was succeeded by the profits tax, which existed from 1951 to 1965: see Harris, above n 1. 193 See n 127 above. 194 The writer recalls a meeting with a Treasury Minister in 1987 when he declined to authorise inclusion in a Finance Bill of a provision to counter a particular tax avoidance scheme on the grounds that, as only £20m tax per annum was involved, it was not worth a fuss in Committee.

Hole and Plug  197 no more than a demonstration that in matters of taxation, as in so many other matters, perfection is not susceptible of achievement. The research for this chapter did not bring to light anything in the nature of the plenitude of learned articles about tax avoidance which have been a feature of recent years.195 A notable exception was Wheatcroft’s ‘The Attitude of the Legislature and the Courts to Tax Avoidance’.196 It is impossible to do justice to that enlightening article in the space available, but some points are worth making with reference to it. It opened with attempts to define tax avoidance, which Wheatcroft concluded meant a transaction which (a) avoids tax, (b) is entered into for the purpose of avoiding tax or adopt some artificial or unusual form for the same purpose, (c) is carried out lawfully, and (d) is not a transaction which the legislature has intended to encourage.197

In view of the discussion under the second heading of this chapter, criticism of that definition would involve tedious repetition, but it may be added that the definition involves circularity. An example given by Wheatcroft of tax avoidance was of ‘the taxpayer going bag and baggage to the Channel Isles’;198 but, if a country’s taxation base is residence, then, arguably, when a person who moves from country A to country B, he is not avoiding tax but is just changing the taxation regime to which he is subject. That may well involve moving to a country which has lower taxes, and that may be the leading, or only, reason for the move, but there are other possible reasons, eg a medically advisable better climate; moreover, the change may be from a low tax jurisdiction to a high one.199 Wheatcroft lamented that some of the country’s best brains would have been more fruitfully deployed other than in concocting tax avoidance schemes or in trying to counter them.200 In view of his experience in the Inland Revenue, the current author is all too aware of the force of that cri de coeur. Wheatcroft dealt neatly with concerns about liberty, observing that ‘If John Smith pays less tax than he should, all the others have to pay more. His “liberty” to avoid tax is an infringement of your and my right to receive a fair contribution from him.’201 Wheatcroft also commented unfavourably on the complications of tax law,202 an undeniable blot. Wheatcroft ended with three points that he put up for consideration which, briefly, were: (i) codify the law to simplify it; (ii) abolish the doctrine of strict construction of tax statutes and look to the substance not the form

195 Say, the last 50 years. 196 GSA Wheatcroft, ‘The Attitude of the Legislature and the Courts to Tax Avoidance’ (1955) 10 MLR 209. It is extensively considered in Harris, above n 1. 197 ibid. 198 ibid 210. 199 Consider eg the so-called ‘Windrush generation’. 200 (1955) 10 MLR 209, 212. 201 ibid 213. 202 ibid 214.

198  Philip Ridd of transactions, while construing statutes broadly and not literally; and (iii) concentrate tax legislation on the ‘intention’ of the taxpayer. Of these desirable objectives, only the second one can be said to have been realised. Finally, reference is made to Wheatcroft’s comments about fair contribution.203 We have seen in this chapter sundry references to ‘decency’, ‘the good citizen’, ‘fair share of fiscal responsibility’, ‘tolerable behaviour’, ‘equality of the burden of taxation’, ‘fair-minded honourable businessmen’ and ‘equity’, with a smattering of references to morality. The theme seems to be that to pay one’s taxes fairly and squarely is a mark of good citizenship. But that is no easy matter for governmental regulation. Seriously bad citizenship may be criminalised, but mere ‘not really playing the game, old chap’ is quite another kettle of fish. A tribunal empowered to adjudicate on ‘good citizenship’ would seem to be too radical a notion in UK consitutional terms to be swallowed. As demonstrated, governments of the twentieth century, by sticking to the hole and plug method, did not altogether fail the challenge of countering tax avoidance, but whether, if their success were to be graded, they should be awarded a first, a second, a third or a mere pass must be open to debate.



203 ibid

213.

8 1988 and All that: The Fundamentals of UK Capital Gains Tax are Changed DAVID COLLISON

ABSTRACT

T

he conception of the UK tax charge on capital gains was the coming together of a concept developed by an academic economist and the political will of a newly elected Labour government. This chapter looks at the changes to the fundamental structure of the tax charge since 1965. The structure of a tax charge reflects the underlying rationale of the tax. Underlying the taxation of capital gains have always been competing rationales. On one analysis, a capital gain is a category of income, and should be computed and subject to tax as such. Others view capital gains tax as a revenue-raising device (but not a particularly productive one). Some see it as a device to dissuade the dressing up of taxable income as otherwise untaxed capital. Some administrations have adopted a structure designed not to affect taxpayer behaviour. Other administrations have created a structure that is designed to change behaviour into favoured activity. This chapter looks at how changes in the importance given to different underlying rationales cause changes to the fundamental structure of the tax in two respects: (i) in the method used to measure the gain; and (ii) in the basis for determining the rate of tax to be applied to the gain. A gain can be measured in historic cost terms or in current cost terms, the second giving relief for inflation. The Finance Act 1965 owed much to the analysis of the socialist economist Nicholas Kaldor, who considered relief for inflation wrong in principle. The 1965 Act required a gain to be measured in terms of historic cost. Following high inflation in the 1970s, in 1982 a Conservative government changed the tax charge from a historic cost calculation to a current cost calculation, a process completed in 1988. In 1998, a successor Conservative government swept away the changes and moved back to historic cost calculation. There are two alternative bases for determining the rate of tax to be charged on a capital gain. The first is to apply income tax rates to gains. The other is to specify a rate specific to capital gains tax. The first reflects a concept of ‘gain’ being a category of income. The second expresses a concept that gains and

200  David Collison income are different. The writings of Nicholas Kaldor treat gain as a subclass of income. Despite his central role in the conception of UK capital gains tax, the Labour government in 1965 imposed a fixed rate of tax (albeit with the option of applying income tax rates, if lower). It was Nigel Lawson, a Conservative Chancellor, who, in 1988, equated gains with income and applied income tax rates to capital gains. In 2007, a successor Conservative government abandoned the link and separated the rates charged on capital gains from the rates charged on income. In 2010, income tax rates were, again, applied to gains. When gains are taxed at progressive rates (in particular, when progressive income tax rates are charged), a gain is frequently taxed at the maximum rate despite it having accrued over many years during which the taxpayer is subject to a lower rate. This problem of ‘lumpy gains’ has been recognised since at least 1952, but has never been addressed by legislation. The history of these two fundamentals of the tax charge illustrate the conceptual conflict at the heart of the taxation of capital gains. INTRODUCTION

There are two ways in which the fundamental structure of the capital gains tax charge can be changed: 1. Change the way the gain is measured. 2. Change the basis on which the rate of tax charged on the gain is determined. Change the Way the Gain Is Measured Over the life of UK capital gains tax, the gain subjected to the tax has been measured in three different ways: • From 1965 to 1982, the gain charged to tax was the money gain;1 that is the receipts less the costs; reintroduced in 2007, this is the manner of measurement now current. • From 1982 to 1998, the gain charged to tax was the gain calculated at current values; that is the effect of inflation is removed.2 • From 1998 to 2007, the gain charged to tax varied according to the length of time the taxpayer has owned the asset. 1 Specifically, the gain calculated as cost expressed in pounds sterling deducted from sale proceeds expressed in pounds sterling, any conversion from a foreign currency being at the separate rates applying at the time of acquisition and the time of disposal, respectively: Bentley v Pike [1981] STC 360. 2 As discussed below, from 1982 to 1988, relief for inflation was partial, in that relief was only given for inflation after 1982, and, until 1985, no relief was given for inflation in the first, post-1982, year of ownership.

1988 and All that: The Fundamentals of UK Capital Gains Tax  201 The three alternatives express three alternative concepts of the underlying rationale for the tax. The first calculation seeks to identify a sum that corresponds to income. The second reflects a concept of preserving a capital fund, imposing a tax charge only on the growth of this fund, in real terms. The third is an expression of the concept that taxation can be used to shape behaviour. Change the Basis on which the Rate of Tax Charged on the Gain is Determined There are two different bases for the rate of tax: • From 1965 to 1988, and from 2007 to 2010, the rate of tax on a capital gain is a percentage charge independent of other tax rates (but see below for the ‘alternative charge’ available from 1965 to 19773). • From 1988 to 2007, and from 2010 to the present, the rate of tax on a capital gain is determined by the taxpayer’s income.4 To consider the three alternative modes of measurement and the two alternative bases of tax rate, we need to consider the nature of taxation itself. We have moved a long way from ‘the art of taxation consisting in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing’.5 Indeed, the rationale for capital gains tax has never been the number of feathers plucked; capital gains tax has never been a significant source of government finance. Arguments around taxing capital gains have always expressed lofty ideals, not pecuniary need. Taxation of a capital gain can be regarded in three different ways.6 3 From 1965/66 to 1977/78, FA 1965, s 21 provided a CGT charge based on income tax (plus surtax) rates, if this gave a lower charge than the fixed rate of CGT. 4 For the former period, capital gains are charged at income tax rates, being treated as sitting on top of taxable income in calculating the tax charge. In the latter period, capital gains are, in general, charged at specified rates that are lower than income tax rates, but the rate to be applied is, again, determined by the gains being treated as sitting on top of taxable income. 5 Norman Lamont, HC Deb 19 March 1991, vol 188, cols 169–72, who, in his Budget Speech, attributes the quotation to Jean-Baptiste Colbert, King Louis XIV’s Minister of Finances of France, 1665–83. 6 There is a fourth approach. That is, to see taxation as a vehicle for the redistribution of wealth. For some of their proponents, capital transfer tax/inheritance tax has sought wealth redistribution, largely unsuccessfully. But capital gains tax has never performed this role. Kaldor, whose socialist principles were offended by the differentiation of the rich and the poor, warned against using taxation for wealth redistribution: ‘Taxes approaching 100 per cent confiscation can exist on paper. But one cannot apply the same notions to a genuine system and expect that it would work. Only a revolutionary dictatorship could change society out of recognition overnight and then it would perforce have to rely on more ruthless instruments for its operations than the Commissioners of Inland Revenue. Taxation can be a peaceful instrument of social progress but it cannot be made into an engine of social revolution. The noble experiment of gradually building a society that is both free and just through progressive taxation is bound to fail unless we recognise that fact’: N Kaldor, An Expenditure Tax (London, Unwin, 1955) 242.

202  David Collison One approach is that the tax paid is the forfeiture of a slice whenever there is a cake. Stamp duties and capital transfer tax/inheritance tax are both examples of UK taxes that have this rationale. The imposition of tax as a fixed percentage of each gain is consistent with this approach. Measurement of a gain in current cost terms, giving relief for inflation, is merely another way of measuring the cake, of which tax devours a slice. Public statements of Inland Revenue in 1965, and many subsequently, follow this cake model, by giving the rationale for capital gains tax as simply ‘a new source of revenue’.7 Any deeper conceptual justification of taxing capital gains is, it seems, deliberately avoided in Inland Revenue/ HM Revenue & Customs (HMRC) public announcements. An alternative view of the nature of the tax charge is the concept that a gain forms part of a taxpayer’s ‘Income’.8 Hence, income tax rates are appropriate. This concept has its strongest expression in statements from different ends of the political spectrum, by the socialist economist Nicholas Kaldor and by Nigel Lawson, Margaret Thatcher’s Chancellor of the Exchequer. Nicholas Kaldor was much concerned to apply equality of treatment to all categories of ‘Income’. No relief for inflation is given in the income tax regime (not for a worker’s pension contributions, nor in computing trading profits), so no relief for inflation should be given in computing a capital gain.9 A third approach to taxation is that it is a vehicle for rewarding good behaviour. Holding an asset for a long time is seen as good behaviour, labelled ‘economic investment’, and rewarded by a low rate of tax to which the gain on disposal is subjected. Buying and selling assets after short periods of ownership is seen as bad behaviour, labelled ‘speculation’, and the full rate of tax is applied to the gains that arise therefrom. This is the conceptual basis for taper relief.10 A variant of this third approach is that investment in particular assets is seen as virtuous. This is the rationale underlying the 10 per cent rate of capital gains tax for gains on the disposal of a shareholding in an unquoted trading

7 See, eg Inland Revenue booklet IR 560, sent to taxpayers in 1965. 8 I am adopting the nomenclature ‘Income’ (with a capital ‘I’) from Nicholas Kaldor. For Kaldor, earnings, investment receipts, gifts, inheritances and winnings are all Income: see Kaldor, above n 6, 67–70. As discussed in D Collison, ‘The UK Capital Gains Tax – The Conception of the 1965 Act’ in P Harris and D de Cogan (eds), Studies in the History of Tax Law, vol 9 (Oxford, Hart Publishing, 2018) 327–63, Kaldor’s aspiration was not to tax capital gains, per se, but to take all incomings that are available for expenditure by the taxpayer. This is the argument he puts forwards at length in An Expenditure Tax, above n 6. A modern expression of this concept, from the other end of the political spectrum, is by Howard Flight, later Conservative Shadow Chief Secretary to the Treasury, then Baron Flight: ‘My vision overall of capital gains tax is that it should apply only when capital gains fall into consumption.’ HC Deb 29 April 1998, vol 311, col 362. 9 This is the argument that Kaldor expresses strongly in Memorandum of Dissent, below n 15, 366 [38], but, in An Expenditure Tax, above n 6, 42 Kaldor recognises that, without relief for inflation, ‘the tax on capital appreciation in this case would be more in the nature of a capital levy’. 10 In his Budget Speech, Gordon Brown said ‘The capital gains tax regime that we inherited rewards the short-term speculator as much as the committed long-term investor … I will introduce a new structure of capital gains tax which will explicitly reward long-term investment’: HC Deb 17 March 1998, vol 308, cols 1097, 1101.

1988 and All that: The Fundamentals of UK Capital Gains Tax  203 company and its predecessor, tax relief, for the sale by a retiring businessman of his business. This third variant highlights a central question that has bedevilled taxation of capital gains from its advent and continues to be unsolved. Is capital gain a form of income? Some – including Nigel Lawson – have had no difficulty in viewing gains on successful stock exchange investment as indistinguishable from income in their usefulness to the investor. But is the gain on the sale of a business run for 20 years a category of Income, or is it of a different nature? Does our view change if the proceeds of the sale of the business fund the businessman’s retirement? And what about the notional gain on the gift of a farm from father to son? Even in the context of stock exchange investment, many view a portfolio of shares as an entity apart from other belongings, in which gains are reinvested, not to be spent in the way that income may be spent. Every annual Budget includes a statement that the Chancellor is improving the tax charge. Capital gains tax has been a favourite tax with which Chancellors choose to make ‘improving’ changes.11 Some change, such as extending favourable treatment to further categories of asset, is merely targeting a relief. By contrast, changes to the structure of the tax charge reflect the view that one fundamental principle of the tax charge is to be given greater importance in favour of another. For Kaldor,12 regarded as the economist who fathered the taxing of capital gains, there was a clear concept. For him, gains were Income, which he equated with receipts. Subsequent Chancellors (other than, arguably, Nigel Lawson) have shied away from declaring a conceptual base for taxing capital gains. Rather, a Chancellor uses reliefs to encourage behaviour he likes or to levy a higher charge to penalise unfavoured action. RELIEF FOR INFLATION

Kaldor recognised that taxing a gain computed by figures of historic cost, without regard to the changing value of money, was perceived as unfair.13 However, for Kaldor, the overarching necessity was to have equality of treatment between the existing income tax and the new capital gains tax. This was accepted by the Labour government, and specifically by James Callaghan, its Chancellor of the Exchequer,14 who introduced capital gains tax in 1965 without relief for inflation.

11 In 1971, Kenneth Baker, Conservative MP, complained that, in just six years, ‘there have been 61 changes in capital gains tax since it was introduced in 1965’: HC Deb 28 April 1971, vol 816, col 493. 12 Economist, King’s College, Cambridge. From 1964 to 1970, and again from 1974 to 1976, he held an official role as ‘Special Adviser to Chancellor of the Exchequer on the economic and social aspects of taxation policy’. 13 Kaldor, above n 6, 42. 14 James Callaghan was a former Inland Revenue official.

204  David Collison Kaldor had written in his 1955 Memorandum of Dissent:15 If a man regularly saves up a part of his earnings by adding to his savings deposits or paying premiums on a life assurance, it may equally happen that as a result of inflation the real value of his accumulated savings is constantly shrinking. He is in no different position from another man who attains the same increase in the money value of his capital as a result of capital appreciation. The fact that in times of inflation money appreciation will not mean a corresponding real appreciation … is not an argument for the differential treatment of capital appreciation as against other forms of saving …

Those property owners who make capital gains during a period of inflation are undoubtedly in a better position than those who own fixed-interest securities, and who therefore lose part of their real capital as a result of the rise in prices. Equity cannot be secured by ignoring relative changes in the taxable capacities of different property owners. Later, Kaldor explained his concept of the purpose of the tax:16 It is a positive advantage, from the equity point of view, that the tax charge is concentrated on those wealth-holders who succeed in appreciating the value of their capital and thereby preserve its real value in the face of inflation; while those who fail to do so … and thus become exposed to the full ravages of inflation, are not called upon to pay any tax.

Kaldor presents a further, and uncharacteristic, argument for taxing inflationary gains. Accepting that taxing inflationary gains is a tax on capital, he writes: ‘There is nothing fundamentally wrong with a tax on capital.’17 Writing in 1979, he records that the amount collected by capital gains tax is of the order of £300–400m which ‘is not very different from what the yield of the proposed wealth tax of the previous Government was estimated to be’.18 A cogent argument for not giving relief for inflation in computing a capital gain is given by Henry Simons, an academic writing in the context of US taxation, who compares the tax on a capital gain made on an investment asset with the income tax treatment of an asset used in a business: Is it proper to confine such pleasant adjustments … for sellers of stocks and real estate, and to deny similar adjustments for depreciation and depletion bases, ie, for useful people who ‘alienate’ their assets by using them up in their business enterprises?19

When the Finance Bill 1965 was published in the UK, four organisations made representations requesting an allowance for the fall in the value of money to 15 Royal Commission on the Taxation of Profits and Income Final Report (Cmd 9474, 1955) Memorandum of Dissent 366 [37] and [38]. 16 N Kaldor, Reports on Taxation I (London, Duckworth, 1980) xiv. 17 Original emphasis. 18 ibid xiv. Kaldor uses the wealth tax yield figure in the Green Paper Wealth Tax (Cmnd 5704, 1974) [4]. 19 HC Simons, ‘Federal Tax Reform’ (1946) 14 University of Chicago Law Review 56.

1988 and All that: The Fundamentals of UK Capital Gains Tax  205 be incorporated in the computation of a gain to be taxed.20 In Committee, an amendment to provide for inflation relief was tabled in the names of five members of the Conservative shadow cabinet.21 The amendment was not moved. In its briefing note to ministers, the Inland Revenue gives, in great detail with numerical example, the argument that income tax provides no inflation relief, therefore nor should capital gains tax,22 a brief reference to which was made by the Financial Secretary in the Budget debate.23 It is interesting to note that when the Conservative party became the governing party five years later, they did not change the law to provide relief for inflation until a further 12 years had passed. Despite the Finance Act 1965 providing no relief for inflation, an approach was made to the courts, arguing that relief for the reduced value of the pound is inherent in the measure of the gain to be taxed. In October 1967, Secretan sold shares he had bought between 1932 and 1944. In 1967, the pound had 26.25 per cent of its 1932 purchasing power. Secretan was assessed to capital gains tax on a gain of £78,771. The taxpayer appealed,24 arguing that no tax should be charged on the gain, as the fall in the purchasing power of the pound meant that no true gain had been made. Buckley J gave judgment against Secretan but said, of his submission arguing for inflation relief: It is a point of view with which, I think, any taxpayer would feel a certain degree of sympathy, for it is very irritating to think that if one buys a piece of property … and holds it for a number of years during which nothing occurs … but the price for which it is sold exceeds the price originally paid for it because of a change in the value of money, one will then be taxed on a gain.25

After just one year of taxing capital gains, in 1966, the President of the National Farmers’ Union wrote to the Chancellor of the Exchequer saying that the lack of relief for inflation in taxing gains will lead to fragmentation of farms, which ‘will, in our view, constitute one of the most serious long-term threats facing agriculture for many years’. The letter gives a numerical example: If inflation continues for the next 20 years at the same rate as it has in the past, a farmer owning 300 acres worth £200 an acre at the present time would have to find £15,000 in order to meet a Capital Gains Tax assessment if he were then to hand his farm over to his son … A farmer owning 450 acres would be assessed … to tax of £24,000.26 20 The Country Landowners’ Association, Engineering Industries Association, Institute of Chartered Accountants in England and Wales and Institute of Directors: Inland Revenue, Finance Bill 1965 Memoranda (London, Board of Inland Revenue, 1965) 428. 21 Amendment 117 to Schedule 6 moved by Edward Heath, Anthony Barber, Peter Walker, John Hall, William Clark and Peter Emery: Inland Revenue, Finance Bill 1965 Amendments (London, Board of Inland Revenue, 1965), 864. 22 IR (1965), above n 20, 864. 23 HC Deb 8 April 1965, vol 710, col 800. 24 Secretan v Hart [1969] 3 All ER 1196. 25 ibid. Later, considering FA 1965, ss 19–22 and Sch 6, Buckley J dismissed Secretan’s appeal. 26 The calculations are after taking the benefit of retirement relief exempting the first £10,000 of gain: Letter, 28 April 1966, from GT Williams, President of the National Farmers’ Union, to James

206  David Collison Five years later, Boyd-Carpenter, a Conservative MP, spoke in the 1971 Finance Bill debate of ‘the evils of long-term capital gains tax in an era of inflation … As the years go by from 1965 these evils become greater.’27 Subsequently, Conservative MPs referred to charging capital gains tax on increases in value that merely keep pace with inflation as ‘capital confiscation’28 and ‘confiscation for that inflation amount, and, therefore, daylight robbery’.29 A numerical argument was put by Mark Lennox-Boyd MP, stating that the pound in 1982 is one-fifth of its 1969 value, hence tax at 30 per cent is equivalent to a charge on real values of 500 per cent.30 Viewed over the period of the last 60 years, the retail price index (RPI) has increased at an average rate of a little under 5.6 per cent a year.31 In the nine years from 1972 to 1981, the increase averaged 14.9 per cent per annum, with an inflation rate of 24.9 per cent recorded for 1975.32 Douglas Hogg, Conservative, recounts that, while he was PPS to the Chief Secretary to the Treasury in 1981, pressure for relief for inflation from throughout the House was intense: ‘people objected to paying tax on paper gains. I believe that that view permeated all parties in the House.’33 Providing relief for inflation was considered by the 1980 Budget Committee. Geoffrey Howe, Conservative Chancellor of the Exchequer, announced in his 1980 Budget that he had reached the conclusion that it ‘would result in an unwelcome increase in the cost of administration – for taxpayers as well as for the Revenue – while reducing the yield of the tax to negligible proportions’.34 The retail price index increased by 430 per cent between 1965 and 1982. There was pressure in the investing community to scale down the tax charge on gains. As put by Conservative MP Sir William Clark: ‘Capital gains tax as we have it has been a tax on inflation and thrift.’35 In 1982, Geoffrey Howe returned to the topic in his Budget speech: No one has yet succeeded in finding a solution to this problem. Innumerable proposals for full indexation, for tapering and other ingenious devices have been put forward. None … overcame all the practical difficulties. I cannot, however, allow this injustice Callaghan, Chancellor of the Exchequer: King’s College Archive Centre, Cambridge, ‘The Papers of Nicholas Kaldor’, NK/10/4/137–139, 138. 27 HC Deb 28 April 1971, vol 816, col 482. 28 Anthony Beaumont-Dark MP: HC Deb 27 April 1982, vol 19, col 748. 29 John Browne MP: HC Deb 27 April 1982, vol 19, col 753. 30 HC Deb 27 April 1982, vol 19, col 782. 31 The RPI (after rebasing) was 12.6 in 1960 and 291.9 in 2019, www.swanlowpark.co.uk/retailprice-index. Figures are for December each year. 32 The RPI (after rebasing) was 22.5 in December 1972 and 78.3 in December 1981, an increase of 248% in nine years. 33 HC Deb 29 April 1998, vol 311, col 348. Douglas Hogg was parliamentary private secretary to Leon Brittan, who was Conservative Chief Secretary to the Treasury from 5 January 1981 to 11 June 1983. 34 In his comments, Sir Geoffrey Howe bracketed it with taper relief: HC Deb 26 March 1980, vol 981, col 1482. 35 In the 1982 Finance Bill debates: HC Deb 27 April 1982, vol 22, col 739.

1988 and All that: The Fundamentals of UK Capital Gains Tax  207 to continue. It is intolerable for people to be permanently condemned to pay tax on gains that are apparent but not real – gains that exist only on paper.36

The relief that was introduced by Geoffrey Howe increased the base cost used in calculating the gain by reference to the increase in the retail price index during the period of ownership after 31 March 1982.37 Ownership before that date did not attract this indexation relief. When introduced, no relief was given for inflation in the first year of ownership. This was a consequence of sustained pressure by the Bank of England, which feared the large-scale reduction in bank balances by taxpayers withdrawing funds to finance stock market investment. The Bank considered a year of no indexation was necessary to ‘put a break on the conversion of income to capital’38 and ‘to avoid distorting the market’.39 From 1985, relief was given for this first year also. The relief in the Finance Act 198240 reduces the gain but does not increase a loss, nor can the relief turn a gain into a loss. This was criticised by Sir William Clark as ‘illogical and inequitable’.41 He gave a simple example: A taxpayer buys two assets, each for £100. After RPI has risen 100 per cent, he sells both assets, one for £250, the other for £150. There is an (indexed) gain of £50 on the first asset. The indexed loss of £(50) on the second is not allowed by FB 1982; instead, the disposal is treated as a gain of £nil. He pays capital gains tax on £50, when his true (indexed) gain is £nil.42

The response of Nicholas Ridley, the Conservative Financial Secretary, is telling: ‘The immediate and apparent symmetry and logic of what he said are difficult to resist.’43 The justification given for not indexing losses is, simply, that this tax concession is too expensive, costing £20m less tax in a full year.44 Sir David

36 HC Deb 9 March 1982, vol 19, col 755. 37 Enacted as FA 1982, s 86. 38 Inland Revenue, Memoranda on Finance Bill 1982 vol 3, 1768, TNA IR63/433. 39 ibid 1761. 40 Finance Act 1982, s 86. 41 HC Deb 27 April 1982, vol 19, col 787. 42 Figures are from HC Deb 27 April 1982, vol 19, col 787. Some text is simplified. 43 Nicholas Ridley, HC Deb 27 April 1982, vol 19, col 787. 44 The subsequent exchange between Clark and Ridley (both Conservative MPs) is a very neat demonstration of how poor is the functioning of our system of parliamentary review. Clark is a chartered accountant and knows how to calculate capital gains. Ridley’s subsequent comments show he is completely out of his depth. Despite having won the argument (or, more accurately, the limited understanding of the government minister having lost his argument), Clark and his colleagues withdraw the amendment that would have given what the government minister calls ‘symmetry and logic’. Lopsided relief for inflation is passed into statute because that is what the government proposed and the system ends up enacting fiscal provisions that the government proposes, irrespective of their virtue. On a related issue, many will have sympathy with a comment made by Anthony Beaumont-Dark later in the debate: ‘The Inland Revenue has a wonderful habit … of always being able to turn something that is fair, just, sensible and intended to alleviate pressure on people and investment into a veritable lead balloon. Reading this turgid prose, one certainly has the feeling that this proposal was very quickly dusted down and shoved into a Finance Bill’: HC Deb 27 April 1982, vol 19, col 795.

208  David Collison Price, Conservative MP, does not mince his words in criticising his own party’s government minister: I quarrel with his use of the phrase that it would be a tax concession to produce this fiscal consistency. I never thought I would hear those words from the lips of my hon. Friend … I am so disappointed with my hon. Friend the Financial Secretary that I feel I must record my disappointment.45

The Liberal Party tabled an amendment to the 1982 Finance Bill, proposing relief for inflation without a 12-month wait, relief based on 1982 values and relief augmenting losses.46 In its confidential briefing note to ministers, the Inland Revenue advised that the Liberal Party’s proposals should be resisted on the grounds that they would cost £180m a year, in addition to the £210m a year cost of the government’s proposals,47 and the revaluation of assets would impose a massive administrative burden.48 The logic of the Liberal Party’s proposal was not disputed. In a confidential note, KV Deacon, of the Inland Revenue Policy Division, wrote: ‘In truth, the only really defensible principle underlying the indexation scheme is … the desire to unblock the log-jam of the past.’49 The economic argument was put that providing relief against inflation increases the attraction of equities, with the expected result that companies can raise additional equity at lower cost. It was expected that this would help move company balance sheets to greater equity and less bank borrowing. One has to question whether during the period 1982 to 1998, when there was relief for inflation, companies were able to raise equity more cheaply than at other times, when there was no relief for inflation. As with many benefits claimed for proposed tax changes, I am not aware of any study being undertaken. In my view, the argument is flawed. Lower cost to the issuing company means shares are floated at a higher price. That is, the investor pays a higher price for shares, a price which the investor knows when he subscribes for shares, in return for which there is the expectation of a reduction, currently unknowable, in the tax bill when the shares are sold. The introduction of relief for inflation was estimated by the government to cost £150m a year, out of a total take for capital gains tax of £600m. This figure (taken in conjunction with a cost of £105m from other capital gains tax measures) led the Labour opposition spokesman, Jack Straw, to accuse the Conservative government of abandoning the system of capital taxation. Jack Straw spoke at length on the annual exempt amount. He spoke only briefly on relief for inflation, which he did not oppose, other than to say that the rate of



45 HC

Deb 27 April 1982, vol 19, col 790. 409–15 to Finance Bill 1982, cl 72. 47 Inland Revenue, Parliamentary Papers on Finance Bill 1982 vol 3, 1300, TNA IR63/433. 48 ibid 1317. 49 Inland Revenue, Memoranda on Finance Bill 1982 vol 3, 1773, TNA IR63/433. 46 Amendments

1988 and All that: The Fundamentals of UK Capital Gains Tax  209 tax on capital gains had been fixed at a low figure, partly to compensate for inflation.50 One assumes he means that the rate should be increased, if there is allowance for inflation, but that is not stated. The speech by Jack Straw shows that the Labour Party had moved a long way away from Kaldor’s concept of fully taxing gains. Kaldor had resolutely opposed relief for inflation, arguing that an inflation gain was as much an increase in spending power as any other and that it was wrong to give relief for inflation in capital gains tax but not in income tax. The 1982 proposals provided relief for inflation experienced by the capital investor but no relief for the effect of inflation on savings for pensions, nor for relief on the inflationary effect of investment in plant or machinery used in a trade. Stronger criticism of relief for inflation was made in the debate by the Labour MP John Maxton, who focused on second homes, saying that the principle that had been established in the 1965 legislation was that tax relief is only given for a single home, but the effect of relief for inflation is to provide tax relief for a second home.51 Criticism was made in the Finance Bill debates of the choice of the retail price index as the basis of relief. Noting that the RPI measures only consumer spending, Richard Wainwright, a Liberal Party MP, criticised its use in measuring the relief for changes in capital values, which are not brought into the calculation of the RPI: ‘That presents the great danger of applying the standards of chalk to matters of cheese.’52 Charles Morrison, Conservative MP, looked at the position when capital transfer tax (CTT) has been paid on the acquisition of an asset and requested that the deduction for CTT paid should be increased by inflation.53 That was refused. What seems to be lacking in these discussions is that relief for inflation is advocated for capital gains, but not for income. The period 1973 to 1983 was one of high inflation, increases in the retail price index averaging 14.0 per cent per annum, with an annual inflation rate of 24.9 per cent in 1975. The accountancy profession was very active in devising current cost accounting to report business profits in real terms, stripping out the effect of inflation.54 These accounts, showing true, uninflated profits, were never accepted for any taxation purpose. Income tax and corporation tax have always been levied on profits calculated on a historic cost basis, including the purely inflationary element. The limited exception to this is stock relief,55 which was brought as an adjustment to profits in computed business tax liabilities between 1973 and 1984. 50 HC Deb 27 April 1982, vol 19, col 774. 51 HC Deb 27 April 1982, vol 19, col 752. 52 HC Deb 27 April 1982, vol 19, col 743. 53 HC Deb 27 April 1982, vol 19, col 793. 54 Those qualifying as chartered accountants in the late 1970s and 1980s were required to pass an examination requiring the construction of current cost accounts. 55 Introduced by Finance Act 1975, s 18; repealed by Finance Act 1984, s 48.

210  David Collison The inflation adjustment made solely to this element of business accounts has some similarity to capital gains tax indexation relief. The relief given was computed as the increase in retail price index applied to the cost price of stock at the start of the accounting period. This arbitrary adjustment was abandoned after 11 years. As the years passed and accumulated inflation increased, the pressure for a full relief for inflationary gains grew. In 1985, the Conservative MP Neil Hamilton tabled a parliamentary question asking what would be the effect of providing indexation relief from 1965, the start of capital gains tax, instead of 1982. The answer from the Conservative Financial Secretary John Moore was that a ‘possible two-thirds’ of the capital gains tax take would be lost.56 Those asking for relief to be given for inflation over the whole period charged to capital gains tax had to wait until Nigel Lawson’s reforms of 1988, when, instead of taking relief for inflation back to the start of capital gains tax (CGT) in 1965, the start of every CGT calculation for the disposal of a long-held asset was brought forward to 31 March 1982, with full inflation relief from that date.57 After commenting that ‘for gains that arose before 1982 the tax falls largely on purely paper profits resulting from the rampant inflation of the 1970s, … it bites deeply, and capriciously, into the capital itself,’ the Chancellor of the Exchequer justified his changes on economic grounds: This … ends once and for all the injustice of taxing purely inflationary gains … will benefit the economy by unlocking assets which have been virtually sterilised because of the penal tax that would have arisen on any sale. And it will help many small business men and farmers in particular.58

Seven years later, in the 1997 General Election, the political pendulum swung the other way. After seven years of relief for inflation, the relief was frozen. On 17 March 1998, in his first full Budget speech since his appointment as Chancellor of the Exchequer, following the Labour victory 10 months before, Gordon Brown said: ‘In a low inflation environment a complex system of indexation is no longer necessary.’59 Relief for inflation has never been reintroduced, despite the retail price index having risen by 83 per cent in the 22 years since the abolition of relief. A Tapering Tax Charge Taper relief provides differing effective tax rates determined by differing length of ownership of the asset at disposal. Under a system of taper relief, either the 56 HC Deb 20 December 1985, vol 89, col 360. This was contradicted seven months later, when Norman Lamont, then Financial Secretary, told the House that indexation relief calculated from 1965 would lose a half of the tax: HC Deb 17 July 1986, vol 101, col 52. 57 Enacted as Finance Act 1982, ss 86, 87. 58 HC Deb 15 March 1988, vol 129, col 1005. 59 HC Deb 17 March 1998, vol 308, col 1101.

1988 and All that: The Fundamentals of UK Capital Gains Tax  211 gain is reduced by a scale relating to the length of time the asset has been held or the tax rate is reduced according to length of ownership. The UK system applies the former, but this gives differing effective tax rates. Taper relief is, thus, an expression of the concept that lengthy ownership should be encouraged and short-term investment should be penalised. Consideration of taper relief has a long history. The Labour opposition put down an amendment to the 1962 Conservative short-term gains provisions using taper relief to, in effect, convert the taxing provisions proposed by the Conservative government for short-term gains into a tax on long-term gains as well. However, when the Inland Revenue drafted a taper relief scheme for the incoming Labour government in 1964, Jim Callaghan stated that a taper system was never a Labour Party proposal for a comprehensive capital gains tax.60 The announcement by Callaghan on 11 November 1964 that the Labour administration will introduce a general capital gains tax inspired a large number of representations on the form and detail of the proposed tax charge. A tapering charge, either reducing the gain charged to tax or reducing the tax payable by the length of time the asset had been held, was advocated in representations by eight diverse organisations: Association of British Chambers of Commerce, Association of Investment Trusts, The Association of Land and Property Owners, The Country Landowners’ Association, Engineering Industries Association, Income Tax Payers’ Society, National Association of British Manufacturers and The National Federation of Property Owners Ltd. Inland Revenue memorandum M.341, given to the Chancellor five days after the Labour victory in the 15 October 1964 election, contained the option of a taper scheme. Although the Chancellor responded saying that a tapering charge was not Labour Party policy,61 the Department of Inland Revenue asked the Treasury for its views on taper relief. A full and detailed paper was produced by the Treasury on 23 December 1964.62 The Treasury paper calculates that the cost, in tax lost, of a taper scheme would be £190m if gains were taxed subjected to income tax, or £130m if gains were taxed at a flat rate of 25 per cent (the Treasury’s favoured rate). The Treasury argues against a system of taper relief. The Treasury paper supports the view of the Governor of the Bank of England that taper relief would adversely affect investor behaviour. The investor would have the uncertainty when he makes a purchase as to the taper available when he sells, and price fluctuations in the market would be accentuated as investors would tend to hold on to holdings giving gains until the next step in the taper has been reached but sell holdings

60 Inland Revenue, History of the Finance Act 1965 (London, Board of Inland Revenue, 1966) 23–24, [52]–[55]. 61 Robert Neild, Economic Adviser to HM Treasury, wrote to William Armstrong, Joint Permanent Secretary, HM Treasury, on 1 January 1965: ‘The abatement system [has] … been dead for some time.’ IR (1965), above n 20, 446. 62 Unreferenced document in IR (1965), above n 20, 431–38, 436.

212  David Collison standing at a loss early. The Treasury states that this behaviour was observed in the USA when the US tax had a taper in the 1930s. The Treasury’s view is that the uncertainties created by a taper system would make the capital market less attractive and convenient both to lenders and borrowers, so that the channelling of funds to projects expected to yield a good rate of return would be impeded and the development of the economy adversely affected. The same factors would impede the smooth functioning of the gilt-edged market, which is of first importance for financing the Exchequer.63

The view expressed by the Council of the Stock Exchange was, perhaps surprisingly, the opposite of the view stated by the Treasury. A memorandum to the Chancellor of the Exchequer dated 2 February 1965 states: The Council [of the Stock Exchange] wish to urge upon the Chancellor two points of major importance. Firstly, any such tax should be in the form of a flat percentage and at a rate which will not … interfere with the efficiency of the market, and that such a rate should gradually be reduced during subsequent years and in due course be extinguished as is the case with gifts inter vivos for estate duty.64

In the Committee stage of the 1965 Finance Bill debate, five Conservative MPs tabled an amendment converting the flat rate charge to a tapering charge in five steps, with no tax payable if the asset had been held for 10 years or more.65 In its briefing to ministers, the Inland Revenue advised that the amendment would ultimately lead to a loss of tax of nearly £100m a year.66 The amendment was defeated. Taper relief was considered by the 1980 Budget Committee. As Geoffrey Howe announced in his 1980 Budget, the conclusion reached was that it ‘would result in an unwelcome increase in the cost of administration – for taxpayers as well as for the Revenue – while reducing the yield of the tax to negligible proportions’.67 In the 1982 debates on inflation relief, Sir William Clark MP proposed (contrary to what his party had drafted in the Finance Bill) that the proper way to give relief for inflation is to reduce the effective tax rate for each additional

63 ibid [17]. 64 ibid 521. At the time this note was written, estate duty was charged on gifts made in the five years before death (FA 1946, s 47 and Sch 11), but the value of the gift brought into charge was reduced by 15% for gifts 2–3 years before death, by 30% 3–4 years before death and by 60% 4–5 years before death: FA 1960, s 64(1). This taper relief system was copied into the scheme for inheritance tax, except that the taper for IHT is a taper of the tax charged, not the gift (FA 1986, Sch 19, para 2 inserting IHTA 1984, s 7(4)). 65 The taper suggested was a 20% reduction in the gain for 5–6 years ownership, increasing by a further 15% for each additional year. The amendment was tabled at the instigation of the Wider Share Ownership Council and is based on the Swedish system of taxing capital gains. 66 Inland Revenue, Finance Bill 1965 Parliamentary Papers vol 2 (London, Board of Inland Revenue, 1965) 661: briefing note on Amendment 349. The amendment was defeated by 170 votes to 162. 67 In his comments, Sir Geoffrey Howe, Conservative MP, bracketed it with relief for inflation: HC Deb 26 March 1980, vol 981, col 1482.

1988 and All that: The Fundamentals of UK Capital Gains Tax  213 year that an asset has been held before disposal.68 Support for a system of taper relief was given by the Country Landowners Association, Confederation of British Industry and Institute of Directors.69 The Inland Revenue’s briefing note for ministers was sharply critical of the concept of a tapering charge: There would be major distortions of behaviour – people would be encouraged to hang on to assets in order to reduce or eliminate their CGT bill. As a result most of the present CGT yields could be lost … Tapering would be quite wrong in principle … It would bring into charge some gains which are wholly or largely inflationary. It would exempt potentially very large real gains – for example, development gains. A taper would also be a major complication.70

These were, for the Labour Party, the long years in opposition. The 1982 Labour Party Annual Conference adopted a proposal deploring ‘that under a Conservative government, inequalities are growing faster than at any time since the war’ and calling for ‘a special Labour Party study group to examine measure to ensure that taxes on capital – capital transfer taxes and capital gains tax – ensure a transfer of wealth to working ‘people’.71 A role for capital gains tax in redistribution of wealth has been argued for, but no government, when in power, has proclaimed this to be the motivation for any change in the structure of the tax.72 Instead of a party calling for redistribution of wealth, the Labour Party elected on May Day 1997 was the party led by Tony Blair and Gordon Brown.73 The scheme for capital gains tax adopted by Gordon Brown in 1998 was taper relief, in what he called the beginning of the task not just of modernising taxation but of modernising the entire tax and benefits system of our country … The capital gains tax regime that we inherited rewards the short-term speculator as much as the committed long-term investor … I will introduce a new structure of capital gains tax which will explicitly reward long-term investment, and which is based on a downward taper and lower tax rates.74

In the Treasury press release accompanying the Budget speech, the Labour government criticised the system it had inherited on being elected 10 months earlier as failing to differentiate structurally between short-term speculative

68 Clark’s scheme was to reduce the 30% rate of tax by 5% for each year of ownership after the first. Hence, he proposed, no capital gains tax would be charged if the assets had been held for over six years: HC Deb 27 April 1982, vol 19, col 786. 69 Stated by Peter Lilley, Conservative MP: HC Deb 29 April 1998, vol 311, col 344. 70 Inland Revenue, Finance Bill 1988 Parliamentary Papers, 1321, TNA IR63/454. 71 Resolution formulated by Labour Party Home Policy Committee Finance and Economic Affairs Sub-Committee Labour Party Archives ref RD 2053K/January 1982 AT/KB/PP accessed in King’s College Archive Centre, Cambridge, above n 26, NK/11/4/148. 72 See above n 6 for Kaldor’s view that capital gains tax should not be used as a vehicle for the redistribution of wealth. 73 ‘New’ Labour was elected with 418 seats, against the Conservatives’ 165 seats. 74 Budget speech: HC Deb 17 March 1998, vol 308, cols 1097 and 1101.

214  David Collison assets and longer-term holding, and between business investment and investment in other assets. A system that gives a low rate of tax for shares held a longer time is a system that has its rationale in looking to preserve the true value of each individual’s capital fund. This is a long way from the Labour Party conference resolution calling for redistribution of wealth. The Budget press release states: The Government’s objectives are to: • encourage long term investment • reward risk taking and promote enterprise • introduce greater fairness for CGT payers. The Government believes the capital taxation system should better reward long term investment particularly in economically productive business assets.75

Taper relief was, in part, designed to encourage business investment. Dawn Primarolo, Labour Financial Secretary to the Treasury, said, during the 1998 Finance Bill debate: The capital gains tax reforms are designed to promote enterprise, reward risk taking and encourage long term investment in place of a culture of short-termism and expediency … The introduction of the taper is central to the reforms … The Government’s objective … is to encourage long-term investment, especially of the entrepreneurial type … The point of the taper is to influence future behaviour.76

A further point, made repeatedly by Primarolo, is that taper relief is a simple system, replacing retirement relief, which is ‘a complex relief that has given rise to high compliance costs and much litigation’.77 In Committee, Primarolo said that taper relief will encourage ‘those who run businesses to invest for the future and expand their businesses’.78 The slightly surprising omission in this statement, and throughout the 1998 debates, is that encouraging the setting up of new businesses is not declared as an aim. Narrowing the focus onto entrepreneurs who establish new businesses came 10 years later.79 The Conservative Party supported taper relief. Opening the response to Brown’s Budget speech, William Hague MP, Conservative spokesman, said: ‘There are measures in the Budget that we will wish to support, including … his reform of capital gains tax.’80 Conservative MP Peter Lilley added his voice in 75 HM Treasury, New Ambitions for Britain, Budget 1998 (London, HM Treasury, March 1998) [4.25], [4.27]. 76 HC Deb 29 April 1998, vol 311, cols 370, 377–78. 77 HC Deb 29 April 1998, vol 311, col 372. 78 HC Deb Standing Committee E 16 June 1998, vol 4, col 827. 79 An excellent analysis of the development of the concept of using capital gains tax reliefs to encourage entrepreneurs is given in N Lee and R Seal, ‘Capital Gains Tax Relief on the Disposal of Business Assets: A Clear Strategy for Encouraging Entrepreneurs?’ (2013) Journal of Business Law 723. The authors argue that ‘entrepreneurs do not have any great impact on lasting job creation or higher levels of business investment unless they are involved with innovative technological advances’ (ibid 744) and, broadly, government’s belief in the efficacy of entrepreneurs’ relief is misplaced. 80 HC Deb 17 March 1998, vol 308, col 1113.

1988 and All that: The Fundamentals of UK Capital Gains Tax  215 support of the system of taper relief, saying that the scheme of capital gains tax before taper relief ‘can freeze capital that has been held long term’.81 Conservative MPs argued for the relief to continue to taper, so that no tax is payable if the asset has be held for more than 10 years.82 As Peter Lilley observed, if the taper does not go to nil, some gain will always be in charge, and that gain may be only an inflationary gain, which would have been cancelled by the indexation relief that preceded taper relief.83 This was rejected by Dawn Primarolo, who argued that to charge no tax on gains of assets held long-term is ‘unfair to the general body of taxpayers, who do not have capital gains’.84 It was left to the Liberal Democrats to challenge the underlying rationale of taper relief. Vince Cable questioned the wisdom of encouraging retention of investments: Many economically beneficial capital gains, by their very nature, are short term. The venture capital business is designed, very often, to produce high-risk, short term returns. That is the nature of the business. It is efficient … Equally, there is nothing inherently beneficial in long-term investments, especially long-term, non-business investments. There is no particular advantage in locking away an investment for 20 years merely because of tax advantages. That does not encourage the right sort of entrepreneurial activity.85

Taper relief, introduced in 1998, reduces the gain charged to tax by reference to the number of years an asset has been held before disposal. When an asset has been held for 10 years or more, 25 per cent of the gain is subject to tax. The rate of tax is the rate at which income tax would be charged if the gain brought into charge were added to the taxpayer’s income for the year in which the disposal takes place. The 1998 Finance Act phased in the system of taper relief over five years, while indexation relief was phased out over the same period.86 Andrew Dilnot, Director of the Institute of Fiscal Studies, gave his reaction in evidence to the Treasury Committee: My specific concern is capital gains tax where I am almost lost for words … The Capital gains tax reform does not, it seems to me, make the system more straightforward. It introduces a whole series of new barriers within the tax system, distortions.87

81 HC Deb 29 April 1998, vol 311, col 344. 82 Finance Bill debate: nil tax was proposed by seven Conservative MPs: Peter Lilley (HC Deb 29 April 1998, vol 311, col 345), Douglas Hogg (col 348), John MacGregor (col 351), Quentin Davies (col 352), Tim Loughton (col 358), Howard Flight (col 362) and Nick Gibb (col 365). 83 The example given by Peter Lilley is that 2.5% inflation and an asset increasing in value less than 5.2% pa, with taper relief providing for 25% of the gain being taxed, gives an effective rate of tax on the non-inflationary gain of over 40%: HC Deb 29 April 1998, vol 311, col 345. 84 HC Deb 29 April 1998, vol 311, col 375. 85 ibid col 386. 86 FA 1998, ss 121, 122. 87 Quoted by Nick Gibb: HC Deb 29 April 1998, vol 311, col 366.

216  David Collison A succinct criticism was made by Peter Lilley: ‘The proposals are a dog’s breakfast.’88 Progressive changes were made in the formula for taper relief, making it particularly advantageous for short-term investors, notably those in private equity funds.89 By 2007, pressure for change90 to taper relief led to two Financial Times editorials91 calling for ‘limiting its scope’, commenting that the rate of tax paid by the cleaners employed by merchant bankers is less than the rate paid by those bankers and quoting the Revenue’s calculation that the cost of taper relief through lost revenue is £6.3bn, being a larger sum than the £4.1bn tax collected.92 On becoming Labour Prime Minister on 27 June 2007, Gordon Brown appointed Alistair Darling as his successor as Chancellor of the Exchequer. In his first autumnal statement,93 Darling announced with much fanfare that he was abolishing the scheme of taper relief that had been introduced by Gordon Brown nine years earlier. The change was justified by Jane Kennedy, Financial Secretary to the Treasury, in the Finance Bill debate as economic stability, with low inflation, allowing ‘reform and stability’.94 A truer answer to the Conservative opposition’s questioning why taper relief was abolished may well be simply that it was costing too much, and much of the benefit was enjoyed by those for whom there was little public sympathy. For 2015/16, receipts from capital gains tax95 are 1.55 per cent of taxes collected by H M Revenue & Customs, up from a low of 0.34 per cent in 1992/93, a 4½ -fold increase. STRUCTURAL CHANGES TO THE RATE OF TAX

A Fixed Rate from 1965 to 1987 In section 20 of the Finance Act 1965, Jim Callaghan, Labour Chancellor of the Exchequer, imposed a fixed rate of tax of 30 per cent. This was a rejection of the argument put forward passionately over the preceding 30 years by his Special Advisor 88 HC Deb 29 April 1998, vol 311, col 344. 89 House of Commons, Tenth Report: Private Equity (London, House of Commons, 30 July 2007) 567. [84] explains the highly favourable treatment by which members of equity funds have their returns charged to capital gains tax, by virtue of the business rate of taper. https://publications. parliament.uk/pa/cm200607/cmselect/cmtreasy/567/56709.htm#a33. 90 Lee and Seal comment: ‘It has to be asked … whether John Lewis “partners” are any more loyal than they used to be before this generous entitlement to taper relief.’ Lee and Seal, above n 79, 739. 91 ‘Buy-Out Tax Rate Is Lower Than a Cleaner’s’, Financial Times (4 June 2007); ‘A Carry On about Carried Interest’, Financial Times (6 June 2007). 92 Tax collected for 2005/06 was £4052m: HMRC, ‘Capital Gains Tax Statistics’ (Oct 2017 edn) www.gov.uk/government/collections/capital-gains-tax-statistics. 93 HC Deb 9 October 2007, vol 464, col 171. 94 HC Deb Public Bill Committee 8 May 2008, col 103. 95 For each of the five years 1990/91 to 1994/95, under £1000m was collected each year, with a low of £608m in 1992/93. In 2015/16, without taper relief, £8347m was collected.

1988 and All that: The Fundamentals of UK Capital Gains Tax  217 Nicholas Kaldor that a capital gain is a species of ‘Income’ and should be taxed at the same rates as income generally, in which argument Kaldor was supported by Thomas Balogh, Special Adviser to the Prime Minister, Harold Wilson.96 That tax is to be levied at a fixed rate was the argument of Treasury officials, the Governor of the Bank of England and the Council of the London Stock Exchange. The decision of the Labour government could, thus, be seen as choosing the pragmatism of established constituents of the nation’s financial structure over the economic concepts of its socialist advisers. An ‘Alternative Charge’ from 1965 to 1977 The fixed rate in the Finance Act 1965 is, however, subject to two exceptions. First, the 1965 Act does not abolish the Finance Act 1962, Schedule D, Case VII income tax charge.97 If land or shares (and certain other non-tangible assets) are sold within 12 months of acquisition,98 the gain is subjected to income tax and surtax, not to the new capital gains tax. That continued until the 1962 short-term gains tax charge was abolished in 1971.99 Second, section 21 of the Finance Act 1965 provides an ‘alternative charge’ that applies automatically if the tax thereby payable is less than under the 30 per cent fixed charge. Under the ‘alternative charge’, the tax payable is calculated by computing the tax that would be payable if one half of the gains up to £5000 and the full gains above £5000 were subjected to income tax plus surtax. The calculation is performed by treating the gains as ‘sitting on top of’ income, so that the tax is computed at the highest rates applicable to the aggregate of income and capital gain. The ‘alternative charge’ could be regarded as a sop to the entrenched views of both Kaldor and Balogh, the two Special Advisers, that income tax rates should be applied. It is probably better regarded as a necessary relieving provision when a flat rate is applied, the necessity for which was acknowledged as early as the 1920 Departmental Committee Report on New Taxation, which described a tax charge remarkably close to that enacted 45 years later. The 1920 Report states: ‘An option would always remain with the taxpayer to claim that any particular kind of casual gain might be assessed according to Income Tax and Super-Tax rules and at the rates of such taxes.’100

96 The arguments leading to the decision to charge the new capital gains tax at a fixed rate of 30% are considered in Collison, above n 8, 359–61. 97 Finance Act 1962, ss 10–16. 98 Finance Act 1965, s 17(1) amended FA 1962, s 10 by giving a 12-month period for all assets subject to the Schedule D, Case VII charge. 99 Finance Act 1971, s 56. 100 Board of Inland Revenue, Report of the Departmental Committee on New Taxation, 1920 (London, Inland Revenue, 1920) 8 [38]. This is an internal departmental report, held in Centre for Tax Law, University of Cambridge.

218  David Collison The ‘alternative charge’ was abolished in 1978. From 6 April 1978 onwards, all gains were charged at a fixed rate, with no alternative.101 Change from Fixed Rate to Income Tax Rates Nigel Lawson is generally given the credit for taxing capital gains at income tax rates in 1988. Arguably, credit should be given to Arthur Cockfield,102 who, when Conservative Treasury Minister of State (Lords), wrote a note on 31 March 1982103 proposing abolition of the investment income surcharge, giving capital gains tax full indexation relief, with income tax rates being applied – the package that was adopted by Nigel Lawson six years later. Nigel Lawson describes himself as ‘a Tory radical’.104 Even so, it is surprising to find that, after Labour Chancellors have rejected the logic of equating income and gains, the first Chancellor of the Exchequer to adopt the analysis of Kaldor, a socialist economist, was a Conservative Chancellor appointed by Margaret Thatcher. 33 years after Kaldor equated income and capital in the 1955 Memorandum of Dissent, Lawson uses words that echo those of Kaldor thirty-three years earlier: In principle, there is little economic difference between income and capital gains, and many people effectively have the option of choosing to a significant extent which to receive … It is by no means clear why one should be taxed more heavily than the other. Taxing them at different rates distorts investment decisions and inevitably creates a major tax avoidance industry.105

Lawson writes in his memoirs:106 I had noted with approval the fact that the American tax reform package introduced by President Reagan107 had … equated … income tax and capital gains taxes. Accordingly, I decided in the 1987 Budget to tax corporate capital gains at the relevant corporation tax rate, [then 35 per cent108] … instead of at the long-standing Capital Gains Tax rate of 30 per cent. It was an astonishing stroke of luck that no-one guessed that I envisaged this merely as the first stage in a two-stage process, with the principle being extended to individuals in a subsequent Budget. It thus came

101 Finance Act 1978, s 44(7)(a) repealed the ‘alternative charge’. FA 1978, s 44(2), (3) introduced a 15% rate of tax (half the normal rate) for gains between £1000 and £5000. 102 Rt Hon Baron Cockfield of Dover PC. 103 IR (1982), above n 38, 1770. 104 This is the subtitle of his memoirs: N Lawson, The View from No 11: The Memoirs of a Tory Radical (London, Bantam Press, 1992). 105 HC Deb 15 March 1988, vol 129, col 1005. 106 Lawson, above n 104, 691. 107 Tax Reform Act of 1986 signed into law by President Ronald Reagan on 22 October 1986. 108 The small company rate was then 27%.

1988 and All that: The Fundamentals of UK Capital Gains Tax  219 as a complete surprise in the 1988 Budget when I brought Capital Gains Tax for individuals into line with the basic and higher rates of income tax.

On 15 March 1988, Lawson announced that capital gains are to be taxed at income tax rates:109 ‘The indexed gain will be taxed at the income tax rate that would apply if it were the taxpayer’s marginal slice of income.’110 This he declared to be a permanent change, so that future changes of income tax rates automatically apply to the rate charged on capital gains.111 Writing four years later, Lawson says:112 The case for reform was overwhelming. Before 1988 anyone paying tax at the higher rate paid less – often much less – on capital gains than on income. A whole tax avoidance industry had therefore grown up whose sole purpose was to dress up income as capital gains … With the reduction in the basic rate below 30 per cent, we had reached the bizarre position in which some people were being taxed more heavily on capital gains than on income, while others were being taxed more heavily on income than on capital gains.

For Nigel Lawson, taxation policy is to have a conceptual base expressed in normative terms. In this, he differs from nearly all his fellow Chancellors. The speaking notes to the 1988 Finance Bill evidence Lawson’s strongly held belief that it is right to tax gains at the same rates as income:113 When the Conservative Government came into office in 1979, capital gains was unjust and damaging … This year’s Budgetary circumstances provide an opportunity for finally tackling the problem … With the new higher rate of income tax … it is possible to assimilate the rates of capital gains tax with those of income tax … These reforms will achieve a much more equitable balance between the tax burden on capital gains and that on income … Changes to income tax rates provide an opportunity to align much more closely the taxation of gains and income … thus reducing very substantially one of the major distortions of the tax system.

Avoiding taxation-distorting behaviour is a constant theme for Lawson in 1988. In Lawson’s view, taxation should be neutral; an individual’s actions should be driven by commercial considerations, not by taxation. The belief in neutrality as an aim for a tax system extends to a concept of ‘fairness’ in taxing receipts: ‘Assimilation of income tax and capital gains tax rates will produce a more neutral fiscal environment in which tax has a much less distorting influence on the way entrepreneurs and others receive their rewards.’114

109 The 1988 Budget replaced the graduated scale of income tax rates with a two-step charge: a basic rate of 25%, and a higher rate of 40%. 110 HC Deb 15 March 1988, vol 129, col 1005. 111 FA 1988, s 98(1). 112 Lawson, above n 104, 818–19. 113 IR (1988), above n 70, 1313, 1315 [16], [18], [27], [45]. 114 ibid 1405 [15].

220  David Collison Speaking at the Institute of Taxation annual Finance Bill Conference on 5 May 1988, Peter Lilley, Conservative Economic Secretary to the Treasury, gave a politician’s turn of phrase to the changes:115 Cutting income tax rates this year has unlocked another great prize, the alignment of the rates of income and capital gains tax … At last, someone can make as much money working for a company as he can from speculating on its shares.

Lawson rejected a short-term gains tax ‘as it distorts behaviour’.116 In the Treasury meetings leading up to the 1988 Budget, he rejected taper relief as ‘wrong in principle’ and ‘a major complication’.117 By tabling a ‘probing amendment’ to the 1988 Finance Bill,118 the Conservative MP James Arbuthnot urged the government to take the opportunity ‘which arises as a result of the taxation of gains at the same rate as the individual’s marginal rate of income tax’ to abolish four pieces of anti-avoidance legislation, each of which charges income tax on a capital gain:119 • • • •

The apportionment of income of close companies. Cancellation of tax advantages in transactions in securities. Offshore fund legislation. Artificial transactions in land.120

Sadly, the government did not take Arbuthnot’s advice, and these four provisions were not repealed. Reintroduction of Fixed Rates The change away from income tax rates was sudden and dramatic. On 28 June 2007, Gordon Brown, appointed Prime Minister the previous day, chose Alistair Darling as his Chancellor of the Exchequer. Just three months later, in his Autumn Statement on 9 October 2007, Darling announced that he was abolishing the use of income tax rates for taxing capital gains, as had been favoured by Gordon Brown. Instead, a flat rate of 18 per cent applied to every gain.121 There

115 Treasury Finance Bill 1988 Working Papers, TNA B/31AX [9]. 116 IR (1988), above n 70, 1320 [51]. 117 ibid 1320 [52]. 118 New Clause 43. 119 Nigel Lawson Private Office Papers 1988, TNA T640/899. In a handwritten note, Hudson, an Inland Revenue official, advises the Economic Secretary on the tone he should adopt when speaking at the Institute of Taxation conference: ‘These people are real specialists. There may even be one or two who will understand [the anti-avoidance provisions]!’ Treasury (1988), above n 115. 120 Employing reference to the consolidating act that had been enacted only 35 days before the 1988 Budget, the sections James Arthbunot was seeking to abolish are Income and Corporation Taxes Act 1988, ss 423–30, 703–09, 757–64, 776. 121 HC Deb 9 October 2007, vol 464, col 171.

1988 and All that: The Fundamentals of UK Capital Gains Tax  221 had been no prior consultation.122 The change was described by Mark Hoban as ‘the tax equivalent of a handbrake turn’.123 The change to the flat rate (along with the abolition of taper relief and the remnants of indexation relief) was said by Jane Kennedy, Labour Financial Secretary to the Treasury, in the Finance Bill debate to be justified by ‘economic stability, with low inflation’, allowing ‘reform and stability’.124 Darling’s ‘simple’ one rate of capital gains tax did not, however, survive even into legislation. The outcry from private equity investors, and others, who had been enjoying a 10 per cent rate under the previous scheme of taper relief125 forced Darling, only 107 days after announcing a single rate of tax, to introduce a second rate of tax, at 10 per cent, for those gains qualifying for what he described as ‘entrepreneur’s relief’.126 Studies of the actual effect of tax changes on taxpayers’ behaviour are remarkable by their absence. Every Budget, the Chancellor tells us that the change he is making will boost investment, promote equality, provide employment or simply make us all happier. But succeeding Budgets never give us statistics of increased investment, equality, employment or happiness as a consequence of the tax change. The Institute of Fiscal Studies (IFS) charted the number of new businesses created when taper relief applied and the number of new businesses created when it did not, by looking at new registrations for VAT. The government had heralded the introduction of taper relief as boosting new businesses. When taper relief was abolished, the government heralded its abolition as boosting new businesses. The IFS study concluded that the number of VAT registrations gave no evidence of business start-ups being increased by either the introduction or the abolition of taper relief.127 Move Back to Gains Being Charged According to Income A new version of linking the rate of capital gains tax to taxpayer’s income was introduced in 2010. Instead of applying income tax rates, there are two rates of capital gains tax: 18 per cent and 28 per cent.128 The rate paid is determined by adding the gain to the taxpayer’s income for the year. Those whose income plus gain is within the income tax basic rate band pay capital gains tax at 18 per cent; gains that, when added to income, exceed the basic rate band are charged at 28 per cent, unless the disposal attracts entrepreneur’s relief, when an unvarying 122 Lee and Seal, above n 79, 740. 123 HC Deb Public Bill Committee 7 May 2008, col 85. 124 HC Deb Public Bill Committee 8 May 2008, col 103. 125 The rate of taper relief that operated from 2002/03 to 2007/08 charged tax, normally at 40%, on only 25% of the gain if the disposal was of a business asset that had been held for at least two years. 126 HC Deb 24 January 2008, vol 470, col 1627. 127 Institute of Fiscal Studies, Green Budget 2008 (London, IFS, 2008) 227–28. 128 Changed to 10% and 20% by FA 2016, s 83(3), unless the gain is of domestic residential property.

222  David Collison rate of 10 per cent is applied. This scheme was introduced by George Osborne in his first Budget speech after appointment and was declared to have effect from midnight on the day of the speech, 22 June 2010. The scheme appears to derive from the competing demands of the two parties in the 2010 coalition government, for which Osborne was Chancellor.129 Ironically, this additional complexity was preceded by Osborne’s observation: ‘One of the most chaotic areas of tax that the new Government inherited from their predecessor is the capital gains tax regime.’130 The 2010 change was accompanied by an innovation. David Gauke, Conservative Exchequer Secretary to the Treasury, shared with MPs the conclusions of Treasury models. Studies of taxpayer behaviour led the Treasury to conclude that an increase in the rate of capital gains tax by 1 per cent leads to taxpayers making 2.75 per cent fewer gains. The Treasury model also concludes that reducing the difference between the higher rate of capital gains tax and the highest rate of income tax by 1 per cent has the effect of increasing the take of income tax by £60m. Gauke justified his choice of 28 per cent as it being ‘close to the revenue-maximising point’.131 We have now moved from the concept of Kaldor that gain is a category of Income to the concept of using taxation to influence investment decisions. The revision of rates by the Finance Act 2016 has the effect that a capital gain can be charged at rates of 0 per cent, 10 per cent, 18 per cent, 20 per cent or 28 per cent, depending on the nature of the asset and on the taxpayer’s income. This variety of rates demonstrates the government’s intention to use taxation to encourage the type of investment of which the government of the day approves. The highest rate is charged on rented domestic property; the tax rate is an attempt by the government to reduce (or slow the growth of) domestic property prices in the marketplace. In its use of multiple capital gains tax rates designed to influence taxpayers’ behaviour, the Conservative government has aligned itself with the conceptual base for taxation of gains advocated by the Labour Chancellor Gordon Brown, who looked to taxation to influence investment decisions. This is a rejection of the concept of the Conservative Chancellor Nigel Lawson that tax should be neutral and investment behaviour must be determined by commercial considerations, not by taxation. The principle underlying the varying rates of capital gains tax is declared unambiguously in the Treasury Notes to the 2016 Finance (No 2) Bill: ‘The retention of the 28 per cent and 18 per cent rates for

129 The result of the 2010 General Election was that the Conservative Party (and supporting parties) obtained 49% of parliamentary seats, the Labour Party 42%, the Liberal Democrat Party 9%. David Cameron, PM, appointed a Cabinet of 20 Conservatives and 8 Liberal Democrats. In his Budget Speech, George Osborne said: ‘It is therefore right, as set out in the coalition agreement, that capital gains should increase in order to help create a fairer tax system.’ HC Deb 22 June 2010, vol 512, col 178. The Liberal Democrat manifesto for the 6 May 2010 election proposed ‘taxing capital gains at the same rate as income, so that all the money you make is taxed in the same way’. 130 HC Deb 22 June 2010, vol 512, col 178. 131 HC Deb 12 July 2010, vol 513, col 761.

1988 and All that: The Fundamentals of UK Capital Gains Tax  223 residential property is intended to provide an incentive for individuals to invest in companies over property.’132 The Unsolved Problem – Lumpy Gains Let us take two pairs of married taxpayers. Couple A choose to invest in equities. Every year the equity portfolio produces net gains of £20,000. At present, the CGT annual exempt amount is £12,300 per individual. Hence, Couple A never pay tax on their capital gains. Couple B choose to invest in buying a property, which they sell after 10 years, making a gain of £200,000. Couple B pay capital gains tax of £49,112.133 The problem of taxing in one year a gain that has accrued over many years is a problem that legislation has never addressed. The problem is acute when capital gains tax is charged at progressive rates, as is the case when income tax rates are applied to gains.134 When taper relief was introduced, government claimed to address the problem. But this is to misunderstand the point. Taper relief is designed to reward the virtue perceived in holding an asset for a long time. There is no additional relief to counteract the effect of lumping many years’ gains into one year. It is not the case that the problem of lumpy gains has not been recognised. In 1955, the main report of the Royal Commission on the Taxation of Profits and Income gives four reasons for rejecting a tax on capital gains, of which the first is: It is illogical to tax to progressive rates the profit on a capital sale in the year of sale, when the property has been held for many years. To avoid hardship a complex structure of provisions is required, which introduce a new group of difficulties.135

To the Inland Revenue three years earlier,136 it is self-evident that mitigation of the tax charge on a lumpy gain is necessary. The Inland Revenue paper presented to the Royal Commission addresses the issue directly: If the view were taken that realised capital gains, generally speaking, possessed taxable capacity of the same quality as ordinary income the most straightforward way of 132 HM Treasury, Finance (no 2) Bill 2016 Explanatory Notes, Note para [53] to Cl 72, https:// publications.parliament.uk/pa/bills/cbill/2015-2016/0155/en/160155en1.pdf. 133 Calculated as two exemptions of £12,300 each (the annual exempt amount for 2020/21), then tax at 28% on £175,400. The problem of bunching is exacerbated by identifying the rate of tax by adding the gain to the year’s income. Adding a large gain to a taxpayer’s income always takes the taxpayer into the higher rate (or rates) of tax, even when the taxpayer’s income is modest. 134 The problem is a problem of graduated tax. When questioned by William Gladstone, then Chancellor of the Exchequer, John Stuart Mill said a ‘graduated income tax is … a graduated robbery’: HC Select Committee on Income and Property Tax, Minutes of Evidence, 18 June 1861, 216, Question 3540. 135 Royal Commission, above n 15, 29 [90]. For the response to this point in the Memorandum of Dissent, see Collison, above n 8, 341. 136 7 January 1952: printed as an annex to the Report: Royal Commission, above n 15, 452–53, Annex [4].

224  David Collison taxing them would be to treat them as additions to income of the year of realisation … The effect in many cases, however, would be to compress a gain that had accrued over a number of years into one year … The gain might so increase the taxpayer’s income as to bring him into higher surtax zones than if the gain had been spread over the years of accrual … Some remedy it is thought would have to be found for this apparent injustice.137

The Inland Revenue paper then deals exhaustively138 with the problems inherent in alternative ways of taxing ‘lumpy gains’ to income tax rates, and concludes: It will be seen that the problem of graduation … is one of the most intractable that would have to be faces in a scheme for taxing capital gains. If the view were taken … that such gains did possess taxable capacity of the same quality as ordinary income it would follow that the income tax and surtax basis of the charge, suitably adjusted to take account of such matters as the period of accrual, and the irregular incidence, of capital gains, would be the theoretical solution. But, as has been noticed, the introduction of all adjustments which might be thought desirable would lead to such complications that that course is hardly practicable.139

Despite this early recognition that provision is necessary to mitigate the tax charge on a lumpy gain, there is no relief provided in the scheme for taxing capital gains that was drawn up by Inland Revenue and presented to the newly elected Labour government on 20 October 1964,140 and which was (with remarkably little amendment) enacted in Finance Act 1965. The 1965 scheme was for a single rate of tax. The problem of a lumpy gain under the 1965 system lies in the application of a single year’s annual exempt amount to a gain accrued over many years. The Finance Bill 1988, applying progressive income tax rates to gains, made the problem acute. The effect of bunching was ignored. If Lawson was made aware of the Inland Revenue’s trenchant criticisms in 1952, he ignored them. There is no reference to the intractable problem of bunching in his papers. If a large gain is made under Lawson’s scheme, nearly all the gain is charged at higher rate, even when the gain has accrued over many years to a basic-rate taxpayer. In 1988, the problem of lumpy gains (also referred to as ‘bumpy gains’ and ‘bunching’) was seen to be largely solved by rebasing to 1982, which was the other part of the 1988 reform. The approach adopted by government comment was to dismiss the problem. The speaking notes prepared by the Inland Revenue for use by ministers in the 1988 Finance Bill debates state: ‘Bumpy gains’ (eg on the sale of second home) … will push some people into the higher rate. Rebasing will substantially reduce the gain arising on disposals of



137 Royal

Commission, above n 15, 436 [16]. extends to three A4 pages of adverse criticism: ibid 437–39. 139 ibid 439. 140 Inland Revenue, unpublished paper ref M.341, [24], reproduced in IR (1966), above n 60, 217–27. 138 [16]

1988 and All that: The Fundamentals of UK Capital Gains Tax  225 valuable indivisible assets like second homes. In the case of business gains … retirement relief … will often be of major help. Beyond that, with the new lower income tax rates special provision does not seem necessary.141

In this way, Lawson advocates one principle of the original concept – equating gains and income – but fails to satisfy Kaldor’s principle of taxing what accrues. Viewed in that year, no taxpayer is taxed on a gain that has accrued for more than six years. It is remarkable that no serious consideration seems to have been given to the passage of time increasing the problem. Now, in 2021, a gain that has accrued over 39 years can be taxed in one year. Applying income tax rates and bands to a capital gain, 20 per cent taxpayer would find that much of a gain on, say, a second home held for many years is charged at 40 per cent or 45 per cent. Under the strange, and overly complicated, range of rates for capital gains tax current at the time of writing, it is the norm that a gain made by a basic-rate taxpayer on the sale of a second home that has been owned for many years is charged to tax at the rate designed for higher-rate taxpayers. For many years, top-slicing has been applied in computing the rate of income tax charged on a gain on encashing an assurance bond, with the intention that the gain that has accrued over many years is taxed in the year of realisation at a rate of income tax that better reflects the taxpayer’s circumstances. It is curious that an equivalent procedure has never been adopted for large capital gains. One is left with the thought that the legislation has consistently failed to embrace a conceptual base for the taxation of capital gains.

141 IR (1988), above n 70, 1404 [13]. This draft neatly fits the description by Ann Robinson and Cedric Sandford of the typical parliamentary question on tax matters as an MP tabling a question given to him by an accountant, the answer to which is understood neither by the minister who gives it nor by the MP who hears it. When the accountant tells the MP that the answer is not adequate, there is no opportunity for any supplementary question or further discussion: A Robinson and C Sandford, Tax Policy-Making in the United Kingdom (London, Heinemann, 1983) 150.

226

9 The 1926 Double Income Tax Agreement between Great Britain and the Irish Free State SUNITA JOGARAJAN*

ABSTRACT

O

n 14 April 1926, the British Government and the Government of the Irish Free State concluded one of the first international agreements on double taxation. The agreement was not only unusual for its time, but continues to be an anomaly with the benefit of almost 100 years of experience since its conclusion. The agreement allocates taxing rights based entirely on residency rather than the typical combination of residency and source. As noted by one president of the UK Board of Inland Revenue, Sir Cornelius Joseph Gregg, ‘it was recognised that the residence basis provided a simpler solution of double taxation between this country [Great Britain] and Ireland and was a blessing to both tax administrations when compared with the sharing of the relief’ (C Gregg, ‘Double Taxation’ (1947) 33 Transactions of the Grotius Society 77, 82). Due to the special relationship between the two countries and the unusual choice of relief from double taxation, the agreement has generally been considered a ‘one-off’ and largely ignored in the tax treaty literature. This chapter addresses that gap in the literature by examining in detail the conclusion of the agreement. INTRODUCTION

On 14 April 1926, the Irish Free State and Great Britain concluded a treaty addressing double income taxation.1 The 1926 Agreement operated for more * I am grateful to John Avery Jones, Richard Thomas, and Charles Garavan for their helpful comments on the draft paper. I am also grateful to Brian Cleave and Philip Ridd for assistance in understanding the role of the Scottish branch of Inland Revenue. 1 Agreement between the British Government and the Government of the Irish Free State in Respect of Double Income Tax (signed 14 April 1926), reproduced in Double Taxation and Fiscal

228  Sunita Jogarajan than 50 years until it was replaced by the present treaty on double taxation between Ireland and the UK, which was concluded on 2 June 1976.2 The current treaty is based on the OECD Model and adopts the conventional approach of addressing double taxation by looking at the source of income and the residence of the taxpayer. In contrast, the 1926 Agreement adopted the novel approach of addressing double taxation purely on the basis of residency.3 The 1926 Agreement is largely ignored in the academic literature on tax treaties due to its adoption of a pure residence basis and the special relationship between Great Britain and the Irish Free State.4 This chapter seeks to remedy that gap in the literature by examining in detail the negotiations which resulted in the conclusion of the 1926 Agreement. The research indicates that the drafters of the 1926 Agreement were primarily concerned with achieving simplicity while ensuring that taxation was not avoided altogether, and that parity was achieved with single residents with domestic income only. The next two sections provide the background to the conclusion of the 1926 Agreement and discuss the particular concerns which led to its conclusion. The following two sections discuss the drafting of the 1926 Agreement and the political considerations which were ultimately determinative in its conclusion. The chapter then examines two developments post the conclusion of the 1926 Agreement, in 1928 and 1932. BACKGROUND

The Irish Free State was established on 6 December 1922, following the conclusion of the Anglo-Irish treaty of 6 December 1921.5 Under Article 1 of the treaty, the Irish Free State was established as a Dominion of the British Empire, having the same status as Dominions such as Canada, Australia, New Zealand and South Africa. Under Article 5 of the treaty, the Irish Free State agreed to assume responsibility for a fair and equitable proportion of the UK’s public debt Evasion: Collection of International Agreements and Internal Legal Provisions for the Prevention of Double Taxation and Fiscal Evasion (Geneva, League of Nations, 1928) (1926 Agreement). 2 Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains (signed 2 June 1976, entered into force 23 December 1976), [1977] UKTS 42 (Cmd 6815, 1976). The 1976 treaty was amended by Protocol in 1998 and more recently by the Multilateral Instrument: Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, signed by the UK and Ireland on 7 June 2017. 3 For example, the first multilateral agreement concluded only a few years earlier allocated taxing rights on the basis of both residence and source: Convention for the Purpose of Avoiding Double Taxation between Austria, Hungary, Italy, Poland, Roumania and the Kingdom of the Serbs, Croats and Slovenes (concluded 6 April 1922), reproduced in Double Taxation and Fiscal Evasion, above n 1. 4 The articles that discuss the 1926 Agreement in some detail are largely descriptive. See, eg C Carr et al, ‘British Isles’ (1928) 10(2) Journal of Comparative Legislation and International Law 1; G Mason, ‘United Kingdom–Eire Double Taxation Agreements and Assessments’ [1959] British Tax Review 261. 5 Articles of Agreement for a Treaty Between Great Britain and Ireland (signed 6 December 1921).

The 1926 Double Income Tax Agreement  229 and payments of war pensions in existence at the time. As discussed later, this commitment to contribute towards the UK’s liabilities would later play a role in the negotiation of the 1926 Agreement. The conclusion of the Anglo-Irish treaty was followed by the adoption of the Constitution of the Irish Free State.6 Under Article 74 of the Constitution, ‘all taxes and duties and arrears thereof shall continue to be assessed, levied and collected in like manner in all respects as immediately before this Constitution came into operation’. This included income tax, which had been extended to Ireland in 1853 and continued to operate in the 1920s despite assurances that it was only a temporary measure and would be abolished by 5 April 1860 at the very latest.7 The problem of double income taxation following the establishment of the Irish Free State as a Dominion of the British Empire was already recognised and was a subject of consideration by the Board of Inland Revenue in December 1919, almost a year into the Irish War of Independence.8 On the assumption that the Irish Free State would continue to adopt a similar tax system to Great Britain, the Board provided several examples of the potential cases of double taxation. First, a significant number of Irish residents invested in British companies and received dividend income from those companies. Under the existing rules, the dividend income was subject to tax relief.9 The Board considered that such income should continue to receive relief following the establishment of the Irish Free State, but queried whether the relief would be provided by the British Exchequer, the Irish Exchequer or on a shared basis (the Board suggested that relief should be provided on a shared basis in equal proportions). Second, the Board noted that the rules regarding the residency of companies increased the likelihood of instances of double taxation. Case law had established that, for income tax purposes, a company was resident where the directors met, and where the directing and controlling power was exercised. As such, a company controlled in Great Britain but carrying on its trading operations wholly in Ireland would be taxed in Great Britain under the existing rules. However, Ireland would presumably seek to tax the company on the basis that the profits were made in Ireland and adjustments would have to be made to provide relief from double taxation. The Board highlighted that such cases were numerous and the number of English companies operating in Ireland was far greater than the number of Irish companies trading in England. Third, the Board pointed

6 Constitution of the Irish Free State (Saorstát Eireann) Act 1922. 7 C Haccius, Ireland in International Tax Planning, 2nd edn (Amsterdam, IBFD, 2004) 5–6. On the history of the Irish taxation system, see P Clarke, ‘The Historical Development of the Irish Taxation System’ (2014) 21 Journal of the Irish Accounting and Finance Association 5. 8 Note by the Board of Inland Revenue on the Recommendation in the Report of the Subcommittee on Irish Finance that the Administration of Income Tax (and Super Tax) in Ireland should be handed over to the Irish Legislatures (UK National Archives, London, File IR 64/39, December 1919). The Irish War of Independence was fought between January 1919 and July 1921. 9 On dividend relief, see J Avery Jones, ‘Defining and Taxing Companies 1799–1965’ in J Tiley (ed), Studies in the History of Tax Law, vol 5 (Oxford, Hart Publishing, 2013) 1–42.

230  Sunita Jogarajan out that in some cases it was impossible to separate the income between the two jurisdictions. For example, shipping companies operated services between Irish ports and British ports, and the operations were carried on in both countries.10 The Board was strongly of the view that double taxation between Ireland and Great Britain needed to be addressed, and suggested that if the problem of double taxation between Ireland and Great Britain was not addressed, the high tax burden and sense of injustice felt by taxpayers would potentially be so great as to result in a push for a system of territorial taxation and even the abandonment of the principle of residence taxation. The Board did not put forward a preferred method of relief at this time, but was strongly opposed to the application of Dominion Relief to the Irish Free State.11 Broadly, Dominion Relief provided taxpayers with a credit for Dominion income taxes up to one half of the UK’s tax rate applicable to the income subject to Dominion income tax.12 Dominion Relief was considered unworkable in the case of the Irish Free State due to the practical difficulties associated with that system. These practical difficulties were mitigated in the case of other Dominions due to their remoteness from Great Britain, the relatively low number of cases of double income taxation and the comparatively low income tax rates in the Dominions. However, it was thought that the proximity of the Irish Free State to Great Britain and the significant number of interactions between the countries, coupled with the high tax rates in the Irish Free State, would place a significant burden on taxpayers and make administrative chaos unavoidable. Further, the Board also noted that the system relied heavily on close cooperation between the revenue authorities of the two jurisdictions. The problem of double taxation arising between Great Britain and the Irish Free State was again considered by the Board of Inland Revenue in March 1922.13 At this time, the Board advocated for the extension of Dominion Relief to the Irish Free State. The practical difficulties associated with the system were not mentioned and Dominion Relief was promoted on the basis that the Irish Free State should not be treated any differently to the other British Dominions. In particular, the Board was of the view that the Irish Free State should not be granted any additional relief or more favourable terms of relief as compared to

10 The special nature of shipping businesses (ie that they are inherently of an international character) was also recognised in the 1923 Economists’ Report and the 1925 Report on double taxation published by the League of Nations: S Jogarajan, ‘Stamp, Seligman and the Drafting of the 1923 Experts’ Report on Double Taxation’ (2013) 5 World Tax Journal 368, 386–90; S Jogarajan, Double Taxation and the League of Nations (Cambridge, Cambridge University Press, 2018) 41–47. 11 Dominion Relief was introduced temporarily in 1916 and later made permanent in 1920 under s 27 of the Finance Act 1920. 12 On Dominion Relief, see P Harris, ‘An Historic View of the Principle and Options for Double Tax Relief’ [1999] British Tax Review 469; CJ Taylor, ‘Twilight of the Neanderthals, or Are Bilateral Double Taxation Treaty Networks Sustainable?’ (2010) 34 Melbourne University Law Review 268, 287–89. 13 Note by the Board of Inland Revenue: Irish Free State Double Taxation as Regards Inland Revenue Duties (UK National Archives, London, File T 172/1279, 13 March 1922).

The 1926 Double Income Tax Agreement  231 the other Dominions. This was on the basis that any advantages offered to the Irish Free State would likely be demanded by other Dominions and there would be no basis not to extend such advantages to the other Dominions. The Board did note that under Dominion Relief, the taxpayer (whether resident in Great Britain or the Irish Free State) would obtain relief up to a maximum of one-half of their applicable British tax rate at the expense of the British Exchequer, and the balance of any relief would need to be obtained from the Irish Free State and depended on the Irish Free State introducing a similar provision. Following this change of position by the Board, the establishment of the Irish Free State did not involve any special arrangement regarding double taxation, and relief on the British side was provided through Dominion Relief.14 The Irish Free State Government introduced a similar relief system in the Double Taxation (Relief) (Order No 1) 1923. However, the Board’s comments in 1919 would prove prescient, and problems with Dominion Relief were soon raised by various parties. IMPETUS FOR CHANGE

The push to change the mechanism for double taxation relief between Great Britain and the Irish Free State came from two particular sources. First, the then Earl of Middleton raised concerns with the President of the Executive Council of the Irish Free State, Cosgrave, regarding the burden of double taxation and the complexities of relief. In response, Cosgrave advised that the existing arrangement had been agreed to in a hurry and therefore it was thought that the only possible solution at that time was to adhere to the system of Dominion Relief.15 However, Cosgrave noted that it was increasingly clear that that arrangement was not suitable for the special conditions between the two countries, and that it was not possible to simply amend the agreement, but it was preferable to seek a new agreement on different terms. Cosgrave’s letter was passed on to the British Treasury by the Earl of Middleton.16 Niemeyer, the Controller of Finance, and Hopkins (Chair of the Board of Inland Revenue) were of the view that if the Irish Free State was to propose a new arrangement exempting non-residents, the British Government would find it difficult to reject such a proposal, given the public position of British officials in other forums.17 Further, Hopkins noted

14 This was officially embodied in the Double Taxation (Irish Free State) Declaration 1923. 15 Letter from MacCosgair (President of the Executive Council of the Irish Free State) to Earl of Middleton (Cork) (UK National Archives, London, File IR 40/3427, 20 February1925). Liam T MacCosgair was the name used by William Cosgrave in official letters. 16 Letter from Hopkins (Inland Revenue) to Financial Secretary to the Treasury (UK National Archives, London, File IR 40/3427, 12 March 1925). 17 ibid. Hopkins is presumably referring to the discussions at the League of Nations, where the British representative made it clear that exemption was the preferred solution: Jogarajan, Double Taxation and the League of Nations, above n 10, 32–33.

232  Sunita Jogarajan that reciprocal exemption of non-residents had already been adopted in relation to shipping.18 The only question at this time was the cost to the British revenue of such a proposal, but this was thought to be less than £500,000 per annum and therefore worth pursuing. Second, Dominion Relief was found to be a particular problem in the case of Northern Ireland. The Chancellor of the Exchequer (Churchill) received a deputation on the matter.19 The deputation was particularly concerned with the problem of double taxation as between Northern Ireland and Great Britain in relation to dividends. Under the existing system, Irish companies were required to deduct tax from dividend payments and, if those dividend cheques were presented at a British bank, the bank was also required to deduct tax from the dividend payment. The taxpayer could apply to each revenue agency for a refund of the tax paid in proportion to the profits earned in that jurisdiction, but this was a time-consuming and costly process and even if successful, would mean that the taxpayer was out of pocket for a considerable period of time. The deputation explained that the reality was that most small investors were not in a position or sufficiently knowledgeable to apply for the refunds. Further, the proximity of the Irish Free State and Northern Ireland meant that there was a high incidence of cross-border investment and the existing system was considered unworkable. The burden of double taxation had led some Irish companies to issue cheques which did not indicate that they were dividend payments or for investors to present their cheques at a bank in the Irish Free State rather than in Northern Ireland to avoid the double deduction. The deputation noted that investors in other Dominions did so with full awareness as to the potential for double taxation whereas, in the case of investments between the Irish Free State and Northern Ireland, these were long-standing arrangements from when no prospect of double taxation had been contemplated. The problem of double taxation had not only reduced investors’ income, but had depreciated the value of the investments such that they could not be sold, or could only be sold at a significant loss. In addition to the burden on taxpayers, it was thought that the problem of double taxation needed to be addressed to continue to promote crossborder investment between the two jurisdictions. The representative from Great

18 The UK had concluded shipping agreements on the basis of reciprocal exemption with Denmark, Norway, Sweden and the USA at this time: United Nations, International Tax Agreements Volume III: World Guide to International Tax Agreements 1843–1951 (London, United Nations, 1951) 352. 19 Deputation to the Chancellor of the Exchequer on the Subject of the Deduction of Income Tax both in the Irish Free State and in Northern Ireland Great Britain – House of Commons (UK National Archives, London, File T 160/277, 16 March 1925).The members of the deputation were Reid (Member of Parliament for Down), Dickens (Chairman, Alliance and Dublin Consumers Gas Company), Grey (Secretary, Alliance and Dublin Consumers Gas Company), Cairnes (Chairman, Great Northern Railway Company and Bank of Ireland), Herdman (Belfast Chamber of Commerce), Barbour (Belfast Chamber of Commerce), Holt (Director, Messrs Glyn, Mills, Currie, Holt & Co representing the British Bankers’ Association), Cooke (Director and General Manager, National Bank Ltd representing the British Bankers’ Association) and Macnaughten (Member for Derry). The Chairman of the Board of Inland Revenue, Hopkins, was also present.

The 1926 Double Income Tax Agreement  233 Northern Railway, Cairnes, pointed out the need for capital to enable investment in infrastructure works. Churchill addressed the deputation by stating that the matter should be resolved according to the following guiding principle: The guiding principle ought to be that a man ought not to pay any more taxation because he has property in parts of the UK which are divided than he would have to pay if he has property in parts of the UK that have not been divided, subject to this, that where there is a different rate of taxation in the two parts, he should not be made to pay more taxation than he would have to pay in regard to the part in which the rate is the highest.

He accepted that the present system accorded with this principle but was unworkable practically. Churchill undertook to discuss the matter with Cosgrove, President of the Dáil of the Irish Free State, and develop an arrangement that could be agreed to by the Irish Free State and Northern Ireland. Meanwhile, following the receipt of the letter from the Earl of Middleton indicating that a solution on the basis of exemption was possible, the British Inland Revenue officials offered to assist the Irish Revenue officials in any way possible with the relevant data to enable the Irish Revenue officials to convince the Irish ministers of the merits of the residence basis.20 In particular, it was suggested that the Irish ministers could be told that the ‘residence basis’ merited detailed consideration in light of the suggestions made by the 1923 Economists’ Report.21 The Irish revenue officials responded that the residence basis was starting to gain acceptance, including with the Minister of Finance, but that the financial aspects of the agreement would be of paramount importance.22 The Board officials noted that, following the Northern Irish deputation, the Chancellor of the Exchequer had undertaken to look into the issue and suggested that the Irish Minister of Finance should formally write to the Chancellor requesting that the matter be looked into again in light of the 1923 Economists’ Report.23 In line with this suggestion, Blythe (Irish Free State (IFS) Minister of Finance) wrote to Churchill (Chancellor of the Exchequer) recommending that the residence basis be explored as a possible solution to double taxation between Great Britain and the Irish Free State, in line with the 1923 Economists’ Report.24 This proposal was accepted by Churchill.25

20 Letter from Slee (Inland Revenue) to Carey (IFS Revenue) (UK National Archives, London, File IR 40/3427, 31 March 1925). 21 Letter from Coates (Inland Revenue) to Carey (IFS Revenue) (UK National Archives, London, File IR 75/102, 31 March 1925). 22 Letter from Carey (IFS Revenue) to Coates (Inland Revenue) (UK National Archives, London, File IR 75/102, 7 April 1925). 23 Letter from Coates (Inland Revenue) to Carey (IFS Revenue) (UK National Archives, London, File IR 75/102, 20 April 1925). 24 Letter from Blythe (IFS Minister of Finance) to Churchill (Chancellor of the Exchequer) (UK National Archives, London, File IR 40/3427, 24 April 1925). 25 Letter from Churchill (Chancellor of the Exchequer) to Blythe (IFS Minister of Finance) (UK National Archives, London, File IR 40/3427, 30 April 1925).

234  Sunita Jogarajan A Committee of Inland Revenue officials was formed to discuss the possibility of addressing double taxation as between the Irish Free State and Great Britain through the adoption of residence taxation.26 The Board informed the Irish Free State revenue officials regarding this and suggested that the committee would develop a draft agreement which could form the basis of discussion between the two authorities.27 This proposal was agreed to by the Irish revenue officials.28 At this time, the Irish revenue officials also suggested that the two revenue authorities should share information, particularly regarding crossborder shareholdings, on the basis that the information could not be used for any other purpose without prior approval. This proposal was eventually agreed to and would prove necessary in determining the actual costs of the scheme.29 The next section discusses the issues considered by the Committee in developing the draft agreement. DRAFTING A RESIDENCE BASIS AGREEMENT

The crux of the 1926 Agreement is embodied in Article 1, which states: (a) Any person who proves to the satisfaction of the Commissioners of Inland Revenue that for any year he is resident in the Irish Free State and is not resident in Great Britain or Northern Ireland shall be entitled to exemption from British income tax for that year in respect of all property situate and all profits or gains arising in Great Britain or Northern Ireland and to exemption from British super-tax for that year. (b) Any person who proves to the satisfaction of the Revenue Commissioners that for any year he is resident in Great Britain or Northern Ireland and is not resident in the Irish Free State shall be entitled to exemption from Irish Free State income tax for that year in respect of all property situate and all profits or gains arising in the Irish Free State and to exemption from Irish Free State super-tax for that year. (c) Exemption under this Article may be given either by discharge or by repayment of tax, or otherwise, as the case may require.

Although Article 1 appears reasonably straightforward, there were a number of issues considered by the Committee during the drafting of the provision. 26 The Committee was in fact formed prior to the correspondence between Blythe and Churchill as the first Committee meeting predates the correspondence. 27 Letter from Slee (Inland Revenue) to Carey (IFS Revenue) (UK National Archives, London, File IR 40/3427, 8 May 1925). 28 Letter from Carey (IFS Revenue) to Slee (Inland Revenue) (UK National Archives, London, File IR 40/3427, 14 May 1925). 29 Letter from Hopkins (Inland Revenue) to Niemeyer (Controller of Finance) (UK National Archives, London, File IR 40/3427, 29 May 1925); Letter from Niemeyer (Controller of Finance) to Hopkins (Inland Revenue) (UK National Archives, London, File IR 40/3427, 5 August 1925); Letter from Slee (Inland Revenue) to Carey (IFS Revenue) (UK National Archives, London, File IR 40/3427, 14 August 1925).

The 1926 Double Income Tax Agreement  235 The first issue considered by the Committee was whether residence taxation should be adopted for all forms of income or whether source taxation should be accepted for certain categories of income.30 The 1923 Economists’ Report had proposed that source taxation should be recognised for certain income amounts, such as income from immovable property.31 However, the Committee agreed that residence taxation should apply to all categories of income with no exceptions as the new system was being considered due to the complexity of the existing system and it was preferable to maintain simplicity where possible. The correct categorisation of income amounts was not always a straightforward issue and to introduce a system which entailed such a process would introduce unwanted complexity. Following this decision, the Committee went through each category of income to determine how the residence principle would apply, ie which country would exempt the income from taxation and, specifically, under which case or schedule would the amount be taxed in the other country.32 The Committee was particularly concerned with double non-taxation and wanted to ensure that any amounts that were exempt in the source jurisdiction would be taxed in the residence jurisdiction. The main subject of discussion in this regard was in relation to the taxation of owner-occupied property in the other jurisdiction. Under existing legislation, the residence country would not be able to tax the annual value of owner-occupied property in the other jurisdiction. Initially, the Committee thought that the issue could be ignored as it was considered to be a comparatively rare situation.33 However, following their decision as to the necessity to deal with unremitted foreign income (see below), the Committee decided that it was theoretically necessary to tax the annual value of such property, although further investigations would have to be undertaken regarding the practicability.34 This decision was made on the basis that the purpose of drafting the agreement was to provide relief from double taxation and not to create an incomplete system of single taxation. On this basis, the Committee initially agreed that the rental value of an owner-occupied property of a resident in the other jurisdiction would be taxed in the source country, and

30 Minutes of the First Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State (UK National Archives, London, File IR 75/102, 16 April 1925). 31 GWJ Bruins et al, Report on Double Taxation Submitted to the Financial Committee (Geneva, League of Nations, 1923) 32. 32 Minutes of the Second Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State (UK National Archives, London, File IR 75/102, 22 April 1925). 33 Minutes of the Third Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State (UK National Archives, London, File IR 75/102, 29 April 1925). 34 Minutes of the Sixth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State (UK National Archives, London, File IR 75/102, 21 May 1925).

236  Sunita Jogarajan would be the sole exception to the residence principle.35 However, after further consideration of the practical difficulties on both sides, the Committee agreed that the annual value of owner-occupied property in the other country should be taxed in the country of residence and that there would be no exception to allow for source taxation.36 Article 2 of the 1926 Agreement addressed the double taxation relief for dual residents as follows: Relief from double taxation in respect of income tax (including super-tax) in the case of any person who is resident both in Great Britain or Northern Ireland and in the Irish Free State shall be allowed from British income tax and Irish Free State income tax respectively in accordance with and under the provisions of Section 27 of the Finance Act, 1920, provided, however, that: (a) The rate of relief to be allowed from British income tax shall be one-half of that person’s appropriate rate of British tax or one-half of his appropriate rate of Irish Free State tax, whichever is the lower; (b) The rate of relief to be allowed from Irish Free State income tax shall be one-half of that person’s appropriate rate of British tax or one-half of his appropriate rate of Irish Free State tax, whichever is the lower; (c) For the purpose of determining that person’s appropriate rate of British tax, the rate of British income tax shall be ascertained by dividing the amount of his total income from all sources as estimated for income tax purposes the amount of tax payable by him on that income before deduction of any relief granted in respect of life assurance premiums or any relief granted under the provisions of the said Section 27 as amended by this Article, and the rate of British supertax shall be ascertained by dividing the amount of the super-tax payable by that person by the amount of his total income from all sources as estimated for super-tax purposes. (d) For the purpose of determining that person’s appropriate rate of Irish Free State tax, the rate of Irish Free State income tax shall be ascertained by dividing by the amount of his total income from all sources as estimated for income tax purposes the amount of tax payable by him on that income before deduction for any relief granted in respect of life assurance premiums or any relief granted under the provisions of the said Section 27 as amended by this Article, and the rate of Irish Free State super-tax shall be ascertained by dividing the amount of the super-tax payable by that person by the amount of his total income from all sources as estimated for super-tax purposes.

35 Minutes of the Eight Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State (UK National Archives, London, File IR 75/102, 5 June 1925). 36 Minutes of the Tenth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State (UK National Archives, London, File IR 75/102, 11 June 1925). By this point in the discussions, the Committee had already identified various issues which would need to be addressed by amendments to domestic legislation.

The 1926 Double Income Tax Agreement  237 The relief for dual residents was the subject of extensive consideration by the Committee. The statistics provided to the Committee indicated that only a small number of taxpayers would be treated as dual residents.37 Nonetheless, the Committee accepted that relief should be extended to dual residents, but the question was the form of relief. The first method contemplated by the Committee was an allocation of taxes in proportion to the time spent in each jurisdiction, but this was considered unsuitable. The example of a taxpayer who spent one month a year in the Irish Free State was raised and it was thought that the Irish Free State would be unlikely to accept one-twelfth of the tax in that scenario. The second method contemplated was an allocation of taxes in proportion to the income earned in each jurisdiction. However, this method was also considered unworkable as it was possible that taxpayers would earn some or all of their income in neither jurisdiction. Further, it was considered incongruous that the residence basis should depend on the source of income. The Committee also noted that the 1923 Economists’ Report had suggested that the source principle should not be adopted in relation to the personal or general income tax.38 The third method raised was an equal division of taxes and the discussion turned to the applicable tax rate. The Committee noted that the Royal Commission had suggested that the taxpayer should bear the burden of the higher rate as the taxpayer who invests abroad should not be treated more favourably than the taxpayer who invests domestically.39 However, if the higher rate were applied and the taxes were shared equally, the country with the lower rate would receive more tax than would be due under its own system; or if the country with the higher rate paid the country with the lower rate the tax payable at the lower rate, the higher rate country would retain more tax than it should. The Committee considered the following example. Assume that a dual resident taxpayer earned £1000 of income and that the tax rate was 20 per cent in the Irish Free State and 30 per cent in Great Britain. Under the third method considered by the Committee, the taxpayer would pay £300 tax in Great Britain and that tax could be shared equally (£150 to each country), or £100 to the Irish Free State (20 per cent of £500) and £200 to Great Britain. If each country were only entitled to tax half the income at the applicable tax rate, the Irish Free State would be entitled to £100 and Great Britain to £150. Therefore, the lower taxing country benefits under the equal division of taxes and the higher taxing country benefits where the tax is paid to the lower taxing country at that country’s applicable tax rate. The Committee eventually decided that the dual resident should pay the higher of the two taxes and that this would be achieved by requiring

37 Minutes of the First Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State, above n 30. 38 Bruins et al, above n 31, 45–51. 39 Report of the Royal Commission on the Income Tax (Cmd 615, 1920) 16.

238  Sunita Jogarajan each country to remit one-half of the lower tax.40 For example, if the taxpayer paid tax of £4 in the Irish Free State and £3 in Great Britain, each country would remit £1.50 to the taxpayer so that the total tax paid by the taxpayer would be £4 and the Irish Free State would retain £2.50 and Great Britain £1.50. After deciding on this method of relief, the Committee was concerned that a dual resident with fluctuating income would suffer from the requirement to pay tax at the higher rate.41 The Committee considered whether relief should instead be done on a ‘time basis’ (ie in proportion to the time spent in each jurisdiction) or on an ‘average basis’ (ie income averaged over a period of years), but there were objections to both of these methods and the Committee eventually came back to its earlier conclusion that the dual resident should pay tax at the higher of the two rates.42 However, it was later thought that there would be strong objections to taxation at the higher of the two rates as it was likely that the taxpayer would end up paying more tax than they should.43 As to taxation in each country on a ‘time basis’, it was thought that, due to the differences in tax rates, it was possible that the dual resident would end up paying less tax than the single resident of the higher taxing country. The Committee revisited the possibility of providing relief for dual residents under Dominion Relief, but again considered this option undesirably complex. The Committee also reconsidered a division on the basis of time spent in each jurisdiction, but recognised that there would likely be many objections to this approach. First, the Irish Free State was unlikely to accept this method of division as, in the case of dual residents, the Irish Free State would probably be the country of ‘holiday residence’. Second, it was unclear how a period of residence outside both countries would be treated. Third, the determination of the period of residence in each country was potentially problematic. Fourth, it would be necessary to amend section 27 of the Finance Act 1920 to make it clear that single residents who were not resident in the source country would not be entitled to a reduction of residence tax on the time basis. The question of dual residents was not discussed further by the Committee. As predicted by the Committee, the Irish Free State revenue officials did object to any apportionment of relief on the basis of residency period, and 40 Minutes of the Fifth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State (UK National Archives, London, File IR 75/102, 14 May 1925). 41 Minutes of the Seventh Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State (UK National Archives, London, File IR 75/102, 28 May 1925). 42 Minutes of the Eight Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State, above n 35; Minutes of the Tenth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State, above n 36. 43 Minutes of the Eleventh Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State (UK National Archives, London, File IR 75/102, 15 June 1925).

The 1926 Double Income Tax Agreement  239 instead proposed that relief be shared equally by the two jurisdictions.44 This proposal was accepted by the British revenue officials on condition that the Irish Free State authorities adopt the same approach as the British authorities that a person would not be treated as a resident if they were physically absent from the country for the whole year, even if they maintained a residence in the country. Article 2 provides for relief at the rate of one-half of the lower of the two rates, with the method for working out the appropriate rate specified in paragraphs (c) and (d) of Article 2. As discussed below, the method for working out the appropriate rate would be the subject of amendment in 1928. Article 3 of the 1926 Agreement addressed the Committee’s concerns regarding double non-taxation and was as follows: (a) Any person who is entitled to exemption from British income tax by virtue of Article 1(a) of this Agreement in respect of property situate and profits or gains arising in Great Britain or Northern Ireland shall, if and so far as the Oireachtas of the Irish Free State so provides, and subject to any exemption or relief to which he may be entitled under the laws in force in the Irish Free State, be chargeable to Irish Free State income tax in respect of such property, profits or gains. (b) Any person who is entitled to exemption from Irish Free State income tax by virtue of Article 1(b) of this Agreement in respect of property situate and profits or gains arising in the Irish Free State shall, if and so far as the British Parliament so provides, and subject to any exemption or relief to which he may be entitled under the laws in force in Great Britain and Northern Ireland, be chargeable to British income tax in respect of such property, profits or gains. (c) Any person who is entitled to relief by virtue of Article 2 of this Agreement shall, subject to such relief, be chargeable, if and so far as the British Parliament so provides, to British income tax in respect of property situate and profits or gains arising in the Irish Free State in like manner in all respects as if he were resident in Great Britain or Northern Ireland but not resident in the Irish Free State, and shall, subject to such relief as aforesaid, be chargeable, if and so far as the Oireachtas of the Irish Free State so provides, to Irish Free State income tax in respect of property situate and profits or gains arising in Great Britain on Northern Ireland in like manner in all respects as if he were resident in the Irish Free State but not resident in Great Britain or Northern Ireland.

Article 3 was the result of the Committee’s deliberations as to whether single resident taxpayers should be taxable in the country of residence on the whole of their income.45 The concern was that certain amounts would escape taxation entirely if such a provision was not included. The Committee initially

44 Letter from Slee (Inland Revenue) to Carey (IFS Revenue) (UK National Archives, London, File IR 40/3427, 19 December 1925). 45 Minutes of the Fifth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State, above n 40.

240  Sunita Jogarajan agreed that taxpayers should be taxed on the whole of their income in the case of income arising in either the Free State or Great Britain.46 However, the Committee subsequently also considered the example of a passive partner in an Indian business who controlled a Free State business from Great Britain and financed the Free State business from remittances directly from India to the Free State.47 The Indian income would not be taxable in Great Britain as it did not arise in either the Free State or Great Britain, and it was not remitted to Great Britain. Further, the Indian income would not be taxable in the Free State as the taxpayer was a single resident of Great Britain. The Committee thought that such cases would be reasonably frequent and initially agreed that foreign income remitted to the Free State should be deemed to be remitted to Great Britain and vice versa. However, after consideration of other amounts that may escape taxation altogether, Article 3 was included in the Agreement. Article 4 of the 1926 Agreement addressed the residency of companies and was as follows: For the purposes of this Agreement a company, whether incorporated by or under the laws of Great Britain or of Northern Ireland or of the Irish Free State or otherwise, shall be deemed to be resident in that country only in which its business is managed and controlled.

Article 4 does not appear to have been controversial.48 The only issue noted by the Committee was that the country of control would tax a company’s reserves and therefore companies would find it beneficial to transfer control to the country with the lower rate of tax.49 However, of interest is the treatment of partnerships and trusts, which was extensively discussed by the Committee but were omitted from the 1926 Agreement. The Committee decided to abandon any consideration of the ‘control’ of the partnership and to impose taxation in

46 Minutes of the Sixth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State, above n 34. 47 On the remittance basis, see J Avery Jones, ‘Taxing Foreign Income from Pitt to the Tax Law Rewrite – the Decline of the Remittance Basis’ in J Tiley (ed), Studies in the History of Tax Law, vol 1 (Oxford, Hart Publishing, 2004) 15. 48 It is impossible to say with certainty as the minutes for the 13th and 14th meetings of the Committee are not available, but there is also no discussion of this issue in the Committee’s Draft Report. The importance of ‘control’ as the criterion for company residence was noted in the Royal Commission’s Report: Report of the Royal Commission on the Income Tax, above n 39, 9. Avery Jones notes that the Committee’s choice of ‘control’ as the criterion for residence was surprising given that the Inland Revenue officials were arguing for residency on the basis of incorporation at the time: J Avery Jones, ‘Corporate Residence in Common Law: The Origins and Current Issues’ in G Maisto (ed), Residence of Companies under Tax Treaties and EC Law (Amsterdam, IBFD, 2009) [5.3.1]. See also J Avery Jones, ‘Changed HMRC Interpretation of the Residence Articles in 16 Double Taxation Agreements’ [2016] British Tax Review 1, 3–4. 49 Minutes of the Fifteenth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State (UK National Archives, London, File IR 75/102, 25 January 1926).

The 1926 Double Income Tax Agreement  241 accordance with the residence of the partners.50 Using the example of a partnership ‘controlled’ by two partners resident in the Irish Free State and also including a third partner resident in Great Britain, the Committee suggested that the partnership profits should be taxed two-thirds in the Irish Free State and one-third in Great Britain, assuming the partners are entitled to the profits equally.51 In the case of trusts, the Committee did not think that there was any issue if all the trust beneficiaries were resident in, and all the trust income was derived from, Great Britain or the Irish Free State.52 However, the situation was more complicated where there was foreign income or a foreign beneficiary, foreign meaning not British or Irish. The Committee considered the case of a Free State trust with three beneficiaries – two British and one foreign – and trust income of £900 derived entirely from British sources. If the beneficiaries were entitled to the trust income equally, British tax would be repaid to the trustees on £600 and tax of £60 would be retained on the foreign beneficiary’s share of £300. However, if the trustees were unable to allocate the £60 to the foreign beneficiary and pay £240, the £60 would be distributed equally between the three beneficiaries and only £20 would in effect be received from the foreign beneficiary. Further, the two British beneficiaries would have paid £20 each on £100 of their respective shares of £300 and would claim to only be taxable on £200 instead of £300. The Committee suggested that the existing practice of repayment to the trust in the case of a foreign beneficiary would have to be abandoned and repayments would have to be made to individual beneficiaries. In the above example, the British revenue would not repay the trust and the British and foreign beneficiaries would not obtain any relief except by reference to any personal allowances due. If there were any beneficiaries who were Free State residents, the British revenue would repay the beneficiary in respect of any claim. The treatment of partnerships and trusts is included in the Committee’s Draft Report.53 Under the Draft Report, the partnership itself is not treated as an entity resident in either jurisdiction, and the partner’s country of residence is entitled to tax their share of the partnership income, as discussed above. In the case of trusts, the Draft Report stated that the trust would be deemed to be a person residing in the country where it is administered, and liable to tax in that country. The trust would be exempt from tax as a non-resident in the other

50 Minutes of the Fourth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State (UK National Archives, London, File IR 75/102, 6 May 1925). 51 Minutes of the Fifteenth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State (above n 49). 52 ibid. 53 Draft Report of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State (UK National Archives, London, File IR 40/3427).

242  Sunita Jogarajan country, irrespective of the subsequent distribution of income. It is not clear why the treatment of partnerships was excluded from the Agreement. In the case of trusts, the Irish revenue officials did not dispute the proposed treatment, but suggested some changes of wording. The two revenue authorities were unable to agree the wording and eventually decided that the taxation of trusts should be left out of the Agreement but would be dealt with by the revenue authorities along the lines proposed.54 Articles 5–8 address the administrative aspects of the Agreement. Much of the Committee’s discussions considered the specific administrative mechanisms for relief and the Committee was keen to ensure that exemption at source did not result in double non-taxation.55 For example, the Committee decided that it would be necessary for the taxpayer to demonstrate that they were not a resident of the source jurisdiction, that they were resident in the other jurisdiction and that tax had been or would be paid in the residence jurisdiction on the income earned in the other jurisdiction. In the case of dual residents, the Committee decided that the establishment of a clearing house (later the conjoint office) would be necessary and the clearing house would determine the liability to each country’s tax and collect the higher amount from the taxpayer after crediting any British and/or Irish tax imposed by deduction.56 The clearing house would remit the appropriate amounts to each country in accordance with the system of relief discussed above. The Committee also spent a considerable amount of time discussing the appropriate cases or schedules under which amounts would be assessed and initially decided that it would be simpler to introduce a new

54 Letter from Carey (IFS Revenue) to Slee (Inland Revenue) (UK National Archives, London, File IR 40/3427, 22 March 1926); Letter from Slee (Inland Revenue) to Carey (IFS Revenue) (UK National Archives, London, File IR 40/3427, 26 March 1926). 55 Minutes of the First Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State, above n 30; Minutes of the Third Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State, above n 33; Minutes of the Fourth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State, above n 50; Minutes of the Fifth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State, above n 40; Minutes of the Seventh Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State, above n 41; Minutes of the Ninth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State (UK National Archives, London, File IR 75/102, 10 June 1925); Minutes of the Twelfth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State (UK National Archives, London, File IR 75/102, 25 June 1925); Minutes of the Sixteenth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State (UK National Archives, London, File IR 75/102, 2 February 1926). 56 Minutes of the Sixth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State, above n 34.

The 1926 Double Income Tax Agreement  243 schedule for all Irish income instead of trying to fit the new scheme within existing rules.57 However, upon further consideration, it was decided that there was little to be gained by way of simplicity in introducing a new schedule.58 The brevity of the 1926 Agreement does not reflect the extent of the Committee’s discussions. The Committee also considered whether losses in one country could be offset against income in the other, and the treatment of income from a third country, but did not decide on these issues.59 In addition to partnerships and trusts, the Committee raised the treatment of charities, Free State friendly societies and government employees, but did not consider these in any detail.60 The Committee also considered the very specific case of a foreign assurance company that was not a resident of either jurisdiction.61 Double taxation would arise because the Irish Free State would tax the company on the proportion of its investment income applicable to proposals made to the company at its Free State branch or agency, and this proportion would also be charged to British tax if the Free State proposals were made through the London office of the company. The issue was raised by the Irish revenue officials, who suggested that such double taxation was anomalous and should be avoided under the residence proposal. However, the Committee thought that such cases would fall outside the scope of the Agreement as the company was not a resident of either jurisdiction. Finally, the Committee also considered whether the existing definitions of ‘resident’ in each country would continue to apply or whether a uniform definition of residence should be developed for the purposes of the double taxation relief scheme.62 It was recognised that the country with the wider definition of residency or a stricter administrative practice would benefit under the proposed system. The Committee considered the example of a French person who derived all their income from British shares and who never visited the UK, but spent one day in the Irish Free State. If the Irish Free State treated ‘one-day visitors’ as residents but the UK did not, the income from the investments would be wholly taxable in the Irish Free State. However, if the situation were reversed, the British 57 Minutes of the Tenth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State, above n 36. 58 Minutes of the Twelfth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State, above n 55. 59 Minutes of the Seventh Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State, above n 41. 60 Minutes of the Sixteenth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State, above n 55. 61 ibid. 62 Minutes of the Ninth Meeting of the Departmental Committee to Investigate and Report on the ‘Residence’ Method of Avoiding Double Taxation between the United Kingdom and the Irish Free State, above n 55.

244  Sunita Jogarajan Exchequer would not receive any benefit. The Committee also recognised the possibility that a taxpayer who the English authorities may view as a single resident may also be considered a resident by the Irish authorities, resulting in the tax revenue being shared, whereas in the reverse circumstance, the taxpayer would be a single resident of the Irish Free State.63 The committee considered four possible options with regard to the definition of residency for the purposes of the relief scheme. First, that the scheme should include a definition of residence which reflected existing law and practice, and should be drafted in such a way that it must be interpreted similarly by the courts and revenue authorities in both jurisdictions. This was thought to be the best option, if a suitable definition of residency could be drafted. Second, that each country should continue to adopt their own definition of residence but that for the purpose of relief, relief in the other country should be determined by some arbitrary rule which was accepted and applied in both countries. This option was not considered in any detail. Third, that the two countries should couple ‘ordinary residence’ with ‘residence’ and that if the taxpayer was a dual resident under each country’s rules, the taxpayer should be treated as a resident in the country of ‘ordinary residence’ only. This option was considered more complex and would result in taxpayers in similar circumstances being treated differently with regard to residency. Fourth, that residence for the purposes of the scheme would be determined in accordance with the law in force at the time the scheme came into operation. This was considered an acceptable solution as the two countries’ laws were the same at that time with regard to residence. It was recognised that administrative practices could differ, but the Committee thought that they were unlikely to alter significantly if the law were to remain the same. THE POLITICS OF CONCLUDING A TAX TREATY

After 16 meetings over a period of almost 10 months, the Committee finalised its Draft Report, which was sent to the Irish Free State revenue officials on 14 August 1925, with discussions between the revenue authorities taking place the following week.64 The Draft Report noted that exemption of the non-resident was one of the simplest approaches to the problem of double taxation, but nonetheless came with significant practical difficulties as both jurisdictions had highly developed systems of deduction at source.65 Unfortunately, there is no record of the

63 This was exactly the problem that was raised in 1932 specifically in relation to Lord Guinness (see below). 64 Letter from Slee (Inland Revenue) to Carey (IFS Revenue) (UK National Archives, London, File IR 40/3427, 14 August 1925); Letter from Carey (IFS Revenue) to Slee (Inland Revenue) (UK National Archive, London, File IR 40/3427, 27 August 1925). 65 Letter from Hopkins (Inland Revenue) to Financial Secretary to the Treasury (UK National Archives, London, File T 160/421, 28 July 1925).

The 1926 Double Income Tax Agreement  245 discussions between the revenue officials, but from the correspondence, the only substantive issue raised by the Irish Free State revenue officials was in relation to dual residents (discussed above). The correspondence was largely regarding the exact wording of the Agreement, the administrative aspects of the proposed scheme and the necessary consequential amendments to both countries’ laws.66 In addition to the correspondence regarding the Agreement, the revenue officials also corresponded about cross-border shareholdings and the discrepancies between the two revenue authorities’ figures (in particular, it was thought that more IFS residents held British shares than indicated by the IFS information).67 After much consideration, it was eventually determined that the residence basis would result in a net gain of between £100,000 and £175,000 for the Irish Free State and a net loss to the British revenue of between £275,000 and £350,000.68 Therefore, it was seemingly not in the British interest to conclude the new agreement. However, the Irish Free State had made a claim in respect of land purchase annuities and local loans funds payments which was valued at approximately £200,000. It was thought that the financial burden on the British Treasury from the conclusion of the new agreement could be reduced if the Irish Free State would agree to abandon its claims in exchange for the conclusion of the residence basis agreement. The British Government was prepared to make some financial sacrifices in light of the political advantages of addressing double income taxation between the two jurisdictions. The Board of Inland Revenue was also in favour of the residence basis, even at a cost, due to administrative convenience. The separate discussions regarding the Irish Free State’s claims were not progressing and coupling the settlement of the claims with the agreement on double taxation was viewed as a potential solution by both sides.69

66 Letter from Niemeyer (Controller of Finance) to Hopkins (Inland Revenue) (UK National Archives, London, File IR 40/3427, 18 February 1926); Letter from Carey to Slee (UK National Archives, London, File IR 40/3427, 22 March 1926); Letter from Slee to Carey (UK National Archives, London, File IR 40/3427, 24 March 1926); Letter from Slee to Carey (UK National Archives, London, File IR 40/3427, 26 March 1926); Letter from Carey to Slee (UK National Archives, London, File IR 40/3427, 29 March 1926); Letter from Slee to Carey (UK National Archives, London, File IR 40/3427, 30 March 1926); Letter from Slee to Carey (UK National Archives, London, File IR 40/3427, 31 March 1926); Letter from Slee to Carey (UK National Archives, London, File IR 40/3427, 12 April 1926); Letter from Carey to Slee (UK National Archives, London, File IR 40/3427, 21 April 1926). Slee was with the UK Board of Inland Revenue and Carey the Irish Free State Revenue. 67 Letter from Slee to Carey (UK National Archives, London, File IR 40/3427, 25 September 1925); Letter from Carey to Slee (UK National Archives, London, File IR 40/3427, 28 September 1925); Letter from Slee to Carey (UK National Archives, London, File IR 40/3427, 2 October 1925); Letter from Carey to Slee (UK National Archives, London, File IR 40/3427, 11 December 1925). The discrepancy was thought to be largely attributable to shareholders in Guinness, which had listed on the London Stock Exchange in 1886. 68 Letter from Waterfield to Upcott (UK National Archives, London, File IR 40/3427, 22 December 1925). 69 Letter from Earnán de Blaghd (Ernest Blythe, IFS Minister for Finance) to Churchill (Chancellor of the Exchequer) (UK National Archives, London, File IR 40/3427, 14 January 1926); Letter from Churchill to Blythe (UK National Archives, London, File IR 40/3427, 16 February 1926).

246  Sunita Jogarajan Meanwhile, pressure to address the problem of double taxation was continuing. Lord Middleton contacted Churchill (Chancellor of the Exchequer) again to query the progress on the issue as it was already a year since he had raised the matter.70 Just over two weeks later, the Minister of Finance for Northern Ireland queried the progress of the agreement as he had been approached by various important bodies in Belfast regarding the problem of double taxation.71 With the conclusion of the new agreement appearing imminent, the Scotland office of the Board of Inland Revenue was also consulted regarding the proposal.72 It noted general concerns regarding the introduction of a special scheme for the Irish Free State and the possibility that other Dominions would request a similar agreement. It also disliked the different treatment of single residents and dual residents. However, it acknowledged that it was perhaps not its place to comment on the principles of the scheme and that it was being consulted on the practicalities. It was thought that the accounting aspects and administrative details of the arrangement would create difficulties and additional work for the Scottish Inland Revenue and it was suggested that revenue officials from Scotland would go to London to discuss these matters. This suggestion was agreed to and it was noted that one of the effects of the proposed scheme was that it would credit Scotland with at least some of the tax that it contributes.73 The Ultimate Financial Settlement was concluded in London on 19 March 1926.74 The Settlement addressed the outstanding claims under the Irish Land Acts, 1891–1909 and the Local Loans Fund annuity payments. Article 4 of the Settlement provided that: It is agreed between the two governments that the question of double income tax shall be settled generally on the residence basis as elaborated in the scheme which has already been provisionally agreed between the Revenue Departments of the two Governments. The two Governments agree to promote any legislation necessary for this purpose to take effect from the beginning of the financial year 1926–27.

70 Letter from Middleton to Chancellor of the Exchequer (UK National Archives, London, File T 160/421, 1 March 1926). 71 Letter from Private Secretary to Mr Pollock, Minister of Finance for Northern Ireland to Board of Inland Revenue (UK National Archives, London, File T 160/421, 19 March 1926). 72 Letter from Stewart (Scotland Inland Revenue) to Slee (Inland Revenue) (UK National Archives, London, File IR 40/3427, 16 March 1926). The Scottish branch of the Inland Revenue was responsible for the assessment and collection of income tax, stamp duties and death duties arising in Scotland. The Board of Inland Revenue’s representative in Scotland was the Comptroller of Stamps and Taxes. See A Johnston, The Inland Revenue (London, Allen & Unwin, 1965) 28–29. 73 Letter from Slee (Inland Revenue) to Stewart (Scotland Inland Revenue) (UK National Archives, London, File IR 40/3427, 26 March 1926). 74 Heads of the Ultimate Financial Settlement between the British Government and the Government of the Irish Free State, London, 19 March 1926. For further information on the Ultimate Financial Settlement and the related negotiations and financial arrangements, see J Fitzgerald and S Kenny, ‘“Till Debt Do Us Part”: Financial Implications of the Divorce of the Irish Free State from the United Kingdom, 1922–1926’ (2020) 24(4) European Review of Economic History 818; D Gahan, ‘The Land Annuities Agitation in Ireland 1926–32’ (PhD thesis, National University of Ireland Maynooth 2017) http://mural.maynoothuniversity.ie/12109/1/David%20Gahan-PhD-2017.pdf.

The 1926 Double Income Tax Agreement  247 The draft agreement was presented to Churchill (Chancellor of Exchequer) on 1 April 1926 on the basis that, if Churchill approved of the draft, the agreement would be formally communicated to Ernest Blythe (Minister for Finance) for his signature.75 However, even before Churchill could agree to the draft agreement, Blythe signed the draft agreement and sent a copy to the British Government.76 The 1926 Agreement was formally concluded on 14 April 1926. THE 1928 AMENDMENT

The 1926 Agreement was amended by the conclusion of a further agreement in 1928.77 The immediate necessity for the 1928 amendment was the abolishment of the ‘super-tax’ and the introduction of the ‘surtax’ in 1927. This was addressed in Article 1 of the 1928 Agreement. It was originally intended that the 1928 amendment would be brief and simple, and deal with this issue only.78 However, the two parties also took the opportunity to address the double taxation relief of dual residents at this time and Article 2 of the 1928 Agreement replaced Article 2 of the 1926 Agreement. The main provisions regarding the relief remained the same (ie one-half of the appropriate rate of tax, whichever is the lower) and the amendments related to the calculation of the appropriate rate. The amendment was necessary to address the special problem of giving relief to dual residents for surtax due to both countries for a year of dual residence but payable after the taxpayer had ceased to be a dual resident.79 It was decided that relief would be given by reference to the income tax and surtax payable in the same year, although they may be paid in different years (eg relief would be given partly against income tax payable in year 1 and against the surtax payable for year 1 in year 2). THE TUMULT OF 1932

The 1926 Agreement came under threat for two reasons in 1932. The first threat arose in relation to the treatment of dual residents.80 Under the Agreement, dual 75 Letter from Hopkins (Inland Revenue) to Chancellor of the Exchequer (UK National Archives, London, File T 160/421, 1 April 1926). 76 Letter from Carey (IFS Revenue) to Slee (Inland Revenue) (UK National Archives, London, File IR 40/3427, 7 April 1926). 77 Agreement Made the 25th Day of April, 1928, between the British Government and the Government of the Irish Free State, Amending the Agreement Made on the Fourteenth Day of April, 1926, between the Said Governments in Respect of Double Income Tax, reproduced in League of Nations, Double Taxation and Fiscal Evasion, above n 1, 58. 78 Note by the Board of Inland Revenue to the Chancellor of the Exchequer (UK National Archives, London, File IR 40/3446, 11 April 1928). 79 Note by the Board of Inland Revenue to the Chancellor of the Exchequer (UK National Archives, London, File IR 40/3446, 24 April 1928). 80 Letter from Grigg (Chairman of the Board of Inland Revenue) to Chamberlain (Chancellor of the Exchequer) (UK National Archives, London, File T 160/421, 28 January 1932).

248  Sunita Jogarajan residents were effectively required to pay tax at the higher of the two countries’ rates and the relief was shared between the two countries. However, the determination of residence was at the hands of the revenue authorities, with appeals generally to the Special Commissioners but with limited appeals to the courts. Further, the right to appeal lay with the taxpayer and not the two Exchequers. As a general rule, taxpayers were not incentivised to appeal as their problem of double taxation was addressed by the Agreement and they would incur significant costs if they were to appeal the decision. Therefore, the Exchequer was left without recourse to appeal the determination of residency by the other jurisdiction. Although it was expected that such situations would occur on both sides and thus balance out the problem, it was thought that the problem was mainly one-sided, to the detriment of the British Exchequer. First, the British revenue authorities were concerned that the Irish revenue authorities were potentially overreaching in treating certain (ie wealthy) taxpayers as residents of Ireland.81 Second, as the relief from double taxation provided under the Agreement resulted in taxpayers who were dual residents effectively paying tax at the higher rate on amounts that were subject to tax in both countries, Irish residents who disputed the British revenue authority’s claim of residency were incentivised to appeal the decision as the British tax rate was higher than the Irish, whereas British residents were not so incentivised and were satisfied with the relief provided by the Agreement. The problem of dual residents was considered so great that the British revenue authorities initially even contemplated ending the treaty by unilateral action (and warned the Irish Free State of the potential for such action), but this was not the preferred option as it would cause significant hardship and inconvenience to affected taxpayers.82 The matter was left unresolved as it was determined that the unilateral repudiation of the Agreement was not practical as the Agreement was expressly covered by the Ultimate Financial

81 The particular case which was the subject of concern in 1932 related to Edward Guinness, the first Earl of Iveagh, who died in 1927. The Irish revenue authorities had determined that Lord Iveagh was domiciled in the Irish Free State and this position was upheld by the Special Commissioners on appeal. However, three judges of the High Court of the Irish Free State unanimously held that Lord Iveagh was not domiciled in the Irish Free State. The case was appealed to the Supreme Court of the Irish Free State, which remitted the matter back to the Special Commissioners on the basis that it was a question of fact. The Special Commissioners again concluded that Lord Iveagh was domiciled in the Irish Free State, notwithstanding the decision of the High Court. Although the question of domicile was relevant to death duties, it was thought that the question of residence in relation to income tax was also an issue. In the case of Lord Iveagh, the British Exchequer was required to pay approximately £200,000 to the Irish Exchequer in relation to income tax. Political considerations were also in play in this case as the Irish revenue authorities could simply seek payment from Lord Iveagh’s estate, which would then seek relief from the British Exchequer, but the British revenue authorities were keen to avoid this inconvenience for the estate and preferred to pay the amount directly to the Irish Exchequer, although they disputed the Irish Free State’s entitlement to the amount. 82 Note Regarding Double Income Tax Arrangements between the United Kingdom and the Irish Free State (UK National Archives, London, File T 160/421, 24 March 1932).

The 1926 Double Income Tax Agreement  249 Settlement of 1926 (discussed above). As such, there were concerns that repudiation of the Agreement would potentially also result in a repudiation of the Ultimate Financial Settlement.83 The second threat to the 1926 Agreement came about following the 1932 general election. It was a significant election as it resulted in the first change of government in the Irish Free State. Fianna Fáil,84 led by Éamon de Valera, swept to power in the general election. One of de Valera’s election promises was that he would stop the payments of the land annuities,85 which he did following the election. This amounted to a sum of approximately £3 million being withheld by the Irish Free State from the British Exchequer.86 As such, there was the view in Great Britain that the actions of the Irish Free State, in withholding the land annuities payments, potentially amounted to a unilateral repudiation of the Ultimate Finance Settlement and, with it, the 1926 Agreement.87 However, the termination of the 1926 Agreement at this time was not the preferred option for the British.88 This was because termination of the Agreement would result in an increase in revenue of approximately £2 million per year for the British revenue, but it would also result in an increase of approximately £1.4 million per year for the Irish revenue (less any relief the Irish Government chose to provide its residents). Further, it was thought that the taxpayers who would be most affected by the termination of the 1926 Agreement would be Irish residents who were also resident in the UK and earned income from investments in the UK, ie ‘loyalists’ who supported Cosgrove and were ‘violently opposed’ to de Valera.89 Therefore, the decision was made to recoup the money owed by the Irish Free State through the imposition of selected tariffs on specific commodities, rather than through the termination of the 1926 Agreement.90

83 Letter from Stephenson (Dominion Office) to Britain (Treasury) enclosing Note on the Position in regard to the Possible Termination of the Double Income Tax Agreements with the Irish Free State (UK National Archives, London, File T 160/421, 30 May 1932). 84 Fianna Fáil was the Irish republican party founded in May 1926 by Éamon de Valera. 85 The land annuities were the payments for the loans previously made by the British government to Irish tenant farmers to assist them to buy their land, and which the farmers had agreed to repay. Under the Anglo-Irish treaty, the Free State government would collect these debts and return the money to Great Britain. 86 Memorandum by the Irish Situation Committee (UK National Archives, London, File T 160/421, 23 June 1932). The memorandum estimates the amount withheld at £3 million, but later accounts generally quote an amount of £5 million: see, eg references below at n 90. 87 Letter from Slee (Inland Revenue) to Britain (Treasury) (UK National Archives, London, File T 160/421, 2 June 1932); Letter from Britain (Treasury) to Slee (Inland Revenue (UK National Archives, London, File T 160/421, 20 June 1932). 88 Memorandum by the Irish Situation Committee (above n 86). 89 Cosgrove was the first President of the Executive Council of the Irish Free State from 1922 to 1932, when he lost the general election to de Valera. 90 This was the start of the Anglo-Irish trade or economic war of the 1930s. See further K O’Rourke, ‘Burn Everything British but Their Coal: The Anglo-Irish Economic War of the 1930s’ (1991) 51 Journal of Economic History 357; J Neary and C Ó Gráda, ‘Protection, Economic War and Structural Change: The 1930s in Ireland’ (1991) 27 Irish Historical Studies 250.

250  Sunita Jogarajan CONCLUSION

The 1926 Agreement survived for half a century until it was replaced in 1976.91 The new treaty was based on the OECD Model. Although the 1926 Agreement was seemingly reasonably straightforward in its operation through the exemption of non-residents, this chapter demonstrates that the Agreement was only concluded after extensive consideration, with the prospect of double nontaxation always at the forefront. There were many issues left unresolved, and the relief for dual residents was particularly complex. It is unlikely that such an agreement would have been concluded if not for the political considerations and close economic ties between the two countries. It is often thought that the British revenue officials were keen to conclude residence-based agreements with other countries, but were unsuccessful in persuading other countries to do so.92 However, it is not clear that that was indeed the case. Despite the significant costs to the British revenue, the Board of Inland Revenue recommended the conclusion of the 1926 Agreement on the basis that the existing system had proved unworkable and due to the large number of affected taxpayers.93 However, when asked whether residence-based agreements should be pursued with other countries, the Board noted that this would depend on the extent the countries were creditor countries or otherwise. Further, the Board noted that the 1926 Agreement was replacing an existing arrangement which had proved impracticable. No such arrangement existed outside the British Empire (suggesting that there was not a pressing need to conclude similar agreements with other countries). Despite the administrative simplicity, the 1926 Agreement has been criticised for the lack of apportionment and undue favouritism of creditor countries.94 Further, the desire to avoid double non-taxation by ensuring that any amounts not taxed in the source country are taxed in the other country potentially limits the benefits of any source-country tax incentives to attract capital investment. The impact of the 1923 Economists’ Report has often been debated in the academic literature.95 This chapter demonstrates that the Report was the 91 Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains (signed 2 June 1976, entered into force 23 December 1976), [1977] UKTS 42 (Cmd 6815, 1976). There were two further amendments to the 1926 Agreement on 4 April 1959 and 23 June 1960, but these did not affect the principles of the 1926 Agreement: J Avery Jones, ‘The History of the United Kingdom’s First Comprehensive Double Taxation Agreement’ [2007] British Tax Review 211, 218. See also M Walsh and JDB Oliver, ‘What’s in a Name?’ [2003] British Tax Review 493, 501–02. 92 R Willis, ‘Great Britain’s Part in the Development of Double Taxation Relief’ [1965] British Tax Review 270, 277; J Avery Jones, ‘The Definition of Company Residence in Early UK Tax Treaties’ [2008] British Tax Review 556, 558. 93 Note by the Board of Inland Revenue (UK National Archives, London, File IR 40/3427, 12 January 1926). 94 KC Wang, ‘International Double Taxation of Income: Relief through International Agreement 1921–1945’ (1945) 59 Harvard Law Review 73, 105–06. 95 HJ Ault, ‘Corporate Tax Integration, Tax Treaties and the Division of the International Tax Base: Principles and Practice’ (1992) 47 Tax Law Review 565, 567; R Avi-Yonah, ‘The Structure of

The 1926 Double Income Tax Agreement  251 key basis upon which the 1926 Agreement was negotiated. Although residencetaxation was always the British preference, the recommendation in the 1923 Report that ‘method 2 [exemption of the non-resident] 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’96 made it politically possible for such an agreement to be pursued. In fact, the formal proposal for the new residence-based agreement was made by the Irish Free State Minister of Finance by citing the 1923 Report. The 1923 Report notes that the exemption of the nonresident was likely to only be suitable in the cases of ‘neighbouring countries with like ideas’,97 which was the case here. It is hoped that the detailed examination of the conclusion of the 1926 Agreement in this chapter provides useful insights into the development of a tax treaty and the political considerations involved, despite the uniqueness of the Agreement and the exceptional nature of the relationship between the two jurisdictions.

International Taxation: A Proposal for Simplification’ (1996) 74 Texas Law Review 1301, 1305–10; M Graetz and M O’Hear, ‘The “Original Intent” of US International Taxation’ (1997) 46 Duke Law Journal 1021, 1078. 96 Bruins et al, above n 31, 51. 97 ibid 48.

252

10 Much Ado about Non-discrimination in Negotiating and Drafting of the 1982 Australia–US Taxation Treaty C JOHN TAYLOR

ABSTRACT

I

n 1968, Australia requested the USA to revise the 1953 Australia–US Taxation Treaty. Although negotiations commenced on 30 November 1970, a new bilateral tax treaty between Australia and the USA was not signed until 6 August 1982. In the interim, major political crises in Australia (the dismissal of the Whitlam government) and in the USA (the resignation of Richard Nixon following the Watergate scandal) and changes of government in Australia and of administrations in the USA disrupted the negotiations. In the case of the USA, changes in administrations significantly affected the composition of delegations and the model treaty used in negotiations. Throughout the negotiations, one issue dominated. This was Australia’s long-standing refusal to agree to the inclusion of a non-discrimination article and the USA’s insistence on its inclusion. The solution ultimately arrived at, to include a non-discrimination article but to not give it the force of law in Australia, was unique among Australian tax treaties. Until the 2003 Australia–UK Tax Treaty, the 1982 Australia–US Taxation Treaty remained the only Australian tax treaty that contained a non-discrimination article. While Australia has subsequently agreed to the inclusion of a non-discrimination article in several of its tax treaties, the article in the 1982 Australia–US Taxation Treaty contains several departures from Australian and US tax treaty practice and, uniquely among articles in Australian tax treaties, has never been given the force of domestic law in Australia. Using archival sources from the National Archives of Australia, this chapter examines the progress of the negotiation and drafting of the treaty against the background of the reasons for Australia’s long-standing opposition to nondiscrimination articles in tax treaties.

254  C John Taylor INTRODUCTION

The negotiation and drafting of the 1982 Australia–US Taxation Treaty lasted for nearly 12 years. During that period, Australia had four Prime Ministers,1 and there were four changes of administration in the USA.2 Although the leadership of the Australian negotiating delegation remained relatively stable,3 each change in US administration brought with it changes in the leadership of the negotiating team and, sometimes, changes in the US Model Tax Treaty. These changes complicated and delayed the negotiation, drafting and final execution of the treaty. While the final treaty produced as a result of the negotiations contained departures from the prior tax treaty practice of both the USA and Australia, the principal focus of this chapter is on the non-discrimination article which dominated negotiations throughout the entire period and delayed the countries’ entry into the treaty.4 This article still has never been given the force of law in Australia.5 In August 1968, the Australian Cabinet authorised officials to request the USA to amend the 1953 Australia–US Taxation Treaty.6 Australia’s concern was to ensure that Australian tax applied to petroleum exploration activities on the Australian continental shelf by US residents. The USA responded that it was willing to discuss the Australian proposal, but considered that this should be done as part of a general review of the 1953 Treaty. Correspondence followed, with the USA sending a draft treaty and specific proposals to Australian officials7 which the Australian Assistant Commissioner (Policy) analysed along with recent US tax treaties. On non-discrimination, the analysis merely noted that the USA would ‘press strongly for such a clause as providing certainty for US enterprises’, commenting

1 Gorton, 10 January 1968–10 March 1971; McMahon, 10 March 1971–5 December 1972; Whitlam, 5 December 1972–11 November 1975; and Fraser, 11 November 1975–11 March 1983. 2 Nixon, 20 January 1969–9 August 1974; Ford, 9 August 1974–20 January 1977; Carter, 20 January 1977–20 January 1981; and Regan, 20 January 1981–20 January 1989. 3 The initial leader of the delegations was Second Commissioner of Taxation, WJ O’Reilly. When O’Reilly became Commissioner of Taxation, Trevor Boucher, his successor as Second Commissioner, and Max Riethmuller, Boucher’s successor as First Assistant Commissioner, took over leadership of the delegations. Boucher and Riethmuller had been members of most previous Australian delegations. 4 This chapter is based on research conducted at the National Archives of Australia (NAA) and at the United States National Archives and Records Administration (USNARA). The principal records referred to have been the 19 Australian Taxation Office files with the NAA reference, ‘Double Taxation Agreement, Australia and USA, Review of Agreement’, Series A7873, Control Symbol J 245/21/14, Parts 1–19. The relevant ATO files are referred to as ‘ATO file Pt 1 to 19’ (as the case may be). Only limited information was found at the USNARA and as this information, in general, related to organisational matters rather than drafting and policy matters, references to it have not been included. 5 See s 5(2) of the Income Tax (International Agreements) Act (Cth) 1953. 6 Cabinet decision 14 August 1968; ATO file Pt 18. 7 The diplomatic note itself is undated, but accompanying correspondence indicates that the note was dated 11 June 1969; ATO file Pt 1.

Much Ado about Non-discrimination  255 that Australia had rejected non-discrimination articles in the past as Australia might want to ‘enact tax provisions which operate differently in relation to nonresidents as a matter of government policy’.8 The non-discrimination article in the US draft (1969 draft) differed from both the May 1977 US Model Tax Convention (1977 US Model) and the 1963 OECD Draft Model Tax Convention in several respects. The most significant differences from the 1977 US Model were that the 1969 draft did not contain equivalents to paragraphs 4 and 6 of the 1977 US Model. Other differences will be examined in the context of particular rounds of negotiations. On 5 January 1970, the Australian Treasurer (Leslie Bury) presented a Cabinet Submission noting that both Australian and US law had changed since the 1953 Tax Treaty, that Australia had joined the OECD and that there were differences between the 1953 Treaty, the OECD Model and subsequent Australian tax treaties.9 The submission pointed to particular concerns relating to the then recent amendment to the definition of ‘royalty’ and the insertion of a statutory source rule for royalties in the Income Tax Assessment Act 1936.10 The submission recommended, and the Cabinet agreed, that Australia accede to the US request to renegotiate the 1953 Treaty and anticipated that negotiations could commence in Canberra later that year and would be likely to be protracted.11 THE FIRST ROUND OF NEGOTIATIONS

The USA and Australia exchanged draft treaties between 22 October 1970 and 17 November 1970.12 Australian officials did not draw particular attention to the inclusion of a non-discrimination article in the US draft treaty. Australia had successfully resisted requests for the inclusion of a non-discrimination article in the 1967 Australia–UK Tax Treaty and in the 1969 Australia–Japan Tax Treaty by agreeing to other concessions sought by the treaty partner.13 It may be 8 ‘Assistant Commissioner (Policy), Revision of United States Agreement’, 27 August 1969; ATO file Pt 1. 9 Leslie Bury, Cabinet Submission No 65, ‘Double Taxation Negotiations’, 5 January 1970, 6–8; ATO file Pt 1. 10 ibid 16, 18. 11 ibid 10. 12 H Marshall (Acting Assistant Secretary), Department of External Affairs to The Secretary, Department of the Treasury and to The Commissioner of Taxation, 22 October 1970, and T Boucher, First Assistant Commissioner to The Secretary, Department of the Treasury, 17 November 1970; ATO file Pt 2. 13 On the 1967 United Kingdom–Australia Tax Treaty, see CJ Taylor, ‘The Negotiation and Drafting of the 1967 United Kingdom–Australia Double Taxation Treaty’ in J Tiley (ed), Studies in the History of Tax Law, vol 5 (Oxford, Hart Publishing, 2012) 427–502, particularly 483–87. This aspect of the 1969 Australia–Japan Tax Treaty is noted in ET Cain, Commissioner of Taxation to The Commonwealth Treasurer, 23 February 1968 in NAA, ‘Double Tax – Australia–Japan Tokyo Papers and Agreement Negotiation Records’, Series Number A7073/6, Control Symbol J245/65 Part 2.

256  C John Taylor that, given these recent experiences, Australian officials considered that the USA would agree to omit the non-discrimination article if Australia offered some matching concessions. The first round of negotiations began in Canberra on 1 December 1970 and concluded on 10 December 1970. Although John S Nolan (Deputy Assistant Secretary, Tax Policy) was a member of the US delegation, Robert T Cole (Deputy Tax Legislative Counsel, International) took the leading US role. The Australian delegation14 was led by WJ O’Reilly (Second Commissioner of Taxation) and included senior officials from the Australian Taxation Office, the Department of the Treasury, the Attorney General’s Department, the Department of Foreign Affairs and an observer from the Department of Trade and Industry. Cole made it clear that the USA wanted a new treaty as the existing treaty was 17 years old and that ‘times have changed’. Cole noted significant differences between the two drafts and hoped to get Australia an appropriate share of revenue and to go further on exchange of information under a new treaty.15 Somewhat disingenuously, given the Australian cabinet decision discussed above, O’Reilly responded, saying that, apart from the Continental Shelf, ‘Australia would not be unduly worried if the treaty remained unchanged’.16 Following a discussion on the possible omission of the extension of the treaty to territories, O’Reilly stated: ‘Having agreed to leave this out, perhaps we could also leave non-discrimination out.’17 Cole replied that the USA regarded it as a matter of principle and that a non-discrimination article was in all recent US tax treaties. Cole thought the article was limited in scope to three specific cases in the treaty and that the USA had been ‘willing to make appropriate rulings in specific cases’, adding that it was ‘One matter where we are on the side of angels’.18 O’Reilly stated that none of Australia’s agreements had a non-discrimination article and he had been instructed to not have one with the USA.19 Cole asked for an enumeration ‘of the sort of things you might do in the next couple of years’.20 Cole appeared to be attempting to reassure O’Reilly that the USA would not be unduly concerned with existing discriminatory practices in Australian tax law. O’Reilly referred to an intercorporate dividend rebate not being available to a US company’s permanent establishment with effectively connected dividends and that a US company’s permanent establishment would not receive a deduction for capital subscriptions to a mining company.21 Cole asked if an Australian subsidiary of a US company would get the benefits. After confirming that this was correct, O’Reilly indicated that a branch profits tax could be

14 Details

of the US and Australian delegations are contained in a document in ATO file Pt 3. notes of negotiations, 1 December 1970; ATO file Pt 4.

15 Untitled 16 ibid

1. 6. 18 ibid 6–7. 19 ibid 7. 20 ibid. 21 ibid. 17 ibid

Much Ado about Non-discrimination  257 contemplated,22 to which Cole replied that the USA had allowed other countries to have a branch tax at a reasonable rate.23 O’Reilly then shifted to the general proposition that ‘our Government does not wish its future activities to be limited in this way by such an article’.24 Cole then said ‘You would wish to reserve the right to tax non-residents differently’,25 to which O’Reilly replied ‘Our government would never agree to it’.26 At this point the discussions virtually broke down, with Cole saying that having a treaty without a non-discrimination article was a policy issue and that he would have to get instructions from the highest level, that he had no authority to enter into a treaty without one and that he could not recommend such a treaty.27 At the end of this round of negotiations, both delegations indicated that they would continue to develop separate drafts. The only actual agreement was on the order of presentation of articles, where the USA agreed to follow Australia’s preferred order.28 The discussion draft resulting from the first round of negotiations had a heading titled ‘Non-discrimination’, followed by the comment: ‘Both parties understand each other’s approach to be determined as to whether this Article will be included.’29 The Australian delegation was aware, but unable to disclose to the US delegation, that the Australian government would be introducing legislation to vary the Australian tax treatment of interest paid to non-residents. Once the changes were publicly announced, O’Reilly sent Cole a copy of the Prime Minister’s press release, commenting, ‘It is something which … was very much in my mind when outlining Australia’s position on a non-discrimination clause.’30 The proposed changes,31 inter alia, introduced an exemption from interest withholding tax (IWT) on interest paid by an Australian owned and controlled borrower on monies borrowed overseas for use in an enterprise with substantially preponderant Australian ownership and control, or in an enterprise with substantial Australian participation where the borrowing was to support the Australian participation.32 By contrast, where an Australian company was 22 ibid. 23 ibid 8. 24 ibid. 25 ibid. 26 ibid. 27 ibid. 28 ibid. 29 The draft is in ATO file Pt 3. 30 O’Reilly to Cole, 14 December 1970; ATO file Pt 3. 31 The proposed amendments were contained in Income Tax Assessment Bill (No 2) 1971 as part of a coordinated package of three bills introduced on the same day. The combined operation of the bills was explained in a joint Explanatory Memorandum. WJ O’Reilly sent copies of the bills, the Treasurer’s second reading speech and the Explanatory Memorandum to Robert Cole on 28 April 1971; ATO file Pt 3. 32 The relevant clause became Income Tax Assessment Act 1936, s 128G, which was amended several times before it was repealed in 2006. For a brief history of the amendments to s 128G, see CCH Australia Limited, Australian Federal Tax Reporter (ITAA 1936 & others) (North Ryde NSW, CCH Australia, 2013) [69-375].

258  C John Taylor foreign owned, interest paid to a non-resident was only exempt from withholding tax where it was payable on widely issued bearer debentures for use in or in connection with a business carried on in Australia by a resident of Australia.33 The USA regarded the proposed changes to the tax treatment of interest paid to non-residents as discriminatory. The issue escalated to the ministerial level, with letters being exchanged between the Australian Treasurer, Billy Snedden, and the US Treasury Secretary, John Connally. THE SECOND ROUND OF NEGOTIATIONS – JUNE 1971

The second round of negotiations began in Washington on 7 June 1971 and continued until 18 June 1971. A draft treaty was initialled at the end of this round of negotiations.34 Nolan opened the general discussions on 7 June 1971 by saying that he hoped they would reach agreement on all articles except non-discrimination an issue which the USA regarded as ‘very serious’ as set out in Connally’s letter to Snedden.35 McBurney, representing the Australian Treasury, reported that the Americans were then reminded of their undertaking to have full and frank discussions to enable delegations to have points on non-discrimination to put to ministers and political secretaries.36 O’Reilly stated that, while non-discrimination had not been fully discussed in the talks in Canberra, the Australian policy was obvious and that, while the delegation would fully discuss the implications, it had been made clear that they could not enter into any commitment.37 O’Reilly and Cole dominated the negotiations on non-discrimination. Cole stated that the USA viewed discrimination as something which could not be tolerated between countries with close economic relationships but that the USA would ‘work with’ items discriminatory in form but accepted by international practice. A non-discrimination article was in all US tax treaties and the Treasury would have great difficulty in entering into a treaty without one, and that the US Senate would have a similar view.38 O’Reilly responded that Snedden, in writing to Connally, had agreed to a full discussion of non-discrimination and probing into its philosophy and necessity.39

33 The relevant clause in the Bill became Income Tax Assessment Act 1936, s 128F. This section has been amended several times since its initial enactment. For a brief history of the amendments to s 128F, see ibid [69-345]. 34 The draft treaty dated 18 June 1971 is contained in ATO file Pt 7. 35 ‘Non-Discrimination Clause, Discussions with US Officials’, June 1971, 1; ATO file Pt 5. 36 SS McBurney, Assistant Secretary, Department of the Treasury, to FC Pryor, Head of General Financial and Economic Policy Division, Department of the Treasury, no date, 6; ATO file Pt 7. 37 ‘Non-Discrimination Clause’, above n 35. 38 ibid. 39 ibid 2.

Much Ado about Non-discrimination  259 O’Reilly pointed out that Australia had modern tax treaties that did not contain a non-discrimination article under a policy developed by the Australian Treasury in the 1960s and unchanged since. O’Reilly appreciated the offer to talk around what constituted discrimination, fringe matters such as section 46 of the Income Tax Assessment Act 1936 (intercorporate tax rebate) and branch profits tax, and to develop a minimum non-discrimination article. O’Reilly pointed out that the decision-makers were politicians aware of discrimination being ‘adopted in other fields’ and would want to know why ‘purity’ was expected in the tax field but not in others.40 Cole responded that ‘we are tax people’, and that the US delegation did not represent all the interdependent economic relationships. Cole then argued that, in principle, there should not be discrimination in any economic field, that tax was a ‘good place to start’ as there was already an established non-discrimination principle and that ‘we should move on in other areas, not retreat from tax’.41 The discussion then focused on Australia’s interest in withholding tax provisions and Cole commented that he was not certain they were discriminatory but that if the USA were negotiating a tax treaty with another country he would broaden it to include such a case.42 O’Reilly pointed out that IWT legally fell on the lender.43 Cole replied that this was why the USA considered that IWT might not contravene the draft article.44 O’Reilly asked whether the USA’s interest equalisation tax (IET)45 did not discriminate against Australian borrowers in the US market. Cole stated that the legal liability for IET was on the lender while admitting it was typically passed on to the borrower. Cole suggested that there was ‘some rough reciprocity’ between the Australian IWT and the US IET.46 McBurney argued that the non-discrimination article was expressed ‘in a way beyond its basic objective’, pointing to branch profits taxes as contravening the letter of the article but being accepted tax practice, with the Australian IWT and the US IET being technical breaches that were permitted. McBurney pointed out that tax policy could get mixed with broader economic policy and that Australia was reluctant to sign away its right to use tax measures to respond to broader economic problems. McBurney noted that tax systems can change from time to time in ways that are hard to foresee. A non-discrimination article 40 ibid. 41 ibid. 42 ibid 3. 43 ibid. 44 ibid. 45 US interest equalization tax was introduced in 1964 and added ss 4911–20 and 4931 of the US Internal Revenue Code of 1954. Subject to exceptions, the tax was imposed on acquisitions by US persons of stock of a foreign issuer or of a debt obligation of a foreign obligor made after 18 July 1963. The tax is discussed in RA Butterworth, ‘The United States Interest Equalization Tax’ (1970) 2 Lawyer of the Americas 164; RL Maines, ‘The Interest Equalization Tax’ (1965) 17 Stanford Law Review 710. 46 ‘Non-Discrimination Clause’, above n 35, 3.

260  C John Taylor could mean giving away power to act as Australia thought necessary in the future.47 McBurney pointed to non-tax restrictions that Australia imposed and asked if these were discriminatory, then asked if Australia seeking to achieve the same result by tax provisions would be discrimination.48 O’Reilly produced a list of non-tax areas where Australia considered that the USA discriminated. These included49 interest equalization tax and the Domestic International Sales Corporation (DISC).50 Nolan commented that many of these items were matters of administrative convenience easily accommodated by the USA and that there was no conceptual difficulty with them.51 Cole conceded that perhaps a non-discrimination article was not needed between Australia and the USA as neither was likely to act badly against foreign investment, but not having one would ‘set a bad tone’. The risk involved in a non-discrimination article seemed appropriate and the USA would also be limiting its sovereignty, and the treaty could be terminated if it proved ‘excessively burdensome’.52 O’Reilly asked what relationship Cole saw between Australia’s IWT and the USA’s IET.53 Cole considered it appropriate for Australia to apply IWT where the US IET did not apply, but noted that Australia applied IWT in some cases where IET did apply.54 O’Reilly asked if the USA would give IET away because of the non-discrimination article either now or in the future.55 Cole replied that the treaty had precedence and that the USA would not collect the tax. In Cole’s view, the question was whether the USA could ‘live with the result’ and whether the draft achieved that result.56 O’Reilly asked if, given there was a rough approximation between the IET and the IWT, the past could be forgotten and only the future covered.57 It is unclear whether O’Reilly meant by this comment that both the IET and IWT could be excluded from the operation of the nondiscrimination article. Nor is Cole’s interpretation of O’Reilly’s comment

47 ibid 4. 48 ibid. 49 On 18 August 1971 O’Reilly confirmed the list in writing. O’Reilly to Cole, 18 August 1971; ATO file Pt 7. 50 ‘Non-Discrimination Clause’, above n 35, 4–5. The United States Domestic International Sales Corporation (DISC) provisions, ss 991–97 of the Internal Revenue Code of 1954, had been introduced in 1971. The DISC in the early to mid-1970s is discussed in DM Rosignoli, ‘Tax Planning for Export Operations Using the DISC’ (1975) 7 Lawyer of the Americas 556; MR Hyde and ME Murphy, ‘The Domestic Sales Corporation in Perspective and Operation’ (1972) 28 Business Lawyer 43. When the GATT Council concluded that the DISC was, in effect, an export subsidy, it was phased out and replaced with the Foreign Sales Corporation provisions of the Tax Reform Act of 1984. The details of the Foreign Sales Corporation provisions and the transition from DISC are discussed in NJ Block, RJ Gilbert and K Kuenster, ‘From DISC to Foreign Sales Corporation: Tax and Other Considerations’ (1985) 19 International Lawyer 343. 51 ‘Non-Discrimination Clause’, above n 35, 5. 52 ibid 5. 53 ibid 7. 54 ibid. 55 ibid. 56 ibid. 57 ibid.

Much Ado about Non-discrimination  261 entirely clear. Cole responded that this ‘would tie in with IET a requirement that if it disappeared so would IWT – would discuss also where Australian tax applies, where it would fit’.58 This may suggest that Cole contemplated that the non-discrimination article would mean that IET would ‘disappear’ at least in Australia–USA relationships. However, the comment could also mean that the contracting states would agree that the non-discrimination article would not affect either the IET or the IWT, but that if the IET were to ‘disappear’ subsequently, so too would the IWT. The 1971 draft did not make any changes to the draft non-discrimination article in the 1969 draft discussed above.59 The parties agreed that a third round of discussions would be needed, possibly at the beginning of the Australian summer or earlier.60 The official Memorandum on the 1971 negotiations stated: ‘A provision dealing with non-discrimination in taxation matters was discussed during the negotiations. The officials will report the substance of that discussion to their respective governments for further consideration.’61 THE KINGSON DRAFT

Efforts were made in 1971 to resume negotiations, but issues associated with the tax treaty negotiating programme of both countries and the impending Australian Federal Election meant that further negotiations could not take place before 2 December 1972, at which time there was a change of Australian federal government. The incoming Whitlam Labor government commenced a review of Australian tax treaty policy.62 Cabinet authority to resume negotiations with the USA was not given until 17 February 1975. The Cabinet also decided that in any negotiations Australia should maintain its strong opposition to the inclusion of a non-discrimination article.63 O’Reilly had an informal meeting in Washington in July 1975 with Nathan Gordon, Deputy Assistant Secretary for Tax Policy (International), and with Robert Patrick, the new US International Tax Counsel. O’Reilly’s impression was that, if Patrick had his way, he would agree to a revised treaty without a

58 ibid 8. 59 The draft is contained in ATO file Pt 6. 60 Above n 35, 8. 61 Memorandum, 18 June 1971; ATO file Pt 6. 62 Exchange of memoranda between Boucher and McBurney from 23 to 28 February 1973; ATO file Pt 8. Cabinet submission by the Treasurer (Frank Crean) dated 9 March 1973, ‘Double Tax Agreements; Submission 197’ in NAA, ‘Cabinet Minutes: Double Tax Agreements: Decision 368’, Series A5915, Control Symbol 197. 63 Cabinet submission 1563 by JF Cairns, Treasurer, ‘Negotiation of Double Taxation Agreements’ is contained in ‘Cabinet Minutes, 17 February 1975, Decision No 3227’, NAA, Series A5915, Control Symbol 1563.

262  C John Taylor non-discrimination article, but that Gordon had not closed off his mind to this possibility.64 Correspondence between O’Reilly and Gordon to resume negotiations continued throughout 1975,65 but the new Assistant Secretary for Tax Policy was immersed in congressional tax hearings and by mid-October 1975 Australia was locked in a constitutional crisis, with the opposition parties blocking a supply Bill in the Australian Senate. On 11 November 1975, the Australian Governor General dismissed the Whitlam government and appointed the Leader of the Opposition, Malcolm Fraser, as caretaker Prime Minister on the condition that a double dissolution election for both houses of Federal Parliament be held the following month. At the request of the US Embassy in Canberra, O’Reilly met with an Embassy official, RE Simpson, Counsellor (Economic Affairs), on 14 February 1976 and then again on 18 June 1976, with Boucher and AD Ross from the Australian Treasury, to discuss possible US compromises that Charles Walker, the US Assistant Secretary for Tax Policy, was prepared to consider. The options on the list were: (A) Approval of existing violations of non-discrimination principle with prohibition against further discrimination; (B) Protection against discrimination which is more limited than OECD article – for instance, we assume Australia could agree not to discriminate against US citizens who are residents of Australia; (C) Limited amendment of old convention without adding non-discrimination article rather than entering into ‘new’ convention; (D) Separate right to terminate non-discrimination article; (E) Agreement to consult before any discrimination is effective; (F) Provision that future legislation may override non-discrimination article if specific reference is made to non-discrimination article; (G) Agreement to endeavour not to discriminate and, in the event of discrimination, to consult with a view to eliminating the discrimination.66

O’Reilly reported that the Australians had not held out hope for any of the alternatives, with the possible exception of (C), but undertook to mention them to ministers in submissions.67 On 1 November 1976, the Australian Cabinet agreed to recommence negotiations with the USA.68 O’Reilly, Boucher and Ross (of Treasury) then met with 64 WJ O’Reilly, 10 July 1975, ‘Note for file, Double Taxation Agreement: Australia/United States’; ATO file Pt 9. 65 WJ O’Reilly to Nathan W Gordon, 12 September 1975, and Gordon to O’Reilly, 1 November 1975; ATO file Pt 9. O’Reilly to Gordon, 10 November 1975; ATO file Pt 9. 66 ‘Talking Points: Subject – US–Australia Tax Treaty Negotiations’, American Embassy, 18 June 1976; ATO file Pt 10. 67 ‘Note for file: Australia–United States of America, Double Taxation Agreement’, 18 June 1976; ATO file Pt 10. 68 National Archives of Australia, Series A12909, Control Symbol 779, Cabinet decision number 1711, Submission number 779.

Much Ado about Non-discrimination  263 Simpson on 3 December 1976 and advised Simpson of the Australian Cabinet’s decision. Simpson was informed that Cabinet had reaffirmed Australia’s opposition to the inclusion of a non-discrimination article and had approved an early resumption of negotiations with the USA. O’Reilly indicated that, while a new treaty without a non-discrimination article was Australia’s ideal, the Cabinet would agree to amend the existing treaty.69 Charles Kingson, as Deputy US International Tax Counsel, led a US delegation to Canberra in July 1977 for informal discussions dealing with the non-discrimination article and developments in domestic tax law. Kingson proposed what he described as a ‘watered down’ non-discrimination article70 that he would need to take back to Washington for a second opinion as he was not confident that his colleagues involved in other tax treaty negotiations would find it acceptable. The Australian delegation gave no undertaking that the ‘watered down’ article would be acceptable to Australian ministers, but agreed to put the proposals to the Cabinet if they were substantially different from previous proposals.71 On 7 September 1977, Kingson wrote to KF Brigden (a Second Commissioner of Taxation) advising that the watered down article was acceptable to Assistant Secretary of the US Treasury Woodworth and requesting that the proposal be put to Australian ministers. Kingson indicated that the USA wanted to make a detailed examination of relevant Australian legislation and reserved the right to make exceptions to paragraph 1(a) arising from that examination.72 The ‘watered down’ non-discrimination article (the Kingson draft) differed from the article in the US 1969 and 1971 drafts, from the article in the 1977 US Model and from the article in the 1982 treaty. Paragraph 1 of the Kingson draft was a key difference from the 1977 US Model and read as follows: This Article shall apply to all Australian taxes imposed at the national level, except that nothing in this Article shall inhibit the application of taxes (a) Existing at the time of the signing of this Convention; or (b) Intended as measures of exchange control (including access to capital markets) or wages or incomes policy; or (c) Required for administrative convenience or reflecting a difference in circumstances (such as a branch profits tax).

Like the 1969 and 1971 drafts, the Kingson draft contained no equivalent to paragraph 4 of the 1977 US Model. Paragraph 5 of the Kingson draft contained the following addition at the beginning of paragraph 5 of the 1977

69 ‘Note for file, 3/12/76 TPB’; ATO file Pt 10. 70 A draft of the ‘watered down’ article is contained in ATO file Pt 11 and in ATO file Pt 17. 71 Letter from an unidentified ATO official (most likely Boucher or Brigden) to PE Simpson, Counsellor (Taxation), Australian Embassy, Washington, dated 15 July 1977; ATO file Pt 11. 72 Kingston to Brigden, 7 September 1977; ATO file Pt 11.

264  C John Taylor US Model: ‘A Contracting State shall endeavour to refrain from enacting tax measures which would subject an enterprise of that State …’ The following addition was made at the end of the paragraph: If, however, such Enterprise is subjected in the first mentioned to any more burdensome taxation than that to which other similar enterprises of the first mentioned State are subjected: (a) The competent authorities shall consult to determine whether such taxation is consistent with taxation standards of the other Contracting State; and (b) If such taxation is not consistent with the standards of the other Contracting State, the competent authorities shall endeavour to reach a solution that is in the interests of both Contracting States.

Like the 1969 and 1971 drafts, the Kingson draft did not contain an equivalent to paragraph 6 of the May 1977 US Model dealing with the taxes that the nondiscrimination article applied to. THE MAY 1979 NEGOTIATIONS

Kingson left the US Treasury in November 1977,73 before the proposal in his letter of 7 September 1977 could be put to Australian ministers.74 An Australian Federal Election had been called in October 1977, with the result that the Australian government was now in caretaker mode, so any submission on the tax treaty negotiations would have to wait until after the election, which was held on 10 December 1977. Kingson was replaced as US International Tax Counsel by David Rosenbloom. O’Reilly and Rosenbloom corresponded between June and December 1978 concerning political and tax technical developments in Australia, consideration of the Kingson draft and possible dates for the resumption of negotiations.75 Rosenbloom was concerned about the potential breadth of paragraph 1(b) of the Kingson draft and indicated that if Australian ministers were willing to proceed along the lines of the Kingson draft, then the USA would want to try to find language which would clarify the intended scope of paragraph 1(b).76 Correspondence followed involving the Australian Taxation Office and the Australian Embassy in Washington, which reported on discussions with Rosenbloom, and between O’Reilly and Rosenbloom concerning possible dates for further negotiations and changes that Rosenbloom wanted to the Kingson

73 Cablegram, Washington to Canberra, Attention – Taxation, 1 November 1977; ATO file Pt 11. 74 Cablegram, Canberra to Washington, Action – Taxation, 3 November 1977; ATO file Pt 11. 75 Rosenbloom to O’Reilly, 2 September 1978. Rosenbloom’s letter refers to a 15 June 1978 letter from O’Reilly to Rosenbloom, but the latter letter is not contained in the ATO file Pt 12. O’Reilly to Rosenbloom, 6 November 1978. Rosenbloom to O’Reilly, 15 December 1978. All this correspondence is in ATO file Pt 12. 76 Rosenbloom to O’Reilly, 15 December 1978; ATO file Pt 12.

Much Ado about Non-discrimination  265 draft. Rosenbloom had indicated that, while wanting something not as ‘open ended’, he had no particular wording in mind, and considered that face to face negotiations were necessary and was optimistic about their outcome.77 Rosenbloom suggested that consideration should be given to a general revision of the 1971 draft to make it conform more closely to the OECD Model and the 1977 US Model.78 A further round of negotiations was held in Washington from 14 to 18 May 1979.79 This round of negotiations was crucial in the development of the approach to the non-discrimination article taken in the final treaty. Much of the discussion reiterated points made in earlier negotiations and potentially discriminatory provisions by both countries were again identified. It was clear, as it had been in earlier negotiations, that the USA was not concerned about any of the then current Australian potentially discriminatory provisions. Two themes became more prominent than previously. One was that the USA wanted certainty in any non-discrimination article, while Australia wanted flexibility to minimise restraints on future Australian actions. The other was Australian officials’ concern about literal interpretations by Australian courts of treaty provisions, legislation and administrative actions. The latter concern evidently underpinned the Australian delegation’s suggestion, first raised in these discussions, for a non-discrimination article that did not give rise to taxpayer rights. Initially, the Australian delegation contemplated having a separate governmentto-government agreement on non-discrimination that was not part of the tax treaty. As all US tax treaties of the time contained a non-discrimination article, this alternative was obviously not agreeable to the US delegation or their superiors. During the negotiations, the Australian delegation began to think of not giving any non-discrimination article the force of law in Australia. Several draft non-discrimination articles were produced by each delegation at the May 1979 negotiations. The following analysis will concentrate on the final draft of 17 May 1979 (referred to as ‘the final 1979 draft’) and contrast it with earlier drafts, the 1977 United States Model and the 1982 treaty. The final 1979 draft was substantially similar to the 1982 treaty. Paragraphs 1(a) and 1(c) were identical to the equivalent paragraphs that appeared in the 1982 treaty. Paragraph 1(b) only differed from paragraph 1(b) in the treaty because of the renumbering of other articles in the treaty. The opening words of paragraph 2 of the final 1979 draft differed from the opening words of paragraph 2 in the 1982 treaty.

77 Cablegram, Canberra to Washington, Action – Taxation, Department of Foreign Affairs, 16 January 1979. Cablegram, Washington to Canberra, Action – Taxation, 30 January 1979. Cablegram, Washington to Canberra, Action – Taxation, 19 January 1979. Brodie, Counsellor (Taxation) to Boucher, 19 March 1979. All these documents are in ATO file Pt 12. 78 Rosenbloom to O’Reilly, 16 February 1979; ATO file Pt 12. 79 Records of the negotiations are set out in ‘Double Tax Agreement: Negotiations in Washington, 14 to 18 May 1979’ (hereafter May 1979 negotiations); ATO file Pt 17.

266  C John Taylor The opening words of paragraph 2 in the final 1979 draft were: ‘Nothing in this article shall be construed as affecting the operation of any provision of the taxation laws of a Contracting State’. The opening words of paragraph 2 of the 1982 treaty are: ‘Nothing in this article relates to any provision of the taxation laws of a Contracting State’. The closing words of paragraph 2 of the final 1979 draft also differed from the closing words of paragraph 2 of the 1982 treaty by referring to ‘nationals’ rather than to ‘citizens’. Paragraph 1 of the final 1979 draft differed from the May 1977 US model, the 1963 draft OECD Model and the 1977 OECD Model by adding the preliminary words, ‘Each Contracting State in enacting tax measures shall ensure that’. Paragraph 1(a) of the final 1979 draft also had a narrower scope than the then existing models as it referred to ‘Citizens of a Contracting State who are residents of the other Contracting State’ rather than ‘Nationals of a Contracting State’. A consequential difference was the omission of any equivalent to paragraph 2 of the 1977 US Model and the 1963 OECD Draft, which provided for a definition of the term ‘nationals’ to be included. In these respects, the final 1979 draft differed from the initial draft of 14 May 1979 (the 14 May 1979 draft) provided by the USA on the first day of the negotiations.80 Both these features, however, were present in the 1969 and 1971 drafts. The scope of the article was further narrowed by paragraph 1(a), which deleted ‘other’ from the phrase ‘other or more burdensome’ as the subject of the relative clause qualifying ‘taxation or other connected requirements’. This variation was also contained in the 14 May 1979 draft, which varied from the Kingson draft in this respect but followed the 1969 and 1971 US drafts. Paragraph 1(a) of the final 1979 draft also differed from the May 1977 US Model by omitting the second sentence of paragraph 1 of the Model, which stated that ‘nationals who are subject to tax by a Contracting State on worldwide income are not in the same circumstances as nationals who are not so subject’. This sentence had been in the Kingson draft but not in the 1969 and 1971 US drafts. The 14 May 1979 draft contained the following sentence, which had a somewhat different effect, given the US practice of taxing citizens on their worldwide income: ‘However, for purposes of United States taxation of income United States citizens not resident in the United States are not in the same circumstances as Australian citizens not resident in the United States.’ During the negotiations, Riethmuller asked what the reason for this sentence was. Rosenbloom replied, somewhat confusingly, ‘As between a non-resident US citizen and a non-resident Australian citizen we do not discriminate between these two.’81 The import of the sentence, however, would seem to be that the USA was permitted to tax US non-resident citizens differently to the way it taxed



80 The

81 May

draft is in ATO file Pt 17 and is identified as ‘Attachment “F”’. 1979 negotiations, record for 14 May 1979; ATO file Pt 17.

Much Ado about Non-discrimination  267 Australian citizens who were not US residents. Rosenbloom then said, ‘Look, the second and third sentences are not fundamental to us. Our minimum position is the first sentence.’82 Paragraph 1(a) of the final 1979 draft also differed from both the US and 1977 OECD Models by omitting the third sentence of paragraph 1 of the US Model (the second sentence of paragraph 1 of the 1977 OECD Model), which indicated that Article 24(1) also applied to persons who were not residents of one or both contracting states. This sentence had been in paragraph 1 of the Kingson draft but not in the 1969 or 1971 drafts. The 14 May 1979 draft contained a sentence having a similar effect but with somewhat different language.83 As noted above, Rosenbloom commented that this sentence was not fundamental to the USA and that the first sentence of paragraph 1 was the minimum US position. Both the second and third sentences were omitted from the second 14 May 1979 draft.84 Paragraph 1(b) of the final 1979 draft was the equivalent of paragraph 4 of the 1977 US Model and of what was numbered as paragraph 5 of the 1977 OECD Model, but differed significantly from those models by referring to payments by ‘a resident of a Contracting State’ rather than to payments by ‘an enterprise of a Contracting State’. During negotiations on 14 May 1979, after the Australian definition of ‘residence’ had been outlined to him, Rosenbloom referred to the equivalent provision in the 14 May 1979 draft and stated, ‘we could change to residents’.85 This change from the 14 May 1979 draft was then incorporated in the second 14 May 1979 draft. No equivalent to paragraph 1(b) had been contained in any of the 1969 draft, the 1971 draft or the Kingson draft. Paragraph 1(b) of the final 1979 draft omitted the second sentence of the US Model, which was an inclusive definition of ‘other disbursements’ that specifically referred to certain executive and administrative expenses, research and development and other expenses incurred for a group of related enterprises that included the enterprise in question. Paragraph 1(b) omitted the third sentence of the US Model (the equivalent to the second sentence of the 1977 OECD Model) concerning the deductibility of debts of an enterprise of a contracting state to a resident of the other contracting state for the purpose of determining the taxable capital of the enterprise. Neither of these sentences were contained in the 14 May 1979 draft. O’Reilly argued that what was to become paragraph 1(b) ‘might offend thin capitalisation rules – if we were to attempt to deny deductions we could fall foul of it’.86 Feinberg, responded that ‘We could cover it in the last paragraph as an exception’.87 O’Reilly gave an example of tax planning activity involving 82 ibid. 83 The sentence was: ‘Notwithstanding the provisions of Article 1 (Personal Scope) this provision shall also apply to persons who are not residents of a Contracting State.’ 84 This draft is in ATO file Pt 17 and is identified as ‘Revised draft “A” 14.5.79’. 85 May 1979 negotiation, record for 14 May 1979; ATO file Pt 17. 86 ibid. 87 ibid.

268  C John Taylor something (presumably loan funds given the context) being supplied to Australia by a US company but routed through Hong Kong with the result that Australia would have to allow a deduction for the amount paid to Hong Kong. Rosenbloom responded, ‘We would get this under our section 482 rules.’88 Paragraph 2 of the 17 May 1979 draft did not explicitly refer to thin capitalisation rules but referred to ‘taxation laws … reasonably designed to prevent the avoidance or evasion of taxes’. It is reasonable to infer from these negotiations that thin capitalisation rules were within the class of rules that the negotiators intended to be covered by these general words. Paragraph 1(c) of the final 1979 draft corresponded with paragraph 5 of the 1977 US Model and paragraph 6 of the 1977 OECD Model, but differed from them by using the term ‘corporations’ rather than the broader term ‘enterprises’ and by using ‘more burdensome’ rather than ‘other or more burdensome’. The 14 May 1979 draft used the term ‘enterprises’ but only referred to ‘more burdensome’, not to ‘other or more burdensome’. The term ‘corporation’ was substituted for ‘enterprise’ in the second draft of 14 May 1979, but neither handwritten notes on the original 14 May 1979 draft nor the Australian record of negotiations mention this change or the reason for it. The terminology had been used in the 1969 and 1971 drafts. The final 1979 draft also added the words ‘in the same circumstances’ after ‘similar enterprises’ in paragraph 1(c). These words were not included in the 14 May 1979 draft. Paragraph 1(d) of the final 1979 draft corresponded with paragraph 3 of the US Model and with paragraph 4 of the 1977 OECD Model, but referred to a permanent establishment of a ‘resident’ rather than to a permanent establishment of an ‘enterprise’ as in the models, by adding ‘in the same circumstances’ after ‘activities’ in the first sentence. Paragraph 1(d) also differed by omitting the second sentence contained in both models. The second sentence of paragraph 4 of the US Model was also omitted from the 14 May 1979 draft. The 14 May 1979 draft referred to ‘enterprises of that other State in the same or similar circumstances and carrying on the same activities’. Handwritten annotations on the 14 May 1979 draft indicate that the term ‘resident’ was to be substituted for ‘enterprise’ and that the word order was to be changed, with ‘carrying on the same activities’ to be located after ‘State’ and before ‘same circumstances’ and with the word ‘similar’ being deleted. The handwritten changes were incorporated in the second 14 May 1979 draft. Other than changes in numbering, paragraph 4 of the second 14 May 1979 draft was identical to paragraph 1(d) of the 1982 treaty. Paragraph 4 of the second 14 May 1979 draft appears to be an amalgam of features derived from the 1969 and 1971 drafts and the 14 October 1979 draft. The final 1979 draft also differed from both the models by omitting paragraph 6 of the US Model and paragraph 7 of the 1977 OECD Model,

88 ibid. Section 482 of the US Internal Revenue Code of 1954 was a specific anti-avoidance provision.

Much Ado about Non-discrimination  269 which applied the article to ‘taxes of every kind and description imposed by a Contracting State or a political subdivision or local authority thereof’. No equivalent to these paragraphs was contained in the 14 May 1979 draft, in the Kingson draft or in the 1969 and 1971 drafts. The final 1979 draft contained additional paragraphs which had no equivalent in the models. Paragraph 2 of the final 1979 draft was designed to carve out existing discriminatory provisions and anti-avoidance/anti-evasion provisions from the scope of the article and read: Nothing in this Article shall be construed as affecting the operation of any provision of the taxation laws of a Contracting State: (a) in force on the date of signature of this Convention; or (b) adopted after the date of signature of this Convention but which is substantially similar in general purpose or intent to a provision covered by subparagraph (a); or (c) reasonably designed to prevent the avoidance or evasion of taxes: provided that, with respect to provisions covered by subparagraphs (b) or (c), such provisions (other than provisions in international agreements) apply in nondiscriminatory fashion to nationals and residents of the other Contracting State and of any third State.

The 14 May 1979 draft had contained the following similar, but more limited, carve-out: Nothing in this Article shall be construed as: … (b) affecting the operation of any provisions of the taxation laws of either Contracting State in force on the date of signature of this Convention; (c) affecting the operation of any provisions of the taxation laws of a Contracting State adopted after the date of signature of this Convention: (i) that is substantially similar to a provision covered by paragraph (b); or (ii) that is intended to ensure that persons who are not residents of that State do not enjoy, under the laws of that State, tax treatment more favourable than that enjoyed by residents of that State.

The scope of the carve-outs was a significant point of discussion in the May 1979 negotiations. Australian negotiators sought to make the carve-outs as broad and as flexible as possible. The USA, by contrast, sought to limit the carve-outs so as to have certainty in the non-discrimination article. The second 14 May 1979 draft rearranged the order of the paragraphs and subparagraphs, and consolidated the language to avoid repetition of phrases. A new paragraph 5 read: 5. Nothing in this Article shall be construed as affecting the operation of any provision of the taxation laws of a Contracting State: (a) in force on the date of signature of this Convention; or (b) adopted after the date of signature of this Convention but which is substantially similar to a provision covered by subparagraph (a).

270  C John Taylor A new subparagraph 6(b) was added which stated: Nothing in this Article shall be construed: … (b) to prevent the adoption by a Contracting State of reasonable measures: (i) against the avoidance or evasion of its taxes (ii) to ensure that persons who are not residents of that State do not enjoy, under the laws of that State, tax treatment more favourable than that enjoyed by residents of that State.

The Australian delegation circulated a ‘rough draft’ on 15 May 1979 focused on limiting the scope of the non-discrimination article and on providing flexibility for carve-outs for future action. This draft opened with the words, ‘Each Contracting State in enacting tax measures shall endeavour to ensure that …’ A carve-out for measures ‘to prevent the avoidance or evasion of taxes’ first appeared in this draft. The draft provided that the non-discrimination article did not apply to measures ‘(ii) to prevent the benefit of business concessions being diverted from their intended beneficiaries; (iii) to prevent either Contracting State using tax measures as a means of giving effect to general economic policy’. Subparagraph (ii) in this draft was aimed at preventing the ‘Treasury effect’, whereby tax concessions for foreign investors were absorbed by the foreign treasury through the country of residence’s foreign tax credit system.89 Rosenbloom characterised the phrase ‘endeavour to ensure’ as a ‘forward looking provision’ and wanted it omitted so that paragraph 1 became a statement of non-discrimination principles. Rosenbloom questioned whether these proposals aimed to stop US investment by tax measures and commented: ‘I find (iii) less offensive than (ii) … We can look to the future but we must look at realistic possibilities.’90 Later, Rosenbloom commented that the offensive feature of the Australian paragraph (ii) was in the distinction between credit and exemption countries with permanent establishments in Australia as it was not possible to determine in advance whether the credit would operate to disadvantage them.91 Rosenbloom objected to (ii) on the basis that it amounted to distinguishing between companies on the basis of ownership and amounted to a ‘banana republic approach’, that it did not take account of the effect of the US deferral system on US companies and thus that Australia should not be concerned that US companies would lose US tax benefits. Rosenbloom was unimpressed by Australia’s argument on permanent establishments, conceding that the concern was understandable as the USA taxed permanent establishments on current income, but pointed out that the USA had ‘soak up credits’. Although it is not entirely clear, this comment may have been directed against an Australian

89 O’Reilly gave this explanation on 15 May 1979. May 1979 negotiation, record for 15 May 1979; ATO file Pt 17. 90 ibid. 91 ibid.

Much Ado about Non-discrimination  271 argument that some US companies used branches to avoid Australian dividend withholding tax. Rosenbloom stated that (ii) would not concern the USA if it distinguished between Australian companies and foreign companies’ permanent establishments, but that as it stood it was too broadly drafted. Rosenbloom then asked, ‘Can you suggest some drafting to prevent “plugging” to the credit system?’ Rosenbloom indicated that (iii) could be acceptable if more specifically drafted.92 On 16 May 1979, the Australian delegation introduced the following subparagraphs in their rough draft of the carve-out paragraph: (iii) to ensure business concessions granted to residents of (sic) permanent establishments in that Contracting State ensure for the actual benefit of those residents or permanent establishments, provided that such measures do not discriminate: (A) in the case of citizens of the other Contracting State, on the grounds of that citizenship; (B) in the case of corporations the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more of the residents of the other Contracting State, on the grounds of that ownership or control; (C) in the case of permanent establishments, on the ground that the permanent establishment is that of a resident of the other Contracting State.

The delegations probed possible ambiguities and anomalies in these proposals without reaching a consensus view. The possibility of each tax administration giving a different interpretation to these provisions while being aware of the other’s position was raised. Rosenbloom seems to have considered that acknowledged de facto discrimination or discrimination against all foreign nationals would not be prevented by the US language. Rosenbloom then indicated that ‘these words are OK because they are more restrictive’. It is reasonably clear that Rosenbloom meant that the words were more restrictive than the Australian draft (ii).93 O’Reilly then handed over an additional subparagraph to paragraph 6 of the draft, saying, ‘In the context of draft 6(iv) and paragraph 4 these are related.’ (iv) as a means of giving effect to general economic regulatory policy where the primary purpose of the Contracting State in adopting such measures is not the raising of revenue.

Rosenbloom’s response was, ‘No, my point is that if you do it across the board there would be no need for a rationale.’ Riethmuller then said, ‘Our words cover the situation where everyone gets the benefit unless it enures to a foreign treasury.’ O’Reilly then stated, ‘We are a trifle confused but do not think that you are right.’ It may be that O’Reilly was confused because Rosenbloom was apparently referring to a provision that would apply to all foreign permanent



92 ibid. 93 May

1979 negotiations, record for 16 May 1979; ATO file Pt 17.

272  C John Taylor establishments rather than to permanent establishments of the other contracting state. Rosenbloom suggested that Australia could override the treaty by legislation and then consult with the USA, with attention being given to the degree of explicitness on the obligation to consult. Kelly (Counsellor, Attorney General’s Department, Australian Embassy) commented that, while Australia could constitutionally override a treaty provision, the Australian government took a ‘very puritanical view’ to ensure that Australian domestic law accorded with Australia’s international treaty obligations but, if the provision were to require consultation every time discriminatory legislation was being introduced, that would be another issue. Rosenbloom appears to have interpreted this comment as not favouring a consultation requirement. This interpretation is consistent with the next comment by O’Reilly, ‘My experience of governments’ decisions on this sort of thing is that if they want to do anything they will want to do it quickly’, to which Rosenbloom replied, ‘I understand.’94 Rosenbloom then said, ‘Are we getting close to the sort of thing that we proposed yesterday?’ O’Reilly then asked whether they were talking about a statement of principle or a non-discrimination article. Rosenbloom’s responded by offering flexibility in implementation for an explicit set of principles. O’Reilly then proposed that the article begin with the words, ‘Each Contracting State in enacting tax measures should ensure’, to be followed by US paragraphs 1–5, Australian paragraph 6(i) and something like Australian subparagraph (iv). Rosenbloom then said, ‘Let me give you something else. Our paras 1, 2, 3, 4, 5(a) and (b) and 6.’95 Rosenbloom and Kelly conferred and the Australian draft of 16 May 1979 was then discussed. The draft began with the words, ‘Each Contracting State in enacting tax measures should ensure that’, and confined the carve-outs to: (2)(a) provisions in force at the date of signature or (2)(b) substantially equivalent provisions subsequently adopted; (3)(a) reasonable measures against the avoidance or evasion of taxes; or (3)(b) reasonable measures as a means of giving effect to general economic regulatory policy where the primary purpose of the contracting state in adopting such measures is not the raising of revenue. In the discussion of the draft, Rosenbloom, aware of anxieties the Australian delegation had expressed previously,96 asked, ‘Does this article give access to the courts?’, to which Kelly replied: A court could not draw the inference that private rights are created but to make it abundantly clear we could put a provision in our law saying that the ND article

94 The record of the discussions in this paragraph is contained in ibid. 95 This appears to be the document referred to in ATO file Pt 17 as ‘Revised draft’. The numbering corresponds with the numbering in that document. 96 On 14 May 1979 O’Reilly had stated, ‘The important question is who decides whether it is discriminatory. We would not trust the courts to make the decision.’ May 1979 negotiations, record for 14 May 1979; ATO file Pt 17.

Much Ado about Non-discrimination  273 would not be effective. It is my confident expectation that a court would not treat this approach as creating private rights. I might add that we prefer ‘should’ in the commencing words of paragraph 1. It gives the impression that no private rights are created.

Presumably to reinforce the point that Kelly had just made, O’Reilly then said, ‘Our courts even say that “may” means “shall”.’ Kelly explained that 3(b) was intended to ‘convey the thought of a reasonable, regulatory and non-revenue raising measure’ such as the interest withholding tax measures designed to prevent foreign companies from agreeing to excessive wage demands. O’Reilly then asked whether ‘substantially similar’ in paragraph 2(b) was to be taken literally or could refer to ‘provisions of a character the aim and direction of which is similar?’ Rosenbloom replied that if ‘you were to change a branch profits tax from an earnings to a remittance basis that would be OK’. O’Reilly seemed concerned that this implied that a literal similarity might be required, thus limiting the carve-out to the existing field of discriminatory measures. Rosenbloom then said, ‘You are limited to specifics of what is in force now but if you say something is similarly justified that is OK with us. But the language does not say that.’ O’Reilly’s reply was, ‘If it is similarly justified then paragraph 3(b) can go but if as you say the language does not permit that interpretation then paragraph 3(b) must stay.’ This led to a discussion of possible rewording of paragraph 2(b), where Rosenbloom proposed the addition of ‘reasonable similar purpose or rationale’, to which O’Reilly suggested the substitution of ‘rational’ for ‘reasonable’ and Rosenbloom then suggested an insertion in 2(b) of ‘rationally justified by an overriding government purpose’. Paragraph 2(b) was then redrafted and the US delegation consulted with US Assistant Treasury Secretary for Tax Policy, Don Lubick, who considered that ‘rationally justified etc’ was too open ended, whereupon the USA proposed adding to paragraph 2(b) ‘which is similar in purpose or effect’. O’Reilly then said, ‘The “general purpose and intent” would seem to me to preserve things for revenue production and would redress any internal biases.’ This language and the substitution of ‘shall’ for ‘should’ in the opening words of the non-discrimination article were introduced into the final 1979 draft. Paragraph 3 in the final 1979 draft allowed a contracting state to distinguish in its taxation laws between residents and non-residents solely on the grounds of their residence. The 14 May 1979 draft had included a subparagraph which allowed more limited differentiation in the tax treatment of residents and nonresidents. This subparagraph was retained in the second 14 May 1979 draft. The Australian draft of 16 May 1979 contained what was to become paragraph 3 in both the final 1979 draft and in the 1982 treaty. This subparagraph in the Australian draft was discussed on 16 May 1979, with Kelly stressing that, because of the words ‘except to the extent expressly so provided’, it was merely a declaratory statement.

274  C John Taylor Paragraph 4 in the final 1979 draft anticipated that future provisions might be considered to breach the article and provided: ‘Where one of the Contracting States considers that the taxation measures of the other Contracting State infringe the principles set forth in this Article the Contracting States shall consult together in an endeavour to resolve the matter.’ This paragraph first appears in the Australian rough draft and was included in the Australian draft of 16 May 1979 and in the final 1979 draft. The only direct discussion of this paragraph concerned the degree of explicitness to be put on the obligation to consult. O’Reilly’s response to the effect that governments usually wanted to act quickly on such matters may have satisfied Rosenbloom as the paragraph appears unchanged in the subsequent drafts. Discussions on 17 May focused on whether the article had, in Rosenbloom’s words, ‘teeth’, his understanding being that Australia wanted an article with ‘no teeth’. O’Reilly stressed that Australia really did not want a non-discrimination article at all, but if there had to be one Australia wanted it to be ‘as weak as possible’ and that the article in its present form, as an agreement between governments, did have teeth. Rosenbloom indicated that if Australia could specify forward-looking carve-outs, the USA could consider including them. In response, McBurney pointed out the difficulty of anticipating what would be required in the future. Rosenbloom presumed that the final 1979 draft was ‘not a goer for you’, to which O’Reilly replied, ‘No, but we will have to take it to the government. This is as far as we are willing to go.’ Rosenbloom indicated that the USA could consider further specific carve-outs, but not ‘something along the lines of what McBurney has described’.97 Rosenbloom raised the possibility that the USA might agree to a treaty without a non-discrimination article if it were closer to the US Model in regard to rates of withholding tax. O’Reilly’s responded, ‘Like Queen Victoria I am not amused by that.’98 After a brief overview of the previous drafts and developments, Rosenbloom concluded the discussions by saying, ‘It is clear we will get a treaty if the ND issue is resolved.’ Technical drafting issues occupy only a small part of the Australian record of the 1979 negotiations. The possibility of the article forming part of the treaty but not being given the force of law in Australia is referred to only by Kelly. O’Reilly’s comment on 17 May that the article would have teeth as an agreement between governments probably indicates that O’Reilly now, following Kelly’s comment, considered that the non-discrimination article, rather than being in a separate agreement, would now be included in the treaty but not given the force of law in Australia. If this was the intention, then it does not appear to have been made particularly clear to the US delegation.



97 May

98 ibid.

1979 negotiations, record for 17 May 1979; ATO file Pt 17.

Much Ado about Non-discrimination  275 The US concern was always to limit the carve-outs applying to future actions but that Australia’s existing discriminatory practices were not of concern. Rosenbloom stated that ‘if we were the only two countries in the world there would not be a problem’, but noted that other countries do discriminate, that all existing US tax treaties contained a non-discrimination article and that its absence in a tax treaty with Australia could have adverse effects on US relations with third countries. Rosenbloom wanted to limit the future provisions that were outside the scope of the non-discrimination article. He was, however, at pains to stress that the USA trusted the Australian tax administration to administer the law in a non-discriminatory fashion. Although the consultation provision in paragraph 4 appeared in the final 1979 draft, Australian negotiators resisted its inclusion. O’Reilly was concerned at administrative discretions being challenged in the courts. US drafting suggestions to avoid this problem were rejected as amounting to giving the Commissioner an unchallengeable discretion. Despite these reservations and notwithstanding that the solution of including the article in the treaty but not giving it the force of law in Australia does not appear to have been agreed on, O’Reilly, as noted above, indicated that the Australia delegation would take the final 1979 draft back to Australia for consideration by ministers. ISSUES FACING THE AUSTRALIAN DELEGATION ON THEIR RETURN TO AUSTRALIA

On their return to Australia, the Australian delegation was faced with three matters requiring resolution before a new tax treaty could be entered into. These were: (i) ascertaining how to ensure that the article did not create private rights for Australian taxpayers; (ii) convincing senior Australian Treasury officials that this approach was desirable; and (iii) obtaining cabinet approval for this approach. Prior to the delegation leaving the USA, Kelly had thought of what was to become the solution adopted for the first matter. Kelly wrote to Brian O’Donovan, First Assistant Crown Solicitor, on 17 May 1979, confirming that it was ‘explicitly and clearly understood’ by the USA that the non-discrimination article would not have the force of law in Australia and would not give rise to private justiciable rights. Kelly stated that how this objective would be achieved was ‘up to us’. His view was that, on the current language, Australian courts would still regard the non-discrimination article as purely intergovernmental in character but that, alternatively, it would be possible to give the treaty the force of law ‘other than article X’.99

99 G Kelly, Counsellor, Attorney General’s Department, to BJ O’Donnovan, First Assistant Crown Solicitor, Attorney General’s Department, Canberra, 17 May 1979; ATO file Pt 12.

276  C John Taylor On 8 August 1979, Riethmuller wrote to the Attorney General’s Department seeking advice on giving the force of law to a treaty that included a nondiscrimination article while, at the same time, ensuring that the article itself remained a purely government-to-government undertaking. Riethmuller also asked whether, assuming that the Income Tax (International Agreements) Act (1953) were to give the force of law to all of the convention except the non-discrimination article, it would be assumed in ratification that both parties were able to give effect to all the provisions in the treaty. Further, he asked whether, in the absence of express words in the treaty itself not giving the force of law to the non-discrimination article, there was any obligation on Australia, either ‘moral, under the law of treaties, or otherwise’, to incorporate the whole of the treaty into domestic law. Finally, he asked for suggestions on alternative approaches to ensure that the non-discrimination article would not be given the force of law.100 The First Assistant Crown Solicitor (CR Morrison) replied to Riethmuller’s letter on 24 April 1980. Morrison considered possible consequences if the nondiscrimination article were to be given the force of law in Australia. These were that a US citizen might successfully claim that Australian discriminatory legislation did not apply because of the article and that an Australian court might read down discriminatory legislation on the assumption that Parliament must be presumed not to legislate contrary to a non-discrimination article having the force of Australian law. In Morrison’s view, the possible outcomes would arise ‘irrespective of the fact that the non-discrimination article, in terms, does not appear intended … to give personal rights available to individual taxpayers’. Morrison considered that excluding the article from those provisions of the treaty to be given the force of law in Australia would reduce, but not entirely remove, these two risks. Morrison discussed whether a specific exclusion of the non-discrimination article might give rise to an implication that other provisions in the treaty also merely recorded an international agreement having no force in Australian domestic law. Morrison considered that, ‘Prima facie, such an implication would appear to exist’.101 Riethmuller and Australian Taxation Office (ATO) officer John Crotty met with Morrison and Adrian Van Wierst (Parliamentary Counsel) on 23 June 1980.102 Morrison and Van Wierst pointed out temporal inconsistencies between paragraphs 1, 2 and 3 of the non-discrimination article in that paragraph 1 was forward looking while paragraph 2 referred to existing provisions, reiterated the points that had been made in Morrison’s letter and questioned whether the article as drafted was anything more than an agreement between governments

100 MV Riethmuller, First Assistant Commissioner to The Secretary, Attorney General’s Department, 8 August 1979 (attention Mr C Morrisson); ATO file Pt 12. 101 CR Morrison, First Assistant Crown Solicitor, to The Commissioner of Taxation, Canberra, 24 April 1980; ATO File Part 13. 102 Riethmuller to Commissioner, 23 June 1980 confirms the existence of the meeting and personnel in attendance; ATO file Pt 13.

Much Ado about Non-discrimination  277 as to the enactment of legislation. Riethmuller recorded that the possibility of the inference being drawn that the whole of the treaty was not to have the force of law in Australia could be avoided by either including provisions (either in amending the Income Tax International Agreements Act 1953 or prior to the enactment of discriminatory legislation or in the discriminatory legislation itself) expressly stating that such an inference was not to be drawn.103 Riethmuller was evidently encouraged by this advice, and sent copies of the correspondence and his record of the meeting to O’Reilly and to the Secretary of the Treasury. Riethmuller commented that McBurney was still wary about the inclusion of a non-discrimination article and had indicated that the Treasury had other problems with a non-discrimination article, and that ‘he would have to get a reaction from higher up’. Riethmuller reported that Boucher had seen the papers and had no real objection to the inclusion of the non-discrimination article on the basis of the Attorney General’s advice.104 The First Assistant Secretary of the Treasury (BW Fraser) then wrote to Riethmuller saying that the Attorney General’s Department’s opinions left some possibility that ‘things could go bad’ and, while acknowledging that subsequent legislation could ‘put them right’, stated that the Treasury was ‘somewhat uneasy’ about the ‘degree of confusion’ which the non-discrimination article could cause. The article ‘had the flavour of starting out to do something and yet declaring on the face of it that it had no real effect of that kind’. Fraser questioned whether it would appease the US Senate. By including the article, Australia could be accused of agreeing in principle to non-discrimination in tax treaties and that it was time that ‘we took our responsibility to move in that direction more seriously’. To do this would ‘cause us even greater misgivings for reasons which have been fully canvassed in the past’. When O’Reilly met with Rosenbloom, it would be as well for him to indicate that there were still misgivings at the official level but that ministers had not yet indicated their position.105 Riethmuller forwarded Fraser’s letter to O’Reilly and, ever the optimist, described the Treasury as having ‘some misgivings’ but not ‘outright rejection’, while noting that it was hard to say what their attitude would be in a Cabinet Submission.106 O’Reilly, in Washington DC for discussions on unrelated tax issues,107 and Brodie (the counsellor for Taxation at the Australian Embassy) met with Rosenbloom and Feinberg on 7 July 1980. O’Reilly stated that the Treasury was

103 Riethmuller’s record of the meeting is ‘Double Taxation Negotiations with USA, Draft Non-Discrimination Article, 23/6/80’; ATO file Pt 13. 104 Riethmuller to Commissioner, above n 102. 105 BW Fraser, First Assistant Secretary to The Acting Commissioner of Taxation, 24 June 1980; ATO file Pt 13. 106 ‘Commissioner’ 24 June 1980; ATO file Pt 13. It is clear by the content of the note and the preceding documents that the author is Riethmuller. 107 This was a meeting of the Pacific Area Tax Administration Group held in Washington DC on 21 June 1980.

278  C John Taylor sceptical about the view that the US Senate might take of the non-discrimination article. O’Reilly conceded that the article met the aims of the ATO, as it would not give rise to private rights and would merely be part of Australian–US bilateral treaty law on a government-to-government basis. O’Reilly agreed that a further round of negotiations was necessary to update the style of the 1971 draft and to review its content. Rosenbloom dismissed that Australian Treasury’s concerns by replying that non-discrimination would present less of a problem to the US Senate than would some other articles in the 1971 draft. Rosenbloom favoured a treaty based more on the US Model and raised issues concerning the royalty article related to the Volvo decision and changes in the Australian treatment of the film industry. It was agreed that the USA would develop a revised draft to reflect the updated drafting style and that Australia would provide written responses to the draft prior to the next round of negotiations.108 Rosenbloom sent a revised draft to Brodie on 2 September 1980. This draft largely reflected policies that were current in 1971 but adopted the format and drafting style of the 1977 US and OECD Models. A notable inclusion was Article 21, dealing with ‘other income’. The non-discrimination article was identical to the article in the final 1979 draft. Rosenbloom enclosed the then current version of the US Model and indicated that the USA would generally be prepared to move to the language of the US Model in any case where the Australian side wished to do so.109 Brodie forwarded Rosenbloom’s letter, the 2 September 1980 draft and the US Model to Riethmuller on 4 September 1980.110 The ATO, in collaboration with the Treasury, prepared a draft Cabinet Submission on the non-discrimination article, which O’Reilly forwarded to the Treasurer (John Howard) for consideration. O’Reilly advised that the draft nondiscrimination article was the USA’s minimum position, that it met Australia’s objections to ‘standard N/D articles’, that it would be unlikely to cause any real difficulties for Australia and that it had been ‘carefully examined’ in consultation with officers of the Attorney General’s Department. The draft Cabinet Submission recommended that the article be accepted as part of an otherwise acceptable treaty with the USA. O’Reilly noted that negotiations had been continuing since 1970 and pointed to Australia’s need to include provisions relating to the continental shelf and the taxation of royalties. O’Reilly stressed the desirability of having an early government decision on the issue as he would then be able to advise the US negotiator (Rosenbloom) that the government agreed to a non-discrimination article, meaning that another round of negotiations could then be scheduled for 17–21 November 1980. 108 ‘Revised US/Australia Double Taxation Treaty. Meeting of US and Australian Officials 7 July 1980’; ATO file Pt 13. Other notes in the file make it clear that this document was prepared by John Brodie. 109 Rosenbloom to Brodie, 2 September 1980 enclosing the 2 September 1980 draft and the United States Model; ATO File Part 13. 110 Brodie to Riethmuller, 4 September 1980; ATO file Pt 13.

Much Ado about Non-discrimination  279 The Prime Minister, Malcolm Fraser, announced that an Australian Federal Election would be held on 18 October 1980. The government was in caretaker mode and was not able to make policy decisions that would be likely to commit an incoming government. If a cabinet decision could not be made, O’Reilly indicated that, if he knew that the Treasurer personally endorsed the proposal, he could advise the USA that the election had prevented a decision being made but that, subject to the government’s post-election consideration of the matter, a further round of negotiations could be scheduled for November. O’Reilly advised Howard that, as the current US negotiator (Rosenbloom) was leaving the Treasury at the end of the year to return to private practice, it would be desirable to finalise the draft agreement with him rather than start again with ‘a new man’.111 Brodie was advised on 19 September 1980 by ATO officials in Canberra that the Treasurer had approved the Cabinet Submission but that this information was not to be passed on to the USA. Brodie was instructed to advise Rosenbloom that the calling of the election had postponed consideration of the submission until towards the end of October, after the election, and that the ATO would advise Rosenbloom then of the government’s decision on the draft non-discrimination article. Brodie was to indicate that the ATO had set aside the week commencing 17 November 1980 for further negotiations and that pressure of other work had prevented detailed examination of the draft of 2 September 1980, but that comments on the draft would be sent prior to the next round of negotiations.112 THE AUSTRALIAN CABINET DECISION OF 16 SEPTEMBER 1980

Evidently considering that no breach of the caretaker convention was involved, the Australian Cabinet agreed to Australian officials resuming negotiations with US officials on the basis that Australia would accept a non-discrimination article ‘along the lines’ of the draft attached to Howard’s submission of 16 September 1980 for inclusion in a new tax treaty that otherwise met Australia’s negotiating objectives.113 The requirement that a new treaty otherwise meet Australia’s negotiating objectives appears to be the basis on which the Cabinet decided that no breach of the caretaker convention was involved.114 Howard’s Cabinet Submission attached a draft non-discrimination article virtually identical to the article that was to appear in the 1982 Treaty, along with the OECD Model

111 O’Reilly to the Treasurer, 16 September 1980; ATO file Pt 13. 112 File note, ‘Telephone John Brodie and advise, telephoned 19/9/80’; ATO file Pt 13. 113 Cabinet Decision No 12822, National Archives of Australia, Series Number A12909, Control Symbol 4392. 114 Riethmuller to Brodie, 8 October 1980; ATO file Pt 13.

280  C John Taylor non-discrimination article and Australia’s December 1971 submission to the OECD on the non-discrimination article. The submission reiterated previous arguments on non-discrimination, briefly outlined the history of the negotiations and stated that Australian officials were satisfied that the attached draft article was the US minimum position in the context of a new tax treaty that would otherwise meet Australia’s negotiating objectives. The submission stressed that the draft article would not be given the force of law in Australia but would remain part of the Australia–USA bilateral treaty law providing for government-to-government consultation about any alleged breach of the article. The submission acknowledged the possibility that subsequent legislation might be interpreted by reference to the article as implying an intention not to discriminate, but noted advice from the Attorney General’s officials that legislation to prevent this result could be enacted at that time. The submission also pointed out that Australia had agreed to the non-binding OECD Declaration on International Investment and Multinational Enterprises, which provided that non-discriminatory treatment should be provided. The submission noted that the US negotiator had discounted concerns that the US Senate might not agree to the draft article. The submission commented that Australian officials had found that the current US negotiator (Rosenbloom) was ‘far more willing to accommodate Australia’s position in N/D than any of his predecessors’ but was leaving the Treasury at the end of the year and that, consequently, if Australia were to have a new treaty, this was the time to settle it. The submission closed by saying that while Howard still had some reservations in principle about non-discrimination articles, the prospect of problems arising with the draft article was ‘fairly remote’ and recommended that the Cabinet adopt the resolution, which became Decision No 12822.115 THE 17–21 NOVEMBER ROUND OF NEGOTIATIONS

Telephone conversations and correspondence followed between Riethmuller, Brodie and Graham Kelly, discussing drafting attempts to resolve the conflict between paragraphs 1, 2 and 3 of the article identified by Morrison and Van Weirst and conversations between Brodie and Rosenbloom concerning the next round of negotiations. Rosenbloom indicated that, while he wanted to come, there was a possibility that he might not, and that Rabinovitz (Rosenbloom’s new deputy) would in that case lead the delegation. Brodie urged Rosenbloom to come himself and Riethmuller asked Brodie to mention that the ATO delegation

115 ‘Double Taxation Negotiations with USA’, Submission No 4392 is contained in National Archives of Australia, Series Number A12909, Control Symbol 4392.

Much Ado about Non-discrimination  281 would urge him to come also.116 In subsequent correspondence, Riethmuller advised Brodie of the cabinet decision, suggested that Rosenbloom not be informed of it unless it was necessary to prevent the next round of negotiations from proceeding and proposed that it would be advantageous to float any changes to the non-discrimination article proposed in Brodie’s comments with the Americans before they came to Australia.117 The Fraser government was returned with a significantly reduced majority at the Australian Federal Election held on 18 October 1980. On 27 October, Brodie confirmed that Rosenbloom would now not be coming to Canberra for the November negotiations and that the US delegation would instead be led by Rabinovitz. Brodie was instructed to tell Rabinovitz or Rosenbloom that the government had not ruled out a non-discrimination article but would decide in the light of the treaty as a whole. On 28 October, Brodie called Riethmuller again to advise him of details of the itinerary of the US delegation. Riethmuller advised Brodie that the ATO would be sending over an Australian draft, but asked him to ring Rosenbloom to float suggested changes to paragraph 2 of the non-discrimination article.118 Boucher wrote to Brodie on 3 November 1980, enclosing a draft which had been prepared by John Crotty reflecting reactions from comparing the 1971 draft, the 1980 US draft and Australia’s current negotiating position. Boucher and Riethmuller had only undertaken a cursory review of this draft and instructed Brodie to provide Rabinowitz with the draft but to advise him that it should not be seen as definitive of Australia’s position but, rather, as a basis from which discussions might follow.119 The 3 November 1980 Australian draft120 proposed many changes to the USA’s 1980 draft but only two changes to the non-discrimination article. The draft proposed to alter the opening words of paragraph 2 to read: ‘Nothing in this Article relates to any provision of the taxation laws of a Contracting State …’ This drafting change was intended to avoid the possible construction of the draft non-discrimination article of 17 May 1979 arising from the temporal inconsistency identified by Morrison and Van Wierst and by Kelly in the correspondence and meetings discussed above. The other drafting change proposed was less significant and involved replacing ‘nationals’ with ‘citizens’ in the proviso to paragraph 2. This change appears to have been made entirely to ensure consistency of terminology between

116 ‘Non-Discrimination’; ATO file Pt 13. From the content and surrounding documents, it is clear that the author is Riethmuller. 117 Riethmuller to Brodie, 8 October 1980; ATO file Pt 13. 118 ‘Double Taxation Negotiations with USA’ 27 October 1980 and 28 October 1980; ATO file Pt 13. Again, it is clear from the content and context of the notes that the author is Riethmuller. 119 Boucher to Brodie, 3 November 1980; ATO file Pt 14. 120 The draft and a copy with handwritten annotations are contained in ATO file Pt 14.

282  C John Taylor paragraphs 1 and 2, with ‘citizens’ having been substituted for ‘nationals’ in paragraph 1 in the drafts produced in the May 1979 negotiations. A further round of negotiations took place in Canberra between 17 and 21 November 1980. Boucher led the Australian delegation and Joel Rabinovitz led the US delegation. Only a minor portion of the overall discussions concerned the non-discrimination article. On the first day, Boucher explained the background to the change to the opening words of paragraph 2, saying, ‘the first item refers to existing law concerned re implications of legal force out of this’. It is apparent from the context that Boucher was referring to preserving existing law from the scope of paragraph 1. Rabinovitz replied, ‘we accept’.121 On 19 November, after Rabinovitz and Feinberg requested more details for the purposes of Senate testimony, Boucher listed provisions in Australian law that were disclosed as discriminatory in the 1979 negotiations. Rabinovitz then replied, ‘Standard nondiscrimination even ours doesn’t say dead equal treatment.’122 On 20 November 1980, Boucher pointed out that the non-discrimination article was there as an arrangement between governments and it was for Australia to determine how to achieve that as a matter of Australian law. Options still being considered concerned: (i) the implementing legislation; and (ii) using the Australian standard form of language in section 6 of the Income Tax (International Agreements) Act.123 The Australian record of the negotiations does not record any response by the US delegation to this statement. At the conclusion of the negotiations, the delegations initialled a draft of 21 November 1980,124 and the memorandum signed by Rabinovitz and Boucher indicated that agreement had been reached at the official level and that, while the draft would be subject to technical examination as to accuracy, it would form the basis on which officials would seek approval of the treaty by their respective governments.125 The non-discrimination article in this draft incorporated Australia’s proposed change to the opening words of paragraph 2 but did not substitute ‘citizens’ for ‘nationals’ in the proviso to paragraph 2. This appears simply to be a drafting error, as the Australian record of the negotiations for 21 November 1980 shows that it was agreed to change the language to ‘citizens’.126 Because the USA, consistently with its usual practice, scheduled a public meeting for submissions on the proposed treaty, Australia departed from its

121 The official Australian record of the negotiations, ‘Double Tax Agreement Negotiations – USA’, is in ATO file Pt 17. 122 ibid. The provisions listed by Boucher were: the intercorporate dividend rebate; branch profits tax; the interest withholding tax exemption; Income Tax Assessment Act 1936, s 136; personal reliefs available to residents only; and consultants rules. 123 ibid. 124 A copy of the draft of 21 November 1980 is in ATO file Pt 14. 125 ‘Memorandum, Canberra, 21 November 1980’; ATO file Pt 14. 126 Official Australian record of negotiations 21 November 1980; ATO file Pt 17.

Much Ado about Non-discrimination  283 traditional practice and also issued a public statement on 7 January 1981 (the day on which the public meeting was scheduled in the USA).127 Correspondence between officials dealing with technical drafting issues followed, but the only change made in the non-discrimination article was the substitution of ‘citizens’ for ‘nationals’ in the proviso to paragraph 2. THE FINAL ROUND OF NEGOTIATIONS AND THE SIGNING OF THE TREATY

The election of Ronald Regan as President in 1980 not only brought changes in the US personnel responsible for tax treaty negotiations, but also resulted in some changes in US tax treaty policy. In April 1981, the new US International Tax Counsel, Leslie Schreyer, wrote to Brigden requesting substantive changes to the draft initialled following the November 1980 negotiations. Significant developments had also taken place in Australia, with the introduction of the general anti-avoidance provision in Part IVA and the transfer pricing provisions in Division 13 of the Income Tax Assessment Act 1936 being proposed. Given the nature of the changes requested by the USA and the changes pending in Australian law, a further round of negotiations was held in Canberra from 22 to 24 March 1982. The Australian delegation was led by Boucher and included Riethmuller.128 The US delegation was led by Leslie Schreyer.129 Only limited time in these negotiations was devoted to the non-discrimination article. The non-discrimination article was discussed at the end of 23 March and at the beginning of 24 March 1982. Schreyer observed that subparagraph 1(c), if read literally, would disapprove of the USA allowing consolidated returns and a dividends received deduction. Boucher made the general point that the article was the product of a week of negotiations in Washington in 1979 and that one of its features was that a taxpayer could not rely on it in challenging an assessment, that it was purely a matter for the contracting states to raise issues under it and, even then, it did not have legally binding force. Schreyer replied that he thought US courts would regard paragraph 4 of the article as providing individuals with a right and that issues here could only arise when an individual complained about being discriminated against. Boucher replied that one of the reasons why Australia accepted the inclusion of a non-discrimination article was the clear understanding that it would not be given the force of law. If the US inter-corporate dividend relief that Schreyer had referred to was discrimination, then Australia considered it to be a proper one, a concession which Schreyer then appreciated. 127 EF Brigden to the Treasurer (John Howard), 19 December 1980; ATO file Pt 14. The actual ‘Statement by the Treasurer, the Hon John Howard, MP; Double Taxation Negotiations with USA’ is in ATO file Pt 14. 128 The other member of the Australian delegation was John Fisher. 129 The other members of the US delegation were Kent Schreiner, Chief Counsel IRS, and Marcia Field from the Office of International Tax Affairs.

284  C John Taylor Boucher then provided the US delegation with the Crown Solicitor’s memorandum discussed above and the November 1980 Cabinet Submission, noting that both documents stated that the non-discrimination article would not have the force of law in Australia. Boucher provided Schreyer with details of Australia’s existing discriminatory provisions and was provided orally with a list of current US discriminatory provisions. Schreyer indicated that there might be problems if a US company went to the Senate and pointed to the non-discrimination article, to which Boucher replied that it was understood that the article ran that risk. Schreyer then said that he ‘guessed that the non-discrimination article was OK’ and agreed to Australia’s suggested punctuation changes.130 It would appear from the annotated and highlighted Australian version of the draft that the ‘punctuation changes’ referred to in the non-discrimination article included substituting ‘citizens’ for ‘nationals’ in the proviso to paragraph 2 of the article. Technical issues in the draft of 24 March 1982 were largely resolved by correspondence and telephone calls by 6 April 1982, when Boucher sent a revised draft incorporating the agreed changes to Schreyer.131 The only change to the non-discrimination article in this draft was the substitution of ‘citizens’ for ‘nationals’ in the proviso to paragraph 2.132 Correspondence on other drafting issues continued until June 1982, but no further changes were made to the nondiscrimination article. A revised draft with agreed emendations highlighted was then prepared on 30 June 1982.133 The final draft of the treaty was signed by the Australian Treasurer, John Howard, and the US Ambassador, Robert Nessen, on 6 August 1982. Howard’s statement, released on signing the treaty, included the following comment on the non-discrimination article: While the article will not be able to be called in aid by a taxpayer in an objection against a taxation assessment, it does provide for consultation between Governments of both countries where any taxation measures are considered to infringe the principles of the particular article.134

Following signing, all articles in the treaty, other than the non-discrimination article, were given the force of law in Australia by section 6 of the Income Tax (International Agreements) Amendment Bill 1983. The Explanatory Memorandum to Income Tax (International Agreements) Amendment Bill 1983 commented on the non-discrimination article: This is the first Australian double taxation agreement to contain an article dealing with ‘Non-Discrimination’. This article, which was included specifically at the 130 ‘Discussion Notes – USA/Australia Double Taxation Agreement – Talks Held in Canberra – 22 March–24 March 1982’; ATO file Pt 17. 131 Boucher to Schreyer, no date; ATO file Pt 16. 132 The draft developed between 24 March 1982 and 6 April 1982 is contained in ATO file Pt 16. 133 This draft is contained in ATO file Pt 16. 134 Howard’s statement on signing the Treaty is contained in ATO file Pt 18.

Much Ado about Non-discrimination  285 request of the USA, represents, in effect, a government-to-government assurance of each country’s intentions that in enacting taxation legislation, citizens or residents of the other country, and enterprises or companies wholly or partly owned by them, will not be treated in a less favourable way than that in which each country treats its own citizens, residents, enterprises or companies. The article was included on the basis that it does not create private rights of appeal and so would not be given the force of law in Australia.

The treaty was then eventually approved by the US Senate Foreign Relations Committee, and was ratified and came into force on 31 October 1983.135 CONCLUSION

It is remarkable that it took Australia and the USA nearly 12 years to negotiate and draft a new tax treaty when the only issue on which they really disagreed was the inclusion of a non-discrimination article. During the 12-year period, changes in US administrations led to significant changes in the US delegation, to changes in the US Model and to relevant changes in the domestic law of both countries which needed to be reflected in the final treaty. But for their disagreement on non-discrimination, it is likely that Australia and the USA would have entered into a new tax treaty shortly after the first round of negotiations in October and November 1970. Intransigence on that issue on both sides continued until the negotiations in March 1979, when the first real effort was made to draft the non-discrimination article in a way that achieved some compromise between the USA’s desire for certainty and Australia’s desire for future flexibility. The Australian delegation’s mistrust of interpretations by Australian courts is evident in the 1979 negotiations, and it appears that this was when the Australian delegation first thought of the solution of not giving the non-discrimination article the force of law in Australia. This approach was taken notwithstanding equivocal advice from the Australian Attorney General’s Department on its likely effectiveness. Although Australia has agreed in subsequent tax treaties to give a non-discrimination article the force of Australian law, the non-discrimination article in the 1982 Australia–USA Tax Treaty has never been given the force of law in Australia. It is the only article in any Australian tax treaty that has never been given the force of Australian law.



135 Commonwealth

of Australia Gazette, No G44, 8 November 1983.

286

11 Tax Reform for Innovation: Dutch Tax Policy in the Thorbecke Era (1850–72) HENK VORDING

ABSTRACT

T

he historians of the nineteenth-century Dutch tax system have identified ‘tax reform’ with ‘adoption of an income tax’. From that perspective, not much happened between the Napoleonic era and the end of the century, when an income tax was finally introduced. It is argued here that this interpretation of nineteenth-century tax reform underestimates the importance of excise tax policy in the 1850s and 1860s. After providing a brief overview of the Dutch tax system in the early part of the century, the oppressive impact of excises is discussed by using Supreme Court decisions on taxpayer fines as a source. As most excises specified in great detail how taxable goods were to be produced, their impact was both protective of old technologies and very meddlesome towards business. Reform of those excises often implied abolition. That was largely the work of Johan Rudolf Thorbecke, the liberal leader who dominated Dutch politics between 1849 and 1872. He also encouraged local governments to experiment with forms of income taxation, thus providing the groundwork for the introduction of a national income tax in the 1890s. He consistently presented his tax reforms in term of economic rather than social policy – which may help to explain why a later generation of progressive liberals tended to ignore his achievements in the field of taxation. INTRODUCTION: PERSPECTIVES ON NINETEENTH-CENTURY TAX REFORM

The development of the nineteenth-century tax system of the Netherlands has often been interpreted as sluggish. In that analysis, the liberal political movement which set the political agenda after 1848 failed to modernise the tax system in a more equitable direction. Indeed, it took the liberals many decades (until 1892/93) to get an income tax through Parliament. In the words of a leading

288  Henk Vording radical liberal in 1878: ‘the Dutch Parliament since 1848 has never consented in a tax reform that would increase the tax burden of the wealthy, that is: the voters. The Javanese and the gin drinkers have thus far paid the bill.’1 This observation was correct, but incomplete. It ignored the important tax reforms that had indeed taken place between 1850 and 1870. These were the years that Johan Rudolf Thorbecke, the liberal leader, dominated Dutch politics. His reforms were primarily aimed at local finance. He reduced, then took away, municipal access to excise taxation. He also gave local governments an incentive to start experimenting with income taxation. And more generally, he strived for repeal of oppressive excise taxation. Under his direction and influence, a major reorientation of tax policy was achieved. This reform of the excises system has not gone unnoticed, nor is it unappreciated. A 1967 evaluation of tax policy in the second half of the nineteenth century2 summarises the liberal analysis of excises as an impediment to trade and a burden on the productivity of workers – but adds that those same liberals were not able to shift the tax burden to the middle and upper classes. This disappointment was common to all previous historians of nineteenth-century taxation, who interpreted the period as a laborious progression towards a general income tax.3 Only with the introduction of such a tax in the 1890s did justice prevail in tax law. It will be argued here that this focus on social justice as a driver – or, at least, an important goal – of tax reform underestimates the size and importance of tax reforms in the Thorbecke years. Actual decisions regarding tax reform were driven by other considerations. One was breaking the traditional power of local oligarchies by curtailing their access to tax bases. A second one was reducing the excessive compliance costs of small entrepreneurs, who were the new voters following the 1848 constitutional reform. Innovation was the underlying force. Rail transport undermined the internal tax borders on which local tax jurisdiction depended and, more generally, steam engines put an end to any tendency of collusion between outdated tax rules and outdated production technologies. The liberal era of Thorbecke did not articulate an ideal of social justice through tax reform. It did, however, lay the foundation for a tax system that was less protectionist towards the vested interests connected with old technology, by reducing the level of intrusiveness of tax rules.

1 S van Houten, ‘Finantieele Beschouwingen’ (1878) 1 Vragen des Tijds 150, 165. The Javanese refer to the colonial revenues of the Dutch state. 2 ACJ de Vrankrijker, Belastingen in Nederland 1848–1893, de strijd om een modernisering van het stelsel (Haarlem, F Bohn, 1967). 3 MWF Treub, Ontwikkeling en verband van de Rijks- provinciale- en gemeentebelastingen in Nederland (Leiden, SC van Doesburgh, 1885); WPJ Bok, De belastingen in het Nederlandsche parlement van 1848–1888 (Haarlem, F Bohn, 1888); GM Boissevain, De jongste belastinghervorming in Nederland in verband met de geschiedenis van ‘s Rijks financiën sedert de Grondwetsherziening van 1848 (Amsterdam, PN van Kampen, 1894). More broadly, FN Sickenga, Geschiedenis der Nederlandsche belastingen sedert het jaar 1810, vols I and II (Utrecht, JL Beijers, 1883).

Tax Reform for Innovation  289 The second section of this chapter briefly outlines the tax system in the first half of the nineteenth century. In the third section, the functioning of the tax system is discussed, using the Supreme Court case law of the 1840s as an indicator of the social and economic impact of tax laws. Finally, the fourth section discusses the tax reforms of the liberal era, which start with the 1848 Constitution and continue up to Thorbecke’s last years. THE DUTCH NATIONAL TAX SYSTEM: AN OVERVIEW

The century started with the introduction of the first ‘national’ tax system in 1805, under the aegis of Napoleon. It rested upon two premises. The first was that people’s ability to pay could be tapped by taxing proxies like housing quality, land ownership and being engaged in a trade or business. The second premise was that every citizen ought to contribute something in tax, which implied that excises had to be applied to some staple foods. The first Dutch Constitution, the revolutionary Staatsregeling of 1798, had promised to exempt basic commodities from tax. This promise was never realised, and the 1805 tax system relied heavily on excises.4 In the early years of the Kingdom of the Netherlands, with Belgium still included (up to 1830), the 1805 system was basically reconfirmed in the Stelselwet (System Law) of 1821. The System Law The System Law followed the basic patterns of Gogel’s 1805 system. It distinguished three ‘direct taxes’; a range of excises on goods; import and export duties; and a number of other taxes, like stamp taxes and inheritance tax. Roughly speaking, the excises and tariffs accounted for half of overall tax revenue and the direct taxes for somewhat less, with the other taxes contributing the small remainder. While any description of the system conventionally commences with the direct taxes, it is proper in this case to start with excises, as these were the dominant type of tax. They were also the taxes most felt by taxpayers as inquisitive and arbitrary. The System Law listed a considerable number of excises – on flour,5 beer, wine and liquors, vinegar, meat, salt and sugar. Excises on peat and

4 On the period, and especially on Gogel, see OIM Ydema and H Vording, ‘Dutch Tax Reforms in the Napoleonic Era’ in J Tiley (ed), Studies in the History of Tax Law, vol 6 (Oxford, Hart Publishing, 2013) 489–521. 5 This excise was a source of conflict between the northern and southern provinces (since 1830: Belgium). The Belgians objected to the tax. It had been repealed in 1816, reintroduced in the System Law, again abolished in 1830 and reintroduced in the north in 1833. Treub, above n 3, 353.

290  Henk Vording coal, and on soap, were added shortly after 1830.6 Quite a number of potential tax bases had been left out, even when they had been used in previous centuries, eg fish, coffee and tea, tobacco, clothing – and potatoes, the staple food of the nineteenth century. In the choice of excise tax bases, there was a trade-off to be made. Some goods were produced or imported by a small number of firms. For those goods, collection at source was easy, but the businesses involved could easily organise into effective veto groups. Other goods were produced by many small businesses  – hard to collect taxes, but no organised political pressure against taxation. It seems that, broadly speaking, the political consideration won. The backbone of the excises system comprised the excises on flour, meat and gin. All required heavy surveillance, as the number of producers (including moonlighting evaders of tax) was large. Of the colonial products landed at the harbours of Amsterdam and Rotterdam, only sugar (then only produced from sugar cane) was taxable, but that actually worked out as a subsidy rather than a tax.7 The import tariffs also reflected colonial interests. Coffee was hardly taxed at two guilders per 100 kg (equalling roughly one per cent of the consumer price), compared to 12–16 guilders for different qualities of tea (about three to four per cent of the price). The explanation may be that the Dutch Indies produced large amounts of coffee, while tea production still had to take off. The protection of domestic industry was also obvious – raw sugar was taxed lower than refined sugar, and the rates on tea were lower when imported on Dutch vessels. The distributional impact of the excises system was not as regressive as modern-day excises. Nowadays, excises are mostly on ‘bad habit’ consumption goods, which correlate with low income status. But in the first half of the nineteenth century, many excises were on ‘middle class’ consumption. Taxable items like sugar, wine, but also meat, wheat bread and coal were far beyond the budgets of the working poor. They would typically eat potatoes and perhaps rice (both not taxable), rye bread (lower taxed than wheat bread), use some taxable salt and vinegar, and heat their dwellings with peat (lower taxed than coal) if they could afford to. Their luxury purchases would probably be a small amount of non-taxable coffee, and taxable gin. The ‘direct taxes’ were copied from the 1805 system. The land tax was a very stable source of revenue over the next decades, as value assessments were never adjusted (until around 1875). The personal tax was levied on the rental value of housing (with a threshold exempting all poor and modest dwellings), furnishing, hearths and windows,

6 The excises on peat and coal were introduced in 1832; up to 1830, the Belgian industry had always objected with success. 7 The sugar excise was the only excise without much red tape. Sugar cane arrived at Amsterdam, and was then taxed using a presumptive sugar output. In fact, sugar refineries exceeded this output. As excise was refunded at export, much of the tax collected on domestic sugar sales remained in the pockets of the sugar producers.

Tax Reform for Innovation  291 domestic servants and carriage horses. The value of furnishing was imputed (as a percentage of rental value), and some avoidance of tax was easy. Windows could be bricked up, and chimneys could be removed in spring and reinstalled in autumn.8 The patent tax was levied on businesses. It replaced the contribution systems of the guilds, which had been phased out in the Napoleonic years. Tax subjects primarily included those professions, trades and crafts that had previously been regulated in guilds – and hardly any outside that field. As a consequence, there was no patent tax for lawyers or clergy, or indeed for farmers. Originally, and following the French model, the tax was only modestly complicated, using business characteristics like number of employees and size of business premises. It had, however, been refined in great detail in the early post-Napoleon years, to better approach the average profitability of businesses depending on type of product, means of production, geographical location, etc.9 The other taxes listed in the System Law were much less significant in revenue terms. Some are interesting because they relate to contract law (stamp duties) and family law (inheritance tax), but they fall outside the scope of the present analysis. Overall, one has to keep in mind that the tax system of the early nineteenth century functioned under conditions radically different from ours – and much more comparable to the Ancien Régime. In the pre-railway years, it took days to transport goods over a distance of 100 km, and many people seldom travelled beyond the next village. Production was usually on a small scale. In the patent tax, the rate went up with the number of employees – capped at 300, later 500, as if nobody imagined that a factory could ever employ more people. Without streetlights to speak of, nights were dark, and darkness limited human action. For example, tax officials’ surveillance powers were much more limited than during daylight. This was especially problematic when tracking illicit slaughtering – farmers were inclined to slaughter their livestock after sunset. On the other hand, taxpayers were also restricted in their activities. Grain mills were not allowed to work in the dark. And whoever wanted to import goods had to do so over the main roads or rivers during daylight. In winter, customs offices would still be opened in the dark afternoon – but traders who attempted to report their imports at such a time could be fined nevertheless.

8 For large mansions, quite a number of hearths could be made tax-free by removing (the external top of) one chimney. Obviously, it would have helped to count hearths during winter – but it was done from 1 May. 9 The tax used two tables with rates (in fixed amounts of guilders). One was graduated according to the number of inhabitants in the taxpayer’s municipality, the other was general. The underlying assumption was that some trades were more profitable in larger towns, but others would not depend on location. The applicable rates went up with indicators of firm size: either the number of employees, the number of mash tuns in breweries, the number of kettles in distilleries, etc; mills were separately classified according to their use. A list of more than 1000 trades and occupations was used to allocate each taxable trade and business to a group.

292  Henk Vording THE PERFORMANCE OF THE TAX SYSTEM UP TO 1848

Tax for a Stationary Society The 1805/1821 tax system was made for a stationary society. Most tax rates were in rem. Taxes were a fixed amount of money on the number of windows and horses, the weight of flour produced by the windmill, the size of the kettles used by the brewer. Tax revenue was therefore unable to keep pace with economic growth and price inflation. The System Law allowed for supplements on the ordinary tax rates, and these were indeed raised frequently. But overall, this did not matter much. There was little or no pressure for higher government expenditure – Parliament was still a taxpayers’ Parliament. Tax as Protection of Insiders The intriguing aspect of the tax system was its protection of tradition. Most excises meticulously prescribed the process of production of taxable goods. The tax legislation of the age was strongly inspired by the notion that revenue had to be wrought from unwilling taxpayers. As one Advocate-General with the Supreme Court argued: ‘The presumption of innocence … does not seem to apply for this tax law. On the contrary, all of this law is inspired by suspicion against potential offenders.’10 He referred to the excise on flour, but could have said the same of most other excises. And a leading liberal member of Parliament commented: excise laws create a different relationship between Government and citizens … as the Government, in order to ensure the collection of taxes due, keeps an eye on all the actions of the worker and manufacturer and thereby hinders them in their free movement and activity. This relationship, as unnatural as it is, puts the citizen in a hostile disposition to the Government, and nothing is more detrimental to the latter than such hostile disposition.11

But there was an advantage for traditional trade and manufacturing as well. The tax on flour laid out in great detail how a bag of grain had to be dealt with. Forms had to be filled and kept in specific places, bags had to be marked and time schedules had to be kept meticulously. These requirements gave rise to

10 Conclusion of Advocate-General Arntzenius in case Hoge Raad 22 February 1842, Van den Honert’s Verzameling van Arresten van den Hoogen Raad der Nederlanden: Belastingen no 41. This was a series of published Supreme Court cases. It provided each case with a case number that the Supreme Court quickly started to use when referring to precedents. Supreme Court case law will further be quoted as: HR (date), Van den Honert (case number). 11 JM de Kempenaer, Hand. TK 1844/1845, 28 November 1844, 133. ‘Hand. TK’ is shorthand for Handelingen der Tweede Kamer; it refers to the transcript of Second Chamber debates (the ‘Hansard’).

Tax Reform for Innovation  293 conflict and frustration. But they also protected traditional windmill production by settled producers.12 Millers had always been closed professional groups. Intermarriage was not uncommon (also regarding the required considerable investment in physical structures). Nor was cartel formation: fixed fees for grinding, uniform quality of produce, mutual insurance of risks and revenues. The excise law endorsed these practices. It protected millers from newcomers unfamiliar with tax obligations, and was an effective impediment against innovation, especially steam-powered grinding without the use of millstones. Things were not very different with beer brewing, with production of soap and with distilleries. The laws again prescribed specific modes of production, which protected against innovation pressures. The excises on peat and coal present another case of discouraging innovation. Meant to burden household heating (as, in fact, did the personal tax on chimneys), business use was not fully exempt and permanent supervision of thousands of firms was required to make sure that the exemption was not abused for private consumption.13 The exception to this negative impact of taxes on innovation was the patent tax, as it was quite flexible towards innovation. This may come as a surprise, as this tax seemed to fossilise economic life. Each trade or business (except the many exemptions) was taxed according to a specific rate table. But in fact, whenever a new trade or profession would develop, it would be treated like the existing trade or profession most comparable to it. The new industry of making safety deposit boxes was treated in the same way as making fire sprayers (the logic being that the Dutch term for such boxes is ‘fire box’). The new trade of producing matchsticks was treated like the production of brooms (considering that twigs were used in both cases). And later on in the century, publishers who started using rotary printing technology were taxed like millers specialised in pressing woollen cloth into bombazine, because in both cases a rotation of heavy cylinders did the job. And while an excise on potatoes was never introduced, the use of potatoes to make starch and glue was easily absorbed under the patent tax rules. The development of steam power, finally, posed no problem to the patent tax. It had always (starting with the 1819 text of the law) taxed both the use of employees by taxable persons and the use of labour-saving technology, be it wind, horses or, indeed, steam power. At the end of the nineteenth century, the patent tax gave way to an income tax, not because it was unable to keep up with innovation, but because it needed sometimes bizarre comparisons to do so – and, of course, because of all those exemptions dating back to the ancient times of the guilds system.

12 JL van Zanden, ‘De introductie van stoom in de Amsterdamse meelfabricage 1825–1885’ in Jaarboek voor de geschiedenis van bedrijf en techniek (Utrecht, Stichting Jaarboek GBT, 1991) 63–80. 13 Parliamentary Documents TK 1863/1864 XXXI no 2, 460.

294  Henk Vording Tax as Conflict: Supreme Court Case Law Tax rules were intrusive and created conflict. A relevant measure is the case law on tax matters by the Dutch Supreme Court. It has been published from 1839 on, usually full-text. For cases with news value, the (then only) weekly law magazine Weekblad van het Regt published additional detail (like the names of persons involved, and sometimes comments or opinions on the case). This case law signals the contested issues in taxation: the tax rules that taxpayers tried to escape, or did not fully understand. An overview of the topics decided by the Supreme Court (1839–49) is provided in Table 11.1. Table 11.1  Supreme Court case law on taxation (1839–49) EXCISES

FLOUR

36

Meat

17

Liquor

15

Soap

7

Peat/coal

7

Salt

4

Sugar IMPORT/EXPORT TARIFFS PERSONAL TAX

PATENT TAX

1 23

Horses

19

Servants

8

Rental value

2

Not allocated

4 21

The figures clearly suggest that the big battlefield of taxation in the 1840s was the excise on flour, with its many administrative rules. Tariffs came second, nearly always concerning smuggling. The patent tax triggered quite some case law, much of it dealing with the fine distinctions between comparable trades and crafts. The single most important issue in the personal tax was the qualification of horses as either taxable or exempt. The case law on the meat excise, while less prevalent than the flour excise, tended to express more violent conflict between peasants and tax officials. Among the cases on liquor, finally, there is not a single one on clandestine house distilleries, which must have been flourishing. The Dutch Supreme Court was and still is a court of cassation; it decides matters of legal interpretation, bound by the facts as established by the lower courts. As the Supreme Court in the nineteenth century was not competent to decide matters of substantive tax law (it only got a Tax Chamber in 1917), tax cases were brought before it for two reasons. The most important was that the taxpayer had been fined. The other reason was that applicable procedure needed

Tax Reform for Innovation  295 clarification (especially the relation between tax procedure and penal law rules and principles, and the competence of the tax administration versus the public prosecutor). The broad majority of cases reviewed by the Supreme Court answer the question whether or not a fine found an adequate basis in tax law. This, of course, allowed the Supreme Court to clarify rules of substantive tax law as well. Tax as Conflict: Excessive Fines If fines were the entrance ticket to the Supreme Court, how did the system of fines work? For indirect taxes, the basis was the General Law on Tariffs and Excises, which included most (but certainly not all) tax procedure. It stipulated that the revenue of fines was to be distributed among the tax officials who applied the fine, their superiors and two tax administration funds, in fixed percentages.14 None of the revenue went to the Treasury. This simply means that tax officials had a personal financial interest in fining taxpayers. In addition to the fine, tax officials could claim the goods not (properly) taxed, and any means of transportation (a cart, a horse, a ship) by which the goods were carried. Those goods could be sold by the tax administration to cover the fine. For perishable food, the sale could be executed immediately. For ‘small amounts’ of food and drinks (for which the law set upper limits of 20 to 200 kg, depending on the type of good), the tax administration was to offer the goods to local almshouses first (for ‘half price’, without any indication of how to determine the market price) and, if rejected, could use the goods as it wished. One suspects that such goods often found their way to the tables of tax administrators’ families. Nothing on this matter was discussed in the prolific nineteenth-century literature on tax reform,15 which suggests that to contemporary observers, the tax administration was not compromised by this practice. Occasionally, a taxpayer did seek publicity. A good example is captain Haye Klein, sailing from Amsterdam to the Baltic with cargo in 1840. He briefly called at the small port of Lemmer in Frisia to load victuals for his crew. Two tax officials, believing that

14 Regulations based on Art 232 of the General Law on Tariffs and Excises. The tax officials who actually applied the fine received 25% jointly; their direct superior 9%, his superior 3% and his superior 9%; the tax administration’s pension fund received 25%; and a fund for the tax administration’s legal expenses 29%. JC de Potter, Algemeene wet van den 26sten augustus 1822 (etc) (Gorinchem, J Noorduyn, 1837) 163–69. In practice, the shares of the higher-rank staff were reverted into fixed remunerations ‘to remove all personal interest’ in legal procedures. Parliamentary Documents TK 1846/1847, XXX no 3. The Parliamentary Documents include all parliamentary records other than the minutes of debates: legislative proposals, explanatory memorandums, White and Green papers, reports of parliamentary committees. 15 The most thorough historian of 19th century taxation, FN Sickenga, does mention in passing ‘an old principle’ that fines went into the purses of tax administration staff, and notes that a regulation of 1874 ended the practice. He ignores the fact that this practice actually relied on the clear text of the law. Sickenga, above n 3, vol II, 80. Nor did the practice end: even in the early 20th century, the tax officials directly involved still received their share of 25%.

296  Henk Vording tariff formalities were required, imposed a small fine and made the captain pay an amount of 162 guilders as bail while awaiting further procedure. The legal provision that they were relying on concerned the loading and unloading of cargo without the required documentation; it allowed the tax administration to claim the cargo and impose a fine 10 times the amount of the unpaid tax and tariffs. But this provision had never been applicable to victuals. Later on, the tax administration proposed a settlement for a modest amount, but the captain refused. The Court of First Instance decided that victuals were not exports, hence not subject to tariffs. The Court of Appeals, however, drew the opposite conclusion. Upon the shipping company’s request for cassation, the Supreme Court ruled that crews’ victuals were not subject to tariffs.16 The shipping company drew public attention to this case by a letter to the editor of a leading Amsterdam newspaper. It claimed that it had successfully asserted taxpayers’ rights: Often, one is almost forced into settlements by the administration, since the conduct of a lawsuit about small amounts is usually avoided in regard of the considerable expense; the administration knows this, so it is often their point of persuasion …17

Had the tax officials simply attempted to force the captain into some payment to avoid further problems? Anyway, we only know about the case because the captain refused to pay. Tax officials had an incentive to apply fines, but the size of the incentive depended on the type of tax. Fines could be 5–10 times the amount of tax underpaid, depending on the type of tax.18 Rates in the direct taxes were modest, and much of the tax base was unambiguous (ownership of land, the number of chimneys and windows, etc). Of the cases listed in Table 11.1, 97 provide the exact amount of fine at stake (and in 82 cases, the Supreme Court endorsed those fines). In 57 cases, the fine was lower than 300 guilders (an amount that a fully employed skilled worker might hope to earn in a year). Of the remaining 40 cases, all but one19 were about excises (and a number on import duties). The average fine here was 820 guilders, with four cases ranging from 5000 to

16 HR 15 November 1842, Van den Honert no 46. 17 Algemeen Handelsblad, 28 November 1842. 18 The legal rules regarding fines are partly found in the General Law on Tariffs and Excises and partly in substantive laws. To the modern reader, the rules and their eventual overlap are not easy to understand (as must have been the case to many 19th-century taxpayers). For example, the fine on overweight (having more goods than accounted for in the required documents) was six times the tariffs and excises underpaid in case of import from sea and three times those for import from rivers or land; and import without required documents was fined by 10 times the amount underpaid. The Supreme Court tended not to accept an incorrect document as a ‘required’ document, so it is not obvious which of the fines had precedence. 19 This single exception is HR 2 December 1845 Van den Honert no 94, a personal tax case: a businessman not reporting his house in the centre of The Hague. Cornelis Daames ran the Inn De Zeven Kerken van Rome (Seven Churches of Rome) at the Spui, and was the agent for the post coach to Rotterdam, ‘s Gravenhaagsche Stadsalmanak voor het jaar 1842, 62. Perhaps this was an early case of ‘mixed use’ – for the inn, he would have needed a patent; and his living quarters were taxable for personal tax.

Tax Reform for Innovation  297 10,000 guilders. In comparison, in the 28 personal and patent tax cases, the average fine was just 110 guilders. Fines running into the thousands of guilders were certainly enough to force a man out of a modest business – and a golden opportunity for tax administrators. Before discussing some illustrative cases, it should be noted how courts dealt with cases involving high fines. To start with, fines were considered administrative sanctions that judges could not temper but could only endorse or reject.20 In many cases, lower judges disregarded or misunderstood the legal basis for imposing a fine. The Supreme Court almost always (upon cassation request by the administration) corrected this negligence of written law. It is hard to say why the lower courts acted as they did. In some cases, it appears that they pitied the taxpayer. In other cases, ignorance of the law may have played its role. Lawyers were trained in Roman law, not in the details of excise laws (which often required some familiarity with production techniques and business practices).21 Anyway, the Supreme Court, aided by its Advocates-General, time and again stressed the decisive meaning of clear provisions in tax codes.22 At times, it was also prepared to use the ‘system of the law’ where its text was unclear. But there was a second escape for judges trying to help taxpayers in the face of fines that they could not pay: an alternative prison sentence. That sentence was not a normal penal sentence (which could also be applied, for example, in cases of fraudulent import or of physical resistance against tax officials). It could only be applied if the taxpayer was unable to pay the fine, and upon request of the administration. In that case, the courts had full discretion (within the range of two days up to two years) in setting the ‘exchange rate’; sometimes they helped taxpayers by combining a huge fine with a short alternative sentence,23 sometimes they did the reverse.24 The implication for tax officials may have been that they should not be too greedy, as the courts could undo high fines by short alternative prison sentences.25 20 Explicitly noted in HR 12 December 1843, Van den Honert no 56, the salt excise case involving a 5000 guilder fine (to be discussed in the main text). 21 Even the Supreme Court could almost get lost in technical detail. A remarkably simple one is HR 13 January 1846, Van den Honert no 96. The issue at stake is whether a traditional Dutch type of groats made from barley was exempt under the excise on flour. Barley certainly was, but it took first the Advocate-General and then the Supreme Court to come to the obvious conclusion: if barley is exempt, so must groats made from barley. 22 The Supreme Court was willing to decide the same matter time and again. For example, the exemption of farm horses in the personal tax raises the question: what are the tax consequences of using a horse incidentally for non-agricultural purposes? The facts of the cases are often the same, only the colour of the relevant horses may differ. The Supreme Court held that even incidental non-agricultural use implies that a horse is taxable, though it did deviate from its clear course in several cases. 23 A fine of nearly 2400 guilders to be replaced by six weeks’ prison, HR 5 November 1837, Van den Honert no 7, a case of smuggling with questionable co-responsibility of the person fined. 24 A fine of 25 guilders to be replaced with three months’ prison, HR 2 March 1841, Van den Honert no 25, a case of evident small-scale fraud with gin transport. 25 The largest fine to be found in the Supreme Court case law up to 1850 is HR 2 January 1849, Van den Honert no 170, involving the salt-maker Willebrordus Kok. The fine was almost 10,000 guilders, or, if the salt-maker could not pay, one year in prison. As Kok had only recently gone into

298  Henk Vording Excise on Meat The first case to be discussed involves the excise on meat. It was actually an excise on slaughtering cattle, sheep and pigs. As such, it potentially covered all farmers – and the Netherlands at the time was still predominantly an agricultural country. It raised a substantial amount of case law, primarily on questions that suggest heavy conflict. Were tax officials allowed to enter the farm at night? What does it mean when the farmer showed his knife to those officials, or hunted them with an axe? The law required that slaughtering be reported in advance to allow the tax official to assess the value of the animal, that the slaughtered animal be transported to consumer markets with matching excise documents and that butchering it into tradeable pieces could only happen when those markets had been reached. Slaughtering animals that had died from natural causes was – remarkably – considered non-taxable.26 In 1841, the Supreme Court decided a case involving resistance of taxable persons to tax officials.27 The taxpayers were a butcher, his wife and their employee, selling veal at a market in The Hague. The butcher was Levie Wolf, from a Jewish family of butchers, and probably quite well informed about the rules and practice of the meat excise. He was approached by an official of local taxes, who ordered him to put the veal already offered for sale back in a basket, apparently questioning the presence of matching documents. Next came more officials, who wanted to claim the basket. Levie Wolf, his wife and his servant tried to protect their meat. When the cavalry happened to cross the marketplace, the crowd got excited and, in the end, the basket remained in the hands of Wolf. The Court of First Instance established that Wolf had indeed had the correct documents available, and that his attempt to protect his merchandise did not constitute ‘rebellion’ – that is, physical resistance of officials performing their duties. The Court of Appeals had confirmed the presence of the documents, but decided that rebellion had been committed. The Supreme Court endorsed this decision. What had probably happened here is that tax officials, whether or not driven by concern about documents, had hoped to lay their hands on a good portion of veal – and failed. The butcher, his wife and his assistant were the salt-making business (at the time of his marriage, 12 years before, he had been a baker like his father), he may not have had the cash to pay the fine. Yet his business subsequently flourished, and at his death in 1860 he was still a salt-maker. The most plausible explanation is that he was allowed to sit in jail instead of paying the fine. 26 The urban underclass had its occasional meat when deceased animals were slaughtered irregularly outside the city gates. The Supreme Court ruled (in palpable disgust) that pork meat obtained from a rotting cadaver was not taxable for meat excise. It believed that the legislator could not have intended to allow such meat to be consumed. HR 26 June 1849, Van den Honert no 179. Yet, it must have been frequent practice. 27 HR 21 August 1841. The case was not published in Van den Honert (perhaps because the only legal question concerned rebellion as defined in the Code Pénal), but only in Weekblad van het Regt, 12 September 1841.

Tax Reform for Innovation  299 each sentenced to a half year’s imprisonment. They were pardoned by the king.28 This implies that the Minister of Justice had intervened to this end, probably feeling that justice had not been done in this case. Excise on Liquor The excise on (domestic) liquor was a fine example of exhaustive regulation of the production process. As with the excise on flour, transport was heavily regulated. Though not as strongly contested in court as the excise on flour, the amounts of fine at stake could be considerable. That was not just a matter of high rates (and a huge consumers’ market); the law had a remarkable provision on fines. Transporting gin without correct documentation would attract a maximum fine of 10 times the amount of excise involved, ie not just the amount underpaid. On 5 May 1840, a workman leaves the city gates of Leiden with a barrel of gin on a cart; he is to bring it to his sister who runs a pub in nearby Oegstgeest,29 now an academics’ suburb of Leiden, then a village of small craftsmen. He has two documents to testify the degree of alcohol: one for national excise reporting 100 degrees, one for local excise saying 90 degrees.30 The barrel is checked by national tax officials, and is found to be 90 degrees. He is fined for having one incorrect document: a standard fine of 25 guilders plus 10 times the excise to an amount of 84 guilders. That must have added up to a full year’s earnings. The Court of First Instance finds that the man was just carrying out a job on behalf of someone else, and cannot be held responsible for the documents. The Court of Appeals finds him guilty, as the man had not shown the ‘required document of transport’: an incorrect document is not a ‘required’ document. The Supreme Court, upon cassation request of the workman, confirms the fine. The workman’s lawyer at the Supreme Court is Dirk Donker Curtius, an activist defender of civil liberties, who will take an important part in writing the Constitution in 1848, but become the leader of a conservative, at least nonThorbeckean, cabinet in the 1850s. Donker Curtius’s defence is weak: the law does not clearly require that a transport document states the correct degree of alcohol. The Supreme Court can easily lay that point aside by a ‘purpose of the law’ reasoning. The point that Donker Curtius does not raise at all is that no tax was underpaid here in the first place. The producer of the gin had either paid excise for 100 degree gin or had been debited for that amount – while he should

28 Weekblad van het Regt, 28 November 1841. 29 HR 16 November 1841, Van den Honert no 35. 30 The percentages refer to the marks on a float used for measuring; a 100% degree equals 40% alcohol. The technique was based on the different masses of water and alcohol: the higher the degree of alcohol, the deeper the float would sink. Measurement required some training, as the results depended on temperature.

300  Henk Vording only have paid the amount corresponding to 90 degree gin. Nor was there any attempt to defraud local excise. If the transport document for local excise had claimed a too high degree of alcohol (which it did not), the workman could have claimed more refund of local excise than he was entitled to (but he didn’t).31 But, indeed, it was the law. It seems no coincidence that two years later, the Minister of Finance instructed the administration that transport documents may underreport the degree of alcohol if payment was made for the higher correct degree.32 Excise on Salt The excise on salt was a fairly simple tax. There was some import of salt, which was taxable at the border. And then there was the domestic production from seawater. Usually, seawater was concentrated into brine at the North Sea coast and then transported to salt-makers working for local markets. The actual production of salt from brine required a sizeable capital investment: the brine was heated – using coal – in cast iron pans of considerable size. While the taxable event was the sale of salt to customers, the control mechanism of the law required a close relationship between this output and the registered input: brine or pure seawater. The case involves a father and son who had recently gone into the salt business. The father was well-to-do, and seems to have given each of his sons a start in life by setting up some business for them. The son, Petrus van Rijn, started a salt-making factory in Oegstgeest – which probably offered better tax rates for business than the nearby impoverished town of Leiden. The son was still young – he needed court permission to act as an adult, and formally his father remained involved. In the early summer of 1842, he started producing salt. It soon appeared that his pans were leaking; perhaps they were second-hand. On 11 August of that year, tax officials noted that salty water had vanished representing a total amount of 500 guilders of excise. They imposed a fine of 5000 guilders. It was confirmed by the Court of First Instance, then reconfirmed by the Court of Appeals. In the meantime, Petrus van Rijn had agreed to accept two investors as partners in the venture. At the Supreme Court, the interest of the Van Rijns was defended by a leading lawyer of the time (another Donker

31 The difference can only be explained by assuming that measurement for the national excise had taken place first and that either the producer or the transporter had subsequently diluted the gin with water, followed by the measurement for local tax. The purpose may have been to defraud the innkeeper, who would have needed the national but not the local document. 32 Resolution 6 October 1843 no 13; HR 19 July 1847, Van den Honert no 143 shows that taxpayers could not rely on this discretionary power of the administration. A transporter using a document underreporting the degree of alcohol was fined anyway. Under the circumstances of the case, he had ample time to replace some of the gin with water, to the detriment of his client.

Tax Reform for Innovation  301 Curtius), who discussed Roman law and, in particular, the history of the principle that no man could be sentenced without guilt. He also noted that tax officials had visited the salt factory very frequently during the summer of 1842, and had always seen the leakage. The Supreme Court basically ignored him: tax fines did not require guilt. The fine had to be paid. No attention was paid to the claim that tax officials had had ample opportunity to give advance warnings before imposing a disastrously high fine. Petrus van Rijn was soon dropped as a member of the cooperative venture exploiting the salt-making factory. Of the other partners, one died quickly, whereas the other later became Mayor of Oegstgeest and was able to attract a new investor, a wealthy baronet. One is left with the feeling that a trap had been set to a young and naive entrepreneur. He never returned to the salt-making business. Excise on Flour Technically speaking, the excise on flour was a tax on grinding three types of grain: wheat, spelt and rye. So, for example, barley and buckwheat were not taxable. Corn, however, was included as ‘Turkish wheat’ and sorghum as ‘Egyptian rye’. The production process was tightly controlled by the tax administration, and a miller processing non-taxable grains had to keep administration as well. It seems that each grain mill had its own supervising tax official.33 The huge amount of red tape involved in collecting the flour tax could only be reduced in one way: admodiation. Municipalities, and, indeed, provinces, were allowed, under certain conditions, to buy off the flour tax. It was then replaced by a per capita payment, which the local government would graduate in relation to its citizens’ estimated consumption of bread, the size of their families or, finally, some measure of their spending capacity. In the 1820s, admodiation was introduced on a considerable scale, but turned out to cause excise tax ‘borders’ between regions and cities. After 1830, it was limited to regions bordering Belgium, where non-taxed Belgian flour was readily available.34 The most intriguing case law involved two issues. One concerned the traditional ‘Frisian’ black rye bread still popular today. It is based on a mixture of ground and unground rye. The Supreme Court decided that taxable grain had to be ground before the baker was allowed to use it.35 This is definitely one of

33 The law of 1833 mentions (in Art 2) ‘an official of the administration connected with the mill, or the receiver of taxes’, but in 1854 it was taken for a fact that each mill had its own resident tax receiver. Parliamentary Documents TK, 1854/1855 LV no 5, 453. 34 Sickenga, above n 3, vol II, 23, fnn 1–2; the law of 1833 limited admodiation to border regions. 35 HR 2 February 1841, Van den Honert no 21.

302  Henk Vording the more counter-intuitive decisions in the history of the Supreme Court, as it effectively declared illegal – and only for tax reasons – a popular type of bread. The second issue involved non-taxable grains. As barley and buckwheat were not taxable, there was an opportunity for bakers to offer bread at discount rates. Indeed, an Amsterdam bakery advertised ‘tax-free bread’ in the Amsterdam newspapers. This was clearly too much for the tax administration, which argued in court that all bakers, even when only using tax-free flour, were required by law to have permission to baking bread. The bakery had not applied for such permission, which resulted in a fine of almost 500 guilders. The tax administration won its case.36 The baker (at least, one of the two companions), undeterred, continued to annoy the tax administration: And now I am prepared to make a finer cake Of Untaxed Flour, enjoy a taste at ease. It’s Amsterdam breakfast, that name it will take, Its Taste and Purity I hope will you please. And with your favour I will further improve it, To live with my family of the modest profit.37

The next case to be discussed is a more simple one. In 1851, tax officials on the (then) island of Walcheren in Zealand discovered two people carrying bags out of a mill.38 As the transport of bags into and from the mill was heavily regulated by law, the officials believed they had discovered an offence. They tried to seize the bags. The two people (the miller’s son and the local baker’s wife) resisted, quickly aided by others, and a local uprising resulted. The tax officials had to withdraw at speed, booed by the crowd. In court, this was presented as another case of rebellion. No mention was made of any other offence or fine. In fact, the two people had carried bags of unground grain out of the mill, which is not typically an act that would result in lower tax payments. There are two interesting facts to be noted. First, the tax officials had intended to carry the bags to the ‘nearby’ premises of a tax official. This suggests that the mill was usually closely guarded by that tax official. The second fact is that the two tax officials showed up exactly when their colleague was away – perhaps hoping that someone would seize the opportunity to evade tax. Their bad luck was that the bags that were carried out of the mill did not contain any flour, but only grain. In cassation, the Supreme Court decided that indeed the two people had rebelled against tax officials. They were sentenced to a few months in prison.



36 HR

28 January 1845, Van den Honert no 75. Handelsblad, 2 July 1845. 38 HR 27 April 1852, Van den Honert no 256. 37 Algemeen

Tax Reform for Innovation  303 Excise on Peat In the nineteenth century, the remaining moors in the north of the Netherlands still produced large quantities of peat. The excise was levied at the production stage, when the peat was shipped in large barrels. Peat production was capital intensive. Investments were needed to acquire the right of exploitation (usually from communal owners) and to drain the moors. Starting in the seventeenth century, peat production had been a profitable investment for the upper class of Amsterdam and for countryside baronets. The case to be discussed suggests that peat excise involved educated men, who also knew their way in the world of lawyering. The basis of the case was the text of the law. Peat was taxable by the barrel – that is to say, by the presumptive content of a standard barrel filled with peat. The law required that the estimation be based on a ‘geometric’ calculation. This had been detailed in a regulation holding that the standard barrel contained an amount of peat equalling 133 litres. But the peat producers had found out that a barrel, when packed carefully, could contain the equivalent of 200 litres of peat. ‘Geometric’ to them meant ‘with precision’. Hence, they argued that they were overpaying excise by 50 per cent. Their argument was published in book form, apparently to reach the general public.39 The Supreme Court, however, ruled that the legislator could not have meant anything but barrels as they were normally packed, ie by throwing the brick-shaped pieces of peat in while shaking the barrel – resulting in 133 litres.40 Summing Up The case law suggests that excises were the battlefield of taxation in the early nineteenth century. The rules themselves were a mixed blessing for entrepreneurs: complicated, sometimes arbitrary, but often also a protection against innovative competitors. There are clear indications that the considerable incentive for tax administrators to impose fines undermined this precarious balance. That, coupled with the pressure for economic innovation, made much of the system unsustainable. 39 IA van Roijen, Wat beteekent de ton als maatstaf der turf-accijns? (Zwolle, JJ Tijl, 1843). A group of peat producers made the point more general by underlining their economic significance and arbitrary tax treatment in an Address to Parliament, Adres aan de Tweede Kamer der Staten Generaal over den turf-accijns (Zwolle, JJ Tijl, 1844). Their arguments had already been developed by another group of peat producers, De accijns op den turf, beschouwd in zijn wezen en gevolgen, door een gezelschap van veenlieden (Assen, Van Gorcum, 1841). Overall, it is an interesting mix of arguments connecting their own investments and profits with the miserable conditions of the poor in the cities who cannot afford good quality peat. 40 HR 9 February 1844, Van den Honert no 62.

304  Henk Vording THORBECKE’S LIBERAL REVOLUTION

In 1848 came the liberal revolution. Originating in France, its main product in the Netherlands was the Constitution of 1848. This was the basis for modern parliamentary democracy and for an ornamental position of the king. It also laid the foundation for curbing the powers of traditional families, both in the cities and in the countryside. Since the Dutch Republic, the country had been ruled by local elites in a federation-like system. Alexander Gogel had understood that the power of those elites had to be broken to provide opportunities for entrepreneurism and innovation. He had not succeeded, in the sense that many of the old ways of doing things returned in 1815. The new man (quite literally a homo novus) was Johan Rudolf Thorbecke, the father of the 1848 Constitution.41 He had much in common with Gogel. Both were outsiders, with family roots in Germany. Both were also highly intelligent workaholics who did not relent easily. Gogel’s scope of activity never exceeded financial matters – but in those matters, he did not appreciate instructions from anyone, including King Louis of Holland (Napoleon’s brother). Thorbecke tended to characterise his opponents as lagging behind in knowledge and insight – and often with good reason. One feels that both men had a personal drive to tear down pretences based on birth and social status. Merit and effort should count, not the old boys’ networks. To be sure, Thorbecke had started his career as a supporter of the first Orange king. But in the 1840s, he moved in a liberal direction, pleading for constitutional reform. He never became a liberal like John Stuart Mill (with whom he shared the remarkable combination of dour appearance and romantic inclination), being shaped by German organic state theory. To Thorbecke, economic freedom was not a goal of liberalism per se, but an instrument to the goal of citizen participation. He was quite aware that the society of his time had little to offer to poor and low-skilled workers, and that their condition was further weakened by industrialisation, but he never drew radical conclusions. His focus was on beating oligarchic traditionalism, which he wanted to replace by legal and administrative clarity as the sound basis for innovation and social mobility. As a young professor of ‘statistics’ (political economy) in Gent (now Belgium), he taught his students from Sismondi’s Nouveaux Principes d’Economie Politique, an antidote to Ricardian free-market liberalism. Sismondi starts his analysis of taxation with the ‘accretion’ concept of income that Americans credit Henry Simons for.42 He then infers that taxes should address revenue net of the costs

41 The most recent biography is R Aerts, Thorbecke wil het! (Amsterdam, Prometheus, 2018), a splendid book that is unfortunately not available in English. 42 ‘[L]e revenu est un accroissement de richesses … qui peut se consommer sans reproduction, et sans que le fonds primitif de la richesse soit diminué’ (‘Income is the increase of wealth which can be consumed without loss of wealth’): JCL de Sismondi, Nouveaux Principes d’Economie Politique, vol II (Paris, Delaunay, 1819) 161.

Tax Reform for Innovation  305 for maintaining the source of revenue, be it land, industrial capital or, indeed, labour. Thorbecke would echo him in Parliament, a quarter-century later: taxes on low-paid labour should be reduced not as a matter of social policy, but because economic neutrality required so. When Thorbecke entered politics in the 1840s, he quickly started linking his main theme of political and administrative reform to excises. As a member of the Second Chamber of Parliament, he expressed his objection to a government proposal for improving the effectiveness of the excise on meat. The proposal aimed at increasing the tax administration’s powers to enter houses during the night. That made sense, as the night (especially in the autumn) was the time when farmers would slaughter their livestock to evade their excise tax obligations. Thorbecke’s objection was that the administration’s power to enter citizens’ houses without their consent should always be limited to cases where the general public interest urgently required them so to do, and on the condition that this power be used impartially, without abuse or arbitrariness. A tax administrator, being focused on increasing tax revenue, could never meet these requirements. More generally, his point was that ‘it always pleads against either the nature or the mode of collection of a tax when, in order to collect it, many and strong extraordinary means are needed’.43 While a number of parliamentarians expressed comparable views, others, including liberals, followed the ‘anti-avoidance’ line of reasoning: the law is the law, and if it doesn’t work, we need more administrative powers and efforts. In the second half of the 1840s, Thorbecke was a member of the City Council of Leiden. At the time, local councils were elected by and out of a very small group of the most prominent citizens. Their meetings were confidential. The experience helped Thorbecke to voice his opinions on local government reform in a booklet entitled Over plaatselijke begrooting (On the Local Budget (Van den Heuvell, 1847)). After analysing the inconsistencies in national rules aimed at limiting local budgetary and tax policy, he notes that these rules were generally being ignored anyway. Municipal governments increased taxes and adopted new ones at will. He then connects the lack of local democracy with the local use and abuse of excises. He starkly condemned Council membership: One does not become a member on the basis of earnest will and ability to direct the affairs of the community – but because one either has a name and belongs to a family to which a seat in the Council is appropriate, or wishes to sit among these families … He who once sits remains; only death clears up and forces change, which is seldom renewal.44

He also presented his view of local excise taxation. Having underscored that these taxes create internal borders, and have excessive compliance costs, he

43 Thorbecke, 44 J

Hand. TK, 1844/1845, 28 November 1844, 136. Thorbecke, Over plaatselijke begrooting (Leiden, Van den Heuvell, 1847) 109.

306  Henk Vording argues that to local governments ‘the dazzling gift of excises … incites bolder spending. They seem like an inexhaustible gold mine, from which new treasures are always hoped to be found.’45 Local governments, Thorbecke implies, tried to hide their inherent incompetence by relying on economically wasteful forms of taxation. In the years between 1849 and 1872 (when he died in office), Thorbecke was the Cabinet chairman (the term ‘Prime Minister’ was not yet in use) for 10 years (1849–53, 1862–66 and 1871–72), always leading the core Ministry of Home Affairs. In addition, Thorbecke held sway over the Cabinet governing from 1868 to 1870, although he did not take up any ministerial position. In the intervening years, he was the effective leader of the opposition, obstructing cabinets that he saw as incidental collections of incompetent conservatives and, in his own words, leading a ‘governing opposition’.46 This means that the tax reforms between 1850 and 1872 can partly be credited to his personal involvement (as Minister of Home Affairs or as leader of the opposition), partly to the ministers of finance in cabinets presided by him and partly also to the conservative governments that he opposed. The liberal tax policy priorities of the Thorbecke era were reduction or repeal of excises and import tariffs. To Thorbecke, the goal was ‘to liberate industry’.47 Funding was to be found in the adoption of an income tax48 or (as it turned out) by growing colonial revenues and increased excises on alcohol. Indeed, the Javanese and the gin drinkers did pay the bill. Thorbecke’s interest in taxation was not at all technical, and he has never been regarded as a tax reformer, like Gogel and Pierson.49 And yet, he was. For two decades, he led an informal parliamentary ‘party’ of liberals propelled by middle-class values like accountability of government, economic innovation and social mobility. And those values determined his actions in the field of tax, like they did in his important contributions to local government reform, improving

45 ibid 87. 46 The qualification is from the synopsis of his Parlementaire Redevoeringen (Parliamentary Discourses) vol 8 (Deventer, Ter Gunne, 1867) xix as edited by himself. He used comparable words in Parliament, Thorbecke, Hand. TK, 1854/1855, 11 June 1855, 874. 47 In a private letter to a liberal ally, 5 February 1855. A seven-volume collection of Thorbecke’s letters (further referred to as Thorbecke’s Letters) is available online at Resources.huygens.knaw.nl/ briefwisselingthorbecke. This letter is from vol 6, no 235. 48 Thorbecke explained his tax policy priorities in a letter of 24 May 1858 to GH Betz, who would join his second Cabinet as Minister of Finance. Municipal excises would have to give way to local direct taxes. When that had been accomplished, the time would be ripe for a national income tax. Thorbecke’s Letters, above n 47, vol 6, no 461. 49 Nicolaas Pierson was the liberal who finally got an income tax through Parliament, in the early 1890s. H Vording and OIM Ydema, ‘The Rise and Fall of Progressive Income Taxation in the Netherlands (1795–2001)’ in J Tiley (ed), Studies in the History of Tax Law, vol 3 (Oxford, Hart Publishing, 2009) 3–33; JLM Gribnau and H Vording, ‘The Birth of Tax as a Legal Discipline’ in P Harris and D de Cogan (eds), Studies in the History of Tax Law, vol 8 (Oxford, Hart Publishing, 2017) 37–66.

Tax Reform for Innovation  307 transport infrastructure and access to higher education (in the year before his death, he allowed the first female student into a Dutch university).50 Thorbecke’s actions in the field of tax reform can be divided into three levels of achievement: • Reforms for which he was personally responsible as Cabinet minister. • Reforms enacted by his cabinets (ie by his colleague ministers of finance). • Reforms that he contributed to from an opposition role. Thorbecke’s Own Reforms The liberal 1848 Constitution was relevant to taxation in several ways. And as Thorbecke personally took up the Home Office in 1849, he was responsible for the laws that worked out the relevant constitutional provisions. The Constitution strongly limited the taxing powers of municipalities in two ways. First, no local tax regulation was valid until approved by the king (or, in the 1848 Constitution, the Cabinet and especially the Minister of Home Affairs). Also, potentially devastating for local excises, local taxation should not impede interlocal trade.51 Thorbecke would detail the latter requirement in his Law on Municipalities of 1851. Hitherto, the field had been poorly regulated and weakly supervised. Gogel’s idea, and that of the 1821 System Law, had been that local governments would add supplemental rates to national taxes. That is what they did, without much national supervision. But municipalities also had their own traditional taxes not fully regulated by Gogel. These were increased, and new tax bases added. The result was that national tax revenue in the 1840s was about 10 per cent of GDP, but known and unknown local taxes would add another three to five per cent (nobody knew exactly). These local taxes were indeed an impediment to growth. They aggravated the impact of the national excises, but they also created internal tax borders. Whenever customers lived in a different municipality than the producer, ‘border’ payments were necessary to provide rebate for excise collected at source, and to collect local tax at destination. What Thorbecke did was, first, to regulate local excises and supplemental rates (1851) and, later on, to abolish them in a joint effort with his Minister of Finance (1865). That was unavoidable anyway, and for two different reasons. One was increased mobility. Railway construction, started in 1839, was considerably speeded up under Thorbecke’s direction. In 1839, it had been expected to

50 In his multi-volume Parlementaire Redevoeringen, it can readily be seen that most of his participation in parliamentary debate (whether as Minister of Home Affairs or as a Member of Parliament) concerned railroads, education, healthcare and the poor law. His contributions on tax reforms cover just a small percentage of his overall speeches. 51 As Thorbecke showed in his Over plaatselijke begrooting, weaker forms of this rule had existed since the 1805 national system, but had not been applied.

308  Henk Vording boost the transport of goods, but, in addition, people had started to make day trips to cities that had always been two or three days’ distance. This allowed them to compare local excises. The second reason was that, as soon as national excises would be reduced or abolished, local governments could simply take over by increasing their own excises.52 If anything was to be achieved in the field of excises, local powers had to be curtailed first. As an alternative source of revenue, the Law on Municipalities gave local governments a new tax: a head tax, to be levied on ‘bases that can be considered a reasonable measure of income’. After some hesitation, the larger cities started to develop forms of income taxation. This was an uncoordinated process, but it did the groundwork for the national income tax of the 1890s, if only by making the wealthy class accustomed to being taxed on their incomes. The 1848 Constitution also introduced direct elections for the Second Chamber of Parliament. There had been an opaque system of indirect election, in which people53 could vote when they paid a sufficient amount in ‘assessed taxes’. These included land tax, personal tax and patent tax – but, in fact, patent tax was not taken into account. The 1848 Constitution used ‘direct taxes’, which also included patent tax, but the 1849 elections still ignored patent tax assessments. Thorbecke adjusted that in his 1850 Law on Elections, thereby increasing the (then small) number of voters by one-third. These were small businessmen, craftsmen and shopkeepers (the bigger ones would have qualified by their assessments of personal and land tax). We may assume that many of these new voters were familiar with the practice of excise taxation. Did Thorbecke increase the number of voters because he hoped for political gain? The only explanation he gave was that he wanted a broader census. There is, however, reason to believe that his preferences in tax policy were connected with considerations of voter support. His opponents, for one thing, believed so.54 There is also a clue in some private notes that he made in the last years of his life. The topic was not excises, but income tax. Thorbecke penned down two thoughts (perhaps meant for later elaboration). First, income tax (which was not to be adopted for another 20 years) was the core of a future tax system.55 And second, adoption of an income tax would have consequences for the voters’ census, which needed consideration.56 He meant the ‘patent voters’ that he had created in 1850: small entrepreneurs who might drop out of the census if the

52 That fear was voiced in Parliament, eg Parliamentary Documents TK 1847/1848, LVIII no 5, 608. 53 Though none of the consecutive Dutch constitutions up to 1917 excluded women, there was broad agreement among men (including the courts) that only males could vote. 54 One of his prominent political adversaries explicitly argued against one of Thorbecke’s initiatives to abolish excises that it was meant to gain electoral support. G Groen van Prinsterer, Hand. TK 1853/1854, 19 November 1853, 123. 55 Thorbecke’s Letters, above n 47, vol 7, no 475. 56 ibid vol 7, no 463. On the other hand, he also questions whether small businessmen have the qualities required to vote for Parliament. That may express disappointment: the 1850 broadening of the census had not in fact strengthened voter support for the liberal party.

Tax Reform for Innovation  309 patent tax was replaced by a general income tax. This political consideration could also explain why Thorbecke developed such a strong interest in repeal of excises in the 1850s. He may well have believed that tackling oppressive taxes would bring small businessmen to support the liberal cause. Reforms under Thorbecke Cabinets The national tax system was the responsibility of the Minister of Finance. During Thorbecke’s cabinets, two proposals for a broad reform of the tax system were presented to Parliament (1851, 1863). Both included abolition or reduction of some excises, adjustments to direct taxes and the introduction of some form of income taxation. Both failed to find a majority. Thorbecke was never able – nor tried hard – to convince the voters that they should accept a higher share of the tax burden. During Thorbecke’s first cabinet, the meat excise was partially abolished (for pork and mutton). Under his second cabinet, the excise on peat and coal was repealed and other tariffs were reduced. Proposals to adopt new excises on coffee and tea did not find a majority in Parliament, nor did the proposal to broaden the scope of the patent tax. The tax on liquor was increased considerably: it was 12 guilders per 100 litres in 1850 when Thorbecke first became Prime Minister; it was 53 guilders in 1872 when he died in office. At that time, the excise on liquor generated roughly 20 per cent of total government tax revenue. Liquor excise policy therefore made a remarkable exception to the liberal anti-excises policy. The reason is that the middle-class perception of poverty was shifting. In the early nineteenth century, that view had been Malthusian, with a good dash of Ricardo. Unskilled workers’ families lived at subsistence minimum because their high level of procreation kept wages low. Hence, excises on staple foods were not borne by those workers (or they would have died of starvation), but by their employers paying higher wages. The new analysis was that the poor were poor because of heavy drinking. Poverty was no longer a fact of life, but a phenomenon that required legislative intervention – on the assumption that liquor excise was not shifted to employers. The thing that did not change was that the tax policy relied on middle-class explanations of poverty. A final result of the Thorbecke cabinets was accomplished in 1869 – by a cabinet created and fully supported by Thorbecke, though he did not participate as a minister. It was a typically liberal tax measure that was long overdue: the repeal of the stamp tax on newspapers. Two of Thorbecke’s cabinets had previously proposed to abolish the tax (1851, 1863). Both proposals had been part of a much broader package, including an income tax of sorts – and had shared in the fate of those packages. In 1858, as opposition leader, Thorbecke had supported paying attention to the topic. He acknowledged that he had been unaware of the high stamp tax burden on newspapers (amounting to 100 per cent): ‘I was surprised, though I could have made the calculation myself. Probably I’ve been

310  Henk Vording told in the past, but I didn’t notice, which makes the impression all the stronger now.’ And he underscored the liberal view: ‘This is a tax on writing and reading.’ What he did not do was to draw the liberal conclusion that the tax should be abolished. A reduction would be fine.57 This sounds like an evident omission for any liberal, and especially for Thorbecke, who had often used the liberal press for advancing his goals.58 However, at the start of the cabinet in 1868, he instructed the Minister of Finance to quickly propose the repeal of the stamp tax on newspapers as ‘a characteristic, permanent monument’ to liberal policy.59 In the meantime, starting from 1867, the newspaper publishers had succeeded in organising a broad ‘free speech’ movement for abolition of the tax. The episode reinforces the notion that Thorbecke’s tax policy priorities were influenced by voter preferences. Reforms while Thorbecke was Leader of the Opposition Thorbecke’s first cabinet unexpectedly ended in religious turmoil in 1853, and the subsequent election weakened the liberal position in Parliament. Thorbecke now became the energetic leader of the opposition. His closely connected goals were to demonstrate the passiveness of (a quick succession of) conservative cabinets and to develop the parliamentary right of legislative initiative as created by the Constitution of 1848. This led him to propose, with his liberal allies, two excise reforms.60 Neither found a majority in Parliament. Ultimately, however, the government had no option but to make a broad gesture: the full repeal of the excise on flour. It seems that the liberal opposition had no particular preference as to which excise should go first, but the repeal of the flour tax opened the way for steam-powered production of flour – and bread without grit. His initiative proposing abolition of the excise on meat gave Thorbecke an excellent occasion to explain his views on tax reform. In December 1853, he spoke at some length in Parliament. His general point was that any tax system has to adapt to changing conditions; this now required that purely financial concerns (how much revenue to raise) had to give way to the need for better tax rules (how to raise revenue). And better tax rules were those that allowed economic life to grow before ‘harvesting’ tax revenue. Production and competition should not be impeded by tax – particularly not that of small businessmen, as they could protect society from increasing poverty. The working poor needed access to food, to support their productive capacities.61

57 Thorbecke, Hand. TK 1857/1858, 27 April 1858, 459–60. 58 Aerts, above n 41. 59 ibid 671. 60 The first (1853) involving repeal of the excise on meat, the second (1854) on peat and coal. ibid 516–21. 61 Thorbecke, Hand. TK 1853/1854, 20 December 1853, 517–18.

Tax Reform for Innovation  311 Half a year later (at the occasion of a government proposal for a limited adjustment of the flour excise), Thorbecke again explained his position: ‘I see this proposal as the result of a clash between our excises and the demands of industrial progress. I greatly appreciate this clash and I do hope that the excises will give way.’62 And in the debate on the full repeal of the flour excise a year later, he stressed his point on taxation of the working poor: [O]ne of the most beautiful victories of common sense over prejudice in our times, is not to tax productive resources. This principle … requires application to the food and subsistence of the worker … It is the simple demand not to cut the tree for the fruits.63

This is a reference to Sismondi: not to tax workers on their cost of subsistence is a matter of sound economic reasoning, not of a social policy that favours a particular class. CONCLUSION

In retrospect, the 1850s can be considered the first stage of full reconsideration of the tax system. The second stage, starting in the early 1900s, is familiar enough – it is the early development of the welfare state and redistribution. But this second stage, with its ideals and justifications, obscures what happened before. For decades, and probably for centuries, taxes had been intertwined with social and economic immobility. Landed wealth and big commerce remained low-taxed; the middle class of trades and businesses felt both the oppressive and the protective impact of taxes. The view that the tax system – like, probably, many other social institutions – both relies on the existing social and economic order and protects it may be familiar enough. But in the nineteenth-century Netherlands, the tax system squarely stood in the way of economic progress, innovation and social mobility. Much of its weight, aggravated by local excises and heavy fines, fell on small businessmen and on farmers. Thorbecke was able to connect administrative reform with repeal of oppressive excises, better transport and education, with the aim of shaking up a complacent traditional society dominated by old boys’ networks. In the 1850s and 1860s, the Dutch tax system was considerably adapted to fit new economic circumstances and opportunities. For Thorbecke, that was the relevant goal of tax reform. Unlike some of his liberal allies, he never explicitly framed his aim to reduce excises in distributional terms, let alone in terms of social justice. We cannot fully explain why. Was it the Ricardian analysis – still shared by many – that excises were taxes on employers? Was it the practical consideration that most excise reductions hardly reached the poor with their very limited access to



62 Thorbecke, 63 Thorbecke,

Hand. TK 1853/1854, 27 May 1854, 978. Hand. TK 1854/1855, 11 June 1855, 875.

312  Henk Vording consumption goods? Was it a desire not to show policy preferences towards any particular social class? Or finally, was it about electoral gain, as small businessmen were voters and poor workers were not? Anyway, the ‘progress towards justice’ frame imposed on the nineteenth century is an ex post perspective. It is a relevant perspective, as it exposes the failure of the Thorbecke liberals to shift the tax burden to the wealthier classes. And it may in fact have been triggered by Thorbecke’s reluctance to see excise reductions as instruments of social policy. But it ignores the social and economic importance of the reforms that were achieved.

12 Lex Aotearoa: A Moment of Intersection, the 1952 Commission of Inquiry into the Taxation of Maori Authorities SHELLEY GRIFFITHS*

ABSTRACT

N

ew Zealand law has both New Zealand and Maori dimensions, and legislation has often struggled to reflect and reconcile the competing principles from these two sources. The events beginning with the 1939 amendments to New Zealand’s taxation regime and culminating in the 1952 Commission of Inquiry are an example of this struggle. They provide a helpful lens through which to consider both tax law and administration at the time; and, more broadly, the intersection between these two legal value systems in New Zealand. Specifically, this chapter explores the attempts by the legislature and executive to tax Maori land in the first half of the twentieth century. The legislation struggled to account for the Maori concept of kaitiakitanga, and ultimately created a new legal entity, a ‘Maori authority’, to hold the land on behalf of its beneficial owners. However, these authorities were an imperfect fit with both legal systems. They did not accurately reflect the Maori concept of land ownership and did not mesh well with the existing taxation law. Each authority was required to pay tax on behalf of the land’s ultimate owners, which often involved almost insurmountable administrative difficulties. For much of the time the 1939 amendments were in force, Maori authorities did not comply with them. Further, they were not enforced by the Commissioner of Taxes – possibly in breach of the Commissioner’s statutory obligations. This chapter follows these legal and

* My thanks to Maia Winiana, Research Assistant, Law Faculty University of Otago, Summer 2019/2020, and to her father and whanau for additional information.

314  Shelley Griffiths historical developments through to the Commission of Inquiry in 1952, which made the radical recommendation of taxing Maori authorities as taxpayers in a separate class. Maori authorities have had that tax status to this day. The years leading up to the 1952 Commission are a key point of intersection between the two legal traditions that exist in New Zealand. This chapter examines these events in detail and seeks in some way to follow Justice Joseph Williams’ ‘heroic attempt at mapping the Maori dimension in New Zealand law’. INTRODUCTION

In October 1939, one month after New Zealand declared war on Germany, the Land and Income Tax Amendment Act was passed. As the Minister of Finance said on introducing the Bill, the legislation contained a number of provisions designed to prevent actions that amounted to ‘cases of evasion – inside the law’.1 There were provisions relating to trading stock, companies and the aggregation of income so that the income of married women was deemed to be income derived by their husband.2 All of those were designed with a view to maximising the amount of income tax collected as the war effort began. The Act also amended the provisions relating to the income tax obligations of ‘Maori authorities’.3 In short, those ‘authorities’ were to pay income tax on behalf of the individual owners of Maori land, whether that income had been distributed or not. For the next decade, that law was largely disregarded. Two points of interest arise from this particular section and its aftermath. First, how did it come to pass that a piece of revenue legislation was simply ignored by the taxpayers and ignored by the Commissioner of Taxes. That seems to run against the perceived wisdom of the inviolate position of the application of taxing statutes. It was not until 1994 that the Commissioner of Inland Revenue was given a power of ‘care and management’ allowing the Commissioner to make some management decisions based on resource availability and related matters.4 Before that, the Commissioner had been charged with the responsibility for ‘administration’ of the Inland Revenue Acts.5 The courts had held that the Commissioner possessed no general managerial discretion about tax collection.6 Delve into the story a little further, and it was a ‘Minister’ that 1 New Zealand Parliamentary Debates 9 October 1939, vol 256, 534 (Walter Nash). 2 eg Land and Income Tax Amendment Act 1939, ss 12, 13(4), 16, 19, 22. 3 ‘Maori Authorities’ is a collective noun used to group together the many different legal and administrative structures and entities used for the collective ‘ownership’ of and responsibility for Maori land. See further below. 4 Tax Administration Act 1994, s 6A. 5 Inland Revenue Department Act 1976, s 4: this provision was re-enacted in the Tax Administration Act 1994, s 6 and was in force from 1 April 1995 until 10 April 1995. This had always been the language used according to the Land and Income Tax Act 1923, s 3, the core legislation in force in 1939. 6 CIR v Lemmington Holdings Ltd [1982] 1 NZLR 512, (1982) 5 NZTC 61,268.

Lex Aotearoa  315 had assured one Maori authority that it ‘need not worry about income tax’.7 It would seem that it was a minister who suspended the law, not only the officers of the Taxation Department who ignored it. One of New Zealand’s more significant constitutional cases, Fitzgerald v Muldoon,8 held in 1976 that the Prime Minister’s purported suspension of an Act before Parliament was called together for a new session was illegal. As the then Chief Justice wrote:9 I am bound to hold that in so doing he was purporting to suspend the law without consent of Parliament. Parliament had made the law. Therefore the law could be amended or suspended only by Parliament or with the authority of Parliament.

It would seem that perhaps executive suspension of the law might have been more common than the political and constitutional furore around Fitzgerald v Muldoon seemed to suggest.10 Secondly, and the principal focus of this chapter, the 1939 amendment was one step in the search to find a way to incorporate Maori communal ‘ownership’ of land (defined by whakapapa) into European legal structures. Tax requires an entity, a person, to which liability for income tax is attached and from whom payment is required. Human persons and companies, as legal persons, sit easily into this framework.11 Partnerships and trusts have been more difficult, but not impossible. Maori (or Native, as it was called in the earlier period) land was always excluded from land tax insofar as it was ‘neither leased nor occupied nor occupied by any person other than the Native owner’.12 It is the struggle to attach income from Maori land to an entity that a Eurocentric tax system could embrace and legitimise that is also the focus of this chapter. The 1939 amendment was an attempt to do this in one way – but one that was widely ignored. Its aftermath saw an alternative solution suggested – one that is broadly the same as is used today. In 2013, Justice Joseph Williams, who joined the Supreme Court in 2019, embarked on what he called a ‘heroic attempt at mapping the Maori dimension in New Zealand law’.13 One of the contributions of his paper is the recognition

7 Report of Commission of Inquiry appointed to Inquire into and report upon the working of the law relating to the taxation of Maori Authorities (Appendix to the Journals of the House of Representatives 1952, B-5) [54]. 8 Fitzgerald v Muldoon [1976] 2 NZLR 615. 9 Fitzgerald v Muldoon [1976] 2 NZLR 615, 622. 10 For a comprehensive and insightful analysis of the case, see S Kos, ‘Constitutional Collision: Fitzgerald v Muldoon v Wild’ (2014) 13 Otago Law Review 243. 11 Land and Income Assessment Act 1900, s 2 (definitions of ‘person’ and ‘taxpayer’). 12 Land and Income Assessment Act 1900, s 16. The terms ‘Maori’ and ‘Native’ were used at different times until the Maori Purposes Act 1947 replaced all statutory uses of the word ‘Native’ with ‘Maori’. 13 J Williams, ‘Lex Aotearoa: An Heroic Attempt to Map the Maori Dimension in Modern New Zealand Law’ (2013) 21 Waikato Law Review 1. Justice Williams (Ngatia Pukena, Waitaha and Tapuika) was a Maori Land Court Judge, Member and then Chair of the Waitangi Tribunal before becoming a judge of the High Court in 2008, of the Court of Appeal in 2018 and the Supreme Court in 2019.

316  Shelley Griffiths that there was a legal system in New Zealand before the arrival of European settlers, who of course brought English law with them. Beyond that there is the recognition of the continued existence of Maori law. ‘Modern Maori law’ has parts that are subjects in their own right and are often ‘internal to the Maori world’ (principally Maori land law, Treaty of Waitangi settlements and common law aboriginal title). But, he observes, there is a much bigger part that is really a ‘gloss on general legal categories’ affecting both the Maori world and the wider community.14 It seemed to me that, from a somewhat lower skill base and less experience and insight than Justice Williams, I might make another ‘heroic attempt’ and try to map a point of intersection of those two dimensions in the applicability of income tax legislation to income generated from Maori land which was administered by the various Maori authorities. There might also be an even more heroic project buried in here. Many have observed that New Zealand is very unusual, if not unique, in not having a comprehensive capital gains tax. In 2015, I suggested that there was an amalgam of factors that had led to that result. I suggested that it was the confluence of them all that was the explanation. One factor on which I placed some emphasis was the particular attitude to land that infused New Zealand society from the nineteenth century.15 A couple of years later, two Australian authors concluded that New Zealand was just another settler society (like, for example, Australia and Canada) where land was important. They concluded that the explanatory power of the factors I identified was ‘ultimately left wanting’.16 Yet it remains a historical fact that New Zealand has been different from other settler societies in its attitude to a comprehensive capital gains tax. Perhaps New Zealanders are simply wilfully misguided. I find that hard to accept. Land and landscape do have a noteworthy cultural resonance in New Zealand. It is perhaps in ‘Lex Aotearoa’ that we might seek an explanation. The European tradition is about ownership of land. Maori belong to the land, rather the land belonging to them. This is manifest in various aspects of tikanga, including the concept of kaitiakitanga. Kaitiaki is the concept of guardianship for the sky, the sea and the land in Te Ao Maori. A modern statutory definition in the Resource Management Act 1990 says this: kaitiakitanga is ‘the exercise of guardianship by tangata whenua in accordance with tikanga Maori in relation to natural and physical resources; and includes the ethic of stewardship’.17 Might the centrality of land in Te Ao Maori have contributed to a particular attitude to land in Aotearoa New Zealand? Looking at the taxation

14 ibid. 15 S Griffiths, ‘“The Game Is Not Worth the Candle”: Exploring the Lack of a Comprehensive Capital Gains Tax in New Zealand’ (2015) New Zealand Journal of Taxation Law and Policy 51, 67–68. 16 C Evans and R Krever, ‘Taxing Capital Gains: A Comparative Analysis and Lessons for New Zealand’ (2017) 23 New Zealand Journal of Taxation Law and Policy 486, 502. 17 Resource Management Act 1991, s 2.

Lex Aotearoa  317 of Maori land might be a path into that. That is a very optimistic vision. More realistically and prosaically, the fact that politicians and presumably law draftspersons and bureaucrats spent a large amount of time developing, drafting and implementing ever more intricate and complex legislation to deal with Maori land might in their conversations reveal more of the particular attitude to land in settler society. The attempts, often feeble, paternalistic and misguided, to reach an accommodation with Maori about land might yield some broader insights. This chapter therefore tells us something about the administration of taxation and perhaps even about public administration and the attitude to the law in the first half of the twentieth century. Secondly, it explores one of the occasions of the intersection of the two legal value systems that exist in New Zealand. The 1952 Commission of Inquiry provides a particular story that is useful for exploring both those things and for my heroic mapping attempt. THE CONTEXT OF THE 1939 LEGISLATION

The 1939 amendment was passed almost on the eve of the centennial of the signing of the Treaty of Waitangi in 1840. That century had witnessed the significant alienation of Maori land, land wars in the 1860s and constantly changing government policy. By 1865, that had settled to a system that enabled Maori to convert land from customary tenure to the freehold tenures of English law and using a specialist court to determine the scope of Maori freehold tenure. Maori land was land that had been in continuous Maori ownership and which the court had investigated. It is the fact that a block of land had been declared to be within the jurisdiction of the Maori Land Court that determined the very concept of ‘Maori land’.18 The history of this process and its relationship with the constitutionally significant Treaty of Waitangi, which guaranteed Maori possession of lands, villages and other important assets, has been, to say the least, fraught and complex. The number of Acts passed, repealed and amended was extraordinary: between 1888 and 1889 there were 18 amendments of statutes dealing with Maori land. In 1939, the Maori Land Act 1931 was the most recent in a long line of large pieces of legislation which had created the process and the jurisdiction. The Act also created Maori Land Boards that were managers and administrators of Maori land.19 They were not the only bodies that fulfilled that role. There was also the Board of Maori Affairs, established in 1934, which was used to promote the development of Maori-owned land,20 the Maori Trustee21 and a number of 18 Prior to 1947, the legislation and the institutions created by it, such as the Land Court, contained the expression ‘Native’. The Maori Purposes Act 1947, s 2 replaced ‘Native’ wherever it occurred with ‘Maori’. This chapter uses Maori rather than the term used when the legislation was passed. 19 Maori Land Act 1931, Part 3. 20 Board of Maori Affairs Act 1934–35 and Maori Land Amendment Act 1936, s 3. 21 Maori Trustee Act 1930.

318  Shelley Griffiths special ‘trusts’, including notably the East Coast Maori Trust Lands Board.22 By 1950, 4 million acres of a total 43 million remained as Maori land. This included much marginal land, but it also included some very productive pastoral land, especially in the East Coast area.23 The Commission Report contains a survey of ‘the evolution of Maori land ownership’, and it is clearly written from the perspective that Maori collective ownership of the land and the fact that an individual would have connections to many places because of connections through generations of whanau whose ancestral connections were not in only one place was problematic to the ‘development’ of the land. This had ‘tended to make the Maori an absentee landowner’.24 The Eurocentric lens is clear: Maori ‘gave up land to the enterprising newcomers, who proved its great productive capabilities’. That justified the alienation of vast amounts of Maori land. For the land that did remain as Maori land, development remained an issue, and the Commission claimed ‘the Maori is not, by nature, a farmer’.25 Such land was thus leased, and ‘a Maori’s interest in the land was largely limited to receiving a rent cheque’. More recently, many Maori had preferred that the land should be worked and farmed for their direct benefit, rather than being leased. ‘Multiplicity of owners precluded any direct farming by them individually’ and hence the need arose for ‘Maori authorities’ to ‘administer and farm the land on behalf of the owners’.26 Thus, by 1939, there was an amount of land managed and administered by various ‘authorities’ being farmed for the benefit of ‘owners’, and income was generated from these farming activities. It is at that point that income tax enters the story. As the Commission noted27 and is immediately apparent, there are complexities arising. In respect of income tax, the complexity arises from the fact that tax requires a taxpayer to whom liability is attached and from whom payment is required, demanded and ultimately enforced. The ‘essential character’ of all the ‘authorities’ was ‘that of trustee for the individual owners’.28 Generally, the empowering legislation of these bodies left that unsaid. But in ‘essence’ if not in ‘law’, these bodies were in some way analogous to ‘trustees’. In their form, there were a number of differences between them. Each structure had been recognised in different statutes and existed in a different form to meet specific needs or policy objectives. The Native Trustee was a corporation sole

22 East Coast Maori Trust Lands Act 1902: R Boast, Buying the Land, Selling the Land Governments and Maori Land in the North Island 1865–1921 (Wellington, Victoria University Press, 2008) 391. 23 On the history of pastoral and agricultural farming in the East Coast area, see H de O Chamberlain, ‘Farming in Gisborne and the East Coast Districts’ (1959) 21 Journal of the New Zealand Grassland Association 20, www.nzgajournal.org.nz/index.php/ProNZGA/article/view/ 1108/736. 24 Report of Commission of Inquiry, above n 7, [8]–[9]. 25 ibid [10]. 26 ibid [11]–[12]. 27 ibid [15]–[16]. 28 ibid [15].

Lex Aotearoa  319 with perpetual life and could accept and hold on trust ‘for any person or persons of the native race any land or other property transferred to him by the owners’.29 The Maori Land Board, there being a separate Board for each Maori Land District, was a body corporate with perpetual succession.30 There also existed Maori incorporations which adopted a corporate form with perpetual life but were different from a company registered under companies legislation as they were not legal entities separate from their shareholders. While a Maori incorporation had some of the characteristics of a company, in important respects it was different. Incorporations first appeared in the Native Land Courts Act 1894.31 The provisions that applied in 1939 were in the Maori Land Act 1931. The Maori Land Court could make an incorporation order after a request that was supported by the agreement of a sufficient number of the owners.32 The created body corporate held the land ‘so vested on trust for the persons entitled thereto as the owners’ and on trust for their successors in title.33 In such a corporation, ‘the beneficial ownership of the incorporation’s assets, and of the income derived therefrom, is deemed to be vested in the individual owners in accordance with their respective shares in the land’.34 Although it is impossible to find out with any degree of certainty, it seems clear that the number of individuals so entitled would have been very many in respect of each lot of land.35 Further, the membership of that group would have been constantly changing as land passed by succession on death, and, unsurprisingly, the Maori Land Court always struggled to keep up with that.36 These specific structures had several things in common: they were all creatures of statute, and they all involved someone looking after and administering something owned by someone else. The trust, as known to English law, had been problematic as a means of dealing with this core notion of some looking after the property of a larger group in this context. The beneficial class, being all the Maori with connection to an area of land, would be an unascertainable class of beneficiaries, making any such trust void for uncertainty under ordinary law.37 Changing focus to an individual person, each might have had such beneficial interests in many different pieces of land, depending on their connections. Income tax legislation looks for income, but it also looks for an entity to attach income tax liability to. From a Cook’s law perspective, these entities are an unusual fit. Statute law finds ways

29 Maori Trustee Act 1930, ss 6, 15. 30 Maori Land Act 1931, s 75; the two members of the Board were the Maori Land Court Judge and Registrar for the particular district. 31 R Boast, The Native/Maori Land Court, Volume 3, Collectivism, Land Development and the Law, 1910–1953 (Wellington, Thomson Reuters, 2019) 227–29. 32 Maori Land Act 1931, s 382. 33 Maori Land Act 1931, s 390. 34 Report of Commission of Inquiry, above n 7, [17]. 35 ibid [40(B)]. 36 Boast, above n 31, 235–56. 37 ibid 292–93.

320  Shelley Griffiths to create entities and structures to deal with the core matter at hand. It finds in the trust relationship and the corporate form some fragments that capture what seems to be required to create a new sort of entity. From a Kupe’s law perspective, the nature of Maori connection with land is ignored to some degree and accommodated to another. From a Cook’s law perspective, the institution of the corporation and the relationship of the trust are ‘in essence’ used, but the law struggles for a perfect fit. It is a collision in the evolution of Lex Aotearoa.38 All that is the context for the 1939 amendment. THE 1939 LEGISLATION

The purpose of section 29 of the Income Tax Amendment Act 1939 was to ensure that ‘Maori authorities’ would be ‘trustees for taxation purposes’.39 To achieve this, it did two things. First, it defined the term ‘Maori authority’.40 Secondly, it made it clear that any income derived by the authority was derived as ‘trustee’ for those Maori on whose behalf or for whose benefit the property was held.41 Where the authority received or retained income to which those persons were entitled or dealt with it on their behalf, that income was ‘deemed to be income derived’ by those persons. The Maori Authority was assessable and liable for income tax as the agent of those persons.42 On the Bill’s introduction in October 1939, Sir Apirana Ngata spoke at length about the need for a ‘clear interpretation from the [Taxation] Department and the Minister as to what is really meant by clause 29’. There were, he said, ‘fears and apprehensions’ about what was intended.43 As the Commission of Inquiry noted, this ‘fixed the basis of a Maori authority’s liability on the individual owner’s share of the profits’, disposed of any suggestion of an authority being taxed as a company and made it clear that taxation was to be paid by the authority ‘on behalf of’ the ‘owner’s’ share of the distributed and non-distributed income. What it did was use the language and constructs of English law to describe the relationship of Maori with land. It was not unique in that, but that is very clear in the language. What it also did

38 The expressions ‘Kupe’s law’ (the law that existed prior to European settlement and continues to exist; Kupe was a legendary figure in story of the discovery of Aotearoa) and ‘Cook’s law’ (the law brought to New Zealand by European settlers; Captain James Cook visited in 1769) are used by Jacinta Ruru as they are representations of the two strands developed in Williams’s work (above n 13). See J Ruru, ‘First Laws: Tikanga Maori in/and the law’ (2018) 49 Victoria of University of Wellington Law Review 211. 39 Report of Commission of Inquiry, above n 7, [27], quoting the evidence given to the Commission by the Commissioner of Taxes. 40 Land and Income Tax Amendment Act 1939, s 29(1). 41 Land and Income Tax Amendment Act 1939, s 29(2). 42 Land and Income Tax Amendment Act 1939, s 29(3). 43 New Zealand Parliamentary Debates 9 October 1939, vol 256, 553.

Lex Aotearoa  321 was to create a structure, a ‘Maori authority’, that it could fit into the construct of income tax. At the same time, it tried to accommodate some of the specific nuances that arose from this particular context. The fact that there need to be a Commission of Inquiry a little over a decade later indicates that this balancing exercise was a failure. However, it was a recognition that a balancing exercise was necessary and that simply shoehorning these structures into existing tax structures was imperfect. The following were defined as Maori authorities:44 • • • •

Board of Maori Affairs.45 Maori Trustee.46 The Maori Lands Boards.47 Incorporations formed under Part VII of the Maori Land Act.

Each of these institutions was created by statute. In addition, section 29(1) extended the definition of the term Maori authority to include ‘any other body, authority or person administering or having control of Maori land and reserves or any other property or income in trust for or on behalf of or for the benefit of any Maori’. This list includes a set of entities, some corporations (generally) and some corporations sole who hold land ‘on trust’ for others. They are an amalgam of the corporate form and the relationship inherent in the trust. By statutory definition, the tax legislation finds entities to attach taxation to. But here emerged a problem: trustee income was taxed at very high rates. The purpose of section 29(3) was to prevent the assessment of trust income as trustee income at the high rates that applied. Those rates applied because of the policy choice to usually tax such income at a high rate because it was income that was being withheld from beneficiaries.48 The usual instances of trusts operating businesses or farms that generated income occurred in deceased estates or where trusts were used to operate mature businesses. The need for income to be retained for developmental purposes was rare, and the income tax rules proceeded on the basis that most income ought to be distributed to beneficiaries. If it were not, a high rate of income tax was appropriate. That was considered an inappropriate policy, given the economic reality of the income and asset structures of Maori authorities and the policy then in place to encourage development of Maori land. Retaining income for that purpose was to be encouraged. During World War II, the rate of tax on ‘trustee income’ reached as high as 17 shillings in the pound. It would be contrary to other policy objectives to have such a high rate attach to the retained income of Maori authorities. 44 Land and Income Tax Amendment Act 1939, s 29(1). 45 Maori Land Act 1931, s 75. 46 Maori Trustee Act 1930, ss 6, 15. 47 Maori Land Act 1931, s 75. 48 Report of Commission of Inquiry, above n 7, [27], quoting the evidence given to the Commission by the Commissioner of Taxes.

322  Shelley Griffiths While this fix of taxing the beneficiaries directly avoided the problem of unacceptably high rates of tax in this context, the solution put ‘authorities’ in an administratively difficult position. They were required to pay income tax on the proportionate share of all of the individual owners. The Commissioner of Taxes sent a memorandum to the Under-Secretary of Maori Affairs setting out these obligations in March 1940. Thereafter, until 1950, nothing was done to ensure these directions were carried out. What little enforcement activity there was, was directed only to the Maori Trustee and the Maori Land Boards.49 Some officials seemed unclear whether Maori owners were to be assessed on their share of the total income or only that which had been distributed to them.50 By 1950, the Commissioner of Taxes determined it was time to sort this out. Why this sudden resurgence of interest in this matter? Probably the staffing shortages that had plagued the Taxation Department through the war years had reduced. But the following information suggests something else. The estimate of income tax and social security charge not paid by the East Coast Commissioner between 1940 and 1951 was £250,000. Of that total, £150,000 was attributable to the year 1950–51. The value per pound for greasy wool was £87. The previous year it was £37.51 These were the years of the ‘Korean wool bonanza’, as soldiers fighting on the Korean peninsula required woollen clothing.52 In December 1951, the Prime Minister made a statement to the House.53 Many hundreds of thousands of pounds that were liable to income tax and the social security charge had not been taxed at all. This was income from ‘large Maori farming operations’. It appeared, he said, that Maori and ‘those administering their affairs’ had been under the impression that the then government had no intention of enforcing taxation law as it applied to Maori. There was, however, no evidence that he had seen of any such undertaking. The next month, the government announced a Commission of Inquiry. The following month, it was announced that there would be no Commission, but rather the Commissioner of Taxes would conduct an inquiry. However, the Maori authorities considered that they ought to be given the opportunity to ‘repel any insinuation that they were tax defaulters or evaders’.54 Soon after, a Commission of Inquiry was appointed. The Commission had three members: JH Luxford, a retired magistrate; PL Porter, a retired banker; and TN Gibbs, a public accountant. Gibbs was the author of the widely used Guide to Income Tax in New Zealand55 and the chair 49 ibid [34]. 50 ibid. 51 ‘Wool Prices: Weight, Sale Prices and Average Value per Pound of Greasy Wool Sold at Auction’, Official Year Book 1951–52, www3.stats.govt.nz/New_Zealand_Official_Yearbooks/1951-52/ NZOYB_1951-52.html 52 J Belich, Paradise Reforged: A History of the New Zealanders (Auckland, Allen Lane, 2001) 308. 53 New Zealand Parliamentary Debates 5 December 1951 vol 296, 1364 (Sidney Holland). 54 Report of Commission of Inquiry, above n 7, 11. 55 TN Gibbs and FG Oborn, A Guide to Income Tax in New Zealand (Auckland, Whitcombe and Tombs, 1933).

Lex Aotearoa  323 of a committee that inquired into taxation generally and which had submitted its Report in 1951.56 The Commission was asked to report on essentially three matters: 1. The working of the law in relation to the 1939 amendment. 2. To make recommendations on any necessary changes to the legislation. 3. Whether Maori authorities had been justified in believing that in the 10 years or so since 1939 they were not required to make returns of income. The first two items essentially fold into one. The third principally concerned the position of the East Coast Commissioner, and it is to that I turn first. SUSPENSION OF THE LAW? OR ‘MR JESSEP GOES TO WELLINGTON’

The terms of reference of the Commission included specific reference to the actions of the East Coast Commissioner. The East Coast Trust was one of the ‘attempts to use the trust device’ as a way to give protection to Maori landowners.57 The Rees-Pere Trusts and their successors, including the East Coast Trust, were set up by tribal leader Wi Pere58 and his solicitor, WP Rees, in the late 1870s. Rees and Pere convinced local landowners to vest their lands in Rees and Pere as trustees instead of selling the land to the Crown or private purchasers. Significant amounts of land were vested in the trusts. Tenurial complexities and a number of ‘unhelpful decisions’ from the Supreme Court59 doomed the project. Rees and Pere abandoned the trusts project and vested the trusts’ assets in the New Zealand Land Settlement Company. The complexities facing the company, legally and commercially, ultimately overwhelmed it and much of the company’s lands were sold at mortgagee sales, then in 1891 the company collapsed into liquidation. In 1892, the remaining lands were vested in re-established trusts, the Carroll-Pere Trusts, and these were reconstituted by statute in 1902.60 In 1906, the three-person Board established in 1902 was replaced with a Commissioner.61 Although much of the land had been sold, what remained included land that was very productive and particularly suited to pastoral farming. By the 1940s, the

56 Report of the Taxation Committee (Appendix to the Journals of the House of Representatives 1951 B-8). 57 Boast, above n 31, 293. 58 Wiremu (Wi) Pere (Te Aitanga-a-Mahaki and Rongowhakaata) (1837–1915) was Member of House or Representatives for Eastern Maori 1884 to 1887 and again from 1893 to 1905. 59 Boast, above n 31, 294: for example, in the unreported decision in Re Pouwa block (1881), Prendergast CJ held that the Native Land Court could not vest land blocks in trustees. 60 East Coast Native Trusts Land Act 1902, Preamble. 61 Maori Land Claims and Adjustment Act 1906, s 22; the Board had sorted out the relationship with the Bank of New Zealand and the Validation Court was given the power to adjust the internal debts and liabilities concerning individual blocks within the whole, see R Boast, The Native Land Court, Volume 2, A Historical Study, Cases and Commentary 1888–1909 (Wellington, Thomson Reuters, 2015) 1050–68.

324  Shelley Griffiths East Coast Commissioner administered more than 112,000 acres and managed more than 100,000 sheep.62 When the 1939 amendment was passed, the East Coast Commissioner was James Jessep. Jessep was Commissioner from 1934 until his death in late 1951. He has been described as a ‘very capable benevolent autocrat’.63 The Commission of Inquiry described him as exercising his wide powers ‘in an autocratic manner and with considerable success’.64 Jessep was a sheep farmer from the Wairoa area (in the southern part of the East Coast) and a close friend of politician Sir Apirana Ngata.65 It would seem that he was widely respected in the area and he is still remembered in the area today, with his name attached to the dining hall at the Putahi Marae near Wairoa.66 He was also a member of the Board of Native Affairs.67 Before becoming Commissioner, Jessep had been deputy chair of the Unemployment Board and was also vice-president of the New Zealand Sheep Farmers’ Association. In addition to being close to Ngata, he also appears to have strong connections with AT (later Sir Turi) Carroll.68 In 1936, he and Carroll had entertained Cabinet Ministers Parry, Webb and Semple at a duck shooting event in the Wairoa area.69 These connections across the political spectrum and with influential Maori politicians provides context to what happened in October 1939. The East Coast Trust’s solicitors showed Jessep a copy of the Bill to amend the Land and Income Tax Act 1923. Jessep was ‘perturbed’ and concerned that the payment of tax on that basis would delay repayment of debts and inhibit some development plans. He ‘said he would go to Wellington and clear the matter up’.70 And so he did. The journey from Gisborne to Wellington is some 250 miles and even in 2020 it takes 10 hours. Although it seems likely he would have used the train, it was nevertheless quite some journey. Jessep clearly was perturbed. He met ministers (which, given his connections, seems entirely plausible), but the Bill had been passed before he arrived. When he returned

62 P Goldsmith, We Won, You Lost, Eat That: A Political History of Tax in New Zealand since 1940 (Auckland, David Ling, 2008) 226. 63 Boast, above n 22, 391. 64 Report of Commission of Inquiry, above n 7, 30. 65 Apirana Ngata (Ngati Porou), 1874–1950, born near Gisborne on the East Coast, member of Parliament for Eastern Maori 1905–43, Minister of Maori Affairs 1928–34: Dictionary of New Zealand Biography, https://teara.govt.nz/en/biographies/3n5/ngata-apirana-turupa. 66 Serendipitously, over summer 2019–20, my research assistant told me her father came from the East Coast area. It was his reaching out to whanau connections in that area that is the source of this information. I am grateful to Maia Winiana and to her father. 67 King Country Chronicle, 12 November 1937. 68 AT Carroll (Ngati Kahungunu), 1890–1975, born Wairoa, a farming leader and local politician (and nephew of Sir James Carroll, member of Parliament 1887–1919 and Cabinet Minister 1899–1912): Dictionary of New Zealand Biography, https://teara.govt.nz/en/biographies/4c12/ carroll-turi. 69 Evening Star, 2 May 1936; Bill Parry, Paddy Webb and Bob Semple were cabinet ministers in the first Labour Government 1935–49. 70 Report of Commission of Inquiry, above n 7, [54].

Lex Aotearoa  325 to Gisborne, he told the Trust’s solicitors that he ‘had the assurance of “the Minister” that there would be no change’ as far as the trusts he administered were concerned.71 The solicitor apparently reminded him that ‘the Minister’ could not suspend the law, but Jessep reiterated that ‘the Minister’ had assured him he need not worry about the income tax. Jessep died about six months before the Commission conducted its inquiry and so his version of the events was relayed by others. No default assessments were received and nothing was heard from the Commissioner of Taxes until a letter in 1951 calling for returns of income for 1950 and 1951. Anecdotal evidence suggested that Jessep said he had discussed it with Peter Fraser, the Prime Minister, and with Sir Apirana Ngata.72 They were also deceased by 1952, so the Commission of Inquiry concluded that that evidence was ‘too vague and unsatisfactory’ to be accepted as reliable. Nonetheless, it appears Jessep was able, through the 1940s, to convince the auditor of the accounts of the trusts of the assurance by ‘the Minister’ and the statements made no reference to taxation. The Commission of Inquiry concluded that, as time went on, there developed a ‘hopeful belief’ among local Maori that there was no obligation to pay; nonetheless, there was growing uneasiness. In 1949, some East Coast incorporations sought assurances from the new Minister of Maori Affairs, EB Corbett. Sir Apirana Ngata told the Minister that ‘the situation was covered by Ministerial dispensation and departmental practice’.73 The Minister gave an assurance to East Coast Maori in February 1950 that matters would ‘continue as they were’. Precisely how matters moved after that is unclear from the Commission of Inquiry’s Report, although it suggests that the Minister had been ‘inadequately advised’ in early 1950. By now, as noted above, income from wool especially had increased dramatically. Income tax rates for individuals and companies were high, and it is probably no surprise if some were restive about the apparent ability of some income to go untaxed. The path to the statement in the House in December 1951 was set. We shall, of course, never know whether Jessep had been given any assurance. The Commission of Inquiry suggested not. I am less certain about that. First, it is entirely plausible that Jessep had the connections and the mana to convince ‘the Minister’ of his case. Secondly, the ‘dispensation’ was later confirmed in writing by Sir Apirana Ngata. In 1939, Ngata was the Member of Parliament for Eastern Maori, but had been Minister of Native Affairs from 1928 to 1934. Ngata was committed to ‘Maori land development’ and believed that through farming as an economic base there was the promise of Maori social, economic and cultural renewal based around renewal of Maori tribal life. Boast describes him as ‘an heir to the new Liberalism of the 1890s’74 that had rural Arcadianism

71 ibid. 72 ibid. 73 ibid [61]. 74 Boast, above n 31, 264; R Boast, ‘Rethinking Individualisation, Maori Land Development Policy and the Law in the Age of Ngata (1920–1940)’ (2019) 25 Canterbury Law Review 1.

326  Shelley Griffiths and commitment to close land settlement at its core and at the core of its taxation policies.75 Ngata’s influence in this story ought perhaps not be underestimated, including his connections with Peter Fraser and with EB Corbett, who became Minister of Maori Affairs in the new national government in 1949. The uneasy relationship between land development and the taxation of income from land seems an underlying factor in this story. The inactivity of the Taxation Department through the 1940s reinforced the belief that there was a dispensation. As the Commission Report noted, this would have coincided with the usual experience of professional accountants who come to construe ‘tax laws in accordance with supplementary rulings and practices adopted by the Tax Department’.76 The ‘solution’ of ignoring the law was driven by practical concerns. Jessep was concerned about the effect on debt repayment and development schemes. He might also have pondered the administrative difficulties of calculating income tax liability based on the amount of tax due by individuals based on their proportionate share of the land.77 One could hardly be surprised if he had. The story is somewhat reminiscent of the Fleet Street Casuals case.78 In the 1990s, the taxpayer in Brierley Investments Ltd v Bouzaid79 had sought to narrow a proposed investigation of its affairs by the Commissioner of Inland Revenue by excluding previous assessments that it claimed the taxpayer and the Commissioner had agreed would be determined on a specified basis. In the Court of Appeal, it was held that whether the Commissioner could be bound to such an agreement was dependent on the statutory regime under which tax was assessed. Under the New Zealand legislation, the Commissioner had a ‘duty … to see that … income is assessed to tax and that the tax is paid’.80 The taxpayer had raised in support of his position a line of English cases, including the Fleet Street Casuals case.81 However, the ‘wide managerial discretion’ that the UK Commissioners had was dependent on the statutory provision that entrusted the UK Inland Revenue Commissioners

75 S Griffiths, ‘The Historical Meaning of “Income” in New Zealand Taxation Statutes, Cases and Administration, 1891–1925’ in P Harris and D de Cogan (eds), Studies in the History of Tax Law, vol 8 (Oxford, Hart Publishing, 2017) 419. 76 Report of Commission of Inquiry, above n 7, [56]. 77 The Commission noted that, according to custom, many Maori are known by different names in the titles to the lands in which they have an interest; ibid [46]. 78 R v Inland Revenue Commissioners, Ex p National Federation of Self-Employed and Small Businesses Ltd [1982] AC 617, [1981] STC 260 (HL). 79 Brierley Investments Ltd v Bouzaid [1993] 3 NZLR 665, alt cit Brierley Investments Ltd v CIR (1993) 15 NZTC 10,212; generally, see S Griffiths ‘Revenue Authority Discretions and the Rule of Law in New Zealand’ in C Evans, J Freedman and R Krever (eds), The Delicate Balance Tax Discretion and the Rule of Law (Amsterdam, IBFD, 2011) 156–57. 80 New Zealand Stock Exchange v Commissioner of Inland Revenue [1992] 3 NZLR 1, 3. 81 R v Inland Revenue Commissioners, ex parte National Federation of Self-Employed and Small Businesses Ltd [1982] AC 617 (HL) (the Fleet Street Casuals case); R v Inland Revenue Commissioners, ex parte Preston [1985] AC 835 (HL); R v Inland Revenue Commissioners, ex parte MFK Underwriting Agents Ltd [1990] 1 WLR 1545 (QB).

Lex Aotearoa  327 with the ‘care, management and collection’ of taxes.82 In New Zealand, the Commissioner had a duty ‘to administer’ the Inland Revenue Acts and quantify the liability for tax imposed by the statute.83 There was thus no scope in New Zealand for the ‘weighing and balancing management functions against collection responsibilities’.84 The relevant provision in the 1940s was identically worded to that which the court considered in Brierley. The events discussed by the Commission of Inquiry suggest that practice might not always have accorded with the statute. We are left to wonder how often the Commissioner did dispense with the law, and if there was such dispensation, how widespread it was and how long the practice lasted. TACKLING THE ISSUE AND THE PATH FORWARD

The East Coast Commissioner was not the only Maori authority to find compliance with the law problematic, although no other asserted there was a clear dispensation. The 1939 amendment was a legal measure that was not accepted as workable by those who were supposed to comply with it. The Maori Affairs Department, which controlled 90 stations and 1769 farms, found compliance challenging. The Department had taken the view that so little income tax was payable that it did not warrant the additional work that would be needed for ‘strict compliance’ with the law. ‘It was considered at the time that [non-compliance] would not result in the loss of any income.’85 But, as the Commission Report noted, that was ‘not in conformity with the law’.86 If it was deemed unworkable by those required to comply with it, it seems probable that it was not seen as workable by those required to administer it. The root of that difficulty in this particular case lies in trying to find an entity to tax in a context of connection, rather than English law notions of ownership. Maori ‘authorities’ were different from all other tax entities, and the Commission embarked on a review in an effort to achieve what one might describe as the best or least bad fit. The Commission approached finding a solution to the problem by first considering in some depth the reason why the 1939 law had been chosen. It then reviewed the other forms of tax entity and their forms of taxation to seek a possible solution. The Commission recognised the practical difficulties in finding a workable way of taxing the income from Maori land holdings.

82 R v Inland Revenue Commissioners, ex parte National Federation of Self-Employed and Small Businesses Ltd [1982] AC 617, 636 (per Lord Diplock). 83 Inland Revenue Department Act 1974, ss 4, 19. 84 Brierley Investments Ltd v Bouzaid [1993] 3 NZLR 655, 664 (per Richardson J). 85 Report of Commission of Inquiry, above n 7, [39]. 86 ibid.

328  Shelley Griffiths AT Carroll had urged a ‘short-cut method’ that would be workable for Maori and for the Taxation Department.87 The complications arose from the ‘character and circumstances’ of the Maori authorities and the large and collective ownership associated with them.88 It will be remembered that the 1939 law had implicitly drawn an analogy with trustees and beneficiaries and required the authorities to pay income tax on the basis of each individual owner/beneficiary’s share of the distributed and undistributed income. The Commission Report noted that the trustee provisions of the legislation ‘normally’ applied to deceased and other estates in which the number of beneficiaries is ‘usually’ few in number. Generally, trusts that have business or farming assets are usually mature operations, with all of their capital needs already met. Most income is generally distributed to beneficiaries. Where income has to be retained to meet some other obligations, such as death duties, the Act taxed such income as trustee income at the graduated rate that applies to individual taxpayers. The situation of Maori authorities was very different. They have hundreds or maybe thousands of owners. Further, where the land is in the development phase, income is not distributed but retained for those purposes or to repay capital liabilities. Maori authorities had comparatively large amounts of undistributed income. If that had been taxed as trustee income, as it was in trusts generally, a high progressive income tax rate would have applied. Overall, taxing the income in the hands of beneficiaries led to a lower tax burden. Similarly, in 1939, it seemed that taxing Maori authorities as ‘companies’ would also have engaged high rates of tax, albeit at rates lower than trustee income. Choosing to tax undistributed income as income in the hands of beneficiary/owners ‘confer[red] a benefit’ on Maori authorities that was not available to ‘other trusts’, the Report noted, while recognising that the benefit had not been recognised as such at the time. Given the imperfection of equating the Maori authorities with trusts, the depiction of this as a benefit seems a rather odd analysis. In the first few years after 1939, the authorities did not earn much income. Later that increased, and about 33 per cent of income was distributed. But the liability to tax was on distributed and undistributed income, so that an owner would be faced with a tax liability that virtually extinguished any income that they had received. The Commission recognised this as a ‘serious complication’, and one that had developed as the authorities were more successful in their economic pastoral farming-based activities. Taxation seemed an administrative and economic burden. It was time for ‘less emphasis to be placed on the individual owner and more on the authority’.89 The 1939 amendment had been to treat the individuals ‘as if’ they were partners, but that had proved ‘unworkable



87 ibid

[42]. [40(B)]. 89 ibid. 88 ibid

Lex Aotearoa  329 and ineffective in practice’.90 It was time to repeal section 29. But the vexed question remained: what to replace it with? There were various problems with approaching this as a taxable entity already known to the law. The authorities could not be treated as partnerships, as the law forbade partnerships of more than 20 partners.91 They were not companies, for the authorities were not separate legal entities from ‘shareholders’ or owners. At a practical level, the fact of progressive company income tax rates had been another reason for not treating authorities as if they were companies. Although not as steep as trustee income tax rates, they were sufficiently higher than the rates applicable to individual owners to make that option not feasible. The upshot of all this is clear: Maori authorities were not closely analogous to any of the existing tax entities. The Commission’s recommendation was radical: [The Commission] has therefore, come to the conclusion that, having regard to relevant circumstances, the most effective system is to treat the Maori authorities as taxpayers in a separate class and to assess them for income tax on undistributed income at an appropriate flat rate.92

The proposed flat rate on undistributed income was 2 shillings 6 pence in the pound.93 Distributed income was taxed in the hands of each recipient. The authority ought to be required to complete a return to the Commissioner of Taxes showing the name and address of each ‘equitable’ owner and the relevant amount of distributed income. For tax policy reasons, there ‘were substantial grounds for treating each Maori Authority for taxation purposes as an entity separate from its owners’. The Report claimed that in most cases, it was the existence of the authority that was ‘tangible evidence of the unity of the tribe or the hapu’.94 This would have been contested by iwi and hapu, but indicates the emergence of a view about identifying a construct that is necessary for tax purposes as being of such significance as to trump other values, structures and practices. The proposal would, the Commission concluded, recognise two things.95 First, ‘Maori lands make an adequate contribution to State revenue’. Secondly, it would ‘at the same time recognize [that] the particular character of Maori ownership in their incorporations, requires a special system of taxation such as the Commission is recommending’.96 As can be seen above, income tax rates on companies and all other taxpayers were progressive. A flat rate of income tax was unusual. In that way, taxation



90 ibid

[40(C)]. Act 1933, s 372: partnerships were limited to 20 persons. 92 Report of Commission of Inquiry, above n 7, [40(D)]. 93 ibid [44(b)]. 94 ibid [45]. 95 ibid [45(c)]. 96 ibid [45(e)]. 91 Companies

330  Shelley Griffiths policy recognises something outside the prevailing norm to accommodate the reality of the income earned from Maori land. It is well recognised that income tax legislation deals with a ‘wholly artificial universe constructed by law’.97 Part of that wholly artificial universe involves the construction of tax entities. ‘Maori authorities’, itself an income tax expression, are a particular type of construct referencing a number of Cook’s law concepts: the separation of legal and equitable interests, the separate entity theory of corporate law, the ideas inherent in a corporation, the notion of perpetual legal life and more besides. This is done to force into a recognisable structure a form of property connection that is based on an altogether different set of values and practice inherent in Kupe’s law. CONCLUDING REMARKS

In 2019, a Tax Working Group (TWG) that had been tasked with considering the future of tax issued its final Report.98 As might be expected, the TWG considered a wide range of issues and material. Among its background papers was one on Maori authorities. There was a clear consensus. There was no need to change the existing manner of the application of income tax to Maori authorities.99 ‘Maori authorities’ continues to be a tax-specific term as defined in the income tax legislation, and specific entities, such as the Maori Trustee, can elect to be so included. Additionally, certain trusts or companies that meet specific statutory connections can choose that status.100 Put generally, to be eligible, the entity must be subject to statutory or other restrictions on the ability to develop or trade the assets held in communal ownership. Tax is paid by the Maori authority at a flat rate of 17.5 per cent. Currently in New Zealand, trustee income is taxed at a flat rate of 33 per cent and company tax is levied at a flat rate of 28 per cent. The flat rate is more common now than in 1950. The Maori authority rate is lower than other rates to reflect the most common marginal income tax rate of the economic owners of Maori authorities. Although much has changed since 1950, especially in relation to settlements under the Treaty of Waitangi, the means of integrating Maori authorities within the income tax system is broadly the same now as that recommended by the 1952 Commission of Inquiry. In that respect, the Commission has a continuing resonance. In 1952, the Commission identified a role for the authorities in the creation of unity for iwi and hapu. A more nuanced analysis of the authorities would, 97 S Elias, ‘Righting Environmental Justice’ (2014) 10 Resource Management Theory and Practice 47, 48. 98 Tax Working Group Te Awheawhe Tāke, Future of Tax: Final Report (Wellington, Tax Working Group, 2019). 99 Tax Working Group Te Awheawhe Tāke, Māori Authorities Background Paper for Session 6 of the Tax Working Group (Wellington, Inland Revenue Department and the Treasury, 2018) [16]. 100 Income Tax Act 2007, subpart HF, ss CV11, CW55.

Lex Aotearoa  331 I suggest, recognise their role in the journey to find a way to encompass different practices and traditions to meet the demands of an income tax system. It is for that reason that I identify it as a moment of intersection. But as the position in 2020 indicates, it is an accommodation that has proved robust. In the 1970s and 1980s, the New Zealand courts spoke with absolute certainty about some constitutional and administrative principles. The ‘law could be amended or suspended only by Parliament’.101 The Commissioner of Inland Revenue had no power of dispensation. The Commissioner had a duty to ensure that ‘income is assessed to tax and that the tax is paid’.102 Intriguingly, the events recounted in the Commission’s report suggest that those principles were not always adhered to. That raises the possibility that those principles that were stated with such confidence and certainty were possibly not as firm and non-contestable as they were portrayed. From 1910, the ideas of Maori land development espoused by Sir Apirana Ngata and others appear to have imbued much of the spirit of the land philosophy of the Liberals of the late nineteenth century. ‘Development’ was a recurring theme in relation to Maori land. We can see those ideas at work as a practical means of taxing the fruits of that policy. In some senses, those ideas associated with the value of ruralism and the social and cultural benefits of connection with and development of land continued to have some political and policy resonance through at least the first half of the twentieth century. In 1951, the Gibbs Report on taxation again drew attention to the distinction between capital as a source of production and income as the result of production.103 That dialogue is implicit in the story contained in the 1952 Commission of Inquiry into the taxation of Maori authorities. The 1939 legislation, the Commission of Inquiry that followed it and the subsequent legislation tell us a little about the administration of taxation and perhaps even public administration in mid-twentieth-century New Zealand. That series of events also highlights one of the occasions of intersection of the two legal traditions that exist in New Zealand. Schumpeter famously told us that in studying fiscal history we hear the thunder of history.104 In taxation history, we may also hear quieter, less thunderous rhythms in the working out of law in a colonial settler society. The interaction of the modern construct of income tax and the relationship of Maori with their lands is an interesting fragment in the bigger story of the development of Lex Aotearoa.

101 Fitzgerald v Muldoon [1976] 2 NZLR 615, 622. 102 New Zealand Stock Exchange v Commissioner of Inland Revenue [1992] 3 NZLR 1, 3. 103 Report of the Taxation Committee, above n 56, [56]. 104 J Schumpeter, ‘The Crisis of the Tax State’ in JA Schumpeter and R Swedberg (eds), The Economics and Sociology of Capitalism (Princeton, Princeton University Press, 1991) 101.

332

13 Countering Tax Avoidance in Canada before the General Anti-Avoidance Rule COLIN CAMPBELL AND ROBERT RAIZENNE*

ABSTRACT

C

anada enacted its General Anti-Avoidance Rule (GAAR) in 1988, as part of a package of tax reform measures first proposed the preceding year. The decision to enact the GAAR arose as a direct result of the unanimous judgment of the Supreme Court of Canada in 1984 in Stubart Investments Ltd v The Queen. In deciding in favour of the taxpayer, the Court reversed the holdings of three lower courts, which had concluded that the business reorganisation in issue in the case should be disregarded as a sham or because it lacked a business purpose. This chapter analyses developments in the law of tax avoidance in Canada during the pre-Stubart period, with a view to describing the shifting judicial approaches to tax avoidance leading up to Stubart and consequently precipitating the enactment of the GAAR. In doing so, the chapter considers: the application of general antiavoidance measures in pre-Stubart Canadian legislation; the response of the Canadian judiciary to a rising tide of tax avoidance cases; the ‘sniper’ approach favoured by Canadian policymakers, which prioritised specific antiavoidance rules over more general rules; the analysis and recommendations in the ‘Carter Report’, released in 1966; and the evolution in interpretive approaches to tax legislation. In doing this, the chapter positions the GAAR in its historical context as a countermeasure to accelerating complexity both in tax law and commercial transactions and the resulting proliferation of tax minimisation strategies.

* The authors wish to thank Ilana Ludwin, associate at Osler, Hoskin & Harcourt LLP, for her assistance in finalising this chapter.

334  Colin Campbell and Robert Raizenne INTRODUCTION

In the 20 years following the enactment of the Income War Tax Act (IWTA) in 1917, tax avoidance was addressed with a series of specific anti-avoidance measures legislated in the face of the rule of strict construction that inhibited development of judicial anti-avoidance doctrines.1 By the late 1930s, the first statutory general anti-avoidance measures emerged; they were then reinforced as a wartime emergency measure. Falling into desuetude after 1945, two decades would pass before some judges began to contemplate expanded general judicial anti-avoidance rules based on notions such as ‘sham’ and ‘business purpose’. This chapter describes this history, culminating in 1984 in the Supreme Court of Canada’s modified restatement of the rule of strict construction in the Stubart case. A straight line then connects that decision and the enactment of the modern General Anti-Avoidance Rule (GAAR) only four years later. THE INCOME WAR TAX ACT: 1917–48

When the IWTA became law in 1917, Canada’s experience with tax avoidance – as opposed to tax evasion, a distinction well established in the UK by 1917 – was largely limited to the municipal property tax on intangible personal property.2 Tax evasion, on the other hand, was present from the earliest days of European settlement. Although the fraud provisions in the Criminal Code would have already applied, the IWTA additionally imposed criminal sanctions for falsifying returns or documents. The IWTA provided significant incentive for ‘reactive’ tax avoidance strategies to reduce or eliminate the tax entirely. Taxpayers went from low-rate municipal and provincial income taxes to a federal income tax with a top marginal rate that exceeded 50 per cent by the early 1920s. Early tax avoidance planning involved moving the income into the hands of a lower taxed alter ego in the same economic unit, typically another family member, in what we would now term income splitting. More complex and sophisticated strategies were driven by the full acceptance and increased use by the 1920s of the separate corporate legal personality,3 combined with the separate taxation of corporations at flat rates of tax. These flat rates were substantially lower than individual rates, growing from 10 per cent by the mid-1920s to 15 per cent by 1939. This rate differential invited deferral of tax by accumulating income in corporate form. Avoidance of 1 SC 1917, c 28. 2 For example, creating artificial debt among family members to reduce the net value of securities held. 3 The principle of separate corporate legal personality is still maintained with undiminished vigour in Canadian courts. See the recent decision of the Ontario Court of Appeal in Yaiguaje v Chevron Corporation, 2018 ONCA 472; leave to appeal to the Supreme Court of Canada denied, 38183 (4 April 2019).

Countering Tax Avoidance in Canada  335 high personal rates on removing tax-paid earnings from a corporation could be achieved by way of tax-exempt capital gains, a tax result generally referred to as ‘surplus stripping’. A further aspect of the tax system – taxing non-residents only on Canadian-source income – allowed another avoidance avenue, the use of controlled foreign corporations (including for the exploitation of transfer pricing) to accumulate earnings offshore. The original IWTA had been drafted and enacted in haste in response to political pressure. It was skeletal in nature and included few anti-avoidance measures. One allowed the Minister to apply personal tax rates to accumulating corporate surplus that, in the Minister’s discretion, was not needed in the business; another gave the Minister discretion to disregard intra-family transfers designed to avoid tax. The IWTA underwent substantial amendment and expansion almost immediately, continuing throughout the 1920s. A series of additional measures to counter specific tax avoidance strategies were added. Between 1924 and 1926, the original income-splitting rule was broadened to include attribution of income where property had been transferred to minors and the removal of the requirement of a tax-avoidance purpose. Additional rules addressed the use of employment or partnership arrangements with spouses and were extended in the mid-1930s to transfers using trusts and to transfers of property to a trust where there was a possibility of reversion to the settlor.4 In 1923, the enactment of the principal business rule prevented taxpayers from reducing tax by using losses from a secondary business like a hobby farm. In one form or another, all of these rules are continued in the modern Income Tax Act.5 Corporate issues were also addressed in measures enacted between 1924 and 1926 directed both at deferral and surplus stripping.6 In introducing the

4 In response to UK jurisprudence that held that the settlor in such a case had no proprietary interest in the transferred property and in anticipation that it would be exploited by Canadian taxpayers: Baker v Archer-Shee [1927] AC 844 (HL); Garland v Archer-Shee [1931] AC 212 (HL). See also M Gammie, ‘The Archer-Shee Cases (1927): Trusts, Transparency and Source’ in J Snape and D de Cogan (eds), Landmark Cases in Revenue Law (Oxford, Hart Publishing, 2019) 139–60. 5 The 1952 Act was largely repealed and replaced in 1971 as a consequence of tax reform by SC 1970–71–72, c 63, which, as amended, was consolidated as RSC 1985, c 1 (5th Supplement). In this chapter we treat the foregoing (as further amended) as a single statute, referred to as the ‘modern Act’. Some are continued more directly than others: the restrictions in the modern Act on the deduction of certain farm losses serve a similar purpose. The restricted farm loss rules replaced the principal business rule in 1952 as a companion to enhanced loss carryover rules, and it is possible that the disappearance of the older rule encouraged some kinds of tax avoidance. See SR Richardson, ‘Transfer of Deductions, Credits or Losses within Corporate Groups: A Department of Finance Perspective’ in Canadian Tax Foundation, Report of the Proceedings of the Thirty-Sixth Tax Conference, 1984 Conference Report (Toronto, Canadian Tax Foundation, 1985) 737–54. 6 Capitalisation of surplus through stock dividends was attacked from the beginning by administrative practice and in 1920 by amendment, retroactive to 1917, to tax stock dividends as ordinary dividends. The 1920 amendment was a direct response to the decision in Eisner v Macomber (1920) 252 US 189, where the US Supreme Court held that a pro rata stock dividend was not income (Debates of the House of Commons, 8 June 1920, 3238 (Debates)). The dissenting opinion of Justice Brandeis in Macomber contains a prescient discussion of ‘surplus stripping’ as an avoidance technique.

336  Colin Campbell and Robert Raizenne main group of provisions in 1926, Georges Boivin, the minister responsible for piloting the amendments through Parliament, referred to the ongoing contest between taxpayers and their advisors and the revenue authorities in terms that have not lost their relevance: there was ‘no greater pastime for many able lawyers’ than to devise new means to avoid tax so that ‘as cracks are found in the walls of the structure, they must be continually repaired’.7 Deferral was addressed in rules directed at corporations closely held in a family (defined as a ‘personal corporation’) with passive investment income in excess of 25 per cent of total income, in which case, all of the income was taxed in the hands of the shareholders at individual rates.8 The first surplus-stripping measure was also an immediate riposte to UK jurisprudence holding that surplus distributed on the winding up of a corporation lost its character of income.9 A group of amendments in 1926 more comprehensively addressed the issue: loans to shareholders were generally deemed to be dividends to the extent of undistributed surplus, and any payments in respect of a reduction of capital or on a redemption of shares were similarly deemed to be dividends, as were premiums paid out of undistributed surplus on share redemptions. A further measure addressed transactions that exploited the non-taxation of intercorporate dividends and capital gains.10 Finally, surplus capitalised on a reorganisation of capital of the corporation was recharacterised as a dividend. Many of the complications, and therefore planning opportunities, arose because it was accepted that capital gains were not taxable under the IWTA based on UK jurisprudence, notwithstanding a series of decisions of the US Supreme Court upholding the taxability of capital gains.11 The ability to dispose of the shares of a corporation, whether at arm’s length or not, without attracting tax was a key weapon in the tax avoidance arsenal.12

7 Debates, 27 May 1926, 3807. 8 Amendments in the 1930s confirmed that the personal corporation rules applied equally to non-resident corporations. 9 IRC v Burrell [1924] 2 KB 52. 10 Shares of a corporation would be transferred to a second corporation for a promissory note; the transferred corporation would distribute its surplus tax-free to its new parent corporation, which, in turn, would use the distributed funds to repay the promissory note. 11 See in particular Merchants’ Loan & Trust Co v Smietanka (1921) 225 US 509. In his written reasons, Clarke J, speaking for the court, observed that in any event capital gains ‘very certainly’ were caught by the concluding words ‘gains or profits and income derived from any source whatever’ in the US law. Similar language appears in s 3 of the IWTA. Justice Clarke also cast doubt on the UK case law holding that capital gains were not income. In his view, the two statutory regimes ‘were wholly different’, rendering the UK decisions ‘quite without value’ in interpreting the US law. 12 This did not, of course, eliminate the need to distinguish capital gains from income gains, and the Canadian courts addressed that issue in a long series of judgments. See JG McDonald, ‘Capital Gains and Losses in Canada’ (1951) XXIX Canadian Bar Review 907. In his testimony to a special committee of the Senate in 1945, Fraser Elliott, the Deputy Minister of National Revenue, Taxation (the title had been changed from Commissioner of Income Tax in 1943), stated that the distinction between income and capital gains caused more interpretive difficulties than any other issue. See Proceedings of the Senate Committee on the Income War Tax Act (Ottawa, King’s Printer, 1945) (Senate Committee) 21 November 1945, 98.

Countering Tax Avoidance in Canada  337 In the interwar period, Canada – similar to the UK – continued to enact targeted anti-avoidance measures. In 1938, Sir John Simon introduced measures in the UK against ‘the … ingenious methods for reducing liability which are within the law but which none the less defeat the intention on which the law is founded’. Clement Attlee reminded him that the ‘tax dodgers are always a few moves ahead of any given Chancellor of the Exchequer’.13 This contest was driven in part by judicial tolerance of tax avoidance, limiting the government’s recourse to the courts. In 1938, Fraser Elliott, Canadian Commissioner of Income Tax, complained that the courts had ‘in a broad sense influenced adversely the moral tendency of the public in their approach to [income tax] by stating that one may “avoid tax but must not evade it”’, thus approving ‘the constant shift of the affairs of taxpayers to avoid tax’.14 The culprit was the doctrine of strict construction, newly reinforced in the Duke of Westminster case.15 In 1924, the Canadian Supreme Court held that the ‘rule for the construction of a taxing statute is most satisfactorily stated by Lord Cairns in Partington’,16 the locus classicus of the doctrine, where the House of Lords held that ‘if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the sphere of the law the case may otherwise appear to be’.17 In the UK, Partington ‘was a fact for the next hundred years’;18 in Canada, it was binding until 1949 thanks to the UK Privy Council being the highest court of appeal. A sporadic judicial revolt in the early 1930s was quickly quashed in the Pioneer Laundry case.19 The taxpayer had effectively claimed tax depreciation twice on the same assets by transferring them between related corporations. A divided Supreme Court upheld the Minister’s denial of the additional depreciation by disregarding the ‘legal facade’. The Privy Council reversed, endorsing Chief Justice Duff’s minority opinion in the Supreme Court that the separate legal existence of

13 See BV Sabine, A History of Income Tax (London, Allen & Unwin, 1966) 181ff. 14 F Elliott, ‘The Canadian Income Tax Law’ (1938) 4 Canadian Journal of Economics and Political Science 377, 388. Elliott’s paper suggested a striking parallel between Canada and the USA with respect to tax avoidance, with Canadian practitioners mimicking US tax avoidance strategies, so that the two jurisdictions were ‘symbiotic’. Notwithstanding, Elliott claimed victory in the battle, quite prematurely as it turned out. 15 Inland Revenue Comrs v Duke of Westminster [1936] AC 1. 16 Versailles Sweets Limited v Attorney-General of Canada [1924] SCR 466, 468. 17 Partington v The Attorney-General (1869) LR 4 HL 100, 122. 18 J Avery-Jones, ‘Tax Law: Rules or Principles’ (1996) 17 Fiscal Studies 63, 69. 19 Pioneer Laundry and Dry Cleaners Ltd v MNR (1939) 1 DTC 499–69 (JCPC), reversing [1939] SCR 1, affirming 1 DTC 408 (Ex Ct). Earlier in the decade, the Supreme Court acted similarly in Attorney-General Canada v Colgate-Palmolive-Peet Co (1933) 1 DTC 238, affirming [1932] Ex CR 120, a case involving the sales tax imposed on the first sale of a product by the manufacturer. The taxpayer incorporated a subsidiary and sold the product to it at less than the market price. The court found that the relevant price was the market price charged by the subsidiary to the public, notwithstanding the interposition of another corporation.

338  Colin Campbell and Robert Raizenne the corporations could not be ignored.20 The lesson was not lost: in 1948, the President of the Exchequer Court could confidently hold that ‘it is the letter of the law, and not its assumed or supposed spirit, which governs’.21 Extrajudicial reaction against strict construction gathered steam in the late 1930s, driven by a growing view that a taxpayer’s liability should be determined not by the ‘strict letter of the taxing act’, but by ‘his intentions and the morality of his actions’. A contributing factor was increasingly inventive schemes to avoid tax on distributions of corporate surplus.22 Minister of Finance JL Ilsley told Parliament in 1943 that it was ‘impossible to foresee or envisage the methods [for tax avoidance]’ and that ‘the only possible way of dealing with the matter is to express general principles and leave it to some tribunal to decide’.23 This ‘ethical test’ was not imported into the IWTA by requirements to be measured and enforced by the courts, however, but by administrative discretion. Ilsley’s reference to ‘tribunal’ and not to ‘court’ was quite deliberate. While he made no reference to an apparent lack of confidence in the courts, it is fairly clear that he shared the view (as Avery-Jones has commented) that ‘the judges could not be trusted to give effect to the ideas behind [the statutes]’.24 In 1938, section 32A of the IWTA introduced for the first time a purpose test.25 It applied to any cross-border transaction that had the effect of reducing Canadian tax liability where the Treasury Board (a committee of the Cabinet) ruled that the purpose of the transaction was to reduce tax. The resort to administrative discretion was not surprising. From the outset, the IWTA relied extensively on administrative discretion by the Minister of National Revenue. In the case of section 32A, it appears that, given the novelty and extent of the provision, it was thought fairer to have a broader decision-maker than the Minister alone. In 1940, section 32A was rewritten and expanded to include domestic transactions of a ‘specious character’ (in the words of the budget resolution); the wording of the enactment itself now referred to transactions that would ‘artificially reduce taxation’ and that had no ‘reasonable business purpose’. In 1943, it was rewritten again to apply to transactions whose ‘main purpose’ was, 20 Chief Justice Duff mentioned briefly Duke of Westminster, above n 15, but his reasoning turned on jurisprudence affirming the separate legal existence of the corporation. The Privy Council’s endorsement of Duff CJ’s judgment can be taken as approving his reference to Duke of Westminster. 21 President Thorson in David Fasken Estate v MNR [1948] Ex CR 580, 586. 22 HH Stikeman, ‘Taxation Law 1923–1947’ (1948) 26 Canadian Bar Review 308, 309. Stikeman was Assistant Deputy Minister of National Revenue for legal matters until 1945. He was the co-founder, in 1952, of the firm now known as Stikeman Elliott. The eponymous Elliott was the son of Fraser Elliott, the former Deputy Minister. See also J Willis, ‘Statutory Interpretation in a Nutshell’ (1938) 16 Canadian Bar Review 1; J Willis, ‘Recent Trends in Canadian Income Tax Law’ (1951) 9 University of Toronto Law Journal 52. 23 Debates, 15 April 1943, 2232. 24 Avery-Jones, above n 18, 69. 25 The Business Profits War Tax Act, which imposed the World War I excess profits tax in 1916, prohibited deductions in computing profit which ‘improperly reduced profits’ and gave the minister discretion to determine whether increases in paid-up capital were ‘fair and proper’, but there was no similar language in the IWTA.

Countering Tax Avoidance in Canada  339 in the Treasury Board’s view, to avoid or reduce tax. It was also expanded to include detailed rules designed to prevent surplus stripping. Minister Ilsley’s explanation regarding the focus on surplus stripping referenced both wartime prosperity which promised larger corporate surpluses and the ‘many fees paid to corporation lawyers’ to devise tax-free withdrawals. The purposive approach in these provisions was, of course, at odds with the rule of strict construction, and raised debate and criticism of the role of the revenue authority in the application of the provision and the nature of a taxpayer’s recourse to their application. A Treasury Board determination under section 32A could be appealed to the Exchequer Court, but there are no reported cases of such an appeal. It is unclear how the court would have approached such an appeal beyond the application of established principles of judicial review. Fraser Elliott stated categorically that if the rules of natural justice had been followed, an ‘exercise of discretion cannot be challenged in the courts’.26 The provision was applied sparingly – evidence in 1948 was that it had been used only four times – but it may have been used in practice in terrorem at the administrative level to frustrate avoidance schemes. Elliott described it as a ‘war section’ directed at the temptation to avoid tax on wartime profits, but in testimony before the Senate in 1945 and 1946 gave no indication it would be replaced in peacetime. In the same testimony, he vigorously defended the use of administrative discretion for the ‘determination of true nature of transactions where lessening of tax may be involved’.27 Heward Stikeman also attributed its existence to wartime necessity and characterised it as the entry of ‘morality’ into the tax system – the notion that citizens had a moral duty to pay their tax rather than an unrestricted right to avoid it if they could.28 Section 32A can, in our view, be seen as the ultimate ancestor of the modern General Anti-Avoidance Rule. It used the concepts of purpose and artificiality, which are inherent to the current rule, and was directed at sophisticated avoidance schemes – in Elliott’s words, ‘usually large sums of money are involved’, as well as ‘some highly technical and skilled moves’.29 The developments of the early 1940s were, however, a kind of false dawn. At least part of the impetus for them was the wartime emergency and, with 26 See Senate Committee, above n 12, 14 November 1945, 78. Plaxton, on the other hand, wrote that the Exchequer Court was ‘perfectly free’ to substitute its own view of the substantive issue; HAW Plaxton, The Law Relating to Income Tax (Toronto, The Carswell Company, 1947) 295. In the absence of any court challenges, the question was never resolved (ibid 652–69). As an aside, ‘Bert’ Plaxton was a member of the Canadian national hockey team awarded the gold medal at the 1928 Winter Olympics. 27 Senate Committee, 7 May 1946, 306. 28 H Stikeman, ‘Canadian Experience in Fighting the War’ in Proceedings of the Annual Conference on Taxation, National Tax Association, vol 36, 20–24 November 1943, 345–60, 352–53. See also LJ Ladner, ‘Post War Impact’ (1944) 26 Canadian Bar Review 652. 29 See Senate Committee, above n 12, 7 May 1946, 306 and 9 May 1946, 332. Elliott’s appearance before the Senate Committee was a bravura performance, worthy of his experience since joining the Income Tax Division in 1919, administering the income tax as Commissioner and Deputy Minister from 1932 and drafting much of the amending legislation during that period. He was replaced in 1946, on his appointment as Canadian ambassador to Chile.

340  Colin Campbell and Robert Raizenne peacetime, patriotic support for combating tax avoidance ebbed. This, combined with the reaction against heavy-handed application of administrative discretion, pushed section 32A into a kind of legislative oblivion, unrepealed and unconsidered. THE 1948 AND 1952 INCOME TAX ACTS: 1949–71

The IWTA was replaced with effect from 1 January 1949 by a substantially rewritten statute, different in form but in many respects identical in substance.30 In turn, as amended, it was consolidated in 1952.31 For convenience, we will refer mostly to the 1952 Act. The provisions discussed in this section are laid out in Table 13.1. The principal statutory anti-avoidance provisions in the IWTA, dealing with income splitting, transfer pricing, personal corporations and surplus stripping, were carried over into the 1948 Act, with some changes in wording and drafting style. These included a provision, originating in 1940 as section 6(2) of the IWTA, that allowed the Minister to disallow deductions in computing income that ‘artificially’ reduced tax. As section 137(1) in the 1952 Act, it was stripped of ministerial discretion as part of the general removal of discretions in 1948 and so became fully subject to challenge in the courts. The principal exception to the carryover of the various anti-avoidance rules in 1948 was the disappearance of the detailed rules addressing surplus stripping in sections 14 and 32A(2) and (3) of the IWTA, where the transaction exploited the non-taxation of capital gains and tax-free intercorporate dividends.32 The omission was partially addressed in 1950 with the addition of new measures, the designated surplus rules. These applied where a corporation acquired

Table 13.1  Table of Concordance for the Provisions Discussed IWTA

1952 Act

Modern Act

Section 6(2) (artificial reduction)

Section 137(1) Pre-GAAR section 245(1) (repealed)

Section 32A (nonsurplus stripping)

Section 138

Section 246 (repealed 1984)

Section 32A (surplus stripping)

Section 138A

Old section 247(1) (repealed 1988)

—

Section 137(2) Pre-GAAR: section 245(2) Post-GAAR: section 246(1)

30 Income Tax Act, SC 1948, c 52 (1948 Act). 31 RSC 1952, c 148 (1952 Act). 32 The original general anti-deferral rule in s 13 of the IWTA disappeared in 1948, possibly due to a combination of higher corporate tax rates and the personal corporation rules.

Countering Tax Avoidance in Canada  341 control (defined as ownership of more than 50 per cent of the shares having full voting rights) of another Canadian corporation with undistributed income. This pre-acquisition undistributed income was labelled ‘designated surplus’, and intercorporate dividends paid out of designated surplus were ineligible for the intercorporate dividend exemption. The rules prevented a purchaser of shares from extracting corporate surplus free of tax by means of intercorporate dividends and using the capital to pay the purchase price of the shares. Until the late 1950s, the rule could be avoided through amalgamation. While almost all of the provisions for the exercise of ministerial discretion were eliminated in the 1948 revision, section 32A, without its surplus-stripping provisions, was continued as section 138 of the 1952 Act.33 The disappearance of those surplus-stripping provisions had what in hindsight was an entirely predictable result: ‘The consequence of the omission of the discretionary powers under section 32A of the Income War Tax Act set the stage for what has virtually been a 15 year battle between the taxpayers and the taxing authorities.’34 Once again, the ingenuity of taxpayers and their advisors produced another discretionbased statutory response in 1963, reflecting ‘an admission of inability to draft legislation wide enough to prevent surplus stripping’.35 Section 138A(1) specifically addressed surplus stripping (the subheading for the provision used the US term ‘dividend stripping’).36 In substance, it followed the earlier anti-surplusstripping rules in section 32A of the IWTA. It applied where a taxpayer received an amount from a sale or disposition of shares, a redemption or acquisition of shares by the corporation or a conversion of shares, or as an otherwise exempt amount in a transaction or series of transactions.37 ‘One of the purposes’ of the series had to be to extract corporate assets so as to avoid tax otherwise payable. Purpose was to be determined by the Minister (rather than the Treasury Board), reintroducing reliance on administrative discretion. Section 138A was broader than its IWTA predecessor in that, similar to section 138, it referred to a main purpose instead of the main purpose. Predictably, it attracted the same criticism that had been previously directed at the use of administrative discretion in the 1940s. In 1965, FE LaBrie complained that ‘to anyone believing strongly in the “rule of law” and equality before the law, the substitution of closed-door administrative discretion for open judicial interpretation is a disturbing development’.38 33 The IWTA requirement that the ‘main’ purpose of the impugned transaction be avoidance or reduction of tax was broadened to ‘one of the main purposes’ and the avoidance narrowed to ‘improper’ avoidance or reduction. 34 FD Jones, ‘Distribution of Corporate Surpluses under the New Income Tax Act’ (1972) 18 McGill Law Journal 483, 484. Jones describes in some detail various of the schemes employed during that period. See also P Vineberg, ‘The Ethics of Tax Planning’ [1969] British Tax Review 31. 35 Jones, above n 34, 490. 36 SC 1963, c 21, s 26. 37 The concept of a ‘series’ of transactions was introduced by s 138A; s 32A merely referred to a ‘transaction or transactions’. ‘Series’ was not yet defined. 38 FE LaBrie, The Principles of Canadian Income Taxation (Toronto, CCH Canadian, 1965) 528. LaBrie was professor in the Faculty of Law at the University of Toronto and a pioneering tax academic in Canada.

342  Colin Campbell and Robert Raizenne More surprisingly, LaBrie attributed the absence of recourse to the courts to failings in the tax administration rather than lack of trust in the courts’ willingness to deal with tax avoidance. LaBrie believed that many of the surplus-stripping schemes in use were mechanical or ‘wooden’ in nature and would not withstand sustained attack. He speculated that failure to challenge might come from ‘lack of confidence’ in the face of ‘compelling legal argument’ made in negotiation, lack of sympathy with the object of the provisions, concern for the economic effect and ‘plain corruption’.39 Lack of faith in the courts was not on his list. The 1948 Act also saw the addition of an explicit arm’s length standard to the statute. While the IWTA since 1917 had contained anti-income-splitting rules for families and a rudimentary ‘fair’ pricing rule for corporations, there had been no general policing of ‘related-party transactions’. In the Canadian context, the arm’s length standard made its first appearance in the 1942 Canada–US Income Tax Convention40 and was then incorporated as a base of reference in the 1948 and 1952 Acts for transfer pricing and other purposes. The inherent unreliability of non-arm’s length arrangements as a basis for taxation was an obvious danger to the integrity of the Canadian tax base and, from initial enactment, the arm’s length standard emerged as a touchstone of the Canadian tax system. In particular, it allowed tax administrators to readily identify and review transactions that were potentially problematic, helping to counter both tax avoidance and tax evasion. Like the modern Act, there was no general definition of arm’s length in the 1948 Act; rather, certain relationships were deemed to be not at arm’s length, and its wider meaning was left for clarification and delineation to the courts and evolving international tax practice.41 It was not until 1974 that the Supreme Court articulated the principle that parties are to be treated as dealing at arm’s length when their arrangements ‘reflect ordinary commercial dealings between parties acting in their separate interests’.42 The deeming rules in the 1948 Act

39 ibid 527–28. 40 Arts III and IV of the 1942 Canada–United States Income Tax Convention made reference to ‘independent persons dealing at arm’s length’. 41 Amendments in 1954 made it clear that, outside the specified relationships, arm’s length status was a question of fact. Those amendments also expanded the deeming provisions regarding corporate control to their modern form and introduced the rule, now in s 251(5)(b) of the modern Act, deeming options and other contingent rights to have been exercised in determining if persons are related. 42 Swiss Bank Corp v MNR [1974] SCR 1144, 1152. The leading Canadian judicial authority prior to the Swiss Bank decision was MNR v Sheldon’s Engineering Limited [1955] SCR 637. Shares of a wholly owned subsidiary corporation were hypothecated to a bank then reregistered in the name of the bank’s nominees. The issue was whether the taxpayer and the subsidiary were dealing at arm’s length in respect of property transferred from the former to the latter. The court concluded that where a taxpayer transacts with a controlled corporation, ‘the controlling shareholder dictating the terms of the bargain’, the parties are not dealing at arm’s length (at 644). Given the bank’s involvement, the transaction was held to have been concluded between arm’s length parties.

Countering Tax Avoidance in Canada  343 addressed specified relationships between and among individuals based on ties of blood and marriage, and between and among corporations and their shareholders. In the corporate context, the linchpin of the deeming rules was the similarly undefined notion of ‘control’. Over time, a significant body of case law had developed, addressing various aspects of the issue of corporate control. Taking inspiration from the decision of the House of Lords in British American Tobacco,43 Jackett P (as he then was)44 framed the essence of the Canadian test in de jure terms: ‘the right of control that rests in ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the board of directors’.45 In rejecting de facto control as an applicable standard, the Canadian courts narrowed the concept, all the while disregarding significant shareholdings as a factor in determining control of a corporation in a tax avoidance context.46 The 1948 Act also introduced the concept of ‘related’ corporations, a more relaxed measure of ‘closeness’ than control, but employing the arm’s length concept in order to regulate eligibility for a preferential tax rate on the first $10,000 of taxable income.47 The 1952 Act was amended to restrict the preferential rate provision by introducing the concept of ‘associated’ corporations, ie corporations under common control, a test that was more restrictive than the related persons test but that similarly used the arm’s length concept to aggregate groups of shareholders. The arm’s length standard thus became (and remains) an essential feature of the web of statutory rules enacted to counter abuse by means of the proliferation of corporations under common control. The introduction of section 138A in 1963 included granting the Minister discretion under section 138A(2) to deem two or more corporations to be associated where their separate existence was not ‘solely’ for business purposes and one of the ‘main reasons’ for their separate existence was the reduction of tax. The 1963 amendment must have reflected a further absence of confidence in the courts to apply the associated corporations rules in the manner intended. In the debate on the Bill that introduced section 138A, Walter Gordon, the Minister of Finance, declared that it was not intended to be a ‘permanent fixture’ but would be replaced, ‘perhaps with the help of the findings of the royal commission on taxation’ appointed the previous year. Governments, Gordon said, ‘have been trying to nail this one down for a long time, without success’.48

43 British American Tobacco Co Ltd v CIR [1943] All ER 13 (HL). 44 From 1920, the chief judge of the Exchequer Court was titled President. This designation was inspired seemingly by relevant practice in English and other Canadian courts. See I Bushnell, The Federal Court of Canada: A History 1875–1992 (Toronto, University of Toronto Press, 1997) 96–97. 45 Buckerfield’s Ltd v MNR [1965] 1 Ex CR 299, 303. 46 De facto control was introduced in the modern Act for limited purposes. 47 The test used in 1948 for related status was 70% ownership by a parent corporation or 70% ownership by a person or group of persons not acting at arm’s length. 48 Gordon also referred to a presentation by Heward Stikeman at a tax conference that described various legal means of stripping corporate surplus. See Debates, 22 July 1963, 2490–94.

344  Colin Campbell and Robert Raizenne The only reference in the debate to the role of the courts was the reminder by John Turner, a future Minister of Finance (and ephemerally Prime Minister), that so long as the ‘loophole’ remained unplugged, it was the taxpayer’s ‘common law right’ to arrange his affairs to minimise tax.49 The extent of tax avoidance (in the modern sense of the term) prior to 1949 is unclear. While Fraser Elliott asserted to an American audience that tax avoidance in Canada was well under control, JL Ilsley’s statement introducing the final version of section 32A in 1943 suggested otherwise.50 There were no reported legal challenges to the use of ministerial discretion and the Treasury Board only used section 32A four times between 1943 and 1949.51 It is unknown, however, how many times the explicit or implied threat of the exercise of that discretion effectively prevented or at least curtailed avoidance transactions without formal use of the power, and thus no challenge in the courts. By 1949, the prevalent view in legal circles was uncomfortable with the use of discretion (LaBrie’s criticism was typical and widely held) and section 138 appears to have fallen into desuetude.52 Its continuance in the 1952 Act suggests an ongoing perception that the courts were unwilling to depart from the canon of strict construction that had dominated under the IWTA. In fact, this was somewhat less true after 1948, though the development was gradual and undramatic. It is difficult to say to what extent the abolition of appeals from the Canadian courts to the Privy Council after 1949 contributed to this process. By 1965, as noted, LaBrie attributed this to the failing of the tax authorities to have recourse to the courts.53 Regardless of the reason, a gradually increasing number of tax avoidance cases came before the courts, particularly after 1960, presumably reflecting a greater incidence of avoidance transactions. The reason is unclear, though the increasing number of tax practitioners54 and exposure to American tax planning may be a partial explanation. One might also speculate that Elliott’s removal as Commissioner in 1946 following prolonged criticism from the tax community reduced the energy expended by the Department of National Revenue on combating tax avoidance. One line of avoidance cases from this period denied a tax benefit where a profitable taxpayer (in the absence of any statutory provision for consolidated

49 Turner had practised tax law with Stikeman Elliott in Montreal before entering Parliament in 1962. 50 Debates, 15 April 1943, 2226. 51 D Abbott, Testimony, House of Commons Standing Committee on Banking and Commerce, Minutes of Proceedings and Evidence, 17 July 1948, 697–98. 52 s 138 was carried over into the modern Act as s 246, but was repealed in 1984 as being inconsistent with the newly enacted Canadian Charter of Rights and Freedoms. 53 There was no such reluctance on the part of taxpayers, however, and the number of tax appeals increased almost exponentially after 1948, though this in part can be attributed to the institution of a less formal and much cheaper avenue of appeal in the newly created Income Tax Appeal Board, an administrative tribunal rather than a court. 54 Some of whom, like Stikeman, had learned their trade working for the Department of National Revenue.

Countering Tax Avoidance in Canada  345 returns, provision for which had been repealed in 1951) had purported to transfer a part of its business to a related corporation or trust with losses and so shelter the profit from tax. Richardson Terminals Limited v MNR55 is probably the best known of these cases, where the taxpayer purported to transfer a grain elevator business to a company with loss carry-forwards under common control. The court found that, factually, the business was still carried on by the taxpayer.56 Similar decisions arising out of transactions undertaken in the mid-1960s followed in The Deltona Corporation v MNR,57 where an amalgamation was found to be legally ineffective, and Kingsdale Securities Co Limited v MNR,58 where a partnership was found not to have come into existence because a number of trusts, putative members of the partnership, had not come into existence. While these transactions have been characterised by some commentators59 as shams,60 it is probably more accurate to describe them as legally ineffective transactions, where the execution failed to rise even to the level of sham.61 By contrast, Susan Hosiery Ltd v MNR produced a finding of true sham. In that case, the taxpayer created a pension plan for senior employees, made substantial past service contributions from its undistributed surplus and immediately wound up the plan, transferring the funds to a deferred profit-sharing plan that allowed the employees to access the funds as a non-taxable capital gain. Citing Snook and Lord Tomlin’s remarks in the Duke of Westminster, the court found that the arrangements were a sham that ‘masqueraded as an employees’ pension plan but was nothing of the sort’.62 Where, however, the legal relationships created by the parties were those intended, the courts would not apply the sham doctrine, notwithstanding that the arrangements had the effect of reducing tax. In Cameron v MNR, a case arising just before the 1971 tax reform, the Supreme Court found that a management company structure erected by the taxpayers created legal relationships that were ‘exactly those which the parties intended’

55 (1971) 71 DTC 5028 (Ex Ct), affirmed by the Supreme Court without reasons (1972) 72 DTC 6431. 56 A decision conceptually similar to the well-known English company law case, Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116 (KBD). 57 71 DTC 5186 (Ex Ct), confirmed by the Supreme Court without reasons 73 DTC 5180. 58 73 DTC 5194 (FCTD). 59 See DA Ward, ‘The Judicial Approach to Tax Avoidance’ in Report of Proceedings of the Twenty-Fifth Tax Conference, 1973 Conference Report (Toronto, Canadian Tax Foundation, 1974) 408–24, 411–12. 60 Following the classic definition in Snook v London and West Riding Investments Ltd [1967] 1 All ER 515, 528 of sham as acts intended to ‘give the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intended to create’. The doctrine was not new – in Duke of Westminster, Lord Tomlin referred to ‘documents … used as a cloak to conceal a different transaction’ ([1935] UKHL 4, 21), but the definition in Snook became the locus classicus of the doctrine. See also DY Timbrell, ‘Of Shams and Simulacra’ (1973) 21 Canadian Tax Journal 529; G Loutzenhiser, ‘Sham in the Canadian Courts’ in E Simpson and M Stewart (eds), Sham Transactions (Oxford, Oxford University Press, 2014) 243. 61 See also MNR v Shields, 62 DTC 1343, where a purported partnership never came into existence. 62 [1969] Ex CR 408, 420.

346  Colin Campbell and Robert Raizenne and rejected the Crown’s argument of sham.63 In particular, the court found that the arrangements in Cameron were permanent, unlike the transitory and self-cancelling transactions in Susan Hosiery. The trial court had also found that the tax benefits were ‘incidental’ to the plan, but it is unclear what part that played in the Supreme Court’s decision. That question was not to be finally resolved until the Stubart decision more than 10 years later.64 A concept related to but often confused with the sham doctrine developed in the 1960s through the judicial application of the artificiality test in section 137(1) of the 1952 Act, which denied the deduction of an expense incurred in a transaction that would ‘unduly or artificially’ reduce income. Until 1949, this test had operated by ministerial discretion. When the determination of artificiality fell to the courts after 1948, what emerged was a line of cases that equated artificiality with a primary tax reduction purpose or the lack of any business purpose for the transaction. In Shulman v MNR,65 the taxpayer, a lawyer, interposed a management company between himself and his law partnership for what the court found to be the primary, if not sole, purpose of reducing his tax. The court found this to be artificial and the deduction of amounts paid to the management entity was denied. There was no suggestion of sham. The court relied on a business purpose test – a transaction with no purpose other than reducing tax did not have a business purpose and, if it involved a deduction in computing income, fell afoul of the artificiality test in section 137(1). In at least two cases in the late 1960s involving pension plan contributions in situations similar to Susan Hosiery,66 the courts relied on the artificial transaction doctrine under section 137(1), rather than sham, to deny the deductions sought where the plan would not have existed without the tax benefit gained. A similar result was reached in Harris v MNR, where the Supreme Court found (in obiter, the transaction having been found to be ineffective) that taxpayer’s scheme, which lacked any business purpose, would have artificially reduced income.67 As in the Smythe case discussed below, the court did not refer to any specific authority for its conclusion. Section 12(2) of the 1952 Act also prohibited the deduction of ‘unreasonable’ amounts in computing income. Unlike section 137(1), it did not appear in Part V of the Act dealing with ‘Tax Evasion’,68 but among other provisions containing rules for determining income. What appears to have been the distinction between the two provisions that, on their face, could have applied

63 72 DTC 6325, 6328. 64 The issue of management companies was to be addressed by legislation targeting ‘personal services businesses’ for taxation years beginning after 12 November 1981. 65 61 DTC 1213 (Ex Ct), affirmed 62 DTC 1166 (SCC). 66 Cattermole-Trethewey Contractors Limited v MNR 71 DTC 5010; Concorde Automobile Ltee v MNR 71 DTC 5161. 67 66 DTC 5189 (SCC). 68 The corresponding portion of the modern Act, Part XVI, was not renamed ‘Tax Avoidance’ until 1986.

Countering Tax Avoidance in Canada  347 to the same amount is the degree of artifice or planning involved – the distinction between simply deducting a particular excessive amount and a scheme or strategy leading to a deduction intended to reduce tax. The last noteworthy anti-avoidance provision introduced in 1948 was section 137(2), which included in income any benefits, conferred directly or indirectly, that would have been includable in income if made directly to the taxpayer. It did not specify the character of the income inclusion and consequently invited use in conjunction with other provisions of the Act.69 Section 137(2) was in issue in one of the best-known anti-avoidance cases in the 1960s, Smythe v MNR,70 where an aggressive surplus-stripping transaction, effected through a complex series of partially self-cancelling transactions, had been designed to convert undistributed income to tax-free capital gains. Justice Gibson in the Exchequer Court found that the result was the conferral of a benefit on the shareholders of the corporation within the meaning of section 137(2) and the benefit to be a shareholder benefit includable in income under section 8 (rejecting the alternative of inclusion under section 81(1) as a distribution on the winding up or dissolution of the corporation).71 The Supreme Court, in a brief judgment, found that there was no need to have recourse to section 137(2) and that the series of transactions amounted to a winding-up or dissolution of the corporation.72 The only authority cited was the decision of McLean P in the Exchequer Court in Merritt v MNR,73 where the court looked to the ‘substance and form’ of what happened in a ‘real and commercial sense’. There was no reference to the substantial body of prior case law addressing tax avoidance, and if counsel for the taxpayer argued strict construction (the legal substance was not a dissolution or winding-up under the corporate law) the court was not moved by it.74 In a case involving a similar surplus-stripping scheme heard while the Supreme Court appeal in Smythe was pending,75 Gibson J held that section 137(2) applied to a series of interrelated transactions with ‘no legitimate business purpose’ designed to avoid tax (‘and in that sense not bona fide’). The result was to ignore the series of steps, finding that they were the same as if the corporation had paid the amounts directly to the shareholders. Again, no authorities were cited, other than his decision in Smythe. 69 s 137(2) continues as s 246(1) of the modern Act, notwithstanding the existence of the modern general anti-avoidance rule. 70 [1970] SCR 64. 71 The precise meaning of s 137(2) has continued to be opaque. 72 This gave the taxpayers the benefit of the tax credit on the deemed dividend arising on a winding-up, not available in respect of a shareholder benefit. There is no indication whether this was a factor in the Supreme Court’s decision. 73 [1941] Ex CR 175, affirmed [1942] SCR 269. 74 As Ward observed, s 137(1) applied only in respect of the deduction of expenses in computing income (and not taxable income or, for that matter, tax payable) and would not apply to an avoidance transaction not turning on such a deduction. Ward, above n 59, 414–15. 75 Craddock and Atkinson v MNR [1969] 1 Ex CR 23, 30.

348  Colin Campbell and Robert Raizenne By the late 1960s, then, there were several anti-avoidance doctrines available to the courts: ineffective transaction, the classic or true sham (following the Snook definition) and the concept of artificiality (increasingly identified with the absence of a purpose other than the reduction or avoidance of tax). In addition, in Smythe, the Supreme Court had, without labelling it as such, effectively applied a step transaction doctrine, arguably anticipating – in the result, if not the reasoning – the decision of the House of Lords in Ramsay.76 The resulting confusion was not to be decisively addressed until the decision of the Supreme Court in Stubart and, perhaps surprisingly, not addressed at all by the massive tax reform exercise of the Carter Commission. TAX REFORM AND THE CARTER COMMISSION: 1962–72

In 1962, the federal government appointed a royal commission of inquiry into the income tax system, chaired by Kenneth L Carter, a prominent accountant. The government’s principal, if unspoken, intention was that the commission would recommend changes that would better align income measurement for tax purposes with financial reporting standards. The 1948 Act (revised slightly in the 1952 consolidation) had significantly reduced the gap with modern accounting practice, but had not fully closed it.77 Tax avoidance was apparently not high on the government’s agenda. After four years of study, the Commission submitted its report (generally known as the Carter Report) to the Minister of Finance in 1966.78 The Commission had chosen to interpret its mandate broadly and had engaged in a wide-ranging examination of the Canadian tax system. With the assistance of its professional staff, and in reliance on numerous external advisors (including tax academics), the Commission recommended sweeping changes to the existing system. For the first time, Canadian taxation was subjected to comprehensive analysis based on modern notions of tax policy and public finance economics, something which had not occurred in either 1917 or 1948. The result of that process was a lengthy series of recommendations intended to reconstruct the existing system on a basis that reflected the overarching concept of the ‘comprehensive tax base’, in essence the Haig–Simons theory of income.79

76 WT Ramsay Ltd v Inland Revenue Commissioners [1981] 2 WLR 449 (UK HL). 77 One example was so-called ‘nothings’ under the 1952 Act – in particular, capital expenditures incurred for an income-earning purpose that were non-deductible under existing rules, such as outlays related to the acquisition of goodwill, intellectual property and governmental permits. 78 Canada, Report of the Royal Commission on Taxation (Ottawa, Queen’s Printer, 1966). 79 See BJ Bittker, ‘Income Tax Reform in Canada: The Report of the Royal Commission on Taxation’ (1967–68) 35 University of Chicago Law Review 637, 637, which described the report as ‘having few peers among modern proposals for income tax reform’.

Countering Tax Avoidance in Canada  349 The Carter Report said little overtly about countering tax avoidance, but accomplished a great deal implicitly through its criticism of deficiencies in the current tax law and recommendations for reform. Tax avoidance strategies often exploit weaknesses in existing rules, and the 1952 Act had no shortage of deficiencies. Surplus stripping was facilitated by the tax-free treatment of capital gains, and domestic base erosion strategies exploited antiquated rules regulating the offshore activities of Canadian resident taxpayers. The Carter Report proposed dramatic changes in these areas, including the full taxation of capital gains, and more robust provisions addressing controlled foreign corporations and foreign trusts benefiting Canadians. Its proposal that transactions within a family unit be free of tax would have eliminated the need for a number of provisions directed at income splitting and its recommendation that graduated rates for small corporations be abolished would have allowed for elimination of the complex associated corporation rules. Its specific recommendations with respect to tax avoidance were few in number, and did not significantly alter the existing approach, at least in the short term.80 The guiding principle in countering tax avoidance was that if a taxpayer arranged things in such a way that tax was reduced ‘below what he would expect to pay under the general scheme and intent of the legislation’ while continuing to control or enjoy the income, tax should be imposed.81 The taxpayer who, on the other hand, relinquished control and enjoyment of the income or who simply chose not to earn income should not be taxed or penalised. The Report contrasted two styles of anti-avoidance legislation, the very focused ‘sniper’ approach and the broad ‘shotgun’ approach: There is a striking similarity in the design of the legislation to prevent surplus stripping in the two periods [before and after the 1948 Act]. In each case, attempts were made originally to enact legislation that addressed already identified methods of surplus stripping and detailed the tax consequences of using the particular method. These attempts, and the subsequent amendments to extend or strengthen the legislation, were not broadly effective, and ultimately recourse was had to discretionary legislation.82

While not expressing a particular preference for either approach, the Report recommended that such legislation should be sufficiently general to allow the court to ‘interpret the words in the context of the legislative scheme’ and distinguish between the acceptable cases and those ‘deserving of correction’.83 It also suggested a number of changes. For example, the legislative text should eschew specificity, making reference instead to ‘broad principles’.84 Curiously, 80 See Carter Report, above n 78, vol 3, Appendix A. 81 ibid 573. 82 Carter Report, above n 78, vol 4, 603–04. See also R Couzin, ‘Simplification and Reform’ (1988) 26 Osgoode Hall LJ 433, 442. 83 Carter Report, above n 78, vol 3, Appendix A, 574. 84 Carter Report, above n 78, vol 5, 130.

350  Colin Campbell and Robert Raizenne while the Carter Report described in some detail general anti-avoidance provisions in the Netherlands and Australia, it made no recommendation for such a general rule in Canada. Ministerial discretion, such as that existing under section 138A, was undesirable ‘except in extreme circumstances’ and should be subjected to periodic parliamentary oversight.85 The section itself was characterised as a temporary measure, enacted to halt ‘widespread and blatant’ surplus stripping.86 Where deemed necessary, it should be used only in ‘unusual’ circumstances.87 The Report also addressed the rule of strict construction, noting that resort to administrative discretion was a product of the drafter’s inability ‘to fashion effective, specific anti-avoidance provisions which will pass the judicial test of strict, literal construction’.88 Its response was a plea that, in order to ‘work with the legislature’ to develop effective legislation and avoid the need for numerous ‘loophole-closing’ amendments, the courts should interpret the statute ‘fairly and equitably and in such a way as to give effect to the legislative scheme’.89 It also recommended that the courts take into account the ‘economic substance’ as well as the ‘legal effect’ of transactions.90 In the absence of a statutory general anti-avoidance rule, however, it was unclear how the courts were to be guided in that direction. The Carter Report, of course, did not articulate government policy, and it fell to the government of the day to decide whether, and to what extent, its recommendations should be enacted.91 From the time the Carter Report was released in 1966 to late 1974, there ensued a continuing dialogue, in the course of which some recommendations were accepted, others reformulated, some deferred and many shelved. The 1952 Act was largely repealed and replaced by the modern Act in 1971 (with effect from 1 January 1972), reflecting choices made in the light of, and mostly inspired by, the Carter Report. There was a substantial revision of the tax base, including the partial inclusion of capital gains in income,92 but the 1971 tax reform process did not result in much by way of specific measures to combat tax avoidance.93 It did not change the more 85 Carter Report, above n 78, vol 3, Appendix A, 567. 86 ibid. 87 ibid 568. 88 ibid 571. 89 ibid 573. 90 ibid 574. 91 The scope and breadth of the Carter Report’s recommendations in fact produced considerable criticism and the government of the day attempted to keep the Report to some extent at arm’s length. After a long period of consultation, the government released a White Paper in 1969. Amendments arising from the White Paper were incorporated into the modern Act in 1971. 92 The partial taxation of capital gains after 1971, combined with increases in the tax credit associated with dividends from Canadian corporations, reduced the incentive for surplus stripping to some extent. 93 Provisions in the 1952 Act that allowed the withdrawal of corporate surplus realised between 1950 and 1971 on payment of a 15% tax were continued; the designated surplus rules were expanded somewhat and new rules put in place to determine the amount of capital that could be withdrawn tax-free (the latter lasting only until 1978). See Jones, above n 34, 501ff.

Countering Tax Avoidance in Canada  351 general anti-avoidance provisions of the 1952 Act, nor did it seek to breathe new life into the ossified powers of the Treasury Board. It did not simplify the legislative text, subject ministerial oversight to continuing parliamentary scrutiny or address the mischief arising from an approach to interpretation of legislative texts steeped in legal formalism. THE MODERN ACT AND THE BUSINESS PURPOSE TEST: 1972–84

Between the Carter Commission and the GAAR, there was no meaningful change in Canada’s legislative approach to tax avoidance. Courts were left to address avoidance cases using different and sometimes conflicting approaches.94 The approach that eventually led the Supreme Court, after a period of uninterest, to intervene was what was generally described as the ‘business purpose test’. Courts had used the absence of any purpose other than tax reduction as an indication of artificiality, which would bear on the application of section 137 of the 1952 Act (continued until 1988 as section 245 of the modern Act). The business purpose test, as it developed, went further. Transactions without business purpose were treated as shams, to be disregarded without reference to a specific statutory provision. This was potentially further reaching than section 137, which applied only to deductions incurred in computing income (and not taxable income or tax payable), and did not extend to other manifestations of avoidance (such as the deferral of tax or the ‘manufacture’ of tax attributes). The doctrine appeared as a kind of genetic mutation in the concept of a ‘sham’, produced by confusion with the long-standing concept of an ineffective or ‘incomplete’ transaction. The essence of a sham is deceit, one of the elements of fraud, an attempt to make something appear what it is not and is therefore to be disregarded.95 An ineffective transaction is one that does not hide its purpose but is disregarded because it lacks the requisite legal substance. The business purpose test, as it developed fitfully, treated a transaction that was legally effective and had no hidden or disguised purpose, as a ‘sham’, to be disregarded if its

94 The structure of the federal courts in Canada was changed significantly in 1971. From 1949, taxpayers had recourse in the first instance to the Income Tax Appeal Board, an administrative tribunal offering a relatively inexpensive means to contest a reassessment. From the Board, appeals lay to the Exchequer Court and thence to the Supreme Court of Canada. In 1971, the Exchequer Court was replaced by the Federal Court, which consisted of two divisions: the Trial Division and the Court of Appeal. Appeals from the Board (renamed the Tax Review Board) proceeded to the Trial Division by way of trial de novo (taxpayers also had the option of proceeding directly to the Trial Division). Appeals from the Trial Division lay to the Court of Appeal and thence to the Supreme Court. The Board became an inferior court, the Tax Court of Canada, in 1983, but the appeal procedure remained unchanged until 1991, when the Tax Court was transformed into a superior court and assumed the trial jurisdiction of the Trial Division. 95 A concept perhaps not fully developed in the tax context in Canada until the decision in 25301284 Québec Inc v The Queen 2008 FCA 398.

352  Colin Campbell and Robert Raizenne only purpose was to reduce tax. Its attraction, to a court offended by an obvious tax avoidance purpose, was the provision of a judicial doctrine independent of the limitations of strict construction and the existing statutory provisions, in particular section 137 (and later section 245). The term ‘bona fide business transaction’ appeared in the decision of Jackett P in Lagacé v MNR, where the taxpayer transferred options on land that had appreciated in value to a corporation he controlled in order to have the resulting profit on realisation taxed in the corporation.96 President Jackett held that the taxpayer used the corporation in the same manner as a nominee or trustee and, in that sense, the corporation was never the bona fide owner of the option. The case bears some similarity to Smythe in that artificial, interposed steps were disregarded. Lagacé was later referred to in Dominion Bridge Co v The Queen, where purported transactions between the taxpayer and a subsidiary may have been ineffective but were also found to camouflage the true legal relationships, which constituted a classic sham.97 Dominion Bridge dealt with transfer pricing, the Canadian parent having incorporated a subsidiary in the Bahamas to purchase steel and sell it on upstream at a profit. At trial, Decary J found that the subsidiary was so completely controlled and directed by the Canadian parent that it was merely a nominee or an agent, and its business was a part of the parent’s business – which constituted a sham. On appeal, Jackett CJ found in a very brief judgment that this finding of fact was sufficient to dispose of the case in the government’s favour. Despite the reliance on sham, there were some glimmerings of a business purpose test in Decary J’s discussion of UK jurisprudence that found – quoting especially from FA & AB Ltd v Lupton (Inspector of Taxes) – that in some circumstances, transactions driven purely by tax reduction or avoidance were not part of the trade or business of the taxpayer but a ‘device to secure a fiscal advantage’.98 The House of Lords in FA & AB Ltd did not draw the conclusion that such a device was a sham because of its fiscal motivation and Decary J relied on it merely as an example of substance over form. In Stubart, Estey J pointed out that the ‘final outcome’ in Dominion Bridge, Jackett CJ’s judgment on appeal, turned solely on the findings of fact, which revealed a true sham.99 In another transfer pricing case decided in the same period, Spur Oil v The Queen, the Court of Appeal made no reference to anti-avoidance doctrines.100 The Crown argued that an agreement between the taxpayer and its tax-havenresident subsidiary committed the taxpayer to purchase oil from the subsidiary at more than fair market value. The court based its decision on the legal substance 96 [1968] 2 Ex CR 98, 109. But see also the reasons of Jackett CJ in Alberta and Southern Gas Co v The Queen [1978] 1 FC 454 (FCA). 97 75 DTC 5150 (FCTD), 77 DTC 5367 (FCA). 98 [1971] 3 All ER 948, 965–66. 99 Stubart Investments Ltd v The Queen [1984] 1 SCR 536, 566. 100 [1982] 2 FC 113.

Countering Tax Avoidance in Canada  353 of the agreement, which was found not to be a binding contract, and the fact that at the relevant time the Canadian parent had actually paid less than fair market value for the oil. In R v Redpath Industries Ltd, another similar transfer pricing case, the Crown relied on the sham doctrine to ground a charge of criminal tax evasion.101 As in Dominion Bridge and Spur Oil, the Canadian parent had established a subsidiary in a tax haven to purchase raw sugar from third parties and sell it on to the parent. The sales were at fair market value spot prices; the raw sugar was at times purchased at a discount, thus yielding a profit to the subsidiary. The court concluded there was no sham and acquitted the taxpayer. The business purpose test was neither argued nor mentioned (the Supreme Court decision in Stubart was released just before that of the appeal decision and was listed in the authorities considered but not referred to in the judgment). As Hobson commented, a true sham was necessary to establish tax evasion: The Redpath case affirms that prosecutions will not be sustained where legal entities or rights and obligations have been created devoid of a prima facie purpose to lead the tax administrator away from the taxpayer … Generally speaking, unless there is objective evidence of a fraudulent intention to avoid payment of the tax, the courts will leave to the civil process the question of whether a tax avoidance scheme achieves its purpose.102

The criminal law provision in the modern Act, section 239, has not been used since to combat this kind of tax avoidance. The business purpose test emerged most visibly in the decision of the Federal Court of Appeal in MNR v Leon.103 The taxpayers, employees and shareholders of a family-controlled business set up a number of management companies, which employed them and provided their services to the operating corporation. The evidence made it clear that the sole reason was to reduce the tax paid by the individuals by diverting income to the management companies.104 In the Trial Division, two of the taxpayers were unsuccessful on the basis that their transactions were ineffective; the others prevailed. In the Court of Appeal, the Crown was successful in reversing the taxpayers’ win at trial. Justice Heald found that, without exception, each of the transactions was ‘a sham, pure and simple, the sole purpose of which was to avoid payment of tax’, based on the principle that ‘[if] the agreement or transaction lacks a bona fide business purpose, it is a sham’.105 The Crown did not rely on any of

101 84 DTC 6349 (Que CA), affirming 83 DTC 5117 (Cour des sessions de la paix du Quebec). 102 WJA Hobson, ‘New Guidelines from the Supreme Court of Canada and Other Canadian Courts: A Broad Interpretation of section 255(1), the Interpretation Test, and Clearer Lines of Demarcation for Tax Avoidance and Tax Evasion’ in Report of the Proceedings of the Thirty-Sixth Tax Conference, 1984 Conference Report (Toronto, Canadian Tax Foundation, 1985) 148, 154–55. 103 [1977] 1 FC 249. 104 Which served to distinguish the Supreme Court decision in Cameron. 105 Leon, above n 103, 256–58.

354  Colin Campbell and Robert Raizenne the existing anti-avoidance provisions, nor did the court have resort to them. It thus created an independent anti-avoidance rule of general application unsubstantiated by analysis. The decision in Leon was not binding on other panels of the Court of Appeal. In a subsequent case, Massey-Ferguson Ltd v The Queen, the taxpayer loaned funds to a subsidiary resident in Canada, Verity, which loaned the funds on to a second-tier subsidiary resident in the USA.106 The business need for funding the second-tier subsidiary was unquestioned, but the admitted purpose for the use of Verity was to avoid the operation of section 19(1) of the 1952 Act, which deemed interest to accrue on a cross-border loan outstanding for more than a year. At trial, the court found for the Crown, on the basis that the ‘substance’ of the transaction was a loan from the parent to the second-tier subsidiary and that there was no independent business purpose for inserting Verity, which was a sham. The Court of Appeal rejected the substance-over-form position, finding that the arrangements created binding legal debtor–creditor relationships – in effect, legal substance. Referring to Snook, it rejected entirely the finding of sham in the court below. Not surprisingly, the Crown had relied on the decision in Leon. Justice Urie was clearly not sympathetic to Heald J’s judgment: I am not at all sure that I would have agreed with the broad principles relating to a finding of sham as enunciated in [Leon] and, I think, that the principle so stated should perhaps be confined to the facts of that case.107

He proceeded to distinguish it by finding that there were, in any event, independent business purposes for using Verity apart from the desire to avoid tax. In Estey J’s discussion of the case in Stubart, he concluded that the Court of Appeal ‘did not necessarily turn its back on the “independent business purpose concept”’.108 In Mendels v The Queen, Cattanach J once again declined to adopt the business purpose test in respect of the deduction of fees paid by a dental partnership to a management company.109 The absence of any business purpose in a transaction solely undertaken to realise a tax advantage did not constitute a sham. Instead, the Crown succeeded on the basis that the fees unduly or artificially reduced income within the meaning of section 245. In Daly v The Queen, which also involved a management company structure, Gibson J used the Snook test to find there was no sham. He rejected the argument that the taxpayer bore the onus of showing there was a business purpose for the structure, suggesting that the cases considering the business purpose test should all be confined to their facts.110 The Court of Appeal agreed that 106 [1977] 1 FC 760. 107 ibid 772. 108 Stubart, above n 99, 568. 109 [1978] CTC 404 (FCTD). 110 81 DTC 5197 (FCA). Although it is not entirely clear from the judgment, the Crown appears to have relied on the business purpose test to argue that the amount paid to the management company was income of the taxpayer and not of the company.

Countering Tax Avoidance in Canada  355 there was no sham, but found that the transaction was ineffective. In his dissent, Pratte J specifically rejected the application of a business purpose test. Justice Pratte also decided in favour of the taxpayer in Produits LDG Products Ltd v The Queen, rejecting the argument that a tax motivation necessarily engaged section 245: There is nothing reprehensible in seeking to take advantage of a benefit allowed by the law. If a taxpayer has made an expenditure which, according to the Act, he may deduct when calculating his income, I do not see how the reason which prompted him to act can in itself make this expenditure non-deductible … there is no reason to apply s. 137(1).111

STUBART AND THE ENACTMENT OF THE GENERAL ANTI-AVOIDANCE RULE: 1984–88112

The relevance of business purpose finally reached the Supreme Court in one of the most significant Canadian tax cases, Stubart Investments Ltd v The Queen.113 In some ways, Stubart was an unlikely candidate for a precedentsetting decision.114 It involved, reminiscent of Richardson Terminals, an attempt by a corporation to shelter its profits from tax by transferring its business, at least temporarily, to a related loss corporation.115 At the hearing before the Tax Review Board and the de novo trial before the Federal Court, the taxpayer’s appeal was denied on the ground that the transaction was a sham because it was intended to be reversed. In the Federal Court of Appeal, a panel led by Urie J confirmed that result on the basis that the transfer of the business was an ineffective transaction.116 Not surprisingly, Urie J did not invoke the sham doctrine he had effectively rejected in Massey-Ferguson. In the Supreme Court, the Crown argued both ineffective transaction and the sham doctrine developed in Leon before a panel of five judges. A unanimous court

111 76 DTC 6344 (FCA). 112 For a general overview of this topic, see L Philipps, ‘The Supreme Court of Canada’s Tax Jurisprudence: What’s Wrong with the Rule of Law’ (2000) 79 Canadian Bar Review 120, esp 131–42. 113 Stubart, above n 99. The relevant provision for the taxation years in question in Stubart was s 137(1) of the 1952 Act, which was re-enacted verbatim in 1972 as s 245(1) of the modern Act. It was repealed and replaced by the GAAR in 1988. 114 Although one might say the same about an iconic case like Donoghue v Stevenson [1932] AC 562. Justice Estey at 541 described the facts in Stubart to be, ‘for a tax proceeding, quite straightforward’. We would speculate that the Department of National Revenue simply saw the Stubart transaction as another ineffective transaction like the Richardson Terminals facts and challenged it accordingly. 115 As noted above, the issue flowed from the absence of any statutory provision for consolidated group returns. Certain loss consolidation transactions were tolerated by the revenue authority; the one chosen by Stubart was not one of them. Thus, the case did not involve an attempt to avoid or frustrate a fundamental policy in the Act but arguably a choice of method and, in the Crown’s view, failure to effectively complete the intended transaction. 116 74 DTC 1209 (Tax RB), 78 DTC 6414 (FCTD), 81 DTC 5120 (FCA).

356  Colin Campbell and Robert Raizenne allowed the taxpayer’s appeal. Justice Estey, who wrote the principal judgment, examined the transaction in some detail and was led ‘inexorably to the conclusion that the transfer and sale of the business … was, in law, fully complete’.117 Justice Wilson concurred in that result, adding that it was not a sham, a sham transaction being a transaction ‘that does not have the legal consequences that it purports on its face to have’, and the taxpayer had in fact created precisely the intended legal relations.118 She then succinctly disposed of the business purpose test as being a ‘complete rejection’ of Lord Tomlin’s dictum in the Duke of Westminster that ‘every man is entitled if he can to order his affairs so as that the tax attaching … is less than it otherwise would be’.119 The dictum, she held, was ‘far too deeply entrenched in Canadian tax law for the courts to displace it in the absence of clear statutory authority’ and the Federal Court of Appeal was ‘in error’ in applying a business purpose test in Leon.120 Shortly after Stubart, Wilson J took a similarly strong position in another tax case when she dissented (in a 4:3 decision in which, interestingly, Estey J wrote the majority judgment) from a decision that arguably blurred the distinction between de jure and de facto control: For the courts suddenly to change direction in face of well-settled and long-standing authority in our tax jurisprudence is, in my view, quite inappropriate. If the legislature wishes to amend the legislation … to discourage the kind of tax planning which was done here, it is, of course, perfectly free to do so. But I do not think that this is a suitable area for judicial creativity. People plan their personal and business affairs on the basis of the existing law, and they are entitled to do so. It is, I believe, important to recognize that any sudden departure by the courts from a well-settled line of authority in an area such as tax law can have a serious retroactive impact on the taxpayer.121 117 Stubart, above n 99, 552. Willard Estey was born in 1919 in Saskatchewan, the son of a Justice of the Supreme Court. After completing graduate studies at Harvard, he quickly achieved prominence practising in Toronto as a corporate litigator. His rise to the Supreme Court was rapid: in 1973 he was elevated to the Ontario Court of Appeal; in 1975 he became Chief Justice of the High Court (Supreme Court of Ontario); one year later he was named Chief Justice of Ontario; and the year after that he became a puisne judge on the Supreme Court, adding prestige and energy. As Chief Justice of Ontario, he attracted considerable attention for his wide-ranging proposals to reform the judicial process. While a sitting judge, he chaired public inquiries into the management of Air Canada and the collapse of two Canadian chartered banks, which drew heavily on his experience in dealing with complex corporate law issues. Justice Estey was an important populariser, speaking more openly and frequently than other justices about the Supreme Court’s work. 118 ibid 539. 119 ibid 540; Duke of Westminster, above n 15, 19. 120 Stubart, above n 99, 540. 121 The Queen v Imperial General Properties Ltd [1985] 2 SCR 288, 308. The issue in that case was de jure control of a corporation. A series of prior cases had held that all aspects of the corporate constitution, and not merely the balance of votes appearing on the shareholder registers, were relevant in determining control, including, in this case, the ability to cause the winding up of the corporation. The facts in the case were at the margin; the difference between majority and minority was very narrow. It did not disclose any material doctrinal difference between Estey and Wilson JJ. Wilson was the first woman to be elevated to the Supreme Court and was generally viewed as a liberal jurist. She had, however, practised for many years at a leading corporate law firm in Toronto, which may explain her sensitivity to taxpayers’ reliance of prevailing advisory practice standards.

Countering Tax Avoidance in Canada  357 Returning to Stubart, Estey J began by disposing of the argument that the impugned transactions were a sham. Sham involved ‘an element of deceit’ (Snook) and the Court of Appeal had found no evidence of deceit.122 Justice Estey’s discussion of the business purpose test was considerably longer and somewhat more nuanced, but came to the same conclusion as Wilson J: ‘I would therefore reject the proposition that a transaction may be disregarded for tax purposes solely on the basis that it was entered into by a taxpayer without an independent or bona fide business purpose.’123 In reaching this conclusion, Estey J began by reviewing the manner in which courts in the USA, Australia and the UK approached impugned avoidance transactions. After noting that, since the 1930s, US courts had adopted a substance-over-form doctrine,124 he turned to the then recent decisions of the House of Lords in WT Ramsay Ltd v IRC,125 IRC v Burmah Oil Co126 and Furniss (Inspector of Taxes) v Dawson,127 which, he suggested, put the UK courts on the road to ‘something approaching the United States bona fide business purpose rule’.128 Given the weight normally accorded by Canadian courts to decisions of the higher courts in the UK and the long-standing use of UK authority in Canadian tax jurisprudence, he sought to distinguish their relevance to Canada by suggesting that in a tax system that had no general anti-avoidance rules, there was an onus on the courts to ‘fill the gap’ with a judge-made substitute. The UK decisions in Ramsay, Burmah Oil and Furniss reflect the role of the court in a regime where the legislature has enunciated taxing edicts in a detailed manner but has not super-imposed thereon a general guideline for the elimination of mechanisms designed and established only to deflect the plain purpose of the taxing provision.129

By contrast, in Australia, which had a statutory anti-avoidance rule, the courts took a less activist role.130 Canada, he argued, was like Australia, having what he took to be a general anti-avoidance rule in section 137, and Canadian courts were relieved to that extent of the burden. Justice Estey’s treatment of section 137 as a general anti-avoidance provision was perhaps the most critical 122 Stubart, above n 99, 545–46. The Crown has continued, inexplicably, to argue the sham doctrine in tax appeals, unsuccessfully in almost every case. The recent transfer pricing decision in Cameco Corporation v The Queen 2018 TCC 195 is the most recent example. Justice Owen cited both the Estey and Wilson JJ judgments in Stubart in support of his unqualified rejection of the Crown’s argument. The Crown did not appeal this finding to the Court of Appeal, but is seeking leave to appeal to the Supreme Court on other grounds. 123 Stubart, above n 99, 575. 124 Citing Gregory v Helvering, Commissioner of Internal Revenue (1934) 293 US 465 and Knetsch v United States (1960) 364 US 361. 125 [1981] 2 WLR 449. 126 [1981] TR 535. 127 [1984] 1 All ER 530. 128 Stubart, above n 99, 557. 129 Stubart, above n 99, 560. 130 s 260 of the Income Tax Assessment Act 1936 (Australia), which Estey J described as ‘a more rigorous anti-tax avoidance provision than our s. 137’: Stubart, above n 99, 555.

358  Colin Campbell and Robert Raizenne part of his judgment because it, in turn, dictated the interpretive approach to the statutory provisions in issue. The presence of such a general provision ‘looms large in the judicial approach to the taxpayer’s right to adjust his sails to the winds of taxation’. In the presence of a general anti-avoidance rule, the court was ‘under no duty, nor indeed possessed of any authority, to legislate new limits’.131 That position led Estey J to suggest that the Crown could have argued section 137 in Stubart, but chose not to.132 Justice Estey also pointed out that the courts had not found that section 137 implied a business purpose test, quoting the following conclusion of Cattanach J in The Queen v Esskay Farms Ltd: ‘What the [taxpayer] has done has been to order its affairs as to attract a lesser tax at a subsequent time as it is entitled to do’, and that the tax benefit obtained could not be a benefit under section 137(2).133 Justice Estey also distinguished the UK cases by pointing out that they involved complex, ‘synthetic’, self-cancelling transactions, and quoted at length Lord Diplock’s discussion of the Duke of Westminster in Burmah Oil, in which he described the transactions between the Duke and his gardener as ‘simple’ and rejected overruling the decision.134 In Stubart, by contrast, there were no synthetic or self-cancelling entities and no preordained transactions, but a single conveyance of the taxpayer’s business, reversible but not required to be reversed (and in fact never reversed).135 The Crown argued that the possibility of reversal was enough, but Estey J was not persuaded. Similarly, the loss carry-forwards of the transferee were real and legitimate, as was the profit realised in the transferred business. No specific provisions in the Act proscribed the transaction and no statutory anti-avoidance provision had been invoked. Justice Estey’s conclusion was that, in the case of a transaction that had no bona fide business purpose, section 137 might apply. Where it did not apply, the ‘older rule of strict construction’ governed, in the absence of an ineffective transaction or a true sham, taking into account the ‘modern’ rule that, quoting the authoritative Elmer Driedger, ‘the words of an Act are to be read in their

131 Stubart, above n 99, 557. 132 Justice Estey’s laboured attempt to show that the transfer of the business could be viewed as involving a deductible expense (needed to trigger s 137) might have been an attempt to bolster that position. It is the least convincing part of the judgment and may have been an unconsidered position on his part. Alternatively, the financial reporting of the transaction may have suggested a ‘deduction’, perhaps leaving Estey J to grapple with the issue of the proper tax reporting of an agency relationship. 133 76 DTC 6010, 6018. 134 Stubart, above n 99, 559.While Estey J did not pursue the point, Ramsay involved step transactions where the courts found that the series of steps undertaken constituted a single transaction in legal substance and, in that sense, were not inconsistent with Duke of Westminster. Ward and Cullity argued similarly; see n 137 below. 135 The Crown argued that the transactions undertaken were intended and designed to be reversed and therefore were self-cancelling. The fact that the transactions were never actually reversed likely undermined the argument in Estey J’s view.

Countering Tax Avoidance in Canada  359 entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament’.136 Exceptions might exist under specific statutory provisions, and the courts might apply or develop a business purpose test or a step transaction rule in the interpretation of section 137, but neither had occurred to date. Finally, Estey J concluded by raising another – and in some ways more fundamental – objection to the business purpose test, questioning the assumption, previously unquestioned, that the minimisation of tax was not, in itself, a legitimate business purpose. In this, he was relying on (and appears to have been significantly influenced by) an article by David Ward and Maurice Cullity suggesting that to properly conduct their business, owners and managers must consider tax reduction strategies that would increase profits and make more capital available for other purposes.137 Justice Estey quoted, with obvious approval, from this ‘high water mark’ of opposition to a business purpose test: Surely, in the penultimate decade of the twentieth century it would be naïve to suggest that businessmen can, or should, conduct and manage business affairs without regard to the incidence of taxation or that they are not, or should not be attracted to transactions or investments or forms of doing business that provide reduced burdens of taxation.138

He pointed out that modern taxation statutes often contained inducements in the form of lower taxation to act in certain ways. Justice Estey showed a high degree of awareness of the role fiscal and economic policy played in the modern economy, likely reflecting his practice experience in the Canadian business community. He appears to have been balancing that role against the avoidance doctrines; that is, trying to reconcile two potentially conflicting public policy goals. By removing the stigma from tax avoidance, Estey J arguably revolutionised the Canadian tax world. Yet relieving taxpayers from the moral strictures on tax saving only made clearer the need for an effective general anti-avoidance rule. After section 32A was rewritten and expanded in 1943, Heward Stikeman wrote that taxation had entered the realm of ‘morality’, by which he meant that

136 Stubart, above n 99, 578, citing EA Driedger, Construction of Statutes, 2nd edn (Toronto, Butterworths, 1983) 87. 137 ‘Abuse of Rights and the Business Purpose Test as Applied to Taxing Statutes’ (1981) 29 Canadian Tax Journal 451. The article was based on a paper presented at the Cambridge Lectures of the Canadian Institute for Advanced Legal Studies on 28 July 1981. The lectures attract an audience of judges, practitioners and academics, and it is possible that Estey J was in the audience. In the early 1980s it was unusual for journal articles to be cited in judgments – very unusual in the case of articles by practitioners (David Ward being a senior partner in the Toronto firm Davies Ward & Beck and Maurice Cullity being one of his partners following a long academic career). This may indicate how persuasive Estey J found their argument. 138 Stubart, above n 99, 575.

360  Colin Campbell and Robert Raizenne taxpayers had a moral obligation not just to pay, but to not avoid tax. Stikeman considered this a product of wartime patriotism but, while it ebbed when peace came, the stigma attached to tax avoidance did not entirely abate. We would suggest that this sentiment lay behind the business purpose test – a transaction intended simply to reduce tax had no legitimate business purpose – and was to be condemned on that account. Justice Estey’s rejection of the business purpose test must be viewed against the broader context of the early 1980s in the Western world. In the age of President Reagan and Prime Minister Thatcher, profit was more to be pursued than to be taxed, business was to be celebrated rather than stigmatised, and tax and regulation were to be reduced. In that climate, Ward and Cullity’s argument made perfect sense. Whether Estey J’s endorsement of that argument in Stubart was a cause, or merely a reflection, of that shifting social reality in Canada is difficult to say. It was without doubt an important milepost. From the perspective of the Department of Finance, Stubart foreclosed recourse to the courts for a general anti-avoidance rule.139 Given the obvious limitations of section 245, a new statutory rule was the only reasonable option, and its emergence in 1987–88 did not come as a surprise to the Canadian tax community, however unwelcome it may have been.140 Some might view the GAAR as reversing the decision in Stubart. However, in our view, it flows logically from Estey J’s decision. It corrects one of the flaws in former section 245(1), which, as pointed out by Estey J, only applied to amounts deductible in computing income (meaning it did not capture the transfer of an amount of profit from agent to principal at issue in Stubart). The GAAR’s broad definition of ‘tax benefit’ as any ‘reduction, avoidance or deferral of tax’ corrected this shortcoming. The GAAR also takes as a threshold question whether there was an ‘avoidance transaction’ – namely, whether any transaction or series of transactions produced a tax benefit that was not undertaken primarily for a bona fide purpose other than obtaining the tax benefit. The bona fide purpose is not restricted to a business purpose, but can include non-business purposes and even some tax purposes. If an avoidance transaction is identified, the GAAR then tests whether there has been any misuse or abuse of the relevant provisions – going beyond the pre-Stubart business purpose test. The Crown bears the burden of persuasion at this final step. 139 A number of other tax avoidance cases reached the courts after Stubart, but in respect of taxation years before the new GAAR came into effect. 140 Following the final decision in Stubart, in 1987 the Department of Finance clarified the application of the Act to loss transfer transactions. New s 69(11)–(13) prohibited ‘loss trading’ between and among corporations, unless they were members of the same corporate group. This exception accommodated the non-consolidated nature of the Canadian corporate income tax regime. When it proposed very shortly thereafter the enactment of the GAAR, the Department of Finance preserved this favourable treatment of corporate groups, indicating that such ‘consolidation’ transactions should not be disturbed by the GAAR unless they ran afoul of specific provisions of the Act. In this way a balance of sorts was struck between acceptable tax compliance and objectionable tax avoidance.

Countering Tax Avoidance in Canada  361 Finally, Estey J endorsed the ‘modern rule’ of statutory interpretation, as stated by Elmer Driedger and set out above.141 He also formulated a set of guidelines for a court faced with the application of ‘complex, specific tax measures aimed at sophisticated business practices’:142 1. Section 137 may apply where there was no bona fide business purpose for the transaction. 2. Where section 137 does not apply, the rule of strict construction, modified by the ‘modern rule’, applied, provided the impugned transaction was neither legally ineffective nor a sham in the ‘classical’ sense. 3. Formal validity will not avail the taxpayer in the face of a clear legislative intent to deny the benefit of the provision or where the object and spirit of the provision has been defeated by ‘procedures blatantly adopted by the taxpayer to synthesise a loss, delay or other tax saving device’ (in what appears to be a nod to the step transaction doctrine).143 The more recent formulation of that test by the Supreme Court – that the words are to be read textually, contextually and purposively – is in substance the same. In the GAAR context, such a reading will, presumably, identify any misuse or abuse of the statute. As an aside, we question whether common law practitioners and judges today are aware of the civil law ancestry of the abuse of rights concept connected with that language. If not, they would be in good (if inadvertent) company with Estey J. Justice Estey was presumably aware of the civil law doctrine, which Ward and Cullity discussed at length, but implicitly followed them in rejecting it. In key respects, then, it can be argued that the modern GAAR has come full circle back to the Treasury Board rule developed between 1943 and 1948: successively section 32A in the IWTA, section 138 of the 1952 Act and section 246 in the modern Act. The core elements are there: a transaction or series of transactions, the main purpose of which is to effect an ‘improper’ or artificial reduction or avoidance of tax. The Achilles heel of the old rule – the discretionary exercise by the Treasury Board that made it increasingly difficult to justify – is replaced by recourse to the courts, while ‘improper’ or ‘artificial’ are replaced by the abuse or misuse concept (but arguably interpreted to the same effect). The enactment of the modern GAAR also preserved what Estey J saw as the Canadian or Australian model, where the courts relied on the application of 141 Stubart, above n 99, 578, citing Driedger, above n 136, 87. 142 Stubart, above n 99, 580. 143 ibid. It is interesting that Estey J, who perhaps cannot be labelled a ‘tax judge’, had occasion to comment on the interpretation of taxing statutes several times in close proximity to his Stubart judgment. In each instance he can be seen seeking to reconcile ‘everyday’ statutory interpretation with respect for legislative intent. In this regard, see Morguard Properties Ltd v City of Winnipeg [1983] SCR 493, decided before Stubart; see also Johns-Manville Canada Inc v The Queen, 85 DTC 5373 and The Queen v Golden, 86 DTC 6138, which both followed in its wake. See also JR Owen, ‘Statutory Interpretation of the General Anti-Avoidance Rule: A Practitioner’s Perspective’ (1998) 46 Canadian Tax Journal 233, 243–46. Justice Owen was elevated to the Tax Court of Canada in 2014.

362  Colin Campbell and Robert Raizenne a legislated anti-avoidance rule rather than a series of judge-made rules. Justice Estey’s suggestion that a ‘business purpose’ standard would complicate the efficient administration of the Act, in particular because the modern Act contained numerous incentives intended to stimulate conduct that, absent the incentive, might not be economically attractive, was prescient. The GAAR as enacted made no express reference to such a standard, limiting the role of the taxpayer’s motivation to a threshold question. In his 1987 Budget Speech, Minister of Finance Michael Wilson expressed his concern that abusive tax-avoidance transactions are a significant factor in eroding corporate tax revenues. They also undermine respect for the integrity of our tax system. Such schemes permit some corporations – often large and profitable – to avoid paying income tax.

He promised the GAAR: The government has acted repeatedly to curb these and other such abuses with a series of specific rules. Where required, the government will continue this practice. In addition, to ensure a fairer and more stable income tax system, I intend to propose improved general anti-avoidance rules as part of tax reform.144

A draft of the proposed GAAR was released in June 1987 as part of a major tax reform.145 It was enacted in a revised form in September 1988. Since then, based on the willingness of the government to apply it, the significant attention paid to it by practitioners and the multiple Supreme Court GAAR decisions, there is no doubt that the GAAR has claimed an integral role in the Canadian tax system.

144 Debates, 18 February 1987, 3577. 145 The background to the GAAR is authoritatively discussed in B Arnold and J Wilson, ‘The General Anti-Avoidance Rule – Part I’ (1988) 16 Canadian Tax Journal 829. For the original 1987 draft of the GAAR, see Canada, Department of Finance, The White Paper: Tax Reform 1987 (Ottawa, Department of Finance, 18 June 1987).

14 The Colonial Taxation Policy, Income Tax and the Modern Japanese Empire SHUNSUKE NAKAOKA

ABSTRACT

T

his chapter explores the taxation policy and the tax law of the colonial Japanese empire from the end of the nineteenth to the middle of the twentieth century. Particular attention is given to the strategies and policies of the Japanese colonial and home governments for the introduction and reform of colonial income tax. The Japanese colonisation in the East Asian region since the late nineteenth century, as in the cases of Korea, Taiwan and southern Sakhalin, in addition to acquiring some dependent territories, such as Kwantung (Liaodong Peninsula), also led to the introduction of the Japanese legal, economic and bureaucratic systems, which functioned as a tool of Japanese rule. The implementation of the tax system, which modelled the Japanese example, into colonies formed an indispensable part of colonial fiscal policy. In addition, attempts to institute the income tax system might be indicated by the socio-economic nature of the Japanese colonial rule, that is, the importance of reducing the fiscal burden of the home country. By exploring the general background, purposes, legal framework and process of introduction of income tax, one characteristic of the Japanese colonial empire becomes apparent: the systematic pressure of social assimilation. Other focus points of discussion include assessing the intentions and socio-economic background of the Japanese government in applying income tax. Some of the documents and official publications indicate that Japanese bureaucrats and officials interpreted the introduction of income tax as a tool for modernising colonial economies and societies even though they confronted serious problems with regard to management of the tax, including tax collection and disputes, in their home country. And though descriptions and explanations come from limited research and findings, some crucial characteristics can be noted in the case of the application of the Japanese income tax system to colonies and

364  Shunsuke Nakaoka dependent territories during the modern period, in addition to finding some variations and differences in the practice of this tax system in each case. INTRODUCTION

Research on colonial finances is an area of growing interest; indeed, it has been considered vital to analyse colonial rule, in addition to its interaction with the home economy. Although European domination of the world economy during the nineteenth and early twentieth centuries has partly been discussed in the context of progress of colonisation by European countries, attention has tended to focus on the political and social aspects of their rule. However, many academic researchers have gradually become aware of the influence of colonial legacies on the governance of former colonised states, including current economic policies. Also, the recent focus on economic insights of colonies – in particular, exploration of how other factors, like the structure of colonial governance and the power relationship within colonial regions, have influenced colonial economic policies – is a result of shifts in research interests. Many studies in this new direction have led to a reinterpretation of the European colonial empires, especially the British case.1 This, in turn, has led to considerable changes in the economic and financial analysis of the British Empire, such as in the case of African colonies.2 In the case of Japan, studies on the modern Japanese empire have progressed significantly from the late twentieth century and various historical approaches, including social, cultural and educational aspects, have described and analysed multidimensional aspects of modern Japanese colonial rule. From the perspective of economic history, colonial rule has been analysed in great detail, even in works that discuss the process of Japanese economic penetration from broader perspectives.3 In addition, this subject is, without doubt, an important field of study for researchers of countries that experienced Japanese colonisation, for instance, South Korea and Taiwan. Much of this research, including that of Korean and Taiwanese graduates of Japanese universities, has been published in Japanese.4 1 For a broad analysis of the British Empire, See, eg AG Hopkins, ‘Accounting for the British Empire’ (1988) 16 Journal of Imperial and Commonwealth History 234; P O’Brien, ‘The Cost and Benefits of British Imperialism’ (1988) 120 Past and Present 163. For the role of colonial taxation, see E Frankema, ‘Raising Revenue in the British Empire, 1870–1940’ (2010) 5 Journal of Global History 447. 2 See, eg L Gardner, Taxing Colonial Africa: The Political Economy of British Imperialism (Oxford, Oxford University Press, 2012). 3 See, eg Y Yamamoto, Nihon Shokuminchi Keizaishi Kenkyu (Nagoya, University of Nagoya Press, 1992); Y Yamamoto, ‘Manshu-Koku’ Keizaishi Kenkyu (Nagoya, University of Nagoya Press, 2003). For a perspective on Japanese colonial fiscal and monetary policies, see H Hirai, Nihon Shokuminchi Zaiseishi Kenkyu (Kyoto, Minerva Shobō, 1997); S Namikata, Nihon Shokuminchi Kinyuseisakushi no Kenkyu (Tokyo, Waseda Daigaku Shuppanbu, 1985). 4 See, eg Kim Nak Nyeon, Nihon Teikokushugika no Chosen Keizai (Tokyo, University of Tokyo Press, 2002); Twu Jaw Yann, Nihon Teikokushugika no Taiwan (Tokyo, University of Tokyo Press, 1975).

Colonial Taxation and the Modern Japanese Empire  365 In the context of the Japanese colonial taxation system, academic research has tended to focus on the land tax, which is strongly related to the land ownership system under Japanese colonial policy and was a significant source of revenue for the colonial government.5 However, other Japanese colonial tax systems, for example income tax, have not received as much attention in academic research, although some long-term analyses of income inequality has been attempted recently by partly utilising the income tax data of the colonised period.6 The aim of this research is to focus on the taxation policy of the colonial Japanese empire, with particular focus on the introduction and reforms of the colonial income tax system. Although it is difficult to discuss and analyse this subject from a broader perspective, some significant points and considerations are explored. Colonial statistical data published by the Japanese colonial government is utilised to consider practices of the income tax system in colonies, in addition to the exploration of progress and characteristics of its application. BRIEF EXPLANATION OF THE MODERN JAPANESE INCOME TAX SYSTEM

Land and liquor taxes constituted important sources of tax revenue for the government in the newly established Meiji government in the late 19th century Japan and were partly inherited from the former Tokugawa taxation system. In contrast, income tax was a wholly new development in this period and its framework derived partly from the taxation systems of contemporary European states, particularly Germany.7 On the one hand, the introduction of income tax in 1881 was swift, and it rapidly formed the basis of Japanese fiscal revenue compared to other developed states in this period, eg the USA.8 On the other hand, Japan’s tax collection system was modelled on the Bavarian and Prussian systems as a result of consultations with tax officers from these states during the process of legislating income tax in Japan.9 The establishment of an income

5 See, eg K Asada, Nihon Teikokushugi to Kyu Shokuminchi Jinushisei (Tokyo, Ochanomizu Shobō, 1968). 6 See, eg Kim Nak Nyeon and Kim Jongil, ‘Income Inequality in Korea, 1933–2010: Evidence from Income Tax Statistics’, paper presented at the APEBH Conference 2013 (15 February 2013). 7 For a general review of the modern Japanese taxation system, see Ōkurasho (ed), Meiji Taishō Zaiseishi, vol 6, Naikokuzei Jō (Tokyo, Zaisei Keizai Gakkai, 1959). For income tax, see 1000–150. 8 For example, the introduction of comprehensive income tax took place in 1913 in the USA, just before the beginning of the First World War. Most other states in this period had the same tendency. See C Moriguchi and E Saez, ‘The Evolution of Income Concentration in Japan, 1886–2005: Evidence from Income Tax Statistics’ (2008) 90 Review of Economics and Statistics 713. 9 Details of exchanges about the income tax system between the Japanese politician, Itō Miyoji, and a Prussian tax officer, Rudolf (other personal details unknown), were discovered recently by the National Taxation Bureau (Kokuzeikyoku). This document is identified in the series of the tax documents collection as: ‘Meiji 17nen Zaisan Tōkyuzei Kōsetsu’ in Zeimu Daigakkō Zeimu Shiryō Sentā Sozei Shiryōshitsu (ed), Sozei Shiryō Sōsho, vol 3, Shotokuzei Kankei Shiryō (Tokyo, Zeimu Daigakkō Zeimu Shiryō Sentā Sozei Shiryōshitsu, 2008) 29–34.

366  Shunsuke Nakaoka tax investigating committee to determine the cost burden for each taxpayer and the election of committee members from the body of public taxpayers, mostly the wealthy elite, is an example of a feature borrowed from the German states.10 At the time of its introduction in 1881, the maximum income tax rate in Japan was just three per cent of personal income and revenue from this tax accounted for a tiny proportion of the overall total. However, income tax revenue became steadily more important for the Japanese government, largely because of the explosive expansion of military expenditure that accompanied the nation’s imperialistic or colonial policy in this period. Consequently, income tax reform bills were frequently introduced by the government during the final years of the nineteenth century and into the twentieth century.11 Indeed, the general content of the income tax system of modern Japan was constructed by these government reforms. For example, in the early twentieth century, income tax was divided into three categories to increase tax revenue, namely, Dai-Isshu (first category hereafter): taxation of company profits, which is almost the same as the current corporate tax; Dai-Nishu (second category): taxation of interest on bonds and bank deposits; and Dai-Sanshu (third category): which is almost the same as current personal income tax.12 With each successive Reform Bill, the maximum tax rate increased, and attempts of the tax authority within the Ministry of Finance (Shuzeikyoku) to further enforce tax collection became increasingly apparent.13 However, it is also certain that tightening income tax collection created resistance from taxpayers, in particular from the wealthy elite, because they were its main targets and contributed largely to the continuous rise of revenue from this tax. In addition, problems related to income tax were difficult to solve. First, both the government and the tax authority needed the assistance of the wealthy elite for income tax collection because of the stipulated income tax investigating committee.14 Although the committee itself fuelled the tax payment dispute as it had the right to set the rate, without the committee the tax authority could not manage collection because of the lack of sufficient numbers

10 However, it is considered that some Japanese characteristics were added to the system, eg valuing the seniority of a candidate at the time of election. For details concerning the income tax investigating committee, see T Ushigome, ‘Shotoku Chosa-Iinkai no Kenkyu’ (2010) 65 Zeimu Daigakkō Ronsō 137. 11 Income tax reform bills were passed by the government in 1899, 1908, 1913 and 1918 before the 1920 reform, which is the main discussion point of this chapter. For further details, see Ōkurasho, above n 7, 1000–80. 12 For more on these categories, see ibid 1035–36. 13 For details of organisational reforms within the tax authority, see T Ushigome, ‘Kokuzei Chozei Kikō Keiseishi Josetsu’ (1999) 39 Zeidai Ronsō 267. 14 From the earliest days following the introduction of comprehensive income tax, both the government and the tax authority attempted to restrict the decision-making power of the committee. However, this attempt was unsuccessful. For details, see G Ōmura, ‘Shotokuzei Chōsa Iinkai Enkaku Gaiyō’ (1979) 13 Zeimu Daigakkō Ronsō 583.

Colonial Taxation and the Modern Japanese Empire  367 of tax officers.15 This serious problem could not be solved completely until the end of the Second World War, when the committee was finally abolished by the General Headquarters. Second, serious challenges came from business circles and business elites because of continuous reforms. These groups came to believe that the income tax system exploited their business success as a form of profit taxation and undermined their business expansion projects in addition to siphoning away their personal rewards. Increasing the tax burden would be fatal to these aims of most big businesses, including Zaibatsu, which relied extensively on self-financing policies for their business expansion.16 Some of the business strategies introduced, particularly those by bigger businesses, such as Zaibatsu, specifically addressed the means of coping with taxation.17 Nevertheless, even though the Japanese taxation authority confronted serious problems with regard to management of the income tax system, including tax collection or disputes related to the role of the income tax investigating committee, this system was consequently imported and applied to Japanese colonies. In addition, although further detailed examination is needed to analyse this subject, limited results from this research indicate some difficulties and contradictions in the Japanese colonial policy, which nominally aimed to assimilate colonial residents into the Japanese empire. SYSTEMATIC APPLICATION OF INCOME TAX TO COLONIES: PROCESS, METHODS AND CONFRONTED PROBLEMS

Role of the Application of the Japanese Legal Framework to the Colonies Although definitions, content and characteristics differ among academic fields, it is assumed that one of the important features of Japanese colonial imperialism was so-called ‘assimilationism’, which influenced practices of colonial policy.18 This characteristic had surfaced from the starting point of the formation of the Japanese colonial empire, that is, the acquisition of Taiwan after the Sino-Japanese War. At first, the Japanese government relied on consultation

15 At the time of introduction, there were just a few thousand tax officers responsible for collecting taxes from all categories. A dramatic increase in the number of tax officers did not take place until the 1940s. See, eg Kokuzeichō (ed), Zeimugyōsei no 100nenkan (Tokyo, Ōkura Zeimu Kyōkai, 2001). 16 For more on the self-financing policy of big business in modern Japan, especially the case of Zaibatsu, see S Yasuoka, Zaibatsu Keiseishi no Kenkyu (Kyoto, Minerva Shobō, 1970); H Morikawa, Zaibatsu: The Rise and Fall of Family Enterprise Groups in Japan (Tokyo, University of Tokyo Press, 1992). 17 The founding of the holding company within Zaibatsu was a particular example of a measure to deal with the increasing tax burden. See H Takeda, ‘Shihon Chikuseki 3, Zaibatsu’ in K Ōishi (ed), NihonTeikokushugishi, vol 1 (Tokyo, University of Tokyo Press, 1985) 248–51. 18 For an interpretation of ‘assimilationism’ from the perspective of economic history, see K Ishii, ‘Mondai Teiki’ (1986) 51 Shakai Keizaishigaku 705.

368  Shunsuke Nakaoka from European legal advisers for governance of the new territory.19 In addition, it is assumed that many government members preferred the advice given by the French legal adviser, which recommended the modelling of French colonial rule using the case of the Algerian colony.20 From the perspective of economic and legal policies towards the colony, the government’s intention surfaced in a Bill submitted to the Japanese Diet houses in 1896 that broadly aimed to enforce the Japanese legal system in Taiwan.21 The legal practice in Taiwan became the model for other Japanese colonies thereafter, eg Korea and South Sakhalin.22 In addition, other dependent territories of the Japanese empire that were categorised as leased or mandated territories, such as Kwantung and the Pacific Islands, took a similar approach to the enforcement of Japanese law.23 However, it should be noted that even if the enforcement of Japanese law towards the colonies and dependent territories was the principle rule for the Japanese government, it could not ignore the customary laws and traditions that had formed the foundation of legal practices before the Japanese colonisation. In addition, the level of legal enforcement was certainly different in each case. In the cases of colonial territories, while Taiwan experienced relatively smooth progress in the legal unification with Japan, which consequently led to the restriction of the rule-making power of the colonial government, Japanese rule in Korea relied on exceptional clauses issued from the Korean governor because the Japanese confronted much more difficulty in reorganising the former Korean governance system.24 The situation in South Sakhalin was relatively convenient for the Japanese government compared to the other two cases, largely due to a less populated territory of indigenous residents, and thus Japanese immigrants quickly formed a majority.25 This condition was presumably favourable

19 For details of the consultation from the legal advisers, see H Ito (ed), Hisho Ruisan:Taiwan Shiryo (Tokyo, Hisho Ruisan Kankōkai, 1936) 108–43, 417. 20 Some researchers insist on the influence of the French model by including their assimilation policy towards the colonial empire, although details of this policy between Japan and French were considerably different. See Kim Nak Nyeon, above n 4, 16–24. 21 ‘Taiwan ni Sekosubeki Horei ni kansuru ken o Sadamu’, 28 March 1896, Kobun Ruiju Dai 20hen Meiji 29nen (National Archive of Japan, Rui00747100-032). Although the governor of Taiwan was able to enforce a specific law effected in Taiwan, it should be noted that the government’s intention during the debate within the Diet was to introduce the Japanese legal system in Taiwan. See ‘Taiwan ni Sekosubeki Horei ni kansuru Horitsuan’, Teikokugikai Shugiin Giji Sokkiroku 11 (Tokyo, University of Tokyo Press, 1985), 634–36. 22 The process of legal enforcement was applied to South Sakhalin in 1907 and Korea in 1911. See ‘Karafuto ni Sekosubeki Horei ni kansuru Horitsu’, Hōritsu dai25 Go Meiji 40nen, 28 March 1907 (National Archive of Japan, Gyo06883100); Chokurei Dai324 Go, ‘Chosen ni Sekosubeki Horei ni kansuru Ken’, 28 August 1911 (National Archive of Japan, Gyo08517100). 23 However, since these territories were not able to rule directly, as in the case of colonies, legal enforcement took the form of promulgation of imperial decree in each case. Consequently, the reality of legal enforcement was more complex in these territories. See, eg K Suzuki (ed), Manshu Kigyoshi Kenkyu (Tokyo, Nihon Keizai Hyōronsha, 2007) 31. 24 For details, see Yamamoto, above n 3, 4–16; Kim Nak Nyeon, above n 4, 33–37. 25 For details, see Karafuto Cho (ed), Karafuto Cho Shisei 30nenshi (Toyohara, Karafuto Cho, 1936) 86–90.

Colonial Taxation and the Modern Japanese Empire  369 for the Japanese government to conduct legal enforcement within this territory.26 This evidence indicates significant differences in the case of legal enforcement, even in areas of direct Japanese rule. In this complex situation, the Japanese government attempted to tackle legislative problems between mainland Japan and the colonies. For example, in 1918, Japan established Kyōtsūhō (the Communal Law), applicable to the colonies and other territories, to form a common legal foundation within the empire.27 However, it should be borne in mind that the main aim of this law was not to unify the legal system within territories of the Japanese empire, but to minimise the legal complexity that led to frequent legislative disputes between mainland Japan and the colonies.28 Thus, a comprehensive solution of legal problems within the territories did not take place until the end of the colonial period. Nevertheless, the introduction of the Japanese legal system in colonies and territories, albeit incomplete, played a certain role in the economic dependency of these territories towards Japan. For instance, in the case of Korea, enforcement of Japanese laws related to the economic system and activities led to rapid economic integration between colonial Korea and Japan.29 Furthermore, without doubt, it is assumed that the legal enforcement policy of the Japanese government created a gateway for introducing the taxation system, including income tax, because it was impossible to apply the Japanese taxation model to colonies without a clear and concrete framework of legal institution. General Outlines of the Colonial Finance Before going on to analyse the Japanese colonial income tax system, it is appropriate to discuss a general outline of colonial budget and finance by utilising statistical data collected from official publications of colonial governments. At the inauguration of colonial rule in Taiwan, the Japanese government had issued a decree which determined the format and content of colonial statistical data compiled by the colonial government.30 Although the format and content were gradually elaborated and collected in more detail, this plausibly became

26 In addition, from the early stage of colonial rule in South Sakhalin, the Japanese government applied mainly the local government system of mainland Japan, in particular that of Hokkaido. See ‘Karafuto Cho Kansei oyobi Karafuto Cho Shokuin Tokubetsu Ninyorei Shinsa Hokoku’, Sumitsuin Shinsa Hokoku 13 February 1907 (National Archive of Japan, Su-C00015100-038). 27 Regarding processes and debates within the Japanese Diet for the codification of the Communal Law, see Teikokugikai Shugiin Iinkaigiroku 17 (Kyoto, Rinsen Shoten, 1983) 251–330. See also T Asano, Teikoku Nihon no Shokumin’chi Hōsei (Nagoya, University of Nagoya Press, 2008) 347–64. 28 Teikokugikai Shugiin Iinkaigiroku, above n 27, 257–63. 29 Kim Nak Nyeon, above n 4, 34–37. 30 See ‘Takushokumushō oyobi Taiwan Sōtokufu ika Kakuken ni kansuru Tōkei Zairyō Yōshiki o Sadamu’, 24 November 1896, Kōbun Ruiju Dai 20hen Meiji 29nen (National Archive of Japan, Rui00747100-033).

370  Shunsuke Nakaoka Figure 14.1  Share of Grant-in-aid in annual colonial revenue

Sources: Taiwan, data from Taiwan Sōtokufu Tōkeisho; Korea, data from Chōsen Sōtokufu Tōkei Nenpō; Kwantung, data from Kanto Totokufu Tōkeisho, Kantocho Tōkeisho and Kantokyoku Tōkeisho; Karafuto, data from Karafutocho Tōkeisho, Karafutocho Chiyōran and Karafuto Yōran. See above n 31 and n 32. the foundation of colonial statistical data collection. Data from Japanese colonies and ruled territories were compiled as Tōkeisho (Statistics Book), which was published annually during the Japanese rule.31 The following data and figures in this chapter are largely based on these colonial statistics books, and are presented to consider the general outlines and characteristics of the colonial finances. Some of the data, especially for Karafuto, was obtained from other governmental publications.32 Although the Japanese government strictly controlled the colonial budget, colonial finance was formally independent, and progress of colonial economic development was utilised as an indicator for paying subsidies to the colonies

31 All of the colonial statistics books terminated publication during the period of the Pacific War. The durations of publication are as follows: Taiwan, 1896–1942 (Taiwan Sōtokufu (ed), Taiwan Sōtokufu Tōkeisho); Korea, 1910–42 (Chōsen Sōtokufu (ed), Chōsen Sōtokufu Tōkei Nenpō); and Kwantung leased territory, 1907–41 (first published as Kanto Totokufu (ed), Kanto Totokufu Tōkeisho 1907–17, then Kantocho (ed), Kantocho Tōkeisho 1918–33 and finally Kantokyoku (ed), Kantokyoku Tōkeisho 1934–40). In the case of Karafuto, only publications in the early Showa period are available (Karafutocho (ed), Karafutocho Tōkeisho, Toyohara, 1927–41). 32 In the case of Karafuto, unavailable data from the statistic yearbook was collected from eg Karafutocho (ed), Karafutocho Chiyōran 1–8 (Toyohara, 1928); Karafutocho (ed), Karafuto Yōran (Toyohara, 1925–29).

Colonial Taxation and the Modern Japanese Empire  371 and territories.33 Therefore, data with regard to the colonial subsidies plausibly signifies the level of financial autonomy of the Japanese-ruled territories to some extent. Figure 14.1 displays the share of formal grant-in-aid (Hojūkin) as a percentage of colonial annual revenue. While in Taiwan the formal financial aid ended after only a short period (probably considered as the ideal model for the Japanese government), other cases indicate that although dependency in financial aid gradually declined, they received continuous support from the Japanese government to cover their expenditure. In particular, the level of grant-in-aid for the Kwantung leased territory was higher than any other case. This was presumably due to the vulnerability of Kwantung’s finance compared to other colonies, which is briefly discussed below. The level and trends of financial aid could also be an indicator of whether or not the colonies and territories had other significant sources of revenue that contributed to financial autonomy of the colonial government. In the case of Taiwan, it received a considerably large revenue from the state monopoly of certain crops and production. One infamous crop was opium, which is frequently referred to in other studies on Taiwan’s colonial rule.34 However, it became apparent that other monopolised crops, like camphor and salts, also supported colonial revenue; in particular, the colonial government obtained huge profits from the monopoly of tobacco and the production of alcoholic beverages in the early 20th century.35 Statistical data also indicates that revenue from tobacco and alcoholic beverages far exceeded the total tax revenue in Taiwan throughout most of the period since the introduction of the state monopoly.36 Certain reliance on the state monopoly for supporting colonial finance was characteristic of the Taiwan case. Except for the Karafuto case, where revenue from forestry heavily aided the colonial budget, other ruling territories had not had any particular sources that contributed stability to colonial finance.37 In the case of Korea, though the Korean colonial government received a certain amount of revenue from the colonial railways, many researchers have suggested that the government was forced to conduct favourable policies, including subsidies, or paying

33 For details, see H Hirai, ‘Nihon Shokuminchi Zaisei no Tenkai to Kozo’ (1982) 47 Shakai Keizaishigaku 678. 34 For one recent study related to this subject, see Hung Bin Tsu, ‘The Taste of Opium: Science, Monopoly, and the Japanese Colonization in Taiwan, 1895–1945’ (2014) 222 (Suppl 9) Past and Present 227. 35 In the case of the monopoly of production of alcoholic beverages, see K Hachikubo, ‘Senzenki Chōsen Taiwan ni okeru Hōjin Shuzōgyo no Tenkai’ (2003) 36 Jinbungaku Kenkyushohō 13. 36 For example, in 1942, the final year in which the statistics book was published, revenue from tobacco and alcoholic beverages exceeded 100 million yen, compared to the total tax revenue in this year, which was about 83 million yen. 37 However, heavy reliance on forestry revenue also caused vulnerability of Karafuto’s finance since direction and changes in the market directly influenced the colonial revenue. See H Hirai, ‘Senkanki no Karafuto Zaisei to Shinrin Haraisage’ (1995) 45(3) Keizaigaku Kenkyu 81.

372  Shunsuke Nakaoka Figure 14.2  Share of tax revenue in annual revenue of each colony

dividends to private investors of the railways.38 The level of contribution of state monopolies, such as ginseng and tobacco leaves, was also relatively smaller in Korea. Kwantung was in the worst position of the cases studied, since such kinds of revenues from state monopolies were non-existent. The lack of stability in the colonies’ own finance also suggests the possible importance of the tax revenue for the Japanese colonial empire. However, results from statistical data for estimating the level of financial contribution of the tax revenue indicate that trends and characteristics were varied in each colonial case. Figures 14.2 and 14.3 demonstrate the level of tax revenue contributions in each ruling territory. Figure 14.3 also includes additional revenue from various special wartime taxes which were gradually introduced from 1935, following the Manchurian Incident and the foundation of Manchukuo. Undoubtedly, the general trend of Kwantung in this case suggests increased dependence on own tax revenue to cover its fiscal vulnerability. In particular, the percentage level of contribution surpassed all other cases after the mid-1930s. By contrast, Karafuto stayed at a relatively lower level with regard to tax contribution, even though the results for a certain period are not available due to the lack of data. Moreover, even after 1940, it showed a decline that was not experienced in any of the other cases. By contrast, the data indicates 38 See, eg K Yajima, ‘Shokuminchiki Chōsen no Tetsudō Tōshi no Kihon Seikaku ni kansuru Ichi Kōsatsu’ (2009) 44(2) Keieishigaku 59; Y Takahashi, Nihon Shokuminchi Tetsudōshiron (Tokyo, Nihon Keizai Hyōronsha, 1995).

Colonial Taxation and the Modern Japanese Empire  373 Figure 14.3  Share of tax revenue in total revenue of each colony (revenue from wartime taxes combined after 1935)

Sources: Taiwan, data from Taiwan Sōtokufu Tōkeisho; Korea, data from Chōsen Sōtokufu Tōkei Nenpō; Kwantung, data from Kanto Totokufu Tōkeisho, Kantocho Tōkeisho and Kantokyoku Tōkeisho; Karafuto, data from Karafutocho Tōkeisho, Karafutocho Chiyōran and Karafuto Yōran. See above n 31 and n 32. the relatively stable positions of Taiwan and Korea, although the general trend of Taiwan shows a gradual decline in terms of level of tax contribution. Thus, with regard to colonial finances, the characteristics of each case show particularities and differences rather than similarities. These results plausibly signify that even if increasing revenue from various sources was necessary to enable colonial financial autonomy that consequently reduced the cost of management, the realities were far from the Japanese ideal. This unfavourable condition might also reflect on the process of enforcement and practices of the Japanese income tax system towards the colonies. APPLICATION AND PRACTICE TO COLONIES: SOME FINDINGS

The following part discusses the application of the Japanese income tax system to colonies and dependent territories. In addition, some common characteristics are pointed out in these cases compared to mainland Japan in general. For example, while personal income tax (the third category) was introduced first on the Japanese mainland, all Japanese colonies and territories introduced corporate income tax (the first category) at the first stage. This is presumably because of

374  Shunsuke Nakaoka the intention of the tax authorities and the government to respond to inequality of taxation between the mainland and the colonies caused by rapid business expansion to imperial territories by Japanese firms. Because the tax authority suffered from various loopholes on the mainland income tax system, as discussed briefly in the second section above, it had a strong motivation to reduce tax evasion by utilising systematic differences of taxation between the mainland and territories.39 By contrast, the introduction of the third category of income (personal) was delayed in every case. Although the background of the delays varied in each case, there are some common points to consider that indicate a possible relationship between the level of economic development and socio-political prejudices of the Japanese empire towards colonies, which will be discussed further below. Moreover, although the first stage of introduction was conducted mainly under the auspices of the colonial governors and government, involvement of the Japanese Diets in later colonial income tax reform gradually became apparent. In particular, reforms for the introduction of the third category of income tax in colonies were subject to parliamentary discussion.40 This evidence possibly indicates that the political decision-making process for the colonies was partly under the control of the Japanese Diets, even if deliberation within the Diets might have been less important for the practices of colonial policy under the political system in the early 20th century. However, particularities can also be found in each case, as discussed below, and these findings indicate that the Japanese government to some extent differentiated the imperial territories by level of economic, political and social integration. Before focusing on each colonial case, data on the level of the income tax contribution within total tax revenue, in addition to some supplementary data, is shown in Figures 14.4 and 14.5. As shown in Figure 14.4, a greater dependency on income tax revenue is apparent in the case of Kwantung, while the results from Taiwan indicate some sort of fluctuation in terms of share within the total tax revenue. Regarding the other cases, Korea and Karafuto each have particularities, as will be discussed in more detail below. Figure 14.5 shows the share of the third category of income tax (personal) within the total income tax revenue.41 As will be explained in the following section, these trends and changes are plausibly related to differences in practices of the income tax system in each case. 39 In addition, the intention to tackle tax evasion was expressed in some governmental publications, in particular those published by the tax authority. In the Taiwan case, see, eg Taiwan Sōtokufu Minseibu Zaimukyoku (ed), Taiwan Zeimushi, vol 1 (Taipei, Taiwan Sōtokufu, 1918) 38, 236. This publication states that the introduction of corporate (first category) income tax to Taiwan was ‘to solve inequality of taxation to firms between the mainland and Taiwan’ or ‘to punish evil (conduct) and inequality between the mainland and Taiwan firms (by taxation)’. 40 For example, in the case of Taiwan, see ‘Taisho9 nen Horitsu Dai2 go chu Kaisei Horitsuan hoka 1ken Iinkaigiroku: Dai1 kai’, Teikokugikai Shugiin Iinkaigiroku 29 (Kyoto, Rinsen Shoten, 1984) 277–80; for South Sakhalin, see ‘Meiji 40nen Horitsu Dai 21go chu Kaisei Horitsuan hoka 1ken Iinkaigiroku’, Teikokugikai Shugiin Iinkaigiroku 33 (Kyoto, Rinsen Shoten, 1985) 275. 41 Data for the Kwantung case for Figure 14.5 is unavailable, due to the lack of subdivided data on the third category of income tax revenue (after its introduction in 1937) in the statistical books.

Colonial Taxation and the Modern Japanese Empire  375 Figure 14.4  Share of income tax revenue in colonial annual tax revenue

Sources: Taiwan, data from Taiwan Sōtokufu Tōkeisho; Korea, data from Chōsen Sōtokufu Tōkei Nenpō; Kwantung, data from Kanto Totokufu Tōkeisho, Kantocho Tōkeisho and Kantokyoku Tōkeisho; Karafuto, data from Karafutocho Tōkeisho, Karafutocho Chiyōran and Karafuto Yōran. See above n 31 and n 32. Taiwan Because Taiwan has a relatively long history of Japanese colonisation compared to the other colonies and territories, the processes of introducing an income tax system and the follow-up reforms in Taiwan might well have been used as a model for the Japanese government when enforcing this system elsewhere. In 1910, the first category of income tax (corporate) was introduced by applying the Japanese income tax law to Taiwan. However, a number of articles within that law ceased to apply to Taiwan, and a clear distinction was made between the income tax laws of Japan and Taiwan.42 In addition, the tax rate in Taiwan was lower than the mainland’s rate.43 42 The income tax law was issued as valid in Taiwan only by the colonial government, although the text was copied almost completely from the Japanese law. In addition, articles that defined the method of formal objection to the tax authority were completely deleted in the Taiwanese law. The text of the Taiwanese income tax law that took effect in 1910 is found in Taiwan Sōtokufu Minseibu Zaimukyoku, above n 39, 236–45. 43 A flat rate was applied to the first category of income tax, which in 1910 was 0.25%, compared to the mainland rate of 0.55%; ibid 236.

376  Shunsuke Nakaoka Figure 14.5  Share of 3rd category income tax in total income tax revenue

Note: additional supplementary data (in the case of Taiwan on Figure 5) was collected from Taiwan Sōtokufu Zaimukyoku (ed), Taiwan Sōtokufu Zeimu Nenpō Taisho 10,11,12,13nen Ban; Showa 2nen Ban (Taipei, 1921–24, 27) to cover unavailable subdivided income tax data from Taiwan Sōtokufu Tōkeisho in these years. Sources: Taiwan, data from Taiwan Sōtokufu Tōkeisho; Korea, data from Chōsen Sōtokufu Tōkei Nenpō; Kwantung, data from Kanto Totokufu Tōkeisho, Kantocho Tōkeisho and Kantokyoku Tōkeisho; Karafuto, data from Karafutocho Tōkeisho, Karafutocho Chiyōran and Karafuto Yōran. See above n 31 and n 32. Compared to the first category, the application of the second and third categories of income tax to Taiwan was delayed until 1920.44 In addition, there were certain differences with regard to the process and introduction of the other two categories, in particular the third. First, while the introduction of the first category of income tax in Taiwan was conducted mainly upon the initiative of the Taiwanese colonial government, the second and third categories required deliberation and approval by the Japanese Diets.45 This signifies the possibility 44 And the timing of the 1920 income tax reform in Taiwan also complicated making a formal financial report for this year since the reform came into effect on 1 August (the formal accounting year started on 1 April). A special regulation to tackle this problem was added in the content of the 1920 income tax reform, from Art 78 to Art 82 of the Taiwan Shotokuzei Rei (Taiwan income tax law), shown in ‘Taiwan Shotokuzei Rei Kaisei Ritsuryōan’, 9 April 1921, Kōbun Ruiju Dai 45hen: Taisho 10nen Dai 24kan (National Archive of Japan, Rui01403100-005). 45 In addition, the introduction took the form of an amendment of the domestic law; see ‘Taisho9 nen Horitsu Dai2 go chu Kaisei Horitsuan hoka 1ken Iinkaigiroku: Dai1 kai’, Teikokugikai Shugiin Iinkaigiroku 29. The nominal intention of the Japanese government for the amendment was to avoid legal inconsistency between Taiwan and the mainland; Taiwan Sōtokufu Minseibu Zaimukyoku, above n 39, 279.

Colonial Taxation and the Modern Japanese Empire  377 of intervention by parliamentary power, which became a constraint on the decision-making power of the colonial government. Second, the role of the income tax investigating committee was considerably different to that of mainland Japan. While the committee was introduced in Taiwan as a result of the third category of income tax being introduced, the members of the committee were not selected by income taxpayers but were nominated by Taiwan’s governors, while articles that defined the methods for formal objection to tax assessments were omitted.46 It is difficult to interpret this omission simply as a discrimination against the Taiwanese because the introduction of the third category in Taiwan also affected Japanese immigrants, in particular with regard to their success in commercial or agricultural activities.47 Furthermore, minimising taxpayer resistance was the prime intention behind the Japanese government’s income tax reform on the mainland.48 However, from another point of view, it is plausible that this amendment contributed to enhancing the tax revenue of the colonial government. This indicates that multidimensional aspects influenced the process of introducing the third category of income tax. Even though the process of application in Taiwan was smooth and the Taiwanese income tax system was plausibly the model used for the mainland Japanese government, the statistical data demonstrates another possible dimension that may have reflected the reality of practice in Taiwan. Studies of the Japanese income tax system have pointed out that the tax authority and the government had gradually became aware that a rise in personal income tax (third category) strongly correlated to the strengthening of government finances in Taiwan.49 However, as indicated in Figure 14.4, smooth progress in its introduction had less influence on the level of income tax contribution within the colonial tax revenue. The first peak appeared in 1920, one year before the introduction of the third category (personal), and this was followed by longer-term stagnation with regard to the tax contribution. And the introduction of the third category did not lead to a drastic increase in the income tax revenue, as shown in Figure 14.6. A rapid increase in income tax revenue, in both in first (corporate) and third categories, finally appeared in the late 1930s, although it did not progress as smoothly as the Korean case. And the level of contribution of the third category of income tax fluctuated throughout the period after the introduction of the category, as indicated in Figure 14.5. Therefore, it is assumed that the smooth application did not lead to a favourable outcome for the colonial government, which expected a certain contribution of the income tax revenue to colonial finances. Statistical data from the colonial 46 Taiwan Sōtokufu Minseibu Zaimukyoku, above n 39, 277. 47 Some members of the Diets who participated in deliberation of the amendment were concerned about deleting articles related to the method of formal objection. It is assumed that they were concerned about the possibility of influencing the economic activities of Japanese firms and businessmen, including Japanese immigrants in Taiwan; ibid 278–79. 48 See, eg Ushigome, above n 10, 153–60. 49 See, eg ibid 171–86.

378  Shunsuke Nakaoka Figure 14.6  1st and 3rd category income tax revenue in Taiwan (Japanese Yen)

Sources: Taiwan, data from Taiwan Sōtokufu Tōkeisho; Korea, data from Chōsen Sōtokufu Tōkei Nenpō; Kwantung, data from Kanto Totokufu Tōkeisho, Kantocho Tōkeisho and Kantokyoku Tōkeisho; Karafuto, data from Karafutocho Tōkeisho, Karafutocho Chiyōran and Karafuto Yōran. See above n 31 and n 32. statistics books also suggests that income tax became the primary form of tax revenue by the end of the 1930s. Before then, it held a lower position than other taxes, like land taxes, liquor taxes and tariffs. Further, as pointed out above, revenue from state monopolies was considerably higher than the total tax revenue throughout the colonial period. This result in the case of Taiwan raised the suspicion of customary tax avoidance or evasion, even though the colonial government already took measures for its prevention. Korea The introduction of the income tax system took a different form in Korea compared to Taiwan largely because of difficulties in transforming the former governance system of the Yi dynasty into the Japanese colonial system. In addition, although some legal and taxation reforms that were favourable for Japanese colonial rule had progressed at the initial stage of colonisation, further adjustments and reforms were needed for the assimilation of the taxation system.50 Therefore, for the Korean colonial government, priority was given to dissolving and reorganising the former governance system. 50 For examples of the initial legal and taxation reforms for land assessment, see Chosen Sōtokufu Rinji Tochichosakyoku (ed), Chosen Tochi Chosa Jigyohokokusho Tsuiroku (Keijo, Chosen Sōtokufu, 1919); for the case of corporate law that influenced economic activities of initial colonization, see H Kobayashi (ed), Shokuminchi e no Kigyoshinshutsu-Chosen Kaisharei no Bunseki (Tokyo, Kashiwa Shobō, 1994).

Colonial Taxation and the Modern Japanese Empire  379 In the case of the income tax system, the first category of income tax was introduced in 1916. However, the prime intention of the Japanese government was considerably different from the Taiwanese case. In Taiwan, the introduction reflected the satisfactory progress of business expansion and the establishment of firms within the territory.51 By contrast, in Korea, the purpose of the introduction was to reduce the economic burden of the wealthy Japanese elite who invested in Japanese firms established in Korea in order to bring further investment to Korea.52 This indicates that strong motivation of economic penetration by Japan influenced the introduction of the corporate income tax. In addition, it is assumed that in the Korean case, the country’s reputation with regard to the level of economic development was considerably lower. Korea’s initial economic reputation presumably resulted in delays in introducing the other categories of income tax, which came into effect in 1934. Although several adjustments and reforms of the taxation system were conducted before 1934, the Korean colonial government abandoned the introduction of the second and third categories of income tax at this time, largely because of the insufficiency of colonial tax organisation and the current economic conditions.53 In addition, when the introduction plan was on track in the 1930s, the Japanese government estimated a balance of profits and losses because the introduction was connected to the possibility of reducing the mainland tax revenue.54 Nevertheless, after the deliberation in the Japanese Diets, the second and third categories of income tax were finally introduced to Korea.55 After the introduction, income tax became a significant source of revenue for the colonial finances, and became the highest direct tax revenues within a short period.56 From this brief description of the procedure, it might be said that economic issues were the main concerns for the Japanese government in applying the income tax system in Korea. Furthermore, it is certainly apparent that of all the colonies ruled directly by Japan, Korea was a rather complex case, even economically. Thus, a distinction should be made between Korea and the other Japanese colonies with regard to the process of tax system assimilation. The effects of influences on the long-term process for system assimilation can be seen in the statistical data shown in Figure 14.4. The level of income 51 See ‘Shotokuzeiho oyobi Hijo Tokubetsuzeiho no Ichibu o Taiwan ni Sekosu’, Komon Ruiju Dai 34hen Meiji 43nen, 12 April 1910 (National Archive of Japan, Rui01101100-007). 52 See ‘Shotokuzeiho no Ichibu o Chosen ni Sekosu’, Kobun Ruiju Dai 40hen Taisho 5nen, 21 July 1916 (National Archive of Japan, Rui01237100-016). 53 See M Murayama, Chosen Sozeiseido Gaiyo (Keijo, Chosen Zaimu Kyōkai, 1940) 5–10. This book was based on the manuscript of a lecture for colonial tax clerk training institutes. 54 See ‘Chosen ni Kanrensuru Shotokuzei oyobi Sozokuzei Shirabe’, Showa Zaiseishi Shiryo Dai 4go Dai 22satsu, undated (National Archives of Japan, Hei15Zaimu00348100-005). 55 See ‘Futai Gian: Taisho 9nen Horitsu Dai 12go chu Kaisei Horitsuan’ in ‘Dai 1go: Showa 9nen Ippan Kaikei Saishutsu no Zaigen ni atsuru tame Kosai Hakko ni kansuru Horitsuan hoka 3ken Iinkaigiroku: Dai 8kai’, Teikokugikai Shugiin Iinkaigiroku Showa Hen 41: Dai 65gikai (Tokyo, 1993). 56 Murayama, above n 53, 22–25.

380  Shunsuke Nakaoka tax contribution to total tax revenue was certainly lower in Korea than in any of the other cases until the 1930s. However, Figure 14.4 also indicates the relatively rapid increase after the middle of the 1930s, this shift presumably coinciding with the introduction of the third category of income tax (personal) in Korea. The changes after 1934 can also be seen in Figures 14.5 and 14.7, with Figure 14.7 demonstrating the rapid increase in the third category revenue compared to the first category (corporate). This contrast with the Taiwan case, which shows no correspondence between the introduction of the third category and a growth in revenue. Also, while Taiwan and Karafuto both show some fluctuation with regard to the third category’s contribution to the total income tax revenue, the results from Korea show a higher contribution compared to other cases (see Figure 14.5). Therefore, although the introduction of this category was delayed compared to Taiwan and Karafuto, and caution should be taken in estimating its impact solely from statistical data during this particular period, the income tax in Korea certainly contributed to growth in tax revenue after the introduction of the third category, and this effect might also be favourable for the Japanese colonial government. Kwantung Leased Territory Kwantung (Liaodong peninsula) became a Japanese possession as a result of the Russo-Japanese war and formed an important part of the Japanese empire Figure 14.7  1st and 3rd category income tax revenue in Korea (Japanese Yen)

Sources: Taiwan, data from Taiwan Sōtokufu Tōkeisho; Korea, data from Chōsen Sōtokufu Tōkei Nenpō; Kwantung, data from Kanto Totokufu Tōkeisho, Kantocho Tōkeisho and Kantokyoku Tōkeisho; Karafuto, data from Karafutocho Tōkeisho, Karafutocho Chiyōran and Karafuto Yōran. See above n 31 and n 32.

Colonial Taxation and the Modern Japanese Empire  381 thereafter. However, legal definitions and the governance system differed significantly from the colonial territories, which caused complications for the Japanese government. In addition, because this leased territory included the railway zone of the South Manchuria Railway, one of the important Japanese statutory companies in this period, it led to other conflicts with regard to taxation policy.57 Even if discussion of the particularities of Kwantung governance is limited to the case of income tax, the situation, practice and problems faced were significantly different from the other cases. First, although the first category of income tax was introduced in Kwantung in 1920, it did not apply to the railway zone controlled by the South Manchuria Railway.58 This signifies that, under the auspices of the Japanese government, the zone itself became a sort of ‘tax free’ zone that eliminated Chinese political authority, including the right of taxation.59 In addition, the Kwantung government relied heavily on tax payments from the South Manchuria Railway. Most revenue of the first category of income tax came from this company and heavy reliance on it caused a fiscal crisis in the early 1930s, when the company experienced a drastic reduction of profits due to the Great Depression.60 Therefore, the existence of this company was undoubtedly the particular characteristic of Kwantung in terms of application of the income tax system. The second significant difference is that although the Japanese government emphasised that the exclusive and sole authorities of Kwantung were in the hands of Japan, China frequently challenged and attempted to recover the right to taxation, in particular towards the railway zone, which consequently led to a serious taxation dispute between China and Japan. In particular, in the 1920s, the Chinese provincial government repeatedly intervened in the railway zone to collect taxes from residential Chinese merchants, although protests were made by the company and the Kwantung government.61 In some cases, the Kwantung government reluctantly compromised with the Chinese side to permit taxation in certain areas, even if such permission raised further possible issues with taxation of Japanese firms in the railway zone.62 Furthermore, the taxation issues

57 For the definition of the railway zone, see H Hirai, ‘Mantetsu Fuzokuchi Keiei no Zaisei Shushi’ (2010) 59(4) Keizaigaku Kenkyu 91. 58 At the time of the establishment of this company, the government issued a decree to regulate its management. Art 6 determined that the company could collect commission fees from residents of the railway zone for zone management. For the text of the decree, see ‘Minami Manshu Tetsudo Kabushiki Gaisha ni Setsuritsu Meireisho o Kafusu’, 1 August 1908, Kobun Ruiju Dai 30hen Meiji 39nen Dai 15kan (National Archive of Japan, Rui01020100-009). 59 Hirai, above n 57, 92. 60 The Kwantung government suffered from virtually zero revenue from the first category of income tax in the early 1930s. See Suzuki, above n 23, 31–33. 61 For studies of this issue, see, eg T Ono, ‘Mantetsu Fuzokuchi Kyoju Kasho ni taisuru Chugokugawa ‘Shuijuan’ Kazei Mondai’ (September 2005) 691 Chugoku Kenkyu Geppo 23. 62 Suzuki, above n 23, 32.

382  Shunsuke Nakaoka became more complicated as some Chinese merchants attempted to evade tax by utilising the legal loophole of the railway zone.63 These complex characteristics differentiated Kwantung from other colonial cases. In addition, these problems related to taxation were plausibly due to ambiguity of legal and political definitions of the leased territory, which resulted in difficulties for Kwantung governance, including taxation. This situation undoubtedly influenced the application of the income tax system to this territory because the introduction of the second and third categories of income tax was finally achieved in 1937, after the foundation of Manchukuo.64 Furthermore, it should be noted that, as in the cases of Taiwan and Korea, certain articles related to the methods of objection to the tax authority were deleted in the Kwantung case.65 The statistical data demonstrates particularities and high-level dependency on tax revenue, especially from income tax, in this leased territory. From the data in Figure 14.4, it is apparent that after the introduction of the first category (corporate), the level of the contribution of income tax to the overall tax revenue was the highest among colonial territories. Revenue from the tax of this category accounts for more than half of the total tax revenue throughout the 1920s. It should also be noted that in 1932, when Kwantung’s income tax revenue plummeted, the income tax payment from the South Manchurian Railway fell to virtually zero.66 In addition, even though a breakdown of income tax revenue based on categorisation is unavailable for Kwantung, Figure 14.8 indicates a drastic increase in income tax revenue after 1937, which corresponds to the introduction of the third category in this territory. Thus, the statistical data shows the importance of income tax revenue for managing colonial finances even before the introduction of the third category. It is also assumed that the heavy dependence on this particular revenue made the disputes with China regarding taxation rights (as mentioned above) more intense and severe. Karafuto (Sakhalin) Compared to the other colonial territories, it was more convenient and favourable for the Japanese government to conduct colonial rule in Karafuto (South Sakhalin). The territorial acquisition was a result of the Russo-Japanese war in the early twentieth century. In addition, a sparse population of native 63 Examples of tax evasion attempts are in Ono, above n 61, 33–34. 64 Introduction of other categories took the form of an amendment of the existing income tax law in Kwantung. Details of the revised text are in ‘Kantoshu Shotokuzeirei o Kaiseisu’, 26 June 1937, Kobun Ruiju Dai 61hen Showa 12nen Dai 67kan (National Archive of Japan, Rui02070100-007). 65 In addition, members of the tax investigating committee were nominated by the Kwantung governor, like the case of Taiwan and Korea. See Art 33 of ‘Kantoshu Shotokuzeirei o Kaiseisu’, above n 64. 66 Suzuki, above n 23, 31–33.

Colonial Taxation and the Modern Japanese Empire  383 Figure 14.8  Income tax revenue in Kwantung

Sources: Taiwan, data from Taiwan Sōtokufu Tōkeisho; Korea, data from Chōsen Sōtokufu Tōkei Nenpō; Kwantung, data from Kanto Totokufu Tōkeisho, Kantocho Tōkeisho and Kantokyoku Tōkeisho; Karafuto, data from Karafutocho Tōkeisho, Karafutocho Chiyōran and Karafuto Yōran. See above n 31 and n 32. inhabitants was presumably an important factor that contributed to the smooth and rapid integration of the governance system and institutions with Japan. Although this territory was classified as a colony by government definition, actual rule of Karafuto was remarkably close to Japanese local governance, as mentioned above. Although an imperial decree was needed to enforce the application of Japanese law to Karafuto, the enactment of exceptional clauses for territorial governance was limited to cases of indigenous residents and bureaucratic issues caused by a shortage of officials.67 This indicates that, even though some difficulties remained for legal enforcement in Karafuto, conditions for legal application were not so complicated compared to other colonial cases. In addition, the characteristics of the tax revenues were, for instance, less dependent on the land tax; furthermore, its industrial structure, reliant mainly on forestry and related industries, was considerably different from the other colonies.68 These particular characteristics plausibly influenced the process and details of introducing income tax in Karafuto. The introduction of the first category of income tax took place in 1919, three years later than Korea. At first, the Japanese government merely applied the part of Japanese income tax law that related to 67 See ‘Karafuto ni Sekosubeki Horei ni kansuru Ken o Sadamu’, 28 March 1898, Kobun Ruiju Dai 31hen Meiji 40nen Dai 1kan (National Archive of Japan, Rui01025100-032). 68 See Hirai, above n 3, 208–14.

384  Shunsuke Nakaoka corporate taxation. However, within a year, the government managed to issue a special income tax law, effective only in Karafuto, as a result of the Japanese income tax reform in 1920, which consequently raised the third category of income tax.69 The situation changed again, and radically, in 1922, when the Japanese government decided to introduce the second and third categories of income tax to Karafuto. Although the background and sudden shift in government taxation policy for Karafuto were difficult to elucidate, some important characteristics appeared in the process of deliberation and the content of the income tax law. First, there was virtually no debate in the Japanese Diets with regard to the application of other categories to this territory.70 This is in sharp contrast to the situation of the other colonies as, in the other cases, certain deliberations could be traced from remaining documents. Second, with regard to the role of the tax investigating committee, no changes or deleted articles were found in the text of the Karafuto income tax law compared to the Japanese law.71 This indicates that the members of the committee were elected by income taxpayers and not nominated by the colonial governor, as in the other colonial cases, and that methods of formal objection remained in the case of Karafuto. Thus, a clear distinction that could be interpreted as a type of discrimination was non-existent in this case. It is assumed that, at least from the perspective of taxation, certain assimilation and integration progressed rapidly and smoothly in this territory compared to Taiwan or Korea. However, as in the case of Taiwan, the smooth introduction of the income tax system did not result in the continuous growth of income tax revenue, and the statistical data shows that Karafuto contrasts sharply with the other colonies in regard to income contribution. Figure 14.4 demonstrates a steady decline in the level of income tax contribution, unlike the other colonial cases, which experienced relative increases. Also, the introduction of the third category (personal) impacted on the share of income tax in the overall revenue only in the year of its introduction, 1925. Moreover, the shifts of revenue in this category are somewhat disappointing in Karafuto, being significantly lower than in the other cases, as indicated in Figures 14.5 and 14.9. The amount of total income tax revenue remained considerably lower than in the other colonial cases, and in terms of tax revenue ranking, income tax remained in second position, behind the brewing

69 Due to considerable reforms of the income tax law in 1920, the Japanese government was confronted with difficulties in applying the new income tax law to Karafuto, which possibly led to some legislative contradiction for application. See ‘Karafuto Shotokuzeirei o Sadamu’, 31 July 1920, Kobun Ruiju Dai 44hen Taisho 9nen Dai 21go (National Archive of Japan, Rui01362100-008). 70 See, eg ‘Meiji 40nen Horitsu Dai 21gochu Kaisei Hoan hoka 1ken Iinkaigiroku’, Teikokugikai Shugiin Iinkaigiroku 33 (Tokyo, 1985) 275. The application took the form of an amendment to existing law, specifically that ‘Karafuto is subjected to pay the second and third category income tax’. 71 For the revised text of Karafuto’s income tax law, see ‘Karafuto Shotokuzeirei o Kaiseisu’, 14 April 1922, Kobun Ruiju Dai 46hen Taisho 11nen Dai21go (National Archive of Japan, Rui01442100-028).

Colonial Taxation and the Modern Japanese Empire  385 and distilling tax, until 1937, the year of the outbreak of the Sino-Japanese war. Even though other factors, such as lower population density and the underdevelopment of the colonial economy compared to other cases, could have influenced the trends and characteristics of the income tax revenue in Karafuto, evidence from the statistical data indicates a certain inconsistency between the smooth introduction of the income tax system and the subsequent growth of its revenue, which is also demonstrated in the Taiwan case. CONCLUDING REMARKS

Although the above descriptions and explanations are derived from limited research and findings, some crucial characteristics can be noted in the case of application of the Japanese income tax system to colonies and dependent territories during the modern period. First, although minor revisions or amendments were made for the application of this system, it is assumed that the process and practices of the income tax system to a certain extent took the form of a systematic assimilation strategy. However, the application procedure also demonstrated that the length of the process depended on the level of social, legal and economic reorganisation as the Japanese government confronted some difficulties in Figure 14.9  1st and 3rd category income tax revenue in Karafuto (Japanese Yen)

Sources: Taiwan, data from Taiwan Sōtokufu Tōkeisho; Korea, data from Chōsen Sōtokufu Tōkei Nenpō; Kwantung, data from Kanto Totokufu Tōkeisho, Kantocho Tōkeisho and Kantokyoku Tōkeisho; Karafuto, data from Karafutocho Tōkeisho, Karafutocho Chiyōran and Karafuto Yōran. See above n 31 and n 32.

386  Shunsuke Nakaoka each case. The total application of income tax needed longer periods in the cases of Korea and Kwantung, largely due to the necessity for considerable reforms and other particular issues that influenced practices. In the case of Korea, the income tax system was differentiated from the mainland model in 1940, when the colonial Korean government decided not to apply the income tax reform in 1940.72 In contrast to these cases, the whole process was shorter in Taiwan, even though the first step, the introduction of the first category of income tax, took much longer than in the other cases. This is presumably due to the inexperience of the Japanese government with colonial rule in the Taiwanese case, as well as the lack of familiarity with income tax in Japan itself at that time. In the case of Karafuto, the process of introduction proceeded rapidly. Progress was quite plausibly influenced by the short-term success associated with the Japanese immigrant majority in this territory, which may have contributed to establishing the same position in Karafuto as that of mainland Japan.73 Second, the application of the income tax system to the Japanese imperial territories cannot be considered as simply benefiting the Japanese government and Japanese colonial residents. On the one hand, from the perspective of the colonial governments, this introduction, in particular the third category of income tax, to a certain extent indicated efforts to strengthen financial foundations and increase the fiscal revenue that made autonomous colonial financial governance possible.74 On the other hand, because the collection of colonial income tax also targeted colonial Japanese firms and residents, and because progressive taxation applied to the third category of income tax (personal), it might have forced financial burdens on these groups, in particular those that succeeded in business or mercantile activities who might have formed the colonial elite, even though their tax rates were lower than those on the mainland. In addition, even in the case of the deletion of articles of colonial income tax law, which limited the autonomous role of the income tax investigating committee, it should be noted that there was distrust and antipathy between the taxation authority and income taxpayers on the mainland, which possibly influenced the regulation of the colonial committees. Third and finally, brief analysis of colonial statistical data indicates further complex results which demonstrate that a swift and smooth introduction of the income tax system as a whole did not correspond with progress of the level

72 The decision of the colonial government was largely due to inexperience of management with the third category of income tax (personal income tax) so that the application of the income tax reform in 1940, which aimed to impose income tax duties on lower level income earners, was considered impossible in Korea. Murayama, above n 53, 33–34. 73 Integration of South Sakhalin to mainland Japan was finally completed in 1943 when the Japanese government abolished laws that legally defined the specific position of South Sakhalin. See ‘‘, 27 March 1943, Kobun Ruiju Dai 67hen Showa 18nen Dai 1kan (National Archive of Japan, Rui02669100-004). 74 See Hirai, above n 33.

Colonial Taxation and the Modern Japanese Empire  387 of contribution to colonial finance. The case of Taiwan suggests that rapid introduction of the third category compared to other cases had less effect on increasing the revenue from income tax in Taiwan, and thus had a relatively small impact on shifts and changes in the structure of colonial revenue. The situation was almost the same for Karafuto, although other factors, for instance, economic, social and demographic characteristics, should be borne in mind regarding the results from Karafuto, and further consideration is needed. By contrast, the case of Korea indicates a certain coincidence between the introduction of the third category and the rapid growth of revenue from income tax, in addition to a rapid increase in the level of colonial fiscal contribution, even though the process of introduction took a longer time than in the other colonial cases. Kwantung demonstrates further particularity with regard to colonial finance and revenue, since scarcity of revenue sources resulted in greater dependency on the territorial taxation. The data in this case shows that the revenue from income tax plausibly formed a lifeline for territorial management. Even before the introduction of the third category, the reduction of revenue from the first category (corporate) could have been fatal for the Kwantung case. However, more comprehensive research and analysis is needed to consider these cases further, and additional inquiries are needed to examine the subject in more detail. First, attention should be paid to the motivation of Japanese officials – in particular, that of financial bureaucrats and tax officers – to apply income tax to territories. As some of the documents and material indicates, officials consider income tax an indispensable taxation system for maturing the national economy and interpret it as the nation’s core and best tax; thus, it can be assumed that their interpretation influenced the process and discussions related to introducing this tax to colonial territories.75 Second, the roles and practices of the colonial income tax investigating committees should be considered in more detail. It is necessary to focus on this issue thoroughly in order to analyse the consequences of the omission of articles in the case of colonial income tax laws, which presumably restricted the activity of the committees. In addition, especially after the middle of the 1930s, when Japan gradually moved to a wartime economy, revenues from colonial income tax had progressively expanded, in terms of both absolute amounts and share within total revenues, the colonial income tax investigating committee plausibly played a significant role in income tax collection as a whole. To explore the investigating committee as a tool for colonial finance and revenue, access to materials and sources collected in the archives of the former colonial states and its detailed analysis will be necessary. 75 See, eg Murayama, above n 53, 3–4, and the response of the government delegate during the deliberation of the Lower Diet, which discussed the application of the third category of income tax to Taiwan, in ‘Taisho9 nen Horitsu Dai2 go chu Kaisei Horitsuan hoka 1ken Iinkaigiroku: Dai1 kai’, Teikokugikai Shugiin Iinkaigiroku, above n 40, 29, 280.

388

15 The British Colonial Income Tax Model: Lessons from Cyprus NTEMIS IOANNOU

ABSTRACT

T

he Cypriot income tax system will celebrate its eightieth birthday next year. It is based on the so-called ‘1922 Model Ordinance’, drafted in 1922 by British tax officials and proposed as a template for enactment in British colonies lacking ‘responsible government’. Perhaps for administrative reasons and the (negative) British experience on transporting UK tax law to British colonies, the 1922 model differed in fundamental ways from the income tax system then in effect in Great Britain. In the decades following its publication, a number of British colonies, including Cyprus, Palestine, Singapore, Hong Kong and Kenya, adopted the 1922 Model Ordinance. Those colonies largely continued, after independence, to base their tax rules on this model. This chapter examines why Cyprus adopted the 1922 Model Ordinance and secondly, using Cyprus as an example, attempts to trace the origins of concepts used in this model. INTRODUCTION

It is common for new forms of taxation to be introduced during times of war, when revenues are low.1 With the exception of limited air raids, Cyprus escaped physical damage during the Second World War. Records suggest, however, that the local economy

1 See the discussion in P Harris, Corporate/Shareholder Income Taxation and Allocating Taxing Rights Between Countries: A Comparison of Imputation Systems (Amsterdam, IBFD, 1996) esp 74–87. For example, the first income tax law in the UK was introduced in 1799 during the Napoleonic wars, in the USA during the American Civil War, and in Australia and Canada (federal levels) during the First World War.

390  Ntemis Ioannou was severely damaged by events in Europe and elsewhere.2 For example, many Cypriots served in the British forces.3 In addition, the country lost access to significant foreign markets, in particular markets for its agricultural products.4 It is therefore not surprising that, despite the limited physical damage in Cyprus caused by the war, the Cypriot government faced budgetary pressure during the war years, and, as a result, turned to income tax in the search for additional sources of revenue. On 6 January 1941, a year and a half after Germany’s invasion of Poland, the British Colonial Governor in Cyprus (Sir William Denis Battershill) announced the introduction of the first income tax legislation in the country.5 That same year, the proposed income tax was approved by the Cypriot Legislative Council, published in the Cypriot Gazette and became law.6 Interestingly, the tax law passed in Cyprus was not copied from the then existing UK income tax law.7 Instead, it was virtually a copy of the model created in London by British tax officials soon after the end of the First World War (hereafter the 1922 Model Ordinance).8 It is clear from the wording of the model that the purpose of British tax officials at the time of drafting the model had been to design a unified model for British colonies not possessing ‘responsible government’ to avoid complexity and issues of double taxation within the British Empire.9 A more difficult question is why the British government developed a separate income tax model for its colonies and did not enforce its own tax law.

2 The Cypriot government budget was in deficit for each of the years 1939 to 1942. See the discussion in M Epstein (ed), The Statesman’s Year-Book: Statistical and Historical Annual of the States of the World for the Year 1940 (London, Palgrave Macmillan, 1940) 100. 3 Records shows that more than 16,000 people joined the British forces. This is a significant number considering that the total population of the island at that time was less than 350,000 people. See https://politis.com.cy/politis-news/koinonia/374-kyprioi-ethelontes-thammenoi-se-23koimitiria-ana-ton-kosmo. 4 For example, the Cypriot economy was severely damaged because of lost access to Italian markets for selling its agriculture products and to Scandinavian countries for selling its citrus fruits according to the local newspaper Νέος Κυπριακός Φύλαξ (The New Cypriot Guardian), 7 January 1941; the newspaper was accessed at the Nicosia research center, at the PIO premises, where digitised newspaper archive is maintained. 5 Local newspaper Eleftheria, 7 January 1941 (accessed at the Nicosia research center, at the PIO premises, where digitised newspaper archive is maintained). 6 See The Cyprus Gazette (Nicosia, Government Printer) [1941] 103, www.cyprusdigitallibrary. org.cy/files/original/9a5b15aba025d2029ddbee7a3733be09.pdf. The Cypriot Legislative Council was formed in 1926 and had legislative functions. It was composed of both elected native members and British officials of the colonial administration. It was, however, structured in such a way that its decisions were controlled by the British officials or the Governor. See PM Kitromilides, ‘An Unexplored Case of Political Change: A Research Note on the Electoral History of Cyprus’ (1980) 38 Επιθεώρη ση Κοινωνικών Ερευνών (The Greek Review of Social Research) 187, https://ejournals.epublishing. ekt.gr/index.php/ekke/article/viewFile/6918/6638. 7 The existing UK law at that time was consolidated in the Income Tax Act 1918 (8 & 9 Geo 5 c 40). 8 Report of the Inter-Departmental Committee on Income Tax in the Colonies Not Possessing Responsible Government (Cmd 1788, 1922). 9 The meaning of responsible government is discussed under the third heading below.

The British Colonial Income Tax Model  391 The clearest answer must be history. Britain had a negative experience of trying to transport its income tax law to countries with a different cultural, social and economic background.10 Probably for these reasons, by the 1920s, four major British colonies had their own income tax models in place. There were an Australasian (1915), Canadian (1917), South Africa (1914) and Indian (1886) income tax model.11 These income tax models were all initially influenced by the UK income tax law, but then underwent significant independent development to meet their local conditions. The importance of these models should not be understated. They have been applied not only to the territories mentioned above, but also to other countries; for example, the Indian model applied to modern-day Pakistan, Bangladesh and Myanmar.12 There were also a few developments in income taxation in other (smaller) British colonies before the Colonial Model that are worthy of note. There was an income tax in Dominica (1879), Antiqua (1899), Trinidad (1918) and Jamaica (1919). Their income tax laws were different and massively simplified compared to the British income tax. All of these sources would have been well known to the committee assigned to draft the 1922 Model Ordinance report and were probably constant sources of reference.13 Nevertheless, the precise origin of the 1922 Model Ordinance remains unclear. It has been argued that it was influenced by the UK income tax law and the Australasian income tax law.14 Another influence on the 1922 Model Ordinance seems to be the report, prepared in 1920 by British tax experts, of the Royal Commission on the Income Tax, which had inquired into the then existing UK income tax law and provided recommendations for its improvement.15 These proposals, although many did not find their way into the UK statute book, may have influenced various tax provisions of the 1922 Model Ordinance.16 10 A good example for this is India. In 1860, India introduced an income tax legislation that follows the British income tax legislation closely. A few years later, this law was repealed and re-enacted in a more simplified version: P Harris, ‘Importing and Exporting Income Tax Law: The International Origins of the South African Income Tax Law’ in J Hattingh, J Roeleveld and C West (eds), Income Tax in South Africa: The First 100 Years (1914–2014) (Cape Town, Juta, 2016) 2–24. 11 These income tax laws were used as income tax laws in many other countries and were thus ‘models’. For a more detailed consideration of income tax developments in British Empire and elsewhere, see Harris (1996), above n 1, 286–300. 12 ibid. 13 In particular, the report accompanying the 1922 Model Ordinance makes reference to the income tax legislation of Jamaica and Trinidad. In comparing these two laws with the model, many similarities can be observed. For a more detailed consideration of income tax developments in British Empire and elsewhere, see Harris (1996), above n 1, 286–300; Harris (2016), above n 10. 14 See P Harris, Metamorphosis of the Australasian Income Tax: 1866–1922, Australian Tax Research Foundation Research Study No 37 (Sydney, ATRF, 2002) 12. 15 Report of the Royal Commission on the Income Tax (Cmd 615, 1920). 16 In particular, the 1922 Model Ordinance makes reference numerous times to the Royal Commission Report. A good example is with respect to business profits which were assessed in the UK at that time on the basis of the average profits of the three preceding years. The Royal Commission report recommended the adoption of the preceding year’s profits as the basis of assessment in the UK. The 1922 Model Ordinance used the preceding year’s profits as the basis of assessment.

392  Ntemis Ioannou From 1922 until the end of the Second World War, a number of British colonies, including Cyprus, Palestine, Singapore, Hong Kong and Kenya, adopted laws based on the 1922 Model Ordinance. With respect to Cyprus, the influence of this model is still within the current Cypriot income tax law. While the Cypriot income tax code has grown in length and complexity, especially after Cyprus joined the EU in 2004, its fundamental concepts have changed little since its origin in 1941. This chapter has two primary purposes: first, to consider why Cyprus adopted the 1922 Model Ordinance in 1941; and second, to investigate the origins of concepts used in the model, using Cyprus as a case. The extent to which the model was modified in Cyprus over the years in response to subsequent fiscal and political challenges will also be examined. The first purpose is pursued under the second heading and the second purpose is pursued under the third heading, which broadly follows a comparison of the provisions in the 1922 Model Ordinance with the provisions in the UK Income Tax Act and other British colonies. The exercise is intended not only to enhance understanding of the current Cyprus income tax code, but also to provide a framework for examining and understanding the tax codes of other former British colonies which adopted that same model. A limitation of this chapter is that it does not attempt to analyse administrative provisions of the 1922 Model Ordinance and only focuses on the substantive provisions. THE FIRST CYPRIOT INCOME TAX IN 1941

Events Leading to the Introduction of the 1941 Income Tax Cyprus was occupied in 1571 by the Ottomans and remained under the Ottoman rule for over 300 years, until 1878. In 1878, Great Britain and Turkey concluded a treaty which shifted administrative control of Cyprus to Great Britain, while formal sovereignty of Cyprus remained with Turkey. Turkey agreed to this shift of control to Britain in exchange for Britain’s promise to protect the Ottoman Empire against possible Russian aggression.17 In 1914, when Britain and Turkey became antagonists during World War I, Britain formally annexed the island of Cyprus. Turkey recognised this a few years later under the Treaty of Lausanne in 1923. In 1925, Britain formally declared Cyprus to be a British crown colony.18 Consistent with its practices in other newly acquired colonies, the British did not immediately attempt to change Cyprus’s then-existing tax regime. At the time of the first step in shift in control of Cyprus from Turkey to Britain, in 1878, more than 20 types of direct and indirect taxes existed in Cyprus.19 17 See C Clerides, The Cyprus Legal System (Athens, Nomiki Vivliothiki, 2017) 25–31. 18 See Arts 16 and 20 of the Treaty of Lausanne. 19 See, G Hill, A History of Cyprus, Volume 4, The Ottoman Province. The British Colony, 1571–1948 (Cambridge, Cambridge University Press, 2010) 443.

The British Colonial Income Tax Model  393 The most important tax was the tithe.20 Tithes were popular in the Ottoman Empire, as they were simple and could be imposed and collected without requiring much subjective judgement by tax collectors. It required farmers to give one-tenth of their agricultural produce to tax collectors. It was collected sometimes in kind and sometimes in money.21 Such taxes, although originating in sixth-century BC Greece,22 would have been familiar to the British, as similar practices could be found in British history.23 In addition to the tithe, other significant late-nineteenth-century Cypriot taxes included taxes on animals (assessed per head), a military exemption tax and taxes on real estate (verghi), tobacco, salt and spirits. The government also imposed custom duties.24 The tax practices inherited from the Turks remained in force well into the 1930s with no major changes. In 1930, a report was commissioned by the British Colonial authorities to enquire into the then-prevailing Cypriot tax system. The commission was charged with reporting on whether the burden of taxation was equitably distributed and, to the extent not, to make recommendations. The 1930 report prepared a list of all estimated revenues realised from each type of tax in Cyprus.25 A summary is presented in Table 15.1. Table 15.1  Estimated Revenues per Each Type of Tax Type of tax

1930 estimated income, £

Percentage of tax revenue

Customs import duties

220,700

32

Tobacco duties

102,000

15

Verghi (tax on property and profession)

29,000

4

Education tax

31,000

4

Stamp duties

37,000

5

Salt tax

32,000

5

Spirit duties

30,000

4

Ship and goat tax

19,200

3

Total taxes

690,400

100

20 K Giorgalliss, ‘The Issue of Tribute: Taxation and Politics in the First Period of British Sovereignty in Cyprus’ (Cyprus, University of Cyprus, 2015) 52, https://gnosis.library.ucy.ac.cy/ handle/7/39346. 21 ibid 102. 22 See, eg A Zenakos, ‘Peisistratos around 600–527 BC’, To Vima, 24 November 2008, www. tovima.gr/2008/11/24/archive/peisistratos-peripoy-600-527-p-x/. 23 In 1188, Henry II sought a tenth of rents and movable goods under the Saladin Tithe and in 1799 William Pitt sought a tenth of property and income. See P Harris, Income Tax in Common Law Jurisdictions: From the Origins to 1820 (Cambridge, Cambridge University Press, 2006) 474. 24 Giorgalliss, above n 20, 97. 25 See Report of the Commission Appointed to Enquire into the System of Taxation in Cyprus (Nicosia, Government Printing Office, 1930) 21.

394  Ntemis Ioannou These taxes were unpopular among Cypriots. They were viewed as disproportionate to the production of income and wealth. In addition, the tax burden fell more heavily upon the poor than on the rich. Local newspapers at that time recorded that the Cypriots favoured the imposition of an income tax on the grounds that an income tax would be fairer.26 The 1930 report, while agreeing that an income tax would be fairer than the then prevailing taxes, concluded that an income tax was not suitable in Cyprus. The main argument was that very few traders kept proper accounts and therefore a tax based on income would result in a great deal of tax evasion and would be unfair to those who kept proper accounts. The idea of introducing an income tax in Cyprus was therefore abandoned.27 It would require the severe economic crisis on Cyprus as a result of World War II to renew discussions about the imposition of an income tax. As discussed in the first section, in 1939 the country lost access to significant foreign markets for selling its agricultural products, the dominant industry in Cyprus at the time. This created negative effects on the economy and drove the unemployment rate very high. In the opposite direction, local reports recorded that during those difficult financial times money lenders and commodity speculators were exploiting the situation and operating very lucrative businesses without being taxed. In addition, evidence shows that many wealthy foreigners decided, because of the absence of an income tax, to move to Cyprus.28 These factors, together with the government’s financial crisis, brought back the idea of introducing such a tax. On 6 January 1941, the British Colonial Governor in Cyprus (Sir William Denis Battershill) announced the introduction of Cyprus’s first income tax. ORIGINS OF THE 1922 MODEL ORDINANCE

As discussed, when the Cypriot income tax was first introduced in 1941, it was virtually a copy of the 1922 Model Ordinance. The discussion now proceeds to investigate the origins of this model and is structured in three subsections. The first briefly provides some background material on the 1922 Model Ordinance, ie it outlines the purpose of the Model and its main sections. The second subsection considers some income tax fundamentals that are important in identifying the main sections of the Model. It is nearly impossible to trace the origin of each provision in the 1922 Model Ordinance, so the key sections of the Model have to be identified. The third subsection then proceeds to trace the origins of those key sections, ie, it identifies the countries that influenced most the key provisions of the 1922 Model Ordinance. 26 The New Cypriot Guardian, 2 April 1941. 27 Report of the Commission 1930, above n 25, 8. 28 P Clarke and A Varnava, ‘Accounting in Cyprus During the Last Four Decades of British Rule: Post-World War I to Independence (1918–1960)’ (2013) 18 Accounting History 293, 303–04.

The British Colonial Income Tax Model  395 About the 1922 Model Ordinance With 62 sections and at 40 pages long, the 1922 Model Ordinance was considerably shorter than the Income Tax Act 1918 then in effect in Great Britain, which ran to more than 200 pages. The Model Ordinance was annexed to the ‘Report of the Inter-Departmental Committee on Income Tax in the Colonies Not Possessing Responsible Government’.29 ‘Responsible’ government in this context meant that the Colonial government was responsible for legislating. The Committee was ‘interdepartmental’ in that it comprised representatives from different departments, including the Colonial Office, the British Inland Revenue and the British Treasury.30 The 1922 report consisted of two parts. The first contained definitions, a description of the methodology used in drafting the model and a summary of the principles underpinning important provisions of the model.31 The second part included the Model Ordinance. In preparing for the drafting of the 1922 Model Ordinance, the drafting committee met 18 times as a working group. In addition, it examined letters addressed to them by representatives of British colonies, it interviewed certain British colonial bodies and it examined ‘all the existing Colonial income tax Acts’.32 As can be seen, input from outside of the UK was largely limited to British-controlled sources, and the drafting committee did not set out to create a model code that incorporated any novel or ambitious enhancements to the then British prevailing practices and policies.33 A possible explanation for the disinterest in outside sources suggests that the primary focus of the committee was to address the problem of double taxation in the British Empire and to draft a uniform model of income tax legislation ‘for the general use of colonial governments’.34 A search for best or new practices, in other words, was not high on the committee’s agenda. Income Tax Fundamentals35 The fundamentals of income tax can assist in identifying the main sections of the 1922 Model Ordinance and so trace their origins. 29 Cmd 1788, https://archive.org/details/reportofinterdep00grea. 30 M Littlewood, Taxation without Representation: The History of Hong Kong’s Troublingly Successful Tax System (Hong Kong, Hong Kong University Press, 2010) 20. 31 Report of the Inter-Departmental Committee 1922, above n 8, [1]–[64]. 32 ibid [6]. 33 During the 1920s, many European countries as well as the USA had adopted income taxes. These sources had no substantial influence on the 1922 Model Ordinance drafting process. For a more detailed consideration of income tax developments in British Empire and elsewhere, see Harris (1996), above n 1, 286–300. 34 The issue of double taxation was a main theme of the 1920 Royal Commission report, which preceded the 1922 Model Ordinance. 35 The discussion draws from P Harris, ‘IFRS and the Structural Features of an Income Tax Law’ in V Thuronyi and G Michielse (eds), Tax Design Issues Worldwide (Alphen aan den Rijn, Kluwer Law International, 2015) 37–97.

396  Ntemis Ioannou There are six fundamental principles, or questions, that are central to the application of income tax. Each piece of income tax legislation must provide an answer to these questions even if not explicitly. The first question is to determine who is going to be taxed (persons). The second is to identify the character of the income. The third is to determine when an item of income is taxed (timing). The fourth is to quantify the income. The fifth is to determine the jurisdictional (rules) limitations. Finally, after answering all these questions, the final issue is the process of calculating the income tax base. Each is considered in turn. Who is Taxed? Every income tax law must identify its tax subjects. The most important reason for this is to allocate income to persons and tax them. Conceptually,36 an income tax law is a personal tax that seeks to tax net income (increases in wealth) after it is allocated to persons on an annual basis. It is the allocation of income to persons that makes the income tax so complex. Although it is generally the owner of the income who is subject to the tax, usually income tax laws do not provide a definition of ownership. Therefore, an income tax law should in principle use the general law definition of ownership, eg property law, to assign income to persons. In many cases, it is obvious to whom a payment received (income) should be allocated. For example, the person that owns (at general law) the immovable asset is the person that rental income will be allocated to. Unfortunately, that will not always be the case, as the income tax law constantly does not follow general law rules. As a result, income may be assigned to a person not having legal ownership under general law. A good example is when income tax law allocates income to a beneficial owner and not to the legal owner. A person, for income tax purposes, might include not only individuals, but also certain entities. The particular entities subject to income tax may in fact not be considered persons under general law rules. Conversely, some entities that are considered persons under general law rules are not subjected to income taxation. Furthermore, it is also possible that income is attributed to one person but the obligation to pay the tax falls to another person. A good example of this is income earned by a partnership. The income is calculated at the partnership level, but the partners pay the tax (after income is allocated to them according to their personal circumstances). In addition, an income tax law can view a person as two persons for tax purposes. A common example of this is the case of a trustee, who is taxed in their personal capacity and is then taxed separately in their capacity as a trustee.

36 ‘Conceptually’ because sometimes the income tax displays features of a consumption nature (eg in the context of savings for retirement).

The British Colonial Income Tax Model  397 Having identified tax subjects, an income tax law often goes on to subcategorise these subjects in some way. There are limited ways in which such subjects can be subcategorised. They may be subcategorised based on the activities conducted by the person subject to income tax, such as banking, insurance and licensing of intellectual property. Further, persons may be subcategorised based on size (for example, small entities), location (resident or non-resident) or by reference to their relations with others (corporate groups and closely held companies). What is Taxed? An income tax law taxes income. There are two primary issues here for consideration. First, an income tax law has to specify what should be taxed. An income may be beyond the scope of an income tax law, for example a capital transaction or a gift. There are three general concepts underlying all income tax laws in this regard: the source concept, the trust concept and the accretion concept.37 A common feature of all concepts is that income must be realised in order to be subject to tax. Under the source concept, an item is taxed if it is produced from a designated source. In other words, instead of defining the word ‘income’, the income tax law specifies the activities that produce the income (referred to as the ‘income earning activities’ or the ‘source of the income’). The main activities that produce income are business, employment and investment. In principle, any income that is produced outside of earning activities is not taxed. Examples include windfalls such as lottery or gambling awards, gifts and certain other items that cannot be traced to a source. The source concept is followed by civil law counties, eg Germany. The second concept – the trust concept – is very similar to the source concept, the only difference being that in the trust concept, when a fixed asset used in business is disposed of, the gain is not taxable, whereas in the source concept it is (because it arises from a source being the business). In other words, the trust concept is stricter, as it excludes all gains from the disposal of business assets apart from the disposal of inventory. The trust concept is followed in the UK, Australia and Canada, although variations may exist. In contrast, under the accretion concept that applies in the USA, any realised increase in wealth is income unless it is specifically excluded. Therefore, the trust concept has a wider tax base than the other two concepts. The second issue that an income tax has to deal with is to explain about the character of the income. The income tax rules tend to provide different rules, eg exemptions, deductions, different rates, depending on the type of income in question. For example, there may be different rules if the income is trading,

37 See V Thuronyi, K Brooks and B Kolozs, Comparative Tax Law, 2nd edn (Alphen aan den Rijn, Kluwer Law International, 2016) 213–17.

398  Ntemis Ioannou interest, dividend, capital, royalty, gift, etc. To characterise income in principle will depend on the rights with respect to which the payment is made. For example, the person that lends money to another person via a standard loan agreement receives interest income. Again, income tax law may decide not to follow the general law and use a substance-over-form approach or any other approach. For example, excessive debt may be characterised by income tax rules as dividends despite the fact that the legal classification of the contract is a loan. When is it Taxed? While business is conducted continuously through time, income taxes are imposed at time intervals. Timing, therefore, is a critical variable with respect to identifying when a taxable event occurs. There are two main methods that countries’ income tax laws follow: the cash basis and the accrual basis. The cash basis is simpler and focuses on the time when cash is received and expenses are paid. The accrual basis focuses on the time at which all the events that determine a person’s right to receive income or pay for an expense have occurred. How Much is the Income? An income tax law has to quantify the income received. This is an important question, especially if what is received is not cash or the transaction is with related parties. The way that countries quantify (price) transactions is with transfer pricing rules. Jurisdictional Rules As discussed, an income tax law is a personal tax that seeks to tax net income (increases in wealth) after it is allocated to persons and according to their circumstances. In a world of many countries, it is necessary to choose the country that will tax a particular person. The country that the individual has the closest social and economic ties to is the appropriate country from a tax policy perspective to carry out this role. This is the country that provides most benefits to the individual. The individual is therefore obliged to fund the government according to their ability to pay. This country is generally referred to as the residence country.38 The same reasoning has been extended to corporations. When stepping into an international setting, however, there is a second well-established principle of income tax law: the country where the income

38 See G Cooper, R Vann, M Dirkis and M Stewart, Income Taxation Commentary & Materials, 8th edn (Pyrmont, Thomson Reuters, 2017) part 6, ch 16: principles of taxing international transactions.

The British Colonial Income Tax Model  399 is generated (the country that has the closest connection with the income), commonly referred to as the country of source, also has a valid jurisdiction to tax.39 Process for Calculating the Income Tax Base Once a person has been identified, their income has been allocated, characterised and quantified, timing issues have been dealt with and the jurisdictional rules have been applied, there is a final question to be answered. That is, what is the process of calculating the income tax base? An income tax law is faced with two choices. The first choice is to calculate income separately for each earning activity and to apply separate tax rates to each category of income. This is commonly referred to as the schedular approach. This means that expenses in one category cannot be allowed as expenses in another category. The second choice is a global approach, under which a person makes only one calculation of aggregate income (ie there are no separate calculations for particular earning activities) and all allowable expenses are deducted without separation. The most common approach in countries with advanced economies is a mixture of the two.40 Origins of the Model In this subsection, I attempt to trace the origins of the main sections of the 1922 Model Ordinance using Cyprus as a case study. Specifically, I compare Cypriot income tax rules to each of the 1922 Model Ordinance, the UK Income Tax Act 1918 (1918 UK Act) and income tax laws that prevailed in various British colonies in the first part of the twentieth century.41 Who is Taxed? As discussed, the first fundamental question that an income tax law has to answer is to identify who is the person to tax.

39 ibid. Note, however, that this principle was not easily accepted by leading professors such as Edwin Seligman, who noted that income tax focuses on the ability to pay principle and that to tax income tax at source opens a ‘Pandora’s box’ of confusion. See MJ Graetz and MM O’Hear, ‘The “Original Intent” of US International Taxation’ (1997) 46 Duke Law Journal 1021, 1037. 40 HJ Ault, BJ Arnold and GS Cooper, Comparative Income Taxation: A Structural Analysis, 4th edn (Alphen aan den Rijn, Wolters Kluwer, 2019) 271–72. 41 As discussed, by that time there were four different income tax models: the Australasian, the South Africa, the Canadian and the Indian. As discussed, at that time, other (smaller) British colonies had in place income tax laws. They are not part of the analysis unless their input becomes relevant.

400  Ntemis Ioannou The 1922 Model Ordinance, in section 2, identifies ‘persons’ as its tax subjects. It then defines ‘person’ to include a ‘body of persons’. In turn, it defines ‘body of persons’ as ‘any body politic, corporate or collegiate and any company, fraternity, fellowship, or society of persons whether corporate or not corporate’. The current Cypriot income tax law also uses the term ‘person’, which is defined as including an individual and a company.42 Company, in turn, is defined as including registered companies and all artificial entities mentioned in the 1922 Model Ordinance.43 It is therefore clear that the provision on identifying taxable persons in the Cypriot income tax law was drawn from section 2 of the 1922 Model Ordinance. Origin of the Section The origin of the 1922 Model Ordinance wording can be found in section 237 of the 1918 UK Act. This section has a long history in the UK, dating back to the first UK income tax law enacted in 1799. As Avery Jones notes, the definition of ‘person’ is one of the most obscure in the Income and Corporation Taxes Act 198844 and an explanation of it would be long-winded. It is clear, however, that the definition brings within the scope of income tax ‘bodies corporate’ and many artificial entities. The reference to ‘any body’ is by itself capable of including a wide variety of bodies of persons.45 In addition, it seems that the purpose of the act to refer to ‘any body’ is to bring within the scope of income tax ‘unincorporated companies’, since corporate companies are already caught by the phrase ‘body corporate’.46 A fraternity is a religious society and society of persons seems not to have any definite meaning.47 Partnerships Partnerships are implicitly excluded as tax subjects under the 1922 Model Ordinance by section 36. They are instead treated as transparent entities, meaning that while they could still have income, another person is taxed with respect to it. The wording of the 1922 Model Ordinance on partnerships is similar to the wording of section 20 of the 1918 UK Act, which reads as follows: ‘The

42 The original (first) version of the Cypriot income tax law (1941) defined ‘persons’ virtually the same as the Model. In 2002, the Cypriot income tax law amended the definition to its current form but remained true to its history. 43 Income Tax Law (No 118(I)/2002) s 2. 44 See J Avery Jones, ‘Bodies of Persons’ [1991] British Tax Review 453, 453. 45 A body may be described as something that has an individual existence and is that which either ‘doeth or suffereth’; see P Harris, Corporate Tax Law: Structure, Policy and Practice (Cambridge, Cambridge University Press, 2013) 20. 46 See Avery Jones, above n 44, 455. 47 ibid 456.

The British Colonial Income Tax Model  401 income of any partner … shall be deemed to be the share to which he was entitled during the year to which the claim relates, in the partnership profits …’ Similar wording is found in the Cypriot tax law, suggesting a clear connection with the 1922 Model Ordinance.48 Trusts The taxation of trusts of incapacitated persons is dealt with under section 26 of the 1922 Model Ordinance (Chargeability of Trustees, etc) and reads as follows: A … trustee … having the direction, control, or management of any property or concern on behalf of any incapacitated person shall be chargeable to tax in like manner and to the like amount as such person would be chargeable if he were not an incapacitated person.

Similar wording was used in the 1918 UK Act.49 The above wording suggests that if the beneficiaries are incapacitated persons, no tax is levied at trustee level and income flows through to the beneficiary. The trustees, however, are obliged to collect and pay the tax liability on behalf of the beneficiaries, ie the trustees are taxed as agents for the beneficiaries. The taxation of a trust whose beneficiaries are not incapacitated is not regulated expressly by either the 1922 Model Ordinance or the 1918 UK Act. This suggests that normal income tax rules would apply, ie the person that received or is entitled to the income (in most cases, that person would be the trustees) would be taxed and then the beneficiary would be allowed a credit for the tax paid at the trustee level.50 The Cypriot income tax law has a similar provision: A trustee … having the direction, control or management of any property or concern on behalf of any person, shall be chargeable to tax in respect of income derived from such property or concern in like manner and to the like amount as such person would be chargeable if he had received such income.51

This wording is very similar to the Colonial provision, suggesting that one was drawn from the other. However, there is a major difference in the Cypriot provision: the rules are not limited to incapacitated persons. As a result, under the Cypriot income tax law, all beneficiaries of a trust are taxed as if the trust income accrued directly to the beneficiaries, unlike the approach followed in the UK and the Colonial Model.

48 The wording is found in the Cypriot Assessment and Collection of Taxes Law (Νo 122(Ι)/2002) s 7. 49 Income Tax Act 1918, First Schedule, General Rules [4]. 50 J Tiley, Revenue Law, 3rd edn (London, Butterworth, 1981) 361. 51 Income Tax Law (No 118(I)/2002) s 31.

402  Ntemis Ioannou The reason for the difference in the Cypriot income tax law is not clear. One possible explanation is that the Cypriot tax law intended to offer practicality and simplicity. In other words, the intent was to avoid the need for multiple payees and the credit relief mechanism to mitigate double taxation of beneficiaries. Other Developments The Cypriot income tax law has undergone some independent development with regard to identifying persons in the years following its original enactment. In particular, it now includes a list of EU companies that are treated as taxable persons, rules for characterising foreign entities and special rules on collective investment funds which treat each compartment as a separate taxable person.52 What is Taxed? A second fundamental issue that an income tax law must address is to identify what it seeks to tax, ie the charging provisions. As discussed, the answer to this question mainly depends on whether a country follows the source concept, the trust concept or the accretion concept to identify its tax base. The 1922 Model Ordinance, in section 5, outlines the activities that produce income. Taking into consideration that any capital gains are excluded,53 it is clear that the 1922 Model Ordinance adopts the trust concept as followed by the UK. It is useful to outline the main categories of income-producing activities that are targeted by the 1922 Model Ordinance: • • • • • •

Trade, business, profession or vocation Employment Annual value of land Dividends, interest or discounts Pension, charge or annuity Rents, royalties, premiums and any other profits arising from property

These provisions are virtually identical to section 5 of the Cypriot income tax law, so it is clear that the one was drawn from the other.

52 ibid s 2. 53 s 12 of the 1922 Model Ordinance provides that no deduction shall be allowed in respect of any capital withdrawn or any sum employed or intended to be employed as capital. Thus, any capital gain will also be exempt.

The British Colonial Income Tax Model  403 Origin of the Section The 1922 Model Ordinance charging section is based in the 1918 UK Act. The charging provisions in the 1918 UK Act are scattered through the legislation, so it is useful to briefly summarise them: • Trade, business, profession or vocation (Schedule D) • • • •

Employment, pension (Schedule E) Land (Schedule A) Interest, annuities, dividends (Schedule C) Royalties (Schedule D)

It is not surprising that the income-producing activities used in the 1922 Model Ordinance are broadly consistent with the approach adopted in the 1918 UK Act. Nevertheless, the express taxation of premiums is a new development in the 1922 Model Ordinance since it does not have a clear counterpart in the 1918 UK Act, nor in any other tax laws that prevailed in various British colonies.54 Other Developments Some minor independent developments have occurred in this section of the Cypriot income tax law since its original enactment. The most important is the taxation of gains from the disposal of goodwill – a provision not in line with the overall structure of the Cypriot income tax law as it taxes a capital gain transaction. The reason for the enactment is not very clear, but it seems that it was to ensure payment of taxes upon certain asset dispositions that were not already covered by the existing capital gains rules in the Cypriot capital gains tax. When is Income Taxed and What are the Jurisdictional Rules? The next fundamental question that any income tax has to answer is timing, that is, when the taxable event occurs. The timing rules in the 1922 Model Ordinance are found in section 5 and read as follows: ‘Income tax shall … be payable at the rate or rates specified … upon the income of any person accruing in, derived from, or received in, the Colony …’ It is clear from the above wording that the primary purpose of the 1922 Model Ordinance was to tax, either on an accrual basis or on a cash basis, sources that originated from the colony in question. If the income had a source outside the colony, it was only taxed if the consideration was received (cash basis) in the colony, ie a remittance basis. It seems that these jurisdictional rules were designed in this way to mitigate the issue of double taxation through the British colonies.

54 The

1918 UK Act only mentions premiums with regard to life insurance.

404  Ntemis Ioannou The same wording was adopted in the Cypriot legislation, showing that the provision was taken from the 1922 Model Ordinance. The words ‘accruing’ and ‘derived’, as well as the concept of remittance basis, were all borrowed from the 1918 UK Act. Other Developments This part of the Cypriot income tax law has evolved to a considerable extent since its original enactment. It continues to tax income on (mainly) an accrual basis, but the cash basis is also occasionally used for some transactions. The jurisdictional rules have been redrafted and are now based on the source and residence concepts. The remittance concept no longer applies since 2002.55 Quantification The 1922 Model Ordinance had no transfer pricing rules. Perhaps the main reason for this was the economic circumstances of the British colonies in which the model was enacted. In rural and small economies, maybe the quantification of the transactions was not thought to be significant enough to justify inclusion of such provisions. Other Developments The Cypriot income tax law has been amended to include transfer pricing rules. Process of Calculating the Income Tax Base? The final issue that an income tax law must address is how to calculate income. The 1922 Model Ordinance adopts a global approach. Section 6 provides that ‘Tax shall be charged … upon the chargeable income of any person’. ‘Chargeable income’, in turn, is defined in section 2 as ‘income … from the sources specified in Section 5 remaining after allowing the appropriate deductions’. Under section 10(1), deduction is allowed for ‘expenses wholly and exclusively incurred … in the production of the income’.56 The important point here is that this approach does not require income to be calculated separately for different types of income or activities. The Cyprus income tax law follows the same approach. The origin for this seems to be the Australasian model.57 This part of the legislation is most

55 Income Tax Law (No 118(I)/2002) s 2. 56 The phrase ‘wholly and exclusive’ is taken from the UK Income Tax Act 1918, First Schedule, Part D [3]. 57 Australia’s Income Tax Assessment Act 1915, s 10 imposed tax on the taxable income. ‘Taxable income’ was defined in s 3 to mean ‘the amount of income remaining after all deductions allowed by this Act have been made’.

The British Colonial Income Tax Model  405 important and should not be overlooked. The global approach that the Colonial Model adopts brings with it a series of other issues. For example, the way that losses are calculated and the way credit relief operates are calculated differently under a global system from the manner in which those issues are treated in a schedular system. Other Developments While today’s Cypriot income tax law does not differ conceptually from the global system, it does now contain several tax competition measures, such as lower rates for royalty income, which embody the schedular system approach for the correct calculation of the tax liability. The findings of this chapter are summarised in Table 15.2. Table 15.2  Summary of Findings 1922 Model Ordinance

Origin

Cypriot income tax law

Who is taxed

The colonial provision has its origin in the 1918 UK Act

The Cypriot income tax law is based on the 1922 Model Ordinance. The only difference is regarding the taxation of trusts. The Cypriot income tax law has been slightly amended to include other types of persons, such as the compartments of collective investment funds

What is taxed

The colonial provision has its origin in the 1918 UK Act. There is one difference: the 1922 Model Ordinance taxes premiums

The Cypriot income tax law is based on the 1922 Model Ordinance. There has been no significant change in the Cypriot income tax law

When is income taxed and jurisdictional rules

The colonial provision has its origin in the 1918 UK Act. The jurisdictional rules were based either on an accrual basis or on a cash basis from sources in the colony. If the income had a source outside the colony, it was taxed only on a remittance basis. There are no jurisdictional rules based on residency

The Cypriot income tax law initially based its provisions on the 1922 Model Ordinance. The jurisdictional rules, however, have changed to include source and residency rules. The remittance basis was abandoned

(continued)

406  Ntemis Ioannou Table 2.1  (Continued) 1922 Model Ordinance

Origin

Cypriot income tax law

Quantification – transfer pricing rules

The colonial model had no The Cypriot income tax law has transfer pricing rules been amended to include transfer pricing rules

Calculation of tax base

The colonial provision has its origin in the Australasian model

The Cypriot income tax law is based on the 1922 Model Ordinance

CONCLUSION

A number of countries base their income tax law on the 1922 Colonial Model. The 1922 Colonial Model was developed by a British committee soon after the end of the First World War. At that time, the British concerned themselves with the two main tax issues. The first was the issue of double taxation among British colonies. The second was that many British colonies had no detailed tax legislation in place to finance themselves. A uniform Colonial Model was viewed as a good strategy for addressing both problems. The reason why the 1922 Colonial Model and the 1918 UK Act are similar is clear: the committee assigned to draft the 1922 Model Ordinance report were mainly British officials with experience in UK income tax legislation. As discussed above, there is ample evidence that many key provisions in the 1922 Colonial Model are in important respects similar to the provisions in the 1918 UK Act. For example, of the five fundamental questions that an income tax code must answer, three of the answers reflected in the 1922 Colonial Model are borrowed from the 1918 UK Act.58 However, it is also clear that, in preparing the 1922 Colonial Model, the drafting committee also borrowed existing provisions from several British colonies. For example, as noted, the process for calculating the income tax base was borrowed from the Australasian model. This borrowed provision, in turn, brought with it a series of other issues, such as various rules relating to losses and credit relief. Based on an examination of today’s Cyprus tax code, it is apparent that the now almost 100-year-old 1922 Colonial Model has proved itself to be a wellconceived, resilient model. That, at least, deserves applause.

58 In particular, the questions as to who is taxed (persons), what is taxed (income) and when income is taxed (timing) have UK origin.

16 ‘An Embarrassing Precedent’: The British India–Mysore Double Tax Arrangement of 1919 CHRISTOPHER L JENKINS*

ABSTRACT

T

ax treaties now number in their thousands, but little is written on their early history. This chapter brings to light what may be the first treaty dealing with income tax drafted in English – concluded a century ago between British India and the semi-independent state of Mysore. It describes the surprisingly modern solution that was reached just before the British Empire and the League of Nations took up the cause of international double taxation. Shortly afterwards, the Empire excluded itself from the international tax treaty network, remaining aloof until 1945. To preserve a ‘united front’, the treaty was withheld from the League’s treaty collection, and for this reason is virtually unknown. It is significant because it indicates how, under different circumstances, an imperial tax treaty network might have developed. It contributes to a recalibration of tax treaty history, with less emphasis on model treaties. And it reminds us that there are no natural templates for tackling double taxation; the only limitation is the imagination of those sitting at the negotiation table.

* The author wishes to thank Professor Peter Harris and André Jenkins for their comments on this chapter. The principal India Office Records consulted at the British Library were: (i) ‘Mysore: Income Tax Regulation’ (Political Department, 1917–29, IOR/L/PS/10/685); (ii) ‘Income Tax: Double Income Tax within the Empire’ (Financial Department, 1917–24, IOR/L/F/7/1258); (iii) ‘Income Tax: Indian Native States’ eligibility for Relief; Particulars of Laws’ (Financial Department, 1923–32, IOR/L/F/7/1275); (iv) ‘League of Nations: Double Taxation’ (Industries and Overseas Department, 1923–32, IOR/L/E/7/1308 file 2048). Each of these is referred to by its IOR number; any others are referenced in full. Access to Mysorean sources was limited to documents sent from its government contained in the above files and published sources (its gazetteer and annual administrative reports).

408  Christopher L Jenkins INTRODUCTION

In 1927, the League of Nations asked its members for ‘all conventions for the prevention of double taxation … signed by your Government’ as it surveyed different solutions to the problem of two states taxing the same income.1 The Government of India eventually replied that it had ‘entered into no such conventions’.2 It lied. In 1919, it had concluded an arrangement with one of the semi-independent ‘Princely States’, Mysore (today, the home of India’s tech hub, Bangalore). The Mysore Arrangement was unusual.3 It was reciprocal, and schedular, with different rules for different types of income. In contrast, by 1927, the Empire favoured unilateral relief based on the rate of tax, not the type of income; a system known as ‘Dominion Relief’. More unusually, it was concealed for fear that it would create ‘an embarrassing precedent’.4 There are over 3000 tax treaties in existence today. Though most ‘modern’ tax treaties apply to several taxes, they are largely concerned with the overlap between income taxes. Their origins lie in treaties concluded between German-speaking states in the nineteenth century, which influenced treaties throughout continental Europe and informed model treaties devised by the League of Nations and, later, the UN and OECD.5 The British were late arrivals on the scene. It was not until after the Second World War that they finally cast aside Dominion Relief and negotiated a treaty with the USA, and then Australia, which spurred an ‘avalanche’ of bilateral treaties within the British Empire.6 This chapter shows that the story really began a generation earlier, in India – in something of a false start. The Mysore Arrangement follows the schedular structure of the earlier European treaties, but was drafted without reference to them. What gave rise to this experiment in international taxation? And why was it later seen as embarrassing? Given the proliferation of tax treaties, it is useful to examine the circumstances – and personalities – that shaped this early treaty. This chapter has three sections. The first outlines the political and economic landscape, and how double taxation arose. The second details the Arrangement’s terms. The third explains why it was concealed: it was a political and financial embarrassment, out of step with the regime later adopted for the rest of India.

1 League of Nations to India Secretary, Lord Birkenhead (4 October 1927): IOR/L/E/7/1308 file 2048. 2 India Office to League of Nations (28 February 1928): ibid. 3 The term ‘arrangement’ is used advisedly: JDB Oliver, ‘Double Tax Treaty Vocabulary’ [1974] British Tax Review 262. In contemporary correspondence it was described as an ‘agreement’ or a ‘non-statutory arrangement’. 4 Telegram from Finance Department to Birkenhead, urging ‘discretion’ in responding to the League’s request (28 October 1927): IOR/L/E/7/1308 file 2048. 5 S Jogarajan, ‘Prelude to the International Tax Treaty Network: 1815–1914 Early Tax Treaties and the Conditions for Action’ (2011) 31 OJLS 679. 6 JF Avery Jones, ‘The History of the United Kingdom’s First Comprehensive Double Taxation Agreement’ [2007] British Tax Review 211, 253; CJ Taylor, ‘The Negotiation and Drafting of the UK–Australia Double Taxation Treaty of 1946’ [2009] British Tax Review 201.

‘An Embarrassing Precedent’  409 The Mysore Arrangement may be the first of its kind drafted in English.7 It is not simply a curiosity. It is a lively example of the part played by bureaucrats, rather than politicians, in the development of government policy. It illustrates the complex – and sometimes contradictory – relationship between the maharajas and the Raj in a period of transition. The British in India allowed the maharajas allied to the Crown greater freedom, fostering a counterweight to the independence movement, whilst the British at home sought to rein in divergent Indian policies on taxation. Most of all, it shows how two states chose to deal with the problem of double taxation, before the English-speaking world had formulated anything like a principled basis for doing so. The solution reached in 1919 is much closer to modern treaties than anything that came out of Britain before 1945. BRITISH INDIA AND MYSORE

The impressive blot of pink on the map belied the fact that there were two ‘Indias’: ‘British India’, under Britain’s direct control; and the ‘Princely States’ (also known as the Indian or Native States), tied by individual treaties to the Crown, through its representative the Viceroy.8 The 500 or so states accounted for a quarter of the population, and a third of the territory. They were the accumulated baggage of a disorderly conquest. For us, the story of their survival is less important than its consequences. As the Government of India explained to the League of Nations in 1933: ‘For the purposes of income-tax administration, each of these states is practically a foreign State in relation to British India.’9 That alone explains how the problem of double taxation could arise. But we need a little more information on British India and Mysore’s political, bureaucratic and economic relationship – and their income taxes – to understand the circumstances in which the Arrangement was devised. The state of these relationships, and the manner in which Mysore’s income tax became known to British India, explain why the Arrangement came into being. On the political front, Mysore had recently secured a new treaty with British India, giving it the freedom to alter its own tax laws and leaving the Viceroy with no real ability to intervene. India’s bureaucrats still acted

7 There are earlier examples that touch on specific instances of income taxation: eg in 1912, British India entered into an arrangement with Baroda (another Princely State) to prevent double taxation of postal workers: CU Aitchison, A Collection of Treaties, Engagements, and Sanads relating to India and Neighbouring Countries (London, Government of India, 1932) vol 6 301, 303. Britain’s first officially recorded tax treaty (on death duties) was concluded in 1872 with one of the Swiss cantons: S Jogarajan, ‘The Conclusion and Termination of the “First” Double Taxation Treaty’ [2012] British Tax Review 283. 8 WS Holdsworth, ‘The Indian States’ (1929) 7 New York University Law Review 1. 9 League of Nations, Taxation of Foreign and National Enterprises, vol 3 (Geneva, League of Nations, 1933) 10.

410  Christopher L Jenkins independently on many matters of policy, particularly in relation to the Princely States. Economically, Mysore and British India were intertwined. With significant cross-border investment, any new taxes affected British Indian interests. And the catalyst – Mysore’s introduction of an income tax modelled on British India’s – left the latter little choice but to negotiate a solution. British India learnt of Mysore’s tax too late to influence its form. It had no power to do so, and to attempt to change the Maharaja’s mind would have been politically inadvisable, given his nation’s war service and the fact that India needed the maharajas more than ever to counterbalance the independence movement. Political Relationship In 1929, a government report introduced it thus: ‘The hills and plains of … Mysore famed for gems and gold … still cry out great names of history’.10 Great names like Hyder Ali and his son, Tipu Sultan – warlords who blunted the advance of the British in India for a generation; and Arthur Wellesley, later Duke of Wellington, among those who defeated Tipu at the siege of Seringapatam in 1799. After the siege, Britain decided to save the former Hindu kingdom of Mysore. The ‘price of mercy’11 was an annual tribute or ‘subsidy’, and limitations on its sovereignty, including taxation.12 The arrangement was to last ‘as long as the sun and moon shall endure’.13 The subsidy endured, but in 1913 Mysore secured the freedom to tax as it pleased.14 British India’s willingness to negotiate in 1913 – and the arguments it accepted – say something of its indulgence. Mysore argued that the government ‘accorded the Maharaja exceptionally high precedence’ with ‘the honour of a salute of 21 guns’; yet limiting its sovereignty reduced it ‘to a position inferior to that of other important Native States’.15 The salute had been granted shortly before the previous Maharaja’s death; it had more to do with the pride of a dying man than the ‘somewhat inferior tenure’ he enjoyed.16 But that act was to spur the British on to another, greater act of ‘sympathy and generosity’ (the Maharaja’s own words):17 a new treaty with limited rights of intervention,

10 Indian States Committee, Report (Cmd 3302, 1929) [12]. 11 Political Department to Edwin Montagu, India Secretary (8 July 1920): ‘Mysore: treaty and subsidy’ (1913–27): IOR/L/PS/10/413. 12 Aitchison, above n 7, vol 9, 207. 13 ibid 241. 14 C Hayavadana Rao (ed), Mysore Gazetteer, vol 2 (Bangalore, Government Press, 1930) pt 4, 3034–36. 15 Aitchison, above n 7, vol 9, 241; cf D Kooiman, ‘The Guns of Travancore or How Much Powder May a Maharaja Blaze Away?’ (2006) 43 Indian Economic Social History Review 301. 16 Lord Crewe to Lord Hardinge (17 October 1913): IOR/L/PS/10/413. 17 Rao, above n 14, 3036.

‘An Embarrassing Precedent’  411 without the obligation to ‘conform’ to the Viceroy’s advice on taxation.18 Before 1913, the Viceroy’s powers were such as to ‘virtually deprive the Maharaja of all freedom in the internal administration of the State’.19 After 1913, he could only interfere where it was ‘necessary to provide adequately for the good government of the people of Mysore or for the security of British rights and interests’.20 Underneath all this is the fact that the British could not ignore the rising demands of the independence movement elsewhere in India, and indulged the princes to a degree; ‘a reflection of their understanding that they needed new forms of political support from their longtime clients’.21 Writing in 1898, a retired coffee planter remarked that ‘There is not, and never has been, an income-tax in Mysore, nor is it probable that there ever will be’.22 Anyone writing after 1913 would have been less confident. By then, the British were less able to control the tax policy pursued in Mysore, and much less able to intervene if they did not like it. Mysore was ‘practically a foreign State’.23 Bureaucratic Relationship The Princely States’ unique constitutional position called for a unique – and uniquely powerful – bureaucracy. As Holdsworth once explained: Over the Indian States the King-Emperor is the Paramount Power, and he exercises the powers which Paramountcy gives him through ministers and officials responsible … to the Parliament of Great Britain. These ministers and officials are the Secretary of State for India [a member of the Cabinet], and the Viceroy.24

The ‘minister’ and ‘official’ were each assisted by his own government: the India Office in London and the Government of India in Delhi. Viceroys and India Secretaries feature hardly at all in this story, but their assistants do. The Viceroy and his government were nominally subordinate to the India Secretary, but on some issues – including the Mysore Arrangement – London exercised little oversight. Even with overnight telegrams, the habits of India’s administrators recalled an earlier time, when orders took months to arrive and were swiftly overtaken by events. The question of double taxation drew in the political and financial departments of these governments. Each had a Political Department headed by a man

18 Instrument of Transfer 1881, Art 22: Aitchison, above n 7, vol 9, 253. 19 Crewe to Hardinge (17 October 1913): IOR/L/PS/10/413. 20 ibid. 21 BN Ramusack, The Princes of India in the Twilight of Empire (Columbus, Ohio State University Press, 1978) xviii. 22 RH Elliot, Gold, Sport and Coffee Planting in Mysore (Westminster, A Constable, 1898) 7. 23 See n 9 above. 24 Holdsworth, above n 8, 2.

412  Christopher L Jenkins named John – Wood in India, Shuckburgh in London.25 They maintained a network of Residents in all the important Princely States, including Mysore. The Resident was the Viceroy’s man on the spot. Technically a kind of ambassador, he had limited advisory and consultative functions. The Arrangement’s negotiation spans the postings of three Residents – Cobb, Barton and Knox. These men were the messengers between Mysore and British India. The India Office’s Financial Department oversaw tax policy. Its opposite number in India was known as the Finance Department (referred to as the ‘Viceroy’s Finance Department’ to avoid confusion). The names to remember here are Frank Lucas, of the India Office (about third in his Department’s hierarchy), and Howard Denning, holding a slightly more junior position in India. In negotiations, the British went two-by-two: the political ‘pair’ (Wood and Shuckburgh) and the financial ‘pair’ (Lucas and Denning). Mysore’s side was simpler. Its government was referred to as the ‘Darbar’ or ‘Durbar’ – the word for a maharaja’s audience chamber. A direct line ran from the Maharaja via the Dewan (the Prime Minister) and the Financial Secretary (a cabinet minister) to the Revenue Department. Negotiations involved two men along this direct line – the Dewan, Visvesvaraya; and the Financial Secretary, Chakravarti – as well as someone to one side, Judge Doraswamy Iyer.26 Economic Relationship British India and Mysore were politically separate, but economically ‘indivisible’.27 British India was dominant, with a population of 250 million, compared to Mysore’s six million.28 There was free movement of goods, labour and capital, and a common currency.29 They were financially intertwined: Mysore paid seven per cent of its tax receipts as an annual ‘subsidy’ to British India,30 and it relied on British Indian capital for investment, particularly in exploiting natural resources.31 British India was technically a ‘gate-keeper’ for any foreign investment – a policy dating from 1797, aimed at protecting the maharajas from

25 Biographical information on those involved is contained in the various editions of the India Office List, published by Harrison & Sons, London. 26 Report on the Administration of Mysore for the year 1918–1919 (Bangalore, Government Press, 1919) (Mysore Report) app I. 27 CP Simmons and BR Satyanarayana, ‘The Economic Consequences of Indirect Rule in India: A Re-appraisal’ (1979) 16 Indian Economic and Social History Review 185. 28 Government of India, Census of India, 1921, vol 1 (Calcutta, Superintendent Government Printing, India, 1923) pt 2, 2–3. 29 Treaty of 1913, Art 12: Aitchison, above n 7. 30 Mysore Report, above n 26, app 12, xxix–xxx. 31 B Hettne, The Political Economy of Indirect Rule: Mysore 1881–1947 (London, Curzon Press, 1978) 250–51; J Hurd, ‘The Influence of British Policy on Industrial Development in the Princely States of India, 1890–1933’ (1975) 12 Indian Economic and Social History Review 409, 420.

‘An Embarrassing Precedent’  413 ‘exploitation by adventurers’.32 By 1919, the Political Department admitted that this meant little more than ‘grandmotherly interference’,33 partly because the Princely States became adept at keeping it out of the loop. Mysore perfected the ‘tactic’ of keeping it ‘uninformed about negotiations until they were so far along’ that British interference would not ‘jeopardise the scheme’.34 In January 1918, for example, Visvesvaraya sought approval for an iron works scheme after the machinery had been purchased.35 British India decided it was too late to impose conditions, and so allowed the project to proceed.36 Rumours of a Rival Tax British India first became aware of Mysore’s income tax not through its Resident, but through non-official channels in London. Officially, Sir John Rees was the Member for Nottingham East. Unofficially, he was the Member for Mysore’s Gold Fields, holding directorships in companies with ties to mining interests.37 In 1917, he wrote to Shuckburgh at the India Office. Rees passed on a report that Mysore was considering an income tax, and asked whether the mining companies would be required to pay it.38 Shuckburgh knew nothing of an income tax.39 His information was only as good as the information that came across the desk of the Resident in Mysore, Henry Cobb. It would be an understatement to say the relationship between Cobb and the Maharaja was strained. It was so bad that Sir John Wood, Shuckburgh’s opposite number in India, was sent to Mysore to investigate and report back to the Viceroy.40 Cobb believed that the previous Resident,41 the Dewan and the Maharaja were part of a ‘conspiracy’ to ‘hound him out of the State’. The Maharaja, for his part, ‘felt so strongly … he would gladly undertake to pay Mr Cobb’s pension if that would facilitate his retirement’, and declared that ‘the Resident will not in future be invited to attend the Durbar in his official capacity’. Unsurprisingly, Cobb had been kept in the dark about the income tax.

32 Government of India Act 1797, s 28; Statement of the Government of India, March 1891, quoted in Hurd, above n 31, 411. 33 Note by RE Holland, Political Department (11 September 1919), quoted in Hurd, above n 31, 415. 34 Hurd, above n 31, 413. 35 Rao, above n 14, 3050. 36 Hurd, above n 31, 413. 37 JF Riddick, Who Was Who in British India (London, Greenwood Press, 1998) 303. 38 Shuckburgh to Wood (31 May 1917): IOR/L/PS/10/685. 39 Note by Shuckburgh (23 May 1917): ibid. 40 ‘Confidential note on Mysore affairs’ (30 July 1917): IOR/R/1/1/1160. 41 The previous Resident, Sir Hugh Daly, had brokered the Treaty of 1913, and retired to a bungalow in the hill station of Ootacamund – ‘as the Maharaja’s guest, or tenant’, Wood was not sure which: ibid.

414  Christopher L Jenkins Given British Indian investment in Mysore, Shuckburgh needed to know whether the rumours were true. Cobb was instructed to write to the Dewan – a man he once described as ‘autocratic … a Napoleon’.42 Visvesvaraya replied: The question is … under the active consideration of His Highness’ Government and a Bill has also been drafted … A copy of the Bill will be forwarded to you in due course as soon as it is decided to place the measure before the Legislative Council. With regard to the liability of the Gold Mining Companies … it is the intention of His Highness’ Government to make the law universally applicable in the State without any invidious distinctions …43

The Dewan made it clear that Mysore would not exempt British Indian mining interests. The British found out too late – the Bill had already been drafted and approved. One cannot help but notice Visvesvaraya’s ‘tactic’ of keeping the British in the dark for as long as possible, as he had done with the iron works. To interfere at this late stage would have been an obvious slight, particularly illtimed: Mysore’s support of the war effort – both in men and money – had been held up as an example to the rest of India.44 There was no way to force Mysore into line. The Viceroy could not intervene under the Treaty of 1913 because ‘the security of British rights and interests’ was not threatened. (The Viceroy’s Private Secretary would later respond to a petition from the Gold Mining Companies by saying that it would not be ‘practical politics’ to attempt any intervention.45) Wood telegrammed Shuckburgh: ‘Mysore Darbar have formulated proposals for Income Tax Act which are in many respects unsuitable.’46 After a ‘cursory examination of the Bill’ in December 1918, he wrote to Shuckburgh that it appeared that various items existed in respect of which advice to the Darbar would be necessary both in their own interests and in those of Government. As the most suitable method of explaining these points would be by a discussion between representatives … it has been decided to hold a Conference on the subject at Delhi towards the end of January next …47

42 ibid. Ganapathi Natesan, a contemporary journalist and publisher, wrote that Visvesvaraya ‘drove the chariot of the State for six years with remarkable success’, with Mysore seen as ‘the model of an efficient and progressive administration which it would be wisdom on the part of British Government to follow and copy’: Indian Statesmen: Dewans and Prime Ministers of Native States (Madras, GA Natesan & Co, 1927) 177, 176. Natesan reproduces a description of Visvesvaraya written by a Mysorean ‘with intimate knowledge’ of his character: ‘His striking originality is evinced by the mechanical and economic inventions, theoretical or material, which stand to his credit. His disciplined life and his steadiness of conduct, make him irreproachable, and enable him to enforce obedience even from the unwilling … He seems the spirit of the twentieth century taken shape and composed of no other qualities but justice, duty, and the idea of national regeneration’: ibid 191–92 (emphasis in original). 43 Cobb to Holland (19 March 1918): IOR/L/PS/10/685. 44 Rao, above n 14, 3036–38. 45 JG Laithwaite to Under Secretary A Hirtzel (8 December 1927): IOR/L/PS/10/685. 46 Wood to Shuckburgh (23 November 1918): ibid. 47 Wood to Shuckburgh (11 December 1918): ibid.

‘An Embarrassing Precedent’  415 Mysore’s income tax was seen as an Indian problem requiring an Indian solution. Negotiations were initiated by the Government of India. Wood kept the India Office informed, but he sought neither approval nor expert financial guidance from the likes of Lucas. So the Conference date was set before the problem of double taxation was properly understood. Wood’s time frame would give the Viceroy’s Finance Department just over a month to consider the issue. His comments suggest that he believed any concessions would come from Mysore: with ‘advice’ leading to changes in the Bill. Two Income Taxes Mysore’s Bill copied the British Indian Act, which taxed income on the basis of source and remittance. Under the ‘general charging provision’, it applied to ‘all income from whatever sources it is derived, if it accrues or arises or is received in British India’ or deemed as such.48 Tax rates were progressive, ranging from two to six per cent.49 Incomes less than Rs 1000 were not taxed.50 Mysore’s rates were lower, with a higher taxability threshold. In both states, the income taxes applied to less than one per cent of the population, accounting for around 20 per cent of British Indian revenue and five per cent of Mysore’s.51 Income was split into six schedules: salaries, securities, property, businesses, professional earnings and other sources.52 Tax was payable by ‘assessees’ (including companies)53 on their combined income.54 The general charging provision buttressed each schedule. Business profits, for example, might be identified by the business schedule (as ‘profits of any business carried on by’ an assessee),55 but became taxable if they ‘accrued or arose or were received’ in India. Income was assessed via a tax return, except for salaries and securities, which were taxed at source via the withholding mechanism.56 Residents and nonresidents were taxable, but residents were more likely to be targeted as they could be compelled to submit returns.57 Non-residents were specifically brought under the Act through provisions deeming their income to be the income of residents: if the income arose through ‘any business connection in British India’, or where

48 Income-tax Act 1918 (ITA 1918) ss 3(1), 5 (‘general charging provision’ refers to the combined effect of these sections). 49 ITA 1918, sch 1. 50 ITA 1918, s 14, sch 1. 51 Statistical Abstract Relating to British India from 1910–11 to 1919–20 (Cmd 1778, 1922) 48; VKRV Rao, Taxation of Income in India (London, Longmans, Green & Co, 1931) 51; Report on the Administration of Mysore for the Year 1920–1921 (Bangalore, Government Press, 1921) xxviii, xxix. 52 ITA 1918, s 5. 53 ITA 1918, s 2(2). 54 ITA 1918, ss 6–11. 55 ITA 1918, s 9(1). 56 ITA 1918, c 2; FR Merchant, Refund of Indian Income Tax (London, Pitman, 1936) 6. 57 ITA 1918, s 17.

416  Christopher L Jenkins there was a ‘close connection between the resident and the non-resident’ and there was ‘substantial control exercised by the non-resident’.58 These provisions were aimed at preventing companies from shifting profits to low-tax jurisdictions, but were ‘feeble’ in operation.59 Neither Wood nor Shuckburgh was a tax expert (both had read classics, one at Oxford, the other at Cambridge). They were archetypical Indian administrators: ‘the most general of the general administrators’.60 The Raj ‘placed generalists on top and technical experts on tap’.61 Wood asked the ‘technical experts’ at the Viceroy’s Finance Department to draft a statement outlining the areas where the two taxes overlapped.62 The ‘Statement of Objections and Suggestions’ The Statement of Objections is more interesting for what it omits than what it includes. It noted the potential for ‘double income-tax’ under three schedules – securities, salaries and businesses – concluding that each ‘will be discussed at the Conference’. It made only passing reference to the general charging provision, observing that it ‘may require alteration when the question of double income-tax referred to … has been decided’ (no such ‘alteration’ eventuated). Curiously, the question of income ‘accruing or arising’ in one state and ‘received’ in another was seen as falling outside ‘the question of double income-tax’. Where two states tax on the basis of source and remittance, the overlap is so obvious that it cannot have been overlooked. The issue may have been deliberately obscured, to ensure that British India’s core taxation rights were not eroded; the general charging provision was too important to be tampered with. For whatever reason, the Statement of Objections focused on specific problems under the schedules, and consequently the Arrangement was structured around the schedules, rather than a ‘general rule’ for ‘total income’. The Statement of Objections did not disclose any solutions or principles for dealing with double taxation. British India may have assumed its ‘suggestions’ would simply be incorporated into Mysore’s Regulations. The Statement of Objections was forwarded to Mysore so it could ‘collect information and statistics for discussion at the Conference’.63

58 ITA 1918, ss 33, 34. 59 Merchant, above n 56, 2. 60 DC Potter, India’s Political Administrators 1919–1983 (Oxford, Clarendon Press, 1986) 34. 61 ibid (emphasis in original). 62 ‘Statement of Objections and Suggestions’ (11 December 1918): IOR/L/PS/10/685 (Statement of Objections). 63 Wood to Shuckburgh (11 December 1918): ibid.

‘An Embarrassing Precedent’  417 THE ARRANGEMENT

Negotiators Representatives of British India and Mysore met on 29 January 1919 in Delhi. That same day, three men signed the Arrangement – one from British India, two from Mysore. On the British side of the table sat Howard Denning. He had been appointed to the Viceroy’s Finance Department three months earlier, having previously worked in the revenue departments of several provincial governments. He was 34 years old. Like many of his colleagues, Denning was not a lawyer (he, too, had read classics at Cambridge). Aside from the ‘basic training’ provided to all new Indian Civil Service entrants – which included examinations in revenue law, horsemanship and Hindustani – he learnt his law in India.64 According to Lucas, Denning’s decade in the provinces had made him ‘conversant with the practical working of the Tax’, ‘able to deal with any details of administration’ and ‘in a position to give authoritative decision as to the practicability of any suggestions’.65 Denning may have written the ‘Statement of Objections and Suggestions’. Its author had an intimate knowledge of the income tax, and probably attended the Conference. British India was the author of the Act and the dominant party, so it is not unfair to imagine that Denning was in the driving seat. On Mysore’s side sat JS Chakravarti, the Maharaja’s Finance Minister and member of his Legislative Council; and CS Doraswamy Iyer, appointed a judge by the Maharaja a month earlier (he had previously been Mysore’s Public Prosecutor).66 Years later, Doraswamy Iyer would be praised for his ‘native genial kindliness’ and for setting ‘an example of how to keep aloof from all contention’.67 Aside from the page-long Arrangement, there is no other record of what was said at the Conference. Summary The Arrangement reached Lucas in London a month later, with a note that said: ‘The question for discussion was double income-tax … A general agreement seems to have been reached.’68 This is the earliest recorded communication with the India Office’s Financial Department. A detailed analysis of the Arrangement is prefaced with a summary of its structure, terms and effect.

64 WH Saumarez Smith, A Young Man’s Country (Salisbury, Michael Russell, 1977) 2. 65 Lucas to Denning (5 July 1919): IOR/L/F/7/1258 (on selecting India’s representative at the Royal Commission, see n 202 below). 66 Rao, above n 14, 3136. 67 ‘Retirement of Mr Doraiswami Aiyar’ (1938) 75 Madras Law Journal 1. 68 Wood to Shuckburgh (10 February 1919); note by HW Garrett, for Shuckburgh, to Lucas (18 March 1919): IOR/L/PS/10/685.

418  Christopher L Jenkins It had three articles, corresponding to the instances of double taxation anticipated in the Statement of Objections: securities, salaries and businesses. It was expanded to include pensions in 1924, and professional earnings and dividends in 1930. Predictably, it ignores the broader problem of overlapping tax bases under the general charging provision. There was no general rule for income ‘accruing or arising’ in one state and ‘received’ in the other. The Arrangement tended to favour the state where income was sourced. Relief took various forms: income could be exempted from taxation; or amounts of foreign tax could be deducted from taxable income, just as revenue expenditure is deductible, or credited against tax payable, directly reducing the final tax bill. Article I dealt with interest on government securities, giving the source state exclusive taxation rights over its own securities, exempting interest received from securities in the other state. Government salaries and pensions came under Article II. British Indian salaries and pensions paid in Mysore were subject to full Mysore tax, and assessees received a credit against British Indian tax for the amount of Mysore tax paid on the same income, meaning they only paid the difference between the two tax rates to British India. Mysorean salaries and pensions paid in British India were taxed only in British India, and were exempted from Mysore tax. Businesses came under Article III, which determined a business’s ‘residence’, by identifying its ‘headquarters’, attributing profits between the states by identifying the location of the underlying ‘transactions’. Businesses headquartered in British India were given a credit against the tax payable in British India for Mysore tax payable on profits attributable to Mysore – meaning that Mysore profits were fully taxed in Mysore, and taxed in British India at the difference between the two rates. Mysore gave those headquartered in its own state a deduction of the profits attributable to British India. Under Article IV, dividends were taxed by whichever government taxed the underlying profits, and if they were then received in a different state, that state waived its tax rights, but took the dividend into account in determining applicable tax rates (now known as ‘exemption with progression’). Article V provided that the state of accrual taxed professional earnings, with the state of receipt adopting ‘exemption with progression’. While there was no express provision for income cutting across different articles, as with the Act’s schedules, the specific (interest on securities, for example) likely overrode the general (business profits).69 Just as tax could only be levied once, assessees could not obtain relief twice.70 None of the terms are defined within the Arrangement; the drafters relied on the common law, as was often the case under the legislation. There was no provision for resolving disputes in interpretation.



69 Commissioner 70 VS

of Income Tax, Bombay v Mehta (1938) LR 65 Ind App 332 (PC) (Mehta) [12]. Sundaram, The Law of Income-tax in India (Calcutta, Butterworth & Co, 1931) 43–44.

‘An Embarrassing Precedent’  419 The Arrangement began operation when Mysore’s tax came into force on 1 July 1920.71 It was ratified two years later by an exchange of official letters. While it is unclear whether those at the Conference saw the Arrangement as permanent – it was described as a ‘Memorandum of Discussion’ with some provisional terms – its ratification leaves us in little doubt: ‘this arrangement will be in force until altered by consent of parties’.72 It was first officially acknowledged that same year, when a member of British India’s Legislative Assembly pointed to Mysore’s tax and said: ‘Some sort of relief is needed’. A Finance Department spokesman replied glibly: ‘We have already come to an arrangement with the Mysore State.’73 Some Articles took effect through instructions issued to the revenue authorities, while others required legislative amendment. In the first instance, relief did not require a special application; it was simply incorporated into the usual returns and assessment process. Tax authorities would ‘provide relief from double taxation in accordance with the arrangements entered into between the two Governments’ by taking the foreign tax ‘into consideration’ at the assessment stage.74 However, if one state taxed beyond what was envisaged by the Arrangement, it appears that assessees could apply for a refund. In 1926, the two revenue authorities concluded ‘Reciprocal arrangements for obtaining information’ from one another to assist with any refund applications, though an official record of this ‘information sharing arrangement’ has proved elusive.75 Article I: Government Securities Under the British Indian Act, tax on the interest on securities was withheld at source.76 The Statement of Objections observed that it was ‘meaningless’ to include Government of India securities in Mysore’s Bill,77 because British India refused to collect taxes for Mysore.78 The Statement of Objections steered Mysore towards an exemption: I. Securities. The representatives of the Durbar provisionally agree that the interest on securities of the Government of India received in Mysore should be exempt from 71 Mysore Income-tax Regulation 1920 (MITR 1920) s 1(3). 72 Resident to Mysore Revenue Department (11 June 1921); Mysore Revenue Department to Resident (18 May 1922): IOR/L/PS/10/685. 73 Legislative Assembly Debates, vol 2, pt 2, pp 2028, 2030 (28 January 1922) (reported as entry into ‘communication’ with Mysore: The Times of India, 30 January 1922, 11). 74 Mysore Glass and Enamel Works Ltd v Commissioner of Income-tax, Madras (1963) 47 ITR 841 Mad (HC Madras) (Mysore Glass) [10] (assessments from 1944 to 1947); Commissioner of Income-Tax, Mysore cum Travancore-Cochin, Bangalore v Mysore Engineering Co [1953] AIR 73 Kant (HC Karnataka) (Mysore Engineering) [4] (assessments from 1942); a sample tax return is found in Merchant, above n 56, 92–96. 75 ‘Income Tax in Mysore: Removal of Hardships’, The Times of India, 15 January 1926, 12. 76 ITA 1918, s 15. 77 Mysore Income-tax Bill, cl 7. 78 Statement of Objections, above n 62.

420  Christopher L Jenkins Mysore tax provided that a similar exemption is given to the interest on Mysore securities received in British India.

Relief was restricted to government securities because these were more common than private securities and were commonly issued ‘tax free’. Mysore’s Bill made no allowances for tax-exempt British Indian ‘War Bonds’, which had been hugely popular in the last years of the First World War, with purchasers throughout British and Princely India.79 The Arrangement preserved the tax status of government bonds as issued by requiring the country of receipt to exempt foreign-sourced interest. Historically, it has been more common for the issuing state (rather than the receipt state) to forgo its right to tax interest paid to non-residents. Otherwise, those investors might seek higher interest to compensate, thereby ‘shifting’ the tax burden back onto the government that imposed it.80 Here, the prevalence of ‘tax free’ bonds, and the fact that there were few alternative investments with similar risk profiles, left little scope for ‘shifting’ the burden.81 Article II: Government Salaries and Pensions Government salaries were potentially taxed twice because both states had expanded the scope of their legislation by deeming these salaries to be taxable, even where they had not accrued, arisen or been received within the jurisdiction.82 These were paid from public funds, so were taxed via the withholding mechanism.83 Private salaries were never brought within the scope of the Arrangement, because those in private employment tended to live and work in the same state; any double taxation was so infrequent it could be safely ignored. The Arrangement dealt with government salaries as follows: II. Salaries. The general question of salaries was discussed, and it was pointed out that the Government of India have provided by executive order that their servants who are liable to tax in an Indian State may deduct the amount of the tax paid to the Indian State from the tax which they are liable to pay to the Government of India.84 The representatives of the Mysore Durbar think that a similar concession will be given

79 JP Niyogi, The Evolution of the Indian Income Tax (London, PS King & Son, 1929) 198–99. 80 P Harris and D Oliver, International Commercial Tax (Cambridge, Cambridge University Press, 2010) 199. The current OECD Model Convention gives the residence country an unlimited right to tax foreign-sourced interest, and provides for limited source country taxation (up to 10%): Art 11. 81 Finance Department exchange restrictions limited the scope for foreign investment: D Kumar and M Desai (eds), The Cambridge Economic History of India (Cambridge, Cambridge University Press, 1983) 790–91; Merchant, above n 56, 1–2. 82 ITA 1918, s 6(2). 83 ITA 1918, s 15. 84 Per ITA 1918, s 44. This is not a ‘deduction’ from income, but from British Indian tax, which we would now call a ‘credit’.

‘An Embarrassing Precedent’  421 to the servants of the Mysore State. Following the practice of Government of India regarding accredited representatives of Indian States,85 they are willing to exempt the official allowance which duly accredited representatives of the Government of India receive in Mysore, if any such cases arise.

There was some confusion as to what was agreed (except for the final sentence – Mysore duly exempted the expense allowances paid to British Indian representatives in Mysore).86 The Dewan believed that British India had agreed to give Mysoreans working in British India a credit for tax payable to Mysore, offsetting British Indian tax liability. Cobb – for once in agreement – wrote to his superiors, requesting that ‘the Government of India may be pleased to accede to the Durbar’s request’.87 It was far from pleased. British India would be giving the ‘concession’ – not Mysore, as envisaged by the Article. To save Cobb embarrassment, the response was delayed until after he retired (all evidence suggests that the Government of India, and not the Maharaja, paid his pension).88 Cobb’s successor, William Barton, had just finished a stint as political officer with the Indian Army’s Waziristan Field Force – gaining a reputation as ‘resolute and uncompromising’ in dealing with the warlike chiefs along the troublesome border with Afghanistan.89 He was equally uncompromising with the Dewan, telling him his proposal was ‘not in accordance with the provisional agreement arrived at’.90 The confusion arose because British India’s tax rate was higher than Mysore’s. A ‘similar concession’ for Mysoreans working in British India would be for them to deduct British Indian tax from their Mysore tax. Because Mysore’s tax bill would always be the lower figure, it had no residual right to tax. British India was effectively given exclusive taxation rights over Mysorean civil servants working in British India. Mysore ratified this interpretation in 1922.91 The Viceroy’s Finance Department later explained the position in a draft response to the League of Nations’ request, which was never sent: Servants of the Government of India who are taxed on their salaries both in the Mysore State and in British India are allowed rebate from the Indian Income-tax of an amount equal to the Mysore income-tax, while the Mysore Government servants living in British India only pay the Indian income-tax and are not liable to pay any tax to the Mysore Durbar on their salaries.92

85 Gazette of India Extraordinary (April 1918) item 2(1); reproduced in The Times of India, 6 April 1918, 14, per ITA 1918, s 44. 86 MITR 1920, s 3(2)(vi). 87 ibid. 88 See text accompanying n 40 above. 89 CC Trench, Viceroy’s Agent (London, Jonathan Cape, 1987) 187. 90 Government of India to Barton (17 February 1921); Barton to Mysore (11 June 1921): IOR/L/E/1308 file 2048. 91 See n 72 above. 92 VS Sundaram to India Office (8 November 1927): IOR/L/E/7/1308 file 2048.

422  Christopher L Jenkins Article II was extended to pensions in 1924. British India had received petitions for relief as early as 1922 (including one from a retired Sergeant-Major living in Mysore, asking for ‘anything to save an old soldier from having his meagre pension grabbed at’),93 but the initiative for expanding the Arrangement was Mysore’s. Its Revenue Minister wrote to Barton, pointing out that pensions were taxed by deduction at source under the ‘salaries’ schedule,94 and on receipt in the other state under the ‘other sources’ schedule.95 ‘The Government of His Highness the Maharaja consider that pensioners are entitled to and deserve relief from double taxations as much as, if not more than persons in active service’.96 Barton agreed, and so did his government. Article II jars with the prevailing treatment of government salaries and pensions.97 The general rule is that the ‘paying state’ has exclusive tax rights; this was a rule found in the earliest European treaties,98 founded on ‘courtesy and mutual respect’.99 British India extended the same courtesy to foreign diplomats, but not to Mysorean public servants.100 Why was the ‘paying state’ not given exclusive rights – especially given that tax was collected at source? British India was already committed to providing relief to its public servants working in the Princely States, by giving them a credit for state income tax against their British Indian tax liability. Otherwise, men like Barton would have been taxed twice. There are several reasons why British India may have used the credit method, rather than forcing the Princely States to exempt British Indian public servants. It was keen to foster good relations, hoping to use the princes as a bulwark against an increasingly restive independence movement.101 Most treaties would not have allowed such interference with a state’s right to tax its own residents (certainly, Mysore’s would not have stood for it)102 – and in 1918 the Viceroy had assured the princes that all treaties would be scrupulously adhered to.103 Allowing a credit did not completely extinguish British India’s residual right to tax, as the Princely States tended to have lower rates than British India.104

93 JL Kenny to War Office, forwarded to India Office (25 October 1922): IOR/L/PS/10/685. 94 Indian Income-tax Act 1922 (ITA 1922) s 7 (pensions were ‘deemed to be chargeable if paid … in any part of India’). 95 ITA 1922, s 12. 96 Mysore Revenue Department to Barton (13 March 1924): IOR/L/E/7/1308 file 2048. 97 Art II takes the opposite approach from the OECD Model’s Art 19, dealing with government salaries and pensions, but it matches the rule for private pensions under Art 18. 98 J Hattingh, ‘On the Origins of Model Tax Conventions: 19th Century German Tax Treaties and Laws Concerned with the Avoidance of Double Taxation’ in J Tiley (ed), Studies in the History of Tax Law, vol 6 (Oxford, Hart Publishing, 2013). 99 OECD Commentary on Art 19, [1]–[2], reproduced in K van Raad, Materials on International & EU Tax Law (Leiden, International Tax Center, 2012) 406. 100 Gazette of India Extraordinary (April 1918), above n 85, item 2(1). 101 Hurd, above n 31, 412. 102 See n 45 above. 103 ‘Informal Conference of Ruling Princes on infringement of Treaty Rights’ (1917–20): IOR/R/2/ Box34/341. 104 Inland Revenue, below n 137.

‘An Embarrassing Precedent’  423 Perhaps it was felt that Mysore deserved to tax those living within its borders. As Andrew Bonar Law, the Chancellor of the Exchequer, said at the Imperial War Conference of 1918 (attended by India Secretary Edwin Montagu and the Maharaja of Patiala representing British and Princely India): ‘It would not be fair, would it’ that a taxpayer with ‘all the advantages of our laws and everything else … should contribute nothing towards the support of the country in which he lives?’105 Article III: Businesses Economic integration meant that business taxation was an important issue, as with modern treaties. The Statement of Objections identified two issues. One state might deem profits that ‘arose or accrued’ in the other to be profits of a resident ‘person’ because of a ‘business connection’. Or, both states might deem the profits of a foreign company (the ‘parent’), exercising ‘substantial control’ over a resident (the ‘subsidiary’), to be the income of that resident.106 Article III did not squarely address these issues; it preserved each state’s right to deem a non-resident’s income to be that of a resident. Instead, it operated on ‘assessable profits’ – whether they were taxable because of where they ‘accrued or arose’, were ‘received’ or were deemed taxable (‘profits’ were not defined because each state had identical deduction rules):107 III. Businesses. This question was discussed at some length and it was provisionally decided that the following arrangement would be the most satisfactory. Businesses whose headquarters are in British India but have branches in Mysore or carry on business in Mysore should be allowed a deduction from the Indian income tax payable by them of the amount of Mysore Tax that would be payable on the profits which appear to the British assessing officer to be due to transactions in Mysore. Similarly businesses whose head-quarters are in Mysore and which have branches or dealings in British India should be allowed by the Mysore assessing authority a deduction from their assessable profits of an amount which appears to the assessing officer to be due to transactions in British India.

Article III effectively shared the right to tax businesses.108 It first determined the residence of the ‘business’, by identifying its ‘headquarters’. Then it attributed profits between the two states, on the basis of a ‘transactions’ test. These concepts were not defined. The Arrangement’s drafters relied on the fact that they were dealing with near-identical income taxes, drawing on the same Anglo-Indian case law. The courts of Mysore, though jurisdictionally separate, 105 Extracts from Minutes of Proceedings of the Imperial War Conference (Cd 9177, 1918) 74. 106 See n 58 above; Sundaram, above n 70, 880–85. 107 ITA 1918, s 9; MITR 1920, s 9. 108 Whereas the OECD Model grants an exclusive or shared right, depending on whether business is carried on by a resident (for example, a company) or a non-resident (a branch): Art 7.

424  Christopher L Jenkins had long been brought into the common law fold. Many of its judges and lawyers were trained in British India (Sir John Rees served as a judge in Mysore in his day), and Mysorean cases regularly cited British Indian and English decisions. ‘Businesses’, as defined in the legislation, covered incorporated and unincorporated bodies.109 ‘Headquarters’ appears to be shorthand for ‘principal place of business’. Under the legislation, tax authorities were already required to determine the ‘principal place of business’ if an assessee had ‘several places of business’ in different territories.110 ‘Headquarters’ was a workable simplification of this term; in line with contemporary cases111 and a summary of the previous Act.112 As for ‘transactions’, in 1918 the Inland Revenue had advised the Viceroy’s Finance Department on attributing shipping profits according to each ‘transaction’ (which covers non-contractual dealings between related parties).113 The cases it mentioned had been pressed into service in identifying profits from ‘transactions’ that ‘accrued or arose’ in British India under the general charging provision – so apportionment on this basis was familiar.114 The article contained a postscript: ‘It was pointed out that there may sometimes be a question as to which shall be considered to be the head-quarters of a business, but it was decided that each individual case which may arise will have to be settled on its merits.’ There is no evidence of further consultation. This uncertainty was singled out because the concept of residence assumed a whole new importance: it determined the nature of relief, either credit or exemption.115 Businesses headquartered in British India were given a credit for Mysore tax on Mysore profits (in modern terms a ‘full foreign tax credit’ that could be set against tax on Mysore or British Indian profits). They paid full British Indian tax on British Indian profits, while profits attributable to Mysore were subject to full Mysore tax as well as British Indian tax at the difference between the two rates. Those headquartered in Mysore paid ‘full British India tax on British Indian profits and full Mysore tax on Mysore profits’, because Article III directed the Mysore authorities to exempt British Indian profits by allowing a ‘deduction’ from taxable income.116 If there was no ‘business’ straddling both states, Article III gave no relief for business income

109 ITA 1918, s 9. 110 ITA 1918, ss 2(5), 16, 47(1). 111 Colquhoun v Brooks (1889) 14 App Cas 493 (HL), 510; The St Tudno [1916] P 291, 297–98; cf In Re Lachhman Prosad Babu Ram [1930] AIR 48 (HC). 112 Notes on the Colonial Income Taxes (HMSO, 1916) 40, paraphrasing the Income-tax Act 1886, ss 2(2), 11. 113 Inland Revenue to Lucas (2 April 1918): IOR/L/F/7/1258. 114 For example, Mysore Engineering, above n 74, [7]; Mehta, above n 69, [19], quoting Erichsen v Last (1881) 8 QBD 414 (CA). 115 The less favourable ‘deduction method’ of mitigating double taxation was already generally available: businesses could deduct income tax paid in the Princely States from their British Indian income, in the manner of business expenses: Niyogi, above n 79, 289. 116 Sundaram to India Office (8 November 1927): IOR/L/E/7/1308 file 2048.

‘An Embarrassing Precedent’  425 that ‘accrued or arose’ in one state and was merely remitted to the other. In 1921, Mysore proposed that business income should be taxed exclusively in the state in which it ‘accrued or arose’ ‘on the analogy’ of Article III.117 British India rejected this suggestion, stating that the matter was sufficiently ‘dealt with’.118 It was unwilling to give up its general right to tax on the remittance basis – just as it had been unwilling to raise the issue of the general charging provision at the Conference. The parties had originally agreed to symmetrical relief. Businesses headquartered in one state were allowed a full tax credit on profits attributable to the other. The credit method preserved British India’s right to tax at the rate differential, and aligned with Article II and recent wartime measures to relieve double taxation between Great Britain and her Dominions.119 The Arrangement that has come down to us is asymmetric, with Mysore allowing an exemption and British India allowing a credit. It was amended retrospectively, on Denning’s initiative. The day after execution, he wrote to the Dewan to point out that Mysore had given up more than it bargained for. Article III provided for a full foreign tax credit, meaning that excess credits for tax on British Indian profits could be set against tax on Mysorean profits. British Indian rates were higher, meaning that a credit for British Indian tax might exceed Mysore tax, leaving it with no ability to tax businesses, with the risk that Mysore might impose an additional tax to compensate. Denning proposed that Mysore deduct British Indian income from taxable profits rather than British Indian tax from Mysore tax. The Dewan accepted – perhaps surprised the point had not been raised by his own delegates.120 Two cases – either side of independence – reveal the Article’s shortcomings. Salaam (decided in Mysore in 1933) illustrates the importance of identifying the ‘business’, and clarifies a point on relief.121 Mysore Glass (decided in 1961 on pre-independence assessments) applies Article III in a situation where the headquarters is in a third state, and where Mysore taxed beyond what was envisaged under the Arrangement.122 Salaam was a sugar-candy business with three branches: two in Mysore, one in British India. The taxpayer argued that the British Indian branch was ‘entirely independent’ because its ‘headquarters’ was not in Mysore, likely seeking to access different forms of relief in respect of two separate ‘businesses’. Article III did not expressly provide for two businesses owned by a single assessee, though

117 Mysore Revenue Department to Resident (1 March 1921): IOR/L/PS/10/685. 118 Resident to Mysore Revenue Department (11 June 1921): IOR/L/E/7/1308 file 2048. 119 Finance Act 1916 (UK), s 43: P Harris, Corporate/Shareholder Income Taxation and Allocating Taxing Rights between Countries (Amsterdam, IBFD, 1996) 295. 120 The Dewan’s response (10 February 1919), referring to Denning’s letter (30 January 1919), is quoted in Cobb to Holland (6 March 1919): IOR/L/PS/10/685. 121 In re MK Khader Mohideen Abdul Salaam and Co (HC Mysore, 21 February 1933), reported in The Times of India, 24 February 1933, 5 (Salaam). 122 Mysore Glass, above n 74.

426  Christopher L Jenkins ‘parallel relief’ is not ruled out by its wording. The Income-Tax Commissioner made a reference to the Mysore High Court as to the Article’s application.123 Chief Judge Doraswamy Iyer (whom the diligent reader will recall from the Conference) presided over the case. He did not rule on ‘parallel relief’, because on the evidence ‘the branches were not independent’, forming a single ‘business’. The Mysore headquarters’ accounts showed that the British Indian branch had paid railway charges on its behalf, which showed the businesses were not separate. The same accounting records identified the ‘income derived from the British Indian branch’ under the transactions test, which was not taxable under Article III. The Court then considered whether this non-taxable income should be ‘taken into account for the purpose of fixing the rate of income-tax’ – whether ‘exemption with progression’ applied. Mysore’s Regulation defined ‘total income’ (which determined the rate),124 as including ‘profits or gains in British India, of any business carried on both in British India and in Mysore’,125 even if these were exempted from ‘taxable income’ (on which tax was levied).126 The distinction between ‘total’ and ‘taxable’ income was present in the British Indian Act,127 but there was no equivalent provision for including ‘exempted’ Article III profits in ‘total income’. It is possible that British India took the same approach as Mysore (it treated exempted agricultural income in this way, despite the lack of legislative permission).128 ‘Exemption with progression’ may be implicit, as Article III refers to ‘assessable income’, pointing towards ‘taxable income’, not necessarily ‘total income’. Mysore Glass manufactured and sold mugs in Mysore and British India. Its headquarters was within another Princely State. The case concerned profits from 1944 to 1947. These came to the attention of the Indian tax authorities after they gained access to the relevant records, following Mysore’s integration into India on independence.129 In 1961, British India’s successor state, India, attempted to claw back the tax. The taxpayer ‘faintly contended’ that because it had already paid Mysore tax on all profits, India’s remedy was a right of recovery against the (now defunct) Mysore. The judge held that this contention had ‘no substance’, because tax liability was ‘fixed by the statute’ and the payment of one state’s tax would not satisfy the liability to the other. The primary remedy under the Arrangement was that Mysore’s tax was taken ‘into consideration’ at the assessment stage, with tax levied at the difference in rates between the two

123 MITR 1920, s 51. 124 ITA 1918, s 2(13); ITA 1922, s 2(15) (emphasis added). 125 MITR 1923, s 16(1); Inland Revenue, below n 137, 2nd edn, 213. 126 ITA 1918, s 14; ITA 1922, ss 3, 16 (emphasis added). 127 Sundaram, above n 70, xxvii. 128 Admittedly ‘acting on the spirit’, though not ‘the letter of the law’: Statement of Objections, above n 62. 129 See n 192 below.

‘An Embarrassing Precedent’  427 income taxes.130 (Assessees may also have had an ancillary right to seek refunds, though this was not mentioned in the judgment.)131 Article III did not provide for headquarters in a third state; nevertheless, the authorities granted relief as if the business had been headquartered in British India. They went further; they gave a credit for Mysore tax paid in respect of profits from sales in both Mysore and British India. Article III provided for a credit only in respect of Mysore tax on Mysore profits. It did not provide an answer when Mysore taxed profits from all transactions, not just those within its own borders. The strange arguments raised and the strained application of the Article illustrate its limitations – but also, perhaps, the limitations of a court sitting in 1961. Conceivably, neither bar nor bench had access to a copy of the Arrangement.132 Article IV: Dividends As the 1920s wore on, Mysore’s economy grew, with ‘the income tax net … steadily dragging in more victims’.133 The economy became increasingly ‘mixed’, with increasing private investment funded by share issues.134 In January 1930, the Arrangement was expanded to cover dividends and professional earnings. There is limited evidence on these additions: we do not know which side initiated negotiations, or drafted them – though the dividends article refers to the British Indian Act, pointing to Delhi. By now, both states had new income taxes,135 though there were no changes affecting the Arrangement (a point certified by the Resident, Lt-Col Knox – he was not legally trained, but he was right).136 Aside from rates, Mysore’s tax followed British India’s ‘practically verbatim’.137 Dividends were not taxed in the hands of shareholders, provided the company’s profits had already been taxed in that jurisdiction – effectively an imputation system, with tax collected once at the company level, not from shareholders as well.138 Companies were taxed at the maximum rate.139 Shareholders receiving dividends could apply for a refund at the rate differential if they were subject to a lower personal rate.140 Such dividends were excluded from ‘taxable income’, but included in ‘total income’ in calculating rates.141 Article IV responded to the 130 Mysore Glass, above n 74, [1], [10]. 131 See n 75 above. 132 The Arrangement was said to be ‘referred to’ in an old Mysore Income-tax Manual: Mysore Glass, above n 74, [10]. 133 ‘Mysore Letter’, The Times of India, 25 January 1924. 134 Hettne, above n 31, 297. 135 ITA 1922; MITR 1923. 136 Knox to Wood (4 January 1923): IOR/L/PS/10/685. 137 Inland Revenue Department, Income Taxes in the British Dominions, 1st edn (HMSO, 1923) 217–29, 6th supplement (1926) 401–10; 2nd edn (1928) 212–21. 138 ITA 1922, s 14. 139 ITA 1922, ss 16, 48. 140 ITA 1922, ss 19A, 20, 48. 141 ITA 1922, s 16.

428  Christopher L Jenkins difficulties in applying this regime across borders. Where there was a mismatch between the state in which the dividends were received and the state in which the profits arose, these were overtaxed – hampering cross-border investment. Company profits could be taxed twice: in the hands of the company under the ‘business’ schedule and in the hands of the shareholder in the other state, as income ‘received’ under the ‘other sources’ schedule. Alternatively, shareholders in the origin state might be advantaged, as the refunds regimes may not have applied to those outside the state. Article IV addressed these issues by restricting each state’s taxing rights, and expanding the refunds regimes: IV. As regards dividends, the Government within whose jurisdiction tax is charged on the profits out of which a dividend is paid, will retain the tax on the part of those profits represented by the dividend and will allow such refund on the dividend as may be due under the provision of its income-tax law, corresponding to section 48 of the Indian Income-tax Act,142 while the Government in whose jurisdiction the dividend is received will include it in the ‘total income’ of the assessee concerned for the purposes of taxing the rate of, and the liability to tax, but will waive its claim to levy tax in respect of the dividend.

Article IV refers to each state in neutral terms, recognising that profits could be apportioned under Article III. Either or both states could be the ‘Government’ taxing the underlying profits, and the ‘Government’ in whose jurisdiction dividends were received. Previously, foreign shareholders were disadvantaged in applying for refunds in the other state. Article IV requires that the state ‘allow’ such refunds; though it is uncertain how these ‘expanded’ regimes operated. What is certain is that the clearest difficulty was dealt with: the double taxation of companies. The state of receipt ‘waived’ its tax rights – which made sense, because dividends were automatically taxed at source.143 ‘Liability to tax’ referred to the use of ‘total income’ in relation to the taxability threshold.144 The Act’s drafters took dividends into account in determining rates, because under a progressive system – with higher rates for higher incomes – it would be unfair to ignore the value shareholders received.145 The drafters of Article IV simply extended ‘exemption with progression’ to cross-border investment. In 1919, there were no international guidelines on double taxation. However, by the time Articles IV and V were drafted, the League of Nations had turned its mind to the matter. One of its earliest documents on the topic was written in 1921 by Sir Basil Blackett – who was appointed Finance Member of the Viceroy’s Council (equivalent to Chancellor of the Exchequer)

142 MITR 1923, s 48. 143 The OECD Model gives the primary right to the state of receipt, and a limited right to the state of the company’s residence, limiting withholding tax: Art 10(2). 144 ITA 1922, ss 2(15), 3. 145 ‘Statement of Objects and Reasons’, reproduced in Sundaram, above n 70, lxxix.

‘An Embarrassing Precedent’  429 the following year. Blackett’s high standing in India meant that his memorandum was avidly read by members of the Viceroy’s Finance Department throughout the 1920s.146 He suggested that relief should be at the cost of countries, like Mysore, that were net capital importers. Encouraging foreign capital was ‘paramount’, so relief should be at the cost of the profit’s ‘country of origin’, not the investor’s country of residence.147 His suggestion was not followed: Article IV is at the cost of the investor’s country of residence. British India must have felt the loss in revenue was worth it, or that the revenue was a lost cause: delaying remittance by three years rendered profits exempt from tax anyway.148 Nor was the League’s model treaty of 1927 followed. This proposed that dividends were to be exclusively taxed in the state of the business’s ‘real centre of management’, whatever the source of the underlying profits.149 It found little favour in India. The leading textbook on the Indian income tax described the League’s model as ‘illogical, arbitrary and complicated’.150 Its author was Vaduvur Sundaram, who held the same position in the Finance Department as Denning had a decade earlier. He had been asked to draft a summary of the Mysore Arrangement in 1927, in response to the League’s request.151 It is probable that he also drafted Articles IV and V. These articles were officially gazetted in Mysore,152 but not British India; perhaps because, by this time, the Arrangement was out of step with the rest of India.153 Oddly – and, need I say, unofficially – they were first published in British India in a newspaper article about Hyder Ali’s patronage of fruit trees in Mysore.154 It is telling that these alternatives were known to the Finance Department, but not followed. It is also telling that the Inland Revenue’s advice was not sought, even though by this stage its views had been considered on the question of double taxation relief with other Princely States.155 Article IV was a specific response to specific problems that arose from interlocking imputation systems, and shared rights to tax businesses under Article III.

146 See IOR/L/E/7/1308 file 2048. 147 B Blackett, Note on the Effect of Double Taxation upon the Placing of Investments Abroad (Geneva, League of Nations, 1921) [7], [16]–[17]. 148 ITA 1922, s 4(2). 149 League of Nations, Double Taxation and Tax Evasion Report (Geneva, League of Nations, 1927) 10, 14. 150 Sundaram, above n 70, 51. 151 See n 92 above. 152 Report on the Administration of Mysore for the Year 1929–1930 (Bangalore, Government Press, 1930) 6. 153 See n 184 below. 154 Bangalore correspondent, ‘Fruit Culture in Mysore: “Grow It in Yards”’, The Times of India, 27 January 1930, 15. 155 See nn 179 and 182 below.

430  Christopher L Jenkins Article V: Professional Earnings Under the legislation, ‘professional earnings’ were ‘profits or gains of any profession or vocation followed’ by an assessee.156 Professions or vocations were defined at common law, distinct from salaried employment.157 Double taxation could arise under the general charging provision, with professional earnings accruing in one state and received in another,158 or under a special deeming provision, whereby professional fees ‘paid in any part of India’ to a person ‘ordinarily resident’ in one state were deemed to be taxable in that state.159 Article V should be seen in the context of the economic and legal developments of the preceding decade. Increased integration and the improvement of ‘imperfect administrative machinery’ as Mysore became familiar with income tax collection meant that more professionals were taxed in both states.160 Contemporary Anglo-Indian cases show that the line between businesses and professions was not clear,161 and meant the difference between relief under the Arrangement or double tax. Article V likely responded to this unfairness and uncertainty. The Article began with a general rule favouring the state where the income arose or accrued, subject to ‘exemption with progression’ in the receipt state – with two ‘provisos’:162 V. As regards income derived from the practice of a profession or vocation, the Government within whose jurisdiction it arises or accrues will tax it, while the Government in whose jurisdiction it is received will include it in the ‘total income’ of the assessee for the purpose of determining liability to, and the rate of, tax provided that– (i) The income earned in Mysore by a resident in British India or in British India by a resident in Mysore shall be charged to tax in British India or Mysore, as the case may be, if it has not already been, or will not be, charged to tax in Mysore or British India; (ii) in cases where such professional earnings have been, or will, be, taxed in Mysore or in British India, they shall be taken into account for the calculation of ‘total income’ in British India or Mysore, whether received in British India or Mysore.

156 ITA 1922, s 11(1) (emphasis added). 157 See, eg In re Lala Indra Sen (1940) 8 ITR 187. 158 ITA 1922, ss 4(1), 6(v), 11. 159 ITA 1922, s 11(3). 160 Hettne, above n 31, 297; Sundaram, above n 70, 420; see also nn 51 and 133 above. 161 Sundaram, above n 70, 422–23, 615–16; GL Pophale, A Quarter Century of Direct Taxation in India (Bombay, Indian Merchants’ Chamber, 1965) 167–72. 162 The closest modern equivalent is the OECD Model’s now defunct Art 14, on ‘independent personal services’. It favoured the professional’s residence state, with the ‘source’ (or accrual) state taxing income only if attributable to a ‘fixed base’.

‘An Embarrassing Precedent’  431 The objection of proviso (i) is to tax in British India incomes which fall below the taxable limit in Mysore, and of proviso (ii) to include in the total income (i.e. to fix the rate of tax) incomes which may be received in Mysore in the first instance and may be brought subsequently into British India; and vice versa.

The basic problem was solved: earnings were generally taxed exclusively in the place of actual (not deemed)163 accrual. The Article anticipates that both governments may have earnings ‘arising or accruing’ within its jurisdiction for a given assessee; attributing these was a familiar task. Each ‘proviso’ guarded against what we would now call tax ‘mitigation’ or ‘avoidance’ – means of reducing an assessee’s tax bill that technically comply with legislation, falling short of illegal tax evasion. The first ‘proviso’ covered income that fell below the taxability threshold in the state of accrual, and was remitted to the other state. Under the general rule, the state of receipt had no right to tax. The proviso gave it a residual right to tax earnings that would otherwise be untaxed. Under the second proviso, earnings taxed in the state of accrual were included under ‘total income’ in the other state, whether or not they were received in that state. This proviso applied where income was received ‘in the first instance’ in one state and ‘brought subsequently’ into the other – a response to cases holding that income could not be ‘received’ twice.164 Without the proviso, professionals could receive payment for Mysore work into Mysore accounts and later remit the income to British India. The income would not be taxable in British India as it had not accrued there, but it would also be ignored under ‘total income’ for fixing rates, as it could not be ‘received’ a second time. WHY WAS IT ‘EMBARRASSING’?

By the time the League wrote its letter, the Arrangement was seen as an embarrassment. It differed from the regime devised in 1920 by the Royal Commission on the Income Tax, known as ‘Dominion Relief’ – a form of which was imposed in India. It gave Mysore special treatment at a time when the princes were especially conscious of their relative standing. It reflected badly on the India Office. The Arrangement was entered into with less authority and oversight than anything that came after. It was more costly than the regime for other Princely States. And it was potentially embarrassing in Europe, because it showed that British India – and, by implication, Britain – was not as wedded to the concept of residence-based taxation as it led the world to believe.165 As a capital-exporting

163 ITA 1922, s 11(3). 164 Sundaram, above n 70, 365–66. 165 JF Avery Jones, ‘The UK’s Influence on the OECD Model Tax Convention’ [2011] British Tax Review 653, 657–58.

432  Christopher L Jenkins nation, Britain was reluctant to give up taxing income received by British residents that accrued or arose abroad. It made a stand in the League of Nations against treaties – like the Mysore Arrangement – that favoured ‘source’ states. Dominion Relief The Royal Commission met in April 1919. The India Office found out about it from a Reuters news telegram, rather than from the British government. Lucas complained to a colleague: ‘Oddly enough this office was ignored: Mr [Austen] Chamberlain of all people should have known better!’166 Chamberlain, now Chancellor of the Exchequer, had been India Secretary a few years before – but left India off the list because it was not a self-governing Dominion. His successor, Montagu, wrote to the Inland Revenue asking to be ‘invited to appoint a representative to confer with the Royal Commission and the Dominions representatives’ at the ‘grown-ups table’, as it were.167 Montagu argued that India deserved a voice because the question of double taxation ‘affects Indian revenue’, and pointed to the ‘strong feeling’ among businessmen in India. He was permitted to send a representative, whose views had little effect on the Royal Commission’s proposal for Dominion Relief.168 The Mysore Arrangement may well owe its existence to Chamberlain’s oversight. On the same day that Montagu asked for an invitation to the Royal Commission, the Netherlands Ambassador asked the Foreign Secretary, Lord Curzon, whether the two states could ‘open negotiations’ ‘to prevent double taxation’, offering to send a draft treaty.169 Curzon (himself a former Viceroy) forwarded the request to the Treasury.170 He received a reply from Percy Thompson, Commissioner of Inland Revenue: ‘The general question of “double income tax” is one of the most important problems which will engage the attention of the Royal Commission … which is now sitting’, and it would ‘be premature to consider the matter with reference to any particular foreign country’.171 There had been calls for a Royal Commission to answer the question of double taxation as early as June 1918, including from Sir John Rees, who begged the Chancellor to ‘remedy this injustice’ ‘as soon as he possibly can’ at the conclusion of the First World War.172 Had India been made aware of the impending Royal Commission a few months earlier, it may

166 Lucas to T Holderness (31 March 1919): IOR/L/F/7/1258. 167 Holderness (for Montagu) to E Clark (5 April 1919): ibid. 168 See generally JF Avery Jones, ‘Sir Josiah Stamp and Double Income Tax’ in Tiley, above n 98. 169 FM van Verduynen to Lord Curzon (5 April 1919): ‘Double taxation agreements: various countries’ (1919–40): IR 40/6152 (National Archives). 170 C Harmsworth (for Curzon) to Treasury (11 April 1919): ibid. 171 Thompson to Curzon (28 April 1919): ibid. 172 HC Deb 3 June 1918, vol 106, cols 1326–27; he later proposed urgent relief from double tax ‘without waiting for the Report of the Commission’: HC Deb 8 May 1919, vol 115, col 1192.

‘An Embarrassing Precedent’  433 have alerted London about the negotiations with Mysore – and the Mysore Arrangement might have suffered the same fate as its Dutch contemporary. The Inland Revenue’s moratorium on concluding bilateral treaties on double income tax was confirmed by the Royal Commission’s proposal for Dominion Relief. Consequently, nothing like the Mysore Arrangement was seen within the British Empire until after 1945.173 Dominion Relief was enacted in 1920.174 Where income was taxed in the UK and a Dominion, the Dominion tax rate was deducted from the UK rate, with the deduction capped at half the UK rate.175 It differed in form and substance from the Arrangement. Relief was granted by way of legislation, not treaty. It was based on the tax rate, not the amount, and applied to income of any type that was doubly taxed.176 In all cases, relief was provided by the UK, although the Royal Commission also suggested that Dominions could enact further relief along the same lines (British India and Mysore had each taken this step by 1925).177 Following the Royal Commission, the Inland Revenue set about devising a scheme for relief between the colonies. The Viceroy’s Finance Department did the same for India (by this point, several more Princely States had introduced income taxes).178 Each arrived at a slightly different conclusion. In the end, the Inland Revenue won. The following note by Richard Carter (of the India Office) summarises the competing views: The arrangement proposed by the Government of India that each country should remit half of the lower of the two rates of tax is simple and does rough and ready justice to the States as well as to the individual … but a recent inter-departmental Committee [led by the Inland Revenue] has drawn up a model Income Tax Ordinance for the Crown Colonies and in this a different method of tackling the problem is suggested. The Committee propose a rather slavish following of the arrangement already adopted when one of the parties is the United Kingdom, the country in which the taxpayer is resident being selected to play the role of the United Kingdom …

173 There were at least two bilateral agreements relating to double income tax concluded in the interim, though neither is structured in a ‘modern’ schedular manner. In 1926, the UK [Great Britain[suggest delete]] and the Irish Free State concluded an Agreement in which income tax was charged in the state of residence only, providing relief in the case of dual-residence in a manner similar to Dominion Relief (Finance Act 1926 (UK), sch 2). This agreement is discussed in ch 9 above. In 1932, South Africa and the Swaziland Protectorate concluded an Arrangement ‘providing for the elimination of double taxation of farmers carrying on business’, apportioning income ‘on the basis of assets employed’, ‘according to the periods for which such flocks and herds were in each territory during the year of assessment’ (League of Nations, Collection of International Agreements and Internal Legal Provisions for the Prevention of Double Taxation and Fiscal Evasion, vol 5 (Geneva, League of Nations, 1933) 92–93). 174 Finance Act 1920 (UK), s 27. 175 HE Seed and AW Rawlinson, Double Income Tax Relief (London, Pitman, 1925) 3. 176 ibid 9–14. 177 ibid 116. 178 See nn 73 and 137 above.

434  Christopher L Jenkins It is not easy to see why the country of residence should be expected to play the part of fairy godmother as in the case of the United Kingdom and the Government of India’s principle of equalisation of the burden of giving relief seems distinctly preferable … As regards Native States, there is of course no reason why the Government of India should not go ahead with their own plan …179

Where did the Arrangement fit in? Carter anticipated that the ‘general problem’ of double taxation with Mysore ‘will no doubt be taken up again’.180 Its survival seemed doubtful. India sought approval for its new regime from the Secretary of State for the Colonies, the Duke of Devonshire. A reply was sent on his behalf: ‘His Grace considers that it is most undesirable that the already difficult and complicated matter of relief from double income tax within the Empire should be made more difficult and complicated by the existence of separate arrangements’.181 In deference to His Grace, Carter revised his views: ‘though the G. of I.’s scheme has some theoretical advantages, it is obviously unwise to try and have two separate schemes going and I think it is hopeless to expect Somerset House [the Inland Revenue] to scrap theirs’.182 The Duke of Devonshire telegrammed the Viceroy’s Finance Department: ‘Government … would not agree to your negotiating for any other form of reciprocal relief from double income tax … Please keep me informed of any such arrangements concluded including those with Native States’.183 There is no evidence that he was told about the Mysore Arrangement. It survived because Delhi kept quiet. This may be part of the reason why it was later kept from the League. The regime of ‘State Relief’ introduced in India gave those who had paid tax to British India and a Princely State the right to claim a refund from British India. The refund was calculated on the part of the income that was doubly taxed, at a rate equal to half the state’s tax rate, but capped at half the British Indian rate.184 Comparison The Mysore Arrangement is contrasted with State Relief, beginning with the most significant provision: business profits. In 1936, the Arrangement was published – for the first and last time – in Farāmarz Merchant’s book Refund of Indian Income Tax. It provides a worked example of Article III, drawn from

179 Minute by RHA Carter (16 February 1923): IOR/L/F/7/1258. 180 Note by Carter (5 March 1923): IOR/L/PS/10/685. 181 G Grindle (for Devonshire) to Lucas (20 April 1923): IOR/L/F/7/1258. 182 Carter to CH Kisch (15 September 1923): ibid. 183 Devonshire to Finance Department (21 November 1923): ibid. 184 Finance Department Notification: Income-tax (No 25), 1 July 1926 (per ITA 1922, s 60); Merchant, above n 56, 88.

‘An Embarrassing Precedent’  435 Merchant’s experience working for the Indian tax authorities. It assumes agreement on profit allocation, and that the headquarters are in British India (recall that relief in this case would be a credit against British Indian tax, for Mysore tax on Mysore profits): [A business] has a total income of Rs 32,000, which includes Rs 24,000 assessed in Mysore at [4.69 per cent]. The net amount of British Indian income tax … will be worked out thus – Rs Business income  32,000 Income tax @ [13.54 per cent] 4,333 Less tax paid in Mysore State  1,125 (@ [4.69 per cent] on Rs 24,000) Net amount of income tax:  3,208185

Under State Relief, the business would have claimed a refund from British India (the ‘fairy godmother’) of half Mysore’s rate applied to the ‘Mysore income’. To do this, we simply halve the ‘credit’ in the third line above; State Relief was precisely half as generous. It was also less generous because both taxes had to be paid before relief could be obtained. Relief under the Arrangement was netted out before tax was paid in either state, with a deduction from ‘Indian incometax payable’ of ‘the amount of Mysore tax that would be payable’ (though Merchant’s example refers to tax ‘paid’, perhaps for administrative simplicity). Those under State Relief would have to fund the delay in processing the refund; those under the Arrangement avoided such costs. The revenue loss was greater for government securities under Article I because relief was provided via exemption, as opposed to State Relief’s partial refund. The salaries and pensions of British Indian civil servants would be treated the same under both systems, as they already received a credit for any Princely State income tax.186 State Relief would, however, have represented a loss to British India in the case of Mysore government servants. They would have been taxable in both states, with British India refunding half the amount of Mysore tax – whereas under Article II, British India would have collected full tax, with the salary exempt in Mysore. Dividends received greater indulgence under Article IV. British India forewent taxing dividends on receipt if they flowed from profits sourced entirely in Mysore. Under State Relief, it retained the right to tax on receipt, providing a partial refund. So, too, Article V relief was more expensive, because it potentially gave up tax rights over an assessee’s entire professional earnings, compared to a partial refund for earnings taxed elsewhere.



185 Merchant, 186 See

above n 56, 94–95. n 84 above.

436  Christopher L Jenkins The Mysore Arrangement may have been more costly than what came after it, but under different circumstances, it might have become an informal precedent for bilateral treaties within India. As it was, the Royal Commission’s regime of Dominion Relief provided justification for treating each Princely State equally, and for granting comparatively ‘cheap’ relief. State Relief was an excuse to save money and face. CONCLUSION

John Buchan once wrote that the Indian income tax was ‘more interesting historically than in its actual workings’.187 The same could be said of the Mysore Arrangement. Technically, it is what we might expect from a first attempt. Its schedular structure followed the Act. Its brevity reflected near-identical legislation and common law concepts. The deference to source country taxation relied on the ability of each revenue authority to apportion income, and was shaped by the obvious dichotomy within the legislation between income that ‘accrued or arose’ or was ‘received’. The Arrangement was a bricolage – a collection of whatever came to hand. It cobbled together concepts found in statute or at common law; it replaced these with commercial terms; it recast domestic solutions in a bilateral mould. In some respects, it was incredibly near-sighted; though the later articles are more sophisticated. What if the authorities could not agree on the interpretation or application of an article?188 How did one article influence another? The Arrangement was drafted in a day, and it shows. Whatever its faults, and in the face of repeated calls for it to be brought into line with the rest of India,189 the Arrangement remained in force until 1947. On 18 July 1947, the Indian Independence Bill received Royal Assent, and from that day, the paramountcy of British India over the Princely States lapsed, as did any agreements concluded between the princes and their Viceroy. This date could represent the technical termination of the Arrangement, though it is possible that it was saved by a provision preserving certain types of administrative agreements – those relating to customs, for example, ‘or other like matters’.190 Mysore was technically independent, but in reality had to decide whether to join India or Pakistan. Despite predictions that Mysore would ‘fight to the

187 J Buchan, The Law Relating to the Taxation of Foreign Income (London, Stevens & Sons, 1905) lxxxi. 188 In 1937 the Madras Chamber of Commerce urged the Government of India to establish ‘some form of arbitration tribunal’ with representatives of the Government, Mysore and ‘non-official opinion’ to determine disputes: ‘Viceroy’s Part in Introduction of New Reforms in India: Tributes by Associated Chambers’, The Times of India, 21 December 1937, 14. No such tribunal was established. 189 See, eg ‘Double Taxation: Proposals to Improve Relief Measures’, The Times of India, 10 June 1937, 6. 190 Indian Independence Act 1947 (UK), s 7(1)(b).

‘An Embarrassing Precedent’  437 death’ to avoid losing its sovereignty,191 the Maharaja took the only reasonable course, and acceded to India. Accordingly, with the transfer of power at midnight on 15 August 1947, the two parties to the Arrangement fused.192 Despite that fusion, the Arrangement likely had a residual effect on the practice of the successor revenue authorities. Mysore’s separate revenue system, including the income tax and separate rates, continued until 1 April 1950, when the state was fiscally integrated into the rest of India – and the Maharaja himself paid income tax for the first time.193 Denning did not live to see independence. He died in 1943, having been ‘permitted’ to retire early for reasons of ill-health.194 The Mysore Arrangement of 1919 was his last project in the field of taxation. After only a year in the job, he was transferred – willingly or unwillingly – to the currency side of the Finance Department. The irony is that for all the embarrassment it caused at the time, the Arrangement is recognisably modern. It was a reciprocal agreement that attempted to provide a comprehensive solution to the instances of double taxation that had been identified. It split up taxing rights or relief responsibilities according to the type of income, with rules determining the allocation or ‘source’ of that income. It is certainly much closer to modern treaties than Dominion Relief, which looks strange and arbitrary – even embarrassing – to our eyes.195 The story of this early tax treaty tells of a history that is far less ordered than often thought. Most textbooks start with the League of Nations models, steadily progressing to the model treaties of today. In truth, so much of the history of tax treaties before 1945 falls outside this neat narrative. There were, of course, treaties that were negotiated with reference to the models; some paid closer attention to regional practice, while others – including the Mysore Arrangement – were unashamedly ad hoc. Those involved in the Arrangement never considered looking abroad for guidance, not even to their superiors in London. If anything, their actions were a continuation of a different kind of treaty practice: the Government of India’s experience in negotiating bespoke treaties with the princes, as it had recently done in Mysore in 1913. What the parties lacked when they met in 1919 were benchmarks. Neither side really had any reference point as to what was reasonable to give up or where they should give in. In the end, the

191 A Watson, ‘Maharajas in the Future’ in Great Britain and the East, 13 February 1943, 12–13. 192 Discussed in Mysore Engineering, above n 74, [6]; see also ‘Effect of the Absorption of a State upon its Existing Treaties’ (1902) 12 Madras Law Journal 209; KRR Sastry, ‘Treaties and the Doctrine rebus sic stantibus’ (1942) 82 Madras Law Journal 23. 193 Indian Finance Act 1950, ss 3, 13; A Mohan, Princely States and the Reform in Hindu Law (Bombay, NM Tripathi, 1990) 191–96. 194 ‘Bombay Government Gazette Appointments: Sir H Denning’s Retirement’, The Times of India, 16 November 1934, 15; ‘Obituary: Sir Howard Denning’, The Times, 22 April 1943, 7. 195 See n 6 above.

438  Christopher L Jenkins nature of the Arrangement may have had as much to do with Delhi’s policy of indulgence as its tax consequences. We should not be surprised that London was not consulted in 1919. India was accustomed to having a certain amount of ‘latitude’ in the conduct of its own affairs.196 But in the years after the First World War, Whitehall sought to rein in India’s renewed ‘sub-imperial impulses’, and was much less willing to put up with friction in the formulation of policy197 – including the formulation of different schemes for dealing with double tax. The contrast between Denning’s freedom of action and the Duke of Devonshire’s subsequent proscription speaks of a broader shift in Britain’s attitude to India. India was expected to present a ‘united front’ with Britain to the Empire and to the League.198 India’s membership of the League of Nations was somewhat anomalous: it had become a full member because it had been represented at the Paris Peace Conference in 1919 – despite the fact that it was not a self-governing Dominion.199 As time went by, some Indian administrators realised that this drive for public unity in double taxation actually undermined India’s separate membership of the League. Ernest Turner, of the India Office, wrote in 1934: I do not think it is politically desirable in dealing with the League to cover up difference of opinion between India and the U.K. more than is really necessary. On the contrary if attention is drawn to the fact that India differs from the U.K. in particular instances, this makes it less easy to argue that India’s membership of the League is an unreality.200

The Arrangement had indeed been withheld to ‘cover up’ Britain and India’s differing approach to double taxation – a policy that was later regretted. The Arrangement cannot be explained with reference to any theories of international taxation. Oddly enough, something like an explanation is given by the very people that later dismissed it as embarrassing. In 1932, the Viceroy’s Finance Department drafted a memorandum on double taxation:201 In our opinion the question … cannot be settled by reference to abstract arguments but must depend upon the view taken of present local conditions. The Board has always maintained that there are no laws of Nature governing taxation, and no absolute principles of justice applicable to it. This is equally true of arrangements for relief from, or avoidance of, double taxation. They must be determined by pragmatic

196 RJ Blyth, The Empire of the Raj (Basingstoke, Palgrave Macmillan, 2003) 3. 197 ibid 5. 198 ibid 8. 199 ibid 7; see generally JC Coyagee, India and the League of Nations (Madras, Thompson & Co, 1932); DN Verma, India and the League of Nations (Patna, Bharati Bhawan, 1968). 200 EJ Turner to GH Baxter, India Office (26 March 1934): ‘League of Nations: Finance and Financial Questions – Double Taxation and Fiscal Evasion’ (1929–46): IOR/L/E/9/505. 201 Finance Department (Central Revenue Board) to Baxter, India Office (19 July 1932): ‘Income Tax & Super Tax: Double Income Tax Relief’ (1932–33) IOR/L/F/7/1314.

‘An Embarrassing Precedent’  439 considerations, rather than by a priori theories, and each country must – and indeed does – adopt the system that seems most advantageous to itself, having regard to the circumstances and needs.

There can be no better account of the pragmatism with which Chakravarti, Denning and Doraswamy Iyer approached the novel question of the double taxation of income in January 1919. The same pragmatism and regard to ‘circumstances and needs’ remains a force today. There is one final irony. It was initially suggested that Denning – who was in London at the time – should represent the Government of India at the Royal Commission; but at 34, he was considered too young to give evidence.202 (But not too young to negotiate a double tax treaty – proof that India was ‘a young man’s country’.) Had he done so, he would have been the only witness to have negotiated an agreement for the relief of double income tax. The man sent in his stead knew little of the Indian income tax and nothing of the Arrangement. It is often said that no empire was more carefully documented than the Indian Empire. The India Office Records at the British Library contain a file on India’s representative at the Royal Commission.203 In between the letter suggesting Denning and rejecting him, there is a copy of the Royal Commission’s ‘Rules of procedure in regard to Witnesses and Evidence’. Item nine is underlined: ‘The Commission will prefer to hear witnesses who have a personal knowledge of the aspects of the subject upon which they tender evidence’. Someone has put an exclamation mark in the margin. I like to think that it was put there by Howard Denning.

202 Finance Department to India Office (10 May 1919); Lucas to Denning (5 July 1919): IOR/L/F/7/1258. 203 IOR/L/F/7/1258.

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