Studies in the History of Tax Law - Volume 4 9781474200707, 9781849460484

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Preface These papers were given in July 2008 at the fourth Tax Law History Conference organised by the Centre for Tax Law, which is part of the Law Faculty of the University of Cambridge. The importance of understanding the history of our system, not least our recent history, has never been greater. We are very happy that our contributing authors have provided us with so rich and diverse a range of materials and at such a high level, and that they are being made available in this published form, maintaining the very high standards our publishers set themselves. We were blessed with wonderful summer sunshine. The buildings and grounds of Lucy Cavendish College provided an ideal setting. We acknowledge once again the support of the Chartered Institute of Taxation. As ever, the papers were followed by discussions in out and out of the formal proceedings. It remains for me to thank those who gave papers or participated in other ways in what is becoming an important part of the academic tax law life in the United Kingdom. Already this event is known as Tax Law History IV; Tax Law History V is scheduled for July 2010. One again, sincere thanks go also Christine Houghton and all the staff of Lucy Cavendish College, who made us so welcome, and to the President and Fellows of the college for allowing us to stay in their college. Finally, thanks go to Richard Hart and his editorial team for taking this publishing project on and, in particular, to Mel Hamill, the Managing Editor, for all her hard work. Cambridge January 2010

Acknowledgement The Centre for Tax Law gratefully acknowledges the support of the Chartered Institute of Taxation in connection with the conferences for which the papers in this volume were written.

List of Contributors LI S T OF CONTRI BUTORS

Robert Attard, Visiting Lecturer at the University of Malta, Visiting Professor at the University of Ferrara, Guest Lecturer QM School of Law (University of London), University of Palermo, Director Tax Services EY. John F Avery Jones, CBE, Judge of the Upper Tribunal (Finance and Tax Chamber), Special Commissioner and Visiting Professor, London School of Economics. Cynthia Coleman, Adjunct Associate Professor, Faculty of Law, University of Sydney. Jane Frecknall Hughes, Professor of Accounting, The Open University Business School, Milton Keynes. David Ibbetson, Regius Professor of Civil Law, University of Cambridge. Marjorie E Kornhauser, Professor of Law, Sandra Day O’Connor College of Law, Arizona State University. Richard Thomas, Retired Assistant Director HM Revenue & Customs and current member of the First Tier Tribunal (Tax). Malcolm Gammie CBE QC, Barrister at One Essex Court, Temple, and Research Director of the Tax Law Review Committee of the Institute for Fiscal Studies. Lynne Oats, Reader in Accounting and Taxation, Warwick Business School, University of Warwick. Fiona A Martin, Senior Lecturer at the Australian School of Taxation (Atax), Faculty of Law, University of New South Wales. Margaret McKerchar, Professor and Head of School at the Australian School of Taxation (Atax) at the University of New South Wales. Pauline Sadler, Professor of Information Law, School of Business Law & Taxation, Curtin University, Perth, Western Australia. Jeremy Sims, Solicitor and formerly General Commissioner for St Margaret and St John, Westminster. Chantal Stebbings, Professor of Law and Legal History at the University of Exeter.

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List of Contributors

C John Taylor, Professor, School of Business Law and Taxation, Australian School of Business, The University of New South Wales. John Tiley, Fellow of Queens’ College, Cambridge and Professor of Tax Law at the University of Cambridge.

1 The Crown Option THE CROWN OPTI ON

R IC H A R D TH O M A S RI CHARD THOMAS

This paper will form part of the ‘deep structure’ of HM Revenue & Customs’ (HMRC’s) Life Assurance Manual: an account of the historical development of the taxation of life assurance business without which those coming anew to the subject tend to flounder. Accordingly it covers some matters not wholly germane to the Crown Option, but which may nevertheless be of interest. It is also to some extent work in progress (rather than stock in hand). If a tax authority put forward, in relation to a particular type of business, that it proposed: —to charge tax on the profits of that business in accordance with one of two alternative bases (basis A and basis B) to be chosen afresh each year at the tax authority’s choice; —that there would be no appeal against the use of the chosen basis; —that if, after applying basis A, the tax authority chose basis B, any losses or other tax attributes falling to be carried forward under basis A would be irrevocably lost even if basis A were chosen again in the future, and vice versa; —that if a company was on basis A but showed that basis B produced a loss it could still use that loss; and —(after 112 years) that if basis A were chosen but basis B would show a greater profit, basis A could be adjusted to give the same result as basis B, the proposal might well run into some problems in seeking to gain acceptance, and it might well be thought to fall foul of Adam Smith’s tests of a good tax system. Nonetheless, this in essence is the way that UK tax law has applied to the life assurance business of insurance companies. The ‘Crown Option’ was the description given by practitioners of the mysteries of life assurance company taxation to the Inland Revenue’s ability to choose which of alternative bases of taxation might apply. Although the Crown Option related very substantially to the taxation of life assurance business, it was not in

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fact confined to that business but could be applied to any financial trade; however, over the years most of the discussion and most of the argument has involved the life assurance aspect of it. The need for, and the effect of, the non-life assurance part of the Crown Option disappeared for all intents and purposes in 1996. The life assurance Crown Option was finally put to rest by Schedule 8 to the Finance Act 2007. This paper sets out the history of the Crown Option and seeks to explain why it was finally removed from the Statute Book following a long period of rest and a sudden late revival in health; and also why the theoretical inequity of it was substantially tempered in practice.

T H E B AC K G RO U N D : T H E S C H E DU L A R SYS T E M

An examination of section 1(1) of the Income and Corporation Taxes Act 1988, which says ‘Income Tax shall be charged in accordance with the provisions of the Income Tax Acts in respect of all property, profits or gains respectively described or comprised in the Schedules A, B, C, D, E and F . . .’, will show that there has been little real change compared with section I of 43 George III, c 122 (the Income Tax Act 1803), which provides ‘that, during the term herein mentioned, there shall be raised, levied, collected, and paid, throughout Great Britain the several duties and contributions in the Schedules contained in this Act, marked (A.) (B.) (C.) (D.) and (E.)’. Each of the Schedules sets out a separate subject matter of taxation, and in the Act of 1803 sets out an elaborate machinery in relation to each separate Schedule for the calculation of the amount of tax and in particular its assessment and collection. It has long been established that the Schedules are mutually exclusive (see Salisbury House Estate Ltd v Fry1), even where they themselves do not explicitly so provide. However proudly an activity of letting land wears the badges of trade, the charge to tax is under Schedule A (income from land) and not under Schedule D (profits from trades). Within some of the Schedules, notably Schedules A and D, there were further distinctions drawn according to the particular nature of the type of income within the general head of the Schedule. The main purpose for setting out separate types of income—or ‘Cases’, as they were specifically referred to in Schedule D—was to allow different methods of computation of the tax base in relation to each type of income and the method by which the income is assessed and charged to tax. 1

15 TC 266, [1930] AC 432.

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In section 84 of the Act of 1803 the general scope of the charge under Schedule (D.) is set out, namely: upon the annual Profits or Gains arising or accruing to any Person or Persons residing in Great Britain from any Kind of Property whatever; whether situate in Great Britain or elsewhere, or from any Profession, Trade or Vocation whether the same shall respectively be carried on in Great Britain or elsewhere . . . And upon the annual Profits or Gains arising or accruing to any Person or Persons whatever, whether subjects of His Majesty or not, although not resident within Great Britain, from any Property whatever in Great Britain, or any Profession, Trade, Employment or Vocation exercised in Great Britain . . .

The first three paragraphs of Schedule (D.) in section 84 are followed by a heading ‘Rules for ascertaining the said last mentioned Duties in the particular Cases herein mentioned’. There is then set out the six cases—for the purposes of this paper we are concerned only with the first, third, fourth and fifth cases: —the first case is duties to be charged in respect of any trade or manufacture; —the third case is the duty to be charged in respect of property of an uncertain value, not charged in Schedule (A.) (by 1842 the third case explicitly included any interest which was not annual interest); —the fourth case is the duty to be charged in respect of interest arising from securities in Ireland or in the British Plantations in America, or in any other of His Majesty’s dominions out of Great Britain and foreign securities; —the fifth case is the duty to be charged in respect of possessions in Ireland or in the British Plantations in America, or in any other of His Majesty’s dominions out of Great Britain and foreign possessions. Nomenclature can become very confused in this area. In the rest of this paper tax ‘on the basis of profits’ and similar expressions means tax charged in accordance with the first case, or Case I, and tax on ‘interest’ or ‘investment income’ means tax charged in accordance with the third, fourth or fifth cases, or Cases III, IV and V.

T H E B USI N ESS O F L I F E AS S U R A N C E AN D OT H E R F I N A N C I A L T R A D E S , AN D W H Y I N C O M E M AY FAL L W I T H I N M O R E T H A N O N E CAS E

In most trades the trader buys something and then sells it to a customer. To be able to do that, the trader requires capital. Having acquired that capital, the trader does not simply invest it to produce interest but employs it, for example, to buy the things which it wishes to sell.

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Looking at the trade of a bank, that pattern can still be seen: a bank borrows money from its depositors to enable it to lend that money to borrowers. An insurance company says to its customers that it will provide them (perhaps) with something, but that may be a long time in the future; however, they must pay for it now. No rational person is going to pay £X today in order to recover £X in 20 years’ time, so the price of getting £X in 20 years’ time is likely to be heavily discounted. The life insurance company therefore has the job of making this heavily discounted receipt—the premium—become the much larger amount that it will need to pay to the customer. To do that, it clearly needs to invest a large part of the premiums it receives, and it is evident that without the interest from investing premiums the business of life assurance in particular could not survive. Life insurance is about the clearest case imaginable of income from investments being ‘integral’ to the carrying on of a trade. Such investments do not necessarily have to be in the UK. Many insurance companies in the nineteenth century were active in the dominions and colonies, and in those places it was normal, if not required by the domestic authorities, for the company to invest in locally situated assets. A company carrying on life assurance business was then quite likely to have both income falling within Case III of Schedule D in the form of untaxed interest (interest from which tax was deducted did not fall within Case III) and income within Cases IV and V if it had foreign operations. At the same time it undoubtedly carried on a trade, and income within Cases III, IV and V was undoubtedly trading income. It therefore also seemingly fell, in the wording of the Cases, to be included in a computation made in accordance with the rules of Case I of Schedule D. This particular issue was not confined solely to companies carrying on life assurance business: it also applied to companies carrying on non-life business. In fact, in the nineteenth and much of the twentieth centuries, most insurance companies carried on both life and non-life business in the same company—so called ‘composite’ companies. Insurance was one of the first types of activity to be regulated and for which there was a requirement to produce audited accounts.2 The provisions of the Life Assurance Companies Act 1870,3 the first of the Acts regulating insurance, show that there were up to five categories of insurance business which were treated separately for regulatory purposes and for which separate funds were required. In addition to life assurance business, which included annuity business, there was bond investment business (a form of long-term insurance not involving any contingency on human life and known now as 2 Railway companies incorporated in Great Britain were required by the Regulation of Railways Act 1868 (31 & 32 Vict, c 119) to do much the same. Some of the regulations look distinctly odd today: s 20 requires a company to provide smoking accommodation for each class of carriage (but the Metropolitan Railway was exempt). 3 33 & 34 Vict (c 61).

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capital redemption business), together with classes of what is now general insurance business, fire, marine and property insurance. It is true to say that, in relation to the classes of general insurance business, the requirements to hold investments as an integral part of the business were less than in life assurance business, but there was still a likelihood of investments being needed to be held to meet liabilities in that business, especially where the liabilities were of a longer term nature. In addition to insurance business, banks also carried on a trade within Case I of Schedule D and received investment income, particularly interest which was not annual interest, in the course of that trade. Other forms of institution lending money by way of trade could also receive investment income, particularly where that trade was the lending of money with interest. Such lending by a bank or similar concern could also be outside the UK and so give rise to income falling within Case IV or V, as well as being a trading receipt. In addition to income chargeable by assessment under Cases III, IV or V of Schedule D, a financial concern of the type mentioned above would also often receive very substantial amounts of taxed interest, interest from which the payer deducted tax, and dividends treated as having been paid out of taxed income. The treatment of the interest and dividends was somewhat different. Where a company received taxed interest or dividends in the course of a trade, they were excluded from any computation of trading profits under Case I on the basis that they had already been charged to tax and therefore could not be charged again by way of direct assessment. As a result, where a financial concern generated substantial amounts of taxed interest and dividends, it was quite likely that, even though on any basis of accounts drawn up in accordance with commercial practice there would be a profit, there might well be a substantial loss under Case I of Schedule D. In such a case there was of course no Case I profit, so where there were any significant amounts of income chargeable under Cases III, IV or V more tax was likely to be generated overall if there was a charge to tax on the Case III, IV or V income than if they had been included in the Case I computation of profit. It should be remembered that there was no facility to claim back any tax on taxed interest and dividends in excess of the amount needed to ‘frank’ any charge under Case I. Income under Cases IV and V was, until 1915, universally charged to tax on the remittance basis. However, the remittance basis did not apply to a trade charged to tax under Case I of Schedule D, so where a trading company had substantial amounts of income chargeable under Cases IV and V it might suffer a higher overall liability if that income could instead be included in a charge on profits under Case I on an arising basis.

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With all these issues in play, it is not surprising to find that, as soon as a general ability to take appeals against assessments to the Courts was instituted and the HMSO series of Tax Cases started, Volume 2 contained a large number of cases relating to insurance companies and other forms of financial concern. It is in Volume 2 and some of the other single-digit volumes of Tax Cases that we can see how many of the issues raised by the system of Schedules and Cases and outlined above were resolved.

THE TAX CASES: 1884–1914

The earliest case that has a bearing on the Crown Option does not in fact discuss that option itself, but sets the scene for the discontent that both the Inland Revenue and insurance companies felt until major reforms during the First World War (considered further below). The case in question is Last v London Assurance Corporation,4 which is known today to practitioners in the mysteries of life assurance taxation mainly for the decision in the House of Lords that bonuses paid to participating policyholders are not deductible in computing the Case I profit of a life assurance business. However, the issue that is of relevance here arose because the London Assurance Corporation carried on three branches of business: marine, fire and life insurance. The company contended that the profits, computed in accordance with Case I of Schedule D, for all three branches must be amalgamated. It sought to do this because the tax chargeable on the profit of the whole business was less than the income tax suffered in respect of taxed income arising, in particular, from the life assurance branch so that when the taxed income is removed from the computation of profits there is no profit to be assessed at all. Mr Last, the Surveyor of Taxes, argued on behalf of the Crown that the life insurance branch should be wholly excluded from a computation under Case I of Schedule D and that life insurance from its peculiar nature did not fall within the scope of the Income Tax Acts except as to the interest from the capital invested in securities. That interest, he maintained, was either taxed by deduction at source or chargeable on the full amount received under the fourth and fifth cases of Schedule D. If that were correct, then the taxed interest of the life branch could not be used to ‘frank’ the income tax chargeable on the profits of the marine and fire branches. That would mean both income tax chargeable on the profits of those branches and also a charge to tax on the untaxed interest of the life branch. The General Commissioners for the Division of the City of London upheld the Corporation’s argument on this point. In the High Court both 4

2 TC 100 (1884).

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judges agreed with the company that there was in substance just one business carried on by one corporate person and that the decision of the Commissioners was correct. Although Mr Last appealed against the decision in relation to bonuses, the decision in relation to ‘one business or two’ stood. In 1889, in Clerical Medical and General Life Assurance Society v Carter,5 the society appealed against an assessment in an amount of £2,000 representing untaxed interest. This was an estimated assessment and it turned out that the actual amount of untaxed interest in dispute was £165. The profits of the company, which carried on marine, fire and life assurance business, after deducting expenses amounted to £78,259. Its taxed income amounted to £84,154, so, on the usual basis of excluding taxed income from a Case I profit, there was no tax liability on profits. The argument for the Crown, put by AV Dicey, was that we are not taxing profits. It is a charge under the third head of Schedule D ‘For and in respect of all interest of money’. If this clause stood alone, nobody could doubt the meaning of it. Here is a clause taxing interest, and here is £165 of interest which has not paid income tax.

In the High Court Lord Esher MR set out the case for the defendant society thus: Interest is not an assessable subject matter, because it is interest which comes to the defendants in the course of trade and business in this way, but that interest is an item in their trade and business which is an item of their gross profits in their trade or business, and that when you come to set-off against their gross profits including this item it will be found that they have made no profits at all.

He went on to say: It is suggested on behalf of the defendants that the word ‘interest’ is not to include this interest because this interest is, as I have said, an item which used to be dealt with in order to arrive at the annual profits and gains of the trade or business. We have heard a long argument and a most able argument, and a puzzling argument, as all arguments about this Income Tax Act seem to me to be—it is enough to puzzle one’s head off nearly.6

To the suggestion by Mr Finlay QC for the company ‘that the Crown can not only tax the interest as a subject matter of itself but can afterwards bring it into the proceeds of the gains and profits of the trade, and so tax it again’, Lord Esher said ‘if that is true it cannot be helped’. But he went on to say that so far as I can bind the Court, I give it as my opinion that I accede to [the Solicitor General’s] argument, and that section 52 [of the Income Tax Act of 1842] 5 6

2 TC 437 (1889). The first of many similar reactions by the judiciary to life assurance taxation issues.

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Also in 1889, this time in Scotland, was the case Scottish Union National Insurance Company v Smiles.7 This case is notorious for the short judgment of the Lord President in which he reverses the Commissioners and sets out instructions which sufficiently embody our reasons for differing both from the assessor and from the commissioners and may at the same time form a useful guide to the Revenue Officers and the General Commissioners of Income Tax in dealing with cases of this description.

The major relevant points from this case are that: (1) in assessing to the income tax, the gains of a company carrying on the business both of fire insurance and life insurance, the net profits and gains from the two branches of the business must be massed together as one undivided income assessable according to the rules applicable to the first case under Schedule D. (2) that the interest of investments which has not suffered deduction of income tax at its source must be taken into account in ascertaining the assessable amount of profits and gains of the company [under that case].

We jump now to 1906 and Volume 5 of Tax Cases for the case of Revell (Surveyor of Taxes) v The Edinburgh Life Insurance Company.8 The facts in this case were very similar to those in Clerical Medical but in this case the untaxed interest amounted to the enormous sum of £1,123, compared with only £165 in Clerical Medical. In the facts stated by the Commissioners it was found that for the years 1903–04 and 1904–05 the company was assessed in respect of its untaxed interest not on profits, but under Cases III and IV. For the year 1904–05 the company returned its income as nil and made a claim for repayment of income tax paid on £41,827 on the ground of the loss shown by the accounts for the years 1901, 1902 and 1903. That account of the loss did not include taxed income. The Commissioners refused the claim to repayment on the grounds that, once taxed income was taken into account, there was not a loss but a profit of £66,976. The company further said that it had no objection to the assessment on untaxed interest under Case III so long as interest and profits were dealt with as distinct things and (presumably) so that it could claim a repayment of income tax. The Commissioners turned down the repayment claim on the grounds that the taxed income formed part of the trade profits but they also discharged the assessment under Case III on the grounds that the

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2 TC 551. 5 TC 221.

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untaxed interest must also be taken as forming a part of the company’s trade profits and should not be assessed. In the Exchequer Court the Lord President (Dunedin) in his judgment felt: almost unable to see the view that commended itself to the commissioners, because it seems to me only arrived at by mixing two things which are absolutely distinct. The Income Tax Acts are complicated enough, but I thought it had been settled beyond all possibility of doubt that in as much as the Income Tax Acts do not only deal with profit in the true sense of the word as a commercial profit, but also deal with an imposed taxes upon the interest of investments, the Crown has always been allowed when investments are held by a trading company, if it suits them, to say, ‘we will charge you a tax upon the produce of your investments, and we won’t charge for tax upon your profits’. The Crown cannot charge for tax on both—that is to say, it cannot take a trading account which has money—its assets and investments—and first of all charge income tax upon the produce of investments, and then over and above charge on the profits. It must elect between the two; the reason is very obvious because if the Crown were not allowed to do that the Crown would lose the produce of an investment according the extent whether that investment was held by a private individual or by a trading company. That being so, when you come to deal with a business like an insurance company, especially a life insurance company which has to hold very large investments, it nearly always, in fact in the life of an insurance company which has not a fire business, pays the Crown better to take the interest on the investments and not trouble with the profits. (Emphasis added)

This is the first clear statement acknowledging the existence of the Crown Option and the pragmatic approach to it that the judiciary expected the Crown to take. Despite what the Lord President says about it being ‘settled beyond all possibility of doubt’ that the Crown has an option, there is little hint of it in the previous cases relating to insurance or to other cases where the issue related to other forms of financial concern and whether interest from overseas was taxable under the first or fourth case of Schedule D.9 However, the important point brought out in both Edinburgh Life and Clerical Medical is that there is a choice between one of two bases. It was not a question in Edinburgh Life of charging the £1,123 untaxed interest under Case III and also charging any profit under Case I, even excluding that interest. The Court of Session made it clear that the Crown has the option either of taking profits under Case I, which would include untaxed interest, or of a separate charge under Cases III, IV and V, and, if they did that, then there was no possibility of a Case I charge.

9 Scottish Mortgage Co of New Mexico v McKelvey 2 TC 165; Smiles v Australasian Mortgage and Agency Co Ltd 2 TC 367.

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In Liverpool and London and Globe Insurance Company Limited v Bennett (and other cases),10 the affairs of three insurance companies were examined. Two of them were composite companies carrying on both fire and life business and the other purely a non-life company, but they all had investments in the US, which they were required to make as part of the cost of doing business there. The question in relation to these companies which were charged to tax under Case I of Schedule D on their profits generally was whether the income from the US securities was part of the Case I profit, or alternatively could be assessed under Case IV, in which case the remittance basis would apply. At first instance Hamilton J referred to the Edinburgh Life case and said that it has been repeatedly recognised that the same facts may fall within two or more of the cases under Schedule D and that in that connection it has been said that the Crown has in such cases the option to tax under one case or the other. I understand that expression which is no doubt convenient, if not very accurate, to mean this: If the words of the Act plainly make the subject taxable under either cases and he is assessed under one case, it is no defence to him to say that he is also assessable under the other, and unless the words of the Act are not plain, and to my mind in connection with this case they are quite plain, the subject cannot pray in aid the interpretation of the Act in favour of the subject so as to require that he should be taxed under the case which is least burdensome to himself. What the duty of the Revenue Officers may be, with regard to selecting the one case or the other for their assessments is a matter I have nothing to do with, but it appears to me that as soon as the charging words are shown to cover the case, then one must find some other answer on behalf of the subject than to point out that he might have been brought under another and less burdensome case.

In the Court of Appeal the Master of Rolls cited the Lord President’s judgment in Edinburgh Life and added that he felt no doubt that the Crown has an option to tax under Case I, or under Case IV in any state of circumstances falling within that case. Fletcher Moulton LJ added in my opinion the true position of the five cases under Schedule D is as follows: they impose separate and independent liabilities to pay income tax and so far as the circumstances of any individual bring him within the ambit of any one of them, he is liable to pay the income tax imposed thereby. But they are not cumulative. This has been held by every court and is evident from the nature and structure itself. The Crown may therefore enforce any one or more of these liabilities but if it enforces more than one it must do so only to such an extent that there is no double charging in respect of any item of income or receipt.

In the House of Lords, Lord Shaw of Dunfermline stated 10 6 TC 327 (including Brice (Surveyor of Taxes) v The Ocean Accident and Guarantee Corporation, Limited and Brice (Surveyor of Taxes) v The Northern Assurance Company).

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My Lords, it is not necessary to decide whether [the fourth] case applies or not. The assessment has been laid on not in respect of it but has been laid on in respect of the first case in Schedule D which is applicable to the balance of profit of trade. The argument as to the fourth case therefore drops out because it is well settled that if a sufficient warrant be found in the statute for taxation under alternative heads the alternative lies with the taxing authorities. They have selected Case I.

The conclusions to be drawn from these cases are as follows.

In the Case of a Company Other than One whose only Business is Life Assurance The Crown could choose whether to charge untaxed interest from UK sources under Case III and income from foreign securities and possessions under Case IV or V, or as part of a profit computed under Case I of Schedule D, but only where the interest etc forms what we would now call an integral part of the trading operations of the company. In the case of such a company it would, in all instances, suit the Crown to charge income under Case I rather than Case IV or V because under Case I the amount chargeable was the amount arising whereas under Cases IV and V it is only the amount remitted to the UK that is charged to tax. There may be second-order differences, such as the period by reference to which the income was calculated, since income under Case III, IV or V was charged to tax on the basis of the preceding year of assessment whereas in the case of a trade it was based on the average of the three preceding years.

In the Case of a Company whose only Business is Life Assurance Business The Crown could choose to tax untaxed interest under Case III and income from foreign securities and possessions under Cases IV and V or to include them in a Case I computation. This is the same position as with other concerns, but in the case of a life assurance company it would normally suit the Crown to charge under the basis of Cases III, IV and V. This is because, as shown in eg Clerical Medical, a substantial amount of a life assurance company’s profits on a Case I basis would consist of income which has already been taxed at source and tax on any Case I profit would be covered by that tax suffered leaving no liability. In such a case, any tax charged under Cases III, IV and V (even on a remittance basis in the latter two Cases), rather than under Case I, would represent the better choice for the Crown because there

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would be some tax rather than none. The Crown would also still obtain all the tax suffered on taxed income without any liability to repay.

In the Case of a Company whose Business Includes Life Assurance Business and Other Non-life Business There was a difficulty for the Crown where an insurance company was a composite, because it would normally suit the Crown to use Cases III–V in life assurance business and Case I in other insurance business. On the basis of Last’s case, such a company carries on only one business. Adopting Cases III–V as the basis would mean that any underwriting profits made in respect of non-life business would escape tax altogether.

The Two Options are Different This last point highlights a difference between the options. If Case I is chosen, then nothing escapes tax. The items also within Cases III–V are included in the Case I reckoning—though it is true that the result of that reckoning may be less tax than would be obtained by a separate charge, in principle the income is taken into account. In the case where Cases III, IV and V are chosen, as normally in life assurance business, the Courts have said that the Inland Revenue do not trouble with the profits:11 there is no Case I charge. That means that profits from life assurance business other than the investment income, such as the underwriting (mortality) profits, annuity profits, profits from lapses and other fees and receipts from sources not within Cases III–V, escape taxation.12 How far that matters is a question that relates primarily to the principles behind the I minus E system, which is beyond the scope of this paper.

Mutuals: No Option Available One further point should be noted here. A large number of insurance companies at at 1910 carried on business on a mutual basis. This meant 11 Lord Dunedin in Revell’s case, and see Fletcher Moulton LJ in Liverpool & London & Globe. It may be that no one appreciated then exactly what was involved in not troubling with the profits. 12 Some of these items fell from 1915 to be deducted from the newly enacted claim for management expenses. An issue that was heavily debated until 1989 was whether items which, outside a trade context, would fall within Case VI (certain fees such as underwriting commission, stock lending fees etc) could be charged under that Case where the Crown elected not to tax Case I. The enactment of s 85 FA 1989 put an end to the debate.

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that a charge to tax under Case I of Schedule D was not possible. The mutuality principle as brought out in cases such as New York Life Insurance Company v Styles13 did not go so far as to rule out taxation on interest even though mutual life assurance14 remains a trade, even when not taxed under Case I, and the interest is an integral part of that trade.

No Case I: No Expenses Finally, in considering the position as at 1910, is should be noted that no relief was given to any company in respect of its expenses other than in a Case I computation.

T H E I N DU S T RY ’ S VI E W S O N T H I S S TAT E O F AF FA I RS

There is evidence in Inland Revenue papers that the Life Offices were not happy with the situation described above. There were two representative bodies for the life offices—one for the English offices and one for the Scottish offices—and they did not always see eye to eye, as will be seen later. In a letter of 31 May 1910 to the Chancellor of the Exchequer, the Life Offices Association and the Associated Scottish Life Assurance Offices submitted a memorandum explaining the grounds on which it was contended that the basis on which British offices transacting life assurance business only (as distinct from composites) were assessed to income tax was inequitable and should be amended. The memorandum revealed that so far back as 1842 the Scottish life offices combined to protest against the imposition of income tax on the interest earnings of life offices. They drew up a memorial on the subject and forwarded it to the Lords of the Treasury but without avail and the Income Tax Act of 1842 was passed in the form in which we know it, in spite of their protest.

The contention put forward by the Life Offices against the existing system was that interest in their hands was not in any true sense entirely ‘profits and gains’ within the meaning of the Income Tax Acts. That was because the bulk of it was required to enable the office to meet its liabilities to its policyholders. They also protested that the system was devoid of reasonable basis because of the disparity between the treatment of a composite office and a pure life assurance company. They recounted that the response of the Inland Revenue to their complaints was that the interest earned on the company’s funds properly 13 14

2 TC 460. Cornish Mutual v CIR 12 TC 841, [1926] AC 281 a Corporation Profits Tax case.

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accrues to the policyholders and that taxation of the interest as such on the life assurance company is a method of ensuring equality between an individual who pays a single premium to a life office and an individual who invests a like sum and accumulates the interest thereon, each thus leaving at death a considerable sum in excess of that originally invested. The Life Offices went to say that the Inland Revenue’s solution for their ills was to allow separate taxation of the life assurance business and the non-life business in a composite, but the Offices maintained, correctly, that the Courts had decided otherwise. They also expressed a fear in 1910 that the Revenue authorities might obtain legislative powers to enable them to collect income tax on interest earned abroad and not remitted. The Life Offices considered that such a step was most unlikely as the Revenue would face the strongest opposition and so to legislate would violate the principles set down by the House of Lords in Gresham Life Assurance Society v Bishop.15 They also complained about the competition from foreign offices transacting business in the UK which do not invest any considerable part of their funds in the UK and so escape the taxation on interest and are therefore assessed on trade profits only. Finally, they sought a calculation of loss relief that would not take taxed interest into account on the grounds that to do so was taxing the interest twice. The complaints of the Life Offices, somewhat sharpened, were submitted in a further memorandum to the Chancellor of the Exchequer16 on 7 May 1914. By then the unthinkable had come to pass and proposals had been made to abolish the remittance basis in relation to investments from overseas. On 12 May 1914 a deputation from the Life Offices met the Board of Inland Revenue. Again they pressed to be taxed not on the interest but only on their profits, to which the Chairman of the Board of Inland Revenue, Sir Matthew Nathan, responded I am not quite clear here. Is it your contention that only the profits of the company should be taxed? Mr Geoffrey Marks: Yes. Chairman: And not any profit that is made by the policyholder?

And, later Chairman: The point of difference is this. We say that the profit that accrues to the policyholder should be taxed as well as the profit which accrues to the insurance company, and you say that it should not be.

15 16

4 TC 464. Rt Hon David Lloyd George MP.

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17

The ranks of the life offices were not however wholly united. In a letter of 4 June 1914 the General Manager of the Sun Life Assurance Society wrote to the Chairman of the Life Offices Association, arguing that taxation of all interest on life and annuity funds of all offices, seems to us to be the most reasonable basis, having regard to all the circumstances and the exceptional advantages given to life assurance by legislation. By this means, inequality of taxation as between office and office might be almost entirely avoided.

Further representations were made on 10 June 1914 to the Board of Inland Revenue by Sir Thomas Whittaker MP, who directed particular attention to three points. —The unfair competition between the pure life offices and the composite offices. —The unfairness that the whole amount of interest is taxed without some allowance for expenses of management. —That interest which would benefit policyholders was being taxed at the standard rate of income tax although many whose money was being invested and saved were persons whose income was too small to fall within the income tax limit. As a result of these representations a great deal of further thought was given to the taxation of insurance business by the Inland Revenue and the result was what would now be called a package (if not a raft) of reforms involving the first statutory rules relating specifically to life assurance included in the Finance Act 1915. However, before considering these it is worth mentioning one more tax case, that of Gresham Life Assurance Society Ltd v Attorney General.17 This case is known today almost entirely for the fact that the High Court struck down as invalid any suggestion that the Surveyor of Taxes could enter into a forward agreement18 with the insurance company as to the basis and amount of taxation for years other than the one for which the return and assessment were under enquiry. The case shows that, for the years before 1911–12, Gresham had been assessed on its untaxed income under Cases III, IV and V of Schedule D, but that for 1911–12, 1912–13 and 1913–14 it was taxed on a basis of profits under Case I of Schedule D. The company’s statement of claim at paragraph 4 shows that before 1911–12 it was taxed on the remittance basis on the income derived from its foreign investments. The immediate cause of the change to a profits basis seemed to have been the supply to the Surveyor of the quinquennial valuation of assets and liabilities required under the Assurance Companies Act 1909 for the 17 18

7 TC 36. See Fayed and others v Advocate General for Scotland 77 TC 273.

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Richard Thomas

period ending 31 December 1910. After enquiries the Surveyor for City XI District wrote on 19 April 1912 to the company showing his computations of the profit for 1911–12 and the four succeeding years based on the results of the previous quinquennium and asking for agreement. Within five days the company replied that it agreed the computation for 1911–12 and succeeding years. The company was thereupon assessed to income tax for 1911–12, 1912–13 and 1913–14 on that basis. On 14 October 1914 the same Surveyor pointed out that section 5 of the Finance Act 1914 had brought all income from securities etc out of the UK into charge to tax whether remitted or not and asked for particulars of the company’s income from those sources. The company queried this request assuming it was an error as there had been agreed to a taxation on the profits basis. They then wrote to the Board of Inland Revenue, saying that the Surveyor seemed to be suggesting that their liability would no longer be under Case I and would revert to the interest basis, and returned the Surveyor’s enquiry form to the Board. The Surveyor reacted on 20 November 1914 by making an assessment on the basis of income, including all foreign investments and not on the quinquennial profits, whereupon the company sought a declaration from the Courts that the letter agreeing to a profits basis for future years was valid and an injunction restraining the Commissioners of Inland Revenue from acting on the assessment on the interest basis. In his judgment, Astbury J pointed out that the enquiries in November 1911 were made with ‘it being obviously in the mind of the surveyor to change over and assess the company thence forward on profits instead of income’. He went on to say, in dealing with the merits of the case, In the first place I think it is quite clear on the authorities, in fact it Is in no sense contested, that in assessing a society of this kind the taxing authority has an option to tax it under Case I or Cases IV and V of Schedule D, or both providing that the Company is not taxed twice over in respect of the said income or In respect of the same moneys. This appears from a number of authorities. [He goes on to cite Liverpool and London and Globe and Edinburgh Life.]

It was held that the Commissioners and the Surveyor were not bound by the letter to charge the company to tax on profits and that the Inland Revenue was perfectly at liberty to change the basis at will. The company’s attitude to this case suggests that neither it nor the Life Offices generally saw anything unusual about a change at the Surveyor’s whim from one basis to another. For the company it was the reversion to the first basis within a few years that stuck in the craw, but even then the suggestion was not so much that the Surveyor was not entitled to change, but that he had bound himself not to. The Life Offices’ representations also did not address the option directly. Of course they wanted in effect to abolish it by making the profits

The Crown Option

19

basis mandatory, but there was little if any mention of the optionality of the existing system as a source of irritation. By the time Gresham came to the High Court, the first Finance Act of 1915 had reached the statute books. This enacted the ‘package’ based on the Life Offices representations and the Inland Revenue’s own thinking. It made a number of important changes. In section 10 it provided that: [w]here an assurance company carries on life assurance business in conjunction with assurance business of any other class, the life assurance business of the company shall for the purposes of this Act be treated as a separate business from any other class of business carried on by the company.

This brought to an end the disparity of treatment between the pure life offices and the composite offices, but in the way the Revenue wanted, not the Life Offices. Nothing was specifically said in the legislation as to why this change was being made, nor was anything said to impose in direct words a charge to tax on interest rather than on profits in relation to life assurance business. Section 13 gave relief for the first time for expenses of management to insurance companies (and to others) in circumstances where the profits of the business was not charged to tax under Case I of Schedule D.19 This was something the Life Offices had requested. It therefore followed that the main purpose of the division of business between life and non-life was to enable the interest basis to apply to the life assurance business, both of pure life companies and of composites. The reference to not being charged under Case I implicitly acknowledged the continuing existence of the Crown Option. However, the rule about management expenses contained a proviso.20 Relief for such expenses (which was given in terms of repayment of tax) was not to be given so as to repay more tax than would have been repaid had the company been charged to tax on its life assurance business under Case I of Schedule D. The effect of this was that if, for whatever reason, the results of the quinquennial actuarial valuation showed that there were profits such that more tax would be collected on the profits basis rather than on the interest 19 (1) Where an assurance company carrying on life assurance business, or any company whose business consists mainly in the making of investments, and the principal part of whose income is derived therefrom, claims and proves to the satisfaction of the Special Commissioners that, for any income tax year, it has been charged to tax by deduction or otherwise, and has not been charged in respect of its profits in accordance with the rules under the first case in s 100 Income Tax Act 1842, the company shall be entitled to repayment of so much of the tax paid by it as is equal to the amount of the tax on any sums disbursed as expenses of management (including commissions) for that year. 20 Provided that ‘relief shall not be given under this section so as to make the income tax paid by the company or bank less than the tax which would have been paid if the profits had been charged in accordance with the said rules’.

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Richard Thomas

basis (which, because it now taxed income with a deduction for expenses, was called the I minus E basis), there was apparently no longer any need for the Crown to opt for the profits basis to collect the extra tax as the effect of the management expenses restriction would be to obtain that higher amount of tax without changing the basis. But the legislation did not touch on the question of the Crown Option at all. Section 10 had no effect on the ‘non-life’ option as discussed in Liverpool & London & Globe, even on the non-life part of an insurance company’s business. Nor did it prevent the Crown from choosing to apply a profits basis in the case of life assurance business. No doubt it was assumed that the proviso in section 13 would mean that there was little point in the Crown making that choice—but the choice was still there, as witnessed by the terms of section 13 itself.

TH E ROYA L C O M M I S S I O N

The Life Offices took an early opportunity to make their feelings about the 1915 package and the tax system generally known to the 1920 Royal Commission. The Commission’s Report21 at paragraph 511 made it clear what the Life Offices thought of the Crown Option: Although the tax deducted from interest is, except in the case of industrial assurance companies, nearly always the effective charge, and recourse is seldom had to the alternative charge on profits, the dual basis of assessment has for very many years been a subject of complaint on the part of the companies carrying on Life Assurance business. While the views of the witnesses who represented the English and the Scottish Life Offices respectively were at variance in regard to what should be the sole basis of charge,22 they were agreed in requesting that Life Assurance companies should have only one clearly defined basis of Income Tax liability, and that the alternative method of assessing now open to the Revenue should be abolished.

The reference to industrial business suggests that, in the case of a company only or predominantly carrying on such business, the Crown Option to tax on profits may have been exercised. In any event, the Commission went on to say 514. In regard to the request preferred on behalf both of the English and the Scottish offices, that there should not be alternative bases of assessment, we are unable to discover any sufficient reason why alternative bases of assessment which have always existed under the present scheme of Income Tax should now be abolished. Cmd 615. Evidence of Mr LF Hovil (for the English Offices) and Mr George M Low (for the Scottish Offices), 25th session, 10 October 1919; ‘The Royal Commission on the Income Tax: Minutes of Evidence’ (HMSO 1920), 826–50. 21 22

The Crown Option

21

The Royal Commission did not elaborate,23 though it also recommended that there should, for the purposes of the proviso to section 13 Finance Act 1915, by then the proviso to section 33(1) Income Tax Act 1918, be a separate restriction for industrial business24 and ordinary (non-industrial) business. This would enable the proviso to have full effect for the industrial business and effectively charge the business on a profits basis, leaving the ordinary business charged on the interest (I minus E basis), and was enacted as section 16(3) Finance Act 1923.

THE MODERN E RA

The Crown Option continued to be commented on in tax cases. In Guardian Life Assurance Co Ltd v CIR,25 it was said Now the last argument was a subtler one, and it was this: Mr. Maugham [for Guardian] said Rule 13 of the Income Tax Act was a provision introduced in view of the well-known habit and for the purposes only of the habit of the Crown to tax insurance companies, or life funds anyhow, on the investments under Case III, Case IV, or Case V. It is really only separating them for the purposes of an assessment of that kind, and you must not use it to effect a separation if you are going to have a Case I computation, which is the only sort of computation that the excess profits duty looks to. Well, I do not think that will do at all; I think the answer to it is pretty obvious. The Attorney-General has pointed it out in his reply, and I have heard it before. It is not true to say that, under Rule 15, which decreed the division and decreed it only in view of one particular form of assessment, the Crown is bound to take the income-tax on the investments. I have no doubt about it at all; the Crown is not bound to take the income-tax on the investments; it could call for the ordinary Profit and Loss Account of the life assurance business. I do not think there is any doubt about that at all. Therefore the section is wide enough to carry what is demanded here by the argument of the Crown in this case.

Cognoscenti will know from the style that this was Sir Sidney Rowlatt (in 1927). In the Court of Appeal (1928), the Master of the Rolls said: Quite apart from the Excess Profits Duty Act, as it has been called, what is the position of an insurance company which engages in life assurance as well as other departments of insurance? It is quite true, that, as was said by Lord Dunedin as far back as 1906, when he was the Lord President of the Court of 23 A dissenting minority report was filed by Mr Geoffrey Marks, the leader of the delegation to the Board of Inland Revenue in 1915. 24 The business of collecting insurance by going door to door—the legendary ‘Man from the Pru’ with his bicycle clips collecting 6d per week. 25 6 Annotated TC 926, 7 Annotated TC 80 (CA) and 8 Annotated TC 57 (HL). An excess profits duty case—see P Ridd, ‘Excess Profits Duty’ in J Tiley (ed), Studies in the History of Tax Law (2004) 115.

22

Richard Thomas Session, when referring to an insurance, the Crown must elect between two methods of charging the income-tax on an insurance company. His words are these, at p. 227 of Volume V of Tax Cases: ‘The reason is very obvious because if the Crown were not allowed to do that the Crown would lose the produce of an investment according to the extent whether that investment was held by a private individual or by a trading company. That being so, when you come to deal with a business like an insurance company, especially a life insurance company which has to hold very large investments, it nearly always, in fact, in the life of an insurance company which has not a fire business, pays the Crown better to take the interest on the investments, and not to trouble with the profits.’ Now, recalling then what the law was in 1906, it was clear that the Crown were able to exercise the choice which the income-tax statute gave them of taxing a life insurance or other insurance body under the various cases of Schedule D, and it was held also in that case that the choice was one which was to be exercised by the Crown. It could not be exercised by the subject. The Income Tax Acts give a revenue for tax upon the income of persons, and that tax can be charged upon them under the various cases in Schedule D, and it lies upon the Crown to select which case is the most favourable for the purposes of the Revenue. That stands, I think, as quite clear law for as far back as twenty years ago.

After Guardian the life assurance option was rarely mentioned in the Courts, despite the fact that companies with life assurance business did feature quite frequently. This may be because a large number of the tax cases involving companies carrying on life assurance business have involved non-resident companies with a UK branch, where the Crown Option is not (really) relevant and was not in issue, or mutuals, where it is not relevant at all, or, in many cases, both. In Sun Life Assurance Co Ltd v Davidson (and the conjoined case of Phoenix Assurance Co Ltd v Logan),26 however, the ability of the Crown to assess Case I as an alternative was mentioned in passing by the Special Commissioners at paragraph 5 of their decision, and more prominently by Harman J in the High Court, though not entirely accurately as to the rationale for the option. He said: As is well known, the Crown has long had the option of charging a life assurance society to tax either under Schedule D or by taxing the income of the society’s investments without regard to its annual profits. In fact such profits are not easily ascertainable year by year and the Crown invariably takes advantage of its right to tax these companies on their investment income.

That may be true, but it is not the principled reason for choosing the I minus E basis. In the Court of Appeal, Singleton LJ remarked: ‘The Crown elected to tax both the Appellant Companies—and, I believe, all other British insurance companies—on the income from their investments rather than under Schedule D.’ 26

37 TC 330.

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23

That may also have been true at that time, but it does not explain the reason for the Crown Option. The same can be said of the mentions in the House of Lords by Viscount Symonds and Lord Somervell. In United Friendly v Eady27 (Corporation Tax transitional rules for management expenses) the separate notional Case I restrictions for industrial and ordinary life assurance business were mentioned. In Johnson v Prudential Assurance Co Ltd,28 also about management expenses of an I minus E company, the ability of the Crown to assess Case I was mentioned in passing by the Special Commissioner (paragraphs 2 and 4 of the decision), with a more developed discussion (though still not entirely accurate as to cause and effect) in the judgment in the Chancery Division of Robert Walker J (at page 465), where he says The first special feature to note is that the investment income of a life assurance-company is a trading receipt. This was established in several early cases of which the most important is Liverpool and London and Globe Insurance v Bennett [1913] AC 610. All the cases are noted and discussed in the judgment of the Court of Appeal delivered by Millett L.J. in Nuclear Electric v Bradley [1995] STC 1125, at pages 1131–6 (since affirmed by the House of Lords [1996] STC 405). As Millett LJ observed, many of the early cases were decided at a time when the remittance basis of taxation of overseas income was more favourable to taxpayers, and it was in the Inland Revenue’s interest to elect to tax the whole of a life office’s trading income, including its unremitted overseas income, under Sch D Case I. An example of this is The Gresham Life Insurance Society v Attorney General 7 TC 36: see especially at page 46, where Astbury J cited the words of Fletcher Moulton LJ in Liverpool and London and Globe Insurance v Bennett [1912] 2 KB 41, at page 56, speaking of the five cases of Sch D: . . . Often however—especially with the progressive attenuation, after 1974, of the remittance basis29—the position was reversed and it was the Inland Revenue, rather than the life assurance company, that would do better by charging tax on investment income rather than on trading profits computed under Sch D Case I. There are various possible reasons for this and some are extremely complex, falling within the arcane expertise of actuaries rather than non-specialist accountants or lawyers.

and there are further remarks in passing in the Court of Appeal by Nourse LJ (at pages 475–76). There is no mention at all in Prudential Assurance Ltd v Bibby30 (deduction of charges on income in computing relevant profits for section 88 FA 1989 purposes); it is mentioned again by way of background in paragraph 11 of the Special Commissioner’s decision and in paragraphs 27 and 28 of the judgment of Sir Richard Scott V-C in Bibby v Prudential 27 28 29 30

48 TC 657. 70 TC 445. This is not relevant to life assurance business. 73 TC 142 [1999].

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Assurance Ltd31 (purchase of own shares—whether insurer selling shares entitled to tax credit). Finally, in Legal & General Assurance Society Ltd v Thomas32 the fact that L & G has always been assessed on the I minus E basis and never under Case I was in the statement of agreed facts cited by the Special Commissioners and by Evans-Lombe J in the High Court. The option, including the life assurance part, was, however, mentioned in a number of non-life assurance cases. For example, Salisbury House Estate Ltd v Fry33 was a case about the exclusivity of the Schedules, or, more precisely, of Schedule A. In the course of his judgment, Viscount Dunedin could not forbear from commenting on the difference between the position as regard the Schedules and as regards the cases: The Company there [Rosyth Building & Estates Co Ltd, in 8 TC 11] had duly been assessed under Schedule A, but the point was, might it have been assessed under Schedule D instead of under Schedule A. The Lord President says: ‘It is settled that it is for the Crown to choose in which capacity the Company shall be charged, as property or investment owner on the one hand, or as trader conducting a business on the other. The house property in this case is not occupied for the purposes of the Company’s business; it is occupied by tenants to whom the Company lets it. Accordingly I think the Crown is alternatively entitled to treat the rents either as chargeable in respect of the Company’s property under Schedule A, or as constituents of the profits arising or accruing to the Company from its business chargeable under Schedule D.’ Now that that settles the point I do not think can be doubted. But when one comes to look at the cases which were cited, and on the effect of which the Lord President says, ‘It is settled, etc.’, it will be found that they are all cases not of choice between Schedule and Schedule but between the various Cases in Schedule D. It had been settled long ago that in the case of insurance companies who held large investments the Crown might proceed to reckon under either Case I in Schedule D or under any of the other Cases which may be found to apply. I myself said it in the case of Revell v Edinburgh Life Insurance Company, and what I said was approved and adopted by Lord Cozens Hardy, M.R., in Liverpool and London and Globe Insurance Company v Bennett, [1912] 2 K.B. 41. From this the Lord President has without authority deduced the view that as there is an option between Cases so there must be an option between Schedules, and he bases this in argument on the possibility of an insurance company having securities which would fall under Schedule C and others falling under Schedule D . . . But I think the answer is that an option between Cases does not in any way disturb the general scheme of the Act: an option between Schedules would . . . There is no conflict between Schedules C and D if, as is the hypothesis put by the Lord President, the Crown elects to charge in Schedule D on Cases other than Case I. Schedule C is not, so to speak, upset. On the contrary the charge on the particular form of investment under Schedule C fits in with the charge on other investments

31 32 33

73 TC 235. 78 TC 321 [2006]. See n 1.

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25

made under, say, Case III of Schedule D. But in the case of real property, if you do what is here asked Schedule A is upset altogether.34

Simpson v Grange Trust Ltd35 was a case about the proviso to the management expenses rule. The question was whether that proviso was applicable in a case other than that of a life assurance company. Such a company was trading even though not charged on a profits basis—so the concept of Case I computation was not so outlandish. However, in the case of an investment company, it was held that the proviso did not apply. The calculation of a Case I profit, if it could be done at all, was only ‘notional’. Again, in the course of judgment, the judges touched on the Crown Option, in particular Lord Hanworth MR at pages 241–12 of 19 Tax Cases, but nothing new was added. In BG Utting & Co Ltd v Hughes36 one of the questions was whether a premium on the grant of a lease could be included in a Case I computation. In the judgment of the Court of Appeal Lord Justice Clauson held that as the charge on ‘fines’37 was originally within number 2 of Schedule A but had been moved to Case III of Schedule D by Schedule 3 FA 1926, then once it arrived in Schedule D the Crown Option could apply and Case I was a possibility as a result of the Crown Option. This was described as a ‘well recognised right’ without citation of any cases. None of these cases38 show the option being argued over. To see what, if anything, happened to the Crown Option in practice after 1915, we need to look at other sources. Guidance on the tax law of life assurance companies was thin on the ground. The Inland Revenue did not publish its guidance to inspectors, and little appears to have been available to companies and their advisers. The Quarterly Record of the Association of HM Inspectors of Taxes contains a series of three articles in its January, April and July 1928 issues. This mentions the pre-1915 position and says that ‘The calculation might also include interest received but as to this the Crown had the option, as they still have, either of doing so or of taxing such interest under the appropriate Case III, Case IV or Case V’. The Journal of the Institute of Actuaries39 contains a paper dated 26 March 1943 by AH Shrewsbury FIA on ‘Income Tax as Affecting 34 This raises some interesting issues about practice involving Schedule A, Schedule C and a Case I assessment on a company carrying on life assurance business and the ‘notional Case I’ computation in relation to management expenses and (after 1940) rates of tax which are outside the scope of this paper. 35 19 TC 231 [1935]. 36 23 TC 174 [1940]. 37 ‘Fines’ includes premiums on grant as well as on renewal of leases, contrary to the Inland Revenue’s view (the Inland Revenue ignored the judgment until FA 1963 repealed the old Schedule A and the rule in Case III which had become s 185 Income Tax Act 1952). 38 The Utting case apart. 39 [JIA 72], 35–78.

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Life Offices’. It starts a passage that is rather difficult to construe40 by saying: It is not unusual to encounter a statement to the effect that the Revenue has an option to tax either investment income or profits, whichever may be greater. Any such statement, if found in a judgment, should be read with close consideration of the context; if it be found in any other source, where the language employed may reasonably be expected to be less precise, the appropriate attitude of mind is scepticism. A complex subject cannot be summarized accurately in one sentence. Paragraph 510 of the Report of the Royal Commission begins with these sentences: Under the present law Life Assurance companies are liable to bear tax either on profits (under Case I of Schedule D) or on the interest arising from the investment of their funds, whichever is greater. This alternative basis of liability is not peculiar to Life Assurance companies; it is common to all trading concerns. The first sentence was in 1920 broadly true (although not technically accurate) but the second was challenged by Mr Geoffrey Marks in his reservations (p. 145 of the Report)41 on the ground that it was not a complete statement of the case. The challenge has lost no force with lapse of time.

The Quarterly Record of the Association of HM Inspectors of Taxes contains a further series of three articles in its April, July and October 1964 issues. One of them says ‘following the doctrine of the Crown’s choice between the case of Schedule D, it pays the Revenue better in most cases to deal with the liability on an “interest basis” rather than under Case I’. The Inland Revenue’s Corporation Tax Manual, in a passage dated June 1976, says that ‘The Crown Option to compute liability under Cases III, IV, V etc instead of under Case I is retained for CT by the application of section 250(3) Income and Corporation Taxes Act (ICTA) 1970.42 Although this option is normally exercised . . .’ The first modern text book on the subject of insurance taxation, Taxation of Insurance Business (JS Macleod and A Levitt (London, Butterworths, 1985)), gives little more than a short résumé of the history of the cases leading to Liverpool & London & Globe, but accepts that the option remained in being. Legislation enacted since 1915 has also at various times acknowledged the existence of the life assurance Crown Option by stating as the condition for its operation that the company is not charged to tax under 40 Mr Shrewsbury was an actuary. The author of this paper notoriously is not (Scottish Widows plc v HM Revenue And Customs, Special Commissioners decision SpC 664, para 34). 41 See n 22. 42 S 250(3) became s 9(3) ICTA 1988. There does not seem to have been any real thought given in 1965 to whether the Crown Option was compatible with corporation tax. This is odd, given that under the Profits Tax, the predecessor to Corporation Tax, the charge was solely on a Case I basis.

The Crown Option

27

Case I of Schedule D (and so is charged under the I minus E basis even though it was the basis that dare not speak its name until 199243). These provisions include, in addition to section 13 FA 1915 (now section 76 ICTA 1988), —section 24(2) FA 1956 (see now section 436A ICTA 1988); —section 69(7) FA 1965 (‘whether or not . . . charged under . . . Case I’); —section 44(12) FA 1989; —section 85 FA 1989; —section 88 FA 1989; —section 441 ICTA 1988 (as substituted in FA 1990); —section 437(1A) ICTA 1988; —section 88A FA 1989; —paragraph 84(3) Schedule 18 FA 199844 (special Crown Option provisions under Corporation tax self-assessment (CTSA)). It is not entirely coincidental that many of the provisions implicitly acknowledging the Crown Option (despite its apparent redundancy since 1915 following the enactment of the management expenses restriction) date from the 1989–91 period. This is because shortly before the major reforms of those years there had been a revival of interest in the Inland Revenue Insurance Districts in invoking the option to tax under Case I. Shrewsbury was right to think that the statements made by judges about the Crown Option and the Revenue being able to choose what it thinks gives it most tax were oversimplistic.45 The Inland Revenue had, at least in the early and late years of last century and in this, adopted a much more principled approach to the Crown Option. The reason for choosing the I minus E basis almost invariably was little to do with it giving most tax. It is because the I minus E system ensures that the income (and since 1965 capital gains) accruing for the benefit of policyholders are taxed at appropriate rates and at the same time the shareholders’ profit is also always taxed. The modern demonstration of that can be found in paragraph 2.23 of the Life Assurance Manual. In addition, the passages from the 1910 memorandum from the Life Offices and the extracts from the meeting of those Offices and the Board of Inland Revenue cited above, together with the other papers from that era, demonstrate that the Inland Revenue at least was fully conscious of the purpose and principle of the I minus E basis. 43 The I minus E basis is first mentioned in tax statute in s 65 F (No 2) A 1992, where it is defined as the basis ‘commonly so called’ under which the profits are not charged to tax under Case I. See now s 431G ICTA 1988. 44 One of the special Crown Option provisions under CTSA—see also para 84(2) for a provision relating to the non-life assurance option. 45 That has not stopped the mantra being put forward by Counsel and repeated by judges even in modern cases.

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Richard Thomas

In 1915 few if any companies wrote exclusively term assurance business. Term assurance business differs substantially from other life assurance business, such as endowment, whole of life or annuity business. It is primarily protection business, like general business. Premiums are set so as to give a profit if the number of lives assured dropping in a year is in line with the company’s actuarially estimated predictions. Little if any investment income is involved—but substantial amounts of expenses in the form of commissions and other acquisition expenses are involved. It sits ill with the I minus E basis—as there is no I and a large amount of E. A company that writes only term assurance will, on the I minus E basis, simply have large amounts of excess E. The notional Case I restriction may apply, but even if it does the company will roll forward a bank of management expenses which may have value to a purchaser with ‘I heavy’ business. In addition, some companies began in the 1980s to ‘buy’ commission from overseas by entering into reinsurance contracts with an overseas insurer on ‘modified co-insurance’ terms. An example of this can be seen in the Special Commissioners decision in Royal London Mutual Insurance Society v Barrett.46 As a result of this type of activity, a number of companies were charged to tax on a Case I basis using the Crown Option. This use of the option has continued, and was last used in 2006 in relation to the 2003 and later years of a company. One aspect of the modern use of the Case I option that emerged was the realisation that any excess management expenses being carried forward under section 75(3) ICTA (especially where section 76(5) applied to increase that amount as a result of the notional case I restriction) were irrevocably lost when Case I was applied, even if the charge reverted to the I minus E basis in a later year.47 The threat of Case I could be seen as a potent weapon in the hands of the Inland Revenue. However, the Crown Option to tax life assurance business under Case I has been exercised only in cases where companies have, in the eyes of the Inland Revenue, been seeking to subvert the I minus E basis, and in such cases it would be expected that the Case I basis would remain. In other cases where large Case I basis profits have arisen in one year as a result of fortuitous events48 the Inland Revenue has declined to use the Crown Option even though it would have brought in much more tax.

75 TC 261. Nor was it entirely clear if Case VI losses under ss 436, 439B or 441 could ‘bridge the gap’—but they certainly could not be set against Case I profits. 48 Examples are the introduction of s 83YA FA 1989 and the major release of provisions allowed by the FSA following PS06–14. 46 47

The Crown Option

29

HMRC has in recent years operated the Crown Option by reference to paragraphs 2.31ff of the Life Assurance Manual.49 Despite the comfort given in LAM 2.31ff, however, the industry remained uncomfortable with 49 Circumstances where actual Case I Appropriate 2.31 Although the I minus E basis is the norm for companies carrying on life assurance business, there are certain cases where it would be appropriate to tax under Case I. This would normally be the case where the profits computed in accordance with the provisions of Case I exceeded the income and gains computed under the I minus E basis even after all management expenses were restricted as a result of the application of s 76(2) (or, after 2004, Step 9 of s 76(7)) ICTA (see LAM 7.211 and 12A.591 onwards). This situation may arise for a variety of reasons • A company may cease to write new business and as a result of the way the reserves for future liabilities were calculated, substantial amounts of surplus begin to emerge.

• Certain types of life assurance business produce very little investment income but substantial underwriting profits. Typical of these is credit life business where a supplier of consumer credit insures the lives of its customers so that if they die during the period of a credit loan, the loan is repaid. Other types of term assurance, particularly short term business produce the same sort of result. • Some types of reinsurance activity involve little investment return and substantial underwriting profits. • Some companies only write business which falls to be taxed in accordance with the rules of Case I of Schedule D, namely pension business, individual savings account business, child trust fund business, life reinsurance business or overseas life assurance business. The use of the option to charge tax under Case I is intended to prevent erosion of the I minus E tax base. So it will not apply where for example • s 83YA FA 1989 applies to bring into charge as a Case I receipt an amount previously not taken into account because of a book value election in a non-profit fund, providing that this is the only factor pointing to a Case I charge (see LAM 6.41A onwards) • there is a release of reserves as a result of a major change in the FSA’s rules about the valuation of liabilities, for example as a result of implementing the EC Reinsurance Directive. Consistent Application: When to Change? 2.32 Although certain dicta from early cases suggest that the Crown is entitled, if not bound, to exercise its option between I minus E and Case I in each year according to which gives the higher figure of tax, it is not now thought that such a course of action would be appropriate where there is no significant change from year to year in the way in which a company conducts its business. Gradual Change: Notice to be given 2.33 In the absence of such a significant change it will only be appropriate to change the basis of assessment from I minus E to Case I (or vice versa) where there has been a gradual but permanent change over a number of years which has rendered the basis in use inappropriate, or which can be seen to be about to do so. Where a change is contemplated in these circumstances Inspectors should give as much notice of their intention to require a change of basis as may be reasonable in the circumstances. Cases where Notice Not Possible 2.34 There will be circumstances in which a change of basis, either temporary or permanent, will be appropriate, but where it will not be possible to give any prior notice of the intention to require a change because the need for it has arisen out of unusual events in a particular year. It is not possible to provide a complete list of such events, but they might, for example, include • use of a tax avoidance scheme to suppress the investment return earned by a company, or to generate large amounts of expenses of management

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its use, especially in relation to the permanent loss of tax attributes, such as excess section 76 expenses, and a lack of certainty about what events HMRC will regard as ones which should, or, as the case may be, should not, trigger the Crown Option. In the course of the major consultation exercise begun in May 2006 on the taxation of life assurance business, these concerns led to the formation of a HMRC-industry ‘Crown Option’ working group and the enactment of Schedule 8 FA 2007. This builds on legislation in FA 199550 which made Case I mandatory for pure reinsurers—companies whose only business was reinsurance outside a group arrangement. It makes Case I mandatory for those companies and also for companies only writing gross roll-up business—section 431G(3) ICTA. More importantly, section 431G(2) ICTA makes I minus E the only basis for all other companies. HMRC remained concerned that some companies not writing only gross roll-up business ought to be taxed on a Case I basis because the expenses restriction did not capture the entire Case I profit—if all expenses were extinguished, no more could be done even if the ‘notional’ Case I profits exceeded the income and gains without expenses. To prevent this, section 76(10) and (11) ICTA51 were repealed and section 85A FA 1989 enacted. This charges to tax a company on the I minus E basis an additional amount equal to the excess of the ‘notional’ Case I profit and the I minus E profit. With that in place, the life assurance Crown Option could safely be buried. But what of the non-life assurance option? It was last mentioned in tax cases in Utting v Hughes, but it lived on, recognised in textbooks and in • an unusually large release of surplus to shareholders, possibly following an ‘inherited estate’ exercise to clarify the respective rights and expectations of shareholders and policy holders in relation to assets that are clearly surplus to the current needs of the business; • a change in the nature of a company’s business, or of the way in which it calculates its mathematical reserves, that is associated with a sale of the company; a major change in reinsurance arrangements or a transfer of business to or from another company (which might require a review of the basis of assessment in use both before and after the change). Where the events that have occurred result in a permanent change to the appropriate basis of assessment then, regardless of whether those events were gradual or sudden, the new basis should be adhered to for the future unless and until a further change becomes appropriate in accordance with this paragraph. Effect of Change from I Minus E to Actual Case I 2.35 One effect of a change from I minus E to Case I is that any excess management expenses otherwise to be brought forward under s 75(3) ICTA 1988 are lost, as is the benefit of any Case VI losses relating to pension business, individual savings account business, CTF business, overseas life assurance business and life reinsurance business. It is also likely that the benefit of capital losses would not easily be realised. Further guidance on the specific provisions applicable when a company carrying on life assurance business is assessed Case I is given in LAM 2.41 onwards. 50 S 439A ICTA 1988. 51 The post-FA 2004 manifestation of the proviso to s 13 ITA 1915—the notional Case I restriction.

The Crown Option

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the Inland Revenue Guidance.52 It was also recognised in section 393(8) ICTA 1988, though that was aimed primarily at income that had suffered tax by deduction at source rather than by assessment under Cases of Schedule D other than Case I. Chapter 2 Part 4 FA 1996, the loan relationships rules, removed the option as between Case I on the one hand and Cases III (except for the charge on discount53 and annual payments) and IV on the other. Credits that arose from assets integral to the carrying on of a trade were Case I receipts—sections 82(2) and 103(2) FA 1996. The Income Tax (Trading & Other Income) Act 2005 (ITTOIA) abolished the remaining elements of the option for non-company traders—section 366(1) (ITTOIA).54 For companies it struggles on, with paragraph 84 of Schedule 18 FA 1998 remaining only for the non-life assurance option. However, the draft of the Corporation Tax Bill published by the HMRC Tax Law Rewrite project proposes to abolish what is left of it for companies too—see clause 300(1) and Annex 1 Change 55 (February 2008 draft).55

52 See, eg Business Income Manual, paras 14035 and 40800 onwards and General Insurance Manual, paras 5050 and 5060. 53 The separate charge on discount in Case III para (c) in s 18(3A) ICTA was repealed by F (No 2) A 2005. 54 And see the Explanatory Notes, Annex 1, Change 66. 55 See draft Bill with origins at http://www.hmrc.gov.uk/rewrite/draft-ct-bill-origins.pdf and Annex at http://www.hmrc.gov.uk/rewrite/draft-ct-annexes.pdf.

2 The Origins of Fiscal Transparency in UK Income Tax THE ORI GI NS OF FI S CAL TRANS PARENCY I N UK I NCOME TAX

MALCOLM G AMMIE MALCOLM GAMMI E

I N T RO DU C T I O N

Pitt’s Income Tax Act of 17991 is often labeled a failure. Certainly, Pitt’s original estimate of the yield of £10,000,000 was subsequently revised to £7,500,000 and in 1799 actually produced not much more than £6,000,000. By 1801 the yield had fallen to £5,600,000. The major objection lay in its method of collection. Assessors each year would give taxpayers notice of the tax claimed, which taxpayers were free to accept. If they wished to object to the amount claimed, however, they had to produce a full return of their income in a return divided into four heads of income comprising 19 cases that corresponded to lines 1–19 on the return. From the total income thus disclosed, the taxpayer was authorised to deduct a variety of sums, some of a general nature and others in respect of particular items of income. The general deductions included both annual interest for debts and annuities. When Addington renewed the tax in 1803, his Property and Income Tax Act of that year2 made two significant changes: —it divided the income tax into five ‘Schedules’; and —it adopted the concept of ‘taxation at the source’. These changes are credited with ensuring that the number of taxpayers doubled and the yield rose by half, notwithstanding that Addington’s 5% tax rate was only half that of Pitt’s. Not surprisingly in view of its success, Addington’s structure remained in place without significant amendment until after victory over Napoleon at Waterloo. The income tax was repealed in 1816, and was only reintro1 2

39 Geo 3, c 13. 43 Geo 3, c 122.

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Malcolm Gammie

duced by Peel in 1842.3 Peel’s income tax was effectively a reprint of the Income Tax Act of 1806,4 which itself largely followed the form of Addington’s 1803 Act. Peel’s income tax was imposed for three years and extended only to Great Britain. The tax was renewed for a further three years in 1845 and 1848. When the government requested a further three years in 1851, Parliament was only prepared to grant a year’s extension, repeated in 1852. Eventually, in 1853, the tax was extended to Ireland and renewed for a further seven years. The Income Tax Acts of 1842 and 18535 remained the bedrock of the income tax until its first consolidation in 1918. As that date indicates, the idea that, one day, the income tax might not be renewed had become an aspiration of a diminishing number of Members of Parliament by the end of the nineteenth century and, after the financial demands laid upon the country by the First World War, none in 1918 could have contemplated its abolition. Nevertheless, the idea that Parliament should be called upon to renew the income tax on an annual basis remains an important constitutional principle underpinning any government’s claim to office. How far Addington can claim credit for the changes that he introduced to Pitt’s income tax, in particular for the adoption of ‘taxation at the source’, is a matter of dispute. It seems that use of taxation at the source in the UK (and some of the legislative language used in the Income Tax Acts) can be traced back at least to 1512.6 It is not the purpose of this paper to explore or resolve that matter. Its aim is to explore the role that ‘the source’ has played in the development of the concept of ‘fiscal transparency’ in income tax law. My interest in this topic was stimulated by reading Kam Fan Sin’s book, The Legal Nature of the Unit Trust.7 In chapter 5 of the book there is an extended analysis of one of the leading decisions on the fiscal transparency of certain trusts, Baker v Archer-Shee,8 which continues to provide the starting point for analysis of offshore trusts and unit trusts. At the beginning of his analysis, Kam Fan Sin notes that: Despite the number of post-Baker cases, there is still no consensus on the ratio decidendi of Baker. To those dissatisfied with Baker’s doctrinal position, it is best to be considered as a case explicable of no more than a tax law principle, or to be applicable only when there is only one beneficiary. A broader interpretation is to see the life tenant in Baker as having a proprietary interest in the trust assets that generated the income paid into her account by the trustee.

5 & 6 Vict, c 35. 46 Geo 3, c 65. 16 & 17 Vict, c 34. P Soos, The Origins of Taxation at Source in England (Amsterdam, IBFD Publications, 1997). 7 Clarendon Press, Oxford (1997). 8 [1927] AC 844, 11 TC 749. 3 4 5 6

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What is the correct way to view this decision? The starting point in answering this question is to look at the structure of the income tax as it is found in the Acts of 1842 and 1853.

P E E L’ S I N C O M E TAX

The Definition of Income Under section 1 of the Income Tax Act 1853 tax was to be ‘charged, raised, levied, collected and paid yearly’: For and in respect of the property in any lands, tenements, or heriditaments in the United Kingdom, and for and in respect of every annuity, pension, or stipend payable by her Majesty, or out of the public revenue of the United Kingdom, and for and in respect of all interest of money, annuities, dividends, and shares of annuities, payable to any person or persons, bodies politic or corporate, companies or societies, whether corporate or not corporate, and for and in respect of the annual profits or gains arising or accruing to any person or persons whatever resident in the United Kingdom, from any kind of property whatsoever, whether situate in the United Kingdom or elsewhere, or from any annuities, allowances, or stipends, or from any profession, trade, or vocation, whether the same shall be respectively exercised in the United Kingdom or elsewhere, and for and in respect of the annual profits or gains arising or accruing to any person or persons not resident in the United Kingdom, or from any trade, profession or vocation exercised in the United Kingdom . . .9

Section 2 of the 1953 Act provided that: For the purpose of classifying and distinguishing the several properties, profits and gains for and in respect of which the said duties are by this Act granted, and for the purposes of the provisions for assessing, raising, levying, and collecting such duties respectively, the said duties shall be deemed to be granted and made payable yearly for and in respect of the several properties, profits and gains respectively described or comprised in the several schedules contained in this Act, and marked respectively (A), (B), (C), (D), and (E) . . .

What immediately appears from this is that a person’s income does not necessarily depend upon the possession or ownership of ‘property’ as such. It is true that Schedule A refers to ‘the property in all lands, tenements, hereditaments, and heritages in the United Kingdom’ and Schedule D opens with: For and in respect of the annual profits or gains arising or accruing to any person residing in the United Kingdom from any kind of property whatever, whether situate in the United Kingdom or elsewhere . . . And for in respect of 9

The section was repealed by the Statute Law Revision Act 1875.

36

Malcolm Gammie the annual profits or gains arising or accruing to any person whatever, whether a subject of her Majesty or not, although not resident within the United Kingdom, from any property whatever in the United Kingdom, . . .

In other respects, however, the Schedules refer to things that are not necessarily synonymous with the ownership of recognisable property: Schedule B refers to the ‘occupation’ of lands; Schedule D to professions, trades, employment or vocations; and Schedule E to every public office or employment of profit. Certainly, at the time the public offices and employments within Schedule E comprised those that existed independently of the particular incumbent from time to time. Nevertheless, the idea that income might have no particular relation to property in any conventional sense was reinforced by other descriptions in the Schedules, notably Schedule C: ‘For and in respect of all profits arising from interest, annuities, dividends and shares of annuities payable to any person, etc.’; Schedule D: ‘For and in respect of all interest of money, annuities, and other annual profits and gains not charged by virtue of any of the other schedules contained in this Act’; and Schedule E: ‘upon every annuity, pension, or stipend payable by her Majesty or out of the public revenue of the United Kingdom’. In these respects, what appears at first glance to matter is the character of the receipt rather than its source. In other words, there are items of an inherently income character that can be described, in the more familiar terms of the later case law, as ‘pure income profit’.10

The Manner of Collection As regards the mechanics of assessment and collection under the 1842 and 1853 Acts, Schedules A and B were unique in the sense that the rules of those Schedules described the amount of income that was to be charged, based in each case on the annual value of the land. In most cases the tax assessed would be payable in the first instance by the occupier,11 who, if a tenant, could recover the Schedule A element from his landlord by deducting the tax from his rent. Landowners would in turn recover the tax assessed under Schedule A,12 where they could, by deduction from any rent charge, annuity charged on the land or interest of any mortgage. Tax in respect of income falling within Schedule C was to be paid ‘by the persons and corporations respectively intrusted with the payment of 10 See, eg Purchase v Stainer’s Executors (1951) 32 TC 367 concerning the actor Leslie Howard, who was killed as a result of enemy action in June 1943. From my electronic search, this case appears to contain the first reference in the tax case series to this precise expression, although the idea behind it is apparent from earlier cases. 11 ITA 1842, s 63, rule IX. 12 Whether assessed directly on them or borne by deduction.

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the annuities, dividends, and shares of annuities’. Similarly, tax in respect of incomes within Schedule E was collected within the department or from the company in respect of which the office was held. In the case of both Schedules, the person entitled to the income would be bound to accept the income to which he was entitled net of the tax. Schedule D was then, as it was until the Tax Law Rewrite lamentably dispensed with both Schedules and Cases, divided into six Cases.13 Case I charged ‘the full amount of the balance of the profits and gains’ of any trade, manufacture, adventure or concern in the nature of trade and Case II extended to professions, employments or vocations.14 In each case the assessment was based on a three-year average. Tax under Case III was charged in respect of ‘profits of an uncertain annual value not charged in Schedule A’. Rule 2 of Case III elaborated on this as follows: The profits on all securities bearing interest payable out of the public revenue (except securities before directed to be charged under the rules of Schedule C), and on all discounts and on all interest of money, not being annual interest, payable or paid by any person whatever, shall be charged according to the preceding rule in this case.

The preceding rule charged the full amount of the profits or gains arising within the preceding year. Case IV charged tax in respect of interest arising from foreign securities (except as were within Schedule (C)) and Case V charged tax in respect of foreign possessions. Finally, Case VI charged ‘any annual profits or gains not falling under any of the foregoing rules, and not charged by virtue of any of the other Schedules contained in this Act’. Section 102 of the 1842 Act charged all annuities, yearly interest of money or other annual payments in the following terms: upon all annuities, yearly interest of money, or other annual payments, whether such payments shall be payable within or out of Great Britain, either as a charge on any property of the person paying the same by virtue of any deed or will or otherwise, or as a reservation thereout, or as a personal debt or obligation by virtue of any contract, or whether the same shall be received and payable half-yearly or at any shorter or more distant periods, there shall be charged for every twenty shillings of the annual amount thereof the sum of sixpence, without deduction, according to and under and subject to the provisions by which the duty in the third case of Schedule (D.) may be charged; provided that in every case where the same shall be payable out of profits or gains brought into charge by virtue of this Act no assessment shall be made upon the person 13 Over time, other Schedule D Cases have come and gone, notably Case VII, introduced in 1962 for charging short-term gains to income tax, and Case VIII, for income from land when the annual value charge under the old Schedule A was replaced in 1963. 14 For a description of how all employments were transferred to Schedule E in 1922, see H Munroe, Intolerable Inquisition? Reflections on the Law of Tax (London, Stevens & Sons, 1981).

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Malcolm Gammie entitled to such annuity, interest, or other annual payment, but the whole of such profits or gains shall be charged with duty on the person liable to such annual payment without distinguishing such annual payment, and the person so liable to make such annual payment, whether out of the profits or gains charged with duty, or out of any annual payment liable to deduction, or from which a deduction hath been made, shall be authorised to deduct out of such annual payment at the rate of sixpence for every twenty shillings of the amount thereof, and the person to whom such payment liable to deduction is to be made shall allow such deduction . . .

As originally enacted, section 102 was a charging section separate from the Schedules and Cases of the Act.15 In 1853, however, it was incorporated in Schedule D as the third paragraph of that Schedule. Section 40 of the 1853 Act also provided that: Every person who shall be liable to the payment of any rent, or any yearly interest of money, or any annuity or other annual payment, either as a charge on any property or as a personal debt or obligation by virtue of any contract, whether the same shall be received or payable half-yearly or at any shorter or more distant periods, shall be entitled and is hereby authorized, on making such a payment, to deduct and retain thereout the amount of the rate of duty which at the time when such payment becomes due shall be payable . . . and the person liable to such payment shall be acquitted and discharged of so much money as such deduction shall amount unto, as if the amount thereof had actually been paid unto the person to whom such payment shall have been due and payable; and the person to whom such payment as aforesaid is to be made shall allow such deduction, upon the receipt of the residue of such money, . . .

The final piece in these collection arrangements did not appear until the Customs and Inland Revenue Act 1888, which in section 24(3) provided that: Upon payment of any interest of money or annuities charged with income tax under Schedule D and not payable, or not wholly payable, out of profits or gains brought into charge to such tax, the person by or through whom such interest or annuities shall be paid shall deduct thereout the rate of income tax in force at the time of such payment, and shall forthwith render an account to the commissioners of inland revenue of the amount so deducted, or of the amount deducted out of so much of the interest or annuities as is not paid out of profits or gains brought into charge, as the case may be;

The Nature and Scope of the Charge on Income In many respects, this brief description of the structure of the income tax reveals nothing especially remarkable. The order of the Schedules reflects 15

See London County Council v Att-Gen (1901) 4 TC 265.

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what mattered in a pre-industrial agricultural society: land ownership and activities most closely associated with the land (farming in particular) come first. The definition of income by reference, essentially, to incomings rather than to more sophisticated concepts of economic income based on accrual accounting is unexceptional and the reliance wherever possible on the collection of tax at the first point at which the different types of incoming emerge and can be recognised is entirely sensible. Even the ability of a payer to deduct and retain the tax is of no particular consequence in the context of what was, leaving exemptions aside, a tax imposed at a single positive rate. A single rate tax (ignoring the zero rate of exemption) also meant that the division of ‘incomings’ into five Schedules to avoid the sensitivity of a declaration of total income was of no particular consequence. The Schedules provided a comprehensive description of the variety of incomings that could go to make up a person’s income. As such, they reflected that different components of personal income require different computational rules, most notably to produce a figure of business profit. In broad terms, the Schedules describe three forms of incomings: —those generated by personal activity, whether through employment or self-employment; —those generated by the ownership of property, notably land; and —those incomings that are income because they have that character, ie they are a specific charge on a fund and therefore pure income profit, notably interest and annuities. The structure of assessment and collection secures, certainly in respect of the third category, that the person responsible for paying an incoming described as income is under an obligation to deduct tax from the payment. As the payment meets the definition of income, the payer should usually have little difficulty in recognising that he has an obligation to deduct tax.16 A similar collection mechanism is adopted where the property or office lends itself to that solution. In those cases in which the payer cannot be reached, as with most foreign income, or that necessarily involve a computation of the taxable amount, such as self-employment, the only solution is direct assessment. In the case of foreign income this was, in the ordinary application of the tax as introduced, when the income was remitted (and therefore could be identified for assessment). In the case of trades, professions and vocations, it was by reference to the known results of past years so as to minimise the need for estimation and adjustment on a current year basis. An early issue to arise from this classification of income was whether particular incomings of public bodies were within the scope of the 16 It is clear, however, that the payment in question must have the particular quality of the payment in question and not just the requisite ‘label’, see eg Westminster Bank v Riches (1947) 28 TC 159 (interest) and Sothern-Smith v Clancy (1941) 24 TC 1 (annuity).

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Schedules where they arose from carrying on particular public undertakings or from some statutory provision entitling them to raise funds or where they were required to apply surpluses for specific public purposes. In most cases the Schedules—usually Schedule A or Schedule D—were found to cover their situation. The scope of the Schedules was commented on in Attorney General v Black,17 where a surplus arising from rates levied under Statute on all coal delivered in Brighton was found to fall within Schedule D. As the Court noted: By that Act the Legislature intended to include every description of property or profits whatsoever . . . Now all these Schedules taken together would seem a sufficiently large net to include every description of property; but to prevent any doubt we have section 100, which imposes a duty on every description of property or profit not contained in the foregoing schedules. In fact the care displayed in embracing every possible source of profit is, I may say, carried to an almost ludicrous extent, it is practically impossible to escape the operation of the Act.

One assumes that the Inland Revenue left court that day with a quiet sense of satisfaction at the suggestion that it might be practically impossible to escape the operation of the Act. Their early optimism, however, would soon disappear as taxpayers and their advisers became more familiar with the structure and application of the Act and increasingly adept at manipulating the Act to their advantage.

T H E ARCH E R- S H E E CAS E S

Baker v Archer-Shee: The Commissioners and High Court It is against that background that I turn to the decision in Baker v Archer-Shee.18 An explanation of the decision must start with its facts. In 1925 Sir Martin Archer-Shee appealed against two assessments made on him under Schedule D in respect of profits from foreign and colonial securities within Case IV of Schedule D. The profits in question arose to his wife as beneficiary under her father’s will trust. The trustee was a New York Trust Corporation and the trust was governed by New York Law. His wife was entitled to have the whole of the income of the trust fund applied to her use and the trustee had accordingly credited her New York bank account with certain sums net of trustee expenses. The Commissioners summarised the position for the years in question in the following terms: 17 18

(1871) I TC 52. [1927] AC 844; 11 TC 749.

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During the three years ended 5th April, 1925, the Appellant was married to the said daughter (Frances) of Alfred Pell, who was entitled to have the whole of the income and profits from the said fund applied to her use. The Trust Company of New York have paid over such part of the sums which they received from the said fund as they considered to be income, as the same accrued, to her order at Messrs. J P Morgan and Company’s bank in New York, while retaining in their own possession such sums as they thought might be required to comply with the income tax or other provisions of American law.

Sir Martin argued that his wife’s interest in the trust amounted to a right under New York Law to have the trusts duly administered and that this was a foreign possession chargeable under Case V of Schedule D. Under Case IV at the time tax in respect of income from foreign securities was taxed on the full amount arising in the year of assessment, whether or not remitted to the UK.19 Under Case V, tax in respect of income arising from foreign possessions, other than stock, shares or rents, was only charged on the remittance basis.20 The nature of a beneficiary’s interest under a trust is a controversial issue for equity lawyers. At law, a beneficiary’s rights went unacknowledged and the trustee was regarded as the sole owner of trust property. In equity a beneficiary initially had rights in personam against the trustee, entitling him to compel the proper administration of the trust according to its terms. Over time, however, the influence of equity predominated to ensure that a beneficiary’s rights were good against all comers except the bona fide purchaser for value without notice of the trust and anyone claiming the property through such a purchaser. It was this development that led to equitable rights being characterised as akin to rights in rem or rights to property.21 An article in the Law Quarterly Review at the time22 explained the significance of the distinction between rights in personam and rights in rem in following terms:23 A student beginning the study of equity cannot do better than to soak himself in the incomparable book written on the subject by Professor Maitland. That very learned author, even at the risk of monotony, pronounces and reiterates the root principle that equitable rights and interests are not iura in rem. They much resemble these, but the dividing line appears at once in the recollection of the ITA 1918, Schedule D, Rules applicable to Case IV, para 1. Ibid, Rules applicable to Case V, para 2. See, eg G Thomas and A Hudson, The Law of Trusts (Oxford, Oxford University Press, 2004) ch 7. As the authors point out, a beneficiary certainly has rights in rem in the case of a bare trust or a nominee arrangement where the beneficiary can compel the transfer of the legal estate. The interest of a beneficiary in a fixed trust, ie a defined limited interest, also has many of the ordinary characteristic of ‘property’. 22 Ie 1928. 23 HC Hanbury, ‘A Periodical Menace to Equitable Principles’ (1928) XLIV Law Quarterly Review 468. 19 20 21

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Malcolm Gammie bona fide purchaser for value of the legal estate. Of course the distinction is only necessary for the lawyer; the layman finds it naturally convenient enough to regard the cestui que trust as an absolute owner and to stigmatize as pedantic and, if the word may be used in the connexion, slightly ‘priggish’, the insistence of a lawyer, with Maitland, on the undoubted character of the cestui que trust’s interest as a mere ius in personam. Now nobody relishes the imputation of ‘priggishness,’ so the lawyer is ready enough to adopt lay phraseology, and to talk loosely of ‘equitable ownership.’ The utter chaos which would result, if it were really true, that equity regarded A as owner, while law so regarded B, he well knows, but in nine cases out of ten this looseness of language produces no ill effects. But unfortunately there always arises the periodical tenth case, where looseness of thinking may lead to a decision round which criticisms subsequently rage and will not be checked.

The periodical tenth case which the author had in mind was Baker v Archer-Shee. In the High Court, Mr Justice Rowlatt did not disagree with the description that had been given of Lady Archer-Shee’s rights as beneficiary. He noted that:24 The appellant’s wife is not entitled specifically to the income from the stocks, shares and rents constituting the trust fund; she is merely entitled to the income from the trust fund. She is, of course, not the shareholder or the stockholder or the landlord, as the case may be, and the trustees are not her nominees for that purpose; they exercise their discretion in the matter of investments, although they exercise their discretion for her benefit. Mr. Maugham says that she has no interest specifically in the stocks, shares and rents constituting the trust fund, and that they are not her possessions. The question is whether that is an argument which carries him home in this case. Of the correctness of the proposition generally speaking there can be no doubt at all. What this lady enjoys is not stocks, shares and rents or other property constituting the trust fund under the will; what she has is the right to call upon the trustees, and, if necessary, to compel the trustees, to administer this property during her life so as to give her the income arising therefrom according to the provisions of the trust. Her interest is merely an equitable one, and it is not an interest in the specific stocks and shares constituting the trust fund at all.25 There is no doubt about the correctness of that proposition. But the question is whether that is so for the purpose of income tax. The view put forward on behalf of the Crown is that the appellant’s wife receives the income from the stocks and shares constituting the trust fund, because for the purposes of the Income Tax Act, 1918, Sch D, Case V., the possessions need not be her possessions in a legal or specific sense; it is sufficient if she in fact receives the income from the stocks and shares constituting the trust fund. It seems to me that I must adopt that latter view. Without in the least impugn[1927] 1 KB 109, 116, 11 TC 753–54 (emphasis added). This sentence and the one immediately preceding it were cited with approval by Sargant LJ in the Court of Appeal, [1927] 1 KB 109, 128. 24 25

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ing the correctness of Mr Maugham’s description of the position of the appellant’s wife from a legal point of view, for the purposes of classifications in the Income Tax Act, 1918, I must adopt the view that she has income from the stocks and shares constituting the trust fund. I do not think I can possibly hold otherwise having regard to the decision in the House of Lords in the case of Williams v Singer.26

The Court of Appeal The case then went to the Court of Appeal, which found in favour of Sir Martin Archer-Shee. Lord Hanworth made much of the fact that what Lady Archer-Shee received from the trustees (and all she was entitled to receive) was:27 not what I will call the dividends in specie in their actual form; what they remit28 is the balance in their hands after they have carried out their trust and defrayed the expenses which fall upon the trust. They do not remit the whole of the income from the profits but they remit a sum which has lost its origin or parentage; it has lost the shape of dividends, share warrants, or the like; and is merely a sum of money which represents the balance after payment of the sums which would properly fall upon the trust.

Lord Hanworth then referred to Lord Sudely v AG29 and continued:30 Applying the analogy of that case, it appears to me that from the facts which are found here, this lady could not require the dividends or other receipts to be sent over to her in specie, and that, until the trustees have ascertained what is the balance which they are able to appropriate to the income account, she is not entitled to that sum, and it is only to the sum when so ascertained that she has a right.

He went on to conclude that the sums Lady Archer-Shee received from the trustees could not be described as income from securities within Case IV or [1920] 36 TLR 661, 7 TC 387; see below. [1927] 1 KB 109, 120, 11 TC 757. Lord Atkinson in the House of Lords professed himself unable to understand the passage of which this is part. In particular, he did not see how it mattered that the trustees paid the dividend cheques into their bank account and retained part on account of their expenses. It was no different from paying the cheques into Lady Archer-Shee’s account and leaving her to meet the expenses; see [1927] AC 844, 860–61. 28 In fact the trustees did not remit anything in its technical income tax sense at the time but credited Lady Archer-Shee’s New York bank account. Had they actually remitted the income, Sir Martin could not have resisted an assessment under Schedule D, Case V. It was because no remittance had been made that the Revenue was forced to contend that the income fell into a category that could be taxed on an arising rather than the remittance basis. 29 [1897] AC 11. Sargant LJ was also of the view that the general reasoning in Sudeley was ‘precisely applicable’. Viscount Sumner in the House of Lords thought that that this was correct, [1927] AC 844, 856. Both Viscount Sumner and Lord Balnesburgh relied on Sudeley in their dissenting speeches. For further consideration of this case, see below. 30 [1927] 1 KB 109, 121. 26 27

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income from stocks or shares within Case V, but were income from a foreign possession, namely her rights under the New York trust.

Williams v Singer and a Subtle Shift in Emphasis It appears that following this reversal the emphasis of the Revenue’s argument may have changed subtly but fundamentally. In the High Court and the Court of Appeal the main argument is summarised in the Law Reports as follows:31 Where there is a trust fund composed of foreign stocks and shares some one must receive the interest and dividends arising therefrom. In the case of a trust there are only two persons who can receive them—namely, the trustee or the cestui que trust . . . The House of Lords [in Williams v Singer32] negative the contention that the revenue authorities were not entitled to look beyond the legal ownership of the fund, and laid down the proposition that the person to be charged with the tax is neither the trustee nor the beneficiary as such, but the person in actual receipt and control of the income which is sought to reach. If the beneficiary receives the profits he is liable to be assessed on them . . . It is necessary to look at the real beneficial owner. Here the income of the trust fund belongs to the appellant’s wife and not to the trustees . . . The appellant’s wife is entitled under the will of her father to the whole of the income of the securities forming the trust fund for her life. The fact that certain expenses are deducted from the income does not make any difference . . . The interposition of trustees does not make the cestui que trust any the less the recipient of the income from the stocks and shares in which the trust fund is invested.

Here the emphasis is laid on the fact that Lady Archer-Shee was the person in actual receipt of the income in question. This derives from the decision in Williams v Singer.33 The income in that case was dividends on shares in the Singer Manufacturing Company of New Jersey. The shares were held by UK resident trustees, but the dividends were paid direct to the income beneficiary under the trust who was resident in France. The Singer dividends were credited direct to the beneficiary’s bank account in New York. The Inland Revenue nevertheless sought to assess the trustees in respect of the income on the basis that as legal owners they were the persons entitled to the dividends and therefore liable to assessment in respect of them. This argument was not available to the Revenue before 1914 because before the enactment of section 5 of the Finance Act of that [1927] 1 KB 109, 114. [1921] 1 AC 65. Williams v Singer and Others; Pool v Royal Exchange Assurance (1920) 7 TC 387. For the interesting history of the Singer litigation, see D Parrot and JF Avery Jones, ‘Seven Appeals and an Acquittal: the Singer Family and their Tax Cases’ [2008] British Tax Review 56. 31 32 33

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year dividends on foreign shares were only taxed on the remittance basis and, by definition, the dividends in this case had never been remitted. The question was whether, following the change to the arising basis, the dividends fell to be taxed even though they represented foreign income of a non-resident person.34 The inappropriate result to which this gave rise was pointed out by Viscount Cave:35 It is obvious that, having regard to the proviso to the above Section, the Princesse de Polignac and Mrs Munthe, who are domiciled abroad, could not have been assessed to Income Tax in respect of the foreign income above referred to. But the Revenue Authorities contend that they are entitled to levy tax upon that income by means of assessments upon the trustees, who are domiciled in this country. If this contention is upheld, the trustees will of course be entitled to retain the tax so paid out of the trust income payable to the beneficial life tenants, who will thus have to bear the burden of the tax from which the proviso appears to relieve them; but the Appellants contend that this is the effect of the statutes . . . I understood Mr Cunliffe to go so far as to say that, when funds are vested in trustees, the Revenue Authorities are entitled to look to those trustees for the tax and are neither bound nor entitled to look beyond the legal ownership.

The House of Lords had little difficulty in rejecting this proposition. As Viscount Cave put the matter:36 My Lords, I think it clear that such a proposition cannot be maintained. It is contrary to the express words of Section 42 of the Income Tax Act, 1842, which provides that no trustees who shall have authorised the receipt of the profits arising from trust property by the person entitled thereto, and who shall have made a return of the name and residence of such person in manner required by the Act, shall be required to do any other act for the purpose of assessing such person.37 And, apart from this provision, a decision that in the case of trust property the trustee alone is to be looked to would lead to strange results. If the legal ownership alone is to be considered, a beneficial owner in moderate circumstances may lose his right to exemption or abatement by reason of the fact that he has wealthy trustees, or a wealthy beneficiary may escape Super-tax by appointing a number of trustees in less affluent circumstances. Indeed, if the Act is to be construed, as Counsel for the [Revenue] suggests, a beneficiary domiciled in this country may altogether avoid the tax on his foreign income spent abroad by the simple expedient of appointing one or more foreign trustees. Accordingly, I put this contention aside.

34 Often referred to as ‘the double foreigner exemption’. The facts in Pool v Royal Exchange Assurance were identical but the form of the assessments differed in that they actually stated that the individuals named in the assessments were assessed as trustees for a [foreign] beneficiary; see Viscount Cave, 7 TC 410. 35 7 TC 410. 36 Ibid, 411. 37 S 76(1) TMA 1970.

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Nevertheless, as Viscount Cave pointed out, this did not mean that a trustee was never liable to be assessed in respect of the trust income. The 1842 Act explicitly recognised that a trustee could be charged to tax and, in relation to foreign income, section 108 of the Act provided that a trustee in receipt of the same could be charged to tax on any profits or gains arising from foreign possessions or securities. Even apart from specific provision, Viscount Cave was:38 not prepared to deny that there are many cases in which a trustee in receipt of trust income may be chargeable with the tax upon such income . . . The fact is that, if the Income Tax Acts are examined, it will be found that the person charged with tax is neither the trustee nor the beneficiary as such, but the person in actual receipt and control of the income which it is sought to reach.

At this point in his speech Viscount Cave was considering the liability of trustees to be assessed to tax in respect of particular income, but I imagine that it may have been the final words in this passage of his speech that led the Revenue to state their case as they did up to the Court of Appeal in Baker v Archer-Shee. Some care has to be taken in this field, however, to distinguish two issues that become apparent from the more precise statement of the position in Williams v Singer in Lord Wrenbury’s speech. Lord Wrenbury (who was to deliver the main speech for the majority in Baker v Archer-Shee) put the matter as follows:39 The Appellants initiate their contentions by pointing out quite accurately that Section 100 of the Act of 1842, to which they point as being the charging Section, charges annual profits or gains accruing to any person whether a subject of His Majesty or not, although not resident in the United Kingdom, from property in the United Kingdom, and that by the Fourth and Fifth Cases duty is to be charged in respect of interest arising from foreign securities or foreign possessions and is to be computed upon the sums received in Great Britain. The duties are to be charged upon the persons ‘receiving or entitled unto the same’. So far, therefore, a foreign subject resident in this country is chargeable upon income from foreign securities or foreign investments received in this country. But a foreign subject resident abroad and receiving the income abroad is not chargeable. This position, however, they say, was altered by Section 5 of the Finance Act, 1914 . . . [b]ut the effect of Section 5 of the Act of 1914 so far would seem to be only that, where there is a person chargeable in respect of income arising from foreign securities, he is to be charged not, as the Act of 1842 had provided, upon so much as is received in the United Kingdom but upon the full amount Ibid. Ibid, 412–13, emphasis added. Lord Wrenbury also featured in the decision in Drummond v Collins (1915) 6 TC 525, in which the House of Lords concluded that discretionary payments from a US Trust remitted to the UK for the benefit of UK resident minor beneficiaries were income from a foreign possession (the US trust) liable to assessment (via their guardian) under Schedule D, Case V. As the children’s only entitlement was as discretionary beneficiaries, there was no question of liability by reference to the underlying property of the trust and, in any event, the case predated the change to the remittance basis. 38 39

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whether received in the United Kingdom or not. The Appellants, however, seek to find in words of enlargement of the income charged an enactment affecting the characteristics of the person chargeable. I do not think that is the effect of Section 5 of the Act of 1914. The two things are quite distinct; the property chargeable is one thing, the person liable to be charged is another. Section 5 affects the former but not the latter. But the matter does not stop there, for Section 5 concludes with a proviso which excludes from its operation a person not domiciled in the United Kingdom or being a British subject not ordinarily resident in the United Kingdom. In other words, if the ‘person’ there referred to is the beneficiary, then Section 5 does not apply to the beneficiary in the Case before your Lordships, and, if it were sought to assess her, the matter would remain as it was under the Act of 1842, and she would not be assessable for she is a foreign subject and the income is not received in this country.

Bringing these points together, formally the Act charges foreign income by reference to both the income and the residence of the person to whom the income belongs.40 This can be contrasted to UK income, where the charge to tax is effectively by reference to the income alone because it is irrelevant to know to whom it belongs for the purposes of charge. It is important to keep in mind, however, that there are two distinct elements to the successful imposition of tax: charge and assessment. The classic statement of this appeared in Whitney v IRC, when Lord Dunedin said:41 My Lords, I shall now permit myself a general observation. Once that it is fixed that there is liability, it is antecedently highly improbable that the statute should not go on to make that liability effective. A statute is designed to be workable, and the interpretation thereof by a Court should be to secure that object, unless crucial omission or clear direction makes that end unattainable. Now, there are three stages in the imposition of a tax: there is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment. That, ex hypothesi, has already been fixed. But assessment particularises the exact sum which a person liable has to pay. Lastly, come the methods of recovery, if the person taxed does not voluntarily pay.

It is beyond the scope of this paper to look in detail at the line that lies between charge and assessment (ie between the income charged and the person liable to assessment in respect of it) and the variety of language that Parliament has used to draw that line. It will be apparent, however, that the 1853 Act had to an extent muddied the waters because so far as foreign income was concerned it had incorporated both elements of charge (income) and assessment (person) in identifying what was charged to tax. 40 At least, this was the position following the 1853 Act (see above). Schedule D as originally enacted in the 1842 Act just charged ‘every description of property or profits [not within any other Sch] and shall be charged annually on and paid by the persons, bodies politic or corporate, fraternities, fellowships, companies or societies, whether corporate or not corporate, receiving or entitled unto the same’. 41 [1926] AC 37, 10 TC 88.

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Here one may note an issue that the Baker v Archer-Shee decision illustrates. The charge to income tax is imposed on UK source income by reference to the property or income specified in the Act alone. The question that follows from charge is who is liable to assessment in respect of it, ie who is the person receiving or entitled to the same, or otherwise liable to withhold tax at the source. Foreign source income can only be subject to a withholding tax when it is in fact paid through a UK paying agent out of monies entrusted to him for that purpose.42 Otherwise it can only be subject to direct assessment (originally only on remittance) on the basis of receipt or entitlement. Following the 1853 Act, however, foreign income was only charged to tax if it ‘arose or accrued’ to a resident person: there was no charge to tax in respect of foreign property or income belonging to a foreign person. If the property or income was not charged to tax, it was irrelevant as a matter of assessment who received or was entitled to the income (as, for example, the trustees in Williams v Singer) because what they received or were entitled to (as trustee) was not charged to tax in the first place. The Act therefore draws a line between UK and foreign sources of income: in relation to UK, the person is relevant to the question of assessment but not charge; in relation to foreign, the person is relevant to the question of charge and (depending upon charge) assessment. What, however, is the position, as in Baker v Archer-Shee, where the income in question is foreign but without evidence of foreign law, so that the tax issue has to be approached on the basis that English law applies?43 What is potentially problematic here is that the individual’s rights under the foreign trust are having to be determined by reference to English trust law principles but for the purpose of determining liability to charge and assessment as a matter of UK income tax law. Trust law and income tax law may overlap (ie may reach the same answer in particular cases), but they do not necessarily coincide. Indeed, they may produce different answers.44 From a UK income tax perspective, it can be seen that in such a case conflicting principles may be at work:

42 See s 10 Income Tax Act 1853, extending the operation of s 2 Income Tax (Foreign Dividends) Act 1842 (the Schedule C paying agent provisions in respect of dividends and shares of annuities payable out of the revenue of any foreign state) to all interest, dividends or other annual payments on foreign securities; see also Canadian Eagle Oil v The King [1946] AC 119, 132 per Viscount Simon. 43 Or in a Scotch (Irish) case, Scottish (Irish) law. 44 Thus, a capital dividend from an English company before 1965 might, as a matter of English trust law principles, have belonged to the income beneficiaries but was not their assessable income, In Re Doughty [1947] 1 Ch 263. The same result may obtain under applicable foreign trust law, Lawson v Rolfe [1970] 1 Ch 612.

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—Ordinarily, foreign law is usually relevant for determining the nature of the foreign possession in question and, more especially, of the identity of the person to whom the income from the foreign possession arises or accrues (ie belongs) and therefore whether the income is in fact charged to tax. —Ordinarily, in an English law context, the income is likely to be charged irrespective of who owns it and the main concern is to determine who can be assessed, ie who receives or is entitled to income. One can immediately see that there may be scope for confusion here. Without evidence of foreign law, is it just a matter of assessment on the basis that the person assessed is UK resident and the question is whether he is entitled to the income, which must mean that the income is charged? Or does one have to look at the foreign trust and decide (applying English trust law principles) whether the trust income belongs to the person concerned so that it is charged to tax, before considering the question of assessment? In most cases the answers to these questions are unlikely to differ because the person to whom the income belongs and the person who is entitled to the income will be the same person. In a trust context, however, it may be more difficult because the property from which the income arises (and by reference to which it is charged to tax) may belong to the trustees (and cannot ‘belong’ to the beneficiary) but the beneficiary may be entitled (depending upon their rights under the trust) to the income. Here lies the scope for confusion in Baker v Archer-Shee. It does not flow exclusively from the absence of evidence of foreign law because foreign law may be to the same effect as English law. The point is that, while it appears that the foreign trust is the source of the foreign income, UK tax law may make the foreign trust disappear by asking under an assessment whether the beneficiary is entitled to the income assessed. In other words, his entitlement under the trust becomes the basis for justifying the assessment but not the basis of the establishing a charge to tax. As has been noted, up to the Court of Appeal the emphasis of the Revenue’s case in Baker v Archer-Shee had been on the fact that Lady Archer-Shee was in actual receipt of the income. Rowlatt J had accepted that argument but the Court of Appeal had protested that what she received was not the actual income in question—as had been the case for the Princesse de Polignac in Williams v Singer—but a distribution of income out of the trust funds made to Lady Archer-Shee by the US trustee net of its expenses and US tax. An argument based on ‘receipt’ therefore looked rather unpromising because the obvious application of that basis of assessment was to look at the person in actual receipt of the income charged to tax.

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Accordingly, in the House of Lords the Revenue’s argument placed more emphasis on the nature of Lady Archer-Shee’s entitlement to the income:45 Upon the true construction of the will the respondent’s wife is the sole beneficial owner of the interest and dividends of the securities, stocks and shares comprised in the trust fund, and is entitled to receive such interest and dividends . . . the person owning the income and assessable to tax in respect of it is the person beneficially entitled thereto and not the trustee in whom such income may be legally vested, except in so far as the trustee may be assessed on behalf of the beneficiary . . . what the income arises from depends upon the trusts of the will, and the fact that it passes through the hands of trustees does not alter the fact that it is income arising from foreign securities . . . it is not true to say that these trustees were not trustees of this income for the respondent’s wife. The fact that they are entitled to be recouped their proper expenses does not alter the fact that they hold the income in trust for her. The appellant [ie the Revenue] makes no claim for tax on any sums rightly deducted by the trustees before making payment to the wife’s bank in New York. [and in reply] . . . A trust fund as such is not a source of income and is not chargeable to tax; the constituent elements of the fund must be looked at.

In answer, Sir Martin Archer-Shee’s counsel maintained the position that Lady Archer-Shee was not entitled to the actual income of any specific investment but only to the aggregate net income of the fund after trustees’ expenses.

Baker v Archer-Shee in the House of Lords The House of Lords found in favour of the Revenue by a bare majority. Lord Wrenbury, in the majority, began by considering the scope of the charge to tax under Schedule D and noted that the question was whether the sums that Lady Archer-Shee received were income from a foreign possession. He continued: What, then, is the property to which Lady Archer-Shee is entitled? The will is an American will. The law of America is in an English Court a question of fact. In the Case stated by the Commissioners there is no finding as to what is the American law . . . The members of the Court of Appeal . . . founded themselves upon the statement that there is paid over to Lady Archer-Shee’s account only such part of the sums which the trustees have received from the funds as they considered to be income. My Lords, the question is not what the trustees have thought proper to hand over and have handed over (which is a question of fact) 45 [1927] AC 844, 845. The case was stated by the Commissioners on 28 October 1925 and heard by the High Court on 26 February and 1 March 1926, by the Court of Appeal on 19 and 20 May 1926, and by the House of Lords on 14, 15 and 17 February 1927, with its decision given on 26 July 1927.

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but what under the will Lady Archer-Shee is entitled to (which is a question of law). The trustees, of course, have a first charge upon the trust funds for their costs, charges and expenses, and American income tax will be a tax which they would have to bear and which would fall upon the beneficiary. But this does not reduce the right of property of the beneficiary to a right only to a balance sum after deducting these. If an owner of shares deposits them with his banker by way of security for a loan he is not reduced to being the owner of a balance sum being the difference between the dividends on the shares and the interest on the loan. He is the owner of the equity of redemption of the whole fund. If a landowner employs an agent to collect his rents and authorises him to deduct a commission he does not cease to be the owner of the rents. Under Mr. Pell’s will Lady Archer-Shee (if American law is the same as English law) is, in my opinion, as matter of construction of the will, entitled in equity specifically during her life to the dividends upon the stocks . . . If the estate had not been fully administered I could well understand a contention that the right to whatever in administration might turn out to be the fund the subject of this gift was a ‘foreign possession’, and fell under Case V, rule 2. But that is not the case. I have to read the will and see what is Lady Archer-Shee’s right of property in certain ascertained securities, stocks and shares now held by the Trust Company ‘to the use of my said daughter’. It is, I think, if the law of America is the same as UK law, an equitable right in possession to receive during her life the proceeds of the shares and stocks of which she is tenant for life. Her right is not to a balance sum, but to the dividends subject to deductions as mentioned above. Her right under the will is ‘property’ from which income is derived.46

For his part, Lord Blanesburgh (dissenting) pointed out that Lady Archer-Shee had no interest in the corpus of the trust fund. Thus: the payments made to Lady Archer-Shee were payments of all that remained of a fund of miscellaneous income receipts after there had been paid or retained thereout sums deemed by the trustees to be sufficient to discharge the trust and other outgoings that had first to be provided for. The payments represented, in other words, the actual net residuary income available for the tenant for life ascertained and only ascertained after payment or provision had been made of or for all prior claims against the gross residuary receipts. The income the lady received was the net income of a totality, not of particular items of property . . . Lady Archer-Shee had no right . . . to demand more than she received or to demand any of it at any earlier date than she received it . . . until the moneys paid to her were actually paid over, she had neither property in them nor right to receive them. The proper result of any account taken would have shown . . .

46 [1927] AC 844, 865–66 (emphasis added). It is this final sentence that creates confusion. It can be taken to suggest that Lady Archer-Shee’s right under the will is the source of her income. As a foreign possession within rule 2 of Case V it can be regarded as a source, but one that can then only lead to taxation on a remittance basis. Her rights under the will, however, are also what entitles her to the trust income and therefore lays her husband open to assessment on an arising basis by reference to the true source of the income assessed in that case: the underlying foreign securities.

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The editor of the Law Quarterly Review at the time shared the minority’s view of the matter and ‘fervently hoped that the decision in Baker v Archer-Shee will be confined within narrow limits [of income tax law], and not allowed to upset well-established principles of equity’.48 The simple answer to this is that the Archer-Shee case was illustrating an important principle of income tax law: that what the Act charges to tax is income. The income must have a source in terms of the property, activities or obligation from which the income is derived. The person and the rights that he or she has in the income are important to the process of assessment or collection. The confusion surrounding the case arises from the fact that the trust property is vested in trustees. Thus, from the trust law perspective, one might anticipate that income from foreign securities held in trust is not charged to tax because the securities belong to non-resident trustees and they are therefore entitled to the income as it arises or accrues. From the beneficiary’s perspective, he is only entitled to that income if his rights under the foreign trust entitle him to receive it; but in that case the source is not the underlying trust property but the foreign possession, ie his rights under the foreign trust. On the other hand, from an UK tax law perspective, the income on the underlying securities can be assumed to be charged to tax on the basis that the person sought to be assessed is UK resident. The point here lies in the fact that from a UK income tax perspective a life interest in a UK trust renders the trust transparent because as a matter of English trust law it gives the income beneficiary an entitlement to the trust income (allowing one to look to the underlying assets and income of the trust for the purposes of assessment). That will also be true where foreign trust law is to the same effect. The effect is that the trust disappears as a source of the income in question. How is it that UK income tax law has arrived at this result?

T RA N SPA REN CY: I N C O M E AN D R I G H T S TO I N C O M E

Income-producing Property and Activities The Income Tax Act 1842 contained an implicit distinction between: 47 48

[1927] AC 844, 873. No CLXXVI, 472.

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1. property, activities and obligations that are ‘income producing’—classified by Schedule and Case; and 2. rights (incorporeal property not within any Schedule or Case) representing an entitlement to income within (1). What the Act charges to tax is income from property, activities or obligations within (1). Obligations aside, property and activities are ‘the source’ of the income that they produce. That property and those activities serve to identify the income that the Act charges to tax. The rules attaching to each Schedule and Case prescribe how income is computed each year and who is liable to pay the tax. What is charged to tax is the income from particular income-producing property or activities within (1) and not the rights to participate or share in that income within (2). The aim of the Act, as previously noted, was to collect tax on the income as close to the source as possible, ideally by way of deduction by the payer at the source where what was paid was immediately recognisable as taxable income, and otherwise by way of assessment on the person in whose hands the income first emerged (eg as trading profits) or the first assessable person into whose hands the income came. In other words, it was always a question of when the income that the Act charged to tax could first be recognised. At that point tax was collected—from the payer or otherwise from the person into whose control and possession the income first came as recognisable subject matter for assessment. The Act was not generally concerned with whose income it was in the sense of who ultimately had beneficial enjoyment of the income. It charged anyone—in particular, trustees and other entities that are not recognised as separate legal entities (eg clubs or societies)—who happened to be in control or possession of income that the Act charged to tax.49 The essential question that underlies the approach adopted by the 1842 Act is when are particular rights (whether of a contractual or trust nature) a source of income (ie the subject matter of charge) and when do they represent an entitlement to share in that income (ie the subject matter of assessment)?

Charges on Income The 1842 Act recognised this distinction between income-producing property or activities and participatory rights in one particular way in 49 See the first rule of Schedule D under the 1842 Act, set out in n 40 above. See also, eg Carlisle and Silloth Golf Club v Smith (1913) 6 TC 198; Income Tax Commissioners for the City of London v Gibbs (1942) 24 TC 221; American Foreign Insurance Association v Davies (1950) 32 TC 1; Frampton and another (Trustees of the Worthing Rugby Football Club v IRC (1987) 60 TC 482.

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section 102 of the Act.50 As originally enacted, section 102 was a charging section separate from the Schedules and Cases of the Act.51 In 1853, however, it was incorporated in Schedule D as the third paragraph of that Schedule. What underlay section 102 was a recognition that certain legal obligations should be regarded as creating what could be recognised as income in its own right and which was capable of being taxed notwithstanding that those obligations are not productive in themselves but are a charge on a productive fund of money available to the obligor—hence the expression a ‘charge on income’. In this respect, the Act effectively regarded yearly interest as the lender’s share of the profits that emerge from the use of the borrowed funds to invest in productive property or activities. Essentially a loan was not seen as income-producing property per se52 because the borrower’s ability to fulfil his covenant to pay interest depends upon the productive use to which he puts the money or on his other sources of income.53 To the extent that what funds payments within section 102 is income derived from the recognised sources of income-producing property identified by the various Schedules and Cases, the payer can withhold and retain tax on the payment because the payment is made from a taxed fund. One feature of a charge on income is that it is a specific charge on the payer’s general sources of income rather than an entitlement to income from a specific source.54 That is probably why the 1842 Act identified annuities, yearly interest and annual payments and charged them separately to tax because it is not possible to say that the legal rights that they involve (giving rise to an obligation to pay yearly interest, annuities or annual payments) are rights that entitle the payee to any specific item of the payer’s income. They are charges on the obligor’s aggregate funds with the result that the payee cannot be assessed in respect of any individual item of that fund under any specific Schedule or Case of the Act. That apart, section 102 also operated as a means of spreading the burden of a tax that was borne by deduction at the source or by assessment whenever the income first emerged.55 See p 37 above. See London County Council v Att-Gen (1901) 4 TC 265. In contrast, government-backed securities within Schedule C are viewed as a species of income-producing property. 53 Alternatively, if the loan just finances personal expenditure, the lender is effectively in the same position as an annuitant or other recipient of an annual payment because the borrower is effectively charging his personal funds with the obligation to pay the lender interest in the same way as he would if he created an annuity or entered into some other obligation to make an annual payment. On this approach, whether interest is UK or foreign depends more on the source of funds from which the borrower intends to discharge his obligation to pay interest than on the location of the obligation itself, see Westminster Bank Executor and Trustee Co (Channel Islands) Ltd v National Bank of Greece SA (1971) 46 TC 472. 54 The payment may, of course, be made out of untaxed sources of income or capital, in which case the payer will have to account for tax on the payment to the Inland Revenue, although this was not something for which the 1842 Act provided. 55 See Att-Gen v London County Council (1907) 5 TC 242, 260, per Lord Macnaghten. 50 51 52

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Participatory Interests in Income That leaves open, however, how other rights to participate in or enjoy the income of particular income-producing sources are dealt with. These participatory rights fall into three main categories: trust interests, partnership interests and company shares.56 Each is a chose in action or species of incorporeal property but none was recognised as a source of income within the Act. For example, the 1842 Act dealt with partnership interests only as part of the rules for assessing Case I trading profits. The source was the partnership trade,57 and what the Act charged to tax was the profits of the trade. A partnership interest provided the basis for a partner’s liability to assessment as a person receiving or entitled to those profits charged under Schedule D. A UK partnership interest was not, however, a separate source of income: it represented the individual partner’s entitlement to share in the underlying income generated by the partnership’s activities and assets. Four categories of item therefore emerge from the 1842 and 1853 Income Tax Acts: —income charged to tax by reference to specific income-producing property or activities; —income from obligations in the form of a specific charge over a general fund of income-producing property or activities; —participatory rights to share in UK income-producing property or activities which are not themselves sources charged to tax but which may, if necessary, provide the basis for assessment where the right amounts to an entitlement to share in income that is so charged; and —participatory rights to share in foreign income-producing property or activities which can be treated as a source of income in the sense of founding a charge on the income derived from the possession of that participatory right58 but which may also provide a basis for assessment of the underlying income where the right amounts to an entitlement to share in foreign income-producing property or activities that is charged to tax.

A possible fourth category, not further dealt with here, would be rights under a life policy. Or perhaps more accurately the personal occupation involved in the activity of trade. It is because trades, like employments, represent the activities of the individuals engaged in them that they fell within the miscellaneous category of Schedule D. They are not ‘real’ property in the form of the property dealt with under Schedules A, B and C (or even the offices of profit in Schedule E). 58 There being no ability to charge directly the underlying foreign income-producing property or activities. 56 57

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Malcolm Gammie T H E E X P L A N AT I O N O F BAKER V ARCHER-SHEE

From a UK tax law perspective, therefore, the simple question raised by Archer-Shee was not what was the source of Lady Archer-Shee’s income in the sense of whether income from her interest in the foreign trust was charged to tax but whether she (through her husband) could be assessed on income that was charged to tax on the basis that he was the person properly assessed as the person entitled (through his wife) to the income. This accounts for the change in emphasis in the Revenue’s argument between the Court of Appeal and the House of Lords. Initially they seem to have put more weight on the fact that Lady Archer-Shee had received the interest and dividends in question (relying on Singer v Williams). She had only done so, however, after it had passed through the hands of the trustees. In this respect, the trustees were the persons in actual receipt of this income, but they were abroad and could not be assessed. Furthermore, they were in receipt of the dividends and interest because they owned the property from which the income arose. Lady Archer-Shee’s entitlement to receive that income arose under a foreign law trust which, even if her trust right was to be determined as a matter of English law (without evidence of foreign law), would not alter the fact that her right arose from a foreign possession (the US trust) and not from the assets of the trust. However, from a UK income tax perspective, because what was opaque as a matter of charge became transparent as a matter of assessment, the only real question was whether she could be said to be entitled to the income from the underlying securities so as to sustain the assessment that had been made in respect of that income. Accordingly, the emphasis shifted to showing that the trustees accounted for the net income to Lady Archer-Shee because she was the person who was entitled to it. It is here that ordinary income tax and trust law principles can become entangled. The income tax question is whether the person who was sought to be assessed is entitled to particular income that is charged to tax, but the answer to that question is not necessarily supplied by analysing the nature of the person’s entitlement to the source of the income, ie the income-producing property that serves to identify the income as charged to tax under a particular Schedule and Case. The Act charged to tax income from foreign securities (as the source) and, based on an English law analysis (in the absence of evidence of New York law), the question was whether Lady Archer-Shee’s entitlement to that income supported the assessment, even though her entitlement to that income arose from her ability to call upon the trustees to account to her for the trust income and not from an analysis of her property right in the underlying securities from which the income arose. At the heart of the distinction between the nature of Lady Archer Shee’s interest in the underlying property and her right to call upon the trustees to account to her for

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the trust income (ie to perform their trust) is the unresolved debate as to the nature of a beneficiary’s interest in a trust: is it a right in personam or a right in rem? For income tax purposes, however, the distinction is essentially irrelevant. What Rowlatt J was deciding (and also the majority in the House of Lords) was that the in rem/in personam distinction was unimportant for income tax purposes even though it might be of the essence for probate, inheritance or other property tax purposes. Lady Archer-Shee could have an in rem interest in the trust assets or she could have an in personam right against the trustees; either way, it was her income. The importance of the underlying securities (whatever the nature of her interest in them, if any) was to identify the income as something that the Act charged to tax for the purposes of assessment under a particular Schedule and Case; the importance of her rights under the foreign trust was in identifying her entitlement to share in that income as a matter of assessment.

T H E L AT E R L I T I G AT I O N I N GARLAND V ARCHER-SHEE

Baker v Archer-Shee had a successor case in Garland v Archer-Shee,59 where Sir Martin produced evidence of New York law and therefore of the nature of his wife’s interest in (and entitlement to) the income of the trust fund. In Garland v Archer-Shee Mr Justice Rowlatt explained his reasons for deciding Archer-Shee v Baker as he did:60 In [Archer-Shee v Baker] I did not think that this lady had any right to the specific investments or the specific dividends. What I thought was that when you come to construe and apply this particular part of the Income Tax Acts which classifies and distinguishes between income according as it arises from securities, stocks, shares, and rents or other property, you have go—I do not fail to notice the difficulties—to go back until you find something from which the income arose, the investment which bore the income, and see what that was; and that the fact that a trust was interposed, a trust which holds the principal and administers the income after it has been earned did not give you a source of income which came into this classification at all. That was my view.

Mr Justice Rowlatt’s reasoning here is entirely correct and encapsulates precisely what was in issue: whether, for the purposes of assessment, ‘the source’ of Lady Archer-Shee’s income was (i) the foreign shares or securities from which the payments she received were derived or (ii) her rights under the foreign trust. From an ordinary UK income tax perspective, the Act clearly treated securities as a source of income charged to tax but did not so treat trust rights unless they amounted to a specific charge on the trust fund 59 60

[1931] AC 212; 15 TC 693. 15 TC 710–11.

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rather than just a right to participate in the fund. Although her rights in the foreign trust (being a foreign possession) could be treated as a source leading to a charge on income arising from that source, that did not displace the charge to tax on the securities or deny her entitlement to share in that income. He continued as follows: I do not think anybody agreed with [my view]. I am not certain, as I said just now, that anybody tried to support it. What took place in the House of Lords, as I understood what the majority of the House of Lords decided, was: ‘Oh, but this lady was specifically entitled to these dividends’ . . . That is to say, they held that she was entitled to the dividends, and that the deductions which the sums from the dividends produced suffered before they reached her hands were analogous really to the expense of collection which a landlord has to submit to when he gets somebody to go and collect his rents. On the other hand, the Law Lords who were in the minority took the view that she was only entitled to the balance sum, and that it was the balance sum which came to her from the trust which was her property.61 That is what I understand was decided; it was decided on the assumption expressed in the judgment that the American law was the same as the English law.

Far from disagreeing with Mr Justice Rowlatt, the majority of the Law Lords were essentially adopting his view of the matter once allowance is made for the subtle shift in the Revenue’s argument to lay more emphasis on Lady Archer-Shee’s entitlement to the income as compared to its actual receipt. The apparent disagreement may be because, as Rowlatt J notes, Counsel for the Revenue was not prepared to adopt his analysis, which (on the basis of the argument that had been put to him) was focused on receipt.62 What is clear is that the decisions in the Archer-Shee cases did not depend upon Lady Archer-Shee’s beneficial ownership or otherwise of the foreign shares and securities in question. She clearly did not hold the legal title to those shares or securities, and her rights under the will trust were rights to share in the income of the trust fund and not rights to any of its assets as such, nor rights that were a charge on the fund. The fact that the majority of the House of Lords was prepared to support the assessment was based on their analysis of her right under the Trust to participate in the income of the trust fund and the proposition that the character of that income was unaffected by the interposition of the trustees between the

61 The conclusion that Lady Archer-Shee’s income only comprised the net amount paid to her resulted from a concession to that effect by Counsel for the Revenue. This concession may have been made to cover the possibility that the assessment should be founded upon receipt rather than entitlement to the income. 62 By definition, Lady Archer-Shee’s Counsel would have been arguing for the opposite view of the matter.

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property (‘the source’) that gave rise to the income that the Act charged to tax and the person who ultimately was entitled to enjoy that income. Essentially, the majority of the Law Lords in Archer-Shee v Baker decided that Lady Archer-Shee’s rights under the foreign trust were rights that entitled her to participate in the income of the trust and that her trust rights were not the source of the income.63 The key lies in the assumption that American law was the same as English law in this respect. Income tax arising under an English law trust would ordinarily have been collected by deduction at the source or by assessment of the income on the trustees. A beneficiary could only be assessed under Schedule D in lieu of the trustees if he were a person receiving or entitled to the income charged to tax. A beneficiary could only be assessed to tax in those circumstances, however, by reference to the underlying trust property (the source) because a beneficiary’s interest under an English law trust was nowhere recognised as a separate source of income for the purposes of the charge to income tax unless the payment amounted to a specific charge on the trust fund, such as an annuity or other annual payment.64 A trust interest is not income-producing property: only those things in which the trust funds are invested are relevant sources, the income from which is charged to tax. The trustees in Archer-Shee v Baker were not resident in the UK and could not be assessed (being foreign persons in receipt of foreign income). As a resident person, Lady Archer-Shee could, however, be assessed (through her husband), provided that what was assessed was income from the source specified by the assessment. Sir Martin Archer-Shee was therefore liable to assessment on the income from foreign shares or securities (whether remitted to the UK or not) provided his wife was in receipt of or entitled to that income. As the income had been paid to Lady Archer-Shee by the Trustees, Sir Martin could not deny that she had received the income in question (hence the Revenue’s initial emphasis), but, of course, the reason why the Trustees had paid the income to her was because (on the majority’s view of her rights under the trust) she was entitled to have it paid to her. Sir Martin’s case therefore depended upon his being able to establish that the Trust changed the character of what she received. That depended, however, on his showing that his wife received the income not as a matter of entitlement pursuant to her interest under the Trust but through the exercise by the Trustees of their discretion to pay her the income. Evidence 63 At every stage of the case it was assumed by all concerned that Lady Archer-Shee’s trust rights were a foreign possession so that her husband would be liable to assessment to the extent that trust payments were remitted to the UK. In that respect, an entitlement to share in the income of a common fund represented by a foreign trust or company has always been recognised as within the scope of charge to income tax under Schedule D, Case V, even though the comparable UK entitlement is not within any Schedule or Case of the Act. 64 Such a charge would usually be paid out of the trust’s taxed funds and to that extent would represent the underlying income of the trust.

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to that effect was only produced in respect of the later years covered in the subsequent case of Garland v Archer-Shee.65 In Archer-Shee v Baker the majority in the House of Lords treated the Trust as transparent on the basis that Lady Archer-Shee’s rights as beneficiary were what entitled her to receive the income and did not represent a separate source of income. Accordingly, one looked to the real source of her income—the foreign shares and securities held in trust—and not to the trust instrument that represented her entitlement to that income rather than as a new source of income that the Act charged to tax. The other case that constantly features in these decisions is Lord Sudeley and Others v Attorney-General (1897) AC 11. The Court of Appeal in Baker v Archer Shee and the dissenting minority (Viscount Sumner and Lord Blanesburgh) in the House of Lords relied in particular on Lord Sudeley. The headnote of that case is as follows: A testator, who dies domiciled in England, by his will bequeathing legacies gave the residue of his real and personal estate to his executors in trust for his wife for life, and by a codicil gave one-fourth of his ‘said residuary real and personal estate to his wife absolutely. His will was proved in England by his executors domiciled in England. His estate included mortgages on real property in New Zealand. His wife afterwards died and her will was proved in England. At her death her husband’s estate had not been fully administered, the clear residue had not been ascertained, and no appropriation had been made of the New Zealand mortgages or of any securities to particular shares of the ultimate residue: Held, that the right of the wife’s executors was, not to one-fourth or any part of the mortgages in specie, but to require her husband’s executors to administer his personal estate and to receive from them one-fourth part of the clear residue, that this was an English asset of the wife’s estate, and that probate duty was therefore payable under her will upon one-fourth part of the value of the New Zealand mortgages.

As this indicates, Lord Sudeley concerned probate duty and, therefore, raised the question of the nature and situs of particular property for the purposes of that tax. The same principles do not apply for income tax purposes. The point appears in Lord Halsbury’s speech in Lord Sudeley:66 In a certain sense a person may have a claim; a person may be entitled to this, that, and the other; but the whole controversy turns upon the character of the particular thing to which the legatee is entitled. With reference to a great many things, it would be quite true to say that she had an interest in these New Zealand mortgages—that she had a claim on them: in a loose and general way of speaking, nobody would deny that that was a fair statement. But the moment you come to give a definite effect to the particular thing to which she becomes 65 66

[1931] AC 212, 15 TC 693. Page 15.

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entitled under this will, you must use strict language, and see what it is that the person is entitled to; because upon that in this case depends the solution of the question. It is idle to use such phrases as your Lordships have heard, . . . that this was what the person was ‘entitled to’—that she had an ‘interest’ in this estate. All those phrases are perfectly true in a general way of speaking, but are not applicable to the particular discussion before your Lordships, unless you establish as the starting-point the proposition that the thing that the legatee was entitled to was the actual mortgage itself, so that the New Zealand mortgage—the foreign asset—was the thing that was to be administered. When one looks at it accurately, that is an entire mistake.

Thus, in the case of a tax imposed on property or a transaction involving property, such as estate, probate duty or stamp duty, the essential statutory question is what is the nature of the property on which the tax falls? And where the tax falls on the property at a particular moment in time (such as death or the execution of a particular instrument), the nature of that property—as domestic or foreign property—is determined by the ordinary rules of private international law. The same is not true of income tax because the income tax is not dealing with the property as such but with the flow of income that it generates. The statutory question for income tax purpose is not, simply, what is the nature of a person’s right to the underlying property? The questions are: is this income? Whose income is it? From whom can we collect by deduction or assessment the tax imposed on this income? And, to the extent that it is important to know whether the income is domestic or foreign income, the relevant statutory question is not where is the property in question situated, but what is the true source of this income?67 The difficulty that Lord Studeley and Archer-Shee illustrate is whether a beneficiary under a trust must show that he has a right in rem over the trust assets or whether a right in personam against the trustees suffices. This is a distinction that matters for property taxes, which are concerned with interests in property, but does not usually matter for income tax purposes because income tax is concerned merely with the income from particular sources charged to tax under the Act.68 The issue in Lord Studeley is relevant in an income tax context because a residuary beneficiary is not entitled to the income of an estate in the course of 67 Which, in the case of an obligation, such as a debt or charge, should properly be answered by reference to the fund that has been charged than by reference to the situs of the obligation itself. 68 It is possible that Schedule A required a stricter analysis than that required for personal property within Schedule D because what Schedule A charged to tax was income for which the source is UK land. In Property Co v HMIT [2005] STC (SCD) 59 the Special Commissioners held that income tax charged under the former Schedule A was concerned solely with estates in land, which required the person concerned to hold an interest in land. In this respect, it might be said that, even if my analysis of Baker v Archer-Shee is correct in the context of income from securities, there is a stricter requirement for Schedule A income and that this is unaffected by Schedule A’s brief sojourn as part of Schedule D between 1964 and 1969.

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administration. His share of the residue does not belong to him until it is ascertained by transfer or assent, or on appropriation.69 This, however, is a particular application of the point that income tax in its original conception looks for a source (in the sense of income-producing property and activities) rather than just a right to participate (not being a charge) in a fund of income. A residuary beneficiary’s interest is effectively in the aggregate fund represented by the deceased’s estate. He has no entitlement to any specific item of income within the estate that would make him liable for assessment or entitle him to claim exemption in respect of it. The conclusion in Archer-Shee v Baker therefore derives from the fact that income tax is imposed on income from specified sources of income-producing property. A moment’s thought tells you that an interest under a trust is not ordinarily speaking income-producing property unless it constitutes a specific charge on the trust fund. Unless amounting to a charge, a trust interest is what entitles a beneficiary to participate in the trust fund, including whatever income the property comprising the trust fund has produced. The source of Lady Archer-Shee’s income, in the sense of what was charged with income tax under the Act, was therefore the foreign shares or securities by reference to which the assessment was raised. The sole issue for determination was whether Sir Martin Archer-Shee could be assessed in respect of the income from foreign shares and securities undoubtedly charged to tax under the Act. From an English law perspective, he could in Archer; from a New York law perspective, in Garland, where the trustee’s discretion intervened, he could not. The dicta in Williams v Singer and Baker v Archer-Shee may not have resolved whether there could be circumstances in which trustees were not assessable in respect of trust income to which a beneficiary was absolutely entitled even though not paid directly to the beneficiary.70 What is clear is that, if the trustee was assessed when the beneficiary had an absolute entitlement to the income as it arose, the trustee could only be assessed in a ‘representative’ capacity. Indeed, that is probably the situation in the case of every assessment on trustees; they are only ever representatives of the beneficiaries’ interests.

T H E D E T E R M I N AT I O N O F E N T I T L E M E N T

The question that then arises is what criteria operate to determine whether a person has an immediate entitlement to income as it arises from a 69 See, eg R v Income Tax Special Commissioners ex parte Dr Barnado’s Homes (1921) 7 TC 646; Marie Celeste Samaritan Society v IRC (1926) 11 TC 226; Corbett v IRC (1938) 21 TC 449. 70 Where the trustee authorised payment direct to the beneficiary or his agent, s 76 of the Taxes Management Act 1970 would usually protect the trustee from assessment.

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particular source. Mr Justice Vinelott summarised the beneficiary’s position as follows:71 Mr Horsfield’s main argument is, of course, that founded on s 17. In construing that section there is one other general principle of tax and trust law which must be borne in mind. Under English law a beneficiary entitled to the income of trust property under a trust instrument which contains no power of accumulation is entitled to the income of each asset comprised in the trust property; each asset constitutes a separate source of income. In Archer-Shee v Baker [1927] AC 844, Lord Wrenbury, describing the life interest of Lady Archer-Shee under a will governed by the law of New York (on the assumption, afterwards shown to be incorrect, that the law of New York was the same in this respect as the law of England) said at page 866: It is, I think, if the law of America is the same as our law, an equitable right in possession to receive during her life the proceeds of the shares and stocks of which she is tenant for life. Her right is not to a balance sum, but to the dividends subject to deductions as above mentioned. Her right under the will is ‘property’ from which income is derived. The principle applies when the beneficiary is entitled to the income of trust property subject to an annuity (see Nelson v Adamson [1941] 2 KB 12) or subject to a charge for administrative expenses or the trustees’ remuneration, although, of course, a deduction can be made of the amount of the annuity and of the expenses and remuneration in ascertaining the beneficiary’s total income. If, on the other hand, a beneficiary has no right to receive income but is paid income (or a sum which for tax purposes falls to be treated as income) in the exercise of a discretion, the exercise of the discretion constitutes a new source of income (see Cunard’s Trustees v Inland Revenue Commissioners [1946] 1 All ER 159, per Lord Greene MR, at page 163).72 Mr Horsfield submitted that if a beneficiary is entitled to income subject to a power of accumulation each asset comprised in the trust property similarly constitutes a separate source of income to which the beneficiary is defeasibly entitled and that if the beneficiary becomes indefeasibly entitled to it (by the expiry or the release or abandonment of the power of accumulation) his title to the income relates back to the time when the income arose . . . I think the true position is, as Mr Nugee submitted, that a new source comes into existence when a power of accumulation expires or is released or abandoned. It was only then that the income formally fell to be included in the beneficiary’s total income for surtax purposes and would now fall to be included in his total income for purposes of higher rate tax.

IRC v Berrill (1981) 55 TC 429, 442–44. In fact, the assessment in Cunard’s Trustees was under rule 21 of the All Schedules Rules, ie that the payments in that case were annual payments not payable wholly out of taxed funds. The payments in Cunard Trustees were funded by realising capital investments to supplement the beneficiary’s annual income. Thus, so far as the beneficiary was concerned, their income arose from the obligation to pay the annuity, even though payments were funded from capital investments because the actual income of the trust was inadequate. 71 72

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Thus, where the beneficiary’s entitlement depends upon the exercise of discretion or is subject to some contingency that might mean the income is never received, it is the trustees who are liable to assessment as the persons in receipt and having control of the income. The beneficiary’s share of the income when eventually paid will not then be a matter of assessment to income tax. There are two elements in arriving at that conclusion. The first is that the participatory interest has to be in income that arises from a specific source and not just an interest in an aggregate fund. This is the position of a person interested in the residue of an estate in the course of administration. The point derives from the fact that an assessment to income tax has to be made according to the rules of a specific Schedule or Case. It cannot be an assessment at large on income. The second is whether what is received is a charge on the fund or just a distribution of the person’s share in that fund. The first may be the subject of an assessment to income tax; the latter is not.

T HE CHARG E TO TAX O N TOTAL I N CO M E

This does not mean, however, that payments from a trust fund as a result of the exercise of discretion or on the occurrence of a contingency are not income. The analysis thus far derives from the basis for charging and assessing the income tax. Inevitably the introduction of supertax and its successor, surtax (from which the higher rate of income tax is derived), complicate the analysis, given that they were charged by reference to the concept of ‘total income’ rather than by reference to the income tax Schedules and Cases as such. Whatever the position of trusts, partnerships and companies in relation to the income tax, it has always been the case that only individuals (and not partnerships, companies or trusts) were ever assessable to supertax, surtax and now higher rate tax on their total income.73 Thus, even when trustees controlled the whole source of income of a beneficiary, they could not be assessed to surtax (or higher rate tax) in respect of it.74 Since the introduction of supertax, it has never been the case for a trust that assessment of the trustees necessarily discharges the entire liability to tax, save to the extent that income can emerge as capital in the beneficiaries’ hands. Similarly, when considering the beneficiary’s liability, there could be liability to both income tax and surtax or just to 73 I have left out of this account any examination of the additional rate liability of trustees of accumulation and discretionary settlements. I also do not deal explicitly with the treatment of trust expenses in what follows. 74 IRC v Countess of Longford (1928) 13 TC 573); Stanley v IRC (1944) 26 TC 12.

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surtax, the liability to income tax having been discharged by deduction at the source or by assessment of the trustees. Under income tax law, trust rights (not amounting to a charge on the trust fund) were largely relevant for the purposes of assessment rather than for charge, except in the case of foreign trust rights, which might be relevant for both purposes. If the trust right did not support an assessment of the beneficiary (because the trust income was subject to some discretion or contingency), it was potentially of little consequence for income tax purposes. However, once individual beneficiaries may be liable to supertax by reference to their total income, it becomes essential to ensure that income distributions from a trust can be counted in total income, even though the trust rights from which they derive are not such as would support any assessment to income tax of the beneficiary on the trust income as it arises to the trust. Thus, trust interests may be capable of being classified in four ways: —rights to participate in the trust fund that may (or may not) support an income tax assessment on the beneficiary by reference to the income of the fund; —a specific charge on the trust fund that is then treated as income for income tax purposes, with income tax being collected by deduction at the source; —a foreign possession, the income from which may be charged to income tax and assessed, or which may support an income tax assessment on the beneficiary by reference to the underlying income of the trust fund; and —a source of income that falls to be included in total income for supertax purposes. In the face of such varying treatments it is hardly surprising that the case law and judicial dicta are varied, confusing and difficult to fathom.

CONCLUSION

In the end, the decision in Baker v Archer-Shee is a decision that flows from the structure of the 1842 and 1853 Income Tax Acts. Much else flowed from that structure in terms of the taxation of UK partnerships and companies. A longer analysis would tend to illustrate three broad propositions that can be derived from the case law of which Baker v Archer-Shee is an important component: 1. UK tax law draws to an extent upon general law, such as trust law and company law, but ultimately income tax law stands apart and may be found to diverge in important respects from the general law;

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2. As a particular feature of this, income tax is a tax on income and is not a tax on property, save insofar as the property is the source of the income that is charged to tax. Property as a source of income, however, is different from property in its ordinary conception of a person’s rights to property and therefore his liability to taxes on property. 3. Finally, the Act may provide different answers according to whether income is UK or foreign source income for the simple reason that anything UK could always be dealt with at the source but anything foreign could not.

3 Variations on a Theme: Stamp Duty in the Eighteenth Century S TAMP DUTY I N THE EI GHTEENTH CENTURY

LY NNE OATS AND PAULINE SADLER LYNNE OATS AND PAULI NE S ADLER

I N T RO DU C T I O N

Much has been written on the Stamp Act of 1765, which was a precursor to the American Revolutionary War, but what are not so well covered in the literature are the stamp duties imposed by the American colonies themselves in the 1750s and early 1760s. This paper examines the stamp duties imposed in the colonies of New York, Massachusetts and Jamaica and the Imperial Stamp Act of 1765. It compares the contents of the respective Acts, and analyses the impacts and outcomes in the respective jurisdictions.

S TA M P DU T Y I N G R E AT B R I TA I N

By the middle of the eighteenth century, stamp duties had become an established part of the fabric of British revenue raising,1 as illustrated by the following extract from Blackstone’s Commentaries: A fifth branch of the perpetual revenue consists in the stamp duties, which are a tax imposed upon all parchment or paper whereon any legal proceedings, or private instruments of almost any nature whatsoever, are written; and also upon licences for retailing wines, of all denominations; upon all almanacks, newspapers, advertisements, cards, dice, and pamphlets containing less then six

1 5 & 6 Will & Mary, c 21: ‘An Act for granting their Majesties several duties upon vellum, parchment and paper, for four years, towards carrying on the war against France’. For a comprehensive discussion of the origins of their introduction and their development up to the period immediately preceding the Stamp Act crisis, see E Hughes, ‘The English Stamp Duties 1664–1764’ (1941) 56 English Historical Review 235. See also S Dowell, A History and Explanation of the Stamp Duties (London, Longmans, Green and Co, 1873), although he does not canvass the full range of stamp duties, considering those such as on newspapers and playing cards to be aberrant and focuses instead on the duties on legal documents.

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Lynne Oats and Pauline Sadler sheets of paper. These imposts are various, according to the nature of the thing stamped, rising gradually from a penny to ten pounds. This is also a tax, which though in some instances it may be heavily felt, by greatly increasing the expense of all mercantile as well as legal proceedings, yet (if moderately imposed) is of service to the public in general, by authenticating instruments, and rendering it much more difficult than formerly to forge deeds of any standing; since, as the officers of this branch of the revenue vary their stamps frequently, by marks perceptible to none but themselves, a man would forge a deed of William’s time, must know and be able to counterfeit the stamp of that date also. In France and some other countries the duty is laid on the contract itself, not on the instrument in which it is contained: but this draws the subject into a thousand nice disquisitions and disputes concerning the nature of his contract, and whether taxable or not; in which the farmers of the revenue are sure to have the advantage. Our method answers the purposes of the state as well, and consults the ease of the subject much better. The first institution of stamp duties was by statute 5&6 W & M c21 and they have since in many instances been encreased [sic] to five times their original amount . . .

The general acceptance of stamp duties was also evident in the colonies, where the widespread incidence of the tax acted as a corrective to other forms of tax which concentrated on the wealthy, such as slave taxes.

T H E CO L O N I A L S TA M P DU T I E S

In January 1755, effective 30 April 1755, the colony of Massachusetts passed an Act imposing stamp duties on the province for a period of two years.2 For some time the colony’s Governor, William Shirley, had been requesting funds to improve the military defences of Massachusetts, and the legislature responded with two measures, a highly unpopular and controversial excise on wine and spirits passed in late 1754 and the 1755 Stamp Act.3 In recognition of the purpose of its provisions, the preamble of the Massachusetts Act reads, in part, the Representatives in the General Court assembled, from a sense of the many occasions which engage this Province in great expenses, for the defence of the frontiers, and for the necessary support of the Government, pray that it may be enacted.4

2 28 George II, c 7 (1755) (Massachusetts Colony) (Province Laws 1754–55, 2nd session, np, nd). 3 M Thompson, ‘Massachusetts and New York Stamp Acts’ (1969) 26 The William and Mary Quarterly 253, 253–54. 4 28 George II, c 7, preamble (1755) (Massachusetts Colony) (Province Laws 1754–55, 2nd session, np, nd).

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The Seven Years War, also known as the French and Indian War, started in 1754 and particularly affected the more northern of the American colonies.5 The duties, four amounts ranging from four pence to one halfpenny, applied to skin, vellum, parchment and paper on which a range of matters were engrossed, written or printed, including a variety of court documents such as writs and warrants, and other documents such as mortgages, bills of lading, charter parties and bills of sale for ships and ‘servants of any sort’.6 Newspapers were also taxed.7 The skin, vellum, parchment or paper was to be stamped before it was used. The Massachusetts Act provided for the making of four stamps and the appointment of a Commissioner or Commissioners of Stamps, these to keep an office in Boston. The Commissioner or Commissioners were to be supplied with vellum, parchment and paper, and were to supply it pre-stamped as required, or alternatively ‘his Majesty’s subjects’ could bring their own blank materials to the stamp office to be stamped or marked as necessary.8 The penalty for counterfeiting the stamps was a fine at the discretion of the court:9 Also to be set upon the Gallows with a Rope about his Neck, for the Space of an Hour, and shall then be publickly whipped not exceeding twenty Stripes, and shall then be committed to House of Correction . . . and be kept to hard Labour for the Space of three Years.

The penalty for failing to use pre-stamped paper as required was a fine of five pounds for each offence. The Commissioner of Stamps in Massachusetts was James Russell.10 In December 1756, effective 1 January 1757, the colony of New York passed a similar Act, this one to remain in force for a year, but was in fact continued by the General Assembly until 1760.11 The reasons for the Act were similar to those behind the Massachusetts Act, the Lieutenant-Governor of New York, James De Lancey, urging the colony legislature to raise funds for improving defence. The duties were five amounts, ranging from four pence to one halfpenny. Matters covered were a variety of court documents, civil or military commissions, marriage 5 This was the first war between the British and French which commenced in the Americas; the dispute was over rival claims to the land west of the Appalachians. See http://www.ohiohistorycentral.org (accessed 20 May 2008). 6 28 George II, c 7, §1 (1755) (Massachusetts Colony) (Province Laws 1754–55, 2nd session, np, nd). 7 Ibid. 8 Ibid, §3. 9 Ibid, §7. 10 Thompson, above n 3, 257. 11 The Colonial Laws of New York from the Year 1664 to the Revolution, vol IV (Albany, NY, Jake B Lyon State Printer, 1894); Thompson, ibid; A Koeppel, The Stamps that Caused the American Revolution (Manhasset, NY, American Revolution Bicentennial Commission, 1976), 36.

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licences, charter parties, bills of lading, mortgages, and bills of sale for ships and ‘servants of any sort’.12 As in Massachusetts, newspapers were also taxed.13 The Commissioners, to keep office in New York, were named in the legislation itself as Abraham Lott junior and Isaac Low. The penalties were somewhat different to those in the Massachusetts Act. For counterfeiting stamps a conviction meant a fine ‘at the discretion of the Court Also be set upon the Gallows with a Rope about his or her Neck for the space of one Hour and loose [sic] his or her Ears’. There were differing penalties—fines of five pounds or twenty shillings—for using unstamped materials, executing instruments on unstamped materials or using materials stamped at an amount less than that required.14 Under both Acts the stamps were embossed on the material, but the newspaper stamp, as in England, was printed on the surface in red.15 Little has been written about these colonial stamps, and there are conflicting views on contemporary reaction to them. On the one hand, Duniway, writing about the tax in Massachusetts, said that critical articles were published in the Boston Gazette or Country Journal, and ‘Such agitation as this caused the abandonment of so unpopular a tax, which expired by limitation . . .’16 This view was supported by Miller: ‘They were quickly dropped, thereby serving warning upon the British government that even when levied by the colonists’ own legislatures, stamp duties were not a popular tax.’17 McAnear, writing about the reaction of printer James Parker to the New York tax, commented:18 Although this levy was made on fewer items and exacted smaller payments than the imperial statute of 1765 was to do, nevertheless it put upon the newspaper publishers the same type of burden as the Imperial Act. Thus James Parker’s attack on the New York law of 1756 affords a detailed explanation for the printers’ fervent opposition in 1765.

The Colonial Laws, ibid, 112. Ibid, 112. Ibid, 112, 114–15. Koeppel, above n 13, 36. A Duniway, The Development of Freedom of the Press in Massachusetts (New York, Burt Franklin, 1969 reprint, orig 1906), 120. Pamphleteers and newspapers in Massachusetts had already become well versed in promoting their particular side in a controversy during the passage, and eventual passing, of a contentious liquor excise bill through the General Assembly and Council in 1754: PS Byer, ‘Borrowed Rhetoric: The Massachusetts Excise Controversy of 1754’ (1964) 21 The William and Mary Quarterly 328. 17 J Miller, Origins of the American Revolution (Boston, MA, Little, Brown and Co, 1943), 112; Miller gives no reference to support this assertion. This quote is cited in Thompson, above n 5, 253—Thompson referring to it as ‘not entirely accurate’. 18 B McAnear, ‘James Parker versus New York Province’ (1941) XXII New York History 321, 321. Notably McAnear adds in footnote 2 ‘I have been unable to find in newspaper comment of 1765 reference to the earlier provincial stamp acts of New York and Massachusetts’. 12 13 14 15 16

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Thompson, on the other hand, after surveying the response to the stamp duties in both colonies, concluded that there was little evidence to show that the stamp duties were unpopular in either colony. He also suggested that this may have encouraged George Grenville ‘to extend the English Stamp Act to all colonies in North America . . .’19 Prior to making the above statements, however, Thompson also included the following information, which dilutes the certainty of his conclusion:20 Almost ten years later, in 1765, at the time of the agitation against the parliamentary Stamp Act, Oxenbridge Thacher, a Massachusetts lawyer, explained that the Stamp Act of 1755 was ‘so burthensome’ to the people of the colony, ‘and it was so generally complained of, that it was laid aside and hath never since been revived’. In 1755, however, there was little criticism in Massachusetts of the Stamp Act. [reference omitted]

With respect to the effect of the two Acts, at the time the Massachusetts Act was passed there were four newspapers operating. According to Duniway, the Boston Gazette or Weekly Advertiser, ceased operating because of the stamp duty. This was contradicted by McAnear, who said the ‘paper was merely sold to other publishers’, and it was the Boston Post Boy that suspended publication in late 1754 or early 1755, but probably because ‘of the loss of the Boston postmastership by its publisher, Ellis Huske . . . or by his death’.21 The remaining papers raised their prices and continued publishing, duly stamped.22 Thompson quotes from a letter sent from Boston to New York in 1757 saying that, of the four Massachusetts newspapers, ‘one was obliged to stop, and another Printer removed into New-Hampshire Government; all the others have lost more Customers than the value of the whole amount of the Duty’.23 Wording very similar to this appears in James Parker’s broadsheet, A Letter to a Gentleman in the City of New York.24 McAnear’s explanation of the stoppage is above, and his explanation for the removal to New Hampshire was that the printer Daniel Fowle was being prosecuted in Massachusetts in relation to a pamphlet he (Fowle) had written.25 Whatever the facts in all the preceding confusion, the Massachusetts Act did not bring in much revenue, most of it going on the salary of the Commissioner, James Russell, various expenses and purchasing a stamp press.26 Thompson, above n 3, 257. Ibid, 256. Duniway, above n 16, 120. McAnear, above n 18, 326, footnote 22. McAnear, ibid. Thompson, above n 3, 256–57. Reprinted in full in McAnear, above n 18. Ibid, 326, footnote 22. Thompson, above n 3, 257 (Thompson cites as the source of this information the Journals of the House of Representatives of Massachusetts). 19 20 21 22 23 24 25 26

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In New York the printers raised their subscription charges, and the literature indicates that it was only Parker who vented his feelings about the tax during the passage of the Stamp Act through the New York assembly, and while it was in effect. In early 1757 ‘he ran a Boston letter, announcing the lapse of a similar Massachusetts statute and telling of its dire effects upon the printing trade’.27 When the New York tax lapsed in 1760, apparently for the reasons that there were difficulties in collecting it in the outlying counties and because the returns were not substantial, Parker thanked the assembly in his newspaper.28 Even more obscure than the Stamp Acts passed by the colonial legislatures of Massachusetts and New York is one passed in the colony of Jamaica in December 1760, effective 1 March 1761.29 Again the extra revenue was required to strengthen the militia, this time in response to a ‘brutal slave revolt’.30 The preamble states: Whereas the Annual Means hitherto used for raising Supplies for the Support of the Government of the Island are not sufficient for the present extraordinary Exigencies and Contingencies and to discharge the Publick Debts which have accrued thereof MAY it please YOUR MAJESTY that it be ENACTED.31

The Jamaican Act, which remained in force until 31 December 1763,32 was far more comprehensive than the Massachusetts and New York Stamp Acts. Both the start date and a finish date of 31 December 1761 are stipulated within the Act itself; presumably its operation was later extended for a further two years. There is, however, no indication as to why it was operative for such a short period of time, although its lifespan was consistent with those in Massachusetts and New York. There were 11 amounts of duty, ranging from £10 to 7½d. There were 13 stamps specified in the Act, but two of them, for £20 and 50s respectively, had no corresponding dutiable item. The Act covered a range of legal and court instruments and other matters, including mortgages, charter parties, bills of lading and military commissions, in a similar fashion to the other two Acts, but in more depth. It also included other instruments, for example grants, letters patent, documents relating to ‘any admittance of any Attorney Sollicitor Clerk Proctor or Notary or other Officer in any Court on this island’, two rates of duty on wine and spirit McAnear, above n 18, 322. Ibid, 330. NA CO 139/21. In the first place it proved difficult to locate a copy of this Act. The Act itself is extremely hard to decipher, being closely handwritten with no breaks or section numbers, at least in the version available to the authors of this paper. 30 DJ Spindel, ‘The Stamp Act Crisis in the British West Indies’ (1977), 11 American Studies 203, 210. 31 NA CO 139/21. 32 According to the testimony of James Carr, merchant, before Parliament on 17 February 1766: BM Add Ms 33030. 27 28 29

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licences, and a £10 duty on certificates of naturalisation.33 Newspapers were not included in the Jamaican Act, but instead there was a complicated system of pre-stamping sheets of paper, according to their size, on which some of the legal instruments were printed or written. The Lieutenant Governor of Jamaica, Henry Moore, and the members of the legislative council and assembly were appointed Commissioners. These Commissioners were charged with providing the 13 stamps and with appointing a person or persons ‘to Execute and perform the Duties and Trusts hereafter required’.34 The Commissioners were to empower the Receiver General to purchase the necessary quantity of paper of varying sizes and to have forms printed, and both paper and forms to be ‘Stamped without Delay for each and every different purpose and Thing that is Charged by this Act with the aforesaid Duties’.35 The penalties in the Jamaican Act were also more varied and comprehensive than those in the Massachusetts and New York Acts. For engrossing, writing or printing on unstamped paper, or on paper stamped with a lower duty than prescribed, the penalties included the payment of £5 over and above the duty payable, the payment of additional duties and a fine of £10, depending on the offence. A public officer convicted under the Act would lose ‘his office place or Employment respectively’, and lawyers convicted under the Act were disbarred from future practice in the legal profession.36 The penalty for counterfeiting stamps was death without the benefit of clergy, and, as this was also the penalty under the English Stamp Act of 1712, the Massachusetts and New York Acts were quite mild in comparison.37 Unlike the other two Acts, there are provisions within the Jamaican Act specifying how the money raised was to be expended. Much provision was made for fortifications and military purposes, but also included were grants to various parishes for ‘maintaining sick and poor persons’. There were also some rather curious grants, for example one of £118 15s ‘to the person that shall win the race to be run on the Race Course of Saint Iago De La Vega . . . to Encourage the Breed of good and Large Horses’, and two £5 per annum annuities to individuals.38

33 34 35 36 37 38

NA CO 139/21. Ibid. Ibid. Ibid. 10 Anne, c 19, CXV. NA CO 139/21.

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Lynne Oats and Pauline Sadler THE I MPERIAL S TAMP DUTY OF 1765 3 9

By the eighteenth century each colony was represented by an agent in London, men who knew Westminster and were able to act as Parliamentary lobbyists. Beloff noted that British attempts to tighten imperial control had begun in the 1750s, but the Seven Years War intervened.40 The main aim of increased control was to prevent evasion of trade regulations, and it was with this in mind that George Grenville’s administration of 1763–65 acted as it did in relation to colonial legislation. On 9 March 1764, during the passage through parliament of the Sugar Act, George Grenville intimated that it might be appropriate to levy stamp duty on the colonies.41 The scheme introduced by Grenville seems to have been devised by Charles Jenkinson, Secretary of the Treasury, who probably derived the idea from English merchant Henry McCulloh.42 London-based McCulloh, a land speculator in North Carolina, exerted great influence over Grenville and ‘pointed out that the colonies were ripe for taxation and that stamp duties were the best means of opening the melon’.43 Having decided to adopt a stamp duty as the most appropriate form of tax in the colonies, it then became necessary to devise specific mechanisms by which it would operate. The design of the stamp duties, in terms of both the rate of duty and the items to be taxed, took into consideration the social and economic conditions prevailing in the colonies. The Solicitor to the Stamp Office, Thomas Cruwys, was instructed to consult McCulloh in September of 1763 and at the end of the month the Stamp Office Board formally ordered the preparation of the Stamp Bill.44 Both versions of the Stamp Bill were submitted on 19 November 1763, though the Treasury rejected McCulloh’s; indeed, few of McCulloh’s proposals were incorporated into the final bill.45 In a report to the Treasury Board, secretary Thomas Whately explained the rationale of the final Stamp Duty Bill, as well as the key differences between the British stamp duties and those proposed for the colonies:46 39 For a fuller discussion of the Imperial stamp duty, in particular the way in which it was accounted for, see L Oats and P Sadler, ‘Accounting for the Stamp Act Crisis’ [2008] 35(2) Accounting Historian’s Journal 101. 40 M Beloff, ‘American Independence in its Constitutional Aspects’ in A Goodwin (ed), The New Cambridge History, Volume VIII. The American and French Revolutions (Cambridge, Cambridge University Press, 1965) 454. 41 ES Morgan, Prologue to Revolution: Sources and Documents on the Stamp Act Crisis, 1764–1766 (New York, WW Norton and Co Inc, 1973 reprint, orig 1959) 24. 42 PDG Thomas, British Politics and the Stamp Act Crisis (Oxford, Oxford University Press, 1975) 70. 43 Ibid, 17, 112 (quote at 112); Thomas, ibid, 69. 44 Thomas, ibid, 70. 45 Ibid, 72, 83. 46 In the ensuing description, quotes are from Whately’s report, which can be found in BL Add MSS 35910 fols 310–23. The report is also partly reproduced in E Hughes, ‘The English Stamp

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Crown Land Grants: In Great Britain, the crown is restrained from making grants of land, ‘but grants of crown land are on the contrary perpetually made in America from which the crown receives no immediate or adequate benefit’. Therefore, a moderate duty was proposed by reference to the quantity of land. The duty was low in deference to the considerable expense of surveying as well as fees to governors in passing grants; and the novelty of the duty. Indeed, Whately notes that ‘like other new duties and like stamp duties in England when they were new, it should begin low’. Objection was made to this head of duty on the basis that it would ‘check the settling of uncleared lands which is directly contrary to the First Principles of Colonisation’. The response to this objection was that the duty was only small, and that ‘abuses . . . have [already] been committed upon this principle [of colonisation], extravagant grants having been made which are retained by the present proprietors in the original state and are actually now the greatest check of any to cultivation’. The duties for mainland colonies were reduced from those proposed in the final bill. Indeed, Whately felt that the double duties in the island colonies was justified as being ‘some balance to the disproportion in the number of grants’. The final bill also contained a duty on the warrant by the governor for the survey of crown lands prior to and separate from their conveyancing, without differentiating between mainland and island colonies. Land Conveyances: In England, the stamp duty on intermediate conveyances took into account the value of the estate conveyed. It was felt that in the colonies the manner of recording the quantity of land conveyed from original grants, and through subsequent divisions, made it possible to distinguish conveyances by quantity of land. This will indeed be different and in most cases a higher duty than in England, though upon the same instruments, but it is at the same time more equitable; it may be more easily carried into execution there than it can be here, and it seems to be a natural consequence of the like duty upon grants where the propriety of apportioning the duty to the quantity of land will be universally acknowledged.

In the final bill, the duty on conveyances varied according to the acreage of land conveyed, with progressive rates applying, starting at 1s 6d for conveyance of land not exceeding 100 acres on the mainland or islands of Bermuda or Bahamas.

Duties 1664–1764’ (1941) 56 English Historical Review 235 and A Koeppel, The Stamps that Caused the American Revolution: The Stamps of the 1765 British Stamp Act for America (Manhasset, NY, Town of New Hempstead, 1976) 45–56.

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Legal Proceedings: The duty on law proceedings in the courts of Justice are the most sensibly felt of any stamp duties whatever because they frequently amount to considerable sums to be paid by one person at the same time. In the Colonies, they will, therefore, be grievous if they are kept too high, because the people really are poor and multiplicity of their suits is a consequence of their poverty. It is therefore proper to give them some relief by putting these duties at a lower rate than they are now raised to in England.

In England, the stamp duties differentiated between actions in superior and inferior courts, and it was proposed to do likewise in America. It was noted that the courts in America had more business, in part because of the litigiousness of the people. The final bill adopted these suggestions. Admission to Corporations, Professions and Degrees: There are not above six or eight corporations in the colonies. If the English duties upon the admission to corporations and companies were extended to America, they would produce a very trifle and yet give rise to complaints of inequality, for nothing will occasion more murmuring than that one colony should be subject to a duty from which the others are exempted, particularly when it happens that the colonies charged are upon the continent and those excused are in the Islands . . . It will therefore be proper to omit this duty entirely, but the duties upon admissions to any of the professions or to the university degrees should certainly be as high as they are in England. It would indeed be better if they were raised both here and there considerably in order to keep mean persons out of those situations in life which they disgrace.

In the final bill, neither corporate charters nor transfers of shares were taxed. Licenses to practice as solicitors and attorneys were taxed at £10, while a university degree attracted duty of £2. Law Instruments: ‘Law instruments such as deeds, obligations &c may in general be charged with the same duties as in England, bonds and indentures of apprenticeship excepted.’ Bonds: It is usual in the colonies to give bonds instead of notes of hand for every [and] the smallest sum of money borrowed, the reasons for this are that the bonds are registered and the money is more easily recovered. But as they are in such common use and are given for such small sums, a duty of 2s 6d would be very heavy and it will be right to reduce it to 1s 6d upon all bonds for a larger sum than £20 and 1s on sums between £10 and £20 on sums less than £10, three pence.

In the final bill this was adopted, but a higher rate of duty was imposed in the West Indies.

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Indentures: It was proposed that the duty on indentures for servants would be ‘a grievous tax upon labor already too dear’; however, a levy on apprentice agreements was made proportionate to the money paid. Retail Licenses: There are few retailers of ale in the Colonies, the usual beverage there is either weak cider or weak punch. Retailers of these should therefore be put on the same footing with retailers of ale, but as many of them are poor and the poorest are those who trade at certain periods in spirituous liquors and other commodities with the Indians, the trade with whom should be under as little restraint as possible, it will be a true policy to exact a lower duty than in England and to charge licences for retailing ale, cider and spirits not more than 10s. Wine licences on the contrary should be kept as high as they are in England because there are no retailers of wine except in the great towns.47

Cards: Nothing is a more proper object of taxation than cards, but no duty is so open to frauds. The increase of duty in England led to an increase of frauds. Frauds may be more easily committed in the colonies and therefore a sixpenny duty will produce a larger revenue than one of a shilling. To secure even this all the proposals for securing the card duty on home consumption must be applied to the American consumption and the cards designed for exportation to the Colonies must be distinguished from all other exportation, as is the case of home consumption now.

In the final bill, the duty was one shilling on cards. Parliament enacted stringent regulations to prevent frauds . . . Two stamps were prepared for this duty, one for the wrapper containing the denomination but of a different design than the regular issue one shilling stamp, the other containing no denomination but including the word ‘cards’ in its design. It was this stamp that was embossed on the back of the ace of spades. There are no reported surviving card stamps.48

Registrations: No duty would be more certainly collected than a duty upon every entry in the Registers that are kept, in almost all Colonies, of conveyances made and securities given, but it is entirely a new tax and if it is laid it should be at first be very low.

According to Koeppel, this new tax was 47 Koeppel, ibid, 53, notes that ‘no stamped paper bearing these high denominations has yet been discovered in any of the archives of Canada or the West Indian Islands’. 48 Ibid, 54.

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Lynne Oats and Pauline Sadler designed to yield a guaranteed collectible revenue . . . [it] was collected by means of binding blank stamped paper upon which the deeds and mortgages were copied into the copy registers. The tax was set at three pence per sheet for every such document upon which the duty had previously been paid, and at two shillings per sheet (as a penalty) for any document wherein no duty had previously been paid (although due) . . . At Spanishtown Jamaica, there were two such copy ledgers, one attacked by dry rot, contained three penny stamps, the other, in better condition, was not on stamped paper, although it should have been since the dates covered fall in the appropriate period.49

This is evidence of the patchy compliance with the legislation to which we return later in this paper. Appointments to Offices: ‘Appointments to offices, employments and promotions made in the colonies should be excused there, because they already pay the duty here.’ In the final bill, the duty on such appointments was set within a range of 10s to £6, according to the salaries of office and whether or not on the mainland. Advertisements: ‘The duty of two shillings upon advertisements is a very high one. Advertisements in the colonies are very numerous and it would perhaps be thought a great grievance if they were rated at more than one shilling.’ In the final bill, the duty was 2s. Koeppel commented that Charles Garth, colonial agent for South Carolina, actually succeeded in convincing the Committee on the Stamp Bill to reduce this tax to one shilling at a hearing held 18 February 1765, but the bill was enacted in error containing no such change.50

Others: Whately concluded his analysis of the duties recommended for the American colonies with the statement that as to other subjects liable to stamp duty, not already mentioned, and they are numerous, there is no particular reason for rating them lower than they are already rated in England, unless the general principle should be adopted of laying all duties lighter at first than they are intended to be raised to hereafter, which might be proper in North America if not in the West Indies.

Amongst the items dismissed by Whately under the heading of ‘others’ were the newspaper and almanac stamp duties, the former of which would prove to be particularly controversial and inflammatory. Another point of difference with the British legislation, not discussed by Whately in his report to the Treasury Board but appearing in the final bill, 49 50

Ibid, 54. Ibid, 55.

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was the additional rate for foreign language documents and publications. Specifically, the legislation states that:51 For every skin or piece of vellum or parchment, or sheet or piece of paper, on which any instrument, proceeding, or other matter or think aforesaid, shall be ingrossed, written or printed, within the said colonies and plantations, in any other than the English language, a stamp duty of double the amount of the respective duties being charged thereon.

The Stamp Act, 5 Geo III c 12, was passed on 22 March 1765 to take effect on 1 November of the same year. The duties were numerous, and for the most part fell on legal and commercial documents, a few examples of these being: licences to practice for solicitors, counsellors, attorneys and advocates (£10); pleas, rejoinders and demurrers (3d per sheet); appeals and writs of certiorari (10s per sheet); licences for retailing wine (£3 per sheet); and indentures, leases, conveyances, contracts, bills of sale and charter parties (2s 6d per sheet).52 Newspapers and pamphlets were also subject to the stamp duties.53 This had the consequence of alienating the legal fraternity and merchants, two groups who were among the most able of all the colonists to express their grievances and to lobby in their own cause—in common with printers and newspapermen, who were similarly affected by the Act. The money raised was to be used for ‘defending, protecting and securing, the colonies and plantations’.54 A security in respect of the duty on advertisements had to be paid to the distribution officials before stamped paper would be released for the purposes of printing pamphlets or newspapers. A refund was available for the stamped paper on unsold copies providing the person claiming the refund swore an oath that the claim was legitimate.55 The penalties for breaching the provisions of the Stamp Act varied in seriousness, the most serious being death without the benefit of clergy which applied to forging or counterfeiting the stamps, or for using forged stamps. Lesser penalties included a £50 fine for reusing stamped paper. Any person selling pamphlets or newspapers which did not have published in them the name and abode of the printer risked a £20 fine. There was a £10 fine for ingrossing, printing, signing or writing on a document or paper before stamping, or where the duty paid was less than required, and also for selling or exposing to sale such items. There was a £5 fine for not writing on or near to the stamp, and a 40s fine for those persons hawking or selling unstamped newspapers. Following any prosecution for breaches of the Stamp Act the offending materials and associated instruments, such 51 52 53 54 55

5 George III, c 12, I. Ibid, I, IV. Ibid, I. Ibid, LIV. Ibid, XXVIII, XXIX.

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as dyes, tools and stamps, were to be destroyed in open court.56 It was intended that the paper be stamped in London and then transported to the colonies for despatch to the various Stamp Distributors appointed in each colony. By April 1765, the colonies had become aware of the impending Stamp Act and action began to formalise protest by way of resolutions. The resolves of the Virginian House of Burgesses, Virginia being the first colony to formally do so, were published in the Maryland Gazette on 4 July 1765 and included the following:57 that the Taxation of the People by themselves, or by Persons Chosen by Themselves to represent them, who can only know what Taxes the People are able to bear, or the easiest Method of Raising them, and must themselves be affected by every Tax laid upon the people, is the only security against a Burthensome Taxation; and the Distinguishing Characteristic of British FREEDOM; and, without which, the antient Constitution cannot exist . . .

Such was the depth of feeling against the imposition of the Imperial stamp duty, that a congress was held in October 1765 in New York at which nine of the colonies were represented.58 Several memorials and petitions were sent to various bodies in Britain. In a petition to the House of Commons the colonists said:59 the Act for granting and applying certain Stamp Duties, &c, in America have fill’d [the colonists] with deepest concern and Surprize, and they humbly conceive the Execution of them will be attended with Consequences very Injurious to the Commercial Interests of Great Britain and her Colonies, and must terminate in the eventual ruin of the latter.

The colonial press were particularly vocal in their opposition to the Stamp Act, while the British press were mixed in their support or otherwise of the colonial view.60 A pamphlet by William Pym under the heading ‘The British Parliament Can at any Time Set Aside All the Charters’, published in the London Evening Chronicle in August 1765, posed the question and answer:61 The people of the colonies know very well that the taxes of the mother country are every day increasing, and can they expect that no addition whatsoever will be made to theirs? . . . If we reap emoluments from the existence of the colonies, the colonies owe everything to our encouragement and protection. As

Ibid, XV, XIX, XX, XXIII, XXIV, XXVII, XXXII. Reproduced in Morgan, above n 41, 49–50. Ibid, 45. Ibid, 67 (square brackets added). See, eg Morgan, ibid, ch IV. Reproduced in Morgan, ibid, 97–99, quote at 99. See also, eg a pamphlet by William Knox entitled ‘The Claim of the Colonies . . . Considered’, published in London in 1765 and reproduced in Morgan, ibid, 96–97. 56 57 58 59 60 61

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therefore we share in the same prosperity, we ought to participate of the same distress . . .

In addition to the official action taken by the colonial assemblies, resistance to the Stamp Act comprised boycott of English imports, and action to force the resignation of stamp distributors. The first manifestation of violence in the context of the latter of the two resistance strategies was in Boston on 14 August 1765, followed by another one in Boston on 26 August 1765, then one in Newport on 29 August 1765.62 In Massachusetts, the resignation of the stamp distributor prompted the British Treasury Lords to instruct the Governor to take charge of stamp distribution pending appointment of a new distributor, which suggests that they were at that point unaware of the severity of the situation in the mainland colonies. A letter from Mr Cooper to Francis Bernard Esq, Governor of Massachusetts Bay, dated 8 October 1765, reads as follows:63 The Lords Commissioner of His Majesty’s Treasurer having read several letters from Mr Oliver, the Distributor of Stamps at Boston, in Massachusetts Bay, giving an account of great outrages committed by the people of Boston, on 14th, 15th and 26th August last, and signifying, That he had been obliged to resign His Office of Distributor of Stamps and Expressing his Apprehensions that the Stampt Paper would be in danger of being seized by the Populace, upon the arrival of the Ship, which carried it to Boston, are pleased to direct your Excellency to see that the Stamps be duly distributed until a Distributor be appointed by My Lords, and Their Lordships recommend it to you, and by your mediation to the Several Magistrates, in your Excellency’s government, to exert yourselves with Spirit, and Firmness, in order to enforce a due Obedience to the Laws and to take Case, That His Majesty’s Revenue suffer no Detriment or Diminution.

Governor Bernard’s response some two months later, on 22 December 1765, reflects his regret in his inability to comply with the Treasury Board’s instructions and highlights the inordinate delays in communication that rendered the implementation of the stamp duty problematic.64 I have this day received a letter from Mr Lowndes, dated Sept 1, and a letter from you dated October 8. In the letter you signify to me that the Lords Commissioners of the Treasury direct me to see that the Stamps be duly distributed until a distributor be appointed. I doubt not but long before this letter will come to your hands, their Lordships will be apprised how impossible it is for me to obey their Commands. At this time I have no real Authority in this Place and am so much in the hands of the People, that if it was to be known here that I had received a power to distribute the Stamps, I should have my House surrounded and be obliged, at least, to give public assurance that I would not Morgan, ibid, 104. BM Add Ms 33030 fol 50: Letter from Mr Cooper to Francis Bernard Esq, Governor of Massachusetts Bay, 8 October 1765. 64 T1/452 fols 191–92: Treasury Letter from Francis Bernard, Boston, 22 December 1765 to Gray Cooper. 62 63

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Lynne Oats and Pauline Sadler undertake the Business. A very late and fresh insult upon Mr Oliver, notwithstanding the respectableness of his public and ableness of his private character, show that these people are determined to spare no one whom they shall make objects of their jealousy and fury. My present and former despatches to the Secretary of State and the Board of Trade will afford their Lordships a view of the present state of this Town and Province. Although I never received any orders concerning the Stamp Act (until this day) nor even a copy of the Act, I thought it my duty to do all I could to get it carried into execution. And I must say, that in so doing, I exerted all possible spirit and perseverance. What has passed between me and the Assembly will appear from the enclosed . . . copies. I have made great sacrifices to his Majesty’s service upon this occasion: my administration, which was before easy, respectable and popular, is rendered troublesome, difficult and dangerous. And yet there is no pretence to charge me with any other offence, than endeavouring to get the Stamp Act carried into Execution. But that is here a high crime never to be forgiven. I have preserved from the destruction with which they were threatened, the Stamps which have hitherto arrived, but not without difficulty. I could not have done this, if I had not had the assistance of two men of war which have attended here constantly for that purpose. In the course of this business I have found it necessary to put the Castle in a state of defence, as if a foreign enemy had been expected and now the people acquiesce in the Stamps being lodged there, only upon assurance that they shall not be distributed from thence. If an attempt to do it was apprehended, the whole Country would be in Arms.

Bearing in mind the administrative and cultural differences between the colonies existing at the time, it is not surprising that the reaction to the Stamp Act was not uniform. For example, ‘Pennsylvanians were much more optimistic, confident that Parliament would soon repent its error and real harmony would be restored’.65 Nova Scotia, unlike the other seaboard colonies, showed very little visible opposition to the stamp duties.66 Indeed, the governor later reported that ‘the sentiments of a dutiful acquiescence’ prevailed in the colony.67 In relation to Georgia, the American Revenue Association (1962) noted:68 The arrival of the ships bearing consignments of stamped papers in September and October was attended by major rioting; some consignments of the stamped paper were burned by the mob and every appointed distributor or ‘stamp master’ was forced to resign his commission. One exception . . . The Georgia distributor, George Angus, finally arrived with the stamps early in December 65 BH Newcomb, ‘Effects of the Stamp Act on Colonial Pennsylvania Politics’ (1966) 23 The William and Mary Quarterly 257, 272. 66 EP Weaver, ‘Nova Scotia and New England During the Revolution’ (1904) 10 American Historical Review 52, 58. 67 Ibid, quoting from a letter from the Governor of Nova Scotia, Wilmott, to Conway on 17 February 1766, MS Vol 42 No 5. 68 American Revenue Association (A Koeppel, ed), New Discovery From British Archives on the 1765 Tax Stamps for America (Boyertown, PA, 1962), 2.

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1765. Under close guard he distributed the stamps for the customs officers and the latter were able to clear some sixty ships on stamped paper between January 17 1766 and January 30 1766. The Savannah merchants were willing to play the role which those of North Carolina had distained, and they thus earned the hatred and contempt of the other colonies for their betrayal of American unity. Quickly, the country people of Georgia, who were also outraged, gathered for a march on Savannah. The Governor, hearing of this, rushed the stamps out to a British warship to save them from destruction by the mob. At the same time, his action removed the stamps from circulation as effectively as if they had been destroyed . . . In addition to the short lived use of the stamps from Savannah, the stamps were consistently used in Quebec, Nova Scotia, East and West Florida, Antigua, Barbados, Grenada and Jamaica, much to the disgust of the other colonies . . .

Spindel noted that, in the island colonies of the British West Indies, ‘the response of each colony was unique, determined by differences in history and environment’.69 The island colonies shared some similarities with those on the mainland, but differed considerably in terms of their demographics, in particular having a much higher proportion of slaves.70 Spindel noted other key differences as being a ‘lack of cultural life, the scarcity of land, geographic isolation, a debilitating climate, and exposure to attacks from French and Spanish ships’.71 The Stamp Act was enforced in at least a quarter of the Caribbean islands, whereas, among the 13 mainland colonies, only Georgia and West Florida are recorded as having actually collected Stamp revenue.72 In Jamaica, one colonist noted in 1765, ‘Great are the murmurings against [the Stamp Act] but we dare not to proceed to such violences as the people of Boston and Virginia’.73 The resistance was concentrated at the ports; in Jamaica, this was Kingston. There the captains threatened to bypass the island if the Act were to be enforced and so were allowed to trade without stamped papers. Spindel suggested that the reason for the circumspect resistance in Jamaica was a ‘general reluctance to disturb economic relations with Britain’ as it was the largest island exporter of sugar to England.74 A letter from the Governor of Jamaica, William Lyttleton, dated 28 February 1766, hints at the difficulties in complying with the Treasury 69 Spindel, above n 30, 204. On the reaction in the West Indies, see also AJ O’Shaughnessy, ‘The Stamp Act Crisis in the British Caribbean’ (1994) 51 The William and Mary Quarterly 211. In 1765, the British colonies in the West Indies were the Bahamas, Jamaica and the lesser Antilles, comprising Anguilla, Antigua, Barbados, Barbuda, Dominica, Grenada, Montserrat, Nevis, St Kitts, St Vincent, Tobago and Tortola. 70 Spindel, ibid, 204–05. 71 Ibid, 207. 72 cf Spindel, ibid, 208. 73 Quoted in Spindel, ibid, 209. 74 Ibid, 212; see also TR Clayton, ‘Sophistry, Security and Socio Political Structures in the American Revolution: or, Why Jamaica did not Rebel’ (1986) 29 The Historical Journal 319.

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Board’s orders and also provides evidence of the monetary amount of the bond required from a Chief Distributor, in this case Mr Howell.75 The Pacquet which arrived yesterday brought me your letter of the 14th September and I have the satisfaction to acquaint you that the Act of Parliament for laying a Stamp Duty has been duly and punctually carried into execution in this Island, but it has not been thought prudent to issue the Stamped Paper to sub distributors or to lodge it anywhere but in Spanish Town the Place where I usually reside. Mr Howell, the Chief Distributor acquaints me that he gave a bond for £5000 Sterling on the 20th June 1765.

Barbados, the first established of the English sugar colonies, similarly showed only token resistance to the Stamp Act and initially enforced it, although, like Jamaica, it soon allowed ships to trade without stamped clearances. The violence of the protest in St Kitts extended to stamped paper being torched and the stamp distributor was forced to resign.76 The St Christopher Gazette was published unstamped throughout the period of operation of the Stamp Act.77 Spindel concluded that, while it was not surprising that island colonists resented British interference in internal affairs, what was surprising, given the risks to safety and livelihood, was that resistance occurred at all.78 In February 1766, the House of Commons appointed a Committee to inquire into the operation of the Stamp Act. Before the Committee reported, Grenville was dismissed from office, and the subsequent Rockingham administration proceeded to repeal the American Stamp Act.79 The extent of the resistance to the Stamp Act meant that it was impossible to secure compliance. Following the report of the parliamentary committee and the subsequent debate, the decision was taken to repeal the stamp Act. The repeal was accomplished by 6 Geo III c 11, assented to on 18 March 1766 and effective from 1 May 1766. The probable yield of the Stamp Act had been calculated as £60,000–100,000 pa. For the six months the Stamp Act was in force it in fact raised only £4,000, an amount insufficient to pay the costs of administration, which were £6,837.80

75 T1/448 fol 42: Treasury West Indies, Jamaica and Mosquito Shore: Governor WH Lyttleton regarding execution of the stamp Act and storage and distribution of stamped paper 28/2/1766. 76 Spindel, above n 30, 214–15. 77 Ibid, 216. 78 Ibid, 221. 79 S Dowell, A History of Taxation and Taxes in England (London, Longmans, Green and Co, 1888) 152. 80 Ibid, 154.

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CONCLUSION

The Stamp Acts considered in this paper have many similarities, and some clear differences. The principal similarities lie in the inclusion of many items in common, reflecting the genesis of these colonial Acts in the English Stamp Act, which had been in effect since 1694. They were all also introduced during times of unrest, and to raise money mainly for the purposes of defence. One of the principal differences is the lack of capital punishment in the Massachusetts and New York Stamp Acts, unlike the Jamaican, Imperial and English Stamp Acts. In many respects this particular difference is indicative of another of the noticeable differences between the Acts—the Massachusetts and New York Acts are comparatively short and simple, whereas the other three are much longer, more detailed and more complex. The Jamaican Act is unusual in that it is the only one that did not impose a duty on newspapers. One of the surprising features that all of them have in common is their very short life span, especially compared with the Stamp Act in England. Considering the capital investment involved in setting up and operating these duties, only a long period of operation would have been cost effective. In some cases the reasons for their discontinuance is well documented, no more so than the Imperial Stamp Act of 1764, but their early demise demonstrates that a tax that is accepted and works well in one community does not necessarily transplant successfully into a different community. What is of great interest is the almost complete anonymity of the Jamaican Act. There are very few references to this legislation in the literature, and even these are oblique and inconsequential. A possible explanation for this lack of prominence may lie in what the Act does not include—a tax on newspapers. The one thing in common that the other Acts had was a stamp duty on newspapers which resulted in adverse publicity in the newspaper press. It was this publicity that focused on, and galvanised reaction against, the legislation in general, and which by its very nature cemented in history a permanent record of the activity surrounding the introduction and operation of the stamp duty legislation.

4 Fiscal Grievances Underpinning the Magna Carta: Some First Thoughts FI S CAL GRI EVANCES UNDERPI NNI NG THE MAGNA CARTA

J A N E F R E C K N A L L HU G H E S J ANE FRECKNALL HUGHES

I N T RO DU C T I O N

It is contended by Frecknall Hughes and Oats (2004, 2007) that the Magna Carta was a reaction to the financial exactions of King John’s reign (1199–1216), which saw innovative and extreme measures used to collect revenue. These measures became increasingly severe and frequent after the loss of Normandy to the French in 1204 and the death in 1205 of John’s chief financial adviser, Hubert Walter (also Archbishop of Canterbury), who had exercised a moderating influence on the king. The purpose of the barons’ armed revolt which resulted in Magna Carta was not to replace John, but to compel him to accept limits on, and refrain from abusing, his royal power and to respect the rights of others before the law, especially in regard to financial matters. Of 61 clauses in the Magna Carta,1 well over half contain references to fiscal grievances, indicating a deep dissatisfaction about the way sums of money were levied or goods/financial rights arbitrarily seized by the Crown. Although the Magna Carta is rightly recognised as a major step towards establishing the pre-eminence of the rule of law over the exercise of the king’s will . . . it is less appreciated that at the time it was predominantly concerned with a detailed redress of the fiscal abuses which the barons believed John had perpetrated (Frecknall Hughes and Oats, 2007, 78).

Clause 61 of the Magna Carta refers to 25 barons being chosen to act as ‘suretors’, to guarantee that the king did not renege on the agreement. A further body of 38 barons stood in readiness to act in like manner, should any of the 25 fail (Norgate, 1902, 235–36). These individuals had been actively involved in the baronial revolt against John, and it is argued that involvement in revolt and willingness to stand surety stem directly from the 1 The version of the Magna Carta referred to here is that in Appendix B of Warren (1997, 265–77).

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impact of fiscal measures on them personally. It is difficult to appreciate the effect on the barons of the enormous sums they had to pay in the context of their own time, but the magnitude cannot be emphasised too strongly. To provide some context, it is suggested that a knight’s daily wage when on service may have been 8d per day,2 and though the amount did clearly vary, it shows that sums payable in taxes must have ranked as fortunes at the time (see Hollister, 1960). While the barons held considerable wealth, this was, arguably, mostly in the form of assets, such as land and manors. If such assets did not generate enough income to pay the taxes demanded, then assets themselves could be forfeit in lieu of payment (see Frecknall Hughes and Oats, 2007, 96). Such demands by the king would serve two purposes—to obtain revenue for the Crown and to deprive high-ranking individuals of the source of their wealth and prestige, hence reducing potential threats to royal power. However, it is clear that John went too far, and actions designed in part to control the barons had quite the opposite effect. There are substantial written records of events in John’s reign, many of them financial. Holt (1992a, 176) comments that an emphasis on the use of financial records is justifiable as the King’s financial policy, in all its many aspects, was one of the main concerns of Magna Carta. Furthermore, John’s financial relations with his men led to broad questions of right and law, to arguments about justice and custom, to a search for precedent, to a questioning of the assumptions men made about the political society of their day.

However, in terms of the 25 suretors, there is a limited amount of work which explicitly attempts to determine how adversely they personally were affected (Round, 1904; Painter, 1949; Powicke, 1965; Holt, 1992a). Powicke (1965, 207) comments that: ‘[t]he personnel of the opposition to King John in 1215 requires much detailed investigation. Local connexions and the evidence given in the Fine Rolls and other records of personal grievances have never been thoroughly examined.’ Issues are often mentioned, however, in the wider contextualisation of John’s reign. This paper offers initial considerations, to fill this gap in part and simultaneously to provide further proof about the financial origins of Magna Carta by linking it to individual suretors’ financial grievances, redress of which was at the root of their rebellion and the Magna Carta clauses. The remainder of the paper is structured as follows. The next section considers the names of the 25 suretors and the sources of this information. A discussion of the fiscal exactions of the ‘ordinary’ exactions (amercements and feudal incidents) and ‘extraordinary’ exactions (scutage 2

See footnote a to Table 2, which gives details about currency used in the medieval period.

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and taxes on movables) of John’s reign follows, after which the financial effects of these ‘ordinary’ and ‘extraordinary’ exactions on particular surety barons are considered. The penultimate section considers the family links between the barons, and the final section offers tentative conclusions.

T H E 25 S U R E T Y B A RO N S

Clause 61 of the Magna Carta3 gives authority to the barons: Videlicet quod barones eligant viginti quinque barones de regno quos voluerint, qui debeant pro totis viribus suis observare, tenere, et facere observari, pacem et libertates quas eis concessimus, et hac presenti carta nostra confirmavimus, ita scilicet quod, si nos, vel justiciarius noster, vel ballivi nostri, vel aliquis de ministris nostris, in aliquo erga aliquem deliquerimus, vel aliquem articulorum pacis aut securitas transgressi fuerimus, et delictum ostensum fuerit quatuor baronibus de predictis viginti quinque baronibus, illi quatuor barones accedant ad nos vel ad justiciarum nostrum, si fuerimus extra regnum, proponentes nobis excessum, petent ut excessum illum sine dilacione faciamus emendari.

Translated: Namely, that the barons choose twenty five barons of the kingdom, whomsoever they will, who shall be bound with all their might, to observe and hold, and cause to be observed, the peace and liberties we have granted and confirmed to them by this our present Charter, so that if we, or our justiciar, or our bailiffs or any one of our officers, shall in anything be at fault toward anyone, or shall have broken any one of the articles of peace or of this security, and the offence be notified to four barons of the aforesaid twenty five, the said four barons shall repair to us or our justiciar, if we are out of the realm, and laying the transgression before us, petition to have that transgression redressed without delay.

Clause 61 goes on to give the barons power of redress, should the king not address a transgression; instructs anyone in the country to obey the barons in such a case; allows replacement of any one of the 25 who might die, be absent or incapacitated (the remainder being permitted to replace him as they see fit, referred to by McKechnie (1914) 469 as ‘co-optation’); and permits a majority of the barons to make decisions if all cannot be present to do so. The Magna Carta itself does not make clear who the 25 barons were who were eventually chosen, and little is known about how they were chosen. The information as to their identity comes from five sources, one of which was discovered as late as 1968 (Cheney, 1968; Holt, 1992b). 3 The Latin text used here is that given in McKechnie (1914, 465), and the translation follows the same source (466–67), slightly adapted.

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Holt (1992b, 478) notes that three of the lists of names ‘have been known since Blackstone’s day’ (referring to Law Tracts II, xxxii). These were lists in the Chronica Majora and Liber Additamentorum of the medieval chronicler, Matthew Paris, monk of St Albans, writing some years later than the date of the Charter itself, circa 1250, and are apparently based on the same source. Cheney (1968, 283) also refers to a further St Albans manuscript containing a list of names, not mentioned by Holt.4 Holt’s third source is a list ‘in a late-thirteenth century collection of law tracts and statutes’ (Harleian manuscript) (Holt, 1992b, 4785), which he refers to as the ‘best of the three’, which gives the later names in a different order. A further list was discovered in Lambeth Palace library by Cheney in 19686 in a manuscript originating in Reading Abbey. Although the source of the names used by Matthew Paris and other manuscript writers remains unknown, McKechnie (1914, 469) comments in relation to Paris, that ‘it is unlikely that so comprehensive a list could be entirely a work of the imagination’. The names of the 25 are given in Table 1. The list in Table 1 is widely accepted. There is great consistency between the original manuscript lists, although some give the names in a different order, which Cheney (1968, 291 and 306) tentatively suggests represents ‘different traditions’—the St Albans list being derived ultimately from the king’s court, the Harleian manuscript from a London municipal source, and the Lambeth manuscript from a baronial source. The St Albans and Lambeth manuscripts give the name of Roger de Mowbray instead of Roger de Montbegon (or Montbegan) (Horneby, Lancashire), which Blackstone corrected by reference to the Harleian manuscript, which gave the latter’s name. The possible reason for the error (again suggested by Cheney) is that Roger de Mowbray had made a name for himself about 1250, the likely date of the lists, whereas Roger de Montbegon had died in 1245 without male heirs. The Lambeth manuscript introduces a further error in ‘substituting Arundel for Aumale’ (Cheney, 1968, 291). Cheney (1968, 291) comments that the St Albans, Harleian and Lambeth lists all have the first eleven names in the same order, which may suggest a common source for these names, possibly the Articles of the Barons, a document which was ‘a remarkable and chance survival from the negotiations of 1215’ (Holt, 1992b, 245). Per Cheney (1968, 306): A comparison of the Charter [Magna Carta] with the Articles of the Barons suggests that when the Articles were drawn up the draftsmen were planning an orthodox charter of liberties; separate documents were envisaged to safeguard its observance. But in the event the only safeguard was included in the Charter 4 5 6

British Museum, Cotton MS Vitell, A.xx. Referring to British Museum, Harleian MS 746, fol 64. Lambeth Palace Library, MS 371, fol 56v.

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Table 1: List of Barons Chosen as ‘Suretors’ to King John 1. Richard de Clare, Earl of Hertford 2. William de Fortibus/Forz, Earl of Aumâle/Albemarle 3. Geoffrey de Mandeville/Magnavil, Earl of Gloucester 4. Saer/Saire/Sayer de Quincey/Quinci, Earl of Winchester 5. Henry de Bohun, Earl of Hereford 6. Roger Bigod, Earl of Norfolk (and Suffolk) 7. Robert de Vere, Earl of Oxford 8. William Marshall the younger, heir to the Earl of Pembroke 9. Robert fitz Walter the elder, Dunmowe Castle, Essex 10. Gilbert de Clare, heir to the Earl of Hertford 11. Eustace de Vesci/Vescy, Alnwick, Northumberland 12. Hugh Bigod, heir to the Earl of Norfolk 13. William de Mowbray, Axholme Castle, Lincolnshire 14. William (de) Hardell, Mayor of London 15. William de Lanvalei/Lanvallei, Stanway Castle, Essex 16. Robert de Ros/Roos, Hamlake Castle, Yorkshire 17. John de Lacy/Laci/Lacie/Lasci, Halton Castle, Constable of Chester 18. Richard de Perci/Percy, feudal baron, Yorkshire 19. John fitz Robert, Warkworth Castle, Northumberland 20. William Malet/Mallet, Curry-Malet, Somerset 21. Geoffrey de Say/Saye, feudal baron, Sussex 22. Roger de Mumbezon 23. William de Huntingfield, feudal baron, Suffolk 24. Richard de Munfichet/Muntfichet/Montfichet, feudal baron, Essex 25. William d’Albini/d’Aubigney/d’Aubigné, Belvoir Castle, Leicestershire Richardson (1944, 433) suggests that Geoffrey de Mandeville, Saer de Quincy, Richard de Clare and Robert de Vere were the sub-group of four barons referred to in clause 61 who acted as an executive committee for the 25.

in the . . . sanctions of clause 61 . . . But a comparison of the texts suggest that eleven of the chief magnates were designated as executors of the Charter before the remainder were picked.

If this were the case, then the names of the first 11 would be well known, whereas the remaining 14 might be less so. Also, as the first 11 were great magnates, it is not surprising to find them listed first. One of the unusual things about the Lambeth manuscript is that attached to each name listed is a number of knights, for example:

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Jane Frecknall Hughes Comes de Clara cum septem viginti militibus (Earl of Clare with 27 knights) Comes Herefordie cum XL militibus (Earl of Hertford with 40 knights) Willelmus Marescallus cum CC militibus (William Marshall with 200 knights) Cheney, 1968, 307 (my translation)

Cheney notes that the manuscript gives septem viginti for the Earl of Clare’s knights, which means 27, although he feels that this septem should read septies, which would give a total of 700. Accepting this as a correction, he totals the number of knights at 1,074, excluding the earls and barons. The latter number 24 in this list, as William de Hardell, as Mayor of London, is not specifically identified as a baron, although he is referred to immediately after the list in ‘a note that the mayor of London will hand over the city of London to the barons if the king should want to contravene his charter’ (Cheney, 1968, 292). Cheney (1968, 292) interprets the list as ‘primarily the record of some military muster’, and designed ‘to show how many knights each [baron] could bring to the field’. In general cum militibus he translates throughout as ‘with knights’, though strictly the word miles, of which militibus is the dative or ablative form, means ‘soldier’. There is no consensus as to what the number of soldiers or knights actually represents. There is not necessarily any connection between these numbers and the number of knights these barons had enfeoffed under scutage requirements (to provide feudal levies for the king—see later). Cheney (1968, 302) suggests that only in the case of the Earls of Hereford and Oxford was there a close connection between the numbers in the list and their feudal quotas, as indicated in Pipe Roll 16 John. However, Gloucester and Clare of the 25 barons had the greatest number of knights’ fees, and do appear with a list quota of 100 and 700 respectively, though the younger William Marshall is credited with 200—a number he could not have had as feudal knights in his own right, as his holdings were small during the lifetime of his father, William Marshall the elder, who was loyal to the king. The Earl of Norfolk, Roger Bigod, is credited with 80 knights/soldiers (though he had ‘more than double this number of knights’ fees’), while Gilbert de Clare, as Clare’s heir, is credited with 80 on far fewer knights’ fees, and ‘the richly enfeoffed’ Robert fitz Walter has 50 (Cheney, 1968). The list in Table 1 includes some of the different spellings of suretors’ names that are variously found. It must be remembered that orthodoxy in spelling was not a medieval requirement but a phenomenon that followed the introduction of the printed word, many centuries later. Lack of orthodoxy here makes it difficult to be certain that the same persons are meant, a situation further complicated by the non-standardisation of names. This is made clear by Powicke (1965, 209–10) when referring to Geoffrey de Mandeville as Geoffrey fitz Peter. ‘Fitz’, according to the Oxford English Dictionary, is an Anglo-French word meaning ‘son’,

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derived from the Latin filius, and denoting this ‘in patronymic designations, in which it was followed by the name of a parent in the uninflected genitive’. Hence ‘Geoffrey fitz Peter’ means ‘Geoffrey son of Peter’. Some of these forms have remained permanently as surnames, for example, Fitzherbert and Fitzwilliam. Significantly the Oxford English Dictionary comments on the later common usage to denote the illegitimate offspring of royal princes. John himself fathered a number of illegitimate children, including Henry fitz Roy (Painter, 1949, 232). A particularly notable example would be (another) Henry fitz Roy, first Duke of Richmond, the only acknowledged illegitimate son of Henry VIII (Gardiner, 2000, 322). The use of ‘fitz’ in a royal context seems to denote that the child was formally acknowledged as a royal son by his father.

F I SCAL EXACTIONS IN JOHN’S REIGN ( 1199–1216)

While the barons would not have been subject to all exactions implemented in John’s reign, they would have been affected adversely by particular measures, such as amercements, feudal incidents and scutage, and to some extent by taxes on movables. These are explained below (following Frecknall Hughes and Oats (2007) 81–82 and Mitchell (1914) 1 and 13). Amercements were ‘fines’, in the modern sense of the word, imposed by the king’s justices for violation of the law. Feudal incidents included reliefs, marriages, wardships, escheats, fines (see later) or oblations (offerings), payments to the king for such privileges as permission to marry a certain person, the custody of the lands of minors and the bringing of cases into the king’s court. There is no definite rule about terminology, but a ‘feudal incident’ often concerned inheritance or the devolution of property, such as a widow’s right to regain her dowry on the death of her husband and an heir’s succession to his father’s estate for which a sum (a relief) was payable.7 It was quite common for a relative, often a minor child, to be demanded by the king as a hostage in return for grant of lands, even where there was a direct heir. A woman or heir to property did not necessarily have the right to marry without the king’s permission and might have to pay a sum to be able to do so. Estates of underage heirs might be assigned to a trustee in wardship until the heir became of age. Persons could pay sums to acquire wardships and estates in escheat (where an estate had reverted to an overlord for lack of an heir or because of a felony). 7 It is clear that the modern notion of a ‘right’ to an inheritance by lineage did not pertain in the same way in this period, and there might be several possible heirs to property (see Holt, 1972).

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Scutage was also referred to as an aid on the knight’s fee, or shield money, and was initially a feudal due (servitium debitum) owed to the king in return for grants of land (fees) made to tenants-in-chief. As a condition of occupying land and receiving rents from it, tenants were obliged to provide a number of knights to fight on the king’s behalf when called upon to do so. By the reign of John, scutage was commonly commuted to a sum of money, a fine in lieu of military service. ‘Fine’ derives from the Latin word finis, meaning ‘end’, and denotes the settling for an agreed amount of a financial sum owed or disputed. It is not a fine in the modern sense of the word, denoting financial punishment for breach of a law or regulation. ‘Amercement’ was used in this sense (see above). In addition to paying scutage, tenants often paid a further sum of money, also confusingly referred to as a fine. Sometimes such payment was regarded as part of the scutage; sometimes it was dealt with separately. As to what the fine actually represented is, in any given case, unclear. It could be calculated as a single sum or a fixed amount per fee. Under John, the fine was extensively used, not only in connection with scutage, but also in other contexts of coming to a financial agreement. Scutage was from the king’s perspective a two-edged sword. While it gave him the means to raise an actual army or money (if satisfied by fine), it also meant that the barons themselves who provided men-at-arms had the potential to raise a fighting force in their own names, and this can never have escaped notice by the king, though it rarely attracts explicit comment. It is, however, noticeable that an individual baron would often hold separate plots of land that were physically many miles apart, which would make day-to-day control more difficult to achieve and would make the raising of personal armies more difficult. Allocating feudal lands which were substantial distances apart was possibly a royal device to counter potential rebellion. The taxes on movables were taxes on movable property, typically gold, silver plate and ornaments, and animals (Jurkowski et al, 1998, xiii). It is difficult to define exactly what a tax was in this period, as some sources of income were considered ‘ordinary’, that is, they were raised each year to fund the king and the business of government, while others were not. If ordinary revenues were insufficient, other ‘extraordinary’ income was raised—‘extraordinary’ because it was not levied every year and often required new machinery to collect it. Of the above exactions, amercements and feudal incident income would be considered ordinary sources of income—though the amount raised could never be predicted, as sums would depend on non-foreseeable events, such as death. Other ordinary sources of income were county tax farms from the royal domain and local courts administered by county sheriffs, income raised similarly from town farms, and royal forest income. Scutage and taxes on movables

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were extraordinary revenues, as were carucage, levied on a unit of plough land called a carucate; tallage, levied on the towns and domain lands of the Crown; dona or auxilia, taken from Jewish or other money lenders, prelates and religious houses; and Church revenues, which John received between the years 1208–1214 as a result of a papal Interdict, excommunicating John and England generally for not accepting Stephen Langton as the papal nominee for the Archbishopric of Canterbury, vacant since the death of Hubert Walter. In this paper all forms of revenue raising are considered as taxes.

E F F E C T O N T H E B A RO N S — S C U TAG E AN D TAX E S O N M OVAB L E S

Frecknall Hughes and Oats (2007) show how the taxes affecting the barons were part of a wider effort by John to collect more revenue in general from all the other sources identified. It would be unfair to suggest that the barons were targeted more severely than anyone else, but the extraordinary exactions affecting them were levied more frequently and more severely (see Table 2). John reigned for some 16 years and collected scutage 11 times. Henry II, John’s father, levied scutage seven times in a 35 year reign—in 1159 and 1161 at two marks8 per fee; in 1162, 1165 and 1168 at one mark per fee; and in 1172 and 1187 at 20 shillings. Richard I, John’s brother, raised scutage four times in a 10 year reign—at 10 shillings per fee in 1190; and at 20 shillings per fee in 1194, 1195 and 1196 (see Keefe, 1983, 30). Taxes on movables were familiar as ecclesiastical tithes took this form, but were rarely used by Henry or Richard other than in exceptional circumstances, such as the Saladin Tithe in 1188 and the ransom (one quarter of revenues and movables) to free Richard from imprisonment on his return from the Third Crusade (Mitchell, 1914; Frecknall Hughes and Oats, 2004). Such taxes would bite hard into the revenues, cash9 and other assets of the barons because they had extensive land-holdings and wealth. Painter (1949, 19 and 296–97) suggests that there were possibly in total 197 lay baronies in England in this period, and a further 39 ecclesiastical baronies. He suggests that the average of a fair-sized barony in terms of knights’ fees would be 30 fees, and overall 75% of the knights’ fees belonged to baronies having 30 or more fees. He suggests that 39 of the lay barons were in revolt prior to Magna Carta, with 13 in open revolt at the time of One mark was roughly two-thirds of an English pound sterling. The extent to which the barons had ready supplies of physical cash is not really known, though it appears that the twelfth century saw the increased availability of cash (see Turner, 1994, 89) and a general transition to a cash-based economy. The implications of this change, while relevant to tax and tax collection, are outside the confines of this paper. 8 9

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Table 2: Scutages and Taxes on Movables (TOM) levied by King John during his Reign Year

Tax levied Ratea

Reason

1199

Scutage

2m

Campaign against Philip Augustus

1201

Scutage

2m

War against the Lusignans

TOM

1/40 of one year’s revenues

Papal request for aid for the Holy Land

1202

Scutage

2m

War against Philip Augustus

1203

Scutage

2m

War against Philip Augustus

TOM

1/7 personal property Desertion of John on return to England? General levy?

TOM

1/5 of one year’s revenues

Channel Islands only, to support defence

1204

Scutage

3m

War against Philip Augustus

1205

Scutage

2m

Invasion of Poitou and Gascony

1206

Scutage

20s

Invasion of France

1207

TOM

1/13 (12 pence in the No immediate cause—possibly levmark) of revenues ied against future need to recover and movables lands lost to Philip Augustus in France.

1209

Scutage

20s

War against Scotland

1210

Scutage

40s

Expedition to Ireland

1211

Scutage

2m

Two expeditions against the Welsh

1214

Scutage

40s

Invasion of Poitou

Sources: Mitchell (1914), Keefe (1983) and Frecknall Hughes and Oats (2004, 2007). aThe rate for scutage is the amount demanded per fee. Here s denotes shilling, d denotes pence and m denotes mark. One mark was roughly two-thirds of one English pound sterling, worth in turn 20 shillings. A pound contained 240 pence. These ‘old’ pounds and pence remained the basic English currency until decimal currency was introduced in 1972.

the Charter in 1215. These 13 held ‘approximately 1,475 knights’ fees against the 1,580 who were not in revolt’. While Painter acknowledges that figures are not very reliable, they do suggest that not all the baronage was in open rebellion, and support his earlier contention (on page 204) that many of the grievances were personal. Holt (1992a, 33), speaking of the northern barons, comments that they were more than just feudal landlords. They were great landlords and keen business men, active enclosers and improvers of their lands, owners of vast sheep flocks, benefactors and patrons of great monasteries, founders both of religious houses and of market and municipal privileges. Their interests even extended into commerce and industry.

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Robert de Ros exported wool and leather from the Humber and imported wine. Eustace de Vesci developed Alnmouth as a licensed port . . . The Percys had forges at Spofforth.

These types of business activities would have been hit by the taxes on movables, sometimes levied in the same year as scutage. Holt also comments: By and large they were the ‘outs’, excluded from the spoils of office, despite a family tradition of service to the Crown in many cases, despite the earlier administrative experience which some of them enjoyed, and despite the expectancy of office which their social position gave them. In addition many of them had personal wrongs, grievances and problems to set right.

In this regard he cites, among others, William de Mowbray, Richard de Percy, Roger de Montbegon, Robert de Ros and John de Lacy, whose names appear in the list of suretors. It is possible to trace some of the resentment against scutage quite easily. The Bigod family had a long history of disputed inheritance, dating back to the reign of Henry II, but Roger Bigod, second Earl of Norfolk, was loyal to John until the end of his reign, having relied on Crown support in a fierce dispute with his half-brother over possession of the earldom. Church (2006) explicitly comments on possible reasons for his joining the rebels. Financial pressure may have been a reason. The scutage due on some 160 knights’ fees, which the earl came to hold by the end of his life, was liable to be heavy, so much so that in 1211 Bigod struck a bargain with the king to pay 2000 marks (£1333 6s 8d) for respite during his lifetime from demands for arrears, and for being allowed to pay scutage on only 60 fees in future. He was pardoned 360 marks of the debt, but paid the substantial sum of 1340 marks in 1211 and 1212.

As a result of the rebellion, Roger Bigod (supported by his son, Hugh), was stripped of his lands, and did not regain them until 1217. Robert fitz Walter, one of the leaders of the baronial revolt, inherited extensive lands in Dunmow, Essex and Baynard’s Castle, London, comprising 66 knights’ fees, to which were added a further 32 brought by his wife, Gunnora, daughter and heiress of Robert de Valognes. William d’Albini, Earl of Arundel had 110 fees attached to his lands in Arundel and 76 more at Castle Rising and Buckenham in Norfolk (Painter, 1949, 21). John de Lacy had extensive estates comprising more than 100 knights’ fees together with the northern baronies of Pontefract, Clitheroe, Penwortham, Widnes, and Halton, held by descent in the female line from the Lacy lords of Pontefract, and in the line of direct male descent as heir to the lands and office of the constables of Chester. (Vincent, 2005a)

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William Malet had an honour of 221/2 knights at Curry Mallet in Somerset. Per Turner (2005), he was appointed as sheriff of Dorset and Somerset at Christmas 1209, when these two counties offered a fine to King John to have William Brewer replaced as their resident sheriff. He served until 1212, by which date he was in financial difficulties with the king, and by 1214 owed 2,000 marks, which remained unpaid in 1221, although he had made an agreement in 1214 to serve King John with ten knights and twenty soldiers in Poitou in exchange for cancellation of his debt. (Turner, 2005)

Henry de Bohun, first Earl of Hereford, was related through the distaff line to the Scottish royal family, and was engaged between 1204 and 1211 in resolving his claim to ‘his mother’s dower lands, the estates and twenty fees of the lordship of Ratho, Edinburghshire’ (D Walker, 2005). This was followed in 1212 by a dispute over Bohun’s honour of Trowbridge, which William Longspée, Earl of Salisbury, claimed. John assumed the honour, but permitted William’s agents to levy scutage from the tenants. This seems to have been the catalyst that forced de Bohun to the side of the rebel barons. Richard de Montfichet inherited the barony of Stansted Montfichet, which ‘comprised nearly fifty knights’ fees’ and a ‘claim to the custody of the royal forests in Essex, forfeited by his grandfather Gilbert de Montfichet (d 1186/7), probably for his part in the rebellion of Henry, the Young King, in 1173’ (Vincent, 2005b). Richard regained custody of these forests at Runnymede in 1215, and Vincent (2005b) suggests that he joined the rebel barons in the hope of such a recovery and because of his kinship with Robert fitz Walter and Richard, Earl of Clare. Gilbert de Clare inherited from his father the earldoms of Gloucester and Hertford, the honours of Clare and Tonbridge, and the ‘vast Gloucester estates, including the lordships of Glamorgan and Gwynllwg ˆ on the Welsh march’, together with the estates of his grandmother, Maud de St Hilaire, and a half of the honour of Giffard from his father (Archer, 2005). If all the sums due on the knights’ fees alone were calculated, they would represent a huge sum, either in men-at-arms or ready cash. Moreover, the sums could be demanded almost at will, although a formal summons for scutage was usually required. Given that John tried to collect scutage 11 times in his reign, along with taxes on movables applicable to agricultural produce and animals and trading activities, this would amount to an intolerable burden.

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E F F E C T O N T H E B A RO N S — A M E RCE M E N T S A N D F E U DAL INCIDENTS

Vincent (2005a) comments that in September 1213, to obtain possession of his father’s estates, John de Lacy was ‘forced to offer a massive fine of 7,000 marks’ payable over three years. Meanwhile he had to surrender his chief castles of Pontefract in Yorkshire and Donington in Leicestershire to the king, but still garrison them, on pain of confiscation, should he rebel. Vincent also notes that he had to give his younger brother as a hostage for his good behaviour in 1214 when he did finally obtain Castle Donington. He seems to have remained loyal to the king as late as 1215, and was then pardoned the 4,200 marks still owing from the 1213 fine. After that ‘he veered opportunistically between the rebel and royalist camps’ (Vincent, 2005a). In January 1216, he sought terms with the king, ‘perhaps in the light of the king’s capture of Castle Donington’ (ibid), again surrendered his brother as hostage, and repudiated the terms of Magna Carta. In April 1215 he regained the manor of Lytham in Oxfordshire, which had been lost from the de Lacy ancestral lands for much of the previous century, but rebelled again before the king’s death in October. William Marshall the younger, had been given as a hostage to the king in 1205 by his father, William Marshall the elder, Earl of Pembroke, when John doubted his loyalty—and he remained a hostage until 1212 (RF Walker, 2005). It is hardly surprising as a result of this to find the younger William Marshall in opposition to the king. Richard de Montfichet was aged about 10 when his father died, and ‘was sold in wardship to Roger de Lacy, constable of Chester, in return for a proffer of £1,000, which seems never to have been paid’, the wardship being later resold to his mother in 1210 for a fine of 1100 marks (Vincent, 2005b). Robert de Vere, Earl of Oxford, succeeded his brother in October 1214, and was charged 1,000 marks by John for his relief and a wardship, but John does not seem to have conferred the earldom upon him. DeAragon (2005) suggests that this relief was ‘high for a baronage of moderate extent such as de Vere’s, but his primary grievance may have been John’s withholding of the earldom’, though the king did recognise him as earl by June 1215. The de Mowbray family had had a long-standing dispute with the de Stuteville family over the claims of the de Stutevilles to the de Mowbray barony—settled in the de Mowbrays’ favour in the reign of Henry II. This was re-opened in John’s reign (allegedly legally, as the original agreement had not been confirmed formally by the Crown) when, in April 1200, John issued a charter to William de Stuteville, promising him justice toward William de Mowbray (the suretor) ‘in a suit for the entire Mowbray barony’ (Painter, 1949, 29). De Stuteville promised to pay 3,000 marks for this, and de Mowbray counter-offered 2,000 to be treated justly. In the

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1201 settlement, de Mowbray gave de Stuteville nine knights’ fees, in addition to 10 given to his father, and the manor of Brinklow, worth £12 pa. De Mowbray still owed 1,940 marks in 1207, and John attempted directly to collect it from the vassals of the de Mowbray barony. This appears to have been the source of de Mowbray’s rebellion against the king. Richard de Percy ‘was uncertain from one year to the next of the title to most of his estates’ (Holt, 1992a, 21). As a younger son who inherited, he was faced throughout his life by the counter-claims of his nephew, William, the son of his elder brother. The Percy lands were divided between them, and William was a minor, until at least 1212, in the custody of William Briwerre, one of the king’s most influential advisers and whose daughter he eventually married (following Holt, 1992a, 21). Richard’s claim to his lands and title was as valid as John’s claim to the throne, though the legal battles were not settled until 1234. A similar suit involved the devolution of the de Mandeville lands between Geoffrey de Mandeville and Geoffrey de Say. Geoffrey de Mandeville was also obliged to pay 20,000 marks to John to marry John’s former wife Isabelle, Countess of Gloucester. The reason why John demanded so high a price probably has its roots in a quarrel, the origins of which are so obscured that the full truth can never be known (Norgate, 1902, 289–93; Round, 1904). Roger de Montbegon’s place among the suretors seems to derive from a long-standing attempt to regain disseized lands in Nottinghamshire, where he was opposed in local courts by the sheriff, Philip Mark. During the drawn-out case he himself committed various transgressions, such as refusing to accept the decision of a local court. Holt (1992a, 5–6) gives the dates of much of this activity as 1217 and after, so it is possible that this has deeper origins.

FAM I LY C O N N E C T I O N S

Powicke (1965, 209–13) also comments on the family relationships between the 25 named individuals and shows quite clearly (213), that the de Vere, the de Mandeville, the de Say and the de Bohun families were linked through marriage. He comments (212), however, that: Mrs Stenton, who has sent me some valuable criticisms . . . suggests that I have laid rather too much stress upon the influence of family connexions. In 1215, as at other times of civil strife, families were divided, as they must always be when the ramifications of kindred are so intricate and widespread in society; and it would indeed be unfortunate if, in the interpretation of political movements, the argument from connexions of this kind were pressed without caution. But the existence of close family ties does seem to me to have been a significant factor in forming a definite group of men personally hostile to King John.

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Strickland (2007) also comments on the links of kinship and marriage. William d’Aubigny, for example, was the uncle of Robert de Ros, the lord of Wark-on-Tweed in Northumberland and Helmsley in Yorkshire, and also first cousin of Robert Fitzwalter, while John fitz Robert was John de Lacy’s cousin. William de Lanvallei had married Fitzwalter’s niece; William de Forz, count of Aumale in Normandy and a major landowner in Cumberland, Yorkshire, and Lincolnshire, was married to the daughter of Richard de Montfichet; both Hugh Bigod and Gilbert de Clare had married sisters of William Marshal the younger; and Henry de Bohun had married Geoffrey de Mandeville’s sister. In turn, Geoffrey and his brother William were married to daughters of Robert Fitzwalter.

One of the least visible threads linking the barons would be the marriages between families. We rarely hear about medieval women in their own right, and when we do it is frequently in their family roles. By John’s time, the great families had become interlinked by marriage and the web of relationships was extremely complex, as Strickland (2007) shows. As a result, estates were often merged or restructured as women could be heiresses in their own right or might bring land as a dowry. Sometimes there were long-standing friendships. Again, per Strickland (2007): In rare instances, close ties of friendship are known to have existed, for instance between William de Forz and Robert de Ros, or between Robert Fitzwalter and Saher de Quincy, who had served together in Normandy in 1203 as castellans of Vaudreuil and were brothers-in-arms, each bearing the other’s blazon on his seal. Conversely, there can have been little love lost between Geoffrey de Mandeville and Geoffrey de Say, whose rival claims to the Mandeville lands had been exploited by John.

While none of this need indicate ‘political cohesion’ (Strickland, 2007), it does suggest that the 25 barons knew each other and probably a great deal about each other’s affairs. This last comment also links to the financial theme of this paper which Strickland makes still more explicit: ‘More tangibly, several of the northerners had been accustomed to stand surety for each other for the payment of fines or proffers to the king, suggesting a significant degree of solidarity.’

CONCLUSIONS

This paper has tried to answer the question of why the particular barons identified in the medieval sources might have had reason for acting as the suretors or executors required by clause 61 of the Magna Carta. While not every suretor has been examined here, it is clear that many were compelled by adverse experience of scutage, taxes on movables and feudal incidents to

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seek a system of fiscal exaction that did not financially cripple individuals at the will of the king. It is hard for a modern reader to comprehend the magnitude of the sums demanded from them, but once this is realised, it is not then surprising to find clauses in the Magna Carta (notably 2–8 and 12) that seek to regulate feudal incidents and scutage demands. The barons did not want radical change in these areas, such as abolition of inheritance dues or scutage, but did want a system that eliminated their arbitrary imposition and use as a punishment or control mechanism.

REFERENCES

Primary Sources British Museum, Harleian MS 746. British Museum, Cotton MS Vitell, A.xx. Great Roll of the Pipe, 16 John, 1214, Pipe Roll Society: New Series 35, ed DM Stenton. Lambeth Palace Library, MS 371. Matthew Paris, Liber Additamentorum, British Museum, Cotton MS Nero D I.

Secondary sources Archer, TA (2005) ‘Clare, Gilbert de, Fifth Earl of Gloucester and Fourth Earl of Hertford (c 1180–1230)’ in rev Altschul, M, Oxford Dictionary of National Biography (Oxford, Oxford University Press, September 2004, online edn May 2006), available at http://www/oxforddnb.com/viewarticle/5437 (accessed on 20 March 2008). Blackstone, W (1759) The Great Charter and the Charter of the Forest (Oxford, Clarendon Press). Cheney, CH (1968) ‘The Twenty-five Barons of Magna Carta’ 50 Bulletin of the John Rylands University Library 280. Church, SD (2006) ‘Bigod, Roger (II), Second Earl of Norfolk (c 1143–1221)’ in Oxford Dictionary of National Biography (Oxford, Oxford University Press, September 2004, online edn May 2006), available at http://www/ oxforddnb.com/viewarticle/2379 (accessed on 20 March 2008). DeAragon, R (2005) ‘Vere, Robert de, Third Earl of Oxford (d. 1221)’ in Oxford Dictionary of National Biography (Oxford, Oxford University Press, September 2004, online edn October 2005), available at http://www/ oxforddnb.com/viewarticle/28217 (accessed on 20 March 2008). Frecknall Hughes, J and Oats LM (2004) ‘John Lackland: A Fiscal Re-evaluation’ in J Tiley (ed), Studies in the History of Tax Law (Oxford, Hart Publishing) 201.

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Frecknall Hughes, J and Oats, LM (2007) ‘King John’s Tax Innovations—Extortion, Resistance and the Establishment of the Principle of Taxation by Consent’ 34(2) Accounting Historians’ Journal 75. Gardiner, J (ed) (2000) Who’s Who in British History (London, CICO Books/ Collins & Brown). Hollister, CW (1960) ‘The Significance of Scutage Rates in Eleventh- and Twelfth-century England’ 75 The English Historical Review 577. Holt, JC (1972) ‘Politics and Property in Early Medieval England’ 57 Past and Present 3. ——(1992a) The Northerners: A Study in the Reign of King John (Oxford, Clarendon Press). ——(1992b) Magna Carta, 2nd edn (Cambridge, Cambridge University Press). Jurkowski, M, Smith, CL and Crook, D (1998) Lay Taxes in England and Wales 1188–1688 (London, PRO Publications). Keefe, TK (1983) Feudal Assessments and the Political Community under Henry II and His Sons (Los Angeles, CA, Center for Medieval and Renaissance Studies, University of California). Matthaei Parisiensis, Paris, M, Monachi Sancti Albani, Chronica Majora, ed Luard, HL, vol 2, Rolls Series 57, 1872–83 (London, Longman & Co/Oxford, Parker & Co/Cambridge, Macmillan & Co/Edinburgh, A & C Black/Dublin, A Thom). McKechnie, WS (1914) Magna Carta: A Commentary on the Great Charter of King John, 2nd edn (Glasgow, James Maclehose & Sons). Mitchell, SK (1914) Studies in Taxation under John and Henry III (New Haven, CT, Yale University Press). Norgate, K (1902) John Lackland (London, Macmillan & Co). Oxford English Dictionary, Compact Version, 2nd edn (Oxford, Oxford University Press, 1993). Painter, S (1949) The Reign of King John (Baltimore, MD, The John Hopkins University Press). Powicke, FM (1965) Stephen Langton, Being the Ford Lectures Delivered in the University of Oxford in Hilary Term 1927 (London, Merlin Press). Richardson, HG (1944) ‘The morrow of the Great Charter’ 28 Bulletin of the John Rylands University Library 422. Round, JH (1904) ‘King John and Robert Fitzwalter’ 19 The English Historical Review 707. Strickland, M (2007) ‘Enforcers of Magna Carta (act 1215–1216)’ in Oxford Dictionary of National Biography (Oxford, Oxford University Press, online edn October 2005, May 2007), available at http://www/oxforddnb.com/ view/theme/93691 (accessed on 20 March 2008). Turner, RV (1994) King John (London, Longman). ——(2005) ‘Malet, William (c 1175–1215)’ in Oxford Dictionary of National Biography (Oxford, Oxford University Press, September 2004, online edn October 2005), available at http://www/oxforddnb.com/viewarticle/17881 (accessed on 20 March 2008). Vincent, N (2005a) ‘Lacy, John de, Third Earl of Lincoln (c 1192–1240)’ in Oxford Dictionary of National Biography (Oxford, Oxford University

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Press, September 2004, online edn October 2005), available at http://www/oxforddnb.com/article/15855 (accessed on 20 March 2008). ——(2005b) ‘Monfichet, Richard de (b after 1190, d 1267)’ in Oxford Dictionary of National Biography (Oxford, Oxford University Press, September 2004, online edn October 2005), available at http://www/oxforddnb.com/article/19044 (accessed on 20 March 2008). Walker, D (2005) ‘Bohun, Henry de, First Earl of Hereford (1176–1220)’ in Oxford Dictionary of National Biography (Oxford, Oxford University Press, September 2004, online edn October 2005), available at http://www/ oxforddnb.com/article/2773 (accessed on 20 March 2008). Walker, RF (2005) ‘Marshal, William (II), Fifth Earl of Pembroke (c 1190–1231)’ in Oxford Dictionary of National Biography (Oxford, Oxford University Press, September 2004, online edn October 2005), available at http://www/ oxforddnb.com/article/18127 (accessed on 20 March 2008). Warren, WL (1997), King John (New Haven, CT Yale University Press).

5 Elizabethan Revenue Law: The Practice of the Court of Wards ELI ZABETHAN REVENUE LAW

D AVI D IB B E T SON DAVI D I BBETS ON

Right from the beginning of the reign of Henry VII, Tudor monarchs had sought to take advantage of their feudal revenues as a source of income which could be exploited independently of Parliament. Exactly what revenues were due to the Crown was a matter of law, sometimes a very complicated one, and from 1540 such questions were channelled through one court, the Court of Wards and Liveries. The present paper aims to examine the approach of this court to legal questions, and thereby to describe what can be described as Elizabethan revenue law. This is, of course, not quite the same thing as tax law—already in 1404 it was said by the House of Commons that wardships and similar dues were allowed to the king precisely to relieve his subjects from the burden of tax1—but in practice we may gloss over the differences. As a leading historian of the subject has described it, it was ‘a system of land taxation, bolstered up with archaic doctrine but owing its survival and revival only to its value as a source of land revenue beyond parliamentary control’.2

F E U DA L I N C I D E N T S AN D T H E CO U RT O F WAR D S

The right of a feudal lord to payments—incidents—on the death of some kinds of tenant was in place by the twelfth century. In particular, where the land was held by knight service the lord was entitled to a payment on the entry of the heir, and if the heir was a minor the lord was entitled to wardship, ie the profits of the land during the heir’s minority as well as the valuable right of arranging the marriage of the heir.3 Where there was more than one lord, in principle each was entitled to wardship of the lands which 1 2 3

FS Haydon (ed), Eulogium Historiarum sive Temporis (London, Rolls Series, 1863) 3.399. J Hurstfield, The Queen’s Wards (London, 1958) 176. JH Baker, An Introduction to English Legal History, 4th edn (London, 2002) 240.

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were held by him, with the lord of the oldest feoffment getting wardship of the body, the right to arrange the marriage. The king, though, had what was known as prerogative wardship, derived from the statute or pseudo-statute Prerogativa Regis: subject to certain exceptions, if any land was held of him by knight service, however small the proportion, he was entitled both to the wardship of the minor heir’s body and to the wardship of all land held by knight service which had descended to the heir.4 Prerogativa Regis was a popular statute for Inns of Court readings between the end of the fifteenth century and the middle of the sixteenth:5 there was a good deal to be said about the law which it had generated. Landowners were adept at attempting to arrange their affairs so as to avoid feudal incidents, and Parliament only slightly less adept at moving to block these loopholes by piecemeal legislation. The common law and Prerogativa Regis were therefore supplemented by a range of statutory provisions, all of which served to make the law of feudal incidents yet more complicated. Feudal incidents were potentially a substantial source of revenue to the Crown, but it was not until the administrative tightening up under Henry VII that the Crown began to look hard at the mechanisms by which these incidents were ascertained, and only under Henry VIII—whose need for regular extra-parliamentary sources of revenue was acute—that the procedure was fully bureaucratised. This culminated in the statutory creation of the Court of Wards in 1540, expanded in 1541.6 We should perhaps think of this as an administrative department of state more than as a court of law, but the assessment and collection of feudal incidents raised a whole host of legal questions, and the sixteenth-century records of the court run to many tens of thousands of pages.7

T H E CO U RT O F WAR D S AN D I T S PRO C E S S E S

To understand the working of the court we need first to look at its processes and personnel. In particular, we need to see exactly where lawyers were involved. On the death of a person who was thought perhaps to hold lands of the king or queen by knight service, a writ diem clausit extremum (or mandamus if the death had occurred more than a year and a day earlier) would issue to the escheator of the county, instructing him to empanel a jury and enquire into the nature of the tenure of the deceased’s land and whether the heir was below the age of majority. Escheators were 4 SE Thorne (ed), Prerogativa Regis: Tertia Lectura Roberti Constable de Lyncolnis Inne Anno 11 H. 7 (New Haven, CT, 1949). 5 JH Baker, Readers and Readings in the Inns of Court (London, Selden Society, 2000) lii, lists at least twelve readings before 1550. 6 Stat 32 Hen VIII, c 46; amended by Stat 33 Hen. VIII, c 22. 7 For the records, see Records of the Court of Wards and Liveries (List & Index Society, vol 18, 1967).

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men taken from the upper echelons of county society, but not lawyers.8 A volume of instructions for them, dating from the latter part of the sixteenth century, is noteworthy for the simplified nature of the law it reproduces and for the instruction to take the advice of learned counsel if they had doubts as to the nature of the tenure or if it ‘passed their knowledge’.9 Since the raw data on which the assessment was to be made were derived from this inquisition, it was important to see that it was right. It was therefore passed to a local official of the Court of Wards, the feodary, whose job it was to check it and then certificate it to the court in London. Though he was more of a professional than the escheator was, the feodary was not a lawyer either. He was more a surveyor, concerned to check the value of the land on which the assessment was made. Once checked and certificated to the court in London, the payment due was assessed. This was the responsibility of an auditor of the Court of Wards. Auditors again were not lawyers, though they would obviously have needed a working knowledge of the law if they were to be able to do their job at all. Above all of this there was the court proper. This was presided over by the Master of the Wards and consisted of its senior officials. The Master was not a lawyer: for almost the whole of the reign of Elizabeth it was the queen’s right-hand man, Sir William Cecil, Lord Burghley, who was to be succeeded at the end of the century by his son, the Secretary of State Sir Robert Cecil. Alongside the Master, though, there were two senior officials who were genuinely lawyers. First was the Surveyor-General, invariably a man who had been Reader of his Inn and who was therefore of some degree of seniority in the profession;10 and more importantly there was the Attorney of the Wards, its chief legal factotum, always an up-and-coming lawyer of very marked ability.11 Final decisions were made by the Master and Council, on which the legal members probably played a dominant role,12 though for the most difficult cases they could and did consult the judges of the Courts of King’s Bench and Common Pleas. So important were cases where the advice of the judges had been taken that in 1556 it was decreed that a new book be bought in which these could be recorded, to replace an earlier book which had been lost, for they were ‘beneficial and necessary for future times’.13 8 For an early seventeenth-century list of men considered by the Justices of Assize to be appropriate for appointment as escheators, see Historical Manuscripts Commission, 1 Sackville, 319. 9 National Archives, IND1/17396; reference at p 63. 10 During Burghley’s mastership, the Surveyors of the court were Robert Keilway of the Inner Temple, Thomas Seckford of Gray’s Inn and Richard Kingsmill of Lincoln’s Inn. 11 Nicholas Bacon of Gray’s Inn, Robert Nowell of Gray’s Inn, Richard Onslow of the Inner Temple, Thomas Wilbraham of Lincoln’s Inn, Richard Kingsmill of Lincoln’s Inn, James Morris of the Middle Temple and Thomas Hesketh of Gray’s Inn. 12 See, eg Anon (1565) H[arvard] L[aw] S[chool] MS 2071, fol 6v, reporting the reasons of the Master, Surveyor and Attorney of the court. 13 CUL MS Hh 3.1, fol 4v.

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The fact that lawyers were involved at this upper level of the working of the court does not in itself prove that it was actually applying law. It would, to say the least, hardly have been surprising if a court presided over by Lord Burghley had seen itself as being concerned primarily with the protection of the royal interest and the maximisation of the queen’s revenues; and some modern historians have indeed seen it this way. HE Bell, in his study of the working of the court, saw the contribution of the common law judges as the only thing standing in the way of its being nothing other than a royal puppet.14 The evidence, though, does not support this. Rather, the Elizabethan court—at least, until the death of Burghley in 1598—seems genuinely to have been trying to apply legal rules in a consistent fashion whether this operated in the Crown’s interest or not, and only departing from this, where appropriate, in the interest of the individual.

JOHN HARE’S REPORT S

The best evidence for the concern for consistency in the working of the court through the first half of Elizabeth’s reign is the existence of a volume of cases from the court said to have been collected out of the Decree Books by John Hare, at least 10 copies of which survive in manuscript.15 Hare was an attorney practising in the court in the 1580s, and a very active Clerk of the Wards between 1590 and his death in 1613.16 His collection is said to have been made in July 1581,17 and it was in all probability put together as a preparation to practice.18 It was an attempt to draw out of the court’s records a set of precedents of legal points, showing what the court had done in the past and acting as a guide to what it should do in the future. A comparison of the manuscripts allows us to see how it was put together and what use might have been made of it. First, the basic shape of the reports was chronological, running from 1553 to 1579. Secondly, throughout the reports there are interpolated references to analogous cases not following this 14 HE Bell, Introduction to the History and Records of the Court of Wards and Liveries (Cambridge, 1953), 99, 109. Perhaps, too, JL Barton, ‘The Statute of Uses and the Trust of Freehold’ (1966) 82 LQR 215, 225, describing the judges as ‘by no means the submissive guardians of the royal financial interests they are sometimes represented to have been’. 15 Cambridge University Library (CUL) MS Hh 3.1, fol 1; CUL MS Dd 3.9, fol 1; CUL MS Ii 5.17, fol 1; British Library (BL) MS Harl 1727, fol 1; BL MS Lansd 606, fol 1; BL MS Lansd 607, fol 35; BL MS Lansd 648, fol 60; BL MS Add 5760, fol 26; Lincoln’s Inn MS Mayn 73, fol 101; Yale Law School MS GR 29.28, fol 1; Exeter College Oxford MS 176. The best manuscript is CUL MS Hh 3.1, said to have been copied from Hare’s original. In what follows I refer to this version. 16 Bell, above n 14, 26–28. 17 CUL MS Hh 3.1, fol 1. 18 Cf the heading of the reports in BL MS Add 5760, fol 26 (and in most other copies): ‘Ieo aye fait cesty colleccion pur mon experience demesne’.

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chronological sequence. The interpolated material common to all the manuscripts contains cases from as late as 1584; and, assuming that the original collection was made in 1581 as the heading of the reports claims, it may be presumed that this extra material was incorporated by Hare (or perhaps someone else19) within a few years of the creation of the original reports. These additions were sometimes quite substantial. A case of 1560 dealing with the peculiar status of lands held in the County Palatine of Chester, for example, leads on to a cluster of cases dealing with palatines;20 a case of 1568 referring to the effect of a general pardon granted in 1563 is followed by 40 or so more cases involving the interpretation of general pardons, running on as far as 1582.21 Thirdly, some manuscripts contain additional material beyond this. The best of the manuscripts, Cambridge University Library MS Hh 3.1, for example, contains occasional observations from as late as the 1630s, together with a few references to cases from Coke’s Reports and cases drawn from Dyer’s Reports which had not been included in the printed text.22 Similarly, British Library Lansdowne MS 607 is annotated with further material in a crabbed later hand, squeezed into gaps in the original copy. It is clear that these manuscripts continued to be used throughout the life of the court (it was abolished in 1645–46 by the Interregnum Parliament, confirmed in 1660). While other manuscripts of Hare’s reports do not contain annotations on this scale, they are commonly accompanied by other material relating to the Court of Wards, in particular by a series of reports of cases of 1605 and 1609–11. There is little doubt, therefore, that they too continued to be used. To judge by the contents of the manuscripts and their handwriting, it is likely that most—perhaps all—of the surviving copies were made in the early part of the seventeenth century. The reports are peppered with observations by Hare. Sometimes these merely draw attention to salient points in the case,23 presumably for his own benefit in the future. Sometimes he went further and articulated what he thought was the legal rule to be derived from a case.24 He might cast 19 The fact that the material is common to all of the surviving manuscripts points to its presence in the archetype from which they were all derived. CUL MS Hh 3.1 claims to have been copied from the original in Hare’s own hand, and if this is true it would point to the additions having been Hare’s work. 20 CUL MS Hh 3.1, fols 11v–13. 21 CUL MS Hh 3.1, fols 23–25v. 22 CUL MS Hh 3.1, fols 48v–49v (dated 1635). 23 Eg Duncombe (1559) CUL MS Hh 3.1, fol 8v, Dyer 157; Bockingham (1561) CUL MS Hh 3.1, fol 14v (referring to other cases too); Ratcliffe (1564) CUL MS Hh 3.1, fol 17v; Allington (1565) CUL MS Hh 3.1, fol 18v; Hunt (1569) CUL MS Hh 3.1, fol 28; Mackloye (1581) CUL MS Hh 3.1, fol 17v; Clavell (1567) CUL MS Hh 3.1, fol 22v; Ingham (1575) CUL MS Hh 3.1, fol 32l; Southwell (1571) CUL MS Hh 3.1, fol 35v. 24 Jerbard (1555) CUL MS Hh 3.1, fol 4v; Note (1558) CUL MS Hh 3.1, fol 8; Horton (1568) CUL MS Hh 3.1, fol 23 (with further references); Bagott (1568) CUL MS Hh 3.1, fol 24; Abrahall (1569) CUL MS Hh 3.1, fol 28; Ridgley (1572) CUL MS Hh 3.1, fol 39; Barons (1573) CUL MS Hh 3.1, fol 15 (with other references); Staveley (1573) CUL MS Hh 3.1, fol 43v; Kingston (1581) CUL MS Hh 3.1, fol 23v.

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doubt on the reasoning behind a decision,25 sometimes trenchantly, or he might draw attention to like cases which had been decided differently;26 on occasion he went so far as to say that a suit had been lost because of the inadequacy of counsel arguing it.27 He drew sharp distinctions between superficially similar situations where different results had been reached28 and, where the basis of a rule might have been ambiguous, he commonly noted what the normal course of the court was.29 All of this clearly points to his concern to establish consistency from case to case, the hallmark of a system controlled by law rather than by arbitrary discretion.

D E C I S I O N M A K I N G I N T H E CO U RT O F WAR D S

The concern for regularity in decision-making was not simply a private conceit of Hare’s. The cases he reports not uncommonly show that the court itself was concerned to act consistently with what it had done in the past. It was ‘beneficial and necessary for future times’, it was said in 1556, that there should be a book in which the cases in which the judges’ opinions had been sought should be recorded.30 Searches might be made for relevant precedents,31 and in one case it was specified in the decree that it should be vacated if any relevant precedent to the contrary should be found.32 The law drew a distinction between lands which were held of the monarch qua monarch, described as lands held ut de corona, and those held of the monarch as manorial lord, ut de honore; it was only the former which entitled the king or queen to prerogative wardship of all the lands of the ward held by knight service. It followed that it was important to know 25 Mainwaring (1557) CUL MS Hh 3.1, fol 5; Hales (1581) CUL MS Hh 3.1, fol 25, WARD9/105, fol 457; Hawtrey (1573) CUL MS Hh 3.1, fol 11; Kemp (1577) CUL MS Hh 3.1, fol 5v; Skinners of London (1564) CUL MS Hh 3.1, fol 17; Savile (1565) CUL MS Hh 3.1, fol 19 (maybe a later addition); Warren (1566) CUL MS Hh 3.1, fol 19v; Ridgley (1572) CUL MS Hh 3.1, fol 39; Losse (1573) CUL MS Hh 3.1, fol 42; Croft (1573) CUL MS Hh 3.1, fol 43; Fawkener (1576) CUL MS Hh 3.1, fol 23v; Rose (1576) CUL MS Hh 3.1, fol 23v; Buckley (1576) CUL MS Hh 3.1, fol 44. 26 Note CUL MS Hh 3.1, fol 12; Wentworth (1566) CUL MS Hh 3.1, fol 20; Allen (1567) CUL MS Hh 3.1, fol 22v; Brockholl (1572) CUL MS Hh 3.1, fol 16. 27 Clifford (1570) CUL MS Hh 3.1, fol 25v; Clifford (1571) CUL MS Hh 3.1, fol 37. 28 Note (1560) CUL MS Hh 3.1, fol 11; Ratheby (1563) CUL MS Hh 3.1, fol 16v; Verney (1565) CUL MS Hh 3.1, fol 18v; Cowper (1568) CUL MS Hh 3.1, fol 24; Skelinge (1571) CUL MS Hh 3.1, fol 15; Anon (1578) CUL MS Hh 3.1, fol 15v. 29 Catesby (1548) CUL MS Hh 3.1, fol 7v; Leonard (1558) CUL MS Hh 3.1.f.8; Knyvett (1570) CUL MS Hh 3.1, fol 13v; Skelinge (1571) CUL MS Hh 3.1, fol 15; Grissold (1571) CUL MS Hh 3.1, fol 36v; Fettyplace (1573) CUL MS Hh 3.1, fol 44; Hamonde (1580) CUL MS Hh 3.1, fol 13v (name supplied from WARD9/85, fol 10); Anon (1578) CUL MS Hh 3.1, fol 15v; Draper (1578) CUL MS Hh 3.1, fol 31; Kingston (1581) CUL MS Hh 3.1, fol 23. 30 Above, n 13. 31 Anderne (1550) CUL MS Hh 3.1, fol 11v; Earl of Oxford (1557) CUL MS Hh 3.1, fol 21; Bamme (1577) CUL MS Hh 3.1, fol 30, 109 SS 322. See too Anon (1557) Dyer 155, 156. 32 Savile (1565) CUL MS Hh 3.1, fol 19.

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the exact nature of the tenure of lands held of the monarch. The Court of Wards kept books in which the incidents of specific tenures were recorded,33 and notes were made of books containing similar information which were kept elsewhere.34 No doubt much of the court’s legal work was more or less routine, establishing the facts in issue when these were controverted and then applying well-established legal rules to them. Land stated in the inquisition to have been freehold might have been alleged to have been in fact copyhold, over which the Crown had no rights; the court would then examine the rolls of the manorial court and reach judgment accordingly.35 More generally, the inquisition might have said that a person had died seised of land held of the Crown, but this finding could be challenged by the heir, who could allege that it was in fact held of a private person; the court would then look at relevant documentary evidence, or send out a further commission to take depositions, so that the true facts could be established and the law properly applied.36 So too if it was alleged that the land was not held in fee, for example, where it was held for a term of years or at will.37 Similarly, the heir could challenge a finding that he was a minor and seek a writ de aetate probanda; the court would then apply the law to the age as reported by the second jury.38 Alternatively the heir might wish to assert that his ancestor had died later than the original jury had found; the court would investigate this and decree accordingly.39 But the nature of feudal tenure was nothing if not complex, so that the court would commonly have to deal with questions which were legally very difficult. They might refer such matters to the common law judges; Jane Tyrrel, for example, establishing the invalidity at law of a use upon a use, arose in the Court of Wards and was remitted for decision to the judges of the Court of Common Pleas and Saunders CB.40 Sometimes the 33 Note (1577) CUL MS Hh 3.1, fol 29v; and n.b. CUL MS Hh 3.1, fol 11 (Hare noting honours from which do hold in chief). 34 CUL MS Hh 3.1, fol 38v (Duchy of Lancaster). 35 Framlingham (1554) CUL MS Hh 3.1, fol 3v. Similarly, though without express reference to examination of the court rolls, Joydrell (1563) CUL MS Hh 3.1, fol 16; Siltders (1567) CUL MS Hh 3.1, fol 21; Molyneux (1573) CUL MS Hh 3.1, fol 21; Smith (1572) CUL MS Hh 3.1, fol 41. 36 Catesby (1548) CUL MS Hh 3.1, fol 7v; Courtopp (1570) CUL MS Hh 3.1, fol 29; Ridgley (1572) CUL MS Hh 3.1, fol 39; Countess of Huntington (1576) CUL MS Hh 3.1, fol 16; Fraunce (1577) CUL MS Hh 3.1, fol 33v 37 Rocke (1554) CUL MS Hh 3.1, fol 20v; Kemp (1557) CUL MS Hh 3.1, fol 5v; Palmer (1562) CUL MS Hh 3.1, fol 15v; Brockholl (1562) CUL MS Hh 3.1, fol 16; Langley (1571) CUL MS Hh 3.1, fol 22v; Pierpoint (1571) CUL MS Hh 3.1, fol 34; Copeman (1571) CUL MS Hh 3.1, fol 37; Leighe (1573?) CUL MS Hh 3.1, fol 44. 38 Anon (1557) Dyer 155, 156; Shelley (1558) CUL MS Hh 3.1, fol 7; Jennetts (1558) CUL MS Hh 3.1, fol 7. 39 Elliker (1562) CUL MS Hh 3.1, fol 14v; Dennys (1577) CUL MS Hh 3.1, fol 29v. 40 (1557) Dyer 155, 1 And 37, Bendl 28, Dal 61. See in particular NG Jones, ‘Tyrrel’s Case and the Use upon a Use’ (1993) 14 Journal of Legal History 75.

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points in issue would be reduced to a set of written questions—we have one very important case of this type involving Trinity College Cambridge, where the question put to the judges was whether gifts by will to charitable corporations were valid41—or they might associate one or more judges with them when they were hearing the case.42 However, they would not always do this, and most of the resolutions referred to in Hare’s reports, even on what appear to have been fairly difficult points of law, seem to have been reached by the court without outside judicial assistance. Sometimes it is reported that the judges had been consulted but could not reach a decision; the court would then go on to make a decision on its own.43 Learned counsel would appear:44 in Calveley,45 for example, Edmund Plowden argued against John Popham, and a dozen years later Popham, now Attorney-General, argued against Thomas Egerton, the Solicitor-General;46 in Wentworth, 47 the Crown was represented by Coke and Egerton. Issues of considerable theoretical difficulty might be raised: in several cases, for example, the court had to face up to the thorny question of whether a statute should be construed strictly or according to its equity.48 Moreover, when we read of cases being argued for two or three days we may be sure both that the argument was complex and that the court took its responsibilities seriously.49 This does not mean, of course, that the court always got things right. One case reported in Dyer’s Reports, for example, records a disagreement between the views of Dyer and Saunders CJJ on the one hand and of two officials of the Court of Wards, Robert Keilway the Surveyor and Robert Nowell the Attorney, on the other, ending with Dyer’s view of the 41 Allen (1567) CUL MS Hh 3.1, fol 22; cf Carell v Cuddington (1565) Plo 295; Thornehill (1572) CUL MS Hh 3.1, fol 40. 42 Townsend (1555) Plo 111 (Saunders and Portman JJ.); Duncombe (1559) CUL MS Hh 3.1, fol 8v, Dyer 157 (all judges of both benches); Anderne (1560) CUL MS Hh 3.1, fol 11v; Venables (1560) CUL MS Hh 3.1, fol 12; Ratcliffe (1564) CUL MS Hh 3.1, fol 17v; Wentworth (1566) CUL MS Hh 3.1, fol 20; Earl of Bedford (1589) HLS 1057, fol 227. 43 Venables (1560) CUL MS Hh 3.1, fol 12; Dacre (1575) CUL MS Hh 3.1, fol 18. 44 The role of senior lawyers at a slightly later period is very clearly visible in judicial notebooks of 1604 (National Archives, WARD9/241), 1607 (WARD9/340) and 1622–23 (WARD9/243). On 30 April 1604, for example, there appeared before the court Serjeants Heale, Foster, Harris and Hobart, as well as ten barristers. 45 HLS MS 2079c, fol 57, Dyer 354v. 46 Earl of Bedford’s Case (1589) HLS MS 1057, fol 227. 47 (1587) Moo 713. 48 Anon (1570) Dyer 287; Calveley (1577) Dyer 354, HLS 2079c, fol 57, HLS 2071, fol 69v; Wiseman (1582) 2 Leon 148. See T Egerton (ed SE Thorne), A Discourse upon the Exposicion and Understanding of Statutes (San Marino, CA, 1942) 140–61; C Hatton, Treatise Concerning Statutes (London 1677), 28–85; SE Thorne, ‘The Equity of a Statute and Heydon’s Case’ (1936) 31 Illinois Law Review 202; S Vogenauer, Die Auslegung von Gesetzen in England und auf dem Kontinent (Tübingen, 2001) 685–90. 49 Duncombe (1559) CUL MS Hh 3.1, fol 8v, Dyer 157; Warren (1566) CUL MS Hh 3.1, fol 19v.

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opposing opinion, non credo, ‘I don’t believe it’.50 In another case it is reported that all the judges of both benches held one view, with which the officers of the Wards disagreed trenchantly; judgment was entered in accordance with the view of the judges.51 Nor was it merely common lawyers who criticised the decisions of the court. Hare’s reports themselves, working from within the Court of Wards’ own tradition, has its own share of annotations beginning ‘Quod mirum est’, ‘which is astonishing’, proceeding to point out what appeared to him to be major errors at the heart of the court’s reasoning.52 Leaving aside cases where the common law judges were involved and where we might expect that the law would be applied and enforced disinterestedly, an examination of the cases reported by Hare gives us a flavour of the approach of the court in holding the balance between queen and subject. At first sight, it is astonishing just how high was the proportion of cases found in favour of the individual and against the Crown. It would be foolish to suppose that Hare’s selection of cases was a perfect statistical sample, but if we look simply at cases in his primary sequence (ie ignoring interpolated cases) where the issue was between the heir of the deceased and the king or queen, in approximately 90% of them the court decreed in favour of the individual. It would, though, be misleading to take this at face value and conclude that, contrary to all expectations, the court was heavily biased against the Crown. Judicial process was only reached after several administrative stages, and in each of these the odds were heavily stacked in favour of the Crown: the feodary as a crown official was inclined in favour of the royal interest,53 and the practice of the auditors of the court, the officials responsible for the actual assessment, seems to have been always to resolve ambiguities in favour of the king or queen. Where the inquisition had found, for example, that the deceased had died seised of land but it did not know of whom the land was held or by what tenure, the auditors might assume that it was held of the Crown as tenant in chief by knight service and levy feudal dues accordingly.54 It was then up to the person on whom the levy had been made to come to the court and to show why he should not be taxed. The court could then assess the truth of his claim by examining his documentation, hearing witnesses, or requiring an additional inquisition to resolve ambiguities or a completely Browne v Coke (1567) Dyer 260. Duncombe (1559) Dyer 157, CUL MS Hh 3.1, fol 8v. 52 Kemp (1556) CUL MS Hh 3.1, fol 5v; Hawtrey (1573) CUL MS Hh 3.1, fols 11, 42; Bulkeley (1576) CUL MS Hh 3.1, fol 44. 53 See in particular Skelinge (1561) CUL MS Hh 3.1, fol 16, where the feodary was said to have overvalued the land out of malice. 54 The practice was deprecated in Russhe (1556) WARD9/103, fol 30v, where it was said that the proper course was to issue a writ melius inquirendum in order to get the matter determined by inquisition. 50 51

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new inquisition if the first was irredeemably defective.55 More generally, if the original inquisition was ambiguous in any way the auditors might conclude in favour of the Crown, leaving it to the individual to produce the evidence to support his claim.56 If it was found that land was held from the queen by knight service, the auditors could assume that it was held ut de corona and that she was therefore entitled to prerogative wardship; it was then open to the individual to argue and prove that it was held ut de honore.57 It would no doubt have been very common for the members of the original inquisition to have been acting in ignorance of facts which were only known to the landholder himself, and in such circumstances it must often have happened that they had little choice but to guess as to the tenure by which the land was held; if they got it wrong, the onus was on the individual to produce evidence showing the truth.58 There was therefore a balance between the administrative and the judicial procedures of the court, one which ensured that those in whose interest it was to reveal the truth actually did so, and there was an effective check on what would otherwise have been the huge uncertainties inherent in the inquisition. It is tempting to argue that the apparent bias in the court’s decision-making may do no more than reflect this balance, but it went further than this. Statutes of pardon, it was said, had to be interpreted most generously in favour of the individual.59 A lessee was excused rent due, under a covenant which he had personally entered into, when he claimed that he was acting as agent for a third party,60 and a man granted £20 per year from the lands of a ward was entitled to keep the whole sum even when it was shown that the land was worth less than half of this.61 There were a number of situations in which the court had an element of discretion, and they commonly exercised this in favour of the individual too. When a royal ward married without consent, he or she could be prevented from suing at full age for livery of the lands until an agreed payment had been made, and until this had occurred the king or queen could continue to take the profits of the land. The court, though, did not 55 Joydrell (1563) CUL MS Hh 3.1, fol 16; Courtopp (1570) CUL MS Hh 3.1, fol 29; Pott (1572) CUL MS Hh 3.1, fol 38; Sand (1576) CUL MS Hh 3.1, fol 25v. 56 Hall (1553) CUL MS Hh 3.1, fol 46v; Covell (1573) CUL MS Hh 3.1, fol 44v; Barham (1580) CUL MS Hh 3.1, fol 46v. 57 Lake (1557) CUL Hh 3.1, fol 7; Wastines (1560) CUL MS Hh 3.1, fol 10v; Dacre (1575) CUL MS Hh 3.1, fol 18; Dennys (1577) CUL MS Hh 3.1, fol 29v; Hamond (1577) CUL MS Hh 3.1, fol 30. 58 Palmer (1562) CUL MS Hh 3.1, fol 15v; Brockholl (1562) CUL MS Hh 3.1, fol 16; Verney (1565) CUL MS Hh 3.1, fol 18v; Rocke (1566) CUL MS Hh 3.1, fol 20v; Abrahall (1569) CUL MS Hh 3.1, fol 28; Courtney (1570) CUL MS Hh 3.1, fol 33. 59 Courtney (1570) CUL MS Hh 3.1, fol 33. Such a directive was included in the statutes themselves. 60 Kemp (1556) CUL MS Hh 3.1, fol 5v. 61 Hawtrey (1573) CUL MS Hh 3.1, fol 11.

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always insist on these profits being paid in full as a condition of ordering livery.62 Heirs might enter a bond to pay triple the value of any undeclared lands; nonetheless, the court might remit this penalty in its entirety if such lands were subsequently found to exist.63 Land in royal wardship could be leased out to a private individual; then, if the land turned out not to be worth as much as expected, the court might retrospectively reduce the rent.64 And the court might order allowances or payments to be made to officials when they were not strictly due by law.65 It is reasonable to suppose therefore that the court did indeed exercise a systematic bias in favour of the individual. This does not mean that it stood out in opposition to any supposed royal policy to maximise revenues. Landowners’ dislike of the capricious burdens of feudal incidents meant that royal policies and practices were forever being moulded to engineer compromises between the need for money and the desire not to alienate those whose support was essential to the running of the state. It has been argued too that Burghley’s policy as Master of the Wards was not so much to extract as large a revenue as possible for the queen, but rather to direct a substantial part of the court’s revenue towards office holders (including, of course, men holding office in the Court of Wards66), whose salaries were not high, as a way of bolstering up the organs of government.67 Hence the Master of the Wards himself might cause wardships to be undervalued,68 or the queen might instruct the Court of Wards to make a decree in favour of the individual.69 Perhaps most tellingly, and indirectly affecting the profits of the Court of Wards to a very considerable extent, it was increasingly the case that new grants of land by the Crown took the form of grants to be held in socage, or at the very least by knight service ut de honore, which did not carry the burden of prerogative wardship,70 typically stated as being held of the manor of East Greenwich.71

Foster (1558) CUL MS Hh 3.1, fol 7v. Maynard (1563) CUL MS Hh 3.1, fol 17. Browne (1556) CUL MS Hh 3.1, fol 5v (land wasted by war with Scots); Throckmorton (1558) CUL MS Hh 3.1, fol 8 (land subject to unexpected charge); Cocke (1560) CUL MS Hh 3.1, fol 12 (lands needing repairs); Dutton (1573) CUL MS Hh 3.1, fol 15 (lands originally overvalued); Baylies (1575) CUL MS Hh 3.1, fol 12 (lands needing repairs); Stourton (1588) CUL MS Hh 3.1, fol 7v (lands needing repairs). 65 Dirde (1560) CUL MS Hh 3.1, fol 10v; Parry (1561) CUL MS Hh 3.1, fol 14v. 66 Burghley himself, it has been estimated, was receiving something in the region of £2,500 per year from the sale of wardships in the 1590s, as compared to his official stipend of 200 marks (£133.6.8d): Hurstfield, above n 2, 280. 67 Hurstfield, above n 2, 329–52. 68 J Hurstfield, ‘Lord Burghley as Master of the Court of Wards, 1561–1598’ (1949) 31 Transactions of the Royal Historical Society 95, 110–111. 69 Hynde (1558) CUL MS Hh 3.1, fol 6; Anon (1564) CUL MS Hh 3.1, fol 17; Warren (1566) CUL MS Hh 3.1, fol 19v. 70 Above, p 108. 71 J Hurstfield, ‘The Greenwich Tenures of the Reign of Edward VI’ (1949) 65 Law Quarterly Review 72, esp 80. 62 63 64

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Against this background, it is possible to understand the court’s attitude towards procedural improprieties. If the proper procedure for assessment had not been followed, the court would invariably find against the Crown even where the impropriety looks to have been purely technical. In one case, for example, the writ authorising the inquisition was issued in the normal way by the Chancery, but it was argued that since the deceased’s land was in the palatine county of Cheshire the writ ought to have issued from the Chancery there; and it was decreed that process should start afresh.72 Where an inquisition was taken in one county but the land was found to have been held in another county the inquisition would routinely be quashed, whether or not any objection was taken to the substance of the findings; and if the objection was raised some time after the initial inquisition, as might well be the case if the heir was a minor, no new inquisition would be awarded but the initial assessment would simply be discharged.73 Where an ambiguous inquisition had been supplemented pursuant to a writ of melius inquirendum, and the supplementary inquisition had found that more lands were held of the Crown than had been originally found, where the melius inquirendum was found to have been improperly obtained by the heir of the deceased and was therefore void, the court would not allow the Crown to take advantage of it notwithstanding that the tenures evidenced in it might have been truly found.74 By contrast, the court was not so punctilious about procedures on the side of the individual. In principle, a person who wished to dispute the findings of an inquisition should follow a technical process known inelegantly as traversing the office. But, time and time again, if the court was satisfied of the truth of the claim it would simply decree accordingly without requiring that all the technical steps be followed. More generally, the court showed a degree of elasticity in the exercise of discretions in favour of the individual when it was just to do so, especially where the estate in question was of relatively low value. Revenue law engenders revenue avoidance, and the court regularly had to deal with attempts by individuals to structure their holdings of land in such a way as to reduce their liability to feudal incidents after the death of the individual. This had been made more difficult by the Statute of Wills of 1540 and its supplementary statute of 1542,75 but the court did not go out of its way to give a broad interpretation to their anti-avoidance principles. Very much the contrary. The Statute of Wills had provided that incidents should be payable where there had been a grant inter vivos for the Aldsey (1572) CUL MS Hh 3.1, fol 39v. Parnal (1559) CUL MS Hh 3.1, fol 9; Evanson (1559) CUL MS Hh 3.1, fol 10; Egerton (1569) CUL MS Hh 3.1, fol 27 (a case of lunacy). 74 Shaw (1570) CUL MS Hh 3.1, fol 32v. 75 Stat 32 Hen VIII c 1, Stat 34 & 35 Hen VIII c 5; see NG Jones, ‘The Influence of Revenue Considerations upon the Remedial Practice of the Chancery in Trust Cases, 1536–1660’ in C Brooks and M. Lobban (eds), Communities and Courts (London, 1997), 99. 72 73

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advancement of one’s wife, the preferment of one’s children or the payment of one’s debts. In construing this provision the court tended to look straightforwardly at whether a grant had in fact fallen within these terms. In several cases, for example, a gift to a bastard child was held to fall outside its purview;76 and a man might commonly arrange that the wardship of a minor heir be postponed or avoided by resettling the land on himself and his wife for the longer of their joint lives and only then passing to the heir. In such a case, if the wife survived him no lands would descend to the heir until her death, and hence there would be no wardship until that time.77 No objection was taken to the granting of long terms of years, with a power in the grantee or his heirs to seek further assurance in order to obtain the freehold, despite the fact that this amounted to a grant in fee in all but name.78 Other devices, sometimes complex ones, came before the court; and their practice in such cases seems always to have been to disentangle each step and see whether it was formally effective. If every step held, then the device would have been successful.79 Of course, we cannot be sure that these were all deliberate attempts to avoid feudal incidents within the letter of the law rather than genuine settlements of land which had avoidance as an accidental and no doubt welcome by-product. However, when we find Sir Thomas Pope, a childless man, settling lands on himself in tail, remainder to another for life, remainder to another for a week, remainder in tail male to the eldest son of the second man, remained to the third man for life, remainder to his first son in tail, with further remainders over, we may reasonably guess that the avoidance of incidents was one of his aims.80 So, too, when Richard Tate settled lands on himself for life, remainder to his executors for one year, remainder to his heir, only the most innocent would not suspect that he was arranging his affairs in such a way as to ensure that wardship would not arise.81 Sir Anthony Browne, a judge of the Common Pleas, bought land jointly with another judge of the court, Richard Weston, to the use of themselves and Browne’s wife and thereafter of Browne’s heir; Browne, Weston and Browne’s wife then made a grant for the advancement of 76 Woodhouse (1576) CUL MS Hh 3.1, fol 47v; Thornton (1577) Dyer 345; Calveley (1577) Dyer 354, HLS 2079c, fol 57, HLS 2071, fol 69v; Wiseman (1582) 2 Leon 148. 77 Moreton (1563) CUL MS Hh 3.1, fol 16v; Savile (1565) CUL MS Hh 3.1, fol 19; Pell (1567) CUL MS Hh 3.1, fol 21v. 78 Catesby (1558) CUL MS Hh 3.1, fol 7v. NG Jones, ‘Long Leases and the Feudal Revenue in the Court of Wards’ (1998) 19 Journal of Legal History 1, with further references, and pointing to a change of practice only after the death of Burghley (though it was suggested, probably in 1589, that long leases of 1,000 years or more and other ‘fraudulent devises’ should be excluded from the Statutes of pardon: National Archives SP12/122, fol 156). 79 Southwell (1569) CUL MS Hh 3.1, fol 27v; Laurence (1570) CUL MS Hh 3.1, fol 34; Pott (1572) CUL MS Hh 3.1, fol 38; Chowne (1572) CUL MS Hh 3.1, fol 41. 80 Pope (1573) CUL MS Hh 3.1, fol 45; cf Southwell (1569) CUL MS Hh 3.1, fol 27v (no decree recorded). 81 Tate (1569) CUL MS Hh 3.1, fol 28v.

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Browne’s children. It was held that since the grant was not made solely by the Brownes it fell outside the terms of the Statute of Wills: Weston was doing nothing for the advancement of his own children.82 In another case a testator protected entailed lands from feudal incidents by linking them to a forfeiture clause affecting lands held in fee simple. ‘A good policy in the devisor so to save the profits of the estate tail’, noted John Hare.83 The court must have recognised this too, but the devices were nonetheless upheld. It is impossible to know without much fuller research into the courts’ records just how typical these cases reported by Hare were, but there is clear evidence that the court did not routinely shoot down settlements which reduced the sums which would otherwise have been payable to the crown; and if it did prove to be the case that Hare had selected out these cases deliberately to show how the rules might operate in favour of the individual, then we might suppose that for him at least the function of the court was to apply the legal rules disinterestedly, even if the consequence of that was the diminution of the royal revenue. A final point is worth making, perhaps one with resonances for the present day. If it was frequently the case that the auditor’s assessment leant in favour of the crown, as it appears to have been, it must also frequently have been the case that the crown received revenue to which it was not strictly speaking entitled. The person being required to pay might object immediately and bring the matter before the court straightaway, but, especially where it was lands of a minor which were in issue, it might not be until some time later, typically when the heir reached his majority, that the assessment might come into question.84 Always in these cases, even where there was no minor involved,85 the practice of the court was to order the repayment of the sums which had been wrongly received on behalf of the crown.

Cited in Calveley (1577) HLS 2079c, fol 57. Southwell (1571) CUL MS Hh 3.1, fol 35v. For example Laken (1558) CUL MS Hh 3.1f7; Parnel (1559) CUL MS Hh 3.1f9; Wastines (1560) CUL MS Hh 3.1 f10v; Davenport (1568) CUL MS Hh 3.1 f7; Smith (1572) CUL MS Hh 3.1 f40; Losse (1573) CUL MS Hh 3.1 f42; Grantham (1576) CUL MS Hh 3.1 f47. 85 Audley (1554) CUL MS Hh 3.1, fol 4. 82 83 84

6 The Poll Taxes in later Seventeenth Century England THE POLL TAXES I N LATER S EVENTEENTH CENTURY ENGLAND

JEREMY SIMS J EREMY S I MS

There is nothing can make it better apparent how displeasing Poll-Money is to the People, than the Observation how ill it is brought in, and answered to the King. For where Taxes seem hard and oppressive, in particular to the Poor, the Country Gentlemen proceed in the Levying of them with no Zeal nor Affection.’1

As the name implies, a ‘poll tax’ was a head tax, payable either at a fixed rate or at a rate variable according to the rank or office of the tax payer. The first poll tax was imposed in England in 1222, being an ‘Aid for the King of Jerusalem’,2 but it was over 150 years later, in the late fourteenth century, that the more famous poll taxes were imposed. In popular belief, these poll taxes of 1377–80, having been responsible for the Peasants’ Revolt, had then been consigned to history. The reality is that poll taxes continued to be imposed by English governments strapped for cash throughout the fifteenth, sixteenth and seventeenth centuries. They were deeply unpopular—even more so than most impositions—since they bore more heavily upon some of the poorer members of society, and they were mistrusted also perhaps because of their association with the Peasants’ Revolt. They were exacted three times in the fifteenth century and again as components of subsidies in 1512–24. In the seventeenth century, resort to the poll tax became more frequent. A poll was raised in 16413 and another in 16604, in both cases for ‘the speedy provision of money’ to disband an army; in 1667,5 to help pay for the Second Dutch War—which, in fact, had ended before the tax could be collected; and in 1678,6 to raise money for a 1 C Davenant, An Essay upon Ways and Means of Supplying the War, 2nd edn (London, 1695). 2 M Jurkowski, CL Smith and D Crook, PRO Handbook, No 31. Lay Taxes in England and Wales, 1188–1688 (Kew, PRO, 1998) xxxiv. 3 16 Car I, c 9. 4 12 Car II, c 9. 5 18 & 19 Car II, c 1. 6 29 & 30 Car II, c 1.

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threatened war against France. In all cases during the reigns of Charles I and Charles II, the government used a poll tax only in extremis. After the ‘Glorious Revolution’, however, it became essential to the government to use every means in its power to raise money. The poll tax became a regular form of taxation throughout most of the 1690s, although each poll was the subject of separate legislation. When William of Orange, Stadholder of the United Provinces, seized the throne of his uncle and father-in-law James II of England, he brought his quarrel with France with him and the very act of his usurpation of the throne was treated by Louis XIV as a casus belli. War ensued—the War of the League of Augsburg, or the Nine Years War, or, as it is sometimes known, King William’s War. This was a war which was to be fought globally—in Flanders and Germany, in North America, in the West Indies and in India, and also in Ireland, where King James was attempting to regain his throne. The wars into which England was then plunged for most of the next two and a half decades involved expenditure of a formerly unimaginable magnitude. European armies of the later seventeenth century greatly exceeded in their numbers those of the sixteenth and early seventeenth centuries. England, though, had very largely avoided military commitments on the Continent since the end of the Hundred Years War in the mid-fifteenth century and, apart from the armies raised during the Civil War and the Interregnum, which were drastically reduced after 1660, had not had to pay for military forces on the scale of Continental states. For example, in the latter part of the seventeenth century, France had an army of some 120,000 men, Spain about 70,000 and the United Provinces 110,000.7 By contrast, prior to its entry into the Nine Years War, England had an army of only about 15,000. However, during this war, up to 90,000 men had to be kept in arms, as well as up to 40,000 sailors, all recruited from and sustained by a population of some five million.8 In addition, the English taxpayer was required to subsidise the Dutch and other continental allies, the cost of these forces and the subsidies paid to allies amounting to some five and a half million pounds a year. This exceeded the average annual revenue and therefore much of the money needed had to be borrowed on the security of future tax income.9 From an annual average during the period 1661–65 of about £1,778,500, revenue from all sources increased to about £4,441,400 a year during the last five years of the century—a nearly 7 J Brewer, The Sinews of Power: War: Money and the English State, 1688–1783 (London, Hutchinson, 1988) 8. However, the tendency of many officers to overestimate the numbers under their command, as well as the relatively high rates of desertion in many armies of the period, render estimating the number under arms at any one time very difficult: ibid, 31. 8 JV Beckett and M Turner, ‘Taxation and Economic Growth in Eighteenth-century England’ (1990) xliii Economic History Review, 380. 9 H Roseveare, The Financial Revolution, 1660–1760 (London, Longmans, 1991) 33.

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150% increase.10 This massive rise was necessary just to put England on something like a par with other European states as, during the earlier part of the century, English taxpayers had had far less strain put upon them than their neighbours across the Channel. It has been estimated that the per capita incidence of tax in France was at least three times that in England, and that Louis XIII received more tax from Normandy alone than Charles I did from the whole of England.11

Fig 1: Average Annual Revenue over Five-year Periods (based on figures in http://www.le.ac.uk/hi/bon/ESFDB/OBRIEN)

The principal sources of revenue at this time were the customs, the excise and the assessment. The assessment was a general property tax producing a fixed sum nationally, which was then divided between the counties according to the wealth which they were presumed to possess—taxes raised by assessments constituted about 42% of all revenue during the Nine Years War.12 But every other means possible had to be explored to raise the enormous sums that would be required: so, in addition to excise duties on the perennial favourites of beer, wines and spirits, duties were payable also on tea, coffee and salt, hackney carriages and coaches, births and marriages—and bachelors were also taxed: no one was able to escape. The wide scope of taxation led to fears of a ‘general 10 JV Beckett, ‘Land Tax or Excise: the Levying of Taxation in Seventeenth- and Eighteenth-century England’ [1985] English Historical Review 306. 11 Brewer, above n 7, 20. 12 http://www.le.ac.uk/hi/bon/ESFDB/OBRIEN, 95.

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excise’, which was a particular bugbear of the time, and although the government tried to introduce an excise duty on staples late in 1689, this and schemes of a similar nature drafted in succeeding years were never enacted. To avoid a general excise, Parliament had to look to alternative sources of revenue, and the poll tax, which because of its unpopularity had so often in the past been a tax of last resort, was just such a further means of raising much needed money. Poll taxes were raised in 1689–90, 1692–93, 1694–95 and 1698–99, and, as an adjunct to the land tax, in 1696–97 and 1702. The sums brought in by these taxes were, however, hardly commensurate with the obloquy with which they were surrounded as they accounted for only a relatively small proportion of the revenue raised. During the period 1689–91, for instance, the poll taxes raised together only about 6.5% of total revenue. What exactly was the poll tax of latter part of the seventeenth century? It was, according to Sir William Petty, ‘a Tax upon the Persons of men, either upon all simply and indifferently, or else according to some known Title or Mark of distinction upon each . . . .’13 So, in part, it was simply a head tax: one shilling a head in each of the poll tax Acts from 1660 to 1690, then four shillings from 1691, rising to 4s 4d in the Act of 1697.14 But it was very much more than a duty of a fixed sum per head of the population. There was some expectation that the wealthy ought to bear their reasonable share of the tax burden. Indeed, Sir William Petty had written around this time that ‘Men should contribute to the public charge but according to the share and interest they have in the Publick Peace, that is, according to their Estates and Riches’.15 The Acts did provide some differential in their scope, but was this merely a nod in the direction of progressive taxation? In addition to a fixed charge, some taxpayers were required to pay sums which varied according to their rank in society. The categories differed somewhat with each Act. In the 1660 Act, for example, a duke was required to pay £100, a marquess £80, an earl £60, and so on. An esquire or a man which the Act described as ‘soe reputed or owning or writeing himselfe’ as such was rated at £10, while ‘every person of what degree or quality soever below the degrees above mentioned . . . who can dispend One hundred pounds per annum of his or her own’ was liable to pay £5.16 In subsequent Acts, this last provision was replaced by a charge 13 W Petty, A Discourse of Taxes and Contributions, Shewing the Nature and Measures of Crown Lands, Assessments, Customs, Poll-Moneys, Lotteries, Benevolence, Penalties, Monopolies, Offices, Tythes, Hearth, Excise, &c (London, 1689) 41. 14 There is some evidence that a view was put forward, at least in 1667, that but one head charge was payable for husband and wife, but it seems that this interpretation received short shrift: B Wheatley (ed), Diary of Samuel Pepys (London, 1893–99) vol VI, 352; Calendar of State Papers Domestic, 1666–7 (London, 1864) 583. 15 CH Hull (ed), The Economic Writings of Sir William Petty (New York, AM Kelley, 1963) vol I, 91. 16 12 Car II, c 9.

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of £1 on ‘every Gentleman or reputed Gentleman or owneing or writeing himself such’,17 and the rates payable by those of higher rank were, in general, halved.18 It was doubtless true that those of higher rank were more wealthy than those lower down the social scale, but the Acts made only a slight attempt to tax the subject according to his actual means.19 As Sir William Petty put it in a pamphlet of 1689, the effect was to tax ‘some rich single persons at the lowest rate; some Knights, though wanting necessaries, at twenty pounds, encouraging some vain fellows to pay as Esquires, on purpose to have themselves written Esquires in the Receipts’, while, at the same time making some poor Tradesmen forced to be of the Liveries of their Companies to pay beyond their strength; and lastly, some to pay according to their Estates, the same to be valued by those that know them not; thereby also giving opportunity to some Bankrupts to make the world credit them as men of such Estates . . .20

Nevertheless, some distinction was drawn according to the wealth of those below the rank of a peer. The 1688 Act provided that an additional sum of £1 should be paid by gentlemen with an estate valued at £300 or more. Subsequent Acts contained similar provisions. Anyone having an estate below this value who did not swear to this effect before two or more commissioners would be liable to pay that tax, but presumably this would apply only to such people who might be expected to be that wealthy. In the 1694 Act a further differentiation was made: those with a personal estate of between £300 and £600 had to pay 10s a quarter, while ‘every person under the degree of a Peer of the Realme having an Estate in the whole either Real or Personal of the cleare value of Six hundred pounds or more’ was required to pay £1 each quarter.21 The poll taxes were, though, more than taxes of a fixed amount according to status, and those imposed in the later seventeenth century might also be considered as precursors of the income tax. The 1667 Act, entitled an Act ‘to raise a supply by a Poll and otherwise’, was a 17 Although a more precise definition was virtually impossible, Sir William Petty attempted this in some notes which he penned in 1685 for a possible Poll Tax Act. He included captains of smaller naval vessels, army officers below the rank of captain, attorneys, Masters of Arts of the Universities, churchmen ‘in full Orders’, those who have coats of arms, and ‘such as will swear themselves’ to be gentlemen . . . .’: Petty papers, 17, BL Add MS, 72866, fol 23. 18 For example, 18 & 19, Car II, c 13, s 9. 19 CD Chandaman, The English Public Revenue, 1660–1688 (Oxford, Clarendon Press, 1975) 161. 20 Petty, above n 13, 41. Similar sentiments are aired in a letter written by Thomas Manley to Sir Joseph Williamson in April 1690, suggesting that yeomen, farmers, artificers, tradesmen, etc and single women worth at least £300 ought to be taxed in the same way as ‘he that is usually called gentleman’: Calendar of State Papers Domestic, 1689–90 (London, 1895) 540. 21 The wording of the Act which imposed a tax upon those having estates of between £300 and £600 led to some differences in interpretation at least among the Hampshire commissioners. Some, it seems, considered the word ‘or’ to be disjunctive: Note of Edward Ward, dated 12 June 1694, Hampshire Record Office, 44M69/G2/89.

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percentage tax on what has been described as ‘the more elusive forms of personalty’, particularly money, debts and income arising from offices, and went ‘some way towards balancing the unequal incidence’ of the tax on land.22 The tax was due to be paid, by both individuals and corporations, on ready money and on debts owing (other than such as were termed by the Act to be ‘desperate’) at the rate of 1%. Income received from public offices (except those in the armed services) was due at one shilling in the pound, or 5%, but recipients of such income who were not also liable to pay tax under the monthly assessment were required to pay at the rate of three shillings in the pound, or 15%. In either case, though, a deduction of one-third of the salary could be allowed ‘towards his or their charge of executing any such Commission Office or Place’. The attempt to widen the tax base was evident also in the 1678 Act, which provided that what might later be termed ‘earned income’, should be taxed at the rate of 5%, or one shilling in the pound. This rate had to be paid by servants and, as in the 1667 Act, anyone receiving an income from a public office. To ease collection from the more recalcitrant servant, provision was made for the tax to be collected from the employer if the servant refused to pay.23 The rate of tax was double for aliens. It was also double the normal rate on the incomes of lawyers and physicians, although from their profits an allowance could be claimed of one-third ‘for and towards the charge and expence occasioned by his or their attendance upon his or their Practise or Professions’. The example set in 1678 was followed in the poll taxes of William and Mary’s reign, although the rates were in some instances increased. Thus, while the rate of one shilling in the pound remained the basic rate of tax on salaries if the payer was liable to pay tax on the monthly assessment, the rate increased to three shillings in the pound if no monthly assessment was payable, and the same higher rate applied to income received from royal pensions and stipends. Lawyers, including judges, also had to pay a similar rate of three shillings in the pound on their profits, but without any allowance of one-third being given as had been the case under the 1678 Act. Servants earning more than £3 pa were liable to tax at one shilling in the pound, and those earning £3 or less were liable at half that rate. In addition, everyone of the age of 16 or above, except the very poor, was liable to pay a fixed charge of 1s. Lawyers especially were again targeted in the 1690 Act, inasmuch as, while the standard rate of tax on the income from public offices or royal pensions was 5%, lawyers (including judges) were to be taxed at three shillings in the pound, or 15%, with no allowance being given for expenses as in the 1678 Act. Chandaman, above n 19, 147. This may, perhaps, have been a more general method of collecting poll tax due from servants: see, eg Diary of Samuel Pepys, above n 14, vol I, 305, quoted at p 134 post. 22 23

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A prime object of a House of Commons composed very largely of landowners was to shift some of the burden of taxation from landed property on to the commercial and moneyed men in the City of London. The poll tax was one of the ways in which this might be achieved. So, as the Acts evolved during the later seventeenth century, the emphasis shifted to some extent from the status of the taxpayer to his or her wealth, and these Acts began to bring more merchants within the specific charges to tax. The Act of 1660 had an inordinately long list of charges that were to be levied on the Masters, Wardens and Liverymen of the City guilds, in which it closely followed the 1641 Act. However, the first poll tax of William and Mary’s reign, while maintaining the fixed charges and the charges according to rank, dispensed with lengthy provisions regarding members of the City guilds, replacing them with a simpler tax of £10 on merchants trading in the Port of London and living within 10 miles of the City and a charge of 10s on other merchants living within 20 miles of the City who had a house worth at least £30.24 But the taxation of the men of capital was taken a step further in the second poll tax of the reign by bringing into the tax net investors in some of the principal chartered companies which had become established earlier in the century. Shareholders in four of the most important companies were targeted in this Act—that is, the East India Company, the Guinea Company, the Hudson’s Bay Company and the New River Company.25 A tax of two pounds on every one hundred pounds of capital stock was imposed in the case of the first three of these companies. For ease of collection, the tax was to be paid by the ‘Governors or Treasurers’ of the companies and then deducted from the next dividend payment. The shareholders in the New River Company were to be taxed at two shillings in the pound, but on ‘the yearly value thereof’, not on the capital. This may well have been the earliest tax on the income from shares in a company. The scope of this new form of taxation was widened slightly in the 1690 Act,26 under which not only the shareholders in the original four companies, but also those in other water companies in London and in the company known as the King’s Printing Company came within the charge to tax at the same rate as those of the New River Company, the ‘Governours, Treasurers or Receivers’ of the relevant companies being required to account for the tax.27 24 Also, the poll tax Acts passed from 1691 onwards contained heads of charge which could have affected wealthy people, whether landowners, merchants or financiers: anyone liable by Act of Parliament to make available for the militia a horse and horseman with arms was required to make a contribution of £1 quarterly for every horse for which he was chargeable. Anyone not so contributing but who kept a carriage (although stage coaches and hackney carriages were exempted in the 1698–9 Act) was to be liable to pay a similar quarterly amount (eg 9 Wm III, c 38, ss 4 and 5). 25 1 Wm & Mary, c 13, ss 9 and 11. 26 2 Wm & Mary, c 2, s 11. 27 The 1689 Act had made no specific mention of the tax payable by New River Company shareholders being deducted at source, so the Act of 1690 was probably the first in which tax on dividend income was so deducted.

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The poll taxes were uneven in their effect, both geographically and socially. Map 1, based upon figures given by Charles Davenant in his Essay upon Ways and Means for Supplying the War,28 shows the amounts raised by the first of William and Mary’s poll taxes in 1689 from each English county and from Wales taken as a whole. Not surprisingly, Map 1: Proceeds of the First Poll Tax of William & Mary’s Reign

28

2nd edn, 1695. Map II is also based upon figures given there by Davenant.

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Middlesex, with London, produced a far higher return than any other county, with the higher returns, in general, being received from the larger counties, such as Yorkshire, Devon and Kent. However, the effect on households in each of these areas shows a different pattern. Map 2 gives some indication of the average amount of tax paid under that Act by

Map 2: Incidence of the First Poll Tax of William & Mary’s Reign

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households in each of the English counties and in Wales.29 As might be expected, this also shows Middlesex households paying a much higher sum than those elsewhere, but it also indicates that, generally, households in the south and south-east of England were paying more than those further from London—perhaps indicating the greater relative affluence of these counties, but perhaps also indicating more assiduity on the part of commissioners and collectors in areas nearer the seat of the Treasury. However, throughout the country the yield was in all cases disappointing. The comparative harshness of the effect of the poll tax on some of the poorer sections of the community made it deeply unpopular and the consequent lack of enthusiasm on the part of many of those responsible for its collection must have been one of the factors which led to the consistently disappointing yield from each of these taxes. Oversight of the administration of poll taxes, like other direct taxes of the period, was entrusted in the localities primarily to ‘amateur’ commissioners, appointed not by the king but by Parliament, as indeed had been so with earlier poll taxes. This, it has been concluded, suggests ‘a belief that . . . the sacrosanct sphere of property should be invaded only by independent property owners’.30 Whilst political allegiances may have played some part in the initial appointment of commissioners, it has been suggested that they were often left in post with the passing of successive Acts,31 though this may not always have been so. A random check of the names of commissioners for Hampshire appointed under Charles II and under William and Mary has disclosed that, of the 113 commissioners appointed for the county32 in 1678, only 25 appeared in the list of commissioners appointed at the beginning of William and Mary’s reign in 1688.33 However, as with the land tax, and in contrast to the customs and the excise, by devolving control of the administration of the tax to the localities, the government was able to bring about a situation in which ‘the political nation was attached to the apparatus of the state, not alienated from it’.34 In this way, much of the civil disturbance that attended the collection of taxes in contemporary France was avoided.35

29 The map is only indicative of the geographical incidence of the tax. The information has been compiled by dividing the number of households in each English county and Wales (which Charles Davenant stated as being liable for the hearth tax for each English county and for Wales in general) by the poll tax receipts for each of these areas. For the purposes of the maps, the total for Wales has been apportioned equally among the Welsh counties. 30 Chandaman, above n 19, 171. 31 C Brooks, ‘Public Finance and Political Stability: The Administration of the Land Tax, 1688–1720’ (1974) xvii Historical Journal 293. 32 Excluding those appointed for the city of Winchester and the town of Southampton. 33 29 & 30 Car II, c 1 and 1 Wm & Mary, Sess 2, c 1. 34 Brooks, above n 31, 283. 35 F Hinckner, Les Français devant l’impôt sous l’Ancien Régime (Paris, Flammarion, 1971) 55ff.

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The Acts set out in some detail the arrangements for the collection of the tax, for which each Act laid down a strict timetable. As an example, the Act of 1667 provided that the commissioners for each county or city for which they were appointed should meet together before 14 February to partition their area into divisions for which some of their number were to be responsible. At that meeting they were also to issue instructions to ‘such inhabitants, high constables, petty constables, bailiffs and other officers and ministers’ as they should think fit to meet before them at a specified time within eight days. At this meeting the commissioners were to read over to these several officers the charging provisions of the Act and fix another date, before 1 March, when they were to produce for the commissioners certificates of the persons chargeable within their respective areas and the amount due from each, and at the same time nominate two ‘able and sufficient persons’ within each parish to be collectors. These collectors were to be regarded as the employees of the parish concerned, the Act specifically making the parish ‘answerable’ for them. Once appointed, the collectors were immediately issued with warrants by the commissioners and were then to make demand of the tax due from those chargeable within six days and pay the amounts collected to the head collector for the division before 8 April, the head collectors in their turn delivering their receipts to the receivers-general for the counties before 15 April. The Act provided an opportunity for dissatisfied taxpayers to appeal against their assessments, but they had to do so within 10 days of demand being made for the tax—reduced to an even shorter period in later poll tax Acts.36 Any two or more of the commissioners for the division—including one of those ‘who signed or allowed the assessment’—had 14 days within which to examine the appellant on oath and they could then ‘abate, defalke,37 increase or inlarge’ the assessment.38 All appeals had to be determined by 20 April. By 30 April all tax due was to be paid by the receivers-general into the Exchequer. In theory, therefore, within a matter of some 11 weeks from the commissioners for each county first meeting to partition their area, all the tax due under the provisions of the Act should have been received in the Exchequer. The receivers-general were at the apex of the pyramid and were centrally appointed. Little is known about the social background of most of the holders of the office. However, Charles Goodwyn, who was appointed receiver-general for a number of poll taxes and other taxes for the county of Sussex, appears to have been the steward of at least seven manors in the county between 1670 and 1695, and was a witness to a 36 In the statute 2 Wm & Mary, c 2, s 16 the period in which an appeal had to be lodged was reduced to the period of five days. 37 Subtract or abate: Oxford English Dictionary, sv ‘defalke’ and ‘defalcate’. 38 By 2 Wm & Mary, c 2 the period for determining appeals was also reduced from fourteen to five days.

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number of extant deeds of various lands in the county, all of which suggests that he was a local attorney.39 It is not unlikely that other receivers-general were of a similar profession or of similar social standing. The office was certainly sought after, and contenders for the post might seek the support of men of influence with the government. For example, when the receiver-generalship for the second poll tax of William and Mary’s reign for the county of Suffolk was to be filled, there was competition for the post between Robert Chaplin and Thomas Love, who had at an earlier date been the receiver-general for the first poll of the reign and for the review and additional poll. Thomas Love sought the support of Sir Charles Blois, ‘not doubting of your Worshipps continued kindness in promoting my interest with the Lords Commissioners that I may obtaine the point of it’. In putting forward his fitness for the post, Love emphasised that when he had acted as receiver for the review and additional poll the money which he had returned to the Exchequer ‘was the greatest summe that any one County brought in’. He had, nevertheless, been advised by one Mr Blackerby, ‘a learned Councill’, not to make application for the post, ‘as it is designed for Mr Chaplin & he must have it’.40 Chaplin was, indeed, appointed.41 There was also no doubt competition for similar offices in other counties and for the lesser posts in the collection process, namely the assessors and collectors. These latter two posts were often combined in the same man, or might alternate between two men or their families. Sometimes these offices were held in several parishes simultaneously, so that in Kent one man is known to have acted as collector in at least nine parishes and as assessor in two. Nevertheless, in the towns at least, there is some evidence that men graduated from collecting, for which they were paid a proportion of the tax they collected, to the office of assessor, which had some standing, although not necessarily popularity, in the community, so that such appointment might be a small step to social advancement.42 However, being chosen to carry out any office involved in the assessment and collection process was not unalloyed good news. Apart from the odium in which the office holder would almost inevitably be held by the other members of his community,43 if assessors failed to carry out their tasks without ‘concealment, love, favour, dread or malice’ they were liable to a fine of £5. Furthermore, should any assessor, collector or 39 Eg East Sussex Record Office SAS/G32/15; SAS/G35/38; SAS/G40?69,137; West Sussex Record Office Add. MSS, 1237. 40 Letter of Thomas Love to Sir Charles Blois, dated 10 November 1690: Suffolk County Record Office, Ipswich, HA30/312/393. 41 Calendar of Treasury Books, 1689–1692, 1273. 42 Brooks, above n 31, 287. 43 In the 1690s, at least, commissioners in some areas suffered abuse sufficient for it to be reported to the Privy Council: see, eg Calendar of State Papers Domestic, 1697 (London, 1927) 140–41, 161, 361.

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receiver-general neglect or refuse to carry out his duties, he could be fined £20.44 But, as will be seen, the threat of such a fine did not prevent serious under-assessment. All the poll tax Acts of the period contained provisions which were similar in form to those contained in the Act of 1667 and which were designed to bring in the tax due in as short a time as possible. The need for speed was also emphasised by the rigid timetables set out in the Acts as by the statutory powers given to those involved in the collection process ‘to call upon and hasten’ those below them in the chain of collection, and by the powers vested in the commissioners to deal with those who were guilty of delay. The Treasury also impressed on receivers-general and others the great need for the tax to be collected and remitted in the shortest possible time. So, for example, just before his sudden death in June 1690, William Jephson, the Secretary to the Treasury, wrote to Ralph Williamson, the receiver-general for both Yorkshire and the city of York:45 You are to get together with all imaginable speed what money you can upon the Poll Act and pay same to Sir Joshua Allen at Chester. Take his receipt and it shall be allowed in your accounts. Let my Lords know the shortest day you can pay this money at Chester and how much you can get together to pay there.46

However exigent their exhortations to commissioners to fulfil their obligations, in practice the Lords of the Treasury had little scope for action: many of the commissioners were substantial men in their localities and, if not themselves members of one or other House of Parliament, were closely connected with such members.47 But the speed with which the collection and payment into the Exchequer should be made was paramount. This would have left little opportunity for receivers-general to hold on to the money in their hands long enough to have used it for their own private banking purposes, which was the case with some other taxes: for example, the land tax collected in Cumberland took some 18 months to reach the Exchequer.48 To assist those involved in collecting the tax, the Acts provided that, if anyone assessed to the tax failed to pay when demand had been made, the collector might distrain the goods of the defaulter for four days.49 If the sum due had not then been paid in full, the goods would be valued by ‘three or two of the inhabitants of the locality’ where the distress had been taken and the goods sold, any surplus being returned to the 18 & 19 Car II, c 1, ss 15, 17. Similar provisions appear in later poll tax Acts. He was also receiver-general for the counties of Durham and Northumberland and the town of Berwick on Tweed. 46 Calendar of Treasury Books, 1689–1692 (London, 1931) 724. 47 SB Baxter, The Development of the Treasury, 1660–1702 (London, Longmans, 1957) 88. 48 Brewer, above n 7, 72. The farmers of the excise, as well as receivers of the assessment also used money they had collected in this way: MJ Braddick, Parliamentary Taxation in Seventeenth-century England: Local Administration and Response (London, 1994) 162–63, 206–07. 49 Eg 18 & 19 Car II, c 1, s 19. 44 45

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defaulting taxpayer. Should someone assessed to the tax have goods of insufficient value to pay the tax, and have failed to pay within 20 days of demand, then three or more of the commissioners were empowered to commit him to gaol ‘to be kept without bail or mainprize’ until payment had been made.50 In spite of the statutes’ endeavours to gather in large amounts of revenue in a short period, the results in all cases fell short of reasonable expectations. Indeed, Charles Davenant, on the basis of receipts from the former hearth tax, estimated that the yield of the 1692 poll tax was only about half what it should have been.51 Under-assessment was common, particularly where those in authority could wield their influence on assessors and commissioners. For example, it is recorded that in Yarmouth in 1667 none of the Justices of the Peace, aldermen or council members were rated as high as ‘gentleman’.52 In 1660 Samuel Pepys wrote in his Diary: This afternoon there was a couple of men with me a book in each their hands, demanding money for the poll money, and I overlooked the book and saw myself set down Samuel Pepys, gent, 10s for himself and for his servants 2s, which I did presently pay without dispute, but I fear I have not escaped so, and therefore I had long ago laid by £10 for them, but I think I am not bound to discover myself.53

There is no record in his Diary of his having to pay any further sum, so the inference is that his not ‘discovering’ himself did indeed allow him to escape so. He was in January 1667 again ‘deeply concerned, being taxed for all my offices, and then for my money that I have, and my title, as well as my head’.54 However, on 20 March he wrote that I and W[illiam] Batten and [Sir] J[ohn] Minnes to our church to the vestry, to be assessed by the late Poll Bill, where I am rated as an Esquire, and for my office, all will come to about £50. But not worse than I expected, nor so much by a great deal as I ought to be, for all my offices. So shall be glad to escape so.55

Eg 12 Car II, c 9, s 19. Similar provisions appear in later Acts. C Davenant, An Essay upon Ways and Means of Supplying the War, 2nd edn (London, 1695); S Dowell, A History of Taxation and Taxes in England (London, Longmans, 1888) ii.45. 52 Calendar of State Papers Domestic, 1666–7, 575. But it does appear that East Anglia generally was at this time suffering economically and the returns were not up to expectations: ibid, 537, 574. This may not have been the situation throughout the whole of England, however: in parts of south-west England, at least, the returns were expected to exceed the estimates—for example, at Keynsham in Somerset and at Truro: ibid, 582–83, 592. 53 Diary of Samuel Pepys, above n 14, vol I, 305. 54 Ibid, vol VI, 147. 55 Ibid, vol VI, 230. From the two entries quoted there is a suggestion that the procedure for assessment changed between 1660 and 1667. Although the 1660 entry does not specifically state that the assessors visited Pepys, this is the inference, whereas in 1667 the taxpayers were apparently required to attend the vestry to be assessed. 50 51

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In fact, Pepys later writes that he paid only £40 17s and, although he thinks this a great deal, believes he should really pay more, as he has not been assessed for some of the offices he holds or for his capital, as of my own accord, I had determined to charge myself with £1,000 money, till coming to the Vestry, and seeing nobody of our ablest merchants, as Sir Andrew Rickard,56 to do it, I thought it not decent for me to do it, nor would it be thought wisdom to do it unnecessarily, but vain glory.

That under-assessment or non-assessment was fairly general is apparent from a letter written by the Lords of the Treasury in March 1667 to the commissioners of the counties, wherein they state there had been ‘from many places representations made either to his Majesty or ourselves by persons who own not their names but send unsubscribed papers, but of those we took noe great notice at first because of the manner of their address’. However, it being now an Universal discourse of the partiality or nonobjectance of the true Intention of the Acts . . . and that not only men are underrated for their Mony, but in severall townes scarce any have Numbers returned & servants wages in some places wholly omitted.57

In this letter they make reference to the fact that some people, in changing their place of residence ‘by fraud or covyn’, thus escape the tax. This, indeed, is what Pepys also alleges against his colleague John Creed, who ‘lately went into the country to Hinchinbrooke . . . only to avoid paying to the Poll Bill’. The extant certificates of non-payment of the poll taxes of the 1690s certainly emphasise the difficulties which were encountered in attempting to tax the more mobile members of the community.58 Throughout this period the receipts from poll taxes fell seriously short of the sums expected. This is vividly described in a letter written by the Lord Treasurer, Lord Godolphin, to William III on 13 May 1692, the king being then in the United Provinces. In this letter Godolphin describes the difficulty experienced in finding the money to pay for the current rations of the Army, which was: occasioned by the failing of the poll tax, not only as to the sum itself which we expected from it but even as to the time of receiving it. By the Act of Parliament it ought to be in the Exchequer by the 3rd of May and now upon the 13th, there is not yet come in £20,000 of that money . . .59

Indeed, about four months later it was reported that ‘the Lords of the Council went into the City to borrow £200,000 upon the general credit of 56 57 58 59

Leading London merchant and chairman of the East India Company. BL Add MS 33,589, fol 70. Brooks, above n 31, 284–85. Calendar of State Papers Domestic, 1691–2 (London, 1900) 281.

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the Poll Act . . .’60 This poll tax in the end failed to produce half the sum knowledgeable contemporaries expected it to raise.61 The quarterly poll of 1694 similarly fell short of expectations. This is indicated in a letter dated 16 July 1694 from Godolphin and his fellow Lords of the Treasury to the Hampshire Commissioners, wherein complaint is made that the returns for the fourth quarter had fallen far short of the sum anticipated, which the Treasury ‘cannot but attribute to some defect or negligence in the assessors’.62 Once collected, the poll tax receipts, like the proceeds of other direct taxes, had to be transmitted to the Exchequer, although, as has been seen, in the case of the tax collected in some northern counties, the money was directed to be taken to Chester, presumably for onward transmission to the army in Ireland. By the latter half of the seventeenth century bills of exchange were starting to be used to transfer money from one part of the country to another, especially from provincial towns to London. Bills were certainly in use for remitting tax receipts from some areas to London in 1667,63 and by the early years of the eighteenth century Daniel Defoe could write that: A very great part of the bills drawn out of the several counties in England upon the London factors, and warehouse keepers, are made payable to the general receivers of the several taxes and duties, customs and excises, which are levied in the country in specie, and the money is remitted by those collectors and receivers; this generally appears by the bills or endorsements, which often mention it in the words, ‘For his majesty’s use’.64

Even though bills may have become gradually more widely available, most money received locally had still to be delivered to London in specie, for which purpose guards had to be employed. Indeed, the Lords of the Treasury wrote frequently to the agents for taxes during the early years of William and Mary’s reign requiring them to impress upon the receivers-general for the counties that, if they should be unable to procure sufficient bills of exchange to remit their receipts to the Exchequer, they were to ‘bring their moneys to Westminster under a sufficient guard’, the charge for which would be ‘defrayed by the King’.65 That such guards were needed, but perhaps not always effectual, was shown in December 1691, Ibid, 437. See p 134 above. Hampshire Record Office, 44M69/92/90. JS Rogers, The Early History of Bills and Notes (Cambridge, Cambridge University Press, 1995) 105–06. 64 D Defoe, Complete English Tradesman (London, 1841 edn) i, 362. 65 Eg Calendar of Treasury Books, 1689–92, 189 (13 July 1689), 559 (31 March 1690) and 1067 (18 March 1691). The agents for taxes had overall management of all the direct taxes. They were professional civil servants who had spent their working lives in the revenue offices, and there is some suggestion that they may have received this appointment in lieu of a retirement pension: Baxter, above n 47, 87. 60 61 62 63

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when Philip Bearcroft, the receiver-general for Worcestershire was robbed of £2,343 ‘or thereabouts’ near Gerard’s Cross while on his way to London with tax receipts. After a wait of nearly four years he was informed that the Lords of the Treasury had agreed ‘to allow Mr Bearcroft £2,500 for his loss and charges by the robbery by tally on the Excise, but he and his suretys must first pay in his whole arrear as received and clear his accounts’.66 The cost of providing these guards was an additional charge on the tax receipts, the amounts claimed varying quite widely. Whereas, for example, John Newsham, the receiver-general for the Six Months’ Assessment and the 1689 poll tax for Warwickshire claimed a sum of only £45 for his additional expenses in transmitting £11,500 ‘under strong guard’ by three separate journeys,67 Nathaniel Rich, the receiver-general of various taxes in Essex, sought a sum of just under £400 in the following year.68 But claimants did not always receive the amount they asked for. For instance, Thomas Love, the receiver-general for Suffolk for the poll of 1689, the review and additional poll of the following year and the 12d Aid of 1689, and who was mentioned above in connexion with his attempt to gain appointment as receiver-general of Suffolk for the second poll of the reign, petitioned for reimbursement of £134 19s 4d in ‘extraordinary’ charges but was paid only £60 10s.69 In some instances, though, the cost of providing a guard could not be justified. In July 1691 Anthony Isaacson, the receiver-general for the poll and other taxes at Newcastle-upon-Tyne, wrote to the Treasury that his receipts were so small that ‘they would not admit of being brought up by guard’, and he could not remit it by bills at a charge of less than 1%, which, presumably, he was allowed as an extraordinary expense.70 Towards the end of the last decade of the century poll taxes ceased to be the subject of separate legislation, but the 169771 ‘Act for granting an Aid to His Majesty as well by a land tax as by several Subsidies and other Duties’ included a poll tax element. The basic head charge was increased to 4s 4d a year, to be paid in 13 instalments over the course of the year. Additional payments were to be made on income, with servants being charged on a sliding scale and officers of state, pensioners and members of the professions paying four shillings and four pence in the pound, a rate of 21.66% on their salary or their ‘emoluments income or profits’. As Peter Harris has pointed out, this seems to be the earliest use of the 66 Calendar of Treasury Papers, 1556/7–1696 (London, 1868) 66. Bearcroft was apparently also transporting £100 belonging to the Bishop of Worcester. Although the bishop sought, perhaps somewhat optimistically, to recover this money from the Treasury, their Lordships were, unsurprisingly, having nothing of this. 67 Calendar of Treasury Books, 1689–92, 438. 68 Ibid, 1033. 69 Ibid, 862, 1162. 70 Calendar of Treasury Books, 1689–92, 1238. 71 8 & 9 Wm III, c 6.

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word ‘income’—and perhaps also of the word ‘emoluments’—in a taxing Act.72 Merchants and shopkeepers were liable for 2.5% of the value of their stock in trade, payable at the rate of half a penny in the pound each calendar month, and farmers a tax of 12s per £100, or 0.6%, on the value of their livestock. An Act of 170273 also incorporated poll tax provisions but was the last to do so: later statutes of Queen Anne’s reign contained no flat rate ‘head’ charge and, while taxing personal estates and pensions paid from the Exchequer, did not tax the income arising from the exercise of the professions. By now revenue was being raised by means of the land tax but, more especially, through indirect taxes in excise and customs duties. Although the revenue collected by the state grew enormously over the 40 year period under review, the poll taxes of these years contributed only a small proportion of the total. Indeed, in the years after 1688 some 90% of tax revenue was collected from the land tax, the excise and the customs.74 As has been seen, the yield of the poll taxes—perhaps over sanguinely estimated at their introduction—was diminished by fairly systematic under-assessment and evasion. This was perhaps inevitable, given that the control of the administration at the local level was in the hands of men who wielded much power and influence in their own areas and sometimes in Parliament. That evasion and delay were general is borne out not only anecdotally by the statements of Pepys and others, but also in official correspondence of the period. But, even though these poll taxes yielded only a small proportion of the tax collected in any of these years, they were highly regressive in their effect, and seem to have become even more so with the quarterly poll taxes of the 1690s. Nevertheless, in spite of the proportionately low yields, the under-assessment and other deficiencies in their administration and their unpopularity—all of which no doubt contributed in part to their demise—some of their features, as they evolved during the later seventeenth century, establish them as forerunners of the income tax that was to be introduced a century or so later.

72 P Harris, Income Tax in Common Law Jurisdictions. From the Origins to 1820 (Cambridge, Cambridge University Press, 2006) 187–88. 73 1 Anne, c 6. 74 Brewer, above n 7, 95.

7 Traders, the Excise and the Law: Tensions and Conflicts in early Nineteenth Century England TENS I ONS AND CONFLI CTS I N EARLY NI NETEENTH CENTURY ENGLAND

CHANTAL S TEBBINGS CHANTAL S TEBBI NGS

I N T RO DU C T I O N

No relationship between taxpayer and taxing authority is entirely comfortable since, despite any notions of social contract and the payment of taxes to ensure the benefit of good government, there is always a significant inherent tension: the taxing authority wants to acquire as much tax as possible whereas the taxpayer wants to pay as little as he can and in the most convenient way possible. Nevertheless, in the early nineteenth century the relationship between the taxing authority and one class of taxpayer, namely the merchant community, was particularly problematic in relation to the excise. The excise was an inland duty first introduced in 1643 as part of the financial measures of the English Civil War on various articles of consumption.1 By the early nineteenth century it applied to a wide range of articles and raw materials of home production or internal circulation, levied at the time of manufacture or the earliest point of circulation, and notably on malt, tea, spirits and soap. In the period immediately before the reintroduction of the income tax in 1842, the excise, along with the customs, was the leading contributor to the public revenue, providing more than twice the yield of the stamps and taxes combined. For the excise to be effective and the revenue secure, the law had to ensure that all articles subject to the duty did not enter the general consumption without due payment of the tax, and that none was evaded by smuggling, adulteration or other fraud.2 As Blackstone observed, unless 1 See generally, G Smith, Something to Declare (London, Harrap, 1980); J Craig, A History of Red Tape (London, Macdonald & Evans Ltd, 1955) 99–101; E Carson, ‘The Development of Taxation up to the 18th Century’ [1984] British Tax Review 237; Edward Hughes, Studies in Administration and Finance 1558–1825 (Manchester, Manchester University Press, 1934). 2 See generally W Phillips, ‘The Smugglers’ [1966] British Tax Review 28.

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a ‘strict watch’ were kept, the duty would be evaded and the revenue suffer.3 This gave the excise law its distinctive character as intensely invasive in substance and administration, and highly technical in form. Not only did it outstrip the income tax in inquisitorial nature and the stamp duties in complexity, it possessed other features peculiar to itself. It demanded high costs of compliance and the need for an exceptionally large implementing body, and had an impact felt well beyond the mere raising of revenue. It was also, unusually, a tax whose enforcement was almost exclusively a matter of the criminal law. As a result, it was initially an extremely unpopular tax with consumers, leading to popular riots in the seventeenth century4 and a parliamentary crisis in the eighteenth.5 Its unpopularity was due to its imposition on items of necessity rather than luxury as part of the purchase price, making it a tax which could not easily be avoided. Resentment to it was exacerbated by its necessarily obtrusive and centralised administration. ‘[I]ts very name,’ observed Blackstone, ‘has been odious to the people of England.’6 Its oppressive character, its potency as a catalyst of violent political unrest, its effect on the development of the country’s commercial and industrial enterprise and the national wealth, has made the excise a tax of social, political and economic significance. A persistent and established perception that tax law is not law at all, compounded by a tradition in legal tax education that avoids the law of indirect taxation, has resulted in the excise receiving relatively little attention from legal historians, but it is a tax of considerable legal significance. The excise laws reveal aspects of the history of tax law not found in other more commonly studied taxes, for the unique nature of the excise resulted in a relationship between the taxpayer and the executive which was exceptionally intense and burdensome, and in which the executive acquired an extraordinary degree of formal and informal control. Such a relationship was distinctive in the fiscal field and highly problematic in terms of its effect on the protection the law afforded the traders upon whom the duty was imposed. The considerable tensions and even conflicts which characterised the relationship between the excise, the law and the mercantile community were unambiguously revealed through the intense and wide-ranging scrutiny of a Commission of Inquiry into the whole establishment of the

3 W Blackstone, Commentaries on the Laws of England, ed E Christian, 15th edn (London, T Cadell and W Davies, 1809) vol i, 318. 4 See MJ Braddick, ‘Popular Politics and Public Policy: the Excise Riot at Smithfield in February 1647 and its Aftermath’ (1991) 34 The Historical Journal 597; S Matthews, ‘A Tax Riot in Tewkesbury in 1805’ [2002] British Tax Review 437. 5 P Langford, The Excise Crisis (Oxford, Clarendon Press, 1975). 6 Blackstone, above n 3, vol I, 319. See too C Wilson, England’s Apprenticeship 1603–1763 (London, Longman, 1965) 129–30.

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excise in the early 1830s.7 The nature of the relationship between the traders and the excise law and its administration in this period, the identification of the difficulties inherent in it and the impact of that relationship on the degree of legal protection enjoyed by the traders form the subject of this article.

T R A D E RS AN D E XC I S E R E G U L AT I O N

It was clear that, for the imposition of excise duties to be effective, the department of central government charged with the implementation of the law, namely the excise board, needed a complete knowledge of, and control over, the manufacture or dealing at every stage. The nature of this control differed according to the nature of the commodity, but in all cases involved a major interference with the traders’ conduct of their trade. In order that traders and their premises were known to the department, most manufacturers and dealers had to purchase a licence from the board,8 and all had to register the premises and equipment they used for the production or storage of the article so as to allow inspection by its officers.9 The more complicated the process and machinery of production of an article, the more onerous was the official interference. Some processes of manufacture, such as malt and soap, were minutely controlled by the excise, while others, such as paper and bricks, were less so. Dealing as opposed to manufacture could be equally closely controlled, as in the case of tea, tobacco and foreign spirits. As a result of the nature of the tax itself, therefore, the relationship between the merchant community and the excise board was an exceptionally close and intense one. The manufacture of malt by germinating barley to a certain stage and then arresting it by the removal of the water and the application of heat was one of the most closely regulated processes. The excise regulations addressed every aspect and stage of production.10 They laid down the construction and dimensions of the cisterns, couch frames and kilns, and these were inspected and recorded. At each stage of the process notice had to be given to the excise officer. Not only had steeping to take place between eight in the morning and two in the afternoon, but the maltster had to give 24 hours’ notice in writing of the precise hour at which he was 7 The commissioners published 20 reports between 1833 and 1836, each one addressing a particular trade or aspect of the excise establishment. These reports are here cited by their number and subject matter title, with their House of Commons Parliamentary Papers (HCPP) reference. A digest of the reports was published in 1837. 8 Eg every soap maker had to take out a licence every year at the cost of £4: Seventeenth Report (Soap) HCPP (1836) (20) xxvi, 4. He also had to satisfy a property qualification. 9 Ibid. 10 See the regulations reprinted in Fifteenth Report (Malt) HCPP (1835) (17) xxxi 345, 355–59.

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to do it; the barley had to remain submerged for 40 hours; it had to be left in the couch for 26 hours at a depth no greater than 30 inches before spreading on the floor. It was gauged by the excise officer in the cistern, in the couch and on the floor, and duty charged on that basis. The maltsters were visited every day, and twice a day depending on the stage of manufacture reached. In remote or large districts the maltsters had to be surveyed at least five times a fortnight. The condition of the grain at every stage was carefully inspected and noted, with entries dated and signed. Every six weeks the officer made a return of the duty charged on the maltster, who had to pay within six days. In the case of articles of foreign production, notably tea, wine, tobacco and foreign spirits, excise control was of a different character but could be just as close. Like the manufacture of goods at home, it included the registration of premises where the commodities would be stored and a requirement on the trader to take out a licence, but the substance of the regulation was primarily to ensure the dealer kept a record of sales, a prohibition on moving large quantities of the commodity without a permit, and frequent and regular stocktaking by excise officers.11 In the case of tea, the East India Company, which had the exclusive right to the trade in tea from China, imported the tea to London, where the customs officers ensured it was placed in the custody of their excise colleagues. The tea was sold at public auction, after which the duty was calculated on that basis and paid by the company. It was purchased by dealers, who were given a permit to receive the stated amount, and their subsequent stock was measured against it when the excise officers entered at regular intervals to weigh it.12 Dealers had to enter into a book all sales of tea of under six pounds in weight, and had to obtain an excise permit for every larger sale when the tea was moved from their premises to their customers. As the duty on the tea was charged at the point of import, the close survey which took place subsequently did not itself result in any direct raising of revenue. Its object was to prevent smuggling, by making it very difficult for tea which had evaded the import duty to get into circulation.13 The survey in theory ensured that the tea dealer’s stock was known to the excise, that any increase was seized and any decrease deducted from his credit. In other words, all tea was accounted for from the moment of import to its ultimate consumption.

11 12 13

First Report (Tea Permits and Surveys), HCPP (1833) (1) xxi 417, 422. For the Board’s instructions for the survey of tea dealers, see ibid, 473–75. Ibid, 507 per William Dehany, solicitor of excise.

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T H E PR AC T I CA L C O N S E QU E N C E S F O R T R A D E RS

Once the intense popular opposition to the excise had been overcome, and the public became accustomed to the duty, the orthodox view was that it was an easy tax. It was collected without taxpayers being aware they were paying it, it could readily be increased and it constituted a reasonably accurate taxation of wealth.14 Nevertheless, the imposition of excise duty on a commodity gave rise to a threefold burden: on the public, on the government and on the traders. First, the burden on the public, even if it was not felt to the same extent as direct taxation, was the high price to be paid by consumers of the articles, both as a result of the duty itself and also the extra expenditure the trader had to incur to meet the demands of the regulations. Secondly, the burden on the government was the considerable cost of maintaining an establishment of sufficient size and training to undertake the meticulous and time-consuming control required15 and all its consequent expenses.16 The scale of the excise operation was huge. In 1835 there were nearly 600,000 individual traders subject to the excise in Britain,17 and for tea, wine, tobacco and beer alone there were several million surveys carried out each year.18 It was a burden on the government often out of all proportion to the revenue raised, and indeed it was observed in 1834 that if tea, wine, tobacco and beer were exempted from excise control, the saving to the Exchequer would be in the region of £100,000 a year.19 Furthermore, all governments had to address the wider economic consequences of excise regulation, notably the inhibition of trade and manufacture, and sometimes the positive encouragement of foreign competition. This was clearly seen in relation to the glass industry, for in Scotland some of the largest manufacturers had been forced out of business by the depressed state of the trade caused directly by excise regulation.20 Similarly the French dominated the international trade in soap, for their manufacture, based in Marseilles, was far advanced and produced a superior soap at less expense and in less time. The British were prevented by the excise laws from using either the French equipment or their processes,21 and this caused clear and extensive injury to British trade.

14 PK O’Brien, ‘The Political Economy of British Taxation, 1660–1815’ (1988) 41 Economic History Review 1, 20. 15 See, eg First Report (Tea Permits and Surveys), HCPP (1833) (1) xxi 417, 457–58; Seventeenth Report (Soap), HCPP (1836) (20) xxvi 1, 38–39. 16 Eg the cost of printing and distributing the thousands of books of entry and permits. 17 Digest, HCPP (1837) (84) xxx 139, 309. 18 Sixth Report (Tobacco and Foreign Spirits), HCPP (1834) (6) xxiv 237, 274. 19 Ibid. In the same period the 6,000 brickmakers in Britain each contributed an average of £70 duty, and the Commissioners of Inquiry questioned whether the expense of excise survey justified such a small return: Eighteenth Report (Bricks), HCPP (1836) (21) xxvi 149, 154. 20 Digest, HCPP (1837) (84) xxx 139, 198. 21 Seventeenth Report (Soap), HCPP (1836) (20) xxvi 1, 101–02.

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The third burden was on the manufacturers of, and dealers in, exciseable commodities. They undoubtedly obtained some benefits from excise regulation. Indeed, many traders felt that, onerous as the regulations were, if they were effective and comprehensive they resulted in a virtual monopoly of the trade for them. Tobacco dealers, for example, believed the regulations constituted a deterrent to entering their trade which, were they to be withdrawn, would be open to competition and their profits would subsequently be reduced.22 The checks of the excise could also constitute a means for traders to check the honesty of their own staff.23 These somewhat tenuous advantages, however, were entirely outweighed by the heavy and direct burdens the regulations placed on traders. These were practical burdens arising directly from the substance of the legal regulation of the excise, and were principally those of inconvenience, interference, the hindrance of innovation and the heavy consequent expense. The inconvenience suffered by traders differed according to the degree of regulation, though all traders found the frequent survey of the excise officers troublesome and inconvenient. Even the papermakers, who were among the lightest of the regulated trades, felt they were ‘exceedingly interfered with’.24 One leading manufacturer who was surveyed between three and five times a week said he found the officer coming ‘constantly’ into his mill25 particularly onerous, and described the excise regulations as ‘so vexatious, that . . . no man would go into the trade if he knew what he would be subject to’.26 Maltsters and soap manufacturers suffered the presence of an excise officer every few hours of every day, depending on the stage of manufacture. The requirement to give notice to the excise officers before beginning the manufacturing process in order to ensure an officer would be present was felt to be inconvenient in all manufactures and was a general complaint. The soap manufacturers, for example, said that having to give between 12 and 24 hours’ notice of charging the copper with materials was a ‘monstrous inconvenience’,27 and that the regulations as a whole were ‘extremely vexatious, troublesome, and expensive to the manufacturer’.28

Sixth Report (Tobacco and Foreign Spirits), HCPP (1834) (6) xxiv 237, 271. Eg in the tea regulations, the checking of the stock by the excise acted as a check on the traders’ staff. See First Report (Tea Permits and Surveys), HCPP (1833) (1) xxi 417, 588 per William Fenn, tea dealer. 24 Fourteenth Report (Paper), HCPP (1835) (16) xxxi 159, 262. 25 Ibid, 280 per William Gaussen, paper manufacturer. 26 Ibid, 278. 27 Seventeenth Report (Soap), HCPP (1836) (20) xxvi 1, 126 per William Taylor, soap manufacturer. See the similar complaint by distillers: Seventh Report (British Spirits Part 1), HCPP (1834) (7) xxv 1, 179–80. 28 Seventeenth Report (Soap), HCPP (1836) (20) xxvi 1, 55 per Thomas Paterson, soap manufacturer. 22 23

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One of the greatest inconveniences of excise regulation was the system of permits applicable to spirits, wine, tobacco and tea.29 In a memorial by the tea dealers of London in 1833, they informed the Treasury of their ‘long and painful experience’ of the system of excise regulation of their trade.30 Whenever dealers sold above six pounds in weight of tea and wished to move it from their premises to their customers, they had to obtain a permit. In practice this caused immense and continuous inconvenience, with dealers invariably describing it as troublesome, vexatious and a great hindrance to business. Generally a permit took about 20 minutes to obtain, but if the permit office was busy or the officer was not available it could take two or three hours. One Manchester dealer with over 2,500 wholesale customers frequently had to procure 150 permits in a week, regularly sending out 60 parcels a day by carrier. His carrier left three times a week, and it often happened that the permits arrived just after the carrier had left.31 Goods were sometimes detained a full week.32 A similar inconvenience was experienced by the papermakers, who were subject to the requirement that paper had to remain on the premises for 24 hours after it had been charged by the surveying officer in order to give time for the supervisor to check it. This was a source of complaint because it gave rise to delays in sending the paper out where wagons or ships left only once or twice a week. In some trades the excise regulations imposed not merely official supervision, but invasive and burdensome interference with the conduct of the trade. Such interference took two forms. The first was the inquisitorial nature of the regulation, whereby excise officers were permitted by statute to enter into the premises of a trader for the purposes of search and inspection to ensure there had been no smuggling or other fraud. In the tea trade, for example, excise officers were empowered to check that all boxes and canisters contained tea and only tea,33 a process which could take a full day. In malt manufacture excise officers were alert to all possible frauds, such as the pressing down of the grain, the artificial filling of the cistern to obscure the true depth, the secret germination of barley and unauthorised sprinkling, and during their visits they inspected the process minutely to this end. Interference could go much further than mere unpleasantness, and did so when it took the form of an active and very direct control over the manufacturing process itself. Indeed, in soap and malt manufacture the management of the process was effectively taken from the trader and given 29 For the complaints of distillers in this respect, see Seventh Report (British Spirits Part 1), HCPP (1834) (7) xxv 1, 179–80. 30 First Report (Tea Permits and Surveys), HCPP (1833) (1) xxi 417, 438. 31 Ibid, 585 per William Labrey, wholesale tea dealer. 32 Ibid, 582 per Thomas Miller, wholesale tea dealer. 33 Ibid, board’s instruction no v, 474.

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to the excise officer. This intense regulation by central government tied manufacturers to a precise method of production which they could not alter so as to work more economically, more quickly or more productively. For example, the regulations were insufficiently flexible to allow the maltsters to adapt processes to the changing seasons and the qualities of different barleys. One of the essential steps in the manufacture of malt was the process of steeping and watering, both in timing and extent, in line with the climate and the type of barley used. The regulations laid down strict restrictions on these elements of the process, framed according to the manufacture of malt in winter, and forbade sprinkling the barley with water before eight days had expired. Since the process depended materially on the effect of heat, adherence to the regulations in summer could cause considerable loss.34 This was a major source of complaint for it prevented maltsters from exercising their skill and judgement so as to make the best malt and, indeed, risked the ruin of the barley. In this sense the regulations were ‘most inconvenient and oppressive’.35 Maltsters were, they said, ‘in chains’.36 If the interference of the excise laws hindered the efficient conduct of manufacture and dealing, they clearly inhibited any kind of innovation or experimentation. Apart from the frequently obsolete nature of the regulations, traders had to use the equipment prescribed by the law and abide by the methods of production laid down, and were thus prevented from using their own skills and resources to full effect for the advancement of their enterprise and their own personal profit. This was particularly striking in soap manufacture. Being a chemical process, whereby fat was mixed with alkali, it had considerable room for development, with new fats, additives and processes potentially making a soap far superior to the current rather coarse product. The close regulation of soap manufacture37 rendered any such innovation or experimentation impossible. As traders had to pay duty according to the weight of the raw materials they used and could not return any soap made for re-manufacture, if an experiment were unsuccessful, they still had to pay the duty of £14 on a ton of soap. Any large-scale experimentation was prohibitive. As a result, soapmakers felt fettered and harassed, and were unable to compete with the largely unregulated French traders, whose product was superior in every respect. One of the greatest burdens resulting from excise regulation was the financial strain it imposed on the traders, despite the theoretical passing on of the fiscal burden to the ultimate consumer. One London distiller said in 1834 that his expenses were so raised by being subject to the excise regulations that it would be worth his while to pay £3,000 pa to be 34 35 36 37

Fifteenth Report (Malt), HCPP (1835) (17) xxxi 345, 505 per John Young, maltster. Ibid, 483 per Joseph Taylor, maltster. Ibid, 500 per John Manton, maltster. See the regulations reprinted in Seventeenth Report (Soap), HCPP (1836) (20) xxvi 1, 4–8.

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exempt.38 Traders had to bear the direct expenses of complying with the law, in the requirement for a licence, the correct design and construction of equipment,39 and the increased manpower to ensure the regulations were observed. They also often had to pay the duty before the commodity came onto the market, as with brick manufacture, and so in effect had to advance the sum to the government.40 The prescribed inefficient, inflexible and obsolete methods of production could be costly in themselves. Soap manufacturers, for example, bitterly objected to the considerable financial loss caused by the imposition of duty by the weighing of the raw materials and the estimate of the soap they would produce.41 Although it was impossible to predict, as the quantity of soap depended on variables such as the quality of the raw materials, if a manufacturer fell short he would nevertheless be charged on the amount the law assumed he produced.42 That regulation had been appropriate in the earliest days of soapmaking, when the materials were unvarying and the process was simple, but it was entirely inappropriate for the more modern processes. New materials, such as palm oil, could contain a great deal of water, which could not be used for soapmaking, so to charge a soapmaker on the weight of the oil was unjust and commercially damaging. Maltsters also suffered real financial losses from the inflexibility of their detailed regulations, notably the statutory period for keeping the malt couch at a certain depth, which could cause the spoiling of the malt through overheating in summer and freezing in winter. Even dealers in commodities were put to expense by the regulations, notably the loss of custom through the delays inherent in the permit system. Another significant potential source of expense was the imposition of a penalty for any breach of the excise laws. In all trades and manufactures excise penalties were notoriously unequal and disproportionate, applying to innumerable acts or omissions, many of them innocent, and imposed to secure the public revenue by severity of punishment rather than seeking to adapt the regulations to the requirements of each trade. Penalties were often treble the value of the best goods of the like kind,43 or a set figure of some £200. When tea dealers sent out tea to their customers without permits they risked a penalty of £200,44 as well as the seizure of the tea. Similarly, under the regulations for paper manufacture, each ream of paper Seventh Report (British Spirits Part 1), HCPP (1834) (7) xxv 1, 275 per Octavius Smith. Soapmakers, for example, had to fit lockable wooden covers to all the vessels in which they made soap: Seventeenth Report (Soap), HCPP (1836) (20) xxvi 1, 4. 40 Eighteenth Report (Bricks), HCPP (1836) (21) xxvi 149, 161. 41 13 cwt of materials must produce a ton of soap. 42 Seventeenth Report (Soap), HCPP (1836) (20) xxvi 1, 4–5,127. The Commissioners of Inquiry said this was objectionable: ibid, 13. 43 Excise Consolidation Act 1827 (7 & 8 Geo IV, c 53), s 69. 44 First Report (Tea Permits and Surveys), HCPP (1833) (1) xxi 417, 509 per William Dehany, solicitor of excise. 38 39

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prepared for weighing had to bear a label delivered by the excise and every manufacturer had to account for every label. If he failed to do so, he risked a penalty of £200, even though, as one label could never cover more than one ream of paper, any fraud in this respect could rarely exceed 25s. A penalty of £800 was imposed on one manufacturer who lost four labels through a workman’s carelessness.45 And any paper manufacturer who allowed his paper to leave the mill even a few minutes before a full 24 hours had elapsed since weighing risked a penalty of £200.

T H E L E G A L P E RS P E C T I V E

The excise laws thus placed an exceptionally heavy burden on the traders subject to them. These burdens were the inevitable consequence of any regime of law regulating manufacture and dealing for fiscal purposes. The special nature of the excise laws, however, had further consequences which were of particular concern in the legal context. They were consequences which placed the traders in a significantly more vulnerable position than other taxpayers, and they were three in number: the inaccessibility of the law; the formal provision for adjudication; and the role of the excise board. Of all tax laws, those pertaining to the excise were among the most inaccessible. Since many related to processes of manufacture, their content was highly technical. Furthermore, many of the provisions were included in order to counteract frauds, and as new frauds were revealed, so the regulations were revised to address them. These complex and immensely wide powers of regulation and control were given to the excise board in a very large number of Acts of Parliament, often years apart, all with innumerable regulations thereunder. In 1816 Henry Brougham remarked that ‘a mere abstract of the revenue laws furnished matter for a large volume, [and] that even a mere index filled a volume of no small bulk’.46 In 1836 the Derby Mercury, reporting on the publication of the report of the Commissioners of Inquiry on the excise establishment, observed in astonishment that there existed over 400 Acts relating to the excise. The law, which it said should be ‘brief, clear, and level to the apprehension of everyone, is dispersed over a multitude of statutes, and is in the last degree confused, contradictory, and unintelligible’.47 This sheer number of Acts made them largely inaccessible to traders, who regularly complained that they had great difficulty in finding out the regulations under which they were to operate.48 Even if traders could access the legislation, the law was 45 Fourteenth Report (Paper), HCPP (1835) (16) xxxi 159, 312 per Alexander Pirie, paper manufacturer from Aberdeen. It seems the penalty was later significantly reduced by the justices. 46 Parliamentary Debates vol 33, ser 1, col 856, 2 April 1816 (HC). 47 The Derby Mercury, 7 September 1836. 48 Fourteenth Report (Paper), HCPP (1835) (16) xxxi 159, 312.

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often so complex that it was impossible to understand. Not only was the precise relationship between the various Acts beyond the ability of most laymen to grasp, the complexity of the subject matter was exacerbated by the form of the legislation. The Acts were long49 and often old, and provisions were expressed in the fullest detail in language which was archaic and obscure and the arrangement sometimes illogical. In addition to the enacted laws, there existed a large body of material incorporating their interpretation by the central board, of copious instructions to officers as to how they were to deal with certain cases, of regulations and countless circulars and orders embodying the daily implementation of the excise laws. This formed a separate and supplementary body of law. This material was central to the implementation of the excise, and was drafted by the board. It was, however, utterly inaccessible to anyone outside the board and was communicated to the traders entirely on the limited terms of the board’s own choosing. It was therefore even more inaccessible than the excise legislation. Consequently traders had ‘feelings of disgust and dissatisfaction’ at being subject to laws in the conduct of their businesses which were impossible to conform to because of their ‘multiplicity and complexity’.50 Through no fault of their own they risked breaching the law and incurring the heaviest penalties. The complexity of the law could only be addressed by its formal simplification and consolidation, and the traders called for this throughout the nineteenth century. Though considerable progress had been made in this respect in the customs, the excise board maintained that it was technically difficult, and progress was slow. The consolidations of 180351 and 182752 effected some improvements, but they were imperfect and limited exercises. This meant that the excise laws were in many instances obsolete, ineffective and ‘unnecessarily vexatious and oppressive’,53 and a programme of thorough and expert revision, simplification and consolidation was urgently needed. The inaccessibility of the excise laws was compounded by the refusal of the excise board to help traders in their understanding of the regulations. The support and assistance of the board would have been invaluable. It was the pivot of the excise system. It administered the laws through its large and highly trained staff, was immensely influential in any question of reform, and was expert in all aspects of the excise laws. In its administration of the law it was bound by the parent Act relating to each trade, but it was responsible for the drafting of the detailed rules regulating its 49 The statute consolidating the provisions relating to the excise on malt in 1827 contained 83 sections (7 & 8 Geo IV, c 52), and was followed by an amending Act of 41 sections in 1830 (11 Geo IV, c 17). 50 Digest, HCPP (1837) (84) xxx 139, 156. 51 43 Geo III, c 69. 52 7 & 8 Geo IV, c 53. 53 Digest, HCPP (1837) (84) xxx 139, 156.

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practical application. However, the official inquiries of the 1830s revealed an almost total lack of communication between the traders and the board. There existed a pervasive and ingrained culture of inaccessibility, which was particularly objectionable in the context of the complex and punitive excise laws, and a determination to retain control. The board consistently refused to reveal the guidance it issued to its own officers on the grounds that it might bind the board and be pleaded against it in any litigation,54 and even refused to supply traders with copies of the regulations applicable to them.55 At the end of the eighteenth century a complete analysis of all the excise laws was printed, but the board would only allow its own officers to obtain a copy. Despite a strong request from the Committee of Finance in 1787 to make the volume more widely available, and a stern rebuke by the Commissioners of Inquiry in 1835,56 the practice of the board did not change and continued into the Victorian period.57 Furthermore, the board regularly ignored routine technical enquiries by traders and gave no formal interviews. A papermaker expressed a widely held view when he said: ‘We have never heard from them; we never get a direct answer; they take no notice.’58 The board also refused to receive deputations of manufacturers, the chairman observing that ‘it generally leads to discussion and a great waste of time’,59 thus ignoring the practical experience which could have informed the creation, revision and enforcement of the excise laws. This culture of non-communication was ‘most severely felt’60 and was a constant and universal complaint by the traders. It was highly objectionable because of the complexity of the laws the board administered and the high level of penalties. In this context communication with the board was essential, and yet denied. As the Commissioners of Inquiry observed, ‘if taxes are levied upon [a trader’s] goods for the public advantage, he ought to be allowed the closest and most unreserved communication with the heads of the departments under whose authority they are raised’.61 It was all the more objectionable because it was in striking contrast with the practice in the other revenue boards of customs, stamps and taxes.62

54 Twentieth Report (Establishment), HCPP (1836) (22) xxvi 179, 525 per John Freeling, secretary to the board of excise. 55 Ibid, 567 per William Hetherington, surveying-general-examiner. 56 Fourteenth Report (Paper), HCPP (1835) (16) xxxi 159, 181–82. 57 Twentieth Report (Establishment), HCPP (1836) (22) xxvi 179, 221. 58 Fourteenth Report (Paper), HCPP (1835) (16) xxxi 159, 285 per John Gater, paper manufacturer. See too Seventeenth Report (Soap), HCPP (1836) (20) xxvi 1, 94 per William Hawes. 59 Twentieth Report (Establishment), HCPP (1836) (22) xxvi 179, 513 per Sir Francis Doyle, chairman of the board of excise. 60 Fourteenth Report (Paper), HCPP (1835) (16) xxxi 159, 182. 61 Ibid. 62 Ibid, 182–83.

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The second legal consequence arising from the special nature of the excise laws concerned the nature of the formal provision for adjudication. Where taxpayers had specific complaints or grievances and wanted to challenge a decision of the executive, English law almost invariably made provision for some kind of appeal to a formal adjudicating body. For the land tax and the assessed taxes an appeal lay to bodies of independent local lay commissioners, and from their earliest days the assessed taxes enjoyed a further right of appeal on points of law to the regular courts. When income tax was reintroduced in 1842, appeals were similarly permitted to independent local lay commissioners, though for policy reasons appeals to the regular courts were not allowed until some thirty years later.63 Whereas appeals in those areas of taxation rarely had criminal connotations, and were appeals against assessments to tax which the taxpayer perceived as unwarranted or appeals against the denial of allowances, excise litigation was of a very different character. Breach of the excise laws constituted a criminal offence resulting in forfeiture, seizure and the imposition of penalties. Since it was widely accepted as impossible to carry on a trade without a trader or his servants regularly and usually unintentionally infringing the law, formal adjudication in excise law was dominated by the exercise of criminal jurisdiction and huge numbers of prosecutions. Prosecutions for important breaches went to the Court of Exchequer to be heard by a judge and jury, while the innumerable minor breaches were heard summarily by inferior courts. In London they were heard by a specialist statutory court, the Excise Court of Summary Jurisdiction,64 with appeal lying to the Court of Excise Commissioners of Appeal,65 while in the country they were heard by justices of the peace in petty session, with appeal lying to quarter sessions. The board of excise decided whether a prosecution should be instigated at all and, if so, in which court it was to take place. The prosecution was by way of information, and almost invariably was made by an excise officer, who was the principal witness and who took a share of the penalty. The formal adjudication process which the law provided for the traders, however, was unsatisfactory in a number of respects. Litigants in the Court of Exchequer faced the usual problems inherent in all early nineteenth-century litigation in the higher courts, but to a greater degree. The problems encountered there by traders were so severe that Exchequer prosecutions were perceived as unfair, punitive and distinct Customs and Inland Revenue Act 1874 (37 Vict, c 16), ss 8–10. The court was first established in 1660: 12 Car. II, c 24, s 45. See 7 & 8 Geo IV, c 53, s 65. 7 & 8 Geo IV, c 53, ss 81, 82. This court consisted of five barristers. It had fallen into disuse by the early nineteenth century: the Court of Excise Commissioners of Appeal was abolished in 1841 and the power of appeal given to a Baron of the Exchequer: 4 & 5 Vict, c 20, ss 25, 26. 63 64 65

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from normal judicial proceedings.66 A trader taken to the court by the board was, for example, not allowed to see the detailed charges against him and could not know the witnesses who would be called. It was also an extremely expensive exercise. Not only did the trader rarely win his case, even if he did, no costs were awarded there,67 and the expenses of legal representation and advice, the summoning of witnesses and appearance in London for the trial were substantial. The London Summary Court, on the other hand, was very popular with traders. It had jurisdiction over 148 parishes and 25,000 traders,68 and heard some 1000 cases a year.69 It was staffed by three commissioners from the excise board and had a threefold jurisdiction. It heard proceedings for the recovery of penalties for breaches of the excise laws, as in selling without a licence or moving goods without a permit, and this formed the most important part of its work. It also heard proceedings for the recovery of double duty as a means of securing the payment of a single duty which a trader had not remitted in time, though this was a penalty like any other. Where a trader had not paid the duty, the board was informed and he was summoned to appear before the court. If he paid, then he would merely be fined; if he refused, the case would take its full course and he would have to pay double duty.70 Finally, the court possessed a wide jurisdiction to hear taxpayers’ complaints. Complaints were usually for overcharging or overpayment, for example asking for the return of duty where a taxable commodity such as malt or paper had been destroyed, or where there had been overcharging through the error of an officer.71 The involvement of the board through the Summary Court held some advantages for the traders. It ensured skilled and committed administration, the support of an expert and well-resourced bureaucracy, and freedom from any danger of local bias. These were advantages often unknown to the direct taxes, which depended on local lay administration. The three excise commissioners who presided as judges in the court sat two days a week for some eight months of the year. All the commissioners, except for the chairman and his deputy, took it in turns to sit, thereby developing a profound knowledge and expertise in excise prosecutions. It was accepted that the commissioners of excise had a ‘superior competency’ to administer the admittedly complex excise law and had ‘a more precise 66 Twentieth Report (Establishment), HCPP (1836) (22) xxvi 179, 567–68 per William Hetherington, surveying-general-examiner. 67 Ibid, 539–42 per William Dehany, solicitor of excise. 68 Third Report (Summary Jurisdiction), HCPP (1834) (3) xxiv 87, 138. 69 Ibid, 94–95. 70 Ibid, 139. 71 In 1831 the Court of Summary Jurisdiction heard 852 informations and 180 complaints, sitting for 97 days in all: ibid, 95.

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knowledge’ of the cases than magistrates.72 It had further advantages. As an expert and dedicated court, it provided traders with the speed, uniformity of decision and certainty they sought in their legal affairs. It was also cheap, as there were no court fees, and, while legal representation was permitted, it was unusual. It sat in one fixed place, namely the excise office in London, and, though an open court, publicity was regarded as less than in the magistrates’ court. It also possessed wide powers of mitigation in relation to penalties. The traders particularly appreciated the independence of the court from local commercial interests. The justices of the peace who heard cases outside London were often tradesmen or merchants and inevitably connected with the litigants appearing before them, so, whether favouring or prejudiced against a litigant, their impartiality was compromised. The judges of the Summary Court, on the other hand, had ‘scarcely any connections in the city, and no prepossessions nor prejudices for or against the persons who are suitors in the Court’.73 The Court was undoubtedly very popular with traders, 74 being perceived as accessible, effective, expert, convenient and fair. Despite these clear advantages, there were objections to the Summary Court. The denial of its superior process and expertise was resented by traders outside London, but a widespread concern related to the expertise of the commissioners who acted as judges. While they undoubtedly had a wide expertise in the excise laws, they had no formal legal training in specialist skills of adjudication. While the London court overcame this by having access to the board’s own exceptionally well-staffed legal establishment,75 it was a very real problem in relation to lower-level bureaucratic tax courts, notably the Courts of Sub-Commissioners in Ireland, which were exclusively responsible for the administration of the excise in that country. In those courts laymen were deciding on the construction of often intricate statutes, and were conducting prosecutions with no training as to the handling of evidence or the observance of fair procedures.76 More significantly, however, was the status of all adjudicating commissioners in these various excise courts, because they were all officials of the very government department charged with the administration of the tax, namely the board of excise. As unambiguously employees of the central government whose interest was to raise the duty, they lacked entirely any independence from the subject matter of the Ibid, 97, 140. Ibid, 139. As evidenced by the low number of appeals: by 1833 the Excise Court of the Commissioners of Appeal had heard only nine appeals in the previous 20 years. Of these, three were not prosecuted to a hearing, and in only one was the judgment of the commissioners reversed: ibid, 96. 75 The excise board enjoyed the services of four solicitors and 19 legal clerks. 76 Ninth Report of the Commissioners of Inquiry into the Collection and Management of the Revenue arising in Ireland and Scotland, HCPP (1824) (340) xi 305, 9 per Leslie Foster. 72 73 74

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disputes before them. The fundamental principle of natural justice that a judge should not be interested, especially in a pecuniary way, in the outcome of the causes coming before him was overtly breached. This problem was a matter of considerable concern, and was not peculiar to the excise. A similar encroachment of the executive into the adjudicating role of the tax tribunals was seen in the administration of income tax. In that tax the surveyor was coming to dominate the appeal hearings of the General Commissioners, while a new and entirely bureaucratic tribunal, the Special Commissioners, would become increasingly important in the later years of the nineteenth century in relation to appeals against assessments of commercial income.77 The lack of independence in adjudication was, however, of greater concern in relation to the excise because it constituted a significant interference of bureaucrats in the administration of criminal justice. In the direct taxes, adjudication by bureaucrats was tolerated because it was at least arguable that it was merely another step in the process of assessment, and as such was just another of the central board’s administrative functions and not a discrete judicial act.78 In such instances, although independence was still absent, it was perceived as less serious and broadly in line with the constitutional orthodoxy of the separation of powers. In a criminal context, however, the same justification was not available. The Irish Courts of Sub-Commissioners, described as ‘courts formed by a meeting of Revenue officers, who act alternately as prosecutors, witnesses and judges’,79 were condemned in 1824 as ‘in theory and principle, indefensible’80 and ‘subversive of all principles of justice’.81 Nearly ten years later the Commissioners of Inquiry unequivocally expressed similar reservations in relation to the English court.82 It was clear that the board’s principal function was an administrative one, and that its criminal jurisdiction was anomalous and inconsistent with it. It was ‘entirely at variance with every principle of our usual judicial policy’83 and so objectionable on principle. Despite repeated recommendations for its abolition, it was not until 1890 that the power of

77 See J Avery Jones, ‘The Special Commissioners after 1842: from Administrative to Judicial Tribunal’ [2005] British Tax Review 80; C Stebbings, ‘Access to Justice before the Special Commissioners of Income Tax in the Nineteenth Century’ [2005] British Tax Review 114. 78 See C Stebbings, Legal Foundations of Statutory Tribunals in Nineteenth Century England (Cambridge, Cambridge University Press, 2007) 308–09; Report of the Royal Commission on the Income Tax, HCPP (1920) (615) xviii 97, para 340; IRC v Sneath (1932) 17 TC 149, per Greer LJ, 164, per Romer LJ, 168. 79 Ninth Report of the Commissioners of Inquiry into the Collection and Management of the Revenue arising in Ireland and Scotland, HCPP (1824) (340) xi 305, 6. 80 Ibid, 8 per Leslie Foster. 81 Ibid, 7–8. 82 Third Report (Summary Jurisdiction), HCPP (1834) (3) xxiv 87, 96–100. 83 Ibid, 96.

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the excise commissioners in the Summary Court to hear and determine informations for penalties was abolished.84 The third and final legal consequence resulting from the special nature of the excise laws placed the traders in a particularly vulnerable position. This was the exceptionally prominent role of the excise board and its officers. The board was involved in formal adjudication through its staffing of the Summary Court in London, but it also carried out, as a board, extensive extrajudicial adjudication. The shortcomings of the excise laws, with their unavoidable infraction and disproportionately high penalties, meant that their strict enforcement would have been impracticable and unacceptable, and this resulted in the growth of a common practice of informal applications for relief to the department of central government. The hazard of unknown evidence, heavy expenses and high penalties in the formal courts led traders to seek a compromise with the board, even if they knew they were innocent of any offence. Appearances before the courts were very often avoided by such arrangements. The terms of a successful compromise would be the payment of a fine and costs, and it had to satisfy both the informer and the board. The board did not fix the amount of the compromise, for that was arrived at between the board and the trader until an appropriate sum was agreed. One paper manufacturer said that negotiation was often by vague intimation, ‘by which we surmise that £50 is not sufficient to stay proceedings in the Court of Exchequer, and we must offer £60 or £100’.85 While the traders welcomed the practice of compromise for minor cases of innocent or accidental breach, and indeed regarded it as a necessary alleviation of the unreasonable severity of the excise law, it became so widespread a practice that it was regularly resorted to in cases of deliberately fraudulent breaches, often repeatedly by the same individual. It was, for example, particularly common in relation to auction duties. As such it undermined the deterrent effect of the excise penalties, leading to a disregard of the law and harming legitimate traders. The practice of compromising had almost become a sanction to fraud by the board.86 There also developed an almost constant practice of petitioning the board, and indeed the Treasury,87 for relief. The board was daily inundated with applications of all kinds, though applications for mitigation of penalties and for a stay of proceedings formed the majority. Though both the justices and the Summary Court had statutory authority to mitigate penalties so as to suit, to some extent, the level of the penalty 84 All informations were thereafter to be heard and determined by a court of summary jurisdiction, as defined by the Interpretation Act 1889 (52 & 53 Vict, c 63), s 13(11). 85 Fourteenth Report (Paper) HCPP (1835) (16) xxxi 159, 279 per William Gaussen, paper manufacturer. 86 See Seventh Report (British Spirits Part 2), HCPP (1835) (8) xxx 33, 74–75. 87 See Third Report (Summary Jurisdiction), HCPP (1834) (3) xxiv 87, 145; Twentieth Report (Establishment), HCPP (1836) (22) xxvi 179, 202, 522, 535.

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to the degree of fraudulent intention involved in the breach, the board had an unlimited power to do so. The justices frequently recommended an appeal to the board for mitigation beyond their own limited authority.88 In such cases the justices would give their reasons, as would the commissioners if further mitigation were necessary in cases before the Summary Court. Since they acted in a dual capacity as judges and administrators, they could, and for ease did, as a board, grant it. The distinction between the board sitting as a board or as a court was obscure.89 This practice of informal petitioning was just as subject to the culture of non-communication as were the routine enquiries as to the nature of the regulations. As a result, although it was necessary, traders were reluctant to petition, even if they had been injured in some way, for they felt they would not be listened to, let alone receive any redress.90 The trader would often be unaware whether his petition had been considered, or even whether it had reached the board at all. The board refused to provide a full written response with reasons, relying instead on the oral communication of the mere decision through an officer.91 This was to save time and to ensure that no written statement could be used against the board in future communication or litigation,92 but it often left the trader uncertain as to the correctness or scope of the decision. The Commissioners of Inquiry were severely critical of the board in this respect, saying it was ‘in every respect highly objectionable’.93 At the very least every decision should be communicated directly to the trader, in writing, with reasons given for the decision.94 The traders enjoyed no greater clarity in the practical administration of the law in the field. Individual excise officers exercised immense control over the traders, a control which was both feared and resented. As one soap manufacturer observed, ‘by acting up to the letter of the law, [the officer] certainly can stop or ruin the house’.95 A tea dealer complained that ‘the Excise officers are complete lords over any district that they go over’,96 that they frightened his customers and exercised a tyranny over them in relation to permits. Maltsters in particular depended to a considerable extent on the honesty and efficiency of the excise officer. For 88 Seventeenth Report (Soap), HCPP (1836) (20) xxvi 1, 140–41 per John Lang, chairman of the quarter sessions of justices, Lanarkshire. 89 Third Report (Summary Jurisdiction), HCPP (1834) (3) xxiv 87, 151. 90 Fifteenth Report (Malt), HCPP (1835) (17) xxxi 345, 484 per Joseph Taylor, maltster. 91 Seventh Report (British Spirits Part 1), HCPP (1834) (7) xxv 1, 179. 92 Twentieth Report (Establishment), HCPP (1836) (22) xxvi 179, 528 per Charles Browne, under secretary in the secretary’s office. 93 Fourteenth Report (Paper), HCPP (1835) (16) xxxi 159, 182. 94 Ibid, 183. 95 Seventeenth Report (Soap), HCPP (1836) (20) xxvi 1, 139 per Charles Tennant, paper and soap manufacturer. 96 First Report (Tea Permits and Surveys), HCPP (1833) (1) xxi 417, 585 per William Labrey, wholesale tea dealer.

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example, the barley was laid out on a malting floor by shovel, and it was inevitably not entirely level. To get an accurate reading of the depth of the barley, which was prescribed to the fraction of an inch, an officer had to take many gauges, but an inexperienced or careless officer could easily measure a raised part and yet maintain that his gauge was correct.97 Consequently maltsters, like paper manufacturers, felt they were ‘at the mercy’ of the excise,98 and one observed that it was in the power of the officers to charge excessive duty should traders complain.99 When a breach of the laws, real or otherwise, was detected by an officer, the process was unclear. A trader could immediately ask for relief from the board to stay the prosecution; it could be allowed to run its course while the trader negotiated with the board; it could be cut short by compromise; it could progress to conviction and then appeal; or it could progress to conviction and a subsequent application for mitigation. While the informal approaches to the board for discretionary relief and the reliance of the traders on the integrity of individual officers were necessary because of the state of the excise laws, and indeed were a laudable attempt on the part of the board to ensure the law was fairly administered, they forced the traders into a relationship with the board and its officers which was unclear and potentially abusive. The board largely made the law, interpreted it and administered it, yet restricted access to it. Its powerful position was undoubtedly a dangerous thing. The relationship between any taxpayer and the taxing authority was inherently unequal, and it was the function of the law and its institutions to ensure that the relationship was not abused. Such was the nature of the excise laws and the demands of their administration that it resulted in an extensive formal and informal control by the excise board, which in turn made the relationship the most unequal of all the taxes, to such an extent that the proper functions of the law were inhibited. The protection which traders, as indeed all taxpayers and all subjects of the crown, were entitled to expect from it was undermined, and they were placed in an invidious position in relation to the law as such, and to the formal legal institutions ensuring its just enforcement. There was none of that clarity and uniformity of process which should have characterised all legal proceedings, especially criminal ones where a person’s liberty as well as his property were in question. Fairness and just administration came to depend on the integrity of the individual excise officers and the view of the board, rather than on any inherent legal structures or institutions. The expressions of control by the excise board constituted an interference with the criminal process on the basis of discretion rather than any rigorous system of Fifteenth Report (Malt), HCPP (1835) (17) xxxi 345, 505 per John Young, maltster. Ibid; Fourteenth Report (Paper), HCPP (1835) (16) xxxi 159, 262, evidence of deputation of papermakers. 99 Fifteenth Report (Malt), HCPP (1835) (17) xxxi 345, 493 per James Fison, maltster. 97 98

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evidence or proof, and amounted to adjudication entirely lacking in any independence either from the parties or the subject matter of the dispute.

CONCLUSION

The distinctive nature of the excise laws and their administration thus resulted in a relationship between the taxpayer and the taxing authority which was exceptionally intimate. This was to a large extent inevitable, the necessary consequence of any regime of law purporting to regulate manufacture and dealing for fiscal purposes. Because of their complex nature, excise laws had to be administered by full-time trained officials with practical and technical expertise in all the trades and manufactures subject to the excise, as well as formal knowledge of the excise laws. It was clear that the local administration which characterised the land tax, assessed taxes and income tax could have no place here. The time-consuming surveys could not be carried out by part-time amateur officials. The administration of the excise laws exclusively by officers of central government had long been recognised as necessary, and their inherent dominance had always been resented. It led Blackstone to condemn the summary jurisdiction of the excise, arguing excessive power over the property of the people by officers of the crown.100 The intimacy of the relationship between the early Victorian trader and the excise laws, however, was oppressive. He was subject to a regime of regulatory law which was necessarily controlling, inquisitorial and burdensome, both practically and financially. It was, furthermore, inflexible and inaccessible. Its breach could hardly be avoided, and that brought him within a criminal process in which the prosecution was also the principal witness and the judge, and where penalties were universally recognised as excessive. The procedures of its administration were informal and unclear, the law’s application was inconsistent, and traders were at the mercy of bullying and extortion by any corrupt officials. Furthermore, the excise board was uncommunicative and often unsupportive to the traders. The law afforded the trader little protection. He could look to the overarching legal requirement of parliamentary consent only to prevent arbitrary taxation at a fundamental level, since Parliament’s concern with the excise laws tended to be limited to either their economic consequences or their political impact. Besides, the protection of such formal consent was already weakening in the face of wider political and constitutional pressures on the position of the House of Lords, the growing dominance of the House of Commons and the increasing power of the executive. The protection of local administration, 100

Blackstone, above n 3, vol iv, 281; see also vol i, 318.

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which, though belittled by the tax authorities, was in fact a potent safeguard to the payers of the direct taxes, was denied him. With both formal and informal safeguards undermined, the trader was in a significantly weaker position in relation to the laws to which he was subject, and to the organs of the legal system implementing them, than a payer of the direct taxes. Unsatisfactory as the relationship between the traders, the excise and the law was, it was sustained and was not in practice as oppressive as its theoretical nature suggested. The relationship took its resilience from three sources. First, economic policy limited the days of the excise as the principal source of public revenue. The prevailing ideology in early nineteenth-century England was one of laissez-faire and free trade. This ran contrary to the ethos of the excise, and it ultimately led to the considerable reduction of indirect taxation101 and the replacement of excise duties by the income tax. Secondly, the traders constituted a social, economic and ultimately political force which could not be ignored. They enjoyed considerable strength as a distinct and powerful merchant class, were united within individual trades and manufactures, and were led by entrepreneurs who were confident, articulate, expert and astute. Finally, and above all, the immense power of the board in practice was not consistently or widely exercised. The board and traders, in the vast majority of cases, enjoyed a relationship of mutual confidence and cooperation. Most excise officers were men of integrity, highly trained, responsible and respected for their knowledge, and implemented the law sensibly and mercifully. For example, the materials for soap making were often not weighed as they went into the copper,102 and the entry of small sales of tea in the retailers’ books was almost universally ignored.103 The widely acknowledged severity of excise penalties was such that many minor breaches (for example breaches of the tea permit regulations) were not prosecuted at all, at least in the higher courts,104 and penalties were often not enforced when there was no indication of fraud. In the paper trade it was said that penalties were ‘almost a dead letter’.105 It was generally recognised that the excise laws were unsound, and that the various informal practices and the dependence on bureaucratic adjudication and discretion which had arisen as a result were objectionable in theory. It was, however, the only way the laws could be made to function, 101 Duties on salt, candles, printed cottons and silks, glass, bricks, soap and paper would be abolished: Smith, above n 1, 85–87, 108–10. 102 Seventeenth Report (Soap), HCPP (1836) (20) xxvi 1, 94 per William Hawes; ibid, 119 per Frederick Fincham. 103 First Report (Tea Permits and Surveys), HCPP (1833) (1) xxi 417, 577–79 per Samuel Davis, tea dealer in Exeter. 104 Ibid, 508 per William Dehany, solicitor of excise; ibid, 539 per James Cousins, tea dealer. 105 Fourteenth Report (Paper), HCPP (1835) (16) xxxi 159, 266, evidence of deputation of papermakers.

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and they did so reasonably effectively. Considering the scale of the excise operation, complaints were relatively few and concentrated on some specific points of practice relating to certain trades, and the revenue was sustained. The administration of the excise laws, however flawed in principle, reflected a pragmatic balance between the interests of the traders and the demands of central government. In relation to the Summary Court, for example, the traders were provided with expert, cheap and swift adjudication, free from local bias, while the excise board acquired the means of ensuring that prosecutions were conducted by experts who understood the field of operation and could interpret the law as the board thought correct,106 so as to ensure uniformity of interpretation and, through that, control over the taxing process. The excise board had the clear objective of ensuring the efficient and uniform administration of the excise duties, which they sought to achieve in a realistic, workable way, in the face of an unsatisfactory body of law and a challenging practical context. The system which had evolved generally gave satisfaction and the law was well administered. In that context, though not untroubled by underlying theoretical objections, in typically Victorian fashion, principle gave way to pragmatism.

106 See Third Report (Summary Jurisdiction), HCPP (1834) (3) xxiv 87, 143 per Hart Davies, commissioner of excise. The board had little confidence in lay adjudication of any kind: see ibid, 148, 152 per William Percy, commissioner of excise and Philip Mayow, assistant solicitor of excise.

8 Jurisdiction to Tax Companies: the Influences of the Jurisdiction of the Courts and of European Thinking J URI S DI CTI ON TO TAX COMPANI ES

JOHN F AVERY JONES J OHN F AVERY J ONES

I N T RO DU C T I O N

Where is a company resident for tax purposes? The common law rule is where it is managed and controlled.1 The reason is that this was the rule for determining which county court had jurisdiction over railway companies in the nineteenth century. The connection may at first sight seem surprising, but the issue is similar, that of locating a company at a place within a national legal system for county court jurisdiction, and locating it in a national tax system for tax residence. The article traces the derivation of the definition of corporate residence to (what is suggested to be) a misreading of mid-nineteenth-century cases on the jurisdiction of county courts, and its development thereafter. It is also interesting that the other side of the coin, the permanent establishment threshold for taxation of the UK activities of a non-resident company, originally to be found in tax treaties derived from mainland Europe and now enshrined in UK domestic law, is very similar to the common law rule enabling the courts to claim jurisdiction over a foreign company. Again, the connection is not surprising, since both address the issue of what is the threshold presence in order to recognise the existence of the company in the UK. Both of the concepts of residence and permanent establishment have been heavily influenced by mainland European thinking. As we shall see, in the UK we thought that we were adopting the mainland European principle for company residence, but the legal situation about companies trading wholly abroad was different and would not have arisen in civil law countries. However, we fully adopted the European permanent establishment concept for tax, even though we had independently invented an 1

In addition now to the company being incorporated in the UK: FA 1988, s 66.

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almost identical concept for determining whether courts had jurisdiction over non-UK incorporated companies. The history develops from taxpayers arguing that the residence of the company was foreign, so that the foreign profits would not be taxed in the UK; through their arguing that its trade was foreign, so that the foreign trading profits would be taxed on the remittance basis; to a non-resident subsidiary carrying on the trade abroad, so that the dividends from the foreign subsidiary would not be taxed until paid and then would originally be taxed on the remittance basis. This in turn resulted in a recommendation, which was never adopted, by the 1920 Royal Commission to treat all subsidiaries of UK resident companies as UK resident. All these depended on the same test of whether something was domestic or foreign: where was the real business carried on?

T H E CO U N T Y CO U RT AUT H O R I T I E S

Originally superior courts had jurisdiction only when the cause of action did not arise within the jurisdiction of the county court where the defendant ‘dwells or carries on his business’.2 The courts seem to have read these as alternatives so far as individuals are concerned.3 However, when they were first presented with companies they were presumably troubled by the concept of a company ‘dwelling’, so decided that the two alternatives meant the same for companies. It would be more accurate to say that the leading case, Taylor v Crowland Gas Co,4 was misunderstood to have decided this, because in fact in that case the head office and the gas works were in the same place, so any distinction between the two was not even in issue. The actual issue was whether the county court had jurisdiction when, although the plaintiff and the company dwelt or carried on business within the jurisdiction of the court, the shareholders did not (which was relevant at that time—before limited companies—because the shareholders were liable on a judgment against a company if the company did not pay5). The 2 Alternatively the superior courts had jurisdiction when the plaintiff dwells more than 20 miles from the defendant: County Courts (England) Act 1846 (9 & 10 Vict, c 95), s 128, preserving the existing law. It followed that one of these rules had to be satisfied before an action could be started in the superior courts. 3 Re Bowie, ex parte Breull [1874–80] All ER Rep 646 on whether ‘the debtor resides or carries on business within the district of [the London bankruptcy] court’ in the Bankruptcy Rules 1870, r 17, in which the court decided that ‘Every person carries on his business where he is to be found during the business hours of the day. The railway cases are distinguishable from this one’. 4 Taylor v Crowland Gas Co (1855) 24 LJ (Ex) 233. 5 Under the Joint Stock Companies Act 1844, s 66. Limited liability companies were first introduced by the Limited Liability Act 1855. The argument had more force at that time, long before Salomon v Salomon [1897] AC 22, when it was thought that the shareholders in general meeting were the company, see the text at n 22.

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case unsurprisingly decided that the company dwelt where it carried on business, and that where the shareholders dwelt was irrelevant, particularly as the company had not failed to pay any judgment against it. However, the perception based on the obiter dicta ‘I do not believe that any distinction was meant by the difference in expression in the two parts of the section [dwells or carry on his business]’,6 when taken out of context, became more important than the reality. In general, the place where a company dwelt or carried on business was where the actual business was carried on, namely the branch rather than the head office, if that were in a different place.7 So from the start the courts approached the matter by looking for one place where the company carried on its business rather than saying that the company could be sued either at the head office or the branch where the business was actually carried on, which seems to be what the section was saying, and how it was interpreted for individuals. Railway companies presented a problem.8 If the branch, meaning the station, were the place where the company carried on its business, it followed that the company could be sued in the county court applicable to every station along the line regardless of whether or not the dispute concerned an event that occurred at the station within that county court’s area. It made much more sense that they should be sued at their head office, the basis being that this was where the whole business (‘his business’) was carried on. In a case9 concerning a claim for damages against a railway company in the Chester County Court,10 the judges looked for the place where the whole business was carried on: ‘The company carry11 on a portion of their business at Chester, no doubt; but in 6 Per Pollock CB at 235. See Denning LJ’s explanation of the case in Davies v British Geon Ltd [1956] 3 WLR 679, 688, and Birkett LJ’s at 686–87. 7 Keynsham Blue Lias Co v Baker 33 LJ Ex 41, in which the company had its registered office in London, where the directors met and managed the business. The quarrying and manufacture and sale of cement were all done at Keynsham. It was held that the company dwelt and carried on its business (within the County Courts (England) Act 1846, s 128) at Keynsham, and not in London. The decisions upon railway companies were reviewed in that case and held to be inapplicable. A different result was reached in Aberystwith Promenade Pier Co v Cooper 35 LJ (QB) 44, in which the place of business was held to be in London, although the pier was built in Wales and the tolls were taken there, but the subject matter of the action was a call on the shares, which is more obviously a head office matter than something relating to the pier. 8 Railway companies also presented a problem for income tax. The equivalent issue was whether they should be liable to income tax under Schedule A for the occupation of the house at every station, to be assessed by each division of General Commissioners (The National Archives, Public Record Office (TNA:PRO) IR99/102, 59, 88). Here Parliament stepped in and directed that railway companies should be assessed by the Special Commissioners (23 & 24 Vict, c 14, s 5; ITA 1918, s 124; ITA 1952, s 485; repealed by ITMA 1964, sch 6). 9 Brown v London and North Western Rail Co (1863) [1861–73] All ER Rep 487. 10 The facts were that a harpist was travelling from Ireland via Chester to London. At Chester, not having money to pay his (her?) fare to London, he left his harp by way of security with the railway company’s servants, who then gave him a free pass to London. Afterwards he paid his fare to the company, who then transmitted the harp to him. The harp suffered considerable damage in the course of transmission, for which the railway company was sued in the Chester County Court.

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no sense can they be said to carry on their business at Chester.’12 Another of the judges identified the problem in terms of branches: At Chester there is a local superintendent and manager for the business of that part of the line, but he is under the control of the London directors. Can it then be said that the company carry on one business at London and another at Chester? I am of opinion that it cannot, and that the local superintendent manages only a branch of the general business. Chester, it is true, is a large station; but at every station, however small, a separate branch of business is carried on, and I cannot hold that the company carry on as many separate businesses as there are branches. I agree with Hill J, in Shiels v Great Northern Rail Co that the company carry on their business at the place where it is managed, and in other places by their agents.13

Another judge was clearly influenced by the practical problems that would arise if he decided that every county court within whose jurisdiction the railway company had a station had jurisdiction over everything concerning the company: wherever the cause of action arises, no matter how remote from the county court, the circumstances of the railway company having a station in the district would give the county court jurisdiction; so that a cause of action arising on a bond executed in London, or from an accident by which a person’s leg was broken, might be tried in any remote county court in the district of which the company had a small station, though the cause of action did not arise within the jurisdiction. If the section does not mean the general business, any place where a person carries on any portion of his business would do to give jurisdiction, and, therefore, a party might go to the remotest and smallest place where a company has a station and sue it in that district.14

The answer was therefore that a railway company carried on its business, meaning its whole business, at its head office and not at any of the stations, which was the opposite of the rule for manufacturing companies generally. Later legislation dispensed with ‘dwells’ and substituted ‘resides or carries on business’,15 but the courts still had the same difficulty over a company ‘residing’ when it came to tax.16 In any case, by then, so far as companies, and particularly railway companies, were concerned, the idea that the two expressions meant the same was too ingrained to change. The 11 Note the company being plural, presumably reflecting the then understanding that the shareholders in general meeting were the company, see the text at n 22. 12 Per Wightman J at 489. 13 Per Blackburn J at 490. 14 Per Crompton J at 489. 15 Supreme Court of Judicature Act 1875, sch 1, Rules of Court. Note the change from ‘his business’ to ‘business’, suggesting that it need not be the place where the whole business was carried on. 16 See n 41. Lord Loreburn said in de Beers Consolidated Mines v Howe ‘A company, cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business’ [1906] AC 455, 458.

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influence of the mid-nineteenth-century railway company cases on county court jurisdiction had a long life. It was not until 101 years after the Taylor case, in 1956, that the Court of Appeal decided, and even then only by a majority, that the railway company cases should not be applied to manufacturing companies with a head office and a factory in different places,17 although it is fair to say that the earlier decisions seem to have been ignored for much of this period.18 It was only then that ‘resides or carries on business’ was fully accepted as comprising two different concepts. Harman J dissented on the basis that, on the authority of the company residence cases, to which we now turn, ‘resides’ and ‘carries on business’ were synonymous.19

T H E CO M PAN Y TAX RE S I D E N C E CAS E S

It was the approach of the jurisdiction of the county court in railway company cases that determined the tax residence of companies, with the courts equating residence with carrying on business just as they did when interpreting the original county court rule ‘dwells or carries on his business’,20 and secondly determining the place of carrying on business as the head office as they had for railway companies. The rationale for this is hard to detect. First, the county court cases elided those two expressions, and secondly, railway companies were obviously a special case because of their number of places of business. Perhaps the reason was merely that by the time the courts first came to consider company residence for tax purposes the weight of the authorities related to railway companies, which were not only the large companies of their time but which, no doubt, also gave rise to plenty of accidents and consequently litigation. Also, for similar reasons to jurisdiction over railway companies, the courts were, unrealistically, trying to find a single place to tax the company.21 17 Davies v British Geon Ltd [1956] 3 WLR 679, in which only ‘carry on business’ was in issue. Denning and Birkett LJJ distinguished the company residence cases on the basis that they were not authorities on ‘carries on business’. 18 See Denning LJ’s recollection at 690. Since the railway company cases were originally an exception to the rule applies to manufacturing companies, this was a reversion to the original rule. 19 At 694. 20 See the quotation in the text at n 41 that company residence was ‘where the real trade and business is carried on, and that definition seems to be almost conceded by all the counsel’. 21 See Sulley v Attorney-General (2 TC 149, abstract), in which a single place was looked for: ‘Wherever a merchant is established, in the course of his operations his dealings must extend over various places; he buys in one place and sells in another. But he has one principal place in which he may be said to trade, viz, where his profits come home to him. That is where he exercises his trade. It would be very inconvenient if this were otherwise. If a man were liable to income tax in every country in which his agents are established, it would lead to great injustice.’ The case related to a different point, whether a profit could be attributed to purchasing.

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Before looking at the cases, one should be aware that the nineteenth-century understanding of the nature of a company was that the shareholders in general meeting were the company22 and that the directors were their agents; Salomon v Salomon23 was not decided until 1897, whereas the early company residence cases were decided much earlier, in the 1870s.24 One can see an example of this type of thinking in an early residence case: There is no shadow of authority to shew that a place in which the governing body, the directors, meet, and where the shareholders at large hold their general and special meetings and exercise their power of transacting their business, is not the principal seat of business, and the place at which, in the language of the statute, the company may be said to reside.25

One might therefore have expected greater emphasis to be placed on the general meetings and less on the directors’ meetings, and therefore The Courts might have decided that residence was at the place of incorporation where the general meetings were normally held. This was not the case, particularly in the first case, Alexander,26 where all the annual meetings were held in the UK, and in that respect the early cases were ahead of their time in concentrating more on the place where the directors met, although in most of the cases the directors’ and the general meetings were held in the same country, the UK. By the time the courts had to deal with cases where the shareholders’ and board meetings were held in different countries27 the doctrine was in process of changing28 to regard both the general meeting 22 PL Davies and LCB Gower, Gower’s Principles of Modern Company Law, 6th edn (London, Stevens, 1997) 183. This was the reason for the decision in Gilbertson v Fergusson (1877) LR 5 ExD 57, (1881) 7 QBD 562, (1881) 1 TC 501, also concerning The Imperial Ottoman Bank, which featured in Alexander (see n 31). Relief was given to the UK shareholders for tax paid on the UK branch profits on the basis that if the shareholders were the company they were entitled to relief for tax paid by the company. For an example of this approach, see the case stated: ‘in making the said assessment the Commissioners regarded all the shareholders in the bank, who were resident in England, as carrying on business in England and abroad jointly with the shareholders resident abroad . . .’ (1877) LR 5 Ex D 57, 66; 1 TC 501, 510. See D Oliver ‘The Rule in Gilbertson v Fergusson—140 Years of Relief for Underlying Tax [2007] British Tax Review 293. 23 [1897] AC 22. 24 The courts first had jurisdiction in tax cases by Customs and Inland Revenue Act 1874, s 9, which permitted the General or Special Commissioners to state a case for the opinion of the High Court. 25 The Calcutta Jute Mills Co Ltd v Nicholson heard with The Cesena Sulphur Co Ltd v Nicholson (1878) 1 ExD 428, 446 per Kelly CB (my italics). 26 See next paragraph. 27 Eg Goerz v Bell [1904] 2 KB 136, which concerned a South African incorporated company having its general meetings there and the directors meeting in London, was before the Automatic Self-Cleansing Filter case (see the next note) and de Beers was just after it but before the House of Lords held that the Automatic Self-Cleansing case was of general application. 28 That understanding was changed by Automatic Self-Cleansing Filter Syndicate Co v Cuninghame [1906] 2 Ch 34. That decision was followed two years later in a tax case, Stanley v The Gramophone and Typewriter, Ltd (1908) 5 TC 358 (see n 192). One of the arguments in the

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and the directors as organs of the company, rather than the directors not being organs of the company but being agents of the general meeting as the only organ of the company. The first company residence case, Alexander29 in 1874, concerned the Imperial Ottoman Bank, which must be one of the strangest companies ever to come before the courts: it was the central bank of the Ottoman Empire, but was run on commercial lines and funded by private capital, raised mainly in London and Paris, to support the then-failing economy of the Ottoman Empire following the Crimean War.30 It was managed by a committee comprising 10 English and 10 French members, meeting four times a year, alternately in London and Paris, with the annual general meetings all being held in London.31 The case therefore potentially raised the difficult issue of an equally divided place of management, to which we shall return.32 The court decided its residence in favour of the place of incorporation and the seat of its business, Constantinople, relying on its constitution and operations, rather than its management. This case is of less importance to our story because the courts headed off in a different

former case was that, since directors could not then (before Companies Act 1948) be removed by ordinary resolution but only under the particular articles by extraordinary resolution, it would be illogical for a simple majority of shareholders to be able to overrule actions of the directors, and it was thought that Cuninghame depended on that provision in the articles, see Marshall’s Valve Gear Co v Manning Wardle & Co [1909] 1 Ch 267. However, where the articles stated that the business of the company shall be managed by the directors along the lines of Art 70 of Table A to the Companies Act 1985 (Art 80 of Table A to the Companies Act 1948 still made reference to the directors’ powers being subject to provisions as may be prescribed by the company in general meeting), the House of Lords established that a general meeting cannot interfere with a decision of the directors unless contrary to the Act or the articles, see Quin & Axtens v Salmon [1909] AC 442. 29 Attorney General v Alexander (1874) LR 10 Exch 20 (the bank also featured in another tax case, see n 22). Although heard in 1874, it is not an early case stated (see n 24) but an action for a penalty for not making a return. 30 The situation became even stranger by the time of its appeal in Gilbertson v Fergusson (1877) LR 5 ExD 57, (1881) 7 QBD 562, (1881) 1 TC 501 because in 1875 the Bank’s powers were increased to give it power to manage the state’s budget. The conflict is perhaps less acute than might appear because the bank’s continuing ability to make profits depended on the successful continuation of the Ottoman Empire’s economy. 31 The Revenue had not relied on half the management meetings, and all the annual general meetings (which would then have been regarded as particularly important, see n 22), being held in the UK, but on the fact that it carried on business through a branch in London, equating any carrying on of business with residence. They swiftly withdrew from this position when Amphlett B, at 33, put forward the example of M Lafitte (possibly the then head of the banking house Perregaux, Laffitte et Cie but his name had two fs (not Jacques Laffitte who had died in 1844), or the owner of Charles Lafitte Champagne, not Chateau Lafite (with one t), which was then owned by the Rothschilds) and asked if the whole of his profits were taxable in the UK, something that the learned judge would have regarded as a ‘monstrous injustice’. Leading counsel for the taxpayer was the same as in Calcutta Jute and, as in that case, he relied on the railway company cases, but the court did not deal with them. Counsel for the Revenue were the same as in Cesena and Calcutta Jute, with the addition of the new Attorney General; and Kelly CB decided Cesena and Calcutta Jute as well as Alexander. 32 See the heading Polycentral management: circle, ellipse or ovoid and also the text at n 149.

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direction from the one taken in all the following cases (which different direction would probably have made it resident33). Leaving aside this case, there is a consistent line of authority from then onwards that is easy to see in retrospect, although the courts had difficulty in accepting the logic of these cases at the time. The context in which company residence for tax purposes first had to be decided was that in the mid- to late-nineteenth century money was often raised on a prospectus, presumably from entrepreneurs made wealthy by the industrial revolution, through a UK-incorporated company (the names of the directors of which would be recognised by investors).34 The directors met in the UK but the whole of the business was carried on in another, often distant, country,35 a situation that would be unlikely to arise today, and which one might have thought would have been impossible then. Next, one had the company being incorporated abroad, where the business was carried on, but the directors still meeting in the UK, which resulted in the leading case on the topic, de Beers.36 As a consequence of that case, UK incorporated companies then started to move the directors out of the UK to the main place of business,37 which the courts found the most difficult as they had an instinctive dislike of a UK-incorporated company escaping tax. In the end, however, which was not until 1928, the courts finally accepted that all these situations were governed by the same rule, where the real business 33 Perhaps because of the different instinctive ‘feel’ for a company incorporated abroad with the majority of its operations abroad, compared to a UK-incorporated company with the directors here. In the same way, the courts had considerable hesitation in deciding that a UK-incorporated company could be non-resident, see the text around n 110. 34 I am grateful to Mr Richard Thomas of HMRC for drawing my attention to a facsimile he had acquired of Bradshaw’s Railway Guide for Shareholders of 1868, which was a guide for those who wished to invest in railway companies, many of which were in all parts of the world, including an entry for the San Paulo Railway (86.5 miles long) that includes a statement of monthly traffic and a balance sheet. Railway companies were ahead of their time in being required to submit audited accounts from 1867; insurance companies followed in 1870, but other companies did not do so until 1908 (and profit and loss accounts not until 1929). 35 The Calcutta Jute Mills Co Ltd v Nicholson (jute mill in India) heard with The Cesena Sulphur Co Ltd v Nicholson (1878) 1 ExD 428 (sulphur mines in Italy); Imperial Continental Gas Association v Nicholson (1877) 1 TC 138 (gasworks in France, Germany, Holland and Belgium), The London Bank of Mexico and South America v Apthorpe [1891] 2 QB 378 (banking transactions all carried out at branches in Mexico and Lima), Denver Hotel Co Ltd v Andrews (1895) 3 TC 356 (hotel in Colorado), San Paulo (Brazilian) Railway Co Ltd v Carter (1895) 3 TC 344, 407 (railway in Brazil), Grove v Elliots and Parkinson (1896) 3 TC 481 (oil wells in Galacia), three US brewery cases: Frank Jones Brewing Co Ltd v Apthorpe (1898) 4 TC 17, St Louis Breweries Ltd v Apthorpe (1898) 4 TC 111 and Apthorpe v Peter Schoenhofen Brewing Co Ltd (1899) 4 TC 41, American Thread Co v Joyce (1912) 6 TC 1, 163 (cotton mills in the US), Mitchell v Egyptian Hotels Ltd (1915) 6 TC 152 (City General Comrs and High Ct) and 542 (CA and HL) (hotels in Egypt); Swedish Central Railway Company v Thompson [1924] 2 KB 255 (CA), [1925] 1 AC 495 (HL) (railway in Sweden); Egyptian Delta Land and Investment Co Ltd v Todd [1928] 1 KB 152 (High Court and CA), [1929] 1 AC 1 (HL); 14 TC 119 (land dealing in Egypt). James Wingate & Co v IR (1897) 24R 939 concerned the opposite, a Norwegian company trading almost wholly in Scotland. 36 de Beers Consolidated Mines Ltd v Howe [1906] AC 455. 37 Mitchell, above n 35; Egyptian Delta Land, above n 35.

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was carried on (understood as meaning the place of intellectual control of the business), in other words where the central management and control is found. The first of that line of cases was the most influential in the development of the law, The Calcutta Jute Mills Co Ltd v Nicholson, heard with The Cesena Sulphur Co Ltd v Nicholson38 in 1878. In these cases residence was agreed by both parties to be where the real trade and business is carried on,39 which was interpreted in the same way as for the county court jurisdiction over railway companies, from which many of the authorities cited were taken.40 Huddleston B’s judgment was the one which had the greater lasting influence. He started with a definition of residence that had been agreed by the parties and which represents the county court meaning: The use of the word ‘residence’ is founded upon the habits of a natural man, and is therefore inapplicable to the artificial and legal person whom we call a corporation. But for the purpose of giving effect to the words of the legislature an artificial residence must be assigned to this artificial person, and one formed on the analogy of natural persons. There is not much difficulty in defining the residence of an individual; it is where he sleeps and lives. I adopt Mr Matthews’ [counsel for the appellant in Calcutta Jute] suggestion, that [the Income Tax Act 1853], when it speaks of ‘residing’ does not mean an artificial residence. It 38 (1876) 1 ExD 428 (a much better report than (1876) 1 TC 83, which is obviously unrevised). 39 At 452 (see the passage quoted in the text at n 41). ‘But I do not think that the principle of law is really disputed, that the artificial residence which must be assigned to the artificial person called a corporation is the place where the real business is carried on’ per Huddleston B at 454. 40 The taxpayer’s counsel, Sir H James, QC, RS Wright and RT Reid (the future Lord Loreburn, who would decide de Beers), contended in Cesena: ‘There is a close analogy between the present case and that of Keynsham Blue Lias Co v Baker. There the company had a registered office in London, where the directors met and managed the business as here. The quarrying and manufacture and sale of cement, &c, was all done at Keynsham. It was held that the company dwelt and carried on its business (within the County Court Act, 9 & 10 Vict, c 95, s 128) at Keynsham, and not in London. The decisions upon railway companies were reviewed in that case and held inapplicable, and this authority is sufficient for the determination of the present case. Kilkenny and Great Southern and Western Ry Co v Feilden points in the same direction, and both the decision and dicta in Attorney General v Alexander [see n 31] upon the Imperial Ottoman Bank are in favour of the appellants.’ The Revenue’s counsel, Sir J Holker, AG and Pinder, contended: ‘The series of cases where it was held that railway companies dwell or carry on their business within the County Court Acts at their head office in London, and not at the country stations where contracts are made, are in favour of this contention: Taylor v Crowland Gas Co, Adams v Great Western Ry Co, Shiels v Great Northern Ry Co, and Brown v London and North Western Ry Co A still stronger case to the same effect is Aberystwith Promenade Pier Co v Cooper. The decision in Attorney General v Alexander is in favour of the Crown in the present case. There the counsel for the Imperial Ottoman Bank cited Ohio and Mississippi Ry Co v Wheeler, and other American decisions, to shew that though a corporation may be recognised in other countries, its seat and residence can only be in the country where it is created and constituted.’ The Revenue were not called upon in Calcutta Jute. In Calcutta Jute the taxpayer’s counsel, H Matthews QC and Rolland, adopted the arguments in Cesena and in addition contended that the US cases had not been followed in England; and that if it was resident only the share of the UK resident shareholders should be taxed.

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means an actual residence. Mr Matthews argues, therefore, that when you deal with a trading corporation it means the place not where the form or shadow of business, but where the real trade and business is carried on, and that definition seems to be almost conceded by all the counsel. There is a German expression applicable to it which is well known to foreign jurists—der Mittelpunkt der Geschäfte; and the French term is ‘le centre de l’entreprise,’ the central point of the business.41

The last sentence shows that the second main influence after the county courts’ jurisdiction was mainland European thinking. Unfortunately Huddleston B would not have realised that he was faced with a situation that foreign jurists would never meet.42 The two companies with which he was concerned were incorporated in the UK, with most of the directors in the UK,43 but the whole of the business operations were carried out abroad, where all the assets were situated and the managing director resided, and where the majority of shareholders resided (74% for Cesena and 64% for Calcutta Jute). At that time, in mainland Europe, companies were not recognised outside their state of incorporation unless this was provided for in a treaty between them.44 Italy had enacted legislation in 1853 that required government authorisation for a società anonima to operate there, and the same applied to foreign incorporated companies.45 The Cesena 41 The last sentence quoted reads in the report in 1 TC 88, 103: ‘There is a German word which is applicable to it, which means the point of the business carried on. The French term, adopted from Saugne, is “le centre de l’Enterprise”, the central point of business, that is to say, the real place where the business is carried on.’ This confirms the suggestion by J Avery Jones et al [2006] British Tax Review 720 that Saugne was a misprint for Savigny (Friedrich Carl von Savigny (1779–1861), a Prussian minister and professor who taught Roman law and its importance for the development of German civil law). The expression Mittelpunkt der Geschäfte is found in §354 in vol 8 of Savigny’s System des heutigen römischen Rechts (I am grateful to Professor Wolfgang Schön for this reference). 42 I suspect that the foreign law concerned the company law to be applied since at the time most European countries, though not Germany, taxed only the branch situated in the state. See the heading ‘Comparison with the Rest of Europe’. 43 Two or three out of eight directors, including the managing director, in Cesena were in Italy, and one out of not less than five in Calcutta Jute were in Calcutta. In Cesena the City of London General Commissioners found that all the practical management of the Companies properties and affairs was carried on in Italy, and that the Italian directors were in constant correspondence with their co-directors in France and England. 44 There was, for example, a treaty between Belgium and France of 1854 following court decisions in both countries not recognising each other’s companies. This has continued, see the Hague Convention of 1 June 1956 on the Recognition of the Legal Personality of Foreign Companies and the EEC Convention of 29 February 1968 on Mutual Recognition of Companies and Legal Persons (neither of which is in force). 45 Law of 30 June 1853, No 1564. Art 2 provided that ‘companies incorporated abroad . . . shall not be entitled to operate in the State unless they shall be expressly authorised to do so pursuant to article 1’. Art 1 provided that ‘Joint stock companies . . . shall have to be authorised by the government together with the approval of their by-laws in conformity with Articles 46 and 47 of the Code of Commerce’. (This may have been similar to the former UK rule (Companies Act 1900, s 6, in the end Companies Act 1948, s 109, repealed 1980) requiring a public company to have what was known as a trading certificate issued by the Registrar of Companies before it could begin to carry on business.) I am grateful to Professor Guglielmo Maisto for his researches into the position at the time in Italy and other European countries.

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Sulphur Company was also registered in Italy46 because otherwise it would not have been recognised as a company there. Belgium enacted similar legislation in 1855, and France in 1857.47 By the end of the nineteenth century, mainland European countries developed a principle that in order to be recognised as a domestic company governed by domestic law the company was required to have its main activity in the country of incorporation. Originally this was developed in order to prevent residents of a state incorporating a company abroad which operated in the state, thereby avoiding complying with the state’s local law; such a company was not recognised.48 Conversely, if foreign shareholders incorporated a company in the state it was considered to be a national of the controlling shareholders’ state and not subject to the law of the state of incorporation, and was also not recognised in that state. This became what is now the central administration principle that a company is governed by the law of the country where it has its real seat,49 meaning its central administration50 (as opposed to the incorporation principle applying in the UK by which a foreign company is recognised so long as it exists according to the law of

46 1 TC 88, para 2 of the case and Art 6 (referred to in para 6 of the case) that the directors had power to register the company in Italy as a société anonyme (then società anonima and now società in accomandita per azioni). This registration meant authorisation under the 1853 law, which was considered to create a new Italian company. 47 By law No 4387 of 27 October 1860, Italy permitted companies with authorisation to operate in the French Empire to operate in Italy subject to making a request for qualification, thus recognising foreign companies. France entered into the Cobden Treaty with the UK in 1860 and made similar treaties with other European countries at the time to reduce tariffs, thus moving towards a free-trade area. The Italian law is presumably related to this. 48 Case C-212/97 Centros, in which Danish shareholders incorporated a UK company to operate in Denmark, thus avoiding Danish minimum capital requirements, is not a new problem. A related rule is that a company was a national (and hence governed by the law) of the state of its controlling shareholders. 49 Siège réel, tatsächlicher Sitz. For the purpose of giving effect to the Brussels and Lugano Conventions on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, the Civil Jurisdiction and Judgments Act 1982, s 42 defines the seat of a company as being in the UK if it is incorporated, or has its central management and control, there. 50 Administration centrale, Hauptverwaltung (effective management and control, see Bundesgerichtshof BGHZ 97, 269, 272), sede della amministrazione. This is the meaning given to real seat by the Hague Convention of June 1, 1956 and by the EEC Convention of February 29, 1968 (see n 44). In Germany it is the place where the fundamental management decisions are put into practice (Bundesgerichtshof BGHZ 97, 269, 272), which is different from the test applied to company residence, where the place where those decisions are made is more relevant. In French law the registered office criterion for defining what was a French company progressively imposed itself in jurisprudence since the end of the nineteenth century and was decisively reinforced by the Law of 24 July 1966, which has since been codified in the French commercial code. This provides that ‘companies that have their registered office on French territory are subject to French law’. (Originally Law No 66-537, now Commercial Code Art L 210–13, applied in 1978 to all companies by Civil Code Art 1837.) However, where the registered office is in France the real seat must also be in France. See ‘The Origins of Concepts and Expressions used in the OECD Model and their Adoption by States’ [2006] British Tax Review 695, 708.

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its state of incorporation51).52 As a result, the situation in Calcutta Jute and Cesena Sulphur—of a company operating entirely outside its country of incorporation—never developed in mainland Europe, and so their law did not deal with this situation. Continuing with the quotation, Huddleston B turned immediately to the county courts’ authorities, most of which by then concerned railway companies: All the cases cited support that view [where the real trade or business is carried on]. In Keynsham Blue Lias Co v Baker, the Court held that Keynsham was the place of business, because the substantial business was carried on there, though the registered office was in London. In Taylor v Crowland Gas Co, the learned judges thought that a company dwells where it carries on its business. In Adams v Great Western Ry Co it was held that the place where that company carried on its business was Paddington. So in Brown v London and North Western Ry Co, it was held that the place where that company carried on its business was at Euston, and not at Chester as had been contended. The same rule had been applied in Shiels v Great Northern Ry Co. Then there is a very strong case, Aberystwith Promenade Pier Co v Cooper, where it was held that the place of business was in London, although the pier was built in Wales and the tolls were taken there. The decision in Sulley v Attorney General was to the same effect. The case of Kilkenny and Great Southern and Western Ry Co v Feilden,53 which was cited for the appellants, is, I am satisfied, distinguishable. In the last case in this Court, Attorney General v Alexander, there was no charter of incorporation in England, and two at least of the learned judges—the Lord Chief Baron and my Brother Amphlett—held that Constantinople, where the corporation was incorporated, was the seat of business, the place where the business was carried on.54

51 The UK was not concerned with avoiding UK rules because the minimum capital requirements were non-existent for private companies. Indeed, there was an encouragement to others to use UK company law. The same approach was adopted for tax since before 1988 a UK-incorporated company was not a tax resident. Many companies operated entirely abroad. 52 Italy adopts a combination of both principles. Following the entry into force of the reform of the Italian private international law (by Law No 318, dated 31 May 1995), the law applicable to a company is not determined according to a pure central administration principle. Indeed, Art 25 of the said law 318/1995 (this law abrogated Art 2505 of the Italian Civil Code, which formerly regulated this matter) generally provides for the incorporation principle, so that companies are governed by the law of the state in which they are incorporated. Nevertheless, Art 25 goes on to state that Italian law is also applicable if either the company’s place of management or the company’s principal purpose is located in Italy. Therefore, foreignincorporated companies are regarded as having Italian nationality if either their place of management (sede dell’amministrazione) or their principal purpose (oggetto principale) is located in Italy. In such cases the application of Italian law does not necessarily imply that the foreign nationality is given up, this depending on the other state’s domestic law provisions. See ‘The Origins of Concepts and Expressions Used in the OECD Model and their Adoption by States’ (2006) 60(6) Bulletin 220, 226. 53 (1851) 6 Exch 81. This decided that an English incorporated company, the whole of whose assets were a railway in Ireland outside the jurisdiction, was a foreign company for the purpose of giving security for costs. 54 At 452.

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In favour of looking to the head office rather than the branch, he therefore relied on three railway company authorities plus an exceptional case.55 He went on to reject use of American authorities that looked only to the place of incorporation, saying, in a passage that would form the basis for the whole of the subsequent law, that it was merely a factor to be taken into account: Registration, like the birth of an individual, is a fact which must be taken into consideration in determining the question of residence. It may be a strong circumstance, but it is only a circumstance.56 It would be idle to say that in the case of an individual the birth was conclusive of the residence. So drawing an analogy between a natural and an artificial person, you may say that in the case of a corporation the place of its registration is the place of its birth, and is a fact to be considered with all the others. If you find that a company which is registered in a particular country, acts in that country, has its office and receives dividends in that country, you may say that those facts, coupled with the registration, lead you to the conclusion that its residence is in that country. In Attorney General v Alexander, Mr Matthews cited several American authorities to support his argument that a corporation resides only in the country under whose laws it was created and constituted. In the present argument, however, he cited another American case, Bank of United States v Mackenzie, which shews that there is a distinction between a corporation constituted by an Act of Congress and one constituted by a particular state; and he also relied on Newby v Colt’s Patent Fire Arms Manufacturing Co.57

Cesena Sulphur and Calcutta Jute Mills did not exhibit the same problems of multiple places of business that was the cause of the different rule for railway companies, but they starkly presented the identical issue of whether residence was found at the head office or the branch. Which one—the head office in the UK with nothing but the directors’ meetings taking place there or the branch in Italy, respectively India, where all the real business was carried on—was ‘the place, not where the form or shadow of business, but where the real trade and business is carried on’? Many people faced with that question would answer that it was at the branch; it was only the branch that was taxed in mainland Europe.58 However, the place where the real trade and business was carried on was, as in the railway company cases that were cited, held to be at the head office. Huddleston B decided both cases on these grounds: But I do not think that the principle of law is really disputed, that the artificial residence which must be assigned to the artificial person called a corporation is 55 Aberystwith Promenade Pier Co v Cooper, in which the head office rather than the branch was chosen for the reason given in n 7. 56 Just as the House of Lords would later decide in Egyptian Delta Land and Investment Co Ltd v Todd [1929] 1 AC 1. 57 At 453. 58 See the heading ‘Comparison with the Rest of Europe’.

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the place where the real business is carried on. The difficulty is in applying that principle to the facts of each case. I admit that the onus of proving the residence lies upon the Crown, as my Brother Cleasby said in Attorney General v Alexander, and if the Crown fails to satisfy the Court that the place of residence is within the area of taxation, the company ought not to be taxed. Then I have to ask myself where was the place where the real and substantial business was carried on—where was le centre de l’entreprise, the central point? Looking at the facts I can only answer that question by saying that in both these cases it was in England. It is not necessary to go at length into the facts which have been minutely examined by my Lord.59 [He then summarises the facts]

He then looked at the articles of association, which showed that general meetings were to be in London, and, after considering the directors’ powers, he said ‘We also find that the board may in general do everything with reference to the company . . .’60 Likewise, he concluded on the facts of Cesena: At first it did seem that the centre of business was in Italy. [But, after considering the company’s constitution, he continues:] It seems, indeed, that almost every act of the company connected with the administrative part of the business is to be done in London.61 No doubt the manufacturing part was done in Italy, and the company might have found sulphur in another country, and carried on the manufacturing part of the business in that other country, but the administrative part would be carried on at the place from which all the orders flowed, where officers and agents were appointed and recalled, where their powers were granted and revoked, where whatever money was sent was received, and where the dividends were declared and were payable. All these acts were performed in London. I think, therefore, that the main place of business of the company is in England, and that there is at Cesena merely an agency, as it were, of the principal house, that agency being confined to the manufacture and sale of the sulphur, but under the direction of the principal house.62

Accordingly he looked at the constitution which showed that the directors ‘called the shots’ and so the location of the directors was where the real and substantial business was carried on; the people in Italy were in exactly the same position as the station manager in Chester.63 Kelly CB, who had been one of the judges in Alexander (the Imperial Ottoman Bank case), adopted a slightly different approach from Huddleston B. He equated the place where both the directors and shareholders met with the seat of the company, the same expression that he had At 453–54. Huddleston B paid much more attention to the directors’ meetings than Kelly CB, see the text at n 65. 61 Para 5 of the case states: ‘Transcripts and copies of the company’s books of accounts are sent to London, where the register of the shareholders prescribed by English law is kept, but all the original books of accounts of the company and all its moneys are kept in Italy . . .’ 62 At 354, 455–56. 63 See n 13. 59 60

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used in Alexander, thus (whether consciously or not) also relying on the mainland European concept of seat, in a passage already quoted: There is no shadow of authority to shew that a place in which the governing body, the directors, meet, and where the shareholders at large hold their general and special meetings and exercise their power of transacting their business, is not the principal seat of business, and the place at which, in the language of the statute, the company may be said to reside.64

One might have been forgiven for thinking that his own decision in Alexander was just such an authority since all the shareholders’ meetings and half the board meetings were in the UK. Like Huddleston B, he looked at the constitution of these companies and concluded that: a joint-stock company resides where its place of incorporation is, where the meetings of the whole company, or those who represent it, are held, and where its governing body meets in bodily presence for the purposes of the company, and exercises the powers conferred upon it by statute and by the articles of association.65

Even though Kelly CB did not specifically explain the reason for his disagreement with the Crown’s argument in favour of the place of incorporation, it is clear that he did not regard the place of incorporation as decisive. On the facts, both the shareholders’ and directors’ meetings were held in England. While he was more influenced by shareholders’ meetings than Huddleston B, nothing turned on this. Everything that happened elsewhere was regarded as the acts of mere agents of the directors. Kelly CB also backed up his argument by referring to the county court authorities on railway companies: In other cases under the County Court Acts the question arose, where do the great railway companies ‘dwell’ or ‘carry on their business’? Every one who knows how the affairs are managed would say that the Great Western Railway Company resides at Paddington, and the London and North Western Railway Company at Euston, because there is the principal seat of business of the company; there the directors meet and exercise their powers, there the books are kept, and from there the great lines emanate.66

He then referred to the memorandum and articles of the company to support the importance of the directors’ decisions. It was a decision based on the constitution of the company and the principles of the law of agency, rather than on what happened on the ground. His answer to counsel for 64 The Calcutta Jute Mills Co Ltd v Nicholson heard with The Cesena Sulphur Co Ltd v Nicholson (1978) 1 ExD 428, 446 per Kelly CB. 65 At 445. He prefaced this statement by the words: ‘whether there may or may not be more than one place at which the same joint stock company can reside, I express no opinion at present . . .’, which is interesting having regard to later cases. 66 At 446.

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Cesena about why we were taxing foreign shareholders on business carried on abroad was that they chose to invest in a UK company and thus obtained the protection of our law.67 Just as in the railway company cases, it was the intellectual centre that was identified as being where the real business was carried on; the manufacturing, like the management of the railway stations, was carried on by agents subject to the control of the directors. It was an expansionist view of tax jurisdiction but one that suited the Revenue. Kelly CB recognised the importance of the issue of company residence for tax: They are both cases of great importance, because they raise, and I believe for the first time, a very important question—important in the extent of its operation as well as in its nature and involve most important principles of great weight as affecting the law of England, and I may almost say as affecting the international law of the world . . .68

History proved him right. The decision was enormously influential and became the rule for company residence throughout the common law. Lord Loreburn, the Lord Chancellor (who, as RT Reid, had appeared as junior counsel for the taxpayer in Cesena Sulphur69), merely followed it in what was to become the leading case of de Beers Consolidated Mines Ltd v Howe70 in 1906 in an extremely short speech in which he cited no other authorities. Factually, de Beers was the same as Calcutta Jute, the directors 67 Rather patronisingly, although it demonstrates the reason that the law did not need to restrict the use by UK residents of companies incorporated elsewhere as does the central administration principle, he said: ‘If Italian subjects, who may not think their investments safe in Italian companies, become shareholders in a company and receive an income under the protection of the laws of this country, I do not know why they should not be under the obligation of paying the tax’ (451). The same thinking was important in Goerz & Co v Bell [1904] 2 KB 136, in which Channell J said at 145: ‘a person who is resident in the United Kingdom takes the benefit of the government of the country, of the security afforded to his life and liberty, and of the opportunity of conducting his business in the way in which the government of a settled and civilised country enables it to be conducted; he accordingly has to pay, like other inhabitants of the country, his full share towards the expenses of that government. On the other hand, if he does not reside in the country and therefore does not get the full benefit of the expenses incurred in governing the country, he does not have to pay income tax upon his full income like persons resident in the country, but only pays what I may style a toll in respect of the use which he makes of the government of the country by coming into the country and doing business here.’ This factor seems to have receded in importance. By the time of Egyptian Delta, when, following World War I, tax rates were much higher, Viscount Sumner understood that if we taxed UK incorporated companies this would drive companies away: ‘the further question must arise whether British status and British protection are in business worth the price’ ([1929] 1 AC 1, 33–34). 68 (1876) 1 TC 83, 92. There is no equivalent of this passage in the 1 ExD 428 report, which suggests that the Chief Baron may have had second thoughts about the influence of the decision on the international law of the world. 69 As Viscount Sumner points out in Egyptian Delta Land and Investment Co v Todd [1929] 1 AC 1, 22. 70 [1906] AC 455. The Crown were not called upon to argue the case.

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met in the UK71 and the whole of the diamond mining business was carried on in South Africa, but with one important variation: the company was incorporated under an Act of the Colony of the Cape of Good Hope in South Africa.72 Lord Loreburn paid no attention to this factual difference and followed Calcutta Jute and Cesena Sulphur: The decision of Chief Baron Kelly and Baron Huddleston, in the Calcutta Jute Mills v Nicholson and the Cesena Sulphur Company v Nicholson, now thirty years ago, involved the principle that a Company resides, for purposes of Income Tax, where its real business is carried on. Those decisions have been acted upon ever since. I regard that as the true rule; and the real business is carried on where the central management and control actually abides.73

The central in central management and control, an expression that was already associated with control by the directors,74 was clearly derived from Savigny’s der Mittelpunkt der Geschäfte or le centre de l’entreprise.75 We could end the story there but for the fact that it took a long time for this principle to be accepted as applying to UK incorporated companies as well, and the word central would be the cause of much debate in future cases over whether this implied that there could be only one centre. Not surprisingly, after de Beers UK incorporated companies assumed that the same rule applied to them and they took the opportunity to appoint foreign boards of directors and argue that they were non-resident.76 It was another 22 years before the courts actually decided 71 But unlike Calcutta Jute the shareholders’ meetings were held in South Africa (5 TC 198, 209). 72 An earlier case, Goerz & Co v Bell [1904] 2 KB 136, in the High Court was on similar facts. It was the same company as that in Union Corporation v IRC (1953) 34 TC 207. New Zealand Shipping Co Ltd v Stephens (1907) 5 TC 553 (CA) and New Zealand Shipping Co Ltd v Thew 8 TC 208 (HL) for a later year are subsequent examples of the same point as in de Beers. Although incorporated in New Zealand, a change to the articles made the main board the London board, which had responsibility for constructing the ships, while a subsidiary board in New Zealand was responsible for operating them. 73 (1906) 5 TC 198, 213. In Egyptian Delta Land and Investment Co v Todd [1929] 1 AC 1 at 19 Viscount Sumner said ‘The Cesena case has not only never been overruled but it has far too long been cited with respect to be overruled, nor were your Lordships asked to do so’. 74 Eg (with my italics), ‘The real management and control of the whole of the business and operations of the Society both in and out of the United Kingdom is vested in and exercised by the Board of Directors, which meet at the head office in London, and the meetings of the proprietors are also held in London, and the Dividends are declared and paid there’ (Universal Life Assurance Society v Bishop 4 TC 139). ‘By the bye-laws of the American Company, the Directors of that Company have the general management and control of the American Company’ (St Louis Breweries Ltd v Apthorpe 4 TC 111). ‘But the whole building, with the exception of a small part let to the ‘Inquirer’ Newspaper, as to which no question arises, is under the sole management and control of Essex Hall’ (R v Special Comrs (Ex p Essex Hall) 5 TC 636). ‘In particular he shall have the management and control and shall use his best endeavours to promote the interests of the American business of the Company but subject to the directions and control of the Directors for the time being of the Company’ (Kodak Ltd v Clark 4 TC 549). 75 See n 41. 76 See, eg Egyptian Delta Land and Investment Co Ltd v Todd, text at n 129, in which foreign directors were appointed in 1907, the year after de Beers.

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this; the proposition just did not feel right to the judges. In the light of this development, the Royal Commission of 1920 had recommended that UK incorporated companies with foreign boards of directors should be deemed to be UK controlled so long as the majority of the voting power could be exercised in the UK,77 which assumed the current law to be that they were non-resident. Their recommendation was not, however, adopted.

Polycentral Management: Circle, Ellipse or Ovoid? Both of the issues left open by de Beers arose in Swedish Central Railway Company v Thompson,78 the proceedings of which ran from 1922 to 1925, that is to say a long time after de Beers had been decided in 1906. The company had started life in the same way as Cesena and Calcutta Jute: the directors met in the UK and controlled the business abroad. In the same year as the Royal Commission, 1920, the articles were changed and the board control moved to Sweden, as the Revenue admitted, but, as would prove to be significant, they did not move the seal, the bank account, the transfer books, the place where the accounts were made up and audited, or the place of payment of dividends, all of which remained in London. By that time it was purely an investment company receiving rent from the railway it had built and subsequently leased on a 50 year full-repairing operating lease.79 This finding of fact was significant: 10. On the 22nd October, 1920, at a meeting of the Board of Directors of the Company, three Members of the said Board were appointed to be a Committee under Article 45a of the amended Articles of Association to deal with transfers of shares in the United Kingdom, attach the seal of the Company to share and stock certificates, and to sign cheques on the London Banking Account of the Company. The Committee so appointed was empowered to transact merely formal administrative business in the United Kingdom.80

The Special Commissioners found that the company was resident in the UK ‘in the same sense as that in which the Egyptian Hotels Company, Limited, was admitted to be so resident’,81 which they considered was ‘clear Cmd 615, para 40, see n 195 below. 9 TC 342 (case stated and High Court), [1924] 2 KB 255 (CA), [1925]1 AC 495 (HL). The terms of the lease are set out at 9 TC 348 onwards. 9 TC 343, 344–45. The resolution is set out at 348. The first sentence records the terms of the resolution; the second sentence is comment, not a statement that they were authorised to carry out additional administrative acts. 81 Mitchell v Egyptian Hotels Ltd (1915) 6 TC 152 was an extremely borderline case, the House of Lords being equally divided, with the result that the Court of Appeal decision stood. The company carried on the business of running hotels in Egypt, including Shepheard’s in Cairo, and in 1908 (also probably not by coincidence two years after de Beers) appointed a local board in Egypt which under the Articles of the company controlled the trade in Egypt, see the Articles quoted at 6 TC 154–55, which makes it clear that the Egyptian business was under the control of the Egyptian board to the exclusion of any other board. It would therefore have taken a third 77 78 79 80

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authority in support of the assessments under appeal’.82 That is, they applied a case that had proceeded on the basis of a concession that the company was resident and dealt with whether the trade was UK or foreign, which is hardly an exercise of judicial interpretation. What they must have meant was that they considered that in Egyptian Hotels the concession of UK residence to have been rightly made, because in that case a UK board which had no power over the local board in the running of the hotels continued to exist: it merely made up the accounts incorporating the accounts prepared in Egypt, and declared dividends out of the profits. Although they could have controlled the finances and, for example, starved the local board of funds, they did not in fact do so. Here, a committee of the board wrote cheques and passed transfers of shares, attaching the seal to new share certificates. There is no finding about what the Swedish board did other than declare (but not pay) dividends and organise shareholders’ meetings, but so far as the lease was concerned they only had the right to instruct an expert to inspect the railway not more than once a year.83 This suggests that there was little for the Swedish directors to do, and the scope of the administrative acts of the UK committee of the board should be seen in that light. As Viscount Sumner pointed out in a later case, the UK business ‘was not much less important than the Swedish part’ and ‘little had to be done anywhere except “administration”’.84 party, the shareholders, to change this. A UK board continued to exist but it had no power over the local board in the running of the hotels and merely made up the accounts incorporating the accounts prepared in Egypt, and declared dividends out of the profits. Although they could have controlled the finances and, for example, starved the local board of funds, they did not in fact do so. The trade was held to be a foreign one. The significant feature was that the UK board had no powers over the Egyptian board; the mere delegation of powers to them would not have achieved the same result. Compare BW Noble Ltd v Mitchell (1927) 11 TC 372, where the UK board delegated their powers to run the Paris branch to a French resident director. The UK board were still responsible for the running of the whole business of the company, and the French business was part of the whole. This seems to be a unique example of a UK resident itself having a foreign trade. The Revenue in International Tax Handbook at para 343 suggests that the company would now be regarded as non-resident (or rather would have been before the incorporation test was introduced in 1988). It was conceded in the case that the company was resident (Case Stated, 159, para 11) and the Commissioners decided that the head and seat and controlling power of the company remained in England with the main board (para 14), so it is not clear that the company would be non-resident if the concession had not been made. In particular, the London board determined the remuneration of the Egyptian board and controlled the finances of the company such as the borrowing power. The Revenue’s view is supported by Viscount Cave in The Swedish Central Railway at 374, who considered that the company would have been resident in Egypt, while Lord Atkinson, dissenting, pointed out that residence was not in issue. It is suggested that the facts do not support Viscount Cave since there was a UK board of directors whose powers are summarised by Horridge J at 6 TC 161–62. There is a somewhat similar Irish case where trustees delegated their powers to carry on business in Australia under an irrevocable power of attorney and were held to have Case V income: Ferguson v Donovan 1929 IR 489. 82 83 84

At 346 and 347. 9 TC 345, 350. Egyptian Delta Land and Investment Co v Todd [1929] 1 AC 1, 16.

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Moving straight to the House of Lords, following which we shall return to the other courts, Viscount Cave, the Lord Chancellor, with whom their Lordships, except for Lord Atkinson, concurred, said the following, which was to be the cause of some misunderstanding: The effect of this decision [de Beers] is that, when the central management and control of a company abides in a particular place, the company is held for purpose of income tax to have a residence in that place: but it does not follow that it cannot have a residence elsewhere. An individual may clearly have more than one residence: see Cooper v Cadwalader;85 and on principle there appears, to be no reason why a company should not be in the same position. The central management and control of a company may be divided,86 and it may ‘keep house and do business’ in more than one place; and, if so, it may have more than one residence.87

When he says ‘it does not follow that it cannot have a residence elsewhere’ he does not mean that there is a rule other than management and control for the residence of companies, because in the next sentence he says ‘The central [note the reference to central] management and control of a company may be divided’. The reference to keeping house and doing business is a reference to Lord Loreburn’s speech in de Beers: A Company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business . . . I regard that as the true rule; and the real business is carried on where the central management and control actually abides.88

Viscount Cave was not suggesting that there is a basis for residence different from central management. He could just have well continued the sentence after ‘divided’ by saying ‘and it may have its central management and control in more than one place’, but presumably he wanted to avoid the repetition of central management and control. The final words mean that the company may factually reside in more than one place, not that it may have two residences for UK tax purposes. On the facts, there was sufficient material on which the Special Commissioners could have based their decision about there being enough management and control exercised in the UK for the company to be resident: In the present case it was found by the Commissioners that, while the business of the company was controlled and managed from the head office at Stockholm, 85 (1904) 5 TC 101, concerning a US resident who spent two months in Scotland each year renting a house and shooting rights, and was held to be UK resident. 86 My italics. 87 [1925] 1 AC 495, 501. 88 Harman J in Union Corporation (34 TC 258) (wrongly) suggested ‘Keeping house will thus refer to administrative management and doing business to trading activities’. Sir Raymond Evershed MR at 275 doubted whether keeping house referred only to administrative management and stated the issue correctly at 271 as where the controlling power and authority was to some substantial degree to be found.

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so that the company would in the contemplation of English law have a residence in Sweden, the company was resident in the United Kingdom for the purposes of the Income Tax Acts; and it was hardly disputed that, assuming that a company can have two residences, there was sufficient material upon which that finding could be based.89

Lord Atkinson’s dissent made the point that Huddleston B in Cesena Sulphur had relied on le centre de l’entreprise. Lord Atkinson continued ‘I presume the French lawyers when using this expression did not entertain the opinion that an enterprise might at the same moment have two or more different and separate “centres”’.90 This is no doubt true, but for the different reason that French law requires the central administration of a French company to be in France, which implies the main centre.91 He was concerned that, if there could be two centres, this would require apportionment of the profits between them, and there was no method to achieve this.92 This is not a problem because, so long as one centre was in the UK, the whole of the profits would be taxable in the UK; the issue then becomes one of double taxation relief.93 In short, the difference between the majority and Lord Atkinson was whether central management and control necessarily implied an analogy with a circle (with one centre), or whether it could apply to an ellipse (with two equal centres) or to an ovoid (with major and minor centres). One would have thought that it was obvious that there would be cases where factually management and control would be divided, as Viscount Cave had said; indeed, the ultimate example of equal division had arisen in the very first residence case, Alexander, concerning the Imperial Ottoman Bank,94 in which the meetings were held alternately in London and Paris. On that basis, the majority had merely decided the case on the basis of divided management and control, and one should now regard it as a forerunner of Union Corporation in 1953.95 The importance of the case, however, is not so much what the case decided but what people wrongly thought it had decided.96 For that we must jump forward to 1936, when the best brains of the UK tax world wrote a Report codifying the law of income tax.97 The Codification Committee Report commented that: At 505. At 509–10. See the text at n 50. At 512. The answer is that dual residence can be dealt with only by tax treaties, which came much later. 93 Dominion relief had been introduced by the Finance Act 1920, but outside the dominions only a deduction was given for foreign taxes. 94 See n 31. 95 See the text at n 149. 96 This is reminiscent of what Taylor v Crowland Gas Co was wrongly thought to have decided on the meaning of ‘dwells or carries on his business’, see the text at n 4. 97 1936, Cmd 5131. The committee included AM Bremner, Reginald (later Sir Reginald) Hills, EM (later Judge) Konstam (author of Konstam’s Law of Income Tax which ran to 12 editions between 1921 and 1952), and F D Morton (later Lord Morton of Henryton). 89 90 91 92

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A company can have more than one place of residence; but, as there can be only one place of chief control, it follows that a company can be resident elsewhere than in the country in which the chief control is situated. To adopt control alone as the test of residence for the purpose we are discussing would be to relieve from liability in respect of its income from foreign sources a company British in every respect (registration, place of manufacture and sale of its goods, nationality of its shareholders, etc) except that its directors meet abroad and manage the business from abroad.98

In the first sentence they assume the circle analogy, which means that they looked for another explanation of residence in Swedish Central Railway. The draft Bill annexed to the Report defined corporate residence as follows: 7. A company shall be treated as resident in the United Kingdom in a year of charge if it is controlled in the United Kingdom, or if it maintains in that year an established place of business in the United Kingdom and any substantial part of the activities of the company, whether administrative or other, is conducted in the United Kingdom, but a company shall not be treated as so resident by reason only of the fact that it has a registered office in the United Kingdom at which is transacted such administrative business only as is necessary to comply with the requirements of the Companies Act 1929.

They interpreted Swedish Central Railway as deciding that a place of business plus a substantial part of the company’s activities (other than merely complying with the Companies Act, as in Egyptian Delta99) constituted residence.100 Further confirmation that this is what people thought the case decided can be seen from Lord Radcliffe’s speech in Unit Construction v Bullock,101 as late as 1959, in which the distinguished counsel for the taxpayer, Frank Heyworth Talbot QC, had submitted: The test laid down by Lord Loreburn [in de Beers] emerges from the authorities supreme and authoritative. It may no longer be exclusive and there may be an alternative criterion, but it is unchallengeable that where one finds management and control of the company’s business, there the company must be held to be resident.102

Counsel was accepting the existence of an alternative criterion. Lord Radcliffe explained what Swedish Central Railway was (wrongly) thought to have decided:

98 Para 64. This is another example of taxation of a branch being ignored because in the absence of residence the branch could still be taxed. 99 Egyptian Delta Land and Investment Co Ltd v Todd [1929] 1 AC 1, see the heading ‘The UK Incorporated Non-resident Company at Last’. 100 The same view was taken by the Special Commissioners in 1950 in Union Corporation v IRC 34 TC 207, 223, 239. 101 [1960] 1 AC 351. 102 At 356.

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To all appearances that laid down the proposition that, although there was a residence in Sweden by virtue of central control and management being exercised there, there was at the same time residence in England by virtue of incorporation here and the performance here of administrative duties such as exercising the custody of the company’s seal and registration of transfers. The novel idea thus appeared that there were some circumstances that could establish residence for a company, even though its central management and control were being concurrently exercised elsewhere.103

He decided that the real decision was found in the passage quoted above104 from Viscount Cave’s speech, that central management and control was divided and the management that was in the UK was sufficient to make it resident. The ellipse analogy had triumphed over the circle.105 Before leaving Swedish Central Railway we should return to the other courts and the arguments that developed about dual residence.106 It is necessary to make two introductory points: first, that, so far as UK law is concerned (and we are not concerned here with dual residence caused by foreign law applying a different test of residence, which is an issue that would later be dealt with in tax treaties), a company must be either resident or non-resident107 and, if the latter, UK law says nothing about where it is resident.108 Secondly, there is a linguistic problem about the term ‘residence’ which can mean both the fact of residing (meaning, in relation to a company, the place of management and control) and the legal result of such residing, that of residence for tax purposes; I shall distinguish these by using the expressions ‘residing’ and ‘residence’ respectively. If, therefore, judges say that a company can have two residences, they clearly cannot mean that it can be both resident and non-resident for UK tax purposes at the same time; they must mean that factually it resides in two places. Confirmation of this is found in Rowlatt J’s reason for thinking that it was easier for a company than an individual to have two residences because an individual cannot be in two places at the same time but a company ‘which only exists in law and in the mind and does not

At 367. See the text at n 87. In Unit Construction residence in Africa was admitted rather than decided and so strictly the case is not authority that dual residence is possible. Lord Radcliffe specifically said (at 367) that the point did not arise and expressed no view on it. 106 This issue had been raised first in Goerz v Bell [1904] 2 KB 136, in which the company (subsequently featuring in another case under its new name, Union Corporation) was held to be resident in the UK, Channell, J remarking (at 146) that ‘it is possible—though I do not decide the question one way or the other—that the company may have two residences’. 107 It was argued in Union Corporation v IRC that there was an advantage in profits tax in being both on account of the reference in FA 1947, s 39 to ‘ordinarily resident outside the United Kingdom’, but the courts decided that there was no difference between this and being not ordinarily resident in the UK, so that the relief did not apply if the company were also resident, see the text around n 149. 108 The first time that became relevant was in the CFC legislation in TA 1988, s 749. 103 104 105

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occupy space at all’ can.109 On the facts, he considered that the company resided in the UK because it was performing some of the vital organic operations incidental to its existence as a company—keeping its seal (its registered office may be merely an address), having the banking account, its transfer books, its accounts made up and audited, and paying its dividend in London110

and accordingly was resident here. Like many judges, and similarly in the quotation from the Codification Committee Report111 13 years later, one can see that he found it hard to accept that a UK-incorporated company could be non-resident. In the Court of Appeal, Warrington LJ slightly confused the point by introducing an unnecessary passing reference to the result under Swedish law: It is said here that applying what Lord Loreburn said [in de Beers] was the true rule, the present company must be held to be resident in Sweden and not here. It is in these last three words that the fallacy, in my opinion, lies. The company may have a residence in Sweden—as to this I express no opinion, for it may involve questions of Swedish law—but I cannot see why it should not also have a residence in the United Kingdom, and if it has, that is sufficient for the present purpose . . .112

What he was really saying was that de Beers did not decide that central management and control could be in only one place, with the result that, if management and control were divided, one had to ask whether sufficient management and control was found in the UK to make the company resident here.113 This was exactly how Viscount Cave would decide it on the facts.114 As before, these references to residence should be understood as (in my terminology) residing. He decided that, although there was some (rather than the only) control and management in Sweden so that the company would in UK law reside in Sweden, the Special Commissioners were entitled to find that there was sufficient management and control in the UK for it also to reside in the UK. One must, however, take issue with Viscount Cave’s loose statement earlier in his speech, where he said ‘My Lords, in my opinion a registered company can have more than one residence for the purposes of the Income Tax Acts’ (my italics).115 Later on the same page, in the passage already quoted, he says ‘The central management and control of a company may be divided, and it may “keep 9 TC 342, 352. 9 TC 342, 353. See the text at n 98. [1924] 2 KB 255, 271. He had posed the issue (at 268) as ‘whether the fact that the real control and management of an English company is exercised abroad justifies the Court in holding that it is not resident here’. 114 See the text at n 89. 115 [1925] 1 AC 495, 501. 109 110 111 112 113

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house and do business” in more than one place; and, if so, it may have more than one residence’,116 which makes it clear that he means that a company may reside in more than one place in the context of the income tax definition.117

Legislative Definition of Company Residence Before dealing with the next case, I should point out the existence of two legislative definitions of company residence made at this time, although both of limited scope, which tend to be overlooked in thinking of corporate residence as an entirely judge-made definition. The first of these was in 1925, the same year as the House of Lords decision in Swedish Central Railway, in the earliest tax treaties giving reciprocal exemption from income tax on shipping profits that were made pursuant to an enabling provision in the Finance Act 1923.118 These treaties exempted ‘any profits which accrue from the business of shipping carried on by . . . a company managing and controlling119 such business in [the other contracting state]’,120 and vice versa. This looked at the management and control of the shipping business rather than that of all of the businesses of the company.121 The second was the Agreement of 14 April 1926 with the Irish Free State, as it then was, dealing with each state’s tax jurisdiction following partition. The Agreement is a unique example of a double taxation agreement between two states with identical tax systems. It was given legislative effect in the Finance Act 1926 and operated so long as legisAt 501. Although this is not usually interesting, as the only issue is whether it resides in the UK. Union Corporation v IRC could have been an exception where residence in another country might have been relevant to UK tax, but the decision was that it was not relevant, see the text at n 149. 118 S 18. 119 Note that in this and subsequent statutory provisions, until FA 1951, s 36 (see n 166), there is no reference to central management. 120 The earliest examples are The Relief from Double Income Tax on Shipping Profits (Denmark) Declaration, 1925 (SR&O 1925 No 102), and similarly with Norway (SR&O 1925 No 104), Sweden (SI 1925 No 105) and Finland (SR&O 1925 No 1353), and one in 1926 with the Netherlands (SR&O 1926 No 824). I have deliberately excluded from this list the even earlier The Relief from Double Income Tax on Shipping Profits (USA) Declaration, 1924 (SR&O 1924 No 1267), which depended not on management and control but on a corporation being organised in the US. 121 This used also to be the case for Art 8 of the OECD Model. The former Art 8 Comm, para 21 provided that, where the international transport activities of an enterprise not exclusively engaged in transport were managed from a permanent establishment, the effective management of a separate enterprise was considered to be in the state of the permanent establishment for purposes of Art 8. In 2000, para 21 was modified to provide that the application of the article is not to be affected by the fact that the transport is operated by a permanent establishment, so that it is now the place of effective management of the whole enterprise (the company) that is relevant. 116 117

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lation confirming it was in force in both states.122 The form of the Agreement was to charge tax in the residence state only; there would be no tax at source.123 It was the UK’s ideal tax treaty, just what the UK had wanted since the 1930s but had never been able to persuade anyone to adopt.124 But how to define corporate residence with the authorities in such an uncertain state, particularly as ideally dual residence should be avoided if tax was to be charged in the residence state only? Since the Revenue was at the time arguing for UK incorporated companies to be resident on the basis of incorporation, one might have expected it to adopt such an easily applied test, but it did not; instead it legislated for the far more difficult to apply management and control test: 4. For the purpose 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.125

The fact of defining residence of a company demonstrates the uncertainty about what Swedish Central Railway had decided the year before. The implication was that this was not so much a definition of residence as a definition of what was not residence. Both states were willing to give up the supposed Swedish Central Railway-type secondary residence in the interests of having a single residence in one or other state. Was this an admission that the Revenue thought it would lose the next case?

FA 1926, sch 2, para 8. Since at the time the company paid income tax and dividends were treated as having tax deducted from them, the effect of residence-only taxation was that the UK repaid the tax collected from the company to the extent that dividends were paid to Irish residents who paid tax in Ireland (there was in practice a method whereby no tax was deducted from such dividends), and the same applied to interest. The net effect was that, to the extent that profits were distributed, tax was paid in the country of residence of the shareholder; and to the extent they were retained, tax was paid in the company’s residence country. 124 See JF Avery Jones, ‘The History of the United Kingdom’s First Comprehensive Double Taxation Agreement’ [2007] British Tax Review 211, particularly the first section. The Revenue’s note to ministers described the Agreement as being based on the League of Nations Report of the four wise men, Professor Seligman (US), Sir Josiah (later Lord) Stamp (UK), Professor Bruins (the Netherlands) and Senator (later President) Einaudi (Italy), ‘Report on Double Taxation’, submitted to the Financial Committee on 5 April 1923 (Document EFS73.F19), Legislative History of US Tax Conventions, vol 4, 4005, available at http://setis.library.usyd.edu.au/oztexts/parsons.html and their conclusion (4055) that residence-only taxation was ‘the most desirable practical method of avoiding the evils of double taxation’ (TNA:PRO IR40/3153). The same point was made in the Memorandum explaining the Agreement to Parliament (1926, Cmd 2654). The residence definition is also not dissimilar from the Leage of Nations 1927 Report: ‘the place where the concern has its effective centre, ie the place where “brain”, management and control of the business are situated’ (4081), The Irish Agreement was made before the first League of Nations draft of 1927. 125 Note the absence of any reference to central management, implying that a company could have only one management and control, as is also indicated by ‘in that country only’. 122 123

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The UK Incorporated Non-resident Company at Last The next case, Egyptian Delta Land and Investment Co Ltd v Todd,126 was waiting in the wings, but the Revenue had deliberately delayed listing it before the Commissioners until after the House of Lords decision in Swedish Central Railway.127 The facts were similar except that it was a trading rather than an investment company; the company dealt in land in Egypt for a railway venture, and in 1907 (presumably not by coincidence shortly after the decision in de Beers) the original UK board had retired and been replaced by Egyptian directors, after which the Revenue had accepted that it was non-resident.128 But, unlike the Swedish Central Railway Company, the company had taken the trouble to move the subsidiary elements, like the seal, the accounting records and place of audit, the bank account, the register of transfers (which were passed in Egypt before being registered in England) and the payment of dividends, to Egypt. On that basis, the City General Commissioners were able to distinguish Swedish Central Railway and find the company to be non-resident. Rowlatt J, however, kept to his view in Swedish Central Railway and said he was bound to find the company resident, as did the Court of Appeal.129 The House of Lords comprised the interesting combination of two of their Lordships, Viscount Sumner130 and Lord Buckmaster, from the majority in Swedish Central Railway; Lord Atkinson, from the minority; Lord Atkin, who had dissented in that case in the Court of Appeal; and Lord Warrington, whose standpoint was unknown. If their Lordships had regarded it as a re-run of Swedish Central Railway but starting with the opposite finding of fact, the result would have been interesting, but it is clear that they did not so regard it. The case did not enlarge on the difference between the circle and the ellipse analogy, but developed into one about the lack of importance of the place of incorporation, which was the company’s only connection with the UK. The opposing contentions were the taxpayer’s that if incorporation were conclusive the whole of the reasoning in Cesena Sulphur was waste labour; and the Crown’s appeal to the principle of the dangerous precedent:131 ‘There has never yet been a [1928] 1 KB 152 (High Court and CA), [1929] 1 AC 1 (HL), 14 TC 119. TNA:PRO file IR40/2968. This is not clear from the case stated, but appears from the PRO file IR40/2968. The company asked the Revenue to pay its costs after the company lost in the Court of Appeal on the ground that it had been treated as non-resident for 20 years and the Revenue was effectively fighting a test case. The Revenue refused, but agreed not to ask for costs if it won in the House of Lords (which they did not): PRO file IR40/2968. 130 Who had merely agreed with Viscount Cave in Swedish Central Railway. 131 ‘The Principle of the Dangerous Precedent is that you should not now do an admittedly right action for fear you, or your equally timid successors, should not have the courage to do right in some future case, which, ex hypothesi, is essentially different, but superficially resembles the present one. Every public action which is not customary, either is wrong, or, if it is right, is a dangerous precedent. It follows that nothing should ever be done for the first time’ 126 127 128 129

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case where it has been held that a company incorporated in England under the Companies Acts is not resident in this country for income tax purposes or for any purpose.’132 Viscount Sumner gave a long and detailed speech ‘treading again the weary road of the Tax Cases’.133 It is sometimes said that he was trying to explain why he had changed his mind since concurring with Viscount Cave in Swedish Central Railway without actually saying so, because at the time the House of Lords was bound by its decisions.134 Such a suggestion would have been completely out of character.135 Egyptian Delta did not raise the issue of the circle and the ellipse analogy: factually there was no residing in the UK, only incorporation here. He started by saying that he could upset the City Commissioners’ decision only on a question of law and, if the place of incorporation was merely a factor to be taken into account, the whole decision was a question of fact for the Commissioners. He looked first at the Companies (Consolidation) Act 1908, from which he concluded that no business need be done at the registered office and no person need be found there. He dismissed Swedish Central Railway as irrelevant: ‘All that was decided in the Swedish Central Ry Co’s case was that the company could have two residences, one in England as well as one in Sweden.136 Your Lordships were not asked to decide more.’ He then surveyed the consistent line of cases, starting with Alexander, continuing with Cesena and Calcutta Jute and on to de Beers, in which incorporation was not the deciding factor, as Huddleston B had said in Cesena and Calcutta Jute.137 He threw in the foreign trade cases of San Paulo (Brazilian) Railway Co and Mitchell v Egyptian Hotels Ltd considered below138 and a number of textbooks as (FM Cornford, Microcosmographia Academica (Cambridge, Bowes & Bowes, Cambridge, 1908), available at: http://www.cs.kent.ac.uk/people/staff/iau/cornford/cornford.html (accessed on 16 January 2010). [1929] 1 AC 1, 5 (taxpayer), 6 (Crown). [1929] 1 AC 1, 18; (1928) 14 TC 119, 144. Eg R Couzin, ‘Corporate Residence and International Taxation’ (Amsterdam, International Bureau of Fiscal Documentation, 2002) 73. 135 As his entry in the Dictionary of National Biography states: ‘His emphasis on the need for certainty, particularly in commercial law—“rights”, he said, “ought not to be left in suspense”—was also reflected in his insistence on the authority of precedent and his refusal to allow that decisions of the House of Lords could be altered except by the legislature.’ 136 The reference to residence in Sweden, which is not something that UK tax law decides, shows that this reference to ‘residence’, is to what I have called ‘residing’. 137 See the text at n 57. He also relied on New Zealand Shipping Co v Thew (1922) 8 TC 208, also relating to a foreign incorporated company in which the House of Lords relied solely on de Beers. 138 He also pointed out that there was no suggestion in the House of Lords in Bradbury v English Sewing Cotton Co [1923] AC 744, (1923) 8 TC 481 that incorporation, which was foreign, was relevant to residence. The US company had become UK resident on its becoming a subsidiary of a UK resident company but changed residence back to the US in 1917. The case mainly concerned the computation of the three-year average. 132 133 134

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support.139 The county court jurisdiction cases were selectively mentioned, but they did not afford much assistance;140 the only two cases to which he referred141 were not railway company cases which had been influential on company residence. Lord Buckmaster, the other member of the majority in Swedish Central Railway, made a passing reference to the case without seeing any difficulty about it, and went on to point out that Parliament had passed subsequent legislation that assumes that a UK-incorporated company can be non-resident.142 Lord Atkinson merely concurred with Viscount Sumner. Clearly he saw no conflict between the two cases that required him to explain why he had dissented in Swedish Central Railway but agreed with the majority here. The others all gave speeches on the mainline of Calcutta Jute, Cesena and de Beers. Lord Warrington, the only one who had not been involved in Swedish Central Railway, merely observed that the present issue had not been raised in Swedish Central Railway.143 The relationship between Swedish Central Railway and Egyptian Delta was explained by Lord Radcliffe much later in 1959 in Unit Construction v Bullock 144 in this way: I am myself of the opinion that the best way of treating the matter is to regard the Swedish Central Railway Co and the Egyptian Delta Land and Investment Co decisions as if they were in effect one decision of the House and the speech of Viscount Sumner in the later case as affording an authoritative commentary on the significance of the earlier. He was party to both of them. If this is done, much of the difficulty disappears, for it is clear that Lord Sumner wished it to be understood that the Swedish Central Railway Company’s business and administration were of such a nature that what managing and controlling had to be done were in fact done as much on English as on Swedish soil.145 He regarded the key of the earlier decision as being contained in the words of Lord Cave: ‘The central management and control of a company may be divided, and it may “keep house and do business” in more than one place; and, if so, it may have more than one residence.’ On this basis the 1925 decision of the House is no more than a decision on that special class of case, such as I have already noticed with reference to the Union Corporation146 where the facts themselves are genuinely such as not to admit of a finding that central management and 139 These included Dicey’s Conflict of Laws, 1st and 2nd edns; Lindley on Companies, 5th edn; Buckley on the Companies Acts; and Dowell’s Income Tax Laws, 1st to 7th edns, none of which contained any support for a UK-incorporated company being automatically resident. 140 [1929] 1 AC 1, 30. 141 Taylor v Crowland Gas Co (see n 4) and Keynsham Blue Lias Lime Co v Baker (see n 7). Neither counsel seems to have cited county court authorities, and Viscount Sumner was making the case for the place of incorporation to be irrelevant. 142 F (No 2) A 1915, s 31(3), subsequently All Scheds General Rule 7 to the ITA 1918. 143 At 43. 144 [1959] 1 Ch 147, 315, [1960] 1 AC 351, (1959) 38 TC 712. 145 This is clear from the passage from his speech in Egyptian Delta quoted in the text at n 84. 146 Discussed below in the text at n 149.

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control are exercised in or from any one country. There will then be only one category of exception from the principle of the De Beers case and not an undefined second class.

This approach finally killed off the idea that Swedish Central Railway had introduced a separate definition of residence, as the Codification Committee thought; it was merely an example of divided management and control. It shows that there can be an advantage in not codifying the law. Thus we were back on the direct track that had started with the county court cases on railway companies, which were applied to tax in Calcutta Jute and Cesena Sulphur to UK incorporated companies with directors in the UK who controlled a trade carried out abroad, which went via de Beers, in which the circumstances were the same except that the company was incorporated outside the UK, to Egyptian Delta, the remaining combination of UK incorporation and director control outside the UK. The principle was the same throughout: it was where the real business was carried on, or the central management and control, that was important; the place of incorporation was only one factor and not a conclusive one, just as Huddleston B had originally stated when considering the US authorities.147 Divided management must have been discussed as a problem because the Court of Appeal recorded in 1952: we have been informed by learned Counsel that those who are engaged in the practice and administration of Income Tax law have now for more than 20 years been vexed by the problem and have awaited an opportunity for its determination by the Court.148

Such divided management and control, which had not been understood as being the issue in Swedish Central Railway, was explicitly in issue in the next case, Union Corporation.149 The facts were similar to de Beers: the company was incorporated in South Africa with directors meeting in the UK and the business carried on in South Africa, but there were a minority of South African directors with wide powers operating under powers of attorney. As well as another company in the same situation, there was a third case, Trinidad Leaseholds, heard at the same time, which was a UK-incorporated company with its main management in the UK but some management in Trinidad. The reason why it was relevant whether the companies were also resident abroad (in accordance with UK tax law) was because profits tax had a provision encouraging retention of profits by a lower rate of tax on them. Where the person carrying on a trade or business was ‘ordinarily resident outside the United Kingdom’ profits were treated Text at n 57. Union Corporation Ltd v IRC 34 TC 266. The discussion about costs, particularly Mustoe at 277, shows that both parties wanted the point decided. 149 Union Corporation Ltd v IRC [1952] 1 All ER 646, [1953] 1 AC 482, (1953) 34 TC 207. 147 148

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as retained and therefore qualified for the lower rate of tax. Confusingly, the same section referred to a body corporate ‘not ordinarily resident in the UK’, enabling the company to contend that, although it was resident in the UK, this did not prevent it from also being ordinarily resident outside the UK. The Special Commissioners decided that, although a dual resident company qualified for the relief, the company was not dual resident, because that arose only if management and control were equally, or substantially equally, divided (the ellipse analogy), which was not the case here. Harman J disagreed on both counts. He considered that ‘not ordinarily resident in’ meant the same as ‘ordinarily resident outside’ the UK, and so the relief did not apply to a dual resident, but he went on to say that the facts would have enabled a finding that the company was a resident of South Africa in accordance with UK tax law. The Court of Appeal agreed with Harman J on the first point, which means that its decision on the possibility of dual residence of companies was obiter. On the latter aspect they said: We agree with Harman, J, in rejecting this view . . . In our judgment, the formula ‘where the central power and authority abides’ does not demand that the Court should look, and look only, to the place where is found the final and supreme authority ... For our part we feel some doubt whether it is right to treat the phrase ‘keeping house’ as referring only to administrative management: but we think . . . that there must, in order to constitute residence, be not only some substantial business operations in any given country but also present some part of the superior and directing authority. We prefer, accordingly, to state the matter as we have done, but we agree with Harman, J, that the question of the extent of the superior or directing authority required (as well as of the business operations being performed) is one of fact to be determined by the Special Commissioners.150

The House of Lords agreed that a dual resident did not qualify for the relief and did not consider whether on the facts it was a dual resident. Later, Lord Radcliffe, in Unit Construction, said of the Court of Appeal decision in Union Corporation: The facts were not such as to allow of Lord Loreburn’s test being applied, and therefore some other basis of decision had to be selected. The solution chosen by the Court of Appeal appears to have been that residence arose in any country in which ‘to a substantial degree’ acts of controlling power and authority were exercised, and in this the line of reasoning followed was avowedly adapted from the judgment of Dixon J in Koitaki Para Rubber Estates Ltd v Federal Commissioner of Taxation.151 It may perhaps still be open to question whether, where the facts are such that Lord Loreburn’s test cannot be applied as a whole, the 150 151

At 270–71 and 275 (TC); 657 and 662 (All ER). 64 CLR 15.

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correct way of determining residence is, so to speak, to fragmentate his principle and establish a residence for tax purposes wherever the exercise of some portion of controlling power and authority can be identified. The point does not arise for our decision in this case, and I express no view at all upon it. I only note the decision in the Union Corporation case as an instance of dual or multiple residence for tax purposes which has its origin in the fact that circumstances do not always make it feasible to apply the Loreburn formula.

If Swedish Central Railway was the ellipse analogy prevailing over the circle, the Court of Appeal decision in this case, that residence was also found at the lesser centre of management and control, extended the ellipse analogy to the ovoid, with the result that many of the companies that the cases had considered, including de Beers, would be dual residents if the same common law test applied in the other country.152 The understanding of corporate residence was then complete. Later cases are examples of the application of these principles. In spite of Calcutta Jute and Cesena relying more on the company’s constitution than what happened on the ground, in cases where the constitution is not followed the place of management and control is necessarily entirely factual, as is shown by the decision in Unit Construction v Bullock, in which there was an unusual finding of fact that At all material times the boards of directors of the African subsidiaries did not and for all practical purposes could not manage and control the businesses of their respective companies. If they had tried to manage and control their companies’ businesses (otherwise than in accordance with instructions from the directors of Alfred Booth & Co Ltd) Alfred Booth & Co Ltd would have removed them from office . . .153

The Special Commissioners’ decision was that: We find that the position was at the material times that the boards of directors of the African subsidiaries (who are the people one would have expected to find exercising control and management) were standing aside in all matters of real importance and in many matters of minor importance affecting the central management and control, and we find that the real control and management was being exercised by the board of directors of Alfred Booth & Co Ltd in London.154

They were therefore held to be resident in the UK, and this finding of fact was upheld by the House of Lords. Although there had been an admission that the subsidiaries were also resident in Kenya, the House of Lords was not dissuaded by this in finding dual residence.155 See the text at n 165 for the beginning of the resolution of dual residence by tax treaty. 38 TC 712, 718. At 721–72. Although the double taxation arrangement with Kenya (1952 SI 1214) was in force in the relevant years, it is not mentioned in the decision. 152 153 154 155

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Further Statutory Definitions of Company Residence Reference was made above to the limited statutory definition of company residence in the shipping treaties and the 1926 Agreement with Ireland. There are further examples of statutory definitions in two varieties of tax treaties. The first of these exempted the profits earned in the UK by an agency of a non-resident, and vice versa, starting from 1931, a few years after the Irish Agreement.156 These treaties also needed to define residence for the purpose of the treaty, and they provided that: a body corporate shall be regarded as resident in the United Kingdom if its business157 is managed and controlled in the United Kingdom and shall be regarded as resident in [the other state] if its business is managed and controlled in [the other state].158

The second example was that in 1945 the UK gave up its insistence of residence-only taxation in tax treaties and made its first comprehensive double taxation agreement with the US; other agreements followed swiftly. The US treaty was atypical so far as company residence was concerned because the US taxes companies exclusively on the basis of incorporation there.159 Treaties between countries adopting the common law definition of 156 Made pursuant to FA 1930, s 17(1). The exemption did not apply if the profits ‘(i) arise from the sale of goods from a stock in the United Kingdom; or (ii) accrue to a person resident in the United Kingdom; or (iii) accrue to a person not resident in the United Kingdom directly or indirectly through any branch or management in the United Kingdom or through any agency in the United Kingdom where the agent has and habitually exercises a general authority to negotiate and conclude contracts’. 157 The reference to its business is to the whole business of the company, cf Cesena, see n 59. 158 The Relief from Double Income Tax on Agency Profits (Sweden) Declaration 1931 (SR&O 1931 No 932), and with Switzerland (SR&O 1932 No 925), Finland (SR&O 1935 No 304), Newfoundland (SR&O 1936 No 175), the Netherlands (SR&O 1936 No 1134), Greece (SR&O 1937 No 1937), Norway (1939 SR&O No 1319). (This list deliberately excludes The Relief from Double Income Tax on Shipping Profits (USA) Declaration, 1924 (SR&O 1924 No 1267) as exemption depended not on management and control but on a corporation being organised in the US.) It is interesting that Sweden, Switzerland and Finland used a different formula in their comprehensive tax treaties with the UK in 1949, 1954 and 1951 respectively (see n 159). As with the shipping treaties and the Irish Agreement, there is no reference in these treaties to central management, and the wording clearly implies that a company can have only one place of management and control. 159 The result of the different wording was that a US incorporated company (a US corporation as defined) was excluded from the definition of resident of the UK on account of US incorporation, and excluded from the definition of resident of the US on account of UK management and control (ie residence for the purposes of UK tax), so that the treaty does not apply to it. Similarly, in the profits tax treaty (1949) with Ireland (which imposed corporation profits tax solely on the basis of incorporation) an Irish incorporated company managed and controlled in the UK is excluded from the definition of resident of the UK on account of Irish incorporation, and from the definition of resident of Ireland on account of being managed and controlled in the UK, so the treaty has no application to it. The treaty with Sweden (1949) differs from the Irish profits tax treaty by not excluding a company incorporated in Sweden from the definition of UK residence on account of management and control in the UK, but is similar to the Irish treaty in excluding a company incorporated in Sweden but managed and controlled in the UK from the definition of resident of Sweden. Such a company is therefore a treaty resident

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corporate residence, which was the case for most of these early treaties with the Dominions and Colonies, all contained a provision on these lines: In the present agreement, unless the context otherwise requires . . . [1] The terms ‘resident of the United Kingdom’ and ‘resident of Canada’ mean respectively any person who is resident in the United Kingdom for the purposes of United Kingdom tax and not resident in Canada for the purposes of Canadian tax and any person who is resident in Canada for the purposes of Canadian tax and not resident in the United Kingdom for the purposes of United Kingdom tax; [2] and a company shall be regarded as resident in the United Kingdom if its business is managed and controlled in the United Kingdom and as resident in Canada if its business is managed and controlled in Canada.160

Limb 2 is the same as in the agency profits treaties and is derived from the Irish agreement.161 It is clear from limb 1 that dual residents do not obtain treaty benefits. It is therefore reasonable to expect that limb 2 helped to achieve that result. Given Swedish Central Railway and the Codification Committee’s support for it 10 years earlier, at the time of the agency profits treaties, it seemed possible for a company to be resident (under UK law) both in its country of central management and control and in its country of incorporation, as the Codification Committee had stated. As in the Irish treaty, the reason for limb 2 was to prevent Swedish Central Railwayresidence from being residence for the purpose of the treaty, which helped of the UK. Sweden may have been prepared to do this because it then had a tax avoidance provision, which they called the Luxembourg rule, such that if a foreign entity had its real management in Sweden it would be taxed in Sweden on its worldwide income. UK and third-country incorporated companies managed in Sweden remain within the definition of Swedish resident and so to that extent Sweden retained its management and control rule. The treaty with Finland (1951) is the same. The treaty with Switzerland (1954) has the same effect as the Swedish treaty. The dates in brackets refer to the date of signature, which may differ from the date of the statutory instrument giving effect to it. 160 This wording was used in our treaties with: Canada (1946), Southern Rhodesia (1946), South Africa (1946), New Zealand (1947) with a variation, Palestine (1947), Netherlands (1948, extended to Netherlands Antilles 1957), Sweden (1949) with a variation, Denmark (1950) (this was varied in 1969 to add at the end ‘and it is resident in Denmark for the purposes of Danish Tax’), Ceylon (1950), France (1950), Norway (1951), Greece (1953) referring to domiciled or resident in Greece, Germany (1954), and in about 44 arrangements with Colonial territories. In France (1945 and 1950) and Belgium (1953) limb 2 is used as the definition of fiscal domicile in those countries (which is equated to residence). The treaty with New Zealand (1947) states specifically that management and control in one state excludes residence in the other, which must be implied by the usual wording. Uniquely, limb 2 was not included in the treaty with Australia (1946) because of Australia’s different definition of residence of (i) incorporation or (ii) carrying on business in Australia plus either management and control or voting power controlled by Australian residents, which was presumably adopted so as to avoid the result in Cesena Sulphur and Calcutta Jute Mills. The meaning of carrying on business in Australia is from the context necessarily different from management and control, which in the UK is equated to where the real business of the company is carried on, see the Australian Taxation Ruling 2004/15. 161 It has the advantage of removing the ambiguity in the Irish agreement about the effect of management and control in a third country.

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to make a company a single resident and therefore entitled to the benefit of the treaty in accordance with limb 1. Reading the two limbs together effectively meant that the requirement was for the company to be resident in Canada for the purposes of Canadian tax [because it is managed and controlled in Canada, and not for any other reason] and not resident in the United Kingdom for the purposes of United Kingdom tax [because it is not managed and controlled in the UK and disregarding any other reason why it is resident]

and vice versa.162 This formula changed about the time of Union Corporation in favour of defining UK residence to mean ‘any company whose business is managed and controlled in the UK’ (and vice versa) while retaining limb 1 for other taxpayers.163 This formula continued to imply that there could be only one place of management and control, although Union Corporation had shown this to be doubtful.164 It was not until 1958 that the First Report of the OEEC, the forerunner of the OECD and the 1963 Draft Convention, dealt with the resolution of dual residence for the purpose of the treaty.165 Two further statutory definitions of general application should be noted. The first is a provision in the Finance Act 1951166 preventing a company from becoming non-resident without Treasury consent, which stated that A body corporate shall be deemed for the purposes of this section to be resident or not to be resident in the United Kingdom according as the central management and control of its trade or business is or is not exercised in the United Kingdom. 162 The treaty with South Africa is mentioned by the Special Commissioners in Union Corporation 34 TC 218, 219, 234 (Union Corporation was initially regarded as treaty resident in South Arica, then in the UK), 235 (Johannesburg Consolidated Investment Co was treaty resident in the UK). The other state might also apply Swedish Railway or it might have a different statutory test, as was the case in New Zealand, which treated a company as resident if it was incorporated or had its head office there. This was presumably the situation in New Zealand Shipping Co Ltd v Stephens (1907) 5 TC 553 (CA) and New Zealand Shipping Co Ltd v Thew (1922) 8 TC 208 (HL) (for a later year) holding the company to be UK resident; it appears that it was also taxed in New Zealand (8 TC 228). 163 The first such treaty was with Switzerland (1954), followed by Pakistan (1955); Austria (1957), in which the definition for Austria says ‘any company which has its management and control (Geschäftsleitung) in Austria’ rather than the normal wording that applies in the UK of ‘any company whose business is managed and controlled in the UK’; Italy (1962); and Malta (1962). This formula lasted until Sweden (1961), which defined residence in accordance with each country’s domestic tax law and also had a dual residence provision based on the OEEC First Report (1958), which is similar to the OECD Draft 1963 applying place of effective management to taxpayers other than individuals. South Africa (1962) is also on the same lines. 164 TNA:PRO file IR40/11356 contains evidence that in 1953 the Revenue was refusing to admit the possibility of split management and control and was looking to the principal place of management, although it recognised that this would be difficult following Union Corporation. 165 The treaties with Sweden (1961) and South Africa (1962) were the first UK examples to adopt this. The origin of the OEEC dual residence provision can be seen at www. taxtreatieshistory.org. The working party had originally proposed using managed and controlled as the tie-breaker. 166 S 36.

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This was the first statutory reference to central management and control. The second is that in 1988 residence was defined to add incorporation in the UK ‘and if a different place of residence is given by any rule of law [meaning case law], that place shall no longer be taken into account for [the purposes of the Taxes Acts]’.167 The concept of a UK-incorporated company that was non-resident, which had given so much trouble to the courts before they finally recognised it, was thus ultimately reversed by Parliament. Central management and control is therefore now relevant only to non-UK incorporated companies. Finally, there was one type of company that was not taxed on the basis of its residence. Until 1993 insurance companies were taxed on the basis of their head office being in the UK rather than their being resident, presumably because this was the criterion for their regulation.168

FOREIGN TRADES169

Assuming that a company was resident in the UK on the basis we have discussed, there was another argument available to the company in the common case where the trade was physically carried on abroad, which was that the trade was foreign170 so that the trading profits were originally taxable on the remittance basis, a system that obviated the difficulty of measuring foreign trading profits. The Act was not exactly helpful in distinguishing UK and foreign trades, because UK trades included any trade whether carried on in the UK or elsewhere,171 and so it was not clear whether a trade could qualify as a foreign possession.172 Material dating FA 1988, s 66(1). I am grateful to Mr Richard Thomas of HMRC for pointing this out. The original definition was in FA 1915, s 14(1), subsequently ITA 1918, rule 3 of Case III of sch D, ITA 1952, s 430, TA 1970, s 323, ending as TA 1988, s 431(2) before being changed to residence by FA 1993, s 103. Regulation of insurance companies according to the place of their head office was in s 7 of the Insurance Companies Act 1982. The Consolidated Life Insurance Directive EC/2003/82, reg 4 requires regulation by the authorities of the state of head office (siege social, Sitz), and subsequently Art 6(3) requires that the head office (administration centrale, Hauptverwaltung) be in the same state as the registered office (siège statutaire, Sitz). 169 Material from this section has previously appeared in JF 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 (Oxford, Hart Publishing, 2004) 15, 26. 170 Formerly a foreign possession taxable under Case V of sch D. 171 TA 1988, s 18(1), sch D (a)(ii), originally in sch D in s LXXXIX of the 1803 Act (although then referring to Great Britain). The rewritten ITTOIA 2005, s 6 now refers to profits of a trade arising to a UK resident wherever the trade is carried on, and to a non-resident from the trade or part of the trade carried on in the UK, while in ITA 2007, s 830(3) ‘A trade is foreign if no part of it is carried on in the United Kingdom’. 172 Although, as Lord Macnaghten points out in Colquhoun v Brooks (1889) 2 TC 490, 506, the specific reference to the British plantations in America in Cases IV and V (‘. . . Possessions in Ireland, or in the British Plantations in America, or in any other of His Majesty’s Dominions out of Great Britain, and Foreign Possessions’) would have been concerns in the nature of trade. FA 167 168

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from 1880 indicates that it was originally thought that the concept of a foreign trade did not exist.173 The question of whether a foreign trade could exist was settled by Colquhoun v Brooks174 (relating to 1884–85), in which the House of Lords decided on the construction of the Act that a trade controlled abroad was a foreign possession.175 Carrying on a trade in the UK or elsewhere therefore did not include a trade carried on wholly elsewhere. One of the main reasons was that, if this were not the case, the assessing provisions for trades did not deal with trades carried on wholly abroad so that they could not be classed as UK trades.176 We have seen that company residence was equated to ‘where the real trade and business is carried on’,177 and that place was where the directors met. The same approach was naturally applied to determining whether a company carried on a foreign trade; indeed, as we have seen, cases on foreign trades were relied on by Viscount Sumner in Egyptian Delta.178 The normal case is illustrated by San Paulo (Brazilian) Railway Co Ltd v Carter,179 in which the trade was controlled by directors in England in a 1940 gave statutory recognition to the existence of a foreign trade when it generally removed the remittance basis from income other than trading or employment or pensions income. 173 See the Opinion of the Law Officers in Scotland (1880) (to be found at the end of 1 TC A1 (printed at the end of vol 1) (Indian partnership). This Opinion cites Sulley v AG (1860) 2 TC 149 (American partnership), where the main issue was the taxation of the US partners who were held not to be taxable, the only UK activity being purchasing, but the Revenue’s question at A3 may be misreading the case in stating that the profits of the UK resident partner ‘coming home’ were the whole profits, not the remitted profits, as this expression seems more appropriate to the remitted profits. (The reason for the existence of a tax case in 1860, when the courts did not have jurisdiction until 1874, is that it concerned an information laid in the Court of Exchequer to enforce a penalty (three times the duty) for failing to deliver the return; this case is also mentioned in argument in Colquhoun 2 TC 495 and Tischler v Apthorpe 2 TC 91.) The Revenue stated that the issue was one of very great importance, particularly in such a mercantile community as exists in Glasgow (A4), suggesting that it was a matter of considerable dispute at the time. I have been informed by Gordon Reid QC that Scottish Inspectors would be bound to follow the Opinion of the Law Officers. 174 (1889) 2 TC 490. Lord Macnaghten goes back to Pitt’s 1799 Act in reaching his conclusion. 175 It was once thought that this case undermined the residence cases, such as Cesena and Calcutta Jute, which at least by taxing the entire profits implied (and Imperial Continental Gas Association v Nicholson 37 LT (NS) 717 decided) that the trade was a UK one, see London Bank of Mexico and South America v Apthorpe [1891] 1 QB 383, 388 per Charles J. The Court of Appeal [1891] 2 QC 378 distinguished Colquhoun, which was a partnership case on the facts, and made no comment on the residence cases. 176 See Colquhoun at 501, 507–08. UK trades were assessed by the Commissioners for the parish or place where the trade is carried on, whether it is carried on wholly or in part in Great Britain (ITA 1842, s 106). 177 See n 41. 178 See the text at n 139. 179 San Paulo (Brazilian) Railway Ltd v Carter [1895] 1 QB 580, [1896] AC 31, (1895) 3 TC 344 and 407 (is the name of the company in Spanish rather than the Portuguese São for phonetic reasons?), see n 34. Counsel for the Surveyor was Sir Robert Reid QC, Attorney General at the time of the Court of Appeal (he appeared with his successor as Attorney General in the House of Lords, following a change of Government) and the future Lord Loreburnm who would decide de Beers and who had been junior counsel in Cesena Sulphur.

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way similar to that in Calcutta Jute Mills. Was the trade a foreign one? Confusingly, foreign control of the trade was described as the trade being carried on abroad, which was not the case where directors in the UK made the ultimate decisions: A director does not get on an engine in America and drive it, but he can say what man shall get on the engine, and how many hours that man shall work and at what pace he shall drive the engine. Everything is done by the order of the directors. They make all the contracts; it is said that they buy all the materials, and it is said that they buy all the engines; and in the trade or business of a railway if you buy bad engines you are pretty certain to come to grief, and where will your whole trade go to? If you buy a series of bad engines your profits will never appear. Then no one in America according to the statement of this case, has any power to do anything but to obey orders. It is beyond discussion and beyond doubt that a great part of this business or trade is done in England by the masters of that trade who are the directors of the English company.180

Indeed the Lord Chancellor went further and said that the trade was wholly carried on in England; he was using the expression in exactly the same sense as it would later be used by his successor Lord Loreburn that de Beers was carrying on its business in England. As with company residence, this concentrates on the intellectual control of the trade, to the exclusion of the trading operations themselves. This is confusing because the expression ‘carried on’ could also mean where the trading operations took place;181 the former statutory provision ‘trade . . . whether carried on in the UK or elsewhere’182 uses the expression in this sense. The logic for the rule was that, unless one could find a single place from which the trade was carried on, there would be a problem in taxing businesses like shipping companies.183 If there is no partnership and a UK resident can direct how his local agents carry on the trade, it is a UK trade, even though ‘not a single instance has ever occurred in which he has, as a matter of fact, attempted to exercise his control, or to give directions even about the smallest detail’,184 and so the control does not ‘go beyond

Per Esher MR at 351. The distinction between the two meanings is made by the Lord Chancellor (Lord Halsbury) at 410. For the same distinction see London Bank of Mexico v Apthorpe [1891] 2 QB 378, (1891) 3 TC 143: ‘It is true that part of the profits of that business which is carried on in England is earned by means of transactions carried on abroad, but that is not carrying on the business abroad. It is carrying on the business in England by means of some transactions of it which are carried out abroad; but those transactions which are carried out abroad are carried out subject to the directions and at the pleasure and will of the masters and owners of that business resident in London’ per Lord Esher MR. All banking transactions were carried on in Mexico but the trade was controlled by directors in London, which was the carrying on of a single trade. 182 See n 171. 183 See the Lord Chancellor’s comment at 410. 184 Ogilvie v Kitton (1908) 5 TC 338, 345. 180 181

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passive oversight and tacit control’.185 Thus, by applying exactly the same test as for company residence, the courts had effectively also removed the possibility of the remittance basis applying to the trading income of a UK resident.

FOREIGN SUBSIDIARIES

Companies controlled by directors in the UK having substantial operations abroad had therefore reached the position that they had failed to establish that they were non-resident, and also that the trades were foreign. But what cannot be done with one company can be done with two: a UK resident parent and non-resident subsidiary.186 The cases show an interesting transition in understanding the concept of a subsidiary, probably encompassing developments both in methods of trading and the understanding of the courts. These cases immediately follow Salomon v Salomon; and Stanley,187 the first case recognising the separate business of a 100% subsidiary, was just after the Court of Appeal had decided that shareholders could not direct the directors to do something,188 and also shortly after de Beers. The Revenue always argued that the subsidiary’s trade is that of the parent, in which case the residence of the subsidiary was irrelevant,189 which the appeal Commissioners initially seem always to have accepted. In some of the early cases the subsidiary was factually an agent of the parent,190 but gradually the separate business of the subsidiary became 185 The words quoted are from Lord Sumner in Mitchell v Egyptian Hotels Ltd 6 TC 542, 551, referring to Ogilvie v Kitton. 186 This is not to suggest that the only reasons for having foreign subsidiaries are tax ones. 187 Stanley v The Gramophone and Typewriter Co [1906] 2 KB 856, [1908] 2 KB 89 CA. 188 Automatic Self-Cleansing Filter, above n 28. Fletcher Moulton LJ refers to this case at 376, and Buckley LJ at 381 in Stanley (which Gower points out was contrary to the then current edition of his Lordship’s book). 189 UK residence was not even argued before the Commissioners in Stanley or the earlier cases mentioned in the next note, although the findings of fact would indicate that they were UK resident. 190 Apthorpe v Peter Schoenhofen Brewing Co Ltd (1899) 4 TC 41, where a US subsidiary which had formerly carried on the trade continued merely to hold real property as required by local law, and there was a finding of fact that the business carried on in the US was in fact carried on by, and was the business of, the UK parent company: St Louis Breweries v Apthorpe (1898) 4 TC 111, where the same finding of fact was made, and also that the US company was the agent of the UK parent company. The difference between shareholder control and control of the subsidiary’s trade does not seem to have been clearly understood by the UK parent company; the articles included power ‘to manage the affairs or take over and carry on the business of any such American Company’. The US subsidiary in Bradbury v The English Sewing Cotton Co Ltd (1923) 8 TC 481 had formerly been controlled in the UK (and had been found to be resident in The American Thread Co v Joyce (1913) 6 TC 1 and 163); it changed its residence in 1917. The separate trade of the foreign subsidiary was recognised in Bartholomay Brewing Co v Wyatt (1893) 3 TC 213 and Nobel Dynamite Trust Co v Wyatt (1893) 3 TC 224.

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accepted, first for holdings of less than 100%191 and ultimately, in 1908, for a 100% subsidiary.192 Once the separate trade of the subsidiary was accepted, the residence of the subsidiary became relevant, and this combination of UK resident parent and non-resident subsidiary used the logic of the definition of residence to the taxpayer’s advantage. The non-resident subsidiary was under the control of its local board, with the parent company board exercising only shareholder control over the subsidiary. Thus the courts, having denied the remittance basis for trading income in a single company, had therefore effectively restored it so long as the subsidiary could show that it was non-resident; the dividends paid to the parent company were taxed on the remittance basis as income from a foreign possession, and then only when declared. At the same time, the courts developed a strict definition of non-residence which required that the directors of the foreign subsidiary were really managing it and not standing aside and carrying out the directions of the directors of the parent company.193 Even after the ending of the remittance basis for dividends from non-resident subsidiaries in 1914, the result was somewhat similar since the amount of dividends could be determined by the taxpayer. The 1920 Royal Commission, which liked the existing system, thought that the ability to create non-resident subsidiaries should be prevented:

191 The distinction between shareholder control and control of the trade is clearly made in Kodak Ltd v Clark (1903) 4 TC 549, concerning a UK company which owned 98% of the shares in the American Kodak Company, reversing the Commissioners’ finding that the business of the subsidiary was carried on by the parent (or the subsidiary was an agent for the parent); the outside-held 2% was significant to the decision. Even then, Phillimore J wondered whether 98% of the profits of the subsidiary should not have been taxed in the hands of the parent (588), but the point had not been argued. UK holding companies seem to have been surprisingly common at the time (see also the next note). 192 Stanley v The Gramophone and Typewriter Co [1906] 2 KB 856, [1908] 2 KB 89 CA, (1908) 5 TC 358, relating to its wholly owned (earlier it had been 54% owned) subsidiary Deutsche Grammophon AG, with all the courts reversing the Commissioners’ finding that the directing power of the German subsidiary was in the UK and the entire business of the subsidiary was carried on by the parent. Note the difference from Kodak, in which Phillimore J was still wondering if one should effectively consolidate 98% of the subsidiary’s profits. The Revenue was trying to tax sums required to be set aside for depreciation under German law. It was pointed out that German law did not forbid all the shares being held by one person ([1908] 2 KB 89, 99). The Revenue was influenced by a remark reported in the press by the chairman at the AGM that the two German directors of the subsidiary would be content with a nominal amount as they had practically nothing to do, which was in fact referring to the German members of the supervisory board, the other three members of which were representatives of the parent company, so the Revenue had misunderstood the remark. 193 As in Unit Construction v Bullock 38 TC 712 (see the text at n 153). We in the UK therefore view with concern the European Court’s concept of a parent company’s holding in a foreign subsidiary giving it a definite influence over the decisions of the foreign subsidiary and allowing the parent company to determine its activities. This suggests that the foreign subsidiary is UK resident because the directors of the parent company are carrying out the central management and control of the subsidiary.

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we are of opinion that the present well-established doctrine in regard to control194 should not be weakened. Further, we think, that even where the trading operations of British-registered companies are carried on abroad by a foreign board of directors or by means of a subsidiary company abroad, the company (and its subsidiary) should still be deemed to be controlled from within the United Kingdom, if the majority of the voting power of the company can be exercised in this country. In other words, our suggestion is that no distinction should be drawn between provable active control and complete potential control.195

One might argue that they had misunderstood the law.196 Now that it had been decided that the shareholders could not require directors to take a particular course of action,197 the parent, as a shareholder of the subsidiary, does not have any potential control over the subsidiary, at least if the law governing the subsidiary is similar to UK law.198 The recommendation was never adopted, although one might say that the controlled foreign companies legislation effectively carries out the recommendation in a more targeted way.

COMPARISON WITH THE REST O F E UROPE

The UK system therefore favoured trading abroad through a non-resident subsidiary because the profits were not taxable until distributed by the subsidiary. The approach that a UK trade was one controlled from the UK meant that there was no scope for the concept of a foreign branch (or permanent establishment199) to evolve as it did in mainland Europe. 194 By this they meant central management and control as the test of company residence, see the 1920 Royal Commission Report, para 31. 195 Cmd 615. Report, para 40. They also recommended in paras 41–42 ending the remittance basis for UK resident partners in partnerships controlled abroad. 196 It is also interesting as a relic of treating the subsidiary’s trade as that of the parent: ‘the trading operations of British-registered companies are carried on abroad . . . by means of a subsidiary company abroad’. One can see the same attitude in the League of Nations materials shortly after this, eg in the first Model treaty in 1927 ‘The real centres of management, affiliated companies, branches, factories, agencies, warehouses, offices, depots, shall be regarded as permanent establishments’ (my italics). 197 See n 188. 198 The Revenue point out in ITH 319: ‘For example, a German private company (GmbH) is managed by one or more managers but some decisions are reserved to shareholders’. One can see this difference in view about the relationship of shareholders and management in the formula often used by the European Court of a national of a Member State having shareholding ‘conferring definite influence over the company’s decisions and allowing him to determine its activities’, thereby exercising his right of establishment, see n 193. 199 The expression ‘permanent establishment’ derives from German nineteenth-century use, see ‘The Origins of Concepts and Expressions Used in the OECD Model’, above n 50, 722. The term Betriebsstätte was first used in Prussian in non-tax law and then picked up in tax law in 1885 as one of a number of terms such as agency and place of management, and from 1891 it was used in the present tax sense. A similar term, stehendes Gewerbe (standing enterprise), had been used in earlier Prussian non-tax law in 1845 and adopted in tax law in 1864. A definition

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Mainland European tax systems developed differently and favoured trading through a foreign permanent establishment, the profits of which were exempted in the residence state. The results of the different methods of trading are similar; exemption of the foreign profits from residence state taxation until distribution to the shareholders of the parent company as dividends in the European exemption system, or until distribution to the parent company in the UK system with a foreign subsidiary. The reason for the development of the permanent establishment concept in Europe was that mainland European countries had impôts réels, an untranslatable expression for a series of separate taxes imposed on different types of income on a source basis, such as a tax on land or a tax on business profits.200 When they later introduced income tax it fitted together with the existing impôts réels by the income tax exempting anything covered by another country’s source-based tax, leaving the income tax to apply to a residual category. Accordingly the European countries continued to exempt from their income taxes foreign earned and property income for both corporations and individuals. Since the UK taxed all foreign income, it was logical to give relief from foreign taxes by the credit mechanism (including credit for the tax paid at the company level in respect of inter-corporate dividends on holdings of 10%) rather than exemption.201

was adopted by the German Double Taxation Act 1909, which is essentially the same as the OECD definition (AA Skaar, Permanent Establishment (Kluwer Law and Taxation, Deventer, 1991) 72–75; he makes the point that the permanence test seemed to pertain to the business activity rather than the place of business as it is in the OECD meaning). The concept, although not the term, was used in Swiss inter-cantonal case law from 1875 (referring to a branch within the meaning of private or commercial law) and 1892 (referring to a fixed place of business). The term was used by Italy from 1925. MB Carroll, Taxation of Foreign and National Enterprises (Geneva, League of Nations, 1932) vol 1, 86 refers to its use in France, and again at 87, where it is stated that: ‘An establishment is in principle “any industrial or commercial organization established on a permanent and autonomous basis which includes, generally speaking branches, factories, buying offices, warehouses, shops, and other places where profit-making operations are conducted”’. The French installations fixe d’affaires implies more of a structure than the English ‘fixed place of business’. See G Maisto (ed), Multilingual Texts and Interpretation of Tax Treaties and EC Tax Law (Amsterdam, IBFD, 2005) 132. The expression was first used in a Model tax treaty in the first League of Nations Model of 1927. 200 We recommended this type of tax for the Colonies following the Report of an Inter-departmental Committee on Income Tax (1922), Cmd 1788. It is interesting to speculate whether the European taxes influenced the UK colonial model income tax ordinance (1922) which existed in many territories until the 1930s and of which Hong Kong’s tax is a surviving example, but one suspects that they did not. The tax was based on income ‘accruing in, derived from, or received in’ the Colony, which seems to be a combination of impersonal tax and the remittance basis; it did not require any determination of the taxpayer’s residence. Many Privy Council cases on source derive from these Colonial taxes, see M Littlewood ‘The Privy Council, the Source of Income and Stare Decisis’ [2004] British Tax Review 121. 201 Originally by Dominion Income Tax Relief from 1920 (following a temporary relief from 1916), with only a deduction for other foreign tax, and then following the US–UK (1945) treaty by credit.

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The UK and mainland European approaches thus defined foreign trading income differently: the UK concentrating on the person controlling the trade, which meant that a trade controlled from the UK would be taxed as a UK trade wherever it was physically carried on, and the European concentrating only on the geographical source of income probably because that was the basis for their impôts réels, and exempting income from a trade physically carried on abroad.202 Geographical source is not important for residents in the UK system because they are taxed on worldwide income; source (in the UK sense) merely determines how one taxes it, traditionally on the remittance basis if it is foreign source.203 For a non-resident, in both systems, geographical source determines what income is taxed, so that a branch in the country concerned is always taxed to whomsoever it belongs.204 In the UK this result used to be achieved by using a different expression, that a non-resident is taxed on a trade exercised within the UK,205 but for income tax206 the tax law rewrite has now changed this to carried on wholly or partly in the UK, the reference to partly carried on in the UK and partly elsewhere indicating that it is referring to the physical place of carrying on.207 The difference between the two approaches can be seen at its most extreme in relation to the profits of a foreign branch. These profits are part of the UK trading profit and taxed in full if the trade is controlled from the UK because we look at it from the standpoint of the UK resident trader; in Europe they are not part of a domestic source but are a source of income in the other country and accordingly the residence state exempts them from tax. This difference between the UK approach of taxing foreign branch profits in full with credit for foreign tax and the European system of exempting them where the trading was carried out in one company led the 1955 Royal Commission208 to look at exemption, but they found it impossible to agree to adopt it. There were three camps, which we would now 202 The distinction between the two approaches can be seen clearly in the territorial tax system of Hong Kong, where, in order to be taxable, the trade must be carried on in Hong Kong (the same as the UK test) and the profits must be ‘profits arising in or derived from Hong Kong’. Thus profits made by a Hong Kong bank from trading in certificates of deposit on markets in London or Singapore did not arise in, and were not derived from, Hong Kong: Comr of IR v Hang Seng Bank Ltd [1990] STC 733, particularly 736e. A similar Indian case was relied upon which decided that profits of an Indian commodity broker made on exchanges outside India were not profits ‘accruing or arising in British India’ (739e). 203 Source is also relevant to double taxation relief. 204 The UK taxes a branch in the UK as a UK trade because it is physically carried on in the UK. Control is not relevant since this is used to decide the type of income, UK or foreign, not whether to tax it. 205 TA 1988, s 18(1), sch D (a)(iii). 206 The point does not arise for corporation tax because a non-resident company is liable to that tax only if it carries on trade in the UK through a permanent establishment. 207 ITTOIA 2005, s 6(2). 208 The 1920 Royal Commission did not examine exemption and indeed did not recommend any relief for double taxation outside the Empire.

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recognise as those favouring capital import neutrality, those favouring capital export neutrality and the pragmatists. In the end the pragmatists won, and the Commission recommended a special case where exemption might be used: the overseas trade corporation, on the lines of the then US Western Hemisphere Trade Corporation or the Canadian foreign business corporation.209 This recommendation was taken up in 1957210 and provided a method of exempting trading profits from a trade carried on wholly abroad until the income was distributed. In that respect it is very similar to the remittance basis, the only difference being that the remittance basis taxed income reaching the UK, while trading profits of an overseas trade corporation were taxed on distribution. The exemption for overseas trade corporations was abolished in 1965. The debate about exemption was revisited in 1999 in a discussion paper on Double Taxation Relief for Companies211 but no changes were made to the present system. Exemption was, however, introduced for capital gains on the disposal of subsidiaries, including foreign subsidiaries, in 2002. The European approach is likely to have the last word as consideration of exemption surfaced again in 2007 with a discussion document,212 and legislation is now proposed in the Finance Bill 2009.

I N WAR D I N V E S T M E N T: T H E P E R M A N E N T E S TA B L I S H M E N T CONCEPT I N T HE UK

Finally, we turn to the mirror image of Calcutta Jute Mills: the non-resident company with trading operations in the UK. It is interesting that, just as it has been argued that company residence derives from county court jurisdiction, the permanent establishment threshold for taxing a branch in the UK, originally under tax treaties and more recently for companies in domestic law, the origins of which we have traced back to nineteenthcentury Prussian non-tax law,213 is almost identical to the degree of presence required at common law to justify the service of process on a foreign company so as to give the courts jurisdiction over it.214 Unlike the See Appendix III of the 1955 Royal Commission Report, Cmd 9474. FA 1957, s 23 onwards. Inland Revenue, March 1999. ‘Taxation of Companies’ Foreign Profits: A Discussion Document’ (HM Treasury and HM Revenue and Customs, June 2007), available at http://www.hm-treasury.gov.uk/ media/E/9/consult_foreign_profits020707.pdf. The proposal to legislate made in the 2008 Pre-Budget Report is available at http://www.hm-treasury.gov.uk/consult_foreign_profits.htm. 213 See n 199 for the origin of this expression. 214 And also for determining whether to enforce a judgment of a foreign court, for which we apply our own rules to determine whether the foreign court had jurisdiction. See Pemberton v Hughes [1899] 1 Ch 781) and, for examples of its application, Littauer Glove Corporation v F W Millinton (1920) Ltd (1928) 44 TLR 746 (director visiting the US to make purchases) and Vogel v R and A Kohnstamm Ltd [1973] QB 133 (agent without power to conclude contracts). 209 210 211 212

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rules for county court jurisdiction that we considered in relation to English companies, there was no reference to residing or carrying on business for foreign companies in the Rules of the Supreme Court. The courts developed rules at a similar time to the first company residence cases for the circumstances in which the foreign company had sufficient presence in England for it to be served.215 Although the permanent establishment concept did not influence domestic law in this area, the similarity is also not surprising as both are concerned with the threshold for claiming jurisdiction over a foreign company.216 As we have seen,217 the Revenue had originally argued in Attorney General v Alexander218 that the Imperial Ottoman Bank was resident by equating residence with any carrying on of some business (rather than the real trade or business) and pointing out that the Bank had sufficient presence to be served with process,219 but the courts found the UK business to be that of an agency only. Once the non-residence of the taxpayer was established, taxation became a question of whether there was trading in the UK, which might be through an agent without any other presence in the UK. Here again we adopted an expansive jurisdiction, that the profits from trading in, as opposed to with, the UK were taxable as UK source income.220 The width of this concept was cut down by tax treaties adopting a higher threshold for taxation, that of the concept of permanent establishment, although one suspects that in practice the result is similar. The marked similarity of the definition of permanent establishment in the OECD Model Tax Convention to the test for service of process can be seen by comparing the definition with the case law on jurisdiction below. The OECD definition is:

For the different rules in the US, for example, see L Brilmayer and K Paisley, ‘Personal Jurisdiction and Substantive Legal Relations: Corporations, Conspiracies, and Agency’ (1986) 74 California Law Review 1. 215 Eg Newby v von Oppen & Colts’ Patent Firearms Manufacturing Co (1872) LR 7 QB 293 (a branch case); In re Busfield (1886) 32 ChD 123; Haggin v Comptoir d’Escompte de Paris (1889) 23 QBD 519. The requirements either for a fixed place of business or an agent who carries on the company’s business in the country concerned are found in Okura & Co Ltd v Forsbacka Jernverks Aktiebolag [1914] 1 KB 715. 216 Presumably the mainland European permanent establishment was also used to determine jurisdiction. 217 See the text at n 31. 218 (1874) LR 10 Exch 20. 219 At 26–27. 220 The test for trading in the UK was originally solely whether the contracts of sale were made in the UK but has become one of ‘where do the operations take place from which the profits in substance arise?’ Smidth v Greenwood (1922) 8 TC 193, 204 per Atkin LJ, approved in Firestone Tyre & Rubber Co v Lewellin (1957) 37 TC 111.

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1. For the purposes of this Convention, the term ‘permanent establishment’ means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term ‘permanent establishment’ includes especially: a) b) c) d) e) f)

a place of management; a branch; an office; a factory; a workshop; and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

3. A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months. ... 5. Notwithstanding the provisions of paragraphs 1 and 2, where a person—other than an agent of an independent status to whom paragraph 6 applies—is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph. 6. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.221 . . .

Paragraphs 1–3 deal with physical establishments; paragraphs 5 and 6 deal with agency. We adopted a very similar definition of permanent establishment, and then only for companies, in domestic law for the first time in 2003,222 bringing our domestic law into line with European approach in this respect as well. 221 The origin of this paragraph can be traced to UK law in FA 1925, s 17 (with some elements being contained in F(No 2)A 1915, s 31), now FA 1995, s 127 (a draft of this provision for a Rewrite Bill containing international provisions has been published). See J Avery Jones and D Ward, ‘Agents as Permanent Establishments under the OECD Model Tax Convention’ [1993] British Tax Review 341, 355; also (1993) 33 European Taxation 154, 163. On agency permanent establishments, see R Vann, ‘Tax Treaties: the Secret Agent’s Secrets; [2006] British Tax Review 345. 222 FA 2003, s 148. The domestic definition brings together the branch and agency parts of the definition at the beginning, which is more logical than the separation in the Model, but at the cost of separating the independent agent’s provision from the agency part.

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The test for jurisdiction over a foreign corporation,223 which developed independently, is extremely similar to this definition of permanent establishment. The authorities on the topic are conveniently summarised by the Court of Appeal in Adams v Cape Industries plc:224 Nevertheless, it is a striking fact that with one possible exception (The World Harmony [1967] P 341225) in none of the many reported English decisions cited to us has it been held that a corporation has been resident [in the context, resident should be read as ‘present’ to justify accepting jurisdiction over it226] in this country unless either (a) it has a fixed place of business of its own in this country from which it has carried on business through servants or agents, or (b) it has had a representative here who has had the power to bind it by contract and who has carried on business at or from a fixed place of business in this country.

In more detail, the Court went on to summarise the authorities as follows:227 In relation to trading corporations, we derive the three following propositions from consideration of the many authorities cited to us relating to the ‘presence’ of an overseas corporation. (1) The English courts will be likely to treat a trading corporation incorporated228 under the law of one country (‘an overseas corporation’) as present within the jurisdiction of the courts of another country only if either (i) it has established and maintained at its own expense (whether as owner or lessee) a fixed place of business of its own in the other country and for more than a minimal period of time229 has carried on its own business at or from such premises 223 The OECD Model definition of permanent establishment is not limited to corporations; the UK definition is limited to corporations because it applies for corporation tax only (with the oddity that the non-resident company is still liable to income tax on anything falling outside this definition). 224 [1990] Ch 433, 529. 225 It is suggested that this is not a true exception because, even though the agents did not have a general power to contract, they could do so in relation to ‘the collection of compensation due for the use of any of the ships, to man and provision them, to contract for all necessary repairs, to maintain in a seaworthy condition and also to incur and make all payments necessary for the operation, upkeep and maintenance, including insurance, wages, bunkers, sorters, repairs, replacements, pilotage, port fees, and so on; to select officers and crew; to designate brokers, underwriters, docks, and so on, and approve all prices and fees’ (349). For the OECD model the contracts must relate to operations which constitute the business proper of the enterprise (Art 5 Comm, para 33), which these would be. 226 The expressions are used interchangeably in this area, see Adams v Cape Industries plc [1990] Ch 433, 523 onwards. 227 At 530–31. 228 Jurisdiction is necessarily based on the place of incorporation rather than residence since a UK-incorporated company can always be served with process at its registered office, so that the problem that arose for tax of a non-resident UK-incorporated company never arises. 229 Nine days presence at an exhibition at which sales were made was held to be sufficient in Dunlop Pneumatic Tyre Co Ltd v AG für Motor und Motorfahrzeubau vorm Cuddell & Co [1902] 1 KB 342. The Commentary to the OECD Model, in a 2003 addition, suggests a minimum 6 months period, except in relation to activities of a recurrent nature, or activities exclusively carried on in the country (Art 5 Comm, para 6).

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by its servants or agents (a ‘branch office’ case), or (ii) a representative of the overseas corporation has for more than a minimal period of time been carrying on the overseas corporation’s business in the other country at or from some fixed place of business.230 (2) In either of these two cases presence can only be established if it can fairly be said that the overseas corporation’s business (whether or not together with the representative’s own business) has been transacted at or from the fixed place of business. In the first case, this condition is likely to present few problems. In the second, the question whether the representative has been carrying on the overseas corporation’s business or has been doing no more than carry on his own business will necessitate an investigation of the functions which he has been performing and all aspects of the relationship between him and the overseas corporation. (3) In particular, but without prejudice to the generality of the foregoing, the following questions are likely to be relevant on such investigation: (a) whether or not the fixed place of business from which the representative operates was originally acquired for the purpose of enabling him to act on behalf of the overseas corporation; (b) whether the overseas corporation has directly reimbursed him for (i) the cost of his accommodation at the fixed place of business; (ii) the cost of his staff; (c) what other contributions, if any, the overseas corporation makes to the financing of the business carried on by the representative; (d) whether the representative is remunerated by reference to transactions, eg by commission, or by fixed regular payments or in some other way; (e) what degree of control the overseas corporation exercises over the running of the business conducted by the representative; (f) whether the representative reserves (i) part of his accommodation, (ii) part of his staff for conducting business related to the overseas corporation; (g) whether the representative displays the overseas corporation’s name at his premises or on his stationery, and if so, whether he does so in such a way as to indicate that he is a representative of the overseas corporation; (h) what business, if any, the representative transacts as principal exclusively on his own behalf; (i) whether the representative makes contracts with customers or other third parties in the name of the overseas corporation, or otherwise in such manner as to bind it;231 (j) if so, whether the

230 Item (ii) differs from the OECD Model, under which travelling agents having power to contract but without a fixed place of business constitute a permanent establishment. 231 This item is interesting in recognising the distinction between the civil law contracting ‘in the name of the principal’ (as in the OECD Model), by which the principal is bound by the contract (but the agent is not personally liable), and binding the principal in English law, which does not involve naming the principal because an undisclosed principal is equally bound. See Avery Jones and Ward, ‘Agents as Permanent Establishments’, above n 221, note 93. For examples where there was no power to contract and no right to serve process on the agent, see Okura & Co Ltd v Forsbacka Jernverks Aktiebolag [1914] 1 KB 715; Vogel v R & A Kohnstamm Ltd [1973] QB 133; Grant v Anderson & Co [1892] 1 QB 108. The expression habitually exercises the power to contract used in Art 5(5) of the Model, which can also be found in relation to jurisdiction, see Thames and Mersey Marine Insurance Co v Societa di Navigazione a Vapore del Lloyd Austriaco (1914) 111 LT 97, 98.

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representative requires specific authority in advance before binding the overseas corporation to contractual obligations.232 [my italics]

In the OECD model item (3) is expressed as being whether the agent is of an independent status and acting in the ordinary course of his business, but the tests applied to determine whether the agent was carrying out the foreign principal’s or his own business are essentially aimed at the same point. Under the model the issue of independent status arises only if the agent does contract for the principal. Continuing with the quotation: If the judge, ante, p 476B–C, was intending to say that in any case, other than a branch office case, the presence of the overseas company can never be established unless the representative has authority to contract on behalf of and bind the principal, we would regard this proposition as too widely stated. We accept Mr Morison’s submission to this effect. Every case of this character is likely to involve ‘a nice examination of all the facts, and inferences must be drawn from a number of facts adjusted together and contrasted:’ La Bourgogne [1899] P 1, 18, per Collins LJ Nevertheless, we agree with the general principle stated thus by Pearson J in F & K Jabbour v Custodian of Israeli Absentee Property [1954] 1 WLR 139, 146: A corporation resides in a country if it carries on business there at a fixed place of business, and, in the case of an agency, the principal test to be applied in determining whether the corporation is carrying on business at the agency is to ascertain whether the agent has authority to enter into contracts on behalf of the corporation without submitting them to the corporation for approval. On the authorities, the presence or absence of such authority is clearly regarded as being of great importance one way or the other.

The main difference from the OECD model is therefore that, where there is no branch office, the agent’s lack of authority to conclude contracts is not conclusive for jurisdiction, although it is the principal test, and there is only one possible example of jurisdiction being accepted in the absence of an agent’s power to contract, whereas this factor is conclusive against there being a permanent establishment.233

232 An agent who requires no specific authority will be within the OECD Model’s ‘has, and habitually exercises, in a Contracting State an authority to conclude contracts’ and the UK legislation’s ‘has and habitually exercises there authority to do business’. 233 There are some differences in relation to such matters as the agent holding a stock of goods, which is excluded by Art 5(4)(b) of the Model but can create a sufficient presence for accepting jurisdiction, see Saccharin Corporation Ltd v Chemishe Fabrick von Heyden Aktiengesellschaft [1911] 2 KB 516 (although in fact the agent there had power to conclude contracts); and also in relation to preparatory and auxiliary activities, which are excluded by Art 5(4)(e) of the Model, but can be sufficient for jurisdiction, see South India Shipping Corporation v Bank of Korea [1985] 1 WLR 585.

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Jurisdiction to tax a company, whether on its worldwide activities (residence) or on its domestic activities (permanent establishment), has much in common with jurisdiction of courts. The country court jurisdiction rules directly influenced our rules for company residence; and the rules for whether there is sufficient presence in the UK of a foreign company for the courts to accept jurisdiction over it, while not directly influencing the permanent establishment threshold for taxation, came to an almost identical solution. In addition to this factor, a constant theme has been the influence of mainland Europe thinking on our law in both these areas. In defining company residence in the 1870s we tried to adopt mainland European thinking: ‘There is a German expression applicable to it which is well known to foreign jurists—der Mittelpunkt der Geschäfte; and the French term is “le centre de l’entreprise,” the central point of the business’,234 although in fact we were dealing with a situation that would not have arisen in Germany or France. Next we adopted into tax law the mainland European concept of permanent establishment concept, first via tax treaties and then for companies in domestic law, even though we already had an almost identical concept in our law already. The final move in that direction will be the adoption of the European exemption system for double taxation relief of dividends from foreign subsidiaries, which is now proposed.

234

See the text at n 41.

9 ‘I suppose I must have more discussion on this dreary subject’: The Negotiation and Drafting of the UK–Australia Double Taxation Treaty of 1946 THE UK– AUS TRALI A DOUBLE TAXATI ON TREATY OF 1946

C J OHN TAY LOR C J OHN TAYLOR

The first comprehensive Double Tax Treaty between the UK and Australia was concluded in 1946 and came into force in 1947. This was one of the UK’s earliest comprehensive Double Tax Treaties and was Australia’s first Double Tax Treaty. Between 1920 and the entry into force of the 1946 Double Tax Treaty the UK had provided relief from international double taxation between the UK and Australia under a system known as Dominion Income Tax Relief. Negotiation of a double taxation treaty with Australia in 1945–46 proved to be the most problematic of all the double taxation treaty negotiations that the UK had with the Dominions in that period. Given the inadequacy of the relief provided for UK residents investing in Australia under the system of Dominion Income Tax Relief and the almost comprehensive unilateral relief provided by Australia at that time for investment by Australians in the UK, one would have thought that the negotiations should not have been difficult. That they were as difficult as they proved to be reflects the changing nature of the relationship between the UK and Australia in the immediate post-World War II period. On the UK side, there is still evidence of a lingering expectation that sacrifices would be made in the Dominions for the good of the Empire as a whole. At the same time, the UK had been opposed, in principle, to source country taxation since the 1920s,1 and as a net exporter of capital to Australia clearly 1 See the discussion in JF Avery Jones, ‘The History of the UK’s First Comprehensive Double Taxation Agreement’ [2007] British Tax Review 211, 211–22.

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sought to protect its own revenue. On the Australian side, there is evidence of an emerging Australian independence intent on maximising Australia’s national interest. Australia at this point wanted to encourage UK investment in Australia, but not in a way that conflicted with its long-held policy of source-based taxation, and a recognition that Australia’s natural resources made it an attractive destination for foreign investors. The treaty negotiations are a microcosm of the tensions that can exist where the countries involved have fundamental differences on the jurisdictional foundations for international taxation. No country in the world at the time could have been more committed to residence-based taxation than the UK. At the same time, the Australian Federal Income Tax system had, since its inception, been fundamentally source based. Australia was a net importer of capital, knew that it had valuable natural resources that foreigners would want to invest in and wanted to get what it perceived to be its fair share of tax from that investment. From the UK perspective, taxation at source was discriminatory and inhibited UK investment into Australia. From the Australian perspective, the problem of international double taxation only existed because countries like the UK insisted on taxing on both a residence and source basis. The Australian view was that Australia was doing the UK a favour and being a loyal member of the British Empire/Commonwealth by agreeing to any reduction in its source taxing rights at all. The other fundamental difference between the two tax systems was that Australia was operating a classical system of corporate-shareholder taxation while the UK was operating what was effectively a type of imputation system. The differing treatment of dividends paid to residents in the two systems led the two countries to different conclusions as to the appropriate treatment of dividends paid to non-residents. From the UK perspective, tax on corporate profits was deducted at source when a dividend was paid and was effectively borne by the shareholder. Hence the UK thought that the state where the shareholder resided was the appropriate one to tax both the corporate profits and the dividend. From the Australian perspective, the company was taxable and a separate tax was levied on the shareholder. The Australian perspective was that its system divided the incidence of tax between the company’s profits and its dividends. If dividends paid to UK residents were exempted, Australia was concerned that it would face claims for similar treatment from other countries and from Australian shareholders.2

2 See UK National Archives IR 40/13740, LS Jackson (Australian Commissioner of Taxation) to Sir Cornelius Gregg (Chairman UK, Board of Inland Revenue), 25 September 1945.

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R E L E VA N T F E AT U R E S O F T H E AUS T R A L I A N TAX SYS T E M IN 1945

As mentioned above, Australia operated a classical corporate-shareholder tax system in 1945. The company tax rate was 30%. In addition, non-private companies were subject to the higher of supertax or wartime (company) tax. Supertax of 5% was payable by non-private companies on the excess, if any, of their taxable income over £5,000. Wartime (company) tax was levied on the amount by which the company’s taxable profit exceeded 5% of its capital employed. The rate of wartime (company) tax was 24% on the portion of its taxable profit that represented the next 7% of its capital employed and 48% on the balance of its taxable profit. No rebate was available in respect of wartime (company) tax, which meant that it cascaded when the same income was distributed as a series of dividends through a chain of resident companies. Undistributed profits tax at the rate of 10% was payable by non-private companies on profits not distributed to shareholders. In calculating the undistributed profits tax payable, the company was allowed a deduction for income tax paid and for foreign income tax paid on the company’s income. Private companies, including non-resident private companies carrying on business in Australia through a principal office or a branch, were taxed on profits which they had not distributed within six months of the end of the relevant income year (or nine months in the case of a non-resident company). The additional tax payable by a private company was calculated as the tax that would have been payable if the company had distributed the income.3 Between 1915 and 1930 Australia only taxed Australian source income. From 1930 onwards, in general, Australia exempted foreign source income which had been subject to tax in the foreign country. From 1942 foreign source dividends had been included in the assessable income of Australian residents with a deduction being allowed under the Income Tax Assessment Act 1936–1945 (Cth) section 72A for any foreign tax paid. In the case of dividends received from UK companies tax deducted at source (representing tax paid by the company) was not included in the shareholder’s assessable income and, as only the net amount of the dividend was included in the shareholder’s assessable income, the shareholder was not entitled to a deduction for the tax deducted at source.4 Foreign source dividends received by Australian resident companies received an inter3 This discussion is based on CJ Taylor and AMC Smith, ‘Trans Tasman Taxation of Companies and their Shareholders 1945–2005’ in Papers Presented at 4th Accounting History International Conference, Braga, Portugal, 2005, 8, available at http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1354944. 4 This followed from the decision of Dixon J in Jolly v FCT (1934) 50 CLR 131, affirmed on appeal by the Full High Court. See the discussion in JL Gunn, OE Berger, JM Greenwood, and RE O’Neill, Gunn’s Commonwealth Income Tax Law And Practice, 2nd edn (Sydney, Butterworth & Co Australia Ltd, 1948) 606, para [1010].

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corporate dividend rebate. The effect of the rebate was that Australian companies receiving dividends from UK companies did not normally incur a net Australian tax liability.5 Australia at the time did not have any gross basis withholding taxes as such. In 1945 both individual and corporate non-residents were assessable on a net basis on dividends paid to them by a company (whether an Australian resident or not) to the extent to which they were paid out of profits derived from sources in Australia. Where the paying company was an Australian resident, the Commissioner had some prospect of enforcing tax liabilities, assuming that the non-resident had property in the form of shares in Australia. Where the paying company was not an Australian resident and the shareholder did not have property in Australia, the Commissioner refrained from assessing the dividend.6 Companies paying interest to non-residents, other than companies carrying on business in Australia, were taxed at a rate of 30% on the payment and were entitled to deduct the tax from the interest they paid. However, this provision did not apply where the paying company could establish to the satisfaction of the Commissioner that the creditor could enforce payment of the interest without deduction of tax at source.7 Under the Income Tax Assessment Act 1936–1945 (Cth) section 255 Australian residents having the receipt, control or disposal of money belonging to a non-resident who derived income from sources in Australia were liable, when required by the Commissioner, to pay the tax due and payable by the non-resident and were authorised and required to retain from moneys that came to the resident on behalf of the non-resident sufficient funds to pay the tax. Section 255 contemplated that the non-resident’s liability had been established by assessment. A ruling issued by the Commissioner had indicated that a company paying dividends to a non-resident had no personal liability to pay tax under section 255 in the absence of notification of the assessment by the Commissioner. The Income Tax Assessment Act 1936–1945 (Cth) section 256 interacted with section 255 in relation to royalties.8 Under section 256, where a resident 5 For a brief account of the Australian taxation system up to 1945 see CJ Taylor, ‘Development of and Prospects for Corporate-shareholder Taxation in Australia’ (2003) 57 Bulletin For International Fiscal Documentation 346. It appears that corporate residents were entitled to a deduction under the Income Tax Assessment Act 1936–1945 (Cth), s 72A, had tax calculated at the corporate rate, and were then entitled to an inter-corporate rebate at the corporate rate under the Income Tax Assessment Act 1936–1945 (Cth), s 46. The rebate did not extend to undistributed profits tax. A further rebate was allowed under s 46(2A), where the dividend was paid out of profits which had borne supertax. The s 46(2A) rebate produced anomalous results and a cascading of tax where dividends were paid though a chain of companies. These effects are discussed in Taylor and Smith, above n 3, 7–8. 6 See the discussion in Gunn, above n 4, 341–42, para [549]. 7 Income Tax Assessment Act 1936–1945 (Cth), s 125. See the discussion in Gunn, above n 4, 859–62, paras [1363]–[1371]. 8 See the discussion in Gunn, above n 4, 1135–36, para [1849].

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paid a royalty to a non-resident the payer was required to advise the Commissioner of the amount of the royalty and to ascertain from the Commissioner the amount to be retained in respect of tax due by the non-resident.9

RELEVANT F EATURES O F T HE UK TAX SYS TEM I N 1945

In 1945 the UK operated a system of corporate-shareholder taxation under which the company paid income tax at the standard rate of 50% and dividends were assumed to be paid out of taxed profits. As income tax was assumed to have been deducted from dividends at the standard rate, only those natural person shareholders who had a surtax liability would be liable to any further tax on the dividend. This was true for both resident and non-resident shareholders. The UK did not apply a withholding tax to dividends paid to non-residents, and practical difficulties were associated with the collection of surtax from non-residents. Various reliefs were allowed to resident natural persons which could mean that a natural person shareholder was entitled to some refund of tax in respect of a dividend in some circumstances. Annual interest and most royalties were not deductible in computing profits, but the payer deducted tax and retained tax from the payment. This was true whether or not the recipient was a resident or non-resident, and no withholding taxes applied to interest or royalties paid to non-residents. Companies also paid the higher of excess profits tax and national defence contribution. Excess profits tax was introduced as a wartime measure and was abolished in 1946.10 Unlike income tax, neither excess profits tax nor national defence contribution could be passed on to shareholders by way of deduction from dividends. For this reason Australia viewed excess profits tax and national defence contribution as equivalents to Australian company tax.11 As will be seen later in this article issues about the operation of the credit article in the Treaty in relation to excess profits tax were the subject of a significant amount of discussion in the Treaty negotiations. For the purposes of the Seventh Schedule of the Finance Act (No 2) 1945, as originally enacted, excess profits tax included the national defence contribution.12 As the Seventh Schedule stood in 1945, foreign excess profits taxes could only be credited against UK excess 9 Ibid, 1136, para [1850]. 10 The description of the

UK system in 1945 has been based on Avery Jones, above n 1, 222–23. 11 National Archives of Australia, Series No A7303/21, Control Symbol J245/45/12, ‘Drafting of the UK–Australia Agreement 1946. Art XII—Tax Credits’, notes on Art XII by Belcher and Mills, 43. 12 Finance Act (No 2) 1945, Seventh Schedule, Clause 1(1).

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profits tax and not against income tax. Similarly, foreign income tax could only be credited against UK income tax and not against excess profits tax.13 The UK provided relief from international double taxation within the Empire (later Commonwealth) under the system of Dominion Income Tax Relief, as described under the next heading.

D O M I N I O N I N C O M E TAX RE L I E F

To appreciate why both Australia and the UK wanted to enter into a comprehensive Double Tax Treaty by 1946, it is necessary to understand how the prior system of Dominion Income Tax Relief worked. Under the system of Dominion Income Tax Relief, the UK provided a credit for the lesser of the rate of Dominion tax or one-half of the relevant UK rate. The aim of the system of Dominion Income Tax Relief was that the total tax paid by a UK resident on Dominion-sourced income should not exceed the greater of the UK or the Dominion rate. In other words, the total relief provided was required to equal the lesser of the relevant UK rate or the relevant Dominion rate. Where the relief provided by the UK did not produce this result, the expectation was that the relevant Dominion would provide a rebate of tax to make up the difference. Several Dominions decided not to participate in the scheme and Dominions in Federal Systems (such as Australia, Canada and the Union of South Africa) that provided reciprocal relief at one but not both levels of government were regarded as non-participating. Where a Dominion was not participating, in some circumstances less UK tax was in fact assessed, but the process for calculating the relevant relief resulted in administrative complexities and depended on extra statutory concessions.14 The Dominions generally provided unilateral relief from international double taxation either through an exemption or a foreign tax credit. Hence, although in theory the UK could provide relief to Dominion residents from UK tax on their UK sourced income, generally the system of Dominion Income Tax Relief did not in fact provide any benefit for residents of Dominions like Australia, which relieved international double taxation through a broad exemption system. By the 1930s the UK was Finance Act (No 2) 1945, Seventh Schedule, Clause 2. For discussions of the operation of Dominion Income Tax Relief where a Dominion was not participating, see R Staples, Dominion Income Tax Relief and Practice (London, GEE & Co, 1925) 37–39 and 65–72; WE Snelling, Dictionary of Income Tax and Sur-tax Practice, 8th edn (London, Sir Isaac Pitman & Sons, 1931) 79; and RL Renfrew, The Practice Of Dominion Income Tax Relief (London, The Solicitors’ Law Stationery Society, 1934) 14–23. The position was complicated by the interdependence of the rate of relief and the amount of the gross up for Dominion tax paid and by the source by source (country by country) approach to providing relief. 13 14

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dissatisfied with the system as it meant that Dominions could increase their rates to equal one-half of the UK rate without being required to provide reciprocal relief. The result was that the total burden of relief was provided by the UK. Neville Chamberlain, as Chancellor of the Exchequer, made desultory efforts to negotiate amendments to the system with the Dominions in the 1930s, but these were met with stonewalling and came to nothing. More significant world events were soon to concentrate Chamberlain’s mind elsewhere. Unless the Dominion was participating and had a relevant rate of taxation greater than one-half of the relevant UK rate, the total relief could not exceed one-half of the relevant UK rate.15 In 1939 Australia changed its treatment of non-resident holding companies by removing a rebate for inter-corporate dividends which had previously been available to them. One year later Australia changed its corporate-shareholder tax system from an imputation system to a classical system by removing the rebate which had previously applied to dividends paid by resident companies to resident individual shareholders.16 The Australian view that developed as a consequence of its move to a classical system was that the tax on shareholders was a distinct and separate tax to the corporate tax. Following these developments, the UK for purposes of calculating Dominion Income Tax Relief grossed up the Australian dividend for the shareholder tax but not, it appears, for the Australian corporate tax.17 Australia, in providing reciprocal relief, only took into account the Australian shareholder tax. As part of the Uniform Tax Scheme implemented in 1942 the Australian Federal Government effectively excluded the Australian states from the income tax field by, inter alia, collecting sufficient tax at the Federal level to enable the states to be reimbursed for the income tax that they would have otherwise collected. The Australian corporate rate, taking into account supertax, by 1945 was 35% and the shareholder tax payable on distribution to a foreign parent was 30%. The UK standard rate of tax was 50%. Hence, when an Australian company derived £1 of taxable income, it was subject to 7s Australian corporate tax. If the after tax income of 13s was distributed as a dividend to the UK parent company, it was subject to 6s Australian 15 For a discussion of the history of the negotiation and the content of the Dominion Income Tax Relief system see CJ Taylor, ‘“Capacity to Put Up A Fight more Important than Intimate Knowledge of Income Tax Acts and Practice’: Australia and the Development of the Dominion Income Tax Relief System of 1920’ in Papers Presented At 5th International Accounting History Conference, Banff, Canada, 9–11 August 2007, available at www.edwards.ukask.ca/special/ 5ahic/Papers-and-Abstracts.html. 16 See the discussion in Taylor, above n 5, 349. 17 An example of the operation of the Dominion Income Tax Relief system where an Australian subsidiary company paid a dividend to its UK parent is contained in LS Jackson, ‘Income Tax and Estate Duty. Double Taxation between Australia and the UK’, Report of Mission to London, 7 January 1946, 7–8, para 20. National Archives of Australia, Series A461, Control Symbol D344/3/3 Part 2, Barcode 188492, ‘Double Taxation—Policy’. In this example the UK does not appear to gross up the dividend for underlying Australian corporate tax.

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shareholder tax. The UK then grossed up the dividend for the shareholder tax to 13s and applied UK tax at half of the UK rate, producing 3s 3d. Australia then took the view that the total tax rate on the dividend was the Australian shareholder rate of 30% and one-half of the UK standard rate, being 25%. As the sum of these two taxes (55%) exceeded the standard UK rate of 50%, Australia provided reciprocal relief for the excess of the combined taxes over the standard UK rate, thus reducing its shareholder from 30 to 25%. This meant that the total tax paid on the dividend by the time it reached the UK parent was 7s Australian corporate tax, 3s 3d Australian shareholder tax and 3s 3d UK tax, making the total tax 13s 3d. The end effect was that UK companies deriving dividends from 100% subsidiaries in Australia were subject to an effective rate of tax approaching 66.25%.18 By the mid-1940s the perception of both UK business19 and of the UK and Australian governments was that the economic double taxation being produced under the Dominion Income Tax Relief system would inhibit direct UK investment in Australia after World War II. Hence consideration was given, both in the UK and in Australia, to the reform of the system.

T H E CO N S E QU E N C E S O F T H E U K — U S D O U B L E TAX T R E AT Y OF 1945

The key development, however, that led to the 1946 Double Tax Treaty between the UK and Australia was the negotiation and signing of the UK’s first comprehensive Double Tax Treaty with the US in 1944–45. As part of that treaty the UK agreed to introduce a foreign tax credit into its domestic law. The credit would be more generous than the credit provided under the Dominion Income Tax Relief system as it would be up to the full amount of UK tax paid on the relevant income. On the other hand, the credit would be less generous as it would only be available to UK residents. As the credit would not involve any additional credit being given by the treaty partner in relation to income of UK residents sourced in the treaty partner country, it was regarded as being likely to be simpler in its operation than the credit given under the Dominion Income Tax Relief system had proved to be. 18 See the example of the operation of the Dominion Income Tax Relief system where an Australian subsidiary company paid a dividend to its UK parent in Jackson, above n 17, 7–8, para 20. 19 The Australian Secondary Industries Commission had been advised by British industrialists that the incidence of double taxation, particularly in the UK parent–Australian subsidiary situation, was so burdensome that direct investment in Australia would not show a return commensurate with the risks involved. The Securities Industry Commissioner raised the issue with the Australian Treasurer in April 1945, urging that the Dominion Income Tax Relief provisions should be modified. An account of these discussions and submissions is contained in Jackson, above n 17, 1, para 2.

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Hence even before treaty negotiations with the US actually began the UK Internal Revenue considered that at least some modification of the Dominion Income Tax Relief system would be both desirable and necessary if and when the UK actually concluded a comprehensive Double Tax Treaty with the US.20 On 15 January 194521 a meeting of officers of the Inland Revenue, the Treasury, the Dominions Office and the Colonial Office considered the effect of the UK–US Treaty on the existing system of Dominion Income Tax Relief. Mr Chambers of the Inland Revenue pointed out that it was the intention eventually to extend the credit provisions in the US treaty to the world and that this would likely to be done on a unilateral basis without a reciprocity condition. If this were done, then the relief provided under Dominion Income Tax Relief would be withdrawn and credit relief would thereafter be confined to UK residents. The intention was to implement the US treaty in the Finance Bill later in 1945 and to include power in the Bill to extend the credit provisions in relation to trading profits to the Dominions and the Colonies. The meeting agreed that an amended version of the memorandum attached to the Cabinet paper dealing with the US treaty and its implications for Dominion Income Tax Relief should be circulated to the Dominions. It appears that the memorandum was circulated by the Dominions Office to the Dominion governments in January 1945.22

THE I NITIAL UK PROPOSALS

Correspondence followed in March and April 1945 between the Australian High Commissioner in London (SM Bruce)23 and the Secretary of State for the Dominions (Lord Cranbourne), the UK Board of Trade and Treasury 20 Avery Jones, above n 1, 237 points out that the Inland Revenue had recognised as early as April 1944 that it would be necessary to offer a similarly favourable credit to the Dominions. The Chancellor of the Exchequer (Sir John Anderson), in a letter to Andrew Duncan (Minister of Supply) dated 15 June 1944, had previously indicated that it was intended to review the system of Dominion Income Tax Relief in conjunction with the negotiation of a double tax treaty with the US. The Chancellor indicated that it was likely that the arrangements with the US would take a simpler form and be more beneficial than the existing system of Dominion Income Tax Relief. UK National Archives T 160/1268. 21 Minutes of the meeting are contained in UK National Archives T160/1403. 22 See Jackson, above n 17, para 1. Subsequent correspondence refers to the memorandum being circulated by the Dominions Office to the Dominion governments, but I have been unable to locate the actual memorandum in either the UK or Australian National Archives. The memorandum is referred to in Sir Cornelius Gregg (Chairman of the Board of Inland Revenue) to Anthony Padmore (private secretary to the Chancellor of the Exchequer), UK National Archives 40/13740, 37. 23 UK National Archives IR 40/13740, 24 and 25, SM Bruce to Viscount Cranbourne, 9 March 1945.

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Officials,24 the Chairman of the Board of Inland Revenue (Sir Cornelius Gregg)25 and UK Treasury Officials.26 Bruce had requested the convening of an Imperial Conference to consider amendments to the Dominion Income Tax Relief system. The UK response, conveyed through Lord Cranbourne, was that the budget speech would announce the UK’s intention of entering into discussions with the Dominions on the issue immediately and that for this purpose Gregg had arranged to meet with the head of Australian Treasury, SG McFarlane, who was currently visiting the UK for talks on wool.27 Gregg had an informal meeting with McFarlane on 16 or 17 April 1945 and subsequently sent him copies of the UK–US Double Taxation Agreements when they were published.28 Following further correspondence from Bruce, which again called for an imperial conference on the issue29 (an idea rejected by the UK due to the differences in the income tax systems operating in the various Dominions30), Gregg met formally with McFarlane on 29 May 1945 and outlined the UK proposals,31 and on 1 June 1945 wrote to McFarlane enclosing the UK’s formal proposals for a double taxation treaty with Australia in place of the Dominion Income Tax Relief arrangements.32 One key proposal concerned the treatment of trading profits and dividends. Gregg’s covering letter stressed the importance of the treatment proposed for taxation of direct cross-border investment. The UK proposed that the source country tax trading profits of investors of the other country at the same rate as it applied to its own traders but that no further tax be levied by the source country on interest or dividends paid out of such trading profits. The proposal was that the residence country would give credit for tax paid in the source country on the trading profits. Significantly, Gregg’s letter contains the following comment on the proposals for taxing business profits and that no tax be levied by the source country on interest or dividends: 24 UK National Archives IR 40/13740, 28 and 29, Sir Percivale Liesching ( Board of Trade) to Sir Wilfrid Eady, Treasury, 3 April 1945. 25 UK National Archives IR 40/13740, 31–32, Sir Cornelius Gregg to Sir Herbert Brittain, 18 April 1945. 26 UK National Archives IR 40/13740, 30, Sir Herbert Brittain (Treasury) to Sir Cornelius Gregg, 17 April 1945 27 UK National Archives IR 40/13740, 33, Lord Cranbourne to SM Bruce (Australian High Commissioner in London), 19 April 1945. 28 UK National Archives IR 40/13740, 37–39, Sir CorneliusGregg to T Padmore (Private Secretary to Chancellor of the Exchequer, Sir John Anderson), 28 May 1945. 29 UK National Archives IR 40/13740, 34–35, SM Bruce (Australian High Commissioner in London) to Chancellor of the Exchequer, 28 May 1945. 30 UK National Archives IR 40/13740, 37–39, Sir CorneliusGregg to T Padmore, 28 May 1945. 31 UK National Archives IR 40/13740, 39, notes by Robert Willis (Secretary of the Board of Inland Revenue) of meeting between SG McFarlane, Sir Cornelius Gregg and Willis on 29 May 1945. 32 UK National Archives IR 40/13740, 54, Gregg to McFarlane.

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In the field of trade the consideration of taxing all businesses whether home or foreign at the same rate lends great weight to the ‘origin’ theory and I imagine that our proposal will accord with Australian policy. It is the further taxation of the dividend and interest or other distribution of the profit that goes to the investing country which acts as a deterrent on investment and we pressed the United States to accept the general proposal that we make to you to abandon any such taxation. They accepted it for interest and royalties but for political reasons could not go the whole way on dividends and only met us to the point of limiting their charge to a withholding rate of 15 per cent on dividends. We did not accept this at Washington but our Government decided to accept it on our return in view of the political considerations involved. I do hope that Australia and the other Dominions will find themselves able to go the whole way, for any system of taxation which seeks to obtain in addition to the ordinary tax on profits something additional by way of a personal tax from an outside investor is not calculated to promote the flow of investment from one country to the other which is for the good of both countries.33

At his meeting with Gregg on 29 May McFarlane had pointed out that under the then current Australian system of corporate-shareholder taxation (a classical system) dividends paid to residents were treated as if they had borne no previous tax.34 Following the recommendations of the Ferguson Royal Commission, Australia had, as noted earlier, adopted a classical corporate tax system in 1940 and had justified its adoption by reference to the separate entity theory. By contrast, in 1945 the UK was operating a form of imputation system under which corporate tax was effectively paid on behalf of the shareholder. The company was taxed on its profits and dividends were treated as being paid out of taxed income. Additional tax was only payable at the resident individual shareholder level on the dividend if the shareholder was liable to surtax. Reliefs operating at the shareholder level could mean that an individual shareholder receiving a dividend could be entitled to tax refunds. The differing treatments in the two systems of dividends paid by resident companies to residents led them to different conclusions as to the appropriate treatment of dividends paid to non-resident shareholders. Under modern terminology each was applying a policy of non-discrimination, though with opposite results. The question of the appropriate treatment of dividends paid to non-residents was to prove to be possibly the major issue in the treaty negotiations. The UK position was surely weakened by its previous treaty with the US, which merely limited US withholding tax on portfolio dividends to 15% and on non-portfolio dividends to 5%, and by the fact that it had not

Ibid. UK National Archives IR 40/13740, 39, notes by Willis of meeting between SG McFarlane, Sir Cornelius Gregg and Willis on 29 May 1945. 33 34

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been able to get the US to agree to the position on dividends that it was now putting to the Dominions.35 The full set of proposals put by Gregg to McFarlane at this meeting was as follows: —In the case of trading profits, each country to have the right to tax income sourced within its borders by traders resident in the other country. The country of residence would retain the right to tax and would give full credit for the tax paid in the source country. —Trading profits of residents in the other country not made through a permanent establishment to be exempt from tax in the source country. Both branch profits and parent and subsidiary profits to be computed on an arm’s length basis. —Shipping and air transport profits to be taxed only on a residence basis. The UK submitted that if Australia would not agree to this then Australia should at least end what the UK regarded as its arbitrary method for calculating Australian profits. —That Australian tax on dividends paid to UK residents be abandoned. In exchange, the UK would forgo the surtax on dividends from the UK to Australia. This would mean that Australia would abandon its tax on dividends paid by Australian subsidiaries to British parent companies and would also abandon attempts to tax dividends paid by British companies flowing to British residents on the basis that the dividend was partly derived from Australian sources. If the proposal were adopted, the UK would give a full credit for underlying Australian corporate tax and Australia, when taxing British dividends, would recognise for credit purposes the British tax deducted by the British paying company. —Interest to be taxed only in the country of residence36 except in the case of interest between parent and subsidiary company. The exemption from tax would probably not apply to any non-resident who was trading in the source country. —Royalties to be taxed on the same basis as interest. —That an exchange of information provision, similar to that agreed to in the UK–US Double Taxation Agreement, be included.37 McFarlane indicated that he had telegraphed Australia suggesting that a mission of taxation experts should be sent to London for the negotiations. He was unsure whether he should stay himself for the discussions or whether any Commonwealth Treasury representative should be involved in 35 See the discussion of the dividend article in the 1945 UK–US Treaty in Avery Jones, above n 1, 226–29. 36 Both the UK and Australia at the time exempted interest on government securities paid to non-residents. 37 UK National Archives IR 40/13740, 3,9 notes by Willis of meeting between SG McFarlane, Sir Cornelius Gregg and Robert Willis on 29 May 1945.

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the discussions. Gregg agreed to put his proposals in writing so that McFarlane could telegraph them to Australia before any mission came to London.38 A memorandum accompanying Gregg’s letter to McFarlane on 1 June 1945 set out the UK proposals in more detail and included other proposals in relation to dual residency, corporate residency, the profits of interconnected companies, film income, other income and giving credit for source country tax on other income.39 The formal proposals contained several references to the terms of the recently concluded UK–US Double Taxation Treaty as examples of the type of article proposed.40 The UK proposal in relation to dual residency was that provisions that gave exclusive right to tax certain types of income to one of the countries would not apply to dual residents.41 For corporate residency, the UK proposed a management and control test.42 Profits of ‘interconnected’ companies were proposed to be determined on an arm’s length basis.43 The proposal in relation to film income was that Australia would not tax UK film producers who did not have a permanent establishment in Australia and that, where a permanent establishment existed, its profit would be determined on an arm’s length basis and not on the arbitrary basis then adopted by Australia. A UK producer distributing through an Australian subsidiary would not be taxed, but the profits of the Australian subsidiary would be determined on an arm’s length basis.44

T H E I N I T I A L AUS T R A L I A N R E S P O N S E

JB Chifley, the Australian Prime Minister45 and Treasurer46, replied to Gregg’s proposals by telegram on 23 July 1945.47 Chifley began by Ibid. UK National Archives IR 40/13740, 50–53. Outline of UK proposals for a double taxation agreement with Australia. 40 Ibid. Reference to the UK–US Double Taxation Treaty is made in para 5 (referring to the definition of ‘permanent establishment’ in Art 1(b) of the UK–US Double Taxation Treaty) para 7 (referring to Art III(3), dealing with the computation of profits of a permanent establishment), para 8 (referring to Art IV, dealing with the computation of profits of interconnected companies), para 10 (referring to Art XV, dealing with the exemption from source country tax on dividends paid by the residence country to residents of that country), para 11 (referring to Art XIII, dealing with credits for underlying corporate tax) and para 15 (referring to the treatment of other income generally in the UK–US Double Taxation Treaty). 41 Ibid, para 2. 42 Ibid, para 3. 43 Ibid, para 8. 44 Ibid, para 9. 45 Following the death of Prime Minister John Curtin on 5 July 1945, Frank Forde, the Deputy Prime Minister, was sworn in as a caretaker Prime Minister on 6 July. Chifley won a ballot for the Labor Party leadership on 12 July and was sworn in as Prime Minister on 13 July. See D Day, John Curtin: A Life (Sydney, Harper Collins Publishers Australia Pty Ltd, 1999) 633–35; D Day, Chifley (Sydney, Harper Collins Publishers Australia Pty Ltd, 2001) 412–16; 38 39

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stressing that, since the inception of Commonwealth income tax, Australia had relived its residents from international double taxation by not taxing foreign source income except where the foreign source income had not borne tax in the country of origin. During World War II the policy had been varied so that Australian shareholders were subject to tax on dividends received from UK companies. Chifley indicated that, as part of a general double taxation agreement, Australia was prepared to review the taxation of dividends derived by Australian residents from UK sources. Chifley pointed out that, if Australia were to do this, then Australia would be bearing the whole burden of relieving Australian residents from double taxation of income derived from UK sources. It was open to the UK to adopt the same method of relief. Consistently with his emphasis on source basis taxation, Chifley stated that Australia was reluctant to consider any proposal which involved departure from the principle that the country of origin had first claim to tax and that the country of residence should only tax if the country of origin did not. Australia would agree to taxation by the country of residence provided it gave full credit for tax paid by its residents in the source country. Recognising that investment of UK capital in Australia would provide advantages to the UK and would promote the economic development of Australia, Chifley noted that an arrangement for avoiding double taxation (particularly between UK parent companies and Australian incorporated subsidiaries) might assist trade, commerce and the flow of capital. The telegram pointed out that the UK proposals would mean that the source country would surrender the right to tax certain types of income and noted that, as Australia was a debtor nation relative to the UK, these proposals would mean a loss of revenue to Australia. Chifley indicated that, because of the existing reciprocal relief provisions and ties between the two countries, Australia was prepared to consider proposals which would involve a smaller portion of net revenue loss for it. It was noted that the UK proposals were based on those agreed in the UK–US Treaty and that, while that treaty achieved a fair and reasonable result as between

R McMullan, ‘Joseph Benedict Chifley’ in M Grattan (ed), Australian Prime Ministers (Chatswood, New Holland Publishers Australia Pty Ltd, 2000) 256; E Brown, ‘Francis Michael Ford’ in Grattan, ibid, 243. 46 Chifley had been Australian Treasurer since the swearing in of the first Curtin government on 7 October 1940. See Day, John Curtin, ibid, 460–62; Day, Chifley, ibid, 369–70; McMullan, ibid, 253. 47 UK National Archives IR 40/13740, 60–68, telegram from Chifley to High Commissioner London, 23 July 1945. A copy of the telegram from Chifley was forwarded to Gregg by the Australian High Commissioner’s official secretary on 25 July 1945. UK National Archives IR 40/13740, 69, Official Secretary, Australian High Commission, London, to Chairman, Board of Inland Revenue, 25 July 1945.

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those two countries, between Australia and the UK they would be heavily loaded to the detriment of the Australian revenue. Chifley made the following comments in relation to the specific proposals on income tax48 made by the UK: —To avoid complications associated with dual residency, that residency of either country should be defined, suggesting, for example, that domicile could be used in the case of individuals and place of incorporation in the case of companies; —That practically the whole, if not the whole, of shipping and transport companies operating between the UK and Australia were resident in the UK. Hence the UK proposals would mean that Australia surrendered the whole of the revenue it now received from UK–Australia shipping and transport. This was so notwithstanding that a UK company transporting persons or freight to the UK entered into contracts through Australian agents for these purposes. Hence such UK companies should be treated as being in the same category as other UK residents selling their goods in Australia through permanent establishments. Owing to the difficulty of ascertaining actual profit on outward freights and passenger fares, Australia had arbitrarily determined the profit to be 5% of freights and passenger fares. While Australia considered this percentage to be fair and to be a simple solution to a difficult question, Chifley indicated that Australia was prepared to discuss the ascertaining of actual profit with a view to adopting that as the basis in lieu of the present arbitrary basis. —That the proposals in relation to other trading profits made through a permanent establishment did not clash with principles maintained by Australia and in broad outline appeared to be acceptable. —That film producers who lease their films for distribution in another country were carrying on a business in partnership with the distributor in the other country. Hence profits of film producers should be regarded as arising through a permanent establishment in the other country and should be taxed on the same basis as other trading profits. Chifley went on to point out that profits of film producers from the distribution of films in the other country through a permanent establishment could not be ascertained on an arm’s length basis. Hence Australia was unable to agree to depart from its practice of assessing non-resident film producers on an arbitrary percentage of film rentals obtained from distribution of their films in Australia. —That the proposals relating to dividends appeared to be inconsistent with the proposals in relation to trading profits. Any equitable 48 As noted above, the UK had also made proposals for an Estate Duty Treaty. Paras 27–29 of Chifley’s telegram dealt with the Estate Duty proposals. The Estate Duty Treaty is not discussed in detail in this chapter.

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arrangement between the countries must have regard to the admitted basic principles of origin. —That Australia was unable to agree to the proposals for the source country to exempt cross-border interest and royalties. Australia’s view was that the source country should have first claim to tax this income and that the residence country should provide a credit for the source country tax in imposing a residence country tax. —That, subject to discussion, the proposals in relation to salaries, pensions, annuities etc (except salaries paid by either government) were generally acceptable to Australia. —That the country where the services were performed should tax employees of the other government except where the employee was a national of the employing government and was domiciled in the country of that government. —That, in view of the above, no specific comment was thought to be necessary in relation to tax credits. —That the UK proposals on exchange of information were generally acceptable to Australia.

T H E N E G OT I AT I O N S W I T H T H E F I RS T AUS T R A L I A N D E L E G AT I O N

An Australian delegation, comprising the then Commissioner of Taxation, LS Jackson, and three of his staff left Sydney on 28 July.49 The delegation apparently arrived in London on 1 August 1945. Gregg had not regarded the Australian reply to his proposals as very accommodating, and suggested that a representative from the Dominions office attend at least the initial meeting with the Australian delegation.50 The Australian delegation met with UK Inland Revenue Officers in August 1945. At that meeting both sides generally adhered to positions that they had previously put. Robert Willis, the Secretary of the UK Board of Inland Revenue, concluded that the Australian position on shipping and films was highly political. In the case of shipping, this was because Australia had virtually no international shipping industry so that obtaining some tax from the shipowner meant that Australia ‘didn’t feel so bad’. Jackson offered to consider the adoption of ratio certificates based on the actual profits of the company as certified by the UK Inland Revenue in lieu of the arbitrary 49 UK National Archives IR 40/13740, 59, Official Secretary, Australian High Commission, London to Chairman Board of Inland Revenue, 23 July 1945. 50 UK National Archives, IR 40/13740, 70, Willis to Sir Charles Dixon (Dominions Office), 26 July 1945.

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method of calculating shipping profits as 5% of the gross freights that Australia had used.51 In the case of films, Australia, on the basis of Australian case law, regarded the UK producer as a partner of, or as being in a joint venture with, the Australian distributor and hence was carrying on business in Australia. The Australian view was that, given the difficulty of ascertaining actual profits, an arbitrary basis was the only practical method to adopt. Willis viewed this as also being a highly political issue, noting ‘Americans getting big money out of Australia’.52 Willis reported that ‘they won’t budge an inch on the main question of taxation of dividends paid by Australian companies to UK residents’, noting that even if the Commonwealth did make some concession on dividends (which Willis saw as impossible) the states would never agree to it, which would create obstacles for a uniform system if the states were to resume taxation after World War II. Australia was tentatively prepared to overrule its Biddle case and to give credit to its residents for tax deducted from UK dividends.53 It is evident, however, that, at the negotiations, Australia did offer to reduce its taxation of dividends paid to UK residents by one-half and regarded this reduction as being equivalent to the reductions in the US withholding tax having regard to relevant tax rates in the respective countries.54 Willis noted that the Australian conception of Australian income went so far as to tax dividends paid by a non-resident company to a non-resident shareholder to the extent that the dividend was sourced in Australian profits. Australia recognised that this tax was largely unenforceable but refused to drop it, as to do so would be inconsistent with the principle of priority of tax for Australia on Australian-sourced income.55 Australia also purported to apply its undistributed profits tax to non-resident companies with Australian branches to the extent that the profits were Australian sourced. The delegation recognised that Australia could not enforce their charge on a UK company’s dividend but only agreed to convey the UK view to the Australian government.56 The Australian view was that the tax should apply as the profits had an

51 UK National Archives IR 40/13740, 73–74, Willis, ‘Australia’, 22 August 1945; see also Jackson, above n 17, 8–9, para 22. 52 Willis, ibid, 74; Jackson, ibid, 9–10, paras 25–28. 53 Willis, ibid. Biddle v Commissioner 302 US 573 was a US Supreme Court decision denying a US resident individual a foreign tax credit for tax deducted by the payer as the recipient had not paid the tax. Australia’s Biddle case was Jolly v FCT (1934) 50 CLR 131, in which Dixon J held that only the net amount of a dividend received by an Australian shareholder from a UK company, which had deducted tax representing tax paid by the company on the source of the dividend, was included in the assessable income of the shareholder. 54 Jackson, above n 17, 6, paras 16 and 17. 55 Willis, above n 51; Jackson, ibid, 7 para 18. 56 Willis, ibid.

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Australian source and exempting them would produce an anomaly with the treatment of Australian companies that were subject to the tax.57 Willis noted that the Australian delegation also indicated that Australia would not hear of exempting interest and royalties when flowing to a UK resident.58 The Australian view was that Dominion Income Tax Relief had generally produced appropriate results in these cases and that the principal need here was simplification of the procedures and the elimination of a few anomalies.59 Consensus was reached on salaries and pensions (where Australia broadly agreed with the UK proposals) and exchange of information. Willis described the Australian attitude in relation to the latter as being ‘They seem keen on it; they have great powers of inquisition and, one gathered, would be glad to have all sorts of information from us’.60

T H E M O D I F I E D UK PRO P O SAL S A N D T H E AUS T R A L I A N R E S P O N S E — T H E B R E A K D OW N O F N E G OT I AT I O N S

Gregg wrote to Jackson on 21 September 1945 modifying the UK proposals.61 Gregg noted that the difficulties that had emerged in their discussions to date sprung from a clash between the ‘origin’ theory of taxation to which Australia adhered and the ‘residence’ theory adopted by the UK. Gregg argued that the original UK proposals were a compromise between the two theories in that, in broad terms, they conceded the origin basis for taxation of trading profits but retained the residence basis concerning income from dividends, interest and royalties. Gregg noted that it was clear from discussions to date that treaty was not likely on this basis as the proposal in relation to dividends, interest and royalties clashed with the origin principal on which the Australian taxation code was based and would also result in an appreciable cost to the Australian exchequer. Gregg submitted that under the modified proposals there would be a slight gain to the Australian exchequer, a greater loss to the UK exchequer and a gain accruing to the benefit of traders investing in Australia. The modified UK proposal was that the Double Tax Treaty only operate in relation to trading profits and that the existing system of Dominion Income Tax Relief operate in relation to investment income (including dividends paid outside a parent–subsidiary relationship) or personal taxation. The UK continued to propose that shipping and air transport be taxed on a residence basis but that, in broad terms, all other trading 57 58 59 60 61

Jackson, above n 17, 7, para 19. Willis, above n 51. Jackson, above n 17, 11, para 33. Willis, above n 51, 73. UK National Archives IR 40/13740, 101–04, Gregg to Jackson, 21 September 1945.

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profits be taxed on an origin basis, with credit being given by the residence country for any origin tax paid. More specifically, the UK proposed: 1. that UK companies trading though Australian branches be subject to tax on their branch profits at the rates applicable to Australian companies, with the UK giving credit for the Australian tax paid; 2. that Australia would tax an Australian subsidiary of a UK company at the rates applicable to Australian companies but would not levy tax on dividends paid by the subsidiary to the UK parent, and that the UK would give the parent company credit for any underlying Australian tax paid by the subsidiary; 3. that Australia would not tax a UK company on dividends that it paid out of Australian source profits and would not charge undistributed profits tax on the Australian source profits of a UK company; and 4. that the profits of shipping and air transport ‘concerns’ of one country be exempt from tax in the other country. Gregg commented that there would also be a general provision that trading profits of a non-resident would only be taxable in the source country where they arose through a permanent establishment in that country. Gregg argued that the current Australian system discriminated against UK investment through the use of a subsidiary (evidently because of the imposition of undistributed profits tax and the taxation of dividends paid to parent companies) as opposed to investment through a branch. Gregg noted that Australian legislation that purported to tax dividends paid by UK companies that were sourced in Australian profits was unenforceable and was unjustifiable in principle as being extra-territorial taxation. If Australia wanted to encourage British, rather than foreign, subsidiaries to be established in Australia, then, given that the UK was proposing to give credit for Australian underlying tax, Gregg submitted, it was not too much to expect Australia to contribute by exempting the dividends themselves. In the case of air and shipping transport, Gregg noted that the proposal was in conflict with Australia’s origin principles but stated that the UK regarded it as a matter of first importance and pressed it strongly. Gregg referred to the agreements that the UK already had on shipping and air transport with the principal foreign countries and with Eire and Canada, and to the acceptance of the appropriateness of a residence basis for taxing shipping and air transport by the League of Nations’ Fiscal Committee owing to difficulties associated with attributing this type of income to particular sources. In relation to other income (principally interest, dividends and royalties), Gregg proposed that the existing Dominion Income Tax Relief provisions continue but indicated that, if Australia wished, the UK was prepared to make special provision for salaries and pensions.

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At the time of writing his letter of 21 September 1945 Gregg already knew what the Australian response would be, as he had given Jackson a draft of the letter in advance and Jackson had met with him and advised him of the response that he had received by cable from Chifley.62 In brief, Chifley had advised that Australia would not accept the proposals. Australia would not entertain any departure from the origin principle, would not agree to taxing shipping profits on a residence basis and continued to claim the right to tax subsidiary companies on dividends paid to UK parents. Chifley advised that in the event of Gregg not accepting the Australian proposals Jackson was to report to HV Evatt (the Australian Minister for External Affairs and Attorney General, who was then acting Australian Minister in London), who was to raise the matter with the Chancellor of the Exchequer. Gregg advised Jackson that he could not agree to the Australian proposals and that the matter would have to be taken up at the ministerial level. Gregg suggested to Jackson that it was unlikely that ministerial level discussions would lead to settlement as the Chancellor of the Exchequer could not give to one Dominion what he denied to another.63 Jackson formally wrote to Gregg on 25 September 1945, stating that Chifley had indicated by cable that any departure from the origin principle would be politically unacceptable in Australia. Jackson’s instructions were to refer the negotiations to Evatt so that he could pursue the matter with the Chancellor of the Exchequer.64 Jackson reiterated the Australian view that, as the UK taxed on both an origin and residence basis while Australia generally taxed only on an origin basis, the responsibility for removing international double taxation rested entirely on the UK. The Australian view was that the country of origin had the primary right to tax income over the country of residence, a claim which, Jackson noted, was admitted by the US by allowing a unilateral credit for foreign tax paid. Jackson disputed the claim that Australia would suffer no financial loss under the amended proposals as the claim: (i) assumed that the existing Dominion Income Tax Relief arrangements were fair even though they required Australia to provide relief in respect of Australian source income; and (ii) ignored the loss of revenue to Australia from forgoing the right to tax shipping and air transport. Jackson noted that the original proposals had contemplated the total abrogation of the existing Dominion Income Tax Relief proposals and indicated that Australia considered it desirable that the original proposals in this regard be consummated. 62 UK National Archives IR 40/13740, 106, Gregg to Sir Charles Dixon (Dominions Office), 21 September 1945. 63 Ibid. 64 UK National Archives IR 40/13740, 107–09, Jackson to Gregg, 25 September 1945.

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Australia concurred on most of the proposals in relation to trading profits, though that it would not concede the right to tax shipping and air transport to the residence country. On the key question of Australia forgoing its tax on dividends flowing to a UK parent company from its Australian subsidiary, Jackson commented that the UK request was not regarded as politically feasible because of the different structure of the Australian incidence of tax upon company profits and dividends. In Jackson’s words, the UK put the whole weight of its tax incidence on the company’s profits (apart from surtax on dividends) while Australia put its incidence partly on the profits and partly on the dividends. If dividends paid to UK parent companies were exempted, then Australian tax on corporate profits would have to be increased and Australia would face claims from other countries and Australian shareholders for a similar exemption. Jackson noted that the US had not agreed to exempt dividends but had agreed to reduce the rate of tax on dividends flowing to the UK. Australia had made a similar offer which would, in Jackson’s view, leave the burden of Australian tax on company profits and dividends comparable with that charged in the US.65 The proposal that Australia not tax Australian source dividends paid by UK companies paid to UK residents was rejected on the basis that it ignored the priority of Australia to tax dividends of Australian origin. Jackson admitted, however, that Australia could not enforce such taxation where the UK resident had no other Australian income. Nor could Australia agree to the proposal to exempt UK companies from Australian undistributed profits tax on their Australian source income. To do so would create an anomalous discrimination compared with the treatment of Australian companies and would deprive Australia of a portion of its tax on profits derived in Australia. On shipping profits, Jackson indicated that political considerations and the principle of origin made it impossible for Australia to agree to taxation of shipping profits on a state of registration basis. Jackson referred to his previous discussions with Gregg, during which it was mentioned that there had been a strong feeling of resentment by Australian exporters of what they considered to be exploitation of Australian freights by foreign shipping companies. Jackson indicated that no Australian government could hope to carry any exemption for any section of the shipping industry through parliament. In response to the criticism that Australia treated foreign direct investors differently according to whether they operated through a branch or a subsidiary, Jackson replied that this was a product of the absence of 65 Jackson’s report to the Australian Government on the negotiations contains an explanation of the reasoning behind this assertion. Similar arguments do not appear in correspondence between Jackson and Gregg but it is likely that Jackson would have used similar reasoning in his discussions with Gregg. Jackson, above n 17, 6, para 17.

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international provisions to enforce another country’s tax laws. The fact that Australia could not, in certain circumstances, enforce the full effect of its taxation laws was no justification for departing from a principle which would undermine the foundations of its taxation structure. Taxing dividends declared by UK companies out of Australian profits was not admitted to be extra-territorial taxation but was seen by Australia as being a proper imposition of tax upon income with Australian origin. In relation to items of income other than trading profits, so long as priority of taxation by the country of origin was fully admitted, Australia was prepared to consider the minor items of salaries, pensions and purchased annuities.

E VAT T M E E T S W I T H DA LTO N

Jackson wrote to Evatt on 26 September 194566 prior to Evatt’s meeting with the Hugh Dalton, then UK Chancellor of the Exchequer in the Attlee government. Jackson stressed that the key item to be settled first was the treatment of dividends paid by an Australian subsidiary company to a UK parent company. Jackson noted that under the present Dominion Income Tax Relief arrangements the combined Australian and UK tax on the subsidiary’s profits and on the dividend paid to the parent exceeded the UK standard rate of 10s (ie 50%). It was this aspect in particular that ‘the commercial world’ and the Australian Secondary Industries Commission wanted corrected. Jackson advised that it would be best to abrogate the whole present arrangement and to give Australia, as the country of origin, the priority to collect taxes without rebate. If the UK wanted to then tax Australian source income on the basis of residency, it should then assume, as did the US through its foreign tax credit system, the obligation of rebating from its tax the whole of the Australian tax. Jackson indicated that the particular bone of contention was that Gregg’s demand that Australia should forgo its taxation of dividends paid by an Australian subsidiary to a UK parent. Jackson noted that the UK had been unable to persuade the US to agree to this demand and that the Board of Inland Revenue had been overruled by the then Chancellor of the Exchequer (Sir John Anderson). In its treaty with the UK, the US had agreed to reduce its withholding tax on dividends from 30 to 15% and, in the case of a 95% subsidiary, to 5%. Australia had offered to reduce its tax on dividends by 50%, which, when the Australian corporate tax rate was taken into account, gave a mean somewhere between the 15 and 5% rate in the US Treaty. Jackson noted that Gregg had refused to accept this offer. In 66

UK National Archives IR 40/13740, 111 and 112, Jackson to Evatt, 26 September 1945.

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Jackson’s view, the established precedent in the UK–US Treaty made Gregg’s position on this issue untenable. Jackson noted that Gregg’s amended proposal intended to leave ‘personal items’ (portfolio dividends, interest, royalties, rents, salaries, pensions and annuities) to continue to be covered under the Dominion Income Tax Relief system. Jackson admitted that it was the Australian revenue, not the taxpayer, that suffered under the present arrangements. In Jackson’s view, it was best to concentrate on trading profits and settle that item first rather than break down the whole negotiations. Jackson commented that the UK–US Treaty could not be adopted in toto in the UK–Australia context, noting that both the UK and the US taxed on both a residence and an origin basis whereas Australia largely taxed only on an origin basis, and that the reciprocal flow of income that existed between the UK and the US did not exist between the UK and Australia. Even if a reciprocal flow of income did exist, Australia would generally not be imposing tax on UK source income and hence any question of Australia allowing a tax rebate would not arise. Gregg wrote to BF Trend (the Private Secretary to the Chancellor of the Exchequer) on 12 October 1945, enclosing a memorandum outlining what he saw as the keys points of difference between the UK and Australia.67 Gregg emphasised three issues: (i) the taxation of dividends paid by an Australian subsidiary to a UK parent; (ii) Australia’s levying of undistributed profits tax on the Australian profits of UK companies with Australian branches; and (iii) shipping and air transport profits. In the case of dividends paid by Australian subsidiaries to a UK parent, Gregg argued in favour of exempting the dividend on the basis that this produced neutral treatment as between direct investment via a subsidiary and direct investment via a branch (given that Australia could not enforce its attempt to tax UK companies on dividends sourced in Australian profits and paid to UK residents). Gregg noted that Australia had offered to halve its rate on dividends, saying that the UK had accepted this settlement in its Treaty with the US. Gregg pointed out that this was incorrect, as in the US Treaty the withholding tax rates had been reduced from 30 to 5% in the case of dividends paid to a subsidiary. This somewhat misrepresented the Australian view, which, as noted earlier, was that halving its rate produced a rate which was a mean between the two rates (15 and 5%) applicable under the US Treaty. Whether Gregg misunderstood the Australian position or was being disingenuous is unclear. In his covering letter, Gregg stressed that much more was at stake than money as the Australian proposals involved ‘a divergence in principle from our treatment of other countries which would have reactions’. The accep67 UK National Archives IR 40/13740, 125, Gregg to Trend, 12 October 1945; UK National Archives IR 40/13740, 123 and 124, ‘Double Taxation And Australia: Brief Summary’.

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tance of the Australian position would mean that the UK would have to give way to the other Dominions, which would lead to greater revenue cost. Gregg’s view was that it would be fatal to give way to Australia. Gregg thought there was good hope that the amended UK proposal would be accepted by South Africa. While they had not yet met with Canada and New Zealand, Gregg noted that the structure of their tax systems was such that difficulties with dividends and undistributed profits tax were not anticipated. On shipping profits in particular, Gregg suggested that the Chancellor should urge on Dr Evatt that it was unreasonable for Australia to not adopt what was, in effect, the international cannon for taxation of this type of income. The Chancellor should tell Dr Evatt that the UK proposals were reasonable and that, while he would consider Dr Evatt’s submission, the officials should meet again to consider the matters in dispute. The Chancellor should also state that he could not come to a decision on Australia before he knew where he stood in relation to the other Dominions.68 The Chancellor of the Exchequer (Hugh Dalton) met with Evatt and Jackson (but not with Gregg) sometime between 12 and 16 October 1945.69 Apparently at that meeting Evatt handed Dalton the letter of 26 September 1945 that Jackson had written to Evatt.70 Evatt also appears to have handed over a short and blunt memorandum.71 The interesting feature of the memorandum is that, for the first time in Australian communications in the negotiations, it opens with a positive statement about what Australia requires from a Treaty rather than with defensive statements about what Australia will not agree to. In the opening paragraph of the memorandum, under the heading ‘What Australia Asks For’, the request is made for the UK to grant a full rebate of tax on income of Australian origin and that such a rebate not only be applied to taxes on company profits but also to taxes on dividends paid out of those profits. The memorandum notes that the US conceded this principle (of granting a full credit for foreign tax) in its tax laws. The memorandum noted that Australia was the only Dominion72 that shared Gregg to Trend, ibid, 125. UK National Archives IR 40/13740, 131, Gregg to Trend, 16 October 1945. Gregg mentions that Jackson had told him in a letter on the previous weekend that Evatt had met with Dalton. Given that Evatt had not met with Dalton when Gregg wrote to Trend on 12 October, the meeting must have taken place sometime between 12 and 16 October. Clearly, Gregg was not present at the meeting as he is relying on Jackson’s report of it. 70 The original letter is in the UK National Archives IR 40/13740, 111 and 112, Jackson to Evatt, 26 September 1945. 71 UK National Archives IR 40/13740, 126 and 127, ‘What Australia Asks For’. 72 While technically correct, this was somewhat misleading as India and the colonies all provided reciprocal relief. None of the other Dominions, viz Canada, New Zealand and South Africa, provided reciprocal relief at Dominion level, but in some instances reciprocal relief was provided at a subnational level. Australia only provided reciprocal relief at the Commonwealth level, none of the states ever having agreed to provide reciprocal relief. None of the Australian 68 69

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relief from double tax on income of its own (Australian) origin. Dalton73 marked this comment with red ink in the margin of the memorandum. The request for a full rebate, at least on business profits, was uncontroversial. A full rebate on business profits had been offered in the amended UK proposals and a full rebate on all Australian tax paid had been part of the original UK proposals. This request, however, accurately stated what the real gain to Australia would be under a Double Tax Treaty with the UK. It would mean that Australia would no longer have to contribute to relief from international double taxation of Australian source income. In situations such as dividends paid from an Australian subsidiary to a UK parent it would also mean that the total tax paid would not exceed the greater of the combined Australian corporate and dividend tax and the UK tax on the dividend without Australia contributing to the overall relief. Under the heading ‘Australia’s Minimum Position’, the memorandum noted that Gregg had asked that personal taxes continue to be dealt with under the Dominion Income Tax Relief provisions (which would mean that relief would be divided between Australia and the UK). The memorandum commented that ‘Australia regards this as objectionable, but if we are forced, we will have to accept it’. That Australia was prepared to accept the continuance of the Dominion Income Tax Relief system in relation to personal taxes, notwithstanding that it would share in the relief on Australian source income, clearly indicates that Australia’s main concern was with providing more complete relief from the double taxation of business profits, corporate income and dividends. This section of the memorandum went on to note that Gregg was prepared to allow a rebate for Trading Profits but wanted Australia to forgo its tax on dividends paid by an Australian subsidiary to a UK parent. The memorandum bluntly stated that Australia would not concede this but would reduce its tax on dividends by 50%, noting that the UK had agreed with the US to accept such a reduction rather than an exemption but had refused such a reduction to Australia. Dalton’s handwritten notes on the memorandum appear to indicate that he thought that a two-thirds reduction would be more appropriate, given that the US had reduced its dividend withholding tax in the subsidiary–parent situation from 30 to 5%. The memorandum also noted that Gregg had asked that Australia forgo its tax on overseas shipping profits74 and bluntly stated, ‘this Australia states were levying an income tax in 1945 following the introduction of the Commonwealth Uniform Tax Scheme in 1942. 73 The ink appears to be the same as is used in other handwritten comments on the memorandum. The handwriting appears to be the same as subsequent handwritten notes in the file where, from the context, it is clear that the writer is Dalton. 74 Dalton made handwritten notes on the memorandum outlining the formula by which Australia taxed shipping profits.

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refuses to do’. Similarly, the memorandum indicated that Australia refused to adhere to Gregg’s request to forgo its tax on undistributed profits. In a handwritten note on the memorandum, Dalton had written, ‘Try to settle this by Monday night’. Evidently Dalton told Evatt and Jackson that he would reach a decision on the matter by Monday.75 As it happened, no decision was forthcoming at this time. Jackson either surmised or was told that Dalton was concentrating on budgetary legislation and banking reform. Jackson and the rest of the Australian delegation stayed in London for another fortnight, then returned to Australia.76 As noted above, it appears that Evatt, at his meeting with Dalton, had given Dalton the letter that Jackson had written to Evatt on 26 September 1945. Dalton forwarded the Jackson letter to Gregg for comment. Gregg wrote to BF Trend (Dalton’s private secretary) on 24 October 1945.77 In that letter, Gregg argued that Jackson had misrepresented the effect of the UK’s treaty with the US in relation to the key question of the treatment of dividends paid by a 100% subsidiary. As discussed above, Jackson had argued that the Australia offer of halving its rate of tax on dividends paid to a non-resident company, when combined with the rate of Australian tax on corporate profits, struck a mean somewhere between the effect of the 15 and 5% agreed in the US Treaty. Gregg argued that in the 100% subsidiary situation equivalence with the US Treaty would mean that Australian tax on the dividend would be limited to 5%. Gregg noted that the South African representatives were recommending the UK’s proposal that there be no tax on dividends paid to non-resident 90% subsidiaries and that difficulties were not anticipated with either Canada nor New Zealand in this respect as neither taxed dividends in this situation. Gregg’s letter also states that, ‘we know that the Australians approached the International Chamber of Commerce to try to get the Chamber to put pressure on Somerset House to give way, which the Chamber refused to do’. Gregg referred to an article that had appeared in The Economist on the issue and quoted the conclusion to that article: The Australian proposal appears to be a rather one-sided bargain and its is difficult to square this policy with the desire of Australia for the maintenance of imperial preference, on the one hand, and the establishment of new industries financed from this country, on the other.

Gregg wrote to Trend again on 31 October 1945,78 enclosing a draft of a lengthy letter (largely reiterating Gregg’s previous comments to Jackson)

75 Gregg to Trend, above n 69, states that Jackson had told Gregg that Evatt had seen Dalton and that Dalton was to give ‘a decision’ on Monday. 76 Jackson, above n 17, 3, para 9. 77 UK National Archives IR 40/13740, 134–35, Gregg to Tend, 24 October 1945. 78 UK National Archives IR 40/13740, 139, Gregg to Trend, 31 October 1945.

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that Gregg proposed Dalton send to Chifley on the subject of the Double Taxation Agreement. Trend, in a note to Dalton, commented, I doubt whether this is the sort of subject on which you will wish to write an ordinary letter, and I think it might be better for you to send a Memorandum, outlining the points at issue, with a short personal covering letter, asking Mr Chifley to come as far to meet you as you have come to meet him.

Dalton wrote ‘Yes!’ in the margin in response to this suggestion. Dalton wrote the following comments on the bottom of Trend’s file note: ‘I suppose I must have more [indecipherable] discussion on this dreary subject. I think IR is being too stiff necked about the whole thing.’ Dalton went on to note that ‘we have left the Australian hanging about in London for months’, and asked ‘how much money is there in it anyway?’79 Gregg then corresponded with the South African High Commissioner in London, asking whether South Africa would agree to Australia being advised that South Africa had agreed to a similar proposal to the one put to Australia.80 South Africa indicated that it was not prepared to view this proposal (of advising Australia of the pending treaty with South Africa) favourably81. Gregg then prepared a further draft note and memorandum for Dalton to send to Chifley.82 Trend forwarded Gregg’s memorandum and draft note to Dalton, observing that it seemed that the South Africans wanted to argue the case a little further. Trend suggested that, ‘you will probably want to expand the draft letter yourself, as one Socialist minister writing to another’. Trend was frustrated at Dalton’s response, which was ‘settle something with some other Dominions first’.83 Nonetheless, it appears that Dalton’s decision at this point may have been critical in eventually producing an agreement with Australia as the Treaties agreed with Canada and South Africa involved compromises by both sides and set some precedent for further negotiations with Australia. The UK then reached agreement on Double Taxation Treaties with South Africa and Canada. As will be seen below, in negotiating those treaties the UK made some concessions which appear to have been significant in resolving the deadlock in its negotiations with Australia.

79 ‘Chancellor of the Exchequer’, 2 November 1945, signed ‘BT’. Handwriting in red is signed ‘HD’ and evidently is Dalton’s. UK National Archives IR 40/13740, 140, Gregg to Trend, 16 October 1945. 80 UK National Archives IR 40/13740 (page number indecipherable), Gregg to Scallen (South African High Commissioner in London), 15 November 1945; UK National Archives IR 40/13740 (page number missing), Gregg to Trend, 6 December 1945. 81 UK National Archives IR 40/13740, 147, Scallen to Gregg, 18 December 1945. 82 UK National Archives IR 40/13740, 148, Gregg to Trend, 28 December 1945. 83 ‘Chancellor of the Exchequer’ 1 January 1946, signed ‘BT’. Handwritten notes in red by Dalton are signed ‘HD 3/1’. UK National Archives IR 40/13740, 155. See also UK National Archives IR 40/13740, p154, exasperated note from Trend to Gregg, 4 January 1946.

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Australia initiated the next step in the Australian negotiations. Jack Beasley, who had taken up a post as Australian minister in London, wrote to Dalton on 5 April 1946 advising that he had received a personal letter from Chifley, who would be arriving in London on 19 April and would be staying for about a fortnight. Chifley had advised that he was most anxious to ‘straighten out’ the double taxation question while he was in London. Beasley requested that Dalton make time to see Chifley on this issue while Chifley was in London. Beasley commented, ‘this is a personal request and I would very much like you to note it’.84 Gregg wrote to Trend on 16 April 1946,85 anticipating that Dalton would see Beasley to discuss the double taxation question on the Thursday of that week. Gregg summarised the points of difference with Australia in a memorandum accompanying his letter.86 Contrary to international practice in relation to air and shipping transport, and in contrast with the UK’s treaties with Canada, South Africa, Eire, the US and many other foreign countries, Australia would not agree to exclusive taxation by the country of the shipowner. Australia and the UK were generally in agreement that independent agents should not be taxed in the country of origin except in the case of insurance, where Australia, uniquely in Gregg’s view, claimed the right to tax independent agents. On the key question of dividends paid to parent companies, Gregg noted that the US had reduced its withholding tax in this situation to 5%, that Canada and South Africa had agreed to exempt such dividends, and that New Zealand did not impose tax on dividends. Similarly, Gregg pointed out that the US had agreed not to impose its undistributed profits tax on non-resident companies, as had South Africa. Canada did not have an undistributed profits tax and had agreed not to impose one on non-resident companies. Gregg pointed out that Australia had refused to budge on both dividends paid to parents and on undistributed profits tax. In the case of interest and royalties, although the US had agreed that interest and royalties not be taxed at source, Canada had not, and full credit was to be given by the UK for Canadian tax paid. In the case of South Africa, the Dominion Income Tax Relief provisions would continue to apply to interest and royalties. Gregg conceded that Australia would not follow the US precedent and that the UK was prepared to concede Australia’s claim to tax these types of income. In the case of film royalties, the US had agreed to exempt British film royalties but Canada had not, nor had 84 UK National Archives IR 40/13740, 157, Beasley to Dalton, 5 April 1946. Dalton’s handwritten note on this letter appears to read, ‘I spoke to Beasley and said “Yes”’. 85 UK National Archives IR 40/13740, 161, Gregg to Trend, 16 April 1946. 86 UK National Archives IR 40/13740, 159 and 160, Board of Inland Revenue, ‘Summary of Differences with Australia’, 16 April 1946, signed ‘CG’.

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South Africa. Gregg commented ‘We shall certainly have to concede to Australia as good a treatment as we have conceded to Canada and South Africa’. Most interestingly, Gregg’s account of the position in relation to portfolio dividends states the initial UK proposal of full exemption and notes that the US agreed to halve its withholding tax rate, that Canada would not make any reduction but was given full credit and that in the case of South Africa the Dominion Income Tax Relief provisions would continue in place. What Gregg fails to mention is that the UK’s amended proposal to Australia was that the Dominion Income Tax Relief system continue to apply to portfolio dividends. Gregg’s covering letter to Trend comments that Australia wanted to ‘pick the eyes’ out of the UK–US agreement, to take what she likes and to leave out what she doesn’t like on the ground that the interflow of income between the UK and Australia is different from that between the US and the UK and that Australia is not a big industrial country.

If the treaty with the US was not seen as the standard that should apply between the mother country and a Dominion, it did not follow that the mother country should give more. This was especially so in relation to the core point of withholding tax, on which the UK was unable to get the US to agree to its view. Gregg characterised Australia as pressing its ‘origin views’ much further than any other country. Gregg pointed out that the US treaty had to be comprehensive as no prior arrangements had been in place for relieving double taxation. By contrast, the Dominion Income Tax Relief system had operated in respect of Australia and the other Dominions. Hence, within the Commonwealth it was a question of reviewing the existing system and of adjusting it where the relief given could be considered inadequate. Serious complaint had only arisen in relation to the inadequacy of the Dominion Income Tax Relief in the sphere of trade.87 Dalton met with (or at least spoke to) Beasley on 18 April 194688 and forwarded a summary of the points on double taxation which were outstanding as between the UK and Australia.89 The UK was largely holding to the negotiating position set out in Gregg’s amended proposals of 21 September 1945. No modifications to that position had been made to reflect the agreements that had been reached with Canada and South Africa. In a modification of the amended proposals, and in contrast to its treaty with Canada, the UK had returned to its original position, of Gregg to Trend, above n 85. UK National Archives IR 40/13740 (page number obscured), Dalton to ‘My Dear Jack’, 18 April 1946. 89 UK National Archives IR 40/13740 (page number obscured), ‘Double Taxation— Summary of Points for Discussion’. 87 88

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requesting residence-based taxation, in relation to interest and royalties and film royalties. The summary also stated that the UK would like to discuss further the question of the treatment of income other than trading income, in particular the treatment of dividends passing from one country to an investor in the other country. Dalton indicated that he looked forward to discussing the outstanding points with Chifley very soon, stating, ‘I am sure we shall be able to settle them without much difficulty’. Marginal notes to the memorandum reflect the UK’s assessment of the Australian position at this time. The assessment was that: (i) the treatment of shipping and air transport remained in dispute; (ii) Australia would probably agree on agency profits with exceptions to be made for particular cases; (iii) Australia would probably agree on exemption of subsidiary to parent dividends; (iv) Australia would probably agree not to levy tax on dividends paid by UK companies out of Australia profits and not to impose undistributed profits tax on UK companies; (v) Australia would probably agree to exempt royalties but not interest; and (vi) Australia would probably refuse to give way on film royalties.90 Gregg then met with Dr HC Coombs, who he described as a member of Chifley’s staff and as being with the Department of Reconstruction. At that meeting Gregg told Coombs what the UK had agreed with South Africa and Canada. Gregg stressed that the following three points were of greatest importance to the UK: (i) the exemption of dividends paid by an Australian subsidiary to a UK parent, at least in the case of a wholly owned subsidiary; (ii) the exemption of dividends and undistributed profits of UK companies; and (iii) the exemption of shipping and air transport profits. Gregg had stressed that the vital question was to relieve trade from double taxation, and noted that Coombs appreciated this. Gregg indicated to Trend that it looked like the following solution might be able to be reached at Dalton’s proposed meeting with Chifley: Australia to Exempt shipping and air transport. Exempt dividends paid by the wholly owned subsidiary. Halve its rate on other dividends (as previously offered). Exempt UK companies from tax on dividends and undistributed profits. UK to Concede Australia’s claim to tax interest and royalties. 90 UK National Archives IR 40/13740, 160, ‘Double Taxation—Summary of Points for Discussion’ with handwritten marginal notes and ‘Double Taxation—Summary of Points for Discussion’ with typed marginal notes. UK National Archives IR 40/13740, 166, ‘Double Taxation—Summary of Points for Discussion’.

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Concede film royalties. If necessary concede the point about insurance profits made through an Australian agent (they ought to be prepared to meet us on this, but it is not a point to make a stand on). Give full credit for Australian tax in all remaining cases of double taxation of UK residents, ‘personal income’ as well as trading income.’

The reference to conceding Australia’s claim to tax royalties is crossed out in a handwritten annotation to Gregg’s memorandum and the word ‘No’ is written above ‘royalties’.91 The agreements that the UK had recently reached with Canada and South Africa made it more difficult for both Australia and the UK to hold to their previous negotiating positions. When the ministerial meeting between Dalton and Gregg (representing the UK) and Chifley, Evatt, Beasley, Coombs and RJ Mair (Australian Second Commissioner of Taxation) took place on 3 May 1946, some further compromises were made. The agreement reached at that meeting was: —trading profits were to be taxed on an origin (source) basis, with full credit being given by the residence country; —shipping and air transport profits were to be taxed on a residence basis (a concession made by Australia consistent with the Canadian treaty and foreshadowed by Coombs in his meeting with Gregg); —agency profits (that is, independent agents in more modern parlance) to be exempt from source basis taxation but with an exception enabling Australia to tax insurance agencies and certain pastoral agencies (Gregg had foreshadowed in his memorandum to Trend that the UK might concede an exception for insurance agencies but the exception for pastoral agencies was an additional concession); —Australia to retain its right to tax films, with credit being given by the UK (a concession made by the UK foreshadowed by Gregg in his meeting with Coombs); —Australia to not tax dividends paid by a 100% subsidiary of a UK company holding all shares other than qualifying shares (a concession made by Australia foreshadowed by Coombs in his meeting with Gregg); —UK companies trading in Australia to be exempt from Australian tax on dividends paid to Australian non-residents but to be subject to Australian undistributed profits tax (not taxing the dividend was a concession made by Australia that had been foreshadowed by Coombs, 91 Board of Inland Revenue, ‘Chancellor of the Exchequer: Double Taxation—Australia’, 29 April 1946, signed ‘CG’. UK National Archives IR 40/13740, p167, ‘Double Taxation—Summary of Points for Discussion’.

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but allowing Australia to continue to apply undistributed profits tax was a concession by the UK made at the meeting of 3 May); —Australia to reduce its tax on other dividends paid by Australian companies to UK residents by one-half (this was Australia’s original offer and its acceptance was a compromise by the UK foreshadowed by Gregg in his meeting with Coombs); —Literary and industrial royalties to be taxed on a residence basis (this was a concession by Australia which had not been foreshadowed by Coombs in his meeting with Gregg); —Australia to tax rents and mineral royalties, with the UK giving full credit (Gregg in his meeting with Coombs had foreshadowed that Australia would retain the right to tax all royalties but, as noted above, ‘No!’ had been written above this concession in Gregg’s memorandum of that meeting); —except in the case of government securities, interest was to be taxed at full rates on an origin basis, with the UK giving full credit (this was a concession made by the UK foreshadowed by Gregg in his meeting with Coombs); and —pensions and purchased annuities were to be taxed on a residence basis.92 Both sides, in 1946, must have been satisfied with some aspects the agreement reached at this meeting. From an Australian perspective, most importantly, the system of Dominion Income Tax Relief was to be replaced by a foreign tax credit which extended to giving credit for underlying Australian corporate tax to all UK resident shareholders. Australia had successfully resisted the UK proposals to exempt dividend, interest and royalty payments entirely from tax at source. On the other hand, the compromise reached on dividends was arguably more favourable to the UK than the one achieved in the UK–US Treaty of 1945. In the UK–Australia Treaty the exemption from dividend taxation at source was confined to the 100% subsidiary situation, Australian tax on other dividends was halved and Australia retained the right to levy undistributed profits tax. By comparison, in the UK–US Treaty of 1945 the US withholding tax on non-portfolio dividends paid to a company with a 95% or more voting interest was reduced to 5% and that on all other dividends was reduced to 15%. Australia had a clear victory on interest, film royalties and mineral royalties, retaining full source country taxing rights in all these cases, with 92 ‘Double Taxation—Australia: Conference At 11 Downing Street, on 3 May 1946; Heads Of Agreement’ dated 4 May 1946. UK National Archives IR 40/13740, 169, ‘Double Taxation—Summary of Points for Discussion’. The Heads of Agreement were drawn up by Gregg. See UK National Archives IR 40/13740, 171, Board of Inland Revenue, ‘Double Taxation—Australia’ 7 May 1946, ‘Double Taxation—Summary of Points for Discussion’, signed ‘CG’.

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full credit being given by the UK. By contrast, under the UK–US Treaty of 1945 interest was exempt from tax at source except where it was paid by a company to a company, resident in the other jurisdiction, which controlled more than 50% of the voting power in the paying company. Similarly, in the UK–US Treaty both industrial and film royalties were exempt from source taxation except where the payee was engaged in trade or business in the paying jurisdiction. In the case of film royalties, as noted above, Australian case law regarded typical Australian distribution arrangements of foreign producers as amounting to carrying on business in Australia and hence as having an Australian source. While an equivalent result was theoretically possible for the US under the UK–US Treaty it depended on a finding that the payee was engaged in a US trade or business and excluded the normal US domestic law rule of imposing withholding taxes on film royalties. In the case of mineral royalties, the US had agreed to reduce its withholding tax to 15%, with an option to be taxed as if carrying on a trade through a permanent establishment on a net basis with taxation at the standard rate (50% in the case of the UK). The UK, however, had a victory over Australia on literary and industrial royalties. It seems clear from a comparison of the discussions between Gregg and Coombs on the one hand and the agreement reached by the politicians at the meeting of 3 May 1946 on the other that this concession was made by Australia at the latter meeting, possibly in the context of Australia retaining source country taxing rights in respect of film and mineral royalties. Australia conceded taxation on a residence basis in the politically sensitive area of shipping profits and in the nascent area of international air transport. Given the international practice that had developed in these areas and given the terms of the agreement that the UK had recently reached with Canada, an Australian concession on these areas was perhaps inevitable if Australia wanted to achieve significant objectives, such as obtaining full foreign tax credits from the UK and preserving its source country taxing rights in other areas. However, as an island and a significant exporter of minerals and primary products with no real international shipping industry of its own, Australia was to continue to press for concessions on shipping profits in its treaty negotiations well into the 1960s.

D E TAI L E D D R A F T I N G B E G I N S AN D T E C H N I CAL I S S U E S EMERGE

Although this meeting had resolved most of the significant issues, some points were left for further negotiation, as was the detail of the drafting. The UK Inland Revenue had prepared a draft treaty dated 6 May 1946, but it is unclear when this was sent to the Australian delegation. Mair remained

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in London for the detailed drafting and was eventually joined by the Australian Crown Solicitor HEF (Fred) Whitlam.93 Technical drafting continued until late August 1946, and in that period a total of four drafts (including the final draft) were developed.94 Throughout the drafting process Mair sent regular, almost daily, cables to Patrick McGovern, the new Australian Commissioner of Taxation, who sent back less frequent replies with drafting suggestions. As the draft was progressively received in Australia it was forwarded for comment to the Australian Taxation Office central committee, the administrative committee, the Deputy Commissioner for New South Wales and the Deputy Commissioner for Victoria.95 The comments made on progressive stages of the draft were collated and were utilised by McGovern in making drafting suggestions to Mair and Whitlam. The original UK offer of a double taxation treaty had made explicit reference to particular articles in the UK–US Treaty of 1945. While the influence of the UK–US Treaty is apparent in this first draft prepared by the UK, there were several differences between the two documents that were not attributable to differences in the agreements reached in relation to the distributive rules. Some of the more significant differences were: (i) the UK draft defined ‘Industrial and Commercial Profits’ in terms which excluded specific items, only some of which were dealt with under the distributive rules; (ii) the definition of ‘permanent establishment’ in the 1945 Treaty included ‘a factory’ but the UK draft did not, although it did include ‘a farm’—something which the definition in the 1945 Treaty did not include; (iii) the industrial and commercial profits article in the 1945 Treaty adopted the ‘force of attraction’ principle, but the UK draft only permitted source taxation of profits attributable to a permanent establishment; (iv) the ships and aircraft provision in the 1945 Treaty referred to the place of documentation of a ship or registration of an aircraft, but the UK draft did not; (v) the credit provisions in the UK draft were considerably more detailed than those in the 1945 Treaty, and were to become still more detailed through the drafting process; (vi) the 1945 Treaty contained an interest article, while the UK draft did not; (vii) the 1945 Treaty contained an article exempting a UK resident (other than one engaged in a trade or business in the US) from US tax on gains from the 93 See National Archives of Australia, Series No A 7303/21, Control Symbol J245/45/19, ‘Drafting of the UK–Australia Agreement 1946. Cables of Draft of Agreement’, 20, Evatt to Holloway, 9 May 1946; ibid, Patrick McGovern (then Australian Commissioner of Taxation) to Mair, 22 May 1946, ‘Drafting of the UK–Australia Agreement 1946. Cables of Draft of Agreement’, 41. 94 The drafts are contained in National Archives of Australia, Series No A7303/21, Control Symbol J245/45/18. 95 See National Archives of Australia, Series No A 7303/21, Control Symbol J245/45/19, ‘Drafting of the UK–Australia Agreement 1946. Cables of Draft of Agreement’, 41, McGovern to Mair, 22 May 1946.

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sale or exchange of capital assets, but there was no equivalent provision in the UK draft; and (viii) the 1945 Treaty contained a non-discrimination article, but the UK draft did not. Neither treaty contained an ‘other income’ article. Some of the drafting work done from May to August 1946 was concerned with refining the language of the initial UK draft so as to avoid ambiguity and technical arguments based on syntactic presumptions. Only articles which were the subject of extensive discussion will be examined here. Key structural features of the treaty and their impact on subsequent Australian treaty practice and policy will then be discussed.

U N D I S T R I B U T E D PRO F I T S TAX O F PR I VAT E C O M PA N Y W H O L LY OW N E D S U B S I D I A R I E S O F UK CO M PAN I E S

Mair wrote to Gregg on 6 May 1946,96 noting that at the meeting Australia had reserved its position on the situation where a UK private company had a 100% Australian subsidiary. Mair indicated that this situation might need to be dealt with separately, given the general tax treatment of private companies in Australia. The meeting on 3 May had not explicitly dealt with Australian taxation of Australian resident private companies, nor with the application of undistributed profits tax to those companies. That Australia would continue to have full right to impose these taxes was, however, implicit in them not being discussed and in the agreement that Australia would have the right to tax the business profits of permanent establishments and to impose undistributed profits tax on the Australian source profits of UK companies. The agreement to exempt dividends paid to by Australian 100% subsidiaries to their UK parent, however, made problematic the imposition of undistributed profits tax on Australian private companies that were 100% subsidiaries of a UK company. The reason was that, in the case of private companies, Australian undistributed profits tax was calculated as the tax that would have been payable by all the shareholders if the profits had been distributed. Hence, where the sole shareholder in the Australian private company was a UK parent company, if the dividend to the parent were exempt from Australian tax then no Australian undistributed profits tax would be payable either. Anomalously, where the Australian subsidiary was a public company as then defined, it would continue to be liable to 10% undistributed profits tax notwithstanding that under the proposed treaty any dividends that it paid to its UK parent would be exempt from Australian tax. This was because, in the case of an Australian public company, undistributed profits tax was set at a flat rate of 10%. Under the definition of ‘private company’ for Australian tax 96

UK National Archives IR 40/13740, 168, Mair to Gregg, 6 May 1946.

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purposes at the time, the key issue in the 100% subsidiary situation was whether the UK parent was a private company for Australian tax purposes. Whether the UK parent was a private company as defined then turned on: —whether seven or fewer persons controlled it in the relevant sense; —whether the public held ordinary shares carrying 25% or more voting power; and —whether it was not a subsidiary of a public company, which turned on whether it was owned by one or more companies none of which was a private company.97 Mair proposed that the exemption for dividends not apply in the case of an Australian private company that was a 100% subsidiary of a UK company but that Australia halve its rate of tax on the dividend and hence halve its rate of undistributed profits tax. A file note by Willis of the UK Inland Revenue commented that ‘from the subsidiary’s point of view, half rate on both dividends and undistributed profits tax is probably a better proposition than exemption of dividends with full rate on undistributed profits’. Willis noted that some Australian private company subsidiaries of UK companies did not pay dividends at all. The Australian proposal also extended to the situation where a UK private company was trading in Australia through a branch. Here Mair proposed that it would halve the nominal but uncollectible tax that it levied on dividends paid by the UK company to its UK shareholders and consequently would halve the undistributed profits tax that it levied on the UK company. Willis’s conclusion was that there was not ‘very much in the dividend tax’ in both these cases and that the reduction in undistributed profits tax that would result from conceding these points was worth having.98 However, Patrick McGovern, the Australian Commissioner of Taxation, disagreed with Mair and indicated that he favoured Willis’s earlier suggestion ‘that full rates of tax on undistributed profits be specifically provided for and that we (Australia) consent to exempt all dividends paid to UK parents’.99 Mair then met with Gregg, who, while agreeing to Australia taxing the undistributed profits of Australian resident private companies that were wholly owned subsidiaries of UK companies, argued that Australia should limit its undistributed profits tax on branches of private companies to the tax that would have been payable if the branch had been a subsidiary. Mair cabled a draft paragraph to McGovern which gave effect to Willis’s original suggestion but which included a proviso the 97 UK National Archives IR 40/13740, 179–80, Memorandum ‘Australian tax on ‘Private Companies’’ by R Willis, 15 May 1946. 98 Ibid. 99 National Archives of Australia, Series No A 7303/21, Control Symbol J245/45/19, ‘Drafting of the UK–Australia Agreement 1946. Cables of Draft of Agreement’, 41, McGovern to Mair, 22 May 1946.

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intent of which was evidently to ensure that the rate of undistributed profits tax on private companies would not exceed the Australian rate of tax on dividends paid to a non-resident company.100 McGovern replied rejecting the proviso as it merely set a maximum rate but not a minimum rate for undistributed profits tax and noted that, ‘Prime Minister advised Cabinet . . . that nothing in the treaty would give a UK company a trading advantage over an Australian company. This principle must be observed’.101 McGovern’s cable contained a suggested draft that became Article VI(4) of the Treaty, which stated that, notwithstanding the earlier provisions in the Article, the undistributed profits tax assessed to a private company was to be the amount that would have been assessable if those provisions had not been included in the Treaty.

A RM ’ S LEN G T H CO M P U TAT I O N S A N D I N C O M E TA X ASSESSMENT ACT 1936 (CTH) S ECTION 136

In his letter to Gregg dated 6 May 1946, Mair also noted that the special position of oil companies was a matter that had been left open for further discussion.102 Australian Board of Review decisions had determined the profits of oil companies on what Mair had argued was arm’s length basis. The determination, however, had been made under the then section 136 of the Income Tax Assessment Act 1936 (Cth). As it stood at the time, section 136 empowered the Australian Commissioner to determine the taxable income of a business carried on in Australia that was: (i) controlled principally by non-residents; (ii) carried on by a company in which the majority of shareholders were non-residents; or (iii) carried on by a company which (directly or through nominees) held the majority of the shares of a non-resident company. The Commissioner’s powers could be exercised where it appeared to the Commissioner that the business either produced no taxable income or produced less taxable income than might be expected from that business. On appeal from a decision of the Commissioner, Australian boards of review had power to make assessments under section 136. The UK was concerned that section 136 did not require the use of arm’s length principles in determining taxable income in these circumstances. Australia was concerned that the draft of the Treaty would require the Commissioner to show that the relevant transaction was not for an arm’s length price, whereas the Australian appeal provisions required the taxpayer to show that the section 136 assessment was excessive. Hence Australia wanted the ‘arm’s length’ provisions in the draft treaty modified so as to leave the operation of section 136 unaffected. Mair assured Willis 100 101 102

Ibid, 44, Mair to McGovern, 30 May 1946. Ibid, 448–49, McGovern to Mair, 7 June 1946. UK National Archives IR 40/13740, 168, Mair to Gregg, 6 May 1946.

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that section 136 was not invoked in normal cases if the profit ascertained was home consumption value which Mair regarded as equivalent to arm’s length and stated that, for all practical purposes, the section was applied only in the case of oil companies.103 McGovern advised Mair that the Australian Taxation Office viewed an arbitrary section like section 136 as being necessary to achieve a result which might reasonably be comparable to a strictly literal arm’s length basis. In McGovern’s view, the formula that the Boards of Review had applied was arbitrary and, although it represented an attempt to arrive at what would be an arm’s length basis if sufficient information were available, it was not truly an arm’s length basis. McGovern instructed Mair to insist upon having the protection of arbitrary provisions to cover oil companies and the like, asking the UK to rely on the fact that any arbitrary Australian basis which did not reasonably approximate to what the result might be of a true arm’s length basis would not survive the taxpayer’s appeal to the Board of Review or the Australian Courts.104

Mair discussed the issue with Gregg on 7 June 1946. Gregg’s principal concern was that UK enterprises trading in Australia were entitled to know with certainty that their Australian profits would be ascertained on an arm’s length basis. The UK view was that Australia’s request to preserve the operation of section 136 would create uncertainty as UK enterprises could not know whether or not the section would be invoked. Although Gregg did not suggest that the Australian Commissioner would not exercise powers under section 136 unreasonably, the Australian request nullified a principle contained in all UK agreements and, hence, he was unable to agree to it. Mair noted that if the operation of section 136 were not preserved in the Treaty the Commissioner would still make a determination under section 136 but would be required to apply an arm’s length principle. In Mair’s view, the formula adopted by the Boards of Review was clearly an arm’s length basis as understood by the UK. Mair recommended that, while it was desirable to have such a provision as section 136 embodied in the Treaty, he did not think that the case was sufficiently strong to make ‘divergence of views an issue between us’.105 Willis, in Gregg’s absence, wrote to Mair on the issue on 20 June 1946. Willis noted that it was common ground between the UK and Australia that an arm’s length basis should be used in computing branch profits and the profits of associated enterprises. Willis went on to note that Australia 103 National Archives of Australia, Series No A 7303/21, Control Symbol J245/45/19, ‘Drafting of the UK–Australia Agreement 1946. Cables of Draft of Agreement’,18, Mair to McGovern, 9 May 1946. 104 Ibid, 41, McGovern to Mair, 22 May 1946. See also ibid, 45 and 46, McGovern to Mair, 6 June 1946. 105 Ibid, 51, Mair to McGovern, 7 June 1946.

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used an arm’s length principle in operating section 136, but pointed out that section 136 did not actually state an arm’s length principle. The UK’s objection to a saving clause in relation to section 136 was therefore: If . . . the agreement were to provide that Section 136 should remain unaffected by the arm’s length provisions it would be equivalent to saying that those provisions could be ignored by the Commissioner. Indeed it might be taken as implying that Section 136 was not founded on the arm’s length principle. We know that neither the Commissioner nor the Board of Review would ignore the principle in practice but the point is that they would be entitled to and might even be expected to and that is a position which we could not possibly accept. The agreement would be indefensibly one-sided if we were bound to observe the principle and you were not.106

Willis argued that, consistently with the broad requirements of the Treaty provision, the Commissioner could still continue to make assessments under section 136 and that in fact the taxpayer was required to show that the assessment was not on an arm’s length basis.107 The Australian reasons for requiring a savings clause for section 136 to this point had been based on the need for a discretionary provision in cases where information was insufficient for arm’s length to be ascertained. Mair now raised a different argument. Mair, in a cable to McGovern dated 20 June 1946, commented that the arm’s length principle as expressed in Article III(3) appeared to be too narrow. In Mair’s view, Article III(3) would not deal appropriately with the situation where a head office purchased from a related entity at an inflated price. If it did, then presumably an independent party purchasing at arm’s length from the head office would not be expected to pay any less than the head office had paid for its purchases. This would mean that, in computing the profits of the permanent establishment, Article III(3) would produce a purchase price at least equal to the price paid by the head office. Mair noted that these were the circumstances existing in the Shell case, where section 136 had been able to be applied. Mair noted that the UK was agreeable to Article III(3) being widened so as to deal with this perceived problem. Mair’s cable to McGovern also included the opinion of Whitlam (the Australian Crown Solicitor) on the powers of the Commissioner under section 136. Whitlam commented that the Commissioner’s determination must be founded on material relevant to ascertaining the income of a controlled business, that irrelevant material could not be considered, and that the relevant material must be considered with the sole object of reaching as complete and correct a determination as possible of the amount of income which might be expected to arise from that business. In UK National Archives IR 40/13740, R Willis to RJ Mair, 20 June 1946, 197ff. Ibid. Mair cabled Willis’s letter to McGovern on the day of its receipt. National Archives of Australia, Series No A 7303/21, Control Symbol J245/45/19, ‘Drafting of the UK–Australia Agreement 1946. Cables of Draft of Agreement’, 67, Mair to McGovern, 20 June 1946. 106 107

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Whitlam’s view, once the taxpayer made a prima facie answer to the determination, the onus was on the Commissioner to establish that the determination was lawful. The existing practice under section 136 was, in Whitlam’s view, the widest lawful practice under that section and conformed to Article III(3). Hence Article III(3) would impose no limitation on the existing practice in relation to section 136 but would prevent the Commissioner from adopting a narrower practice which, presumably, the Commissioner would not want to do. Hence, Whitlam considered that there was no justification at all for any qualification of Article III in relation to section 136. If there was difficulty in accepting these views, Whitlam suggested, the matter should be submitted to Dr Evatt (as Attorney General) for his opinion.108 McGovern then sought and received the advice of the Australian Solicitor General (Kenneth Bailey) on the issue.109 The Solicitor General was asked whether Article III(3) was ‘as strong from the point of view of the Commissioner of Taxation for Australia as section 136 of the Act’ and if a redrafted Article III(3) would put the Commissioner in as strong a position. In addition, the Solicitor General was asked whether, having regard to the discussions between Dalton and Chifley, Australia was obliged to include provisions in the Treaty relating to the ascertainment of the quantum of taxable income derived by a taxpayer in either country. The Solicitor General was also asked whether it would be possible for the Treaty to contain such a provision without giving parties other than the contracting governments recourse to the covenant against the Commissioner of Taxation. The other questions asked of the Solicitor General related to the method of ascertaining arm’s length prices under Article III(3). The Solicitor General’s opinion was that a covenant for ascertaining the quantum of taxable income of a taxpayer had been expressly contained in the original UK proposal of June 1945 and that such a covenant was directly relevant in connection to the interpretation and practical incidence of the agreement between Dalton and Chifley. In other words, Australia was bound to include the covenant in the Treaty. The Solicitor General drafted a provision the effect of which would have been to exclude taxpayer rights in relation to Article III(3) so that the article only had effect as an agreement between the contracting governments. In the opinion of the Solicitor General, while the criteria applicable under Article III(3) and in section 136 were broadly the same, one important difference was that the assessment of taxable income under section 136 rested on the 108 National Archives of Australia, Series No A 7303/21, Control Symbol J245/45/19, ‘Drafting of the UK–Australia Agreement 1946. Cables of Draft of Agreement’, 67–70, Mair to McGovern, 20 June 1946. 109 The advice is quoted in full in National Archives of Australia, Series No A 7303/21, Control Symbol J245/45/19, ‘Drafting of the UK–Australia Agreement 1946. Cables of Draft of Agreement’, 96, McGovern to Mair, 14 July 1946.

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judgement or determination of the Commissioner whereas Article III(3) depended on what the Commissioner was able to establish. This appeared to shift the onus from the taxpayer to the Commissioner. Nor was the Solicitor General confident that the considerations relevant to the application of the arm’s length basis under Article III(3) were as flexible as those that applied under section 136, for example, in the case where inflated prices were paid by an English parent organisation that supplies goods to an Australian branch. The Solicitor General’s opinion included a draft saving clause in relation to section 136 which included the following: that discretion shall be exercised or that estimate shall be made with the object that the amount so liable to tax shall be determined, as nearly as the information available to the taxing authority permits, in accordance with paragraph (3) of this Article, but the application of that law and liability of any taxpayer shall not otherwise be affected by that paragraph.110

In the light of this advice, McGovern stated to Mair that he could no longer maintain the stance that there should be no covenant in the Treaty dealing with the method of ascertaining taxable income derived by a taxpayer in either country, although, in McGovern’s view, the Treaty would have been better without such a provision. McGovern did not consider that it would be possible to exclude taxpayer rights under Article III(3) as once the terms of the Treaty became public there would be an irresistible demand for the whole of its terms to be given the force of law. McGovern suggested that Mair request a re-expression of Article III(3) and Article IV along the lines suggested by the Solicitor General. McGovern considered that this should be acceptable to the UK officials in view of their previous comments.111 The UK would not accept either the Solicitor General’s redraft of Article III(3) or the draft of the saving provision in relation to section 136. The UK did not like the closing words of the saving provision as they might have prevented the taxpayer from exercising appeal rights to have profit determined in accordance with Article III. Mair indicated to McGovern that the UK would agree to extension of the original paragraph in the manner that Mair had foreshadowed in his cable of 23 June (referred to above). To meet Australia’s concerns in relation to section 136, the UK suggested that the following be added to Article III(3): If the information available to the Taxation Authority concerned is inadequate to determine the profits to be attributed to the permanent establishment nothing in this paragraph shall affect the application of the law of either territory in relation to the liability of the permanent establishment to pay tax on the amount determined by the exercise of a discretion or the making of an estimate by the Taxation authority of the territory provided that such discretion shall be exercised or such estimate shall be made so far as information available to the 110 111

Ibid, 96–100. Ibid, 96–101.

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Taxation authority permits in accordance with principle stated in this paragraph.112

Mair advised McGovern that Whitlam’s opinion was that the proposed addition fully safeguarded the powers of the Commissioner to exercise discretion or to make an estimate under section 136. Mair suggested that, to reach finality, the UK proposal be accepted.113 On 27 July 1946 McGovern advised Mair that the proposed saving provision in relation to section 136 was acceptable.114 On 30 July Mair cabled an amended Article IV which included an equivalent saving provision in relation to section 136.115 Hence both Article III(3) and Article IV(3) contained saving provisions in the terms suggested by the UK, as quoted above. Every Double Tax Treaty that Australia has entered into subsequently has contained equivalent provisions in the Industrial and Commercial Profits/Business Profits Article and in the Associated Enterprises Article preserving the ability of the Commissioner, in cases where information is inadequate, to exercise a discretion or make a determination consistently with arm’s length principles. This is despite the fact that section 136 has long been repealed following the enactment of the Income Tax Assessment Act 1936 (Cth) Part III Division 13 in 1982. While Division 13 substitutes arm’s length consideration for actual consideration in transfer pricing transactions, it deems arm’s length consideration to be such an amount as the Commissioner determines where it is not possible or practicable for the Commissioner to ascertain arm’s length consideration.

F O R E I G N TA X C R E D I T S

One of the major objectives that Australia sought in entering into the treaty was to obtain full UK relief from Australian taxation of UK investment in Australia to replace the more limited relief allowed under the system of Dominion Income Tax Relief. At the time the Treaty was entered into, Australia did not have any foreign tax credit provisions and generally exempted foreign source income that had been subject to foreign tax. As noted earlier, at the time of the Treaty negotiations foreign source dividends were subject to Australian tax, with a deduction being allowed for foreign tax paid. Where the recipient shareholder was an Australian resident company, a rebate of Australian corporate tax was then available at the Australian corporate tax rate. The rebate did not extend to any undistributed profits tax for which the recipient company was liable, nor did it extend to wartime company tax. The rebate for supertax was only 112 113 114 115

Ibid, 115, Mair to McGovern, 25 July 1946. Ibid, 115–16. Ibid, 119, McGovern to Mair, 27 July 1946. Ibid, 123, Mair to McGovern, 30 July 1946.

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available if the company paying the dividend had paid Australian supertax. As noted earlier, the UK foreign tax credit rules were set out in section 51 and Schedule Seven of the Finance Act (No 2) 1945. Under these rules, foreign income tax was creditable against UK income tax but not against excess profits tax or national defence contribution. Conversely, foreign excess profits taxes were creditable against UK excess profits tax and national defence contribution but not against UK income tax. The treaty required both the UK and Australia to give a foreign tax credit to their residents in respect of tax paid in the other country on income sourced in the other country. However, although Article XII(2) of the Treaty was potentially broad enough to cover all forms of income, Australia was only required to give credit for UK tax payable by a resident where Australian tax was payable by the resident on income derived from sources in the UK. At the time, only foreign source dividend income and foreign source income which was exempt from tax in the source country was included in an Australian resident’s assessable income. Hence, the effect of the drafting was that, while its domestic treatment of foreign source income other than dividends remained, Australia was only required to apply a foreign tax credit in relation to dividends (and income which was exempt from tax at source). The article had been deliberately drafted so as to be able to require Australia to provide a foreign tax credit for all forms of income in the event that Australia subsequently changed its domestic law and taxed residents on their worldwide income.116 In the case of an ordinary dividend,117 the UK was obliged, irrespective of the level of shareholding, to give credit for underlying Australian corporate tax against UK income tax in addition to credit for any Australian tax on the dividend itself. Australia had been concerned that a company with credits for Australian income tax in excess of its UK income tax liability (arising, for example, where a UK company with a permanent establishment in Australia had a liability for undistributed profits tax) would be unable to offset the excess credits against any UK excess profits tax liability that it might have. Australia argued that all UK taxes on income which Australia had taxed on a source basis should be available for absorption of the tax credit. The UK would not agree to this suggestion, but indicated that, as from 1 January 1947, the UK Finance Act would be amended by abolishing excess profits tax and by treating national defence contribution as an income tax for the purposes of the 116 National Archives of Australia, Series No 7303/21, Control Symbol J245/45/12, ‘Drafting of the UK–Australia Agreement 1946. Art XII—Tax Credits’, ‘Art XIII’ signature illegible, 39; ibid, 121, Commissioner of Taxation (Patrick McGovern) to The Rt Hon The Prime Minister (JB Chifley), 3 October 1946. 117 In the case of preference shares, the same treatment was given to Australian corporate tax to the extent that the dividend exceeded the fixed share of profits to which the preference shareholder was entitled.

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foreign tax credit provisions. As a consequence, Australia requested an exchange of letters between the High Commissioner and the Chancellor of the Exchequer on this issue (discussed below).118 In the case of a UK dividend, an Australian resident shareholder was only entitled to a credit if the shareholder elected to have the UK tax on the dividend (as reduced by any relief or repayment to which the shareholder was entitled under UK law) included in assessable income.119 In the absence of any such election, the High Court decision in Jolly v FCT (1934) 50 CLR 131 would have meant that the UK tax was not included in the shareholder’s assessable income. The effect of the article and of its implementation in Australian law was that an Australian resident shareholder receiving a dividend who made the election was allowed a foreign tax credit for underlying UK tax levied on the company irrespective of the shareholder’s level of shareholding in the UK company. Australia was obliged to give credit for UK tax deducted from the gross dividend but not for so much of the amount deducted as exceeded the net UK tax applicable to the dividend where that rate had been reduced by reliefs allowed by the UK. Australia had been concerned that the effect of the gross up was that an Australian resident investing in a UK company would be in a better after tax position that the resident would have been if the investment had been made in an Australian company or in an UK company with Australian source profits. Australia had argued that the limit of the Australian credit should therefore be the excess of the UK standard rate (at that time nine shillings in the pound) over the Australian corporate rate (at that time six shillings in the pound). The UK, understandably, would not agree, given that in all of its treaties and in the treaties of other countries credit was allowed up to the limit of the residence county’s own tax. The Australian response was to request that the Chancellor of the Exchequer give an assurance, discussed in more detail below, to the effect that Article XII would be amended if it transpired that the advantage gained by investment in UK companies with only UK source income were being exploited by Australian investors.120

118 National Archives of Australia, Series No 7303/21, Control Symbol J245//45/12, ‘Drafting of the UK–Australia Agreement 1946. Art XII—Tax Credits’, ‘Art XIII’ signature illegible, 39; National Archives of Australia, Series No 7303/21, Control Symbol J245/45/12, ‘Drafting of the UK–Australia Agreement 1946. Art XII—Tax Credits’, 123, Commissioner of Taxation (Patrick McGovern) to The Rt Hon The Prime Minister (JB Chifley), 3 October 1946. 119 Implemented in Australian law as the Income Tax Assessment Act 1936–1947 (Cth), s 160L. 120 National Archives of Australia, Series No 7303/21, Control Symbol J45//45/12, ‘Drafting of the UK–Australia Agreement 1946. Art XII—Tax Credits’, ‘Art XIII’ signature illegible, 39; National Archives of Australia, Series No 7303/21, Control Symbol J245/45/12, ‘Drafting of the UK–Australia Agreement 1946. Art XII—Tax Credits’, 123, Commissioner of Taxation (Patrick McGovern) to The Rt Hon The Prime Minister (JB Chifley), 3 October 1946.

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The treaty provisions in relation to foreign tax credits for dividends were implemented in Australian law as Part IIIB of the Income Tax Assessment Act (1936–47) inserted by section 27 of the Income Tax Assessment Act 1947. The limit of the credit was the lesser of the Australian tax (including undistributed profits tax and supertax) payable on the grossed up dividend or the Australian tax payable by the shareholder.121 As the calculation of the Australian tax payable took into account any inter-corporate income tax rebate, the result for a resident corporate shareholder was that the amount of the credit was zero except where the recipient company had an undistributed profits tax liability and, in some circumstances, a supertax liability.122 In 1947 Australia also enacted a unilateral foreign tax credit for dividends received from other countries123 but did not introduce a comprehensive foreign tax credit until the 1980s. In the intervening period Australia continued to exempt other foreign source income. The exemption initially applied to income that was not exempt from tax in the source country.124 The limit of the unilateral credit on foreign source dividends was the lesser of the foreign tax paid or the Australian tax payable on the dividend.125 The calculation of the Australian tax payable on the dividend took into account any inter-corporate rebate (which did not extend to undistributed profits tax), with the result that for a resident corporate shareholder the amount of the credit was zero except where the recipient company had an undistributed profits tax liability. That the foreign tax credit article required the UK to credit underlying Australian corporate tax irrespective of the extent of the shareholding is significant as this was a major factor leading to the desire of the UK to Income Tax Assessment Act 1936–1947 (Cth), s 160P. Australian tax payable was calculated under the Income Tax Assessment Act 1936–1947 (Cth), s 160K, which deducted from the tax otherwise ascertained any inter-corporate rebate allowed to the shareholder under the Income Tax Assessment Act 1936–1947 (Cth). As noted earlier, the s 46 rebate did not extend to undistributed profits tax. Where dividends were paid through a chain of companies, the effect of the decision in Carlton Breweries Ltd v FCT (1947) 3 AITR 515 as noted by Latham C J (in dissent) was that each alternate company would pay supertax in full while the other companies in the chain would not pay supertax but would receive s 46(2A) rebates. 123 Income Tax Assessment Act (1936), s 45, inserted by s 8 of the Income Tax Assessment Act 1947 (Cth). The credit was restricted to dividends funded from ex-Australian profits and applied only to foreign tax for which the shareholder was personally liable and which the shareholder had paid either directly or by deduction. Credit was not allowed for tax paid by the company on the profits out of which the dividend was paid. See the discussion in Gunn, above n 4, 366–73, para [589]. 124 Income Tax Assessment Act 1936–1947 (Cth), s 23q. In 1947 the exemption applied where the foreign source income was not exempt from tax in the country in which it was derived. The exemption was subsequently amended so that it applied where the foreign source income had been subject to tax in the source country. 125 Income Tax Assessment Act 1936–1947 (Cth), s 45(1)(a). Australian tax payable was calculated under s 160K, which, as pointed out in n 122, allowed the s 46 inter-corporate rebate to be deducted from the Australian tax otherwise ascertained. 121 122

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renegotiate the Treaty in 1965, when the UK changed from an imputation system of corporate-shareholder taxation to a classical system. One aspect of the foreign tax credit that had been overlooked in the Treaty drafting was the position of a dual resident who did not qualify for a UK surtax exemption. An amendment to the draft, which became the second paragraph of Article XII(2) of the Treaty, appears to have been suggested by the UK and accepted by Australia. Prior to the signing of the Treaty, Australia raised questions as to how the UK would interpret what would eventually become Article XII(1) dealing with credit being given by the UK for Australian tax on Australian source income. Mair wrote to Gregg on 5 August 1946,126 outlining the issues on which Australia wanted assurances as to what the UK interpretation of the provision would be. One issue concerned the situations: (i) where a dividend was paid to a UK resident by a company resident in a third country out of Australian source profits; and (ii) interest received by a UK resident on money secured by a mortgage over Australian real property. Here Australia was concerned about a potential conflict of source rules, recognising that, while particular types of income might be regarded as having an Australian source for Australian tax law purposes, it was possible that ‘the general law’ would determine that the source the relevant income was in some other country. Mair noted that the understanding had been reached in discussions that the UK would give credit for the Australian tax paid in this situation. The second situation on which Mair requested assurances was where an Australian holding company was interposed between an Australian subsidiary and its UK parent. Under Australian law at the time intercorporate dividends between resident companies received a rebate of tax which meant that the recipient Australian holding company would not have any net Australian tax liability on the inter-corporate dividend. Mair sought assurances that, in calculating the amount of Australian tax on which the UK would give credit, the UK would take into account the underlying tax paid by the Australian subsidiary on its profits. The third situation concerned the case of a dual resident company that paid a dividend from profits which Australia regarded as having an Australian source but which the UK did not. Mair sought assurances that the UK would give credit for the Australian tax paid in this situation. Gregg replied to Mair on 6 August 1946, giving the requested assurances in the second and third cases but not in the first. Gregg commented: The credit system on which the Draft Treaty is founded relates to income flowing from one country to the other and I do not like the idea of extending it to 126 UK National Archives IR 40/13740, 221 (two pages), RJ Mair to Sir Cornelius Gregg, 5 August 1946.

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income flowing to other countries which may be a contributory to a pool of profits that may be distributed by that other country in the form of dividend.

Gregg went on to describe this as a ‘rather freak case’ and noted that Australia’s claim to tax such a dividend was rarely enforceable anyway because of its extra-territorial character. Gregg indicated that if a case arose where there were special circumstances the UK would be prepared to consider it on its merits.127 Mair wrote a further letter to Gregg on 23 September 1946 also asking for assurances that the UK would give credit for Australian tax paid by a UK resident shipowner where the ship was registered in a third country and where Australia regarded relevant income as having an Australian source. As the ship was registered outside the UK, Article V of the treaty would not exempt the shipowner from Australian tax on the shipping profits.128 As mentioned earlier, Australia sought an exchange of letters between the High Commissioner and the Chancellor of the Exchequer on two points. First, that, following repeal of UK Excess Profits Tax and the retention of the UK’s National Defence Contribution as a profits tax later that year, Australian taxes on income would be allowed as a credit against not only against UK Income Tax but against the profits tax as well. Secondly, that, as the Treaty required that Australia give its residents a foreign tax credit for the UK tax deducted at the net UK rate, Australia considered that this would mean that Australian shareholders would receive a greater after tax cash dividend from a UK company with wholly UK profits than they would receive from either an Australian company with Australian source profits or from a UK company with Australian source profits. Australia indicated that if this difference in tax treatment was shown to be affecting the incidence of Australian taxation on dividends then Australia would approach the UK under the mutual agreement procedure with a view to altering Article XII(2) so as to equate the position of an Australian investor in a UK company with UK profits with that of an Australian investor in an Australian company with Australian source profits. Australia assumed that, having been so approached, the UK would agree to the proposed amendment. Letters to this effect were subsequently exchanged between Beasley (as Australian High Commissioner in London) and Dalton (as UK Chancellor of the Exchequer). On the first point, Dalton noted that excess profits tax was being repealed as from 31 December 1946 and that subsequently Australian tax would be allowed as a credit against both UK income tax 127 UK National Archives IR 40/13740, 223 (two pages), Sir Cornelius Gregg to RJ Mair, 6 August 1946. 128 UK National Archives IR 40/13740, 277, Mair to Gregg, 23 September 1946. I have not yet located correspondence from Gregg giving the assurance requested.

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and profits tax (which national defence contribution was to be known as from that date). On the second point, Dalton undertook to undertake a review with the Australian government of the principles underlying Article XII should it be found to be operating to the detriment of Australia.129

E XC H A N G E O F I N F O R M AT I O N

The 1946–47 Treaty also contained an exchange of information article which, unlike the equivalent article in the UK–US Treaty of 1945, was agreed to by the parties without any apparent difficulty. In the initial negotiations Australia accepted the offer of an exchange of information article with alacrity.130 As noted above, the exchange of information article in the original UK draft followed the equivalent article in the 1945 UK–US Treaty. Mair, in a cable to McGovern dated 20 May 1946, noted that the UK was not prepared to unequivocally exchange information required by each taxing authority. Mair considered that the information which Australia could conceivably require from the UK could be related to any one of the matters mentioned in the draft article.131 Australia requested that the article be amended by deleting the reference to ‘against legal avoidance’. The UK would not agree to this as it was strongly opposed to the extension of the purposes for which information could be exchanged. One the UK’s main concerns was that continental countries with which they expected to conclude double tax treaties would require an exchange of information article in similar terms and that, as a consequence, there would be a heavy administrative burden in disclosing information about taxpayers to continental authorities. The UK did, however, agree to amendments to the article which ensured that information could be divulged to a Court in addition to a Board of Review. Mair’s view remained that Australia could relate the great majority of its enquiries to one of the purposes stated in the article and that the matter of extending the purposes for which information could be sought should not be pressed.132 129 UK National Archives IR 40/13740, 294–96, Beasley to Dalton, 29 October 1946; UK National Archives IR 40/13740 (page number obscured), Dalton to Beasley, 29 October 1946. An issue subsequently arose as to whether, following the repeal of excess profits tax, the Australian wartime company tax would be creditable against UK income tax. The Australian view was that this was implicit in the exchange of letters between Dalton and Beasley. See UK National Archives IR 40/13740, 334 and 335, Willis cable to Mair, 24 February 1947 and McGovern cable to Australian Taxation Representative 5th March 1947. How this issue was finally resolved is unclear from the research that the author has conducted to date. 130 Willis, ‘Australia’, above n 51, 73–74. 131 National Archives of Australia, Series No A 7303/21, Control Symbol J245/45/19, ‘Drafting of the UK–Australia Agreement 1946. Cables of Draft of Agreement’, 36, Mair to McGovern, 20 May 1946. 132 Ibid, 92, Mair to McGovern, 8 July 1946.

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R E S I D E N CY I S S U E S

The definitions of ‘UK resident’ and ‘Australian resident’ in the Treaty as finally signed referred to persons who were residents for the purposes of UK or Australian tax respectively and who were not residents of the treaty partner country for its tax purposes. Thus dual residents were not treaty residents, although, as will be seen below, the Treaty did provide benefits to dual residents in particular circumstances. One of the significant features of the Treaty was that, unlike every other treaty that the UK entered into in this period, it did not contain the second limb of the definition which had the effect of deeming a company to be resident where it was managed and controlled, and which had been contained in the original draft submitted by the UK.133 The provision was then amended in a draft dated 22 May 1946134 so that a company managed and controlled in the UK was regarded as resident in the UK while a company that was either incorporated in Australia or carried on business in Australia and either (i) was centrally managed and controlled in Australia or (ii) had its voting power controlled by Australian residents was regarded as resident in Australia. The amended provision reflected the test of Australian corporate residency in the Income Tax Assessment Act 1936 (Cth) section 6(1). When the amended provision was circulated within the Australian Taxation Office several comments noted that dual corporate residency was possible under the amended provision—for example, in the situation where an Australian incorporated company was managed and controlled in the UK. Mair also noted this in a cable to McGovern on 9 May 1946, observing that dual residence would not cause difficulty where taxation was on an origin basis as the other residence country would give credit and that the position where a residence basis applied would be considered further when dealing with the tax credit article.135 McGovern cabled Mair suggesting that the definition could be broken up into separate paragraphs dealing with: (i) UK residents other than a company; (ii) Australian residents other than a company; (iii) UK companies; and (iv) Australian companies.136 Prior to receiving the comments from Australia, however, Mair and Willlis had agreed to delete the provision referring to corporate residency entirely. Mair noted that Willis ‘was experiencing difficulty in deciding what, under UK law, is a company. They use the term “body of 133 National Archives of Australia, Series No A 7303/21, Control Symbol J245/45/18, ‘Drafting of the UK–Australia Agreement 1946. Progressive Draft of Agreement’, 21. 134 Ibid, 50. A handwritten note on 52 (the first page of the draft) states, ‘This was first draft worked on in Australia’. 135 National Archives of Australia, Series No A 7303/21, Control Symbol J245/45/19 ‘Drafting of the UK–Australia Agreement 1946. Cables of Draft of Agreement’, Mair to McGovern, 9 May 1946, 16. 136 Ibid, 42, McGovern to Mair, 30 May 1946.

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persons” in their Act. We eventually decided that it was unnecessary to include therein any reference to a company’. Mair further commented in the same cable, It is not practicable to make a rule to avoid ‘double residency’ cases, as neither UK nor Australia could give up its existing principles of determining whether an individual or a company is resident of its territory. We must, therefore, accept as inescapable the case of the double resident. The proportion of such cases will, I feel sure, prove to be very small.137

The Australian Taxation Office administrative committee of Belcher and Mills then comprehensively analysed double taxation possibilities that might arise in cases of dual corporate residency. As Australia regarded the source of a dividend as the source of the fund of profits from which it was paid while the UK regarded the source of a dividend as where the paying company was centrally managed and controlled, cases of unrelieved double taxation could arise where the paying company was a dual resident. Belcher and Mills suggested that, while the problem would be overcome if, for purposes of the Treaty, the UK adopted the Australian source rule for dividends, they noted that this might produce another potential double taxation problem where, for example, an Australian company paid a dividend to a UK resident where part of the profits of the paying company were derived in a third country such as New Zealand.138 Belcher and Mills noted that it appeared that the UK would agree to allow a credit in the first case and that, in the circumstances, an exchange of letters on the point would be sufficient considering the relative importance of the matter.139 This suggestion ultimately led to the third of the assurances given by Gregg to Mair on 6 August 1946 referred to above. A further problem that was recognised in the dual residency situation was where a dual resident received income that had been taxed in a third country. Here Article XII(3) provided that a proportional credit would be allowed by each contracting government. The drafting device used in this situation was to refer to ‘a resident of Australia for the purpose of Australian tax, who is also a resident of the UK for the purposes of UK tax’ and not to ‘Australian resident’ nor to ‘UK resident’ as defined in 137 National Archives of Australia, Series No A 7303/21, Control Symbol J245/45/12, ‘Drafting of the UK–Australia Agreement 1946. Art XII—Tax Credits’, 73–74, extract from letter of Second Commissioner dated 11 June 1946. See also National Archives of Australia, Series No A 7303/21, Control Symbol J245/45/19, ‘Drafting of the UK–Australia Agreement 1946. Cables of Draft of Agreement’, 53–54, Mair to McGovern, 11 June 1946. 138 Art XII(2) of the Treaty, although not the original draft, deemed, for the purposes of the credit provisions, a dividend paid by a company resident in the UK to be derived from sources in the UK, thus applying same source rule for inbound dividends to Australia as the UK applied to dividends. 139 National Archives of Australia, Series No A 7303/21, Control Symbol J245/45/12, ‘Drafting of the UK–Australia Agreement 1946. Art XII—Tax Credits’, 75, ‘Dual Residence’, signed ‘Belcher’ and ‘Mills’.

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Article II. The intention was that dual residents would have the benefit of a proportionate credit in this situation but, as they were neither Australian residents nor UK residents as defined, would not have treaty benefits generally. Similarly, the reductions in source taxation in the dividend article applied where the paying company was a ‘resident of Australia (whether or not also a resident of the UK or elsewhere)’ or a ‘resident of the UK (whether or not also a resident of Australia or elsewhere)’. Again, the effect of the drafting was that relief would still be available where the paying company was a dual resident even though a dual resident was not a treaty resident. As Belcher (of the Australian Taxation Office) noted, however, the distinction between ‘Australian resident’ and ‘UK resident’ on the one hand and ‘resident of Australia’ and ‘resident of the UK’ on the other was not apparent from the Treaty itself.140

S I G N I F I CA N T ST RU C T U R A L F E AT U R E S O F T H E T R E AT Y

A notable feature of the UK–Australia Treaty of 1946–47 was that it did not try to deal with all forms of income. There was no ‘other income’ article and, unlike the 1945 UK–US Treaty, there was no capital gains article. This was understandable, as neither Australia nor the UK at the time taxed capital gains as a general rule. That the intention was clearly that domestic rules were to operate in relation to items not specifically dealt with in the Treaty can be seen from the treatment that was ultimately given to interest. As noted above, the compromise arrived at by the meeting of politicians was that interest was to be fully taxed on a source basis, with full credit being given by the residence country. As the right to tax interest on a source basis did not involve any modification of the tax treatment of interest under the domestic law of either country, no provision dealing with the taxation of interest was included in the Treaty. As will be seen in the next paragraph, interest was excluded from the definition of ‘industrial and commercial profits’ and hence Australian taxation of interest was not limited by either the interest article or the industrial and commercial profits article. Australia could tax interest received by a non-resident at full Australian rates irrespective of whether or not the non-resident had a permanent establishment in Australia. That this was the intended position in relation to interest is also clear from the following statement in a cable from Mair to McGovern dated 20 May 1946 in relation to the credit provisions: 140 National Archives of Australia, Series No A 7303/21, Control Symbol J245/45/2, ‘Drafting of UK–Australia Agreement 1946. Art II—Definitions’, 32–33, ‘Dual Resident’ signed by Belcher, 24 June 1946.

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As interest and rent remain on an origin basis it has not been considered necessary to include in the treaty an article dealing with these two classes of income. Where such income is derived from sources in Australia by the UK resident paragraph 1 of this Article provides for allowance of a tax credit of Australian tax against UK tax.141

The position appears to have been similar in the case of mineral royalties. Mineral royalties were excluded from the royalty article and, as is discussed in the next paragraph, royalties were excluded from the definition of industrial and commercial property. Hence it would seem that Australia could tax mineral royalties paid to a non-resident at full Australian rates irrespective of whether or not the non-resident had a permanent establishment in Australia. The argument is also supported by negotiations concerning the right of the source country to tax film royalties. McGovern had requested that a positive power to tax film royalties at source be included in the Treaty.142 Mair, in a cable dated 27 June 1946, noted, Willis was opposed to the inclusion of a special Article to preserve Australia’s right to continue to tax film business in accordance with Division 14. His first point is that the definition of ‘industrial and commercial profits’ excludes rents and royalties and that consequently paragraph 1 of Article III does not apply in respect of royalties and rents received for the hire of films. In case these terms did not cover all the forms of receipt from film business he was agreeable to the addition to the proviso to that paragraph to include therein Division 14 in addition to Division 15. Although this is not a positive power such as you suggest should be given, Whitlam considers it fully safeguards Australia’s right to continue to apply Division 14 to UK film producers.143

Another feature of the UK–Australia Treaty of 1946–47 was that it defined ‘industrial and commercial profits’ in terms which excluded items that either were dealt with under the distributive articles of the Treaty or in relation to which the source country was intended to retain full taxing rights. Hence income in the form of dividends, interest, rents, royalties, management charges or remuneration for personal services was excluded from the definition. The treaty contained distributive rules for dividends, some royalties (but significantly neither mineral royalties nor film royalties) and personal services, but not for the other items excluded from the definition of industrial and commercial profits. Defining ‘industrial and commercial profits’ in this way and not dealing with items where the source 141 National Archives of Australia, Series No A 7303/21, Control Symbol J245/45/19, ‘Drafting of the UK–Australia Agreement 1946. Cables of Draft of Agreement’, 32, Mair to McGovern, 20 May 1946. See also ‘Items Not Specifically Covered’ in National Archives of Australia, Series No A 7303/21, Control Symbol J245/45/21, ‘Drafting of UK–Australia Agreement 1946—Matters Additional to Those in Agreement’. 142 National Archives of Australia, Series No A 7303/21, Control Symbol J245/45/19, ‘Drafting of the UK–Australia Agreement 1946. Cables of Draft of Agreement’, 48–50, McGovern to Mair, 7 June 1946. 143 Ibid, 74–76, Mair to McGovern, 27 June 1946.

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country was intended to retain full taxing rights were to become structural features of the treaties that Australia entered into until the end of the 1960s. This structure was later to be described by the Australian Taxation Office as ‘the colonial model’144 with some justification, as it appears to be a product of the outline structure that the UK sent to all the Dominions at the beginning of the negotiations. Some of these structural features were to remain in Australia’s treaties for a lengthy period. It was not until the second Australian treaty with Canada in 1980 that all of the structural features noted above were absent. Whether Australia’s treaties containing these structural features protected taxpayers against Australia’s general capital gains tax when it was introduced in 1985 became a matter of debate between the Australian Taxation Office and practitioners.145 The archival evidence, discussed above, in relation to the 1946 UK–Australia treaty suggests that, even if Australian capital gains tax is a covered tax for purposes of treaties having these structural features, the intention was that source country taxing rights were to be fully preserved in relation to items not dealt with under the distributive rules. The issue then becomes one of whether capital gains were within the definition of industrial and commercial profits and hence, to that extent, dealt with under the distributive rules.

THE UK–AUSTRALIA T REAT Y O F 1946 AND T HE REASONS F O R T H E SU C C E S S O F B I L AT E R A L T R E AT I E S

It is interesting to consider why the 1946 UK–Australia Treaty was able to achieve a compromise on an issue that had not been able to be resolved under the previous system of Dominion Income Tax Relief. In one sense, the global system of Dominion Income Tax Relief would appear to have been a more natural approach to the problem of relieving international double taxation between Australia and the UK than the schedular approach adopted under the 1946–47 Treaty (and, indeed, under most bilateral double tax treaties before and since). After all, neither Australia nor the UK had a truly schedular system in the sense that many continental systems had at the time. Eliminating international double taxation, particularly when one country adopted a residence basis for taxation while the other adopted a source basis, was always going to involve some degree of compromise by 144 The usage was subsequently adopted by the Australian Taxation Office in ATO Ruling TR 2001/12 and ATC Ruling TR 2001/13, and was based on terminology previously employed in J Newman, UK Double Tax Treaties (London, Butterworths, 1979) 2. A key difference, however, between the model as described in ATO Rulings and colonial (as distinct from Dominion) treaties examined by Newman in 1979 was that the colonial treaties did not define industrial and commercial profits in terms which excluded other items. 145 See, eg ATO Ruling TR 2001/12 and IV Gzell, ‘Treaty Protection from Capital Gains Tax’ (2000) 29 Australian Tax Review 25.

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both parties. The problem with Dominion Income Tax Relief was that the compromises (the giving of a credit by the UK up to one-half the UK rate of tax, and the giving of reciprocal relief by Australia) were all global and, in theory, did not depend on source or classification of income into categories but rather depended on the relative rates of tax on the income. This begged the question (which was actualised when Australia changed from an imputation system to a classical system of corporate-shareholder taxation) of how one knew that the same income was being taxed. It also meant that compromises that dealt with the overall amount of credit and the overall amount of reciprocal relief had to be big and obviously evident. By contrast, the 1946–47 Treaty (and most prior and subsequent treaties) dealt with the identification issue by classifying income into categories. This classification into categories also meant that compromises could be spread throughout the treaty and could be subtly varied from treaty to treaty according to variations in the economic and political dimensions of the bi-lateral relationship. The other feature of the system of Dominion Income Tax Relief which clearly contributed to its demise and which was absent in the 1946 UK–Australia Treaty was that relief by a Dominion depended on the nature of the relief that had previously been granted by the UK. Relief by the UK itself also depended on the comparative rates of taxation applicable between the two jurisdictions. By contrast, under the 1946 UK–Australia Treaty, in those instances where the source county gave relief (for example, by reducing or eliminating source country tax on dividends), it could be given without waiting for the relief provided by the residence country to be determined.

10 The History of Income Tax in Malta, the Early Years (1641–49) THE HI S TORY OF I NCOME TAX I N MALTA, 1641– 49

ROBERT ATTARD ROBERT ATTARD

The little island of Malta and its tiny archipelago—an archipelago which is much smaller than an average European city—has a long history that is not proportional to its small size. Malta’s long tax history runs parallel to its eventful story and its quest for self-determination.

M A LTA’ S F I RS T I N C O M E TAX

In 1641, the Treasury of the Order of the Knights of Malta was in a penurious state. With not enough gold in its coffers, the ruler of the island, Grandmaster Fra Jean-Paul Lascaris Castellar, realised that the circumstances warranted drastic measures . . . Lascaris was a very strong-willed gentleman. He ruled the island with an iron fist and was not afraid of losing his popularity with his Maltese subjects. When the island was short of bronze for coinage, he disarmed the city of Mdina and melted down its cannons to produce bronze coins. When the revelry at Carnival grew out of control, he outlawed carnival. He was intensely disliked by his subjects, and the contempt of the Maltese to their Grandmaster was eternally carved in stone in the Maltese vocabulary. The words Wicc Laskri (meaning ‘a face of Lascaris’) mean a grumpy, sulking face.1 Lascaris’s fiscal policy must not have increased his popularity, either. A tax that could be broadly classified as an income tax, Malta’s first tax on revenue was traced back to 1641, when Lascaris introduced a special emergency income tax. 1 VA Gio, Storia Di Malta (Malta, Tipografia Cumbo, 1890) 564–66. The principal reasons for his unpopularity (with women) included his dismantling of the defences at Mdina, the way he tackled the ensuing tumult and his regulations relating to Carnival.

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During Lascaris’s Grandmastership2 the island was in a dire financial state. The wars on the Continent3 decreased the Order’s revenues from its possessions in Germany and Italy, and the mammoth project on the massive Floriani lines drained the Treasury.4 The Order was in desperate need of money and needed to raise revenues to hold back the Ottoman peril. Thus, Lascaris introduced a 5% tax on the revenues derived from all the properties of the Order,5 an early form of income tax. This extraordinary tax was a temporary measure that was limited to a three-year term. Malta’s taxation system retained its traditional nature6 throughout the rest of the Hospitaller period and Malta’s appointment with income tax was postponed for many years to come.7

N A P O L E O N ’ S RE F O R M S

The fall of the Knights of Malta and the French invasion of the Maltese islands in 1798 did not drastically change the island’s taxation system. Napoleon imposed a number of new taxes, but his taxation policy was by 1636–57. The Thirty Years War, which was not only a war about Catholics v Protestants but also a war about less righteous matters. It is interesting to note that taxation had a bearing on this war. Von Wallenstein, the commander of the Catholic forces, was dismissed because of his unfair tax collecting. His exit from the scene turned out to be inauspicious on the outcome of the war. LW Snellgrove, The Early Modern Age (London, Longman Publishing, 1972), 135–37. 4 Pietro Paolo Floriani may have been a brilliant architect, but his qualities as a surveyor may have been commensurate to his skills as a military engineer. He grossly miscalculated the work required to accomplish his goals. A Hoppen, The Fortification of Malta by the Order of St John 1530–1798 (Edinburgh, Scottish Academic Press, 1979) 139–40. 5 Dal Pozzo Fra Bartolomeo, Historia Della Sacra Religione Militare Di S Giovanni Gerosolemitano Detta Di Malta (Venice 1715) 2.54, ‘che s’usasse ogni diligenza per esiger I crediti del Tesoro . . . che si mettesse un impositione generale sopra tutti i beni della Religione per tre anni a ragione di 5%o delle rendite, la quale impositione fu anco confermata per autorita’ Apostolica’. 6 Namely taxes on eatables, grain, the infamous neuba (a tax payable in lieu of statutory labour on the fortifications), taxes on imports and exports ‘of soap, paper, coffee, hides, tobacco, brandy and playing cards’. See Hoppen, above n 4, 138–39, 142–43 and 148–49; A Hoppen, ‘Malta and its Fortifications’ in V Mallia Milanes (ed), Hospitaller Malta 1530–1798 (Malta, Mireva Publications, 1993) 399, 402. A particularly interesting tax from a historical point of view was a tax law with social aims that was imposed by Grandmaster Manoel De Vilhena on 16 April 1733. De Vilhena created a special type of duty on documents on transfers to prosee for the homeless. Libr Ms 388. 7 Hoppen, ‘Malta and its Fortifications’, ibid, maintained that ‘A far more onerous demand was made on the clergy in 1736 when it was suggested that they pay a levy of 5,000 scudi on their revenues to help finance the latest project—the Floriana Revenues’ quoting AOM 256, fol 146v as her source. The tax mentioned by Hoppen cannot be classified as an ‘income tax’. I managed, with some difficulty, to trace the original excerpt from AOM 256, fol 146v (a manuscript that is characterised by a confusing duplicate pagination), which reads, ‘. . . per imporre una contributione di cinquanta mila scudi sopra li beni de secolari, e come in esso breve, e l’altro indirizzato a Mons. Inquisitore per imporre cinque mila scudi sopra li beni degl’ ecclesiastici per via di decima’. It appears that the latter impost, unlike the tax mentioned by Dal Pozzo, was purely a wealth tax ‘sopra li beni’ and not an income tax ‘on renditi’. 2 3

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no means groundbreaking. Despite the imposition of a new tax on rents,8 the taxes imposed by Napoleon were rather unimaginative and certainly not in keeping with Napoleon’s reputation as a trendsetter. Napoleon merely confirmed the taxes imposed by the Knights and imposed a number of consumption taxes and other taxes of traditional form.9 Needless to say, most of the proceeds from the said taxes were destined for the French Army.10

T H E E A R LY B R I T I S H PE R I O D

In 1800 Malta was ‘liberated’ by the British army. The British may have owed their victories over the French to income tax, but they were reluctant to impose income tax in Malta. The British followed the taxation policy of their predecessors. The taxes imposed in the early British period included a tax on wine enacted in 180511 endorsed by Samuel Taylor Coleridge,12 protective tariff measures, a duty on transfers of immovable property of 2% of the value of the consideration13 and the loathed tax on imported corn.14 Subsequently, the British attempted to carry out significant reforms to ensure that the taxation system imposed in Malta was equitable. Significant attempts to develop an efficient tax system that could equitably raise sufficient funds to meet public needs were carried out. The most notable attempt took place in 1878, when Mr Francis W Rowsell, Director of Naval Contracts, devised an action plan that was designed to ease the burden of taxation on the lower classes. Rowsell’s plan envisaged a novel system of duties on beer, wines and spirits and ship tonnage, but his taxation system was still stultified in the Hospitaller manner of collecting In a way, a tax on income. See Order of the day delivered at Napoleon’s General Headquarters in Malta on Prarial 30 Year VI (18 June 1798). It is interesting to note that the 18 June was an inauspicious day for Napoleon. On 18 June 1815 Napoleon was defeated by Wellington at Waterloo. The Order of the day of 18 June 1798 read as follows: ‘Article 1. Les impots etablis seront provisoirment maintenus. Le Commissaire du Gouvernment et la commission administrative en assueront la perception. Article 2. Dans le plus court delui, il sera etabli un systeme d’ impositions nouvelles, de maniere que le produit total, pris sur le doins, le vin, l’enrigistrement, le timbre, le tabac, le sel, les loyers (rents) des maisons et des domestiques, s’ eleve a 720,000 francs . . . Article 7. L’entretiens des fontaines, ainsi que les gages des employes attaches a ce service, par un droit qui sera etabli sur le batiments qui font de l’eau. Article 8. Il sera etabli un droit de passé pour l’entretien des routes . . . Article 10. Les gages des magistrates de Sante et frais y relatifs seront payes par un droit sur les vaisseaux(ships) et sur les voyageurs.’ (HP Scicluna, Documents Relating to the French Occupation of Malta in 1798–1800 (Malta, 1923) 97–98. 10 Scicluna, ibid, 97. 11 Bando, 8 March 1805. 12 Qua Public Secretary of the Royal Commissioner. 13 P De Bono, Breve Compendio Della Storia di Malta (Malta, Stemperia del governo, 1899) 105. 14 P Bartolo, ‘British Colonial Budgeting in Malta: the First Formative Decades 1800–1838’ (1980) 8 Melita Historica 1. 8 9

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revenues and the Colonial powers were averse to applying Pitt’s brainchild to Malta. Failure to implement income tax may have been due to pressures from the Maltese intelligentsia15 and the Maltese commercial community.16 This notwithstanding, discontent with the British taxation system was rife for a significant part of the British period. Bread taxes were constantly in the line of fire,17 and there were governors who lost their popularity with the islanders because of their taxation policies.18 15 It appears that Sir Adrian Dingli was partly responsible for this policy in the last quarter of the nineteenth century. See A Mercieca, ‘A Dingli [Part II] sommo statista, legislatore, magistrato. (Continuazione)’ (1955) 1 Melita Historica 221, 221: ‘Il carteggio Dingli-Rowsell per ovvii motivi politici non venne subito reso di pubblica ragione. Nel 1882 però Lord Kimberley, Segretario di Stato per le Colonie, ne permise la stampa in Inghilterra per circolazione privata’ (‘Letters addressed by Sir Adrian Dingli GCMG, CB, LLD to FW Rowsell Esqre CB, CMG, London, Clayton & Co Printers, Bouverie St Fleet St, 1st September 1882’). Copie se ne trasmisero in Inghilterra al Dicastero delle Colonie, a Lord Kimberly, a Lord Carnarvon, a Sir Michael Hicks Beach, a Herbert Gladstone, a Sir Julyan Pauncefote, a Sir H Drummond Ford, a Mr Gladstone e ad altri. I rapporti di Dingli incontrarono largo favore. Sir George Baden Powell, uno dei Regi Commissionari per Malta del 1888 [37] così ebbe a scrivere al Dingli in merito:

I must ask leave to congratulate you on putting together in so clear a form so much valuable and interesting information. Specially valuable are the experienced estimates of the incomes of the various classes in Malta; and specially interesting to me are your remarks on the incidence of the taxes; for instance at page 12 where you show that wheat is not the only ‘necessary’—a preciously similar argument I am proud to say was made in my West Indian Financial Report. I principi in base ai quali Sir Adriano stimava doversi elaborare qualsiasi riforma fiscale furono da lui enunciate in una lettera a Sir Charles Straubenzie del 23 luglio 1877 nei seguenti termini: [235] ‘1. that the new arrangement should be such as, subject to small fluctuations, to secure an adequate revenue; so that the Government should not be under the necessity of proposing fresh taxes in consequence of deficits—and they having in this small place an almost permanent subject of agitation; 2. that as few direct taxes should be imposed as possible, so that only a few classes of the community be affected by them, in order not to irritate the feelings of the mass of the people, and thus bring them to hate the Government’. È notorio che, come risultato della polemica sostenuta dal Dingli, la tassa sui grani non venne abolita, e che tasse dirette non vennero in quell’epoca introdotte.’ 16 See N Denny, ‘British Temperance Reformers and the Island of Malta 1815–14’ (1987) 9 Melita Historica 329: ‘Commercial men knew the value of the wine trade with Italy, and preferred liquor tax to income tax, while professionals were increasingly anti-British. “Temperanza” to this class meant moderation rather than sobriety, as with the British aristocracy, effectively restricting temperance to the expatriate community.’ 17 AV Laferla, British Malta (Malta, Gov’t Printing Office, 1977) vol II, 5–7. 18 Z Gabarretta, T Maitland and F Mattei, ‘A Controversy from a Contemporary Diary’ (1977) 7 Melita Historica 163: ‘It is in this context that Don Lorenzo Lanzon gives the following portrait of Thomas Maitland, Governor of these Islands and of those of Corfù where he loved to stay for the greater part of the year, and only came here once or twice a year, for a few days . . . I find it necessary to make a reference to the rather brutal character of this man. He was Scotch by birth and well advanced in years. Arrogance and unlimited pride predominated in him. He looked down with contempt upon everyone without any exception: even the most qualified persons could not escape his scorn. He despised the Maltese and the English alike—whatever their rank. He had not one friend. With his oppression, with his heavy, outrageous taxes he pushed the whole population to the brink of poverty. He so restricted the number of officers employed with Government that even the day-to-day business could hardly be carried out.’

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THE WARS, A CATALYS T F OR CHANGE

The two world wars had a dramatic impact on the island’s taxation history. The First World War rediscovered Malta’s role as a staging post of the British Empire and Malta relived the prosperous days of the Crimea.19 Such rare influx of wealth induced the Colonial government to impose an inheritance tax and an entertainment tax. The latter moves appear to have disturbed the island’s equilibrium.20 It is believed that the excessively convoluted inheritance tax contributed to the discontent, which led to the famous 7 June 1919 uprising.21 The Labour Party heralded the introduction of income tax in its 1921 electoral programme and Sir Charles Bonham Carter22 attempted to introduce income tax in 1939,23 but the state of the nation discouraged any further sweeping tax reforms24 and the introduction of income tax 19 J Bonnici and M Cassar, The Malta Grand Harbour and its Dockyards (Malta, Tecnografica (self-published), 1994) 203. 20 H Ganado, Rajt Malta Tinbidel (Malta, Tecnografica (self-published), 1975) vol III, 292–94. 21 See Prof H Vassallo’s testimony published in P Bartolo, Fis-Sette Giugno (Malta, 1979) 43–46, which translates as:

President of the Commission of Inquiry Senior Judge Alfredo Parnis: Some witnesses testified that the laws gave rise to discontent. Do you think that Inheritance Tax was too oppressively formalistic? Professor Vassallo: It would have been harsh even if it was enacted in times of prosperity. In view of the fact that the law was enacted when the people were in a state of despair, the measures were held to be doubly oppressive . . . As far as the inheritance tax is concerned, its worse aspect was that even if a person was exempt from tax he still was required to comply with certain formalities. In order to tackle such formalities such a person would have needed to go to a professional. Following the disturbance, taxpayers were proseed with means for the purpose but in the first days or months after the law came into force the taxpayer was bound to go to his lawyer and discovering whether the deceased possessed assets in excess of Stg 30. At times the latter operation was more expensive than the tax itself. 22 Governor of Malta, 1936–40. 23 Times of Malta, 12 October 1948, 3. See also J Manduca, The Bonham Carter Diaries 1936–40 (Malta, 2004) 362, ‘I said that the meeting had been called to enable members to indicate the policy they wished to be adopted by Government, that the policy would be decided before Autumn and that at the beginning of next session I would declare the policy in a speech from the Chair; but I could say now that it would be necessary first to deal with taxation, and that I should lay on the table as soon as I received it the report on the feasibility of income tax as a result of the enquiry by Sir Arthur Eborall’. 24 Especially in view of the attitude assumed by some Maltese politicians, ‘Strickland came to see me on Wednesday 2nd, but I got rid of him after about half an hour. He had already had an hour with Hunter. He simply repeated what he had already said in Council Chamber about direct taxation, income tax and so on. I did not argue with him because I thought I would make the interview longer and I had other things to do. He also warned that he intended to press that my term as Governor be extended’. See Manduca, ibid, 364. See also the entry for October 16 (427), ‘In the afternoon we had a meeting of the Council of Government. Strickland spoke for about an hour, Mizzi for about twenty minutes. Strickland spoke with a view to my passing on his opinions to the Secretary of State. Of course, he made remarks to the following effect: the old audit act should be re-enacted; there should be a contribution from the Imperial Government; careful apportionment of all expenditure a contributory system of old age pensions. He referred also to the Milk Marketing Department, the Electricity Generating Station, the incidence of

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would need to wait for some years. When England implemented the efficient tax collection PAYE25 system, Malta was still without an income tax.

T H E F I RS T F O R M A L TAL K S RE L AT I N G TO I N C O M E TAX

Malta may have emerged ‘Invicta’26 from the Axis bombings, but its financial system had been crippled by the economic trauma of war. In May 1945 the Colonial government commissioned Sir Wilfred Woods to report on the financial state of the island. Woods estimated that Malta required the astronomical sum of £42,637,750 to return on its feet.27 The sum was to be raised from imperial grants and taxation. Prewar efforts to examine proposals for a new taxation system were revived.28 The setting for the reform was the 1947 political election, the first election to be held under the MacMichael Constitution.29 The parties, which contested the general elections, were Professor Guiseppe Hyzler’s Democratic Action Party; Dr Paul Boffa’s Labour Party; Jones’s Party, led by Mr. Henry Jones; Dr Francesco Masini’s Gozo Party; and Dr Enrico Mizzi’s Nationalist Party, a party which had been bruised by the Colonial government’s arbitrary deportations.30 Taxation was on the agenda of the elections.31 The Malta Labour Party won the 1947 elections with a majority of 60% of the votes cast. Dr Paul Boffa MD was appointed Prime Minister and Doctor Arthur Colombo was appointed Minister of Finance.32 The bad state of the public treasury warranted a drastic tax reform. The first step to reorganisation was the presentation of the Succession and Donation Duties Bill33 in February 1948.34 The debates relating to this Bill introduced the subject of income tax. direct and indirect taxation. He said he would support a rating Bill but oppose an Income Tax, that the sentiment in Malta . . .’ 25 26

In 1943. G Borg, Taxation with Tears (Malta, DOI, 1968) 23. Bartimeus, ‘Malta Invicta’ (March 1943) LXXXIII The National Geographic Magazine

375. Ganado, above n 20, 272. In 1939 the Colonial government set up a commission for the purpose. The members of the commission included Dr Paul Boffa and Dr Carmelo Mifsud Bonnici, but their proposals were rather unimaginative. Ganado, ibid, 294. 29 JJ Cremona, The Maltese Constitution and Constitutional History (Malta, 1994), 43. 30 M Schiavone, L-Elezzjonijiet f’Malta 1849–81 (Malta, pin, 1987) 57. 31 The Malta Labour Party was (rightly) credited with the introduction of income tax in Malta. See E Vella, Notes on Income Tax in Malta (Malta, 1968) 10. 32 Schiavone, above n 30, 125–27. 33 It was principally described as a tax on unearned incomes. 34 Times of Malta, 21 February 1948. 27 28

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Dr J Pace from the Democratic Action Party described the proposed inheritance tax as ‘deferred income tax’. Dr Colombo denied Dr Pace’s assertion and preferred to name his new tax ‘one of evaded income tax or payment of delayed excess profit tax’.35 At the sitting of the Legislative Assembly held on 6 March 1948, when the enactment of the proposed law was cluttered by legalistic arguments relating to the legislative enactment process of the Bill, Colombo declared that Malta had become ‘heaven on earth for the rich man’, that ‘taxes had been introduced and that income tax would follow’. Colombo’s statement appears to have caused an outcry in the assembly, and accusations that the Labour Party harboured individuals with ‘communistic tendencies’ were made.36 In the following sitting, Notary George Borg Olivier observed that the Nationalist Party was ‘never opposed to taxation as could be seen from the electoral programme’, and clarified that his reservations referred exclusively to the proposed succession Bill. Dr Masini from the Gozo Party observed that he did not object to the Bill in principle, but he suggested that the introduction of the Bill should have been made after ‘the introduction of income tax’.37 The enactment of Dr Colombo’s Succession and Donation Duty was celebrated at a Labour Party Meeting held on Sunday, 28 March 1948. Dr Colombo announced, ‘The Government was determined on a more equitable method of taxation and he promised that indirect taxation would be decreased by the introduction of more direct taxes . . .’38 A few days later, ‘Democrat’, an anonymous supporter of one of the members of the opposition wrote to The Times: False economics are short lived. A correction will have to be made sooner or later, either by quick and intelligent adjustment of taxing income rather than capital, or by a dire process of impoverishment that will ultimately hit the very workers, who the Labour Party are supposed to represent by the gradual disappearance and the total elimination of the employers.39

All was now set for the introduction of income tax . . .

T H E G R E AT I N C O M E TAX D E B AT E

The local headlines of The Times of Malta of Wednesday, 26 May 1948 announced that income tax would be introduced in January 1949.40 On the Times of Malta, 3 March 1948. Times of Malta, 6 March 1948, 3. Ibid, 5. Times of Malta, 30 March 1948, 9. Times of Malta, 2 April 1948. Similar statements were misleading in that the general public was unaware that the Income Tax Act would be imposed with retroactive effect discussed in Case 1 of the Court of Appeal. 35 36 37 38 39 40

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afternoon of 25 May 1948 Dr Colombo spoke for two hours and forty-four minutes in a crowded Legislative Assembly to present his budget and his plan to attract more revenue through the imposition of income tax. Colombo described his tax as ‘just and fair’,41 but his ideals of social justice and equity were misunderstood by a section of the public. Objections to his plans were vociferous. Democrat declared that Dr Colombo’s first budget may well prove to be his last. The ship of state is steering for the rocks of financial disaster . . . Very soon there will be no rich . . . Dr Colombo’s budget is step towards killing private initiative in Malta and may also have serious repercussions.42

The imposition of the income tax in Malta was condemned as a leftist move that sought to impoverish the rich in the name of some godless Marxist ideal.43 Dr Enrico Mizzi sustained that ‘Communism . . . had entered Malta and after the Russian victory had been exerting greater influence on the masses’. Mizzi solicited Boffa to fight communism and rid himself of the Marxist element within his party, namely Colombo and Mintoff.44 Colombo was undeterred by the belligerence, and tabled his Bill45 to impose a tax upon incomes on 7 June. Colombo was very proud of his brainchild and was reported to have addressed the House using the first person singular.46 Unfortunately, Colombo’s political adversaries across the house did not share his enthusiasm. Mizzi described Colombo’s Bill as ‘odious and dangerous’.47 More criticism came from Dr G Pace of the Democratic Action Party, who accused Colombo’s law of acting as a deterrent to private enterprise.48 The publication of the Bill on 20 September that year did not calm the tempers. The papers were rife with criticism for the new law. Democrat did not exclude that the inexplicable delay in the publication of the Bill was part ‘of a plan to rush its passage through the House without ample time for constructive criticism and possible improvement’.49 The anomalous reason for the delay of the publication of the Bill was explained during the sitting of the Legislative Assembly of 27 September. Colombo explained that the delay ‘had been caused by an accident to a translator who had hurt his wrist and, by certain machinery in the Government Printing Office being put out of order’.50 The reading of the Bill was postponed to October 11, 1948. In Times of Malta, 26 May 1948, 1. Ibid, 4. 43 This view was alimented by the 1 May manifestations at Saint Paul’s Bay. 44 Times of Malta, 27May 1948, 12. 45 The Bill was in a recognisable form to the Income Tax Acts presently in force. It included relief for double taxation in respect of tax paid in the UK. 46 Times of Malta, 8 June 1948, 8. 47 Times of Malta, 9 June 1948, 3. 48 Times of Malta, 21 August 1948, 4. 49 Times of Malta, 25 September 1948, 4. 50 Times of Malta, 28 September 1948, 8. 41 42

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the meantime, criticism persisted in the press, with Democrat accusing the Labour government of fleecing the employers by imposing disproportionate and excessive Income Tax Acts.51 Even the Chamber of Commerce joined the fray, arguing that the proposed income tax discouraged private enterprise and investment.52 The second reading of the Income Tax Act was heard on 11 October, when Dr Colombo spoke for two and three-quarter hours. In his passionate speech Colombo could not resist the temptation to use the clichés of Marxist diatribes and referred to a ‘hated class’ which had never paid taxes.53 Similar arguments tended to defeat his cause, and accusations that his fiscal measures would disturb the social harmony of the island and the liberty of the individual were soon to follow. These arguments of an ideological nature were occasionally peppered with constructive debates,54 but the proposed law was heavily attacked. Dr Frendo Azzopardi of the Nationalist Party said that the proposed law was a demagogical move by the Labour Party aimed at please the ‘Have-Nots’ at the expense of the ‘Haves’.55 Dr Carmelo Caruana56 went a step further, deploring ‘a spirit of malice behind the Bill’.57 The arguments in the Assembly turned nasty. At the sitting of 10 October Mintoff sought to defend the proposed Bill by arguing that the proposed law would attract foreign income. He turned out to be prophetic because the Maltese tax system has remained a bulwark of the Maltese financial services industry to this day. When Dr Mizzi interrupted him Mintoff replied that, ‘he could not tolerate interruption from a member of that Party which according to Count Ciano had been receiving money from the Italian Government’. The Ciano diaries58 had just been published and the prewar diaries alleged that Dr Mizzi had received funds from the Fascist government.59 The accusation was Times of Malta, 29 September 1948, 4. Times of Malta, 9 October, 1948, 3. Times of Malta, 12 October 1948, 9. In the sitting of the 11 October the elimination of juridical double taxation was discussed. Times of Malta, 13 October 1948, 3. 55 Times of Malta, 14 October 1948, 8. 56 Nationalist Party. 57 Times of Malta, 15 October 1948, 3. 58 The Ciano Diaries, 1939–43; the complete, unabridged diaries of Count Galeazzo Ciano, Italian Minister for foreign affairs, 1936–43 were published by Hugh Gibson (New York, Doubleday) in 1946. Count Galeazzo Ciano of Cortellazzo was the foreign Minister of the Italian Fascist government in the pre-war and early war years. He was married to Benito Mussolini’s daughter Edda. In 1943, when the tides of war were turning Ciano turned his back on Mussolini. He was arrested by the Germans and executed for treason. His diaries were salvaged by Edda and published right after the war. 59 An analysis of Mizzi’s alleged involvement with the Fascist Party was made by J Pirotta, in ‘Enrico Mizzi’s Political Integrity: Fact or Fiction?’ [1992] Melita Historica 93–113. Pirotta concludes, ‘Twenty months before his death, during a heated debate in the Legislative Assembly, Mizzi declared (113): “I hope that when I pass from this life to become a memory to posterity I hope no one will slander me . . . for party reasons . . . As I had been declared by the Nationalist Party some thirty years ago, I am still, thank God, before the Party, before the people, and above 51 52 53 54

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vehemently denied, but the subject would be brought up again in the debates on the Income Tax Act.60 A more constructive sitting was held on 16 October, when Dr Francesco Masini of the Gozo Party made a clear-headed analysis of the law. The proposed law was equitable and a welcome reform but it was legally flawed. The proposed Bill was based on the alien laws of Palestine and Cyprus, and such laws were incompatible with Malta’s civil law system. In the meantime, the Nationalist Party added another charge to the Labour Party. Notary Borg Olivier held that the Labour government was the longa manus of the Imperial government. Mizzi suggested that Colombo was the puppet of Bonham Carter. Borg Olivier referred the Assembly to a speech by the pope,61 which condemned unwise or evil taxation. Mintoff defended his party by arguing that the proposed law would result in a fairer distribution of wealth,62 and the discussions continued. An important amendment to the Bill was effected at the sitting of 23 October, when significant changes were made to the proposed tax base. The tax base was shifted to a worldwide tax base for persons who are ordinarily resident and domiciled in Malta.63 An important insertion was made at the same sitting when the list of capital allowances was extended to include initial deduction, expenditure on scientific research and expenditure on patent rights. In the sitting, Colombo clarified that lottery prizes would be treated as capital and consequently not taxable.64 Constructive debates were held throughout the rest of the October65 sittings and in the 3 November sitting, when the Assembly discussed tax avoidance and fictitious transactions.66 Then, at the sitting of Friday, 5 November 1948, all hell broke loose. Colombo was taken ill, and it appears that Mintoff held fort for the Labour Party. After the Assembly had discussed failure to submit a tax return, Mintoff raised the matter relating to the Ciano diary again. He quoted an extract from the diary, which implied that Mizzi ‘Capo Del Partita Nazzionalista Maltese pro Italiano . . .’ received 150,000 lire on behalf of the Nationalist Party for the purposes of its electoral campaign. The extract quoted by Mintoff suggested that Mizzi was in touch with the all else before my own conscience ‘senza macchia e senza paura’.” There seems every likelihood that history will concur.’ Times of Malta, 15 October 1948, 7. Published in the Times of Malta, 18 October 1948. Ibid, 3. ‘Sub-clause (1) page iv, lines 7 and 8 delete the words “accruing in derived from or received in Malta” and substitute the following words therefore: “accruing in or derived from Malta or elsewhere, and whether received in Malta or not”’. Times of Malta, 23 October 1948, 3. 64 Times of Malta, 25 October 1948, 3. 65 Times of Malta, 26 October 1948, 3; 27 October 1948, 3; 1 November 1948, 3. 66 Times of Malta, 1 November 1948, 3. 60 61 62 63

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Fascist government in the prewar years. Mizzi vehemently denied the allegations and quoted an academic archival search report, which sought to exculpate him. In the meantime, Notary Borg Olivier accused Mintoff of using the Ciano story to divert the Assembly’s attention from the income tax discussions. Boffa and Hyzler intervened to calm tempers down, but Boffa reiterated that Colombo had ‘spoken to Borg Olivier on the matter. Quoting from Ciano’s diary . . . said that Dr Mizzi had given the Duce information on defence matters . . .’ This comment added fuel to the fire, and the sitting was finally closed at nine in the evening with insults67 and reciprocated accusations. Similar petty matters were discussed during the subsequent sitting, but in the sitting of 12 November an interesting debate was held in connection with the Commissioner of Inland Revenue’s powers of search. Dr Pace expressed his reservations on the width of those powers. He feared that the Commissioner’s rights could impinge on the traditional duty of bank secrecy. Dr Colombo believed that the concerns raised by Dr Pace were superfluous, but the subsequent history68 of the Income Tax Act was to prove him wrong. In the meantime, the final reading of the Income Tax Bill was nearing its end.

T H E B I RT H O F P RI N C E C H A R L E S A N D T H E B I RT H O F I N C O M E TAX

The Times of Malta of Tuesday, 16 November 1948 announced the news of the royal birth of Prince Charles. Notes of congratulations addressed to Her Royal Highness the Princess Elizabeth on the birth of Prince Charles filled the headlines.69 The Bill received its finishing touches and the Assembly discussed the role of the Board of Special Commissioners for Income Tax Purposes and the elimination of juridical double taxation.70 Then, at the sitting of 17 November, the Income Tax Bill 1948 was read a third time and passed by 21 votes to 12 amid prolonged government cheers.71 Income tax was born; a new era in Maltese taxation history had been bred. Dr Colombo emerged victorious, but the island repaid his zeal with its characteristic ingratitude. Colombo was expelled from the Labour Party and few educated persons from subsequent generations know of Colombo. However, his remarkable feats deserve to be remembered.72 Times of Malta, 8 November 1948, 3 Times of Malta, 15 November 1948, 3 Times of Malta, 16 November 1948, 1. Times of Malta, 17 November 1948, 8. Times of Malta, 18 November 1948, 8. Dr Arturo Colombo was a very popular medical practitioner in the well-to-do Sliema area. He held various important offices within the Labour Party machine. Professor Godfrey Pirotta, an author who is associated with the Nationalist Party wrote, ‘During his term of office, 67 68 69 70 71 72

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The Income Tax Act, 1948, ‘an Act to Impose a Tax upon Incomes and to Regulate the Collection thereof of enacted by the King with the advice and consent of the Legislative Assembly and the consent of the Governor FCR Douglas’, was enacted on 7 December 1948. The first version of the Income Tax Act, denominated Act LIV of 1948, possessed the fundamental rules contained in the version of the Income Tax Act presently in force.

Colombo showed that he was a dedicated and clever person who was not only a powerful journalist but also a great orator. He was never afraid to challenge either the opposition or the British administration.’ After Colombo lost the struggle for power within the Labour Party he fell out with Mintoff and was expelled from the Labour Party in 1949. Following the split in the Labour Party he joined Boffa’s team and successfully contested the general elections with the Malta Worker’s Party, but in 1951 relinquished his post at the Assembly to become a Capuchin Friar. After working as a missionary in Ethiopia, he quit the order and re-entered politics in his old age by founding a new party. He died in 1978. MJ Schiavone and LJ Scerri (eds), Maltese Biographies of the Twentieth Century (1997), available at http://www.maltamigration.com/settlement/personalities/ colomboarthur.shtml.

11 The History of Land Tax in Australia THE HI S TORY OF LAND TAX I N AUS TRALI A

CYNTHIA COLEMAN AND M ARGARET M CKERCHAR CYNTHI A COLEMAN AND MARGARET MCKERCHAR

Australian Financial Review, 12 May 2008. Cartoon © Rod Clement.

Land is the only thing in the world worth workin’ for, worth fightin’ for, worth dyin’ for, because it’s the only thing that lasts. (Gerald O’Hara to Scarlett O’Hara in ‘Gone With the Wind’ by Margaret Mitchell) Buy land. They ain’t making any more of the stuff. (Will Rogers, Poet Lariat, United States of America)

I N T RO DU C T I O N

New South Wales was first settled by Britain as a penal colony in 1788. In accordance with constitutional theory, land was considered at the time to be ‘terra nullius’ as there was no recognised legal system in existence. Other areas in Australia were subsequently settled by free people and in 1901

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Australia became a federation. Early revenue legislation in Australia was modelled on that of England. Historically, all state governments and the federal (or Commonwealth) government in Australia have enacted land tax legislation at times. The reasons for doing so were limited to the fundamental need to raise revenue and a desire to encourage wider settlement by breaking up large land holdings (latifundia). This chapter traces the early history of land tax in Australia from the first settlement in 1788. It begins by presenting an overview of Australian settlement and a discussion of the reception of English law in the colony. Early attempts to establish land tax in each of the Australian colonies are then reviewed, followed by the impact of federation in 1901 on the imposition of land tax by the New South Wales (NSW) and Commonwealth governments. Drawing on this history, the general features of land tax and its inherent problems are then considered both from a historical perspective and from a more contemporary view, including its revenue-raising capacity and its continued existence in Australia.

OVE RVI E W O F AUS T R A L I A N S E T T L E M E N T AN D R E C E P T I O N O F E N G L I S H L AW I N T H E CO L O N I E S

As a colony of Britain, the first settlers in Australia were deemed to have carried with them as much of the common law as was applicable to their new circumstances. Customs duties were initially imposed by the governor of the NSW colony, but their legality was questioned when proceedings were taken to recover unpaid duties.1 In response, the British Parliament passed legislation that validated duties levied up to 1821 and granted power to the governor to continue to impose duties and to extend them to spirits made in the colony. In 1823 the British Parliament passed the New South Wales Act,2 granting NSW the status of a full colony. The king could nominate members to a legislature, but only the governor could propose laws. These laws had to be consistent with the laws of England to the extent that local conditions permitted. The Australian Courts Act 1828 (Imp)3 provided that all English laws existing up until 1828 were to be received as having force in the Australian colonies, at the time comprising NSW and Tasmania, to the extent they were applicable to local conditions. Any English laws passed after 1828 only apply in those colonies if they were stated to apply by ‘paramount force’. 1 PA Harris, ‘Metamorphosis of the Australasian Income Tax: 1866–1922’, Research Study Number 37 (Australian Tax Research Foundation, 2002). This study constitutes the definitive work in this area and the early section of this chapter comes from it. 2 4 Geo IV, c 96 (Imp, 1823). 3 9 Geo IV, c 83 (Imp, 1828).

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Western Australia was established as a free settlement in 1829, South Australia in 1834, Queensland in 1824 and Victoria in 1836. Representative government was granted to the colonies by a series of British Acts: NSW (1842 and 1855); Victoria (1850); Tasmania (1856); South Australia (1856); Queensland (1867); and Western Australia (1870 and 1890). In 1865 the British Parliament passed the Colonial Laws Validity Act,4 which granted independent power to legislate to the colonies. This Act remained in force until 1986, when the Australia Act (Cth) provided that it would not apply to state laws made after its commencement. Australia became a federation in 1901 and the various colonies became states.5 The legislative powers of the Commonwealth today remain limited to what was transferred to it at the time of its formation, and residual powers rest with the states. Some federal powers are concurrent with those of the states whilst others are exclusive to the Commonwealth. Taxation is a concurrent power, but during World War II the states transferred the power to collect income tax to the Commonwealth. In 1931 the Statute of Westminster (Imp), adopted in Australia in 1942,6 gave full power to the colonies to legislate with extra-territorial effect and provided that the Colonial Laws Validity Act did not apply to Commonwealth statutes. Section 51(ii) of the Australian Constitution gives the federal government the power to make laws with respect to taxation; but so as not to discriminate between states or parts of states. Section 90 of the Australian Constitution gives the Commonwealth exclusive power to impose duties of customs and excise and to grant bounties on the production or export of goods.

E A R LY AT T E M P T S TO TAX L A N D B Y T H E C O L O N I E S

New South Wales Early methods of raising revenue available to the colonies came from the sale of Crown land and the granting of leasehold interests in land. The NSW government introduced a Land Tax Bill on 16 February 1860. It was intended to be a supplement to the Public Lands Bill, which dealt with the sale of Crown Land. The Bill was introduced by Mr Black, who stated that the underlying reason for introducing the Bill was not revenue raising, although that was obviously relevant, but to ‘check the tendency to monopoly of those lands that will be thrown open to the public under the 4 5 6

28 & 29 Vict, c63 (Imp). Commonwealth of Australia Constitution Act 1900 (Imp), 63 & 64 Vict, Ch 12 (Imp). Statute of Westminster Adoption Act 1942 (Cth).

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operation of the new land law . . .’7 Mr Black further justified the concept of taxing land on the basis it had been used in the UK since ancient times. One of the earliest forms of tribute levied on land was the Danegeld, which is thought to have originated in the tenth century and continued under William the Conqueror.8 The Bill imposed a tax of the unimproved value of freehold land on the occupant or, if there was no occupant, on the owner of the land. Land was to be valued every six years, and the Land Commissioner had the power to sell the land if the tax was not paid. Many of these standard features appear in later Australian legislation. The Bill lapsed when Parliament was prorogued, for other reasons, on 4 July 1860. In 1886 and 1888 the New South Wales government again failed to pass land and income tax legislation. In 1895 it passed the Land and Income Tax Assessment Act, which constituted the first enactment in Australia of legislation which directly taxed land and income.

Tasmania After becoming a state with the power of self-government, Tasmania’s revenues, particularly from customs duties, declined. If customs duties were not reduced, future trade and the development of the state would also be at risk. In 1866 the government decided to abolish customs duties and introduce a tax of 5.5%, levied on the annual value of property as listed in the Valuation Rolls, on all incomes of £80 pa or more.9 The Bill was modelled on the 1842 and 1853 United Kingdom (UK) Acts. Its short title was The Property and Income Duties Act. However, the government failed to gain support for the Bill and Parliament was prorogued on 7 September 1866. In 1873 another, less detailed Bill was introduced, but it also failed to be passed. In 1878 Tasmania introduced a Land, Dividend and Mortgage Tax Bill. The need to raise revenue to finance the construction of railways was the main impetus behind it. The Bill provided that land tax was to be a first charge on the land. The amount payable depended on the assessed annual value of the land, the tax-free threshold was £15, and the tax was payable by owners and/or mortgagees. The tax was to be collected initially from occupiers of the land. This Bill too failed to be passed. A subsequent Bill largely modelled on the 1873 Bill, the Income Tax and Property Bill 1879, also failed to pass. Finally, the Tasmania government passed the Real and Harris, above n 1, 26. BEV Sabine, A Short History of Taxation (The Institute of Taxation, 1980); CA Daw, ‘Land Taxation: An Ancient Concept’ (February 2003) 37 Australian Property Journal 20. 9 Harris, above n 1, 27ff. 7 8

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Personal Estates Duties Act in 1889 and the Land and Income Taxation Act in 1910.

Victoria In 1876 the colony of Victoria also needed additional revenue. The government introduced the Land Property and Income Tax Bill to impose a tax on property of all types, but it failed to be passed. In 1877 the Victorian Parliament passed the Land Tax Act. The impetus behind this legislation was to fund public spending on works such as roads and railways, which would in turn result in increased land values. In addition, there was the need to break up large tracts of concentrated land ownership on the grounds they were not always being used productively.10 The tax was imposed on tracts of land which were greater than 640 acres and valued at more than £2,500. The tax was imposed on the owners of land, or on beneficiaries where the land was held in trust on their behalf. Official classifiers entered properties and classified land according to its sheep-bearing capacity. These classifications were then published. The tax could be recovered from the occupiers of the land, who in turn could recover the tax from the landowners. This was the first Act on land tax to be enacted by an Australian (or New Zealand) colony. The Victoria Parliament passed a separate Land Tax Act in 1910.

South Australia South Australia first attempted to enact a Land and Property Tax Bill in 1878. It was not driven by a need for revenue, but instead its underlying rationale was to level the playing field between citizens who worked for income and those who derived income from accumulated capital. The annual value of land was to be estimated at 5% of the market value of the land or the estimated annual rent. The assessment book was to be available to the public. The Bill failed to be passed. There was no obvious reason for this failure, apart from a general antipathy towards the concept of taxation. The Property Tax Bill 1879 also failed to be passed. In 1882 a Land Tax Bill and in 1883 a Land and Income Tax Bill both failed to be passed. In 1884 the Taxation Act (South Australia) was passed. The growing deficit had made it imperative for the government to be able to raise revenue to ensure the economic future of the colony. The tax was imposed on the unimproved capital value of land and the burden was 10

Ibid, 44ff.

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divided between citizens who had an interest in freehold estates: owners, mortgagees and tenants.

Queensland Queensland was comparatively late in considering the introduction of a tax on land. The colony had derived adequate revenue from customs and excise duties, and had introduced a tax on dividends in 1890.The Queensland Income Tax Act 1902 did not include provisions to tax land, although it differentiated between income from ‘personal exertion’ and ‘income from property’. Queensland passed a separate Land Tax Act in 1915.

Western Australia Like Queensland, the colony of Western Australia in its early days had not needed revenue from sources other than customs and excise duties. In 1907 the Western Australian Land and Income Tax Assessment Act was enacted. Various sections of this Act were modelled on previous Acts, and it did not distinguish between income from personal exertion and income from property.11

P O S T- F E D E R AT I O N AN D T H E I M PACT O N TA X I N G POWE RS A N D T H E I M P O S I T I O N O F L A N D TAX

When Australia became a federation on 1 January 1901, its members comprised the six states (all former colonies) and the Northern Territory, which has its own territorial government. It is the only state or territory in Australia which does not have land tax legislation. Apart from the fact that large tracts of land in the Northern Territory are subject to ownership claims by Australia’s indigenous people, it is principally used for primary production—cattle and buffalo stations. It also contains rich deposits of minerals, including uranium. The area around the city Canberra (Australia’s capital), some 940 square miles known as the Australian Capital Territory, also imposes land tax. There are three levels of government in Australia and three levels of taxation.12 The federal government has the power to levy income tax (the states gave it up during World War II), and from 1911 to 1952 it also imposed land tax. Although all of the states and territories, except the Ibid, 163ff. GA Forster, ‘Australia’ in RV Andelson (ed), Land Value Taxation Around the World, 3rd edn, ch 25 (The American Journal of Economics and Sociology vol 59 annual supplement). 11 12

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Northern Territory, have land tax legislation, various methods of implementation exist, including different exemptions and rates. States are responsible for health (hospitals), education, police and roads. Local governments (councils) impose municipal property rates. These are paid by the owner of the property, not the occupier under a lease. Local governments are responsible for maintaining local roads, collecting and disposing of rubbish, and providing and maintaining street lighting, libraries, recreational facilities such as tennis courts, football fields, parks and swimming pools, and health care centres for parents (mainly new mothers) and children. Water rates are based on consumption and are paid either to a statutory or a municipal authority. Municipal property rates may be based on site value (often named unimproved capital value), or the value of the site plus improvements (capital improved value or net annual value). Often there is an additional annual charge for specific services, such as garbage disposal.

L A N D A N D I N C O M E TA X I N N E W S O U T H WAL E S

New South Wales attempted to introduce a combined land and income tax in 1894. The state had suffered from droughts and floods, and revenue from customs and excise duties was declining. It was also obvious that those taxes would eventually be administered by the future federal government. The debates in the House of Assembly at the time the tax was proposed indicate there was no detailed discussion of the current principles for introducing a new tax based on Adam Smith’s ideas of simplicity, efficiency and equity.13 Mr Young stated that ‘the government had a mandate to give up the wretched protectionist taxation we have been labouring under and to impose a land and income tax’.14 In 1895, when it was reintroduced, having failed to be passed the previous year, Mr Coleman (member for Armidale) stated: when it is introduced for one ostensible purpose, namely to enable the Colonial Treasurer to remove customs duties which in our opinion, will simply bring about wholesale insolvency and ruin on our producers, then I will submit that it is our bounden duty to oppose the imposition of a land tax in every form.15

Mr Chapman felt that the main reason behind the introduction of land tax was a community desire to tax wealthy property owners and to force them to contribute to the cost of government. His view was that land tax was the most equitable method of doing so. He noted the mixed purposes of raising 13 Land Tax Review Report of the Government Treasury Advisory Committee (NSW Government, June 1990) 13–16. 14 Ibid. 15 Ibid.

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revenue and breaking up large estates: ‘I see sheep and cattle grazing where there ought to be women and children’.16 He further noted that the breaking up of estates would be promoted more effectively if there were a progressive rate scale instead of a flat rate. Mr Crick (Member for West Macquarie) noted the inconsistency of introducing a flat rate while supporting progressive taxation principles. He said that ‘there is no principle at all in these matters if taxation. All our taxation laws, in the past have been guided purely by expediency and the self interest of politicians or the classes they represented.’17 When the Local Government Shires Act (NSW) 1905 and the Local Government Extension Act (NSW) 1906 were enacted, the state government withdrew from taxing land in all areas in NSW, except for the western division of the state. This was to prevent double taxation and leave the field to local government authorities to levy their rates. Local councils on NSW are currently administered under the Local Government Act (NSW) 1993. Land tax was reintroduced in NSW in 1956 by the Land Tax Management Act, which remains in force today.

F E D E R A L L A N D TA X

The federal government enacted the Land Tax Assessment Act (Cth) in 1910. The reason for its introduction was to break up large estates (latifundia), thereby freeing up land. This was so that a comprehensive immigration policy could be developed, which included the offering of small blocks of land as an inducement to potential immigrants. This Act remained in force concurrently with state land taxes until 1952. The Royal Commission of 1922 (Ferguson Commission), in its Fourth Report dealing with the harmonisation of state/federal relations, recommended that due to the complexity and administration difficulties associated with land tax that it should be left exclusively to the states to raise. When introducing the Land Tax Abolition Bill 1952, the then Treasurer, Sir Arthur Fadden, noted that the federal land tax had not achieved its objectives.18 1. It had not led to the breaking up of big estates. Over 75% of revenue for 1941–42 was generated from city areas where there was no possibility of further subdivision. Ibid. Ibid. BF Reece, ‘State Land Taxation: a Critical Review’, Research Study No 15 (Australian Tax Research Foundation, 1992) 69–71; R Simpson and H Figgis, ‘Land Tax in New South Wales’, Briefing Paper No 6/98 (NSW Parliamentary Library Research Service, 1998) 4. 16 17 18

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2. It was a tax on a ‘capital base’, which was a tax on the ‘major income producing asset of farmers’.19 No other assets were taxed at a federal level. 3. The growth of revenue from other sources, particularly income tax, meant the revenue from land tax was less important. 4. Its administrative costs were very high. On the second reading of the Bill, further arguments were advanced by Mr Hulme. He noted that, because land tax was a deductible expense under section 51(1) of the Income Tax Assessment Act 1936 (Cth),20 some of the revenue lost on its abolishment would be partly offset by the cessation of these claims. Rent controls in certain states had increased the burden on some taxpayers and the owners of the land had been forced to absorb the cost. An additional benefit was that it would provide the states with an exclusive source of revenue. The vertical/fiscal imbalance between the states and the federal government has been a constant problem since federation.21

C O M M O N F E AT U R E S AN D I S S U E S O F S TAT E L A N D TA X E S H I S TO R I CA L LY

Policy Concerns The underlying reasons for land tax historically were its revenue-raising capacity and its ability to break up large parcels of land. This latter issue was discussed as early as 1911 in relation to the introduction of land tax in both Australia and New Zealand. While unsuccessful in breaking up large tracts of the land in both countries (mainly due to their unsuitability for settlement), commentators at the time noted that there were still important concerns as a result of using land tax to raise revenue.22 These included: 1. The person primarily liable to pay the tax is the landowner. When rental properties are scarce it is possible for landlords to pass part of the burden to tenants.23 State land tax exempts land used for primary production. Harris, above n 1, 163ff. J Freebairn, ‘Opportunities to Reform State Taxes’ (2002) 35 The Australian Economic Review 405. 22 PW Reeves, ‘Land Taxes in Australasia’ (1911) 21(84) The Economic Journal 513–26. 23 Land Tax Act 2005 (Victoria), Part 6, Division 3 prohibits the passing on to or seeking reimbursement from tenants of land tax in relation to residential tenancy agreements entered into after 1 January 1998. V Mangioni, Land Tax in Australia (Australian Property Publications, 2006). 19 20 21

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2. Land tax is deductible under section 8-1 of the Income Tax Assessment Act 1997 (Cth), so there is still some subsidisation of the tax by the Commonwealth. 3. Land tax is assessed annually on land owned on 31 December.24 However, the federal income tax year runs from 1 July until 30 June, so there is a lack of harmonisation. 4. Land tax operates as a charge on the land. 5. The rate of land tax is progressive in all states except NSW, which has a flat rate. 6. There are standard exemptions: • Tax-free threshold. • Land used and occupied as its owner’s principal place of residence. This is often subject to a certain space size, such as 2.2 hectares. • Land intended to be its owner’s principal place of residence—with a time limit, often for two years, to allow building a new residence. Taxpayers can only have one principal place of residence at the one time. A husband and wife cannot claim the total of two separate dwellings—for example, a city residence and a holiday house. If necessary, ownership can be apportioned per partner per residence. • Primary production land. This was not exempt under the federal land tax. • Retirement villages and nursing homes. • Public hospitals, charitable, religious, sporting or educational institutions not carried on for pecuniary profit, cemeteries, state government-owned corporations. 7. Taxpayers can claim hardship if they cannot afford to pay. 8. Standard administrative issues dealing with valuation, assessment, objections and appeals. 9. Administered by the Office of State Revenue (or its equivalent) in each state. 10. Despite the fact that land is regarded as being in fixed supply, new land becomes available with reclamation, urban renewal of docklands and re-zoning, which releases previous unsettled land for subdivision and development.

Tax Base and Valuation Australian land tax legislation uses the unimproved capital value of land as its tax base. Any method of valuation requires a team of valuers to ensure the tax is levied on a current value. This increases the collection costs of the 24

In New South Wales until 1973 land tax was assessed on land owned at 31 October.

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tax. The meaning of ‘unimproved value’ was defined as follows in the Annual Report of the Commonwealth Commissioner of Taxation in 1953. Unimproved Value is defined in effect, as the amount which the fee simple of the land would realise if sold at the date of valuation, assuming it to be unimproved, but in its existing environment. In relation to improved land, the minimum Unimproved Value is the difference between the Improved Value and the Value of the Improvements. Improvements means improvements, made or acquired by the owner or his predecessor in title, on, to or appertaining to, the land. An improvement on the land is a visible improvement having a separate identify, such as a building. An improvement to the land is an invisible improvement which merges into the land such as the alteration in the condition of the soil resulting from timber treatment or drainage or in the surface of the land from earthworks.25

The definition of ‘improvement’ was subsequently slightly amended.

Changes in Land Values The revenue from land tax is unstable because of fluctuations in land value. In boom times taxpayers near the liability threshold provide additional revenue to government, but there is often hostility from those taxpayers who incur liability for the first time.26 One method of dealing with the problem of fluctuations would be to index the land values in accordance with the consumer price index. However, the disadvantage of this approach for the government is the fact that revenue collections would remain stable. An example of the problems that can be caused by rising land values was seen with the introduction of the Premium Property Tax Act (NSW) 1998. In 1956 a taxpayer’s principal place of residence was exempt from land tax. In 1973 a 1200 square metre threshold was legislated, again to encourage the subdivision of large areas and the freeing up of land for development. In 1987 the exempt area was increased to 2100 square metres. In 1998 this threshold was abolished and the premium property tax, which introduced a land value threshold of $1,000,000, was enacted. The Valuer General was charged with ensuring that only 0.2% of private residences were subjected to the tax. The threshold for investment property in 1998 was $160,000. Land tax paid on the principal place of residence under the Premium Property Tax Act was not deductible for income tax purposes, and the maximum personal rate at that time was 48.5 cents in the dollar. There was great hostility to the tax, and it did not always reach its intended target. Sydneysiders who had lived in the same 25 26

1953, p 86. Discussed in Reece, above n 18, 66–7. Ibid, 44.

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house for over 50 years were subject to the tax even if they were living in a ‘shack’ with a harbour view and had no means of paying the tax. Naturally, relatives hopeful of inheriting this ‘shack’ were also angered that the value of their inheritance was being eroded as the tax with interest was charged on the land. The tax raised 1.15% of total land tax revenue in 2003. As a result of media pressure encouraged by various affected taxpayers, the premium property tax was abolished with effect from the 2005 land tax year.27 From 2005 NSW has not had any land value or land area threshold applicable to the principal place of residence for the purposes of levying land tax.

L A N D TAX : C O N T E M P O R A RY I S S U E S

Once land tax had been enacted in all states of Australia, the usual process of amendments to deal with contentious issues and the holding of inquiries which may, or may not, lead to legislative change began and have been ongoing since. In Australia, when discussing the problem of vertical/fiscal imbalance, the idea of abolishing land tax is almost never considered. Since the introduction of a goods and services tax (GST) in 2000, the revenue from the GST has been distributed among the states, but the complaints regarding inequity and favouritism which existed previously still remain. The states continue to rely on land tax as a steady source of revenue, as apparent from Table 1. Land tax is a direct and very visible tax. Because it is paid by the designated taxpayer, it tends to be very unpopular.28 Unless taxpayers perceive that they are gaining benefits from improvements to their property in the form of public goods, such as roads, kerbing and guttering, they tend to resent paying taxes. Home ownership has always been part of the Australian psyche. Taxpayers’ sole and principal place of residence is exempt from land tax in all states and territories of Australia. Further, any gain made on the disposal of a principal residence is basically exempt from capital gains tax, but the terminology in the rewritten Income Tax Assessment Act 1997 uses the term ‘main residence’ instead.29 Land tax is inherently regressive because poorer people spend a larger proportion of their income on their property. It can also be arbitrary and therefore hard to introduce initially in developing countries, as demonstrated by the experience in Australia, and difficult to amend. Mangioni, above n 22, 57ff. RM Bird and E Slack, ‘Taxing Land and Property in Emerging Economies: Raising Revenue . . . and More?’ International Tax Program paper 0605 (Joseph L Rotman School of Management, University of Toronto, 2006). 29 Subdivision 118-B. 27 28

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Table 1: Land Tax Revenue for the Year 2006–07 State

$ (m)

Percentage of total taxation revenue

ACT

67

67/845 = 7.93%

New South Wales

1955

1955/17277 = 11.3%

Northern Territory

N/A

N/A

a

b

c

d

Queensland

497

497/7516 = 6.61%

South Australia

188

188/3032 = 6.20%

Tasmania

63

63/748j = 8.42%

Victoria

989

989/11702 = 8.45%

Western Australia

386

386/5718 = 6.75%

e

g

i

f

h

a

k

m

l

n

aAustralian Capital Territory, Department of Treasury Annual Report 2006–07, vol 2 (Canberra, Department of Treasury, 2007) note 36 to Department of Treasury Territorial Financial Report, accessed at http://www.treasury.act.gov.au/about/publications.shtml# Annual%20Reports on 13 June 2008. bIbid. cThe Government of New South Wales, New South Wales Report on State Finances 2006–07 (Sydney, NSW Treasury, 2007) 3–27, available at http://www.treasury.nsw.gov.au/__data/ assets/pdf_file/0007/9853/2006-2007_NSW_Report_on_State_Finances.pdf (accessed on 13 June 2008). dIbid. eThe Government of Queensland, Queensland Treasury Annual Report 2006–07, (Brisbane, Queensland Treasury, 2007) 113, available at http://www.treasury.qld.gov.au/knowledge/ docs/annual-reports/2006–07/pdf/index.shtml (accessed on 13 June 2008). fIbid. gThe Government of South Australia, Consolidated Financial Report for the year ended 30 June 2007 (Adelaide, Department of Treasury and Finance, 2007) 29, available at http://www.treasury.sa.gov.au/dtf/home_page.jsp (accessed on 13 June 2008). hIbid. iThe Government of Tasmania, Treasurer’s Annual Financial Report 2006–07 (Hobart, Department of Treasury and Finance, 2007) 25, available at http://www.treasury.tas.gov.au/ domino/dtf/dtf.nsf/d4790d0513819443ca256f2500081fa2/cd9ba8959bf97d4aca25737e0016 b581?OpenDocument (accessed on 13 June 2008). jIbid. kThe Government of Victoria, Financial Report for the State of Victoria 2006–07 (Melbourne, Victorian Government Printer, 2007) 20, available at http://www.treasury.vic. gov.au/CA25713E0002EF43/pages/publications-annual-financial-reports (accessed on 13 June 2008). lIbid. mThe Government of Western Australia, 2006–07 Annual Report on State Finances (Perth, Department of Treasury and Finance, 2007) 54, available at http://www.dtf.wa.gov.au/cms/ tre_content.asp?ID=518 (accessed on 13 June 2008). nIbid.

The main issues with land tax that are still apparent in Australia are: 1. 2. 3. 4.

identifying the property subject to the tax; ascertaining liability; preparing a roll of potential taxpayers; and effective machinery for assessment and collection.

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In an era of computerisation, preparation of a roll of potential taxpayers is much easier. Most developed economies have computerised records of land sales and land ownership. However, while the compliance costs of real property taxes are generally low, the administration costs can be high.30 A major expense is the necessity of maintaining up-to-date valuations on the land the subject of the tax. The following is a list of recent land tax inquiries in NSW. These inquiries have often dealt with specific issues, rather than a general coverage of the whole regime. 1. NSW Tax Task Force (Collins) Report 1988—Review of the State Tax System. New South Wales Treasury. 2. Land Tax Review—Report of the Government Treasury Advisory Committee, 1990. 3. White Paper on Land Tax—Review of NSW Land Tax Base and Valuation System. 4. Report on the Inquiry into Changes in Land Tax in New South Wales—Parliament of NSW, 1998. 5. Following this report, Briefing Paper No 6/98, Land Tax in New South Wales (Rachel Simpson and Honor Figgis) was prepared by the NSW Parliamentary Research Service. 6. Office of State Revenue: The Levying and Collection of Land Tax—Auditor General’s Report, 1998. 7. Report of Inquiry into Operation of Valuation of Land Act 1916—Julie Walton. 8. Improving the Quality of Land Valuations by the Valuer General—NSW Ombudsman, 2005. 9. Briefing Paper No 5/05 Land Tax: An Update (Stewart Smith) NSW Parliamentary Library Research Service. Similar inquiries are held regularly by the other Australian states. Often the reports commissioned by the states rely on data from other states when gathering evidence before making any recommendations.

CONCLUSION

In Australia the enactment of land tax legislation was closely linked to the enactment of income tax legislation. Many of these early attempts were modelled in part on UK income tax legislation. There were two underlying policy issues: the breaking up of large estates to provide smaller parcels of land for closer settlement, and the raising of revenue. Eventually all states 30 C Evans, ‘Studying the Studies: An Overview of Recent Research on Taxation Operating Costs’ (2003) 1(1) eJournal of Tax Research 64; NSW Tax Task Force (Collins), ‘Review of the State Tax System’ (Sydney, NSW Treasury, 1988).

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and territories with the exception of the Northern Territory, and the Commonwealth (albeit briefly), enacted land tax legislation. Like all taxes, there have been numerous amendments and government inquiries throughout its existence. At present, land tax is in the realm of the states and territories, and it is generally an important component of their somewhat limited revenue-raising capacity (the exception being the Northern Territory). In spite of the shortcomings and issues of land tax, as discussed, its existence does not appear threatened in respect of the states of Australia.

12 The History of the Taxation of Charities: How the Common Law Development of a Legal Definition of ‘Charity’ Has Affected the Taxation of Charities THE HI S TORY OF THE TAXATI ON OF CHARI TI ES

FIONA A MARTIN FI ONA A MARTI N

T H E RO LE O F T H E C H U RC H U N T I L T H E S I X T E E N T H CENTURY

The concept of ‘charity’ can be traced back to biblical times, as, for example, in the Bible’s imperative: ‘And now abideth faith, hope, charity, these three; but the greatest of these is charity’.1 During early English history it was the local parish priest who provided relief to the poor through such means as almshouses, doles and elementary education.2 The Roman Catholic Church also provided other relief for the sick and the poor, including hospitals and homes for the aged, poor and ill.3 This situation was maintained until the late Middle Ages. Because of the dominant role of the Church in the provision of welfare, wealthy individuals who wished to contribute to the relief of the poor usually did this through ecclesiastical institutions.4 Often this took the form of testamentary bequests and, in order to preserve these bequests, the New Testament, 1 Corinthians 13:13, King James edition. Refer generally to WK Jordan, Philanthropy in England 1480–1660: A Study of the Changing Pattern of English Social Aspirations (London, Allen & Unwin, 1959); M Chesterman, Charities, Trusts and Social Welfare (London, Weidenfeld & Nicholson, 1979); S Petrow, ‘The History of Charity Law’ in G Dal Pont, Charity Law in Australia and New Zealand (Melbourne; Oxford, Oxford University Press, 2000) 44–82. 3 G Jones, History of the Law of Charity 1532–1827 (Cambridge, Cambridge University Press, 1969) 13–15; Chesterman, above n 2, 11–15; BT Colditz, ‘Income Tax Aspects of the Income of Charities and Gifts to Charities’, research paper (Taxation Institute of Australia Research and Education Trust, 1977), 6. 4 Chesterman, above n 2, 12. 1 2

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ecclesiastical courts granted them certain privileges that were not granted to private legacies. For example, charitable legacies were not allowed to fail because they were indefinite or uncertain.5 Many of these gifts and bequests by the wealthy were made in response to pressure by the Church, with the medieval Church’s teaching on giving to the poor stressing the importance of saving a rich man’s soul rather than any humanitarian feelings. As a result, the Statutes of Mortmain6 were introduced during the reigns of Edward I and Richard II from 1279 to regulate gifts to religious corporations, due to the fact that such gifts meant the loss of valuable incidents of tenure to the Crown. The Statutes of Mortmain forbade such gifts without statutory authority or licence of the Crown.7 During this period, rich testators were encouraged to establish ‘chantries’, under which bequests of property to the Church were granted for the support of a priest who would say regular masses for the testator’s soul. They were also encouraged to make bequests for the maintenance of Church buildings or other ways that supported the Church’s activities.8 Furthermore, if a wealthy individual died intestate, the ecclesiastical courts customarily applied one-third of his or her personal property to pious purposes.9 Overall, the state at this time played a limited role in the provision of social welfare.10 It did not impose taxes for the benefit of the poor, or apply existing taxes for social welfare purposes. There were some legislative attempts to ensure poor relief, but this was very much on an ad hoc basis.11 Often the reigning sovereign endowed almshouses, hospitals and schools, but this was also not done in any systematic manner.12 Nor was there any development by either the monarch or the state of institutional mechanisms to provide for and enhance individual philanthropy.13 The Catholic Church did not distinguish between the deserving and the undeserving poor. In fact, the Church took a substantially benevolent attitude towards the poor, which was in accordance with the teachings of the Bible.14 This can be contrasted with the developing attitude of Tudor Jones, above n 3, 5. Mortmain can be defined as ‘A gift of land to a religious corporation in feudal times, often made in the hope of shortening the donor’s time in purgatory’ (‘Mortmain’ in Encyclopaedic Australian Legal Dictionary (Butterworths, 2007)). 7 7 Edward I, Statute of Mortmain 1279; 15 Richard II, c 5. 8 Chesterman, above n 2, 12–13. 9 Petrow, above n 2, 45; Chesterman, above n 2, 12. 10 Chesterman, ibid, 13; EM Leonard, The Early History of English Poor Relief, 2nd edn (1965) 9; Petrow, above n 2, 45. 11 Chesterman, ibid, 13. 12 Ibid. 13 Ibid. 14 B Bromley, ‘1601 Preamble: The State’s Agenda for Charity’ (2002) 7 Charity Law & Practice Review 177, 197. 6 7

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299

England, which saw a distinction between the worthy aged, impotent and poor, and the able bodied who chose to beg rather than work.15 This situation existed until the sixteenth century, by which time two major social changes had taken place which impacted on philanthropic approaches. These were the decline of the Church’s power in secular matters and the breakdown of feudal relationships which led to the establishment of new social classes.16 The Church was increasingly seen as corrupt and inefficient. For example, residential privileges in almshouses were often given to donors and their families instead of to the poor, aged or sick for whom they had been established.17 Furthermore, the monasteries had been accumulating vast capital wealth, and the income from this capital was often applied to increasing the comforts of monks at the expense of the poor and sick.18 The breakdown of feudal relationships meant that feudal tenants and retainers were dispossessed of their land and livelihood. These people became agricultural labourers, sought employment in the towns as tradesmen or artisans, or degenerated into vagrants and beggars. All these circumstances led to an increase in the unemployed landless poor.19 At the same time, the middle classes expanded through growth in foreign trade and the opportunity to purchase land that had been appropriated from the monasteries during the Reformation. The result was an increase of the rich urban and rural middle classes.20 As a consequence of Henry VIII’s attack on the power of the Church during the Reformation and the inability of the Church to cope with widespread poverty, the English state intervened and commenced regulation of charities.21 Various statutes were enacted aimed at deterring begging and also prohibiting the bequeathing of land to religious institutions.22 In 1539 Henry VIII also dissolved the monasteries.23 These changes were partly justified because there had been misapplication of endowments which were intended for the poor, but also had the effect of increasing the royal treasury.24 15 Eg 22 Henry VIII, c 12, An Act Directing how Aged, Poor and Impotent Persons, compelled to live by Alms, shall be ordered, and how Vagabonds and Beggars shall be punished. 16 Chesterman, above n 2, 14; G Moffat, Trusts Law: Text and Materials, 4th edn (London, Cambridge University Press, 2005) 883. 17 Chesterman, ibid, 14. 18 Jordan, above n 2, 59; Jones, above n 3, 10; JJ Fishman, ‘Encouraging Charity in a Time of Crisis: The Poor Laws and the Statute of Charitable Uses of 1601’ (2005), available at http://ssrn.com/abstract=868394 (accessed on 21 August 2007), 5, 25. 19 Chesterman, above n 2, 16. 20 Ibid. 21 Jones, above n 3, ch 2; Chesterman, ibid, 14–16; Petrow, above n 2, 45. 22 Eg the Poor Law Act 1536 (27 Hen 8, c 25), which punished unlicensed beggars; the Mortmain Act 1531, which was aimed at preventing bequests to the Church. 23 Chesterman, above n 2, 15. 24 In particular the Mortmain Act 1531, the Chantries Act 1545 and the Chantries Act 1547. This last act, which was passed by Edward VI, dissolved chantries and directed that all property held for superstitious purposes would revert to the Crown.

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The dissolution of the monasteries, however, meant that the Church could no longer provide for the poor. The poor became a problem for the Tudor administration and Parliament.25

T H E STAT U T E O F E L I Z A B E T H

The role of the Church in charitable work continued to decline, and it was increasingly recognised during Elizabeth I’s reign that poverty was a national problem.26 Around this time, there were also a series of events that exacerbated the situation. These included several disastrous harvests, the Spanish war, inflation, a domestic and international economic depression and the plague, which killed 14% of the population of London.27 These events led to widespread poverty, unemployment and vagrancy. The Elizabethan state became more interventionist, establishing workhouses to discipline and make productive the poor who could work and also requiring local parishes to provide for their own poor.28 Due to its own lack of funds, the state then turned to the encouragement of private philanthropy to assist.29 It did this through three major avenues. First, the Court of Chancery was reinforced as the dominant legal mechanism for enforcing charitable purposes. Secondly, the privileges that the law provided to charitable institutions, including remedying many technical defects and ensuring that they did not fail due to uncertainty, were confirmed and enhanced. Thirdly, the Statute of Charitable Uses Act 1601,30 commonly referred to as the Statute of Elizabeth, was enacted.31 The aim of this statute was to appoint the bishop of a diocese and the local gentry as commissioners to supervise the administration of most charities and to prevent any misuse of charitable property.32 These commissioners were empowered to inquire into the ‘abuses breaches of trustes negligences mysimploimentes, not impoloyinge concealinge defraudinge misconvertinge or misgovernmente’ 25 Bromley, above n 14, 195; J Ely, ‘Pemsel Revisited: The Legal Definition of Charitable: A Case Study of a Moveable Feast’ (2006) Australia and New Zealand Law and History E-Journal, available at http://www.anzlhsejournal.auckland.ac.nz/pdfs_2006/Paper_9_Ely.pdf (accessed on 2 October 2007), 4–5; Fishman, above n 18, 11–12. 26 Jordan, above n 2, chs 4–6; Chesterman, above n 2, 16–24. 27 M McGregor-Lowndes, ‘Diversions of Charitable Assets: Crimes and Punishments in Australia’, paper presented at the National Centre on Philanthropy and the Law: Reforming the Charitable Contribution Deduction 16th Annual Conference, New York, 2004, 4–5; Fishman, above n 18, 3; Bromley, above n 14, 199; A Brundage, The English Poor Laws, 1700–1930 (Basingstoke, Palgrave, 2002), 9. 28 Local parishes were required to provide for assistance for their own poor through the Poor Law Act 1601; for a more detailed discussion see Bromley, above n 14, 198–200. 29 Chesterman, above n 2, 19. 30 43 Eliz 1, c 4. 31 Chesterman, above n 2, 19. 32 Jones, above n 3, ch 3; Chesterman, ibid, 16, 24–28.

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of any property given for such ‘charitable and godlie uses’ as were listed in the statute’s Preamble.33 It is this statute that is important for the balance of this discussion. The most important feature of this piece of legislation is that it set out a Preamble that comprehensively listed for the first time a range of charitable purposes. This list has been confirmed in subsequent case law as the foundation of the modern legal definition of ‘charitable purpose’.34 The Preamble sets out the following charitable purposes: —relief of the aged, impotent and poor; —maintenance of sick and maimed soldiers and mariners; —schools and scholars in universities; —repair of bridges, ports, havens, causeways, churches, sea-banks and highways; —education and preferment of orphans; —maintenance of prisons; —marriages of poor maids; —aid and help of young tradesmen and handicraftsmen; —aid and help of persons decayed; —the relief or redemption of prisoners or captives; —the aid or ease of any poor inhabitants concerning payment of fifteens; —setting out of soldiers; and —other taxes.35 According to WK Jordan, the statute did not actually create a concept of charitable purposes but rather codified ‘a body of law badly wanting classical statement’.36 The leading contemporary source of the time considered that the Preamble was an elaborate listing of uses, which would relieve poverty and reduce the local parish’s responsibilities under the poor law. It was a list of charities the state wished to encourage.37 In effect, the Preamble did not really set out a list of areas that were considered altruistically charitable; rather, it expressed the state’s agenda for charitable giving.38The objects enumerated reflect Elizabethan political, economic and social programmes, with the government hoping that the wealthy would be encouraged to implement and fund programmes in these areas.39

Chesterman, ibid, 24; Jones, ibid, 225. Chesterman, ibid, 25. Jones, above n 3, 224. Jordan, above n 2, 112. F Moore, ‘Reading on the Statute of Charitable Uses’ in G Duke, The Law of Charitable Uses (London, W Clarke & Sons, 1805). 38 Bromley, above n 14, 178. 39 Fishman, above n 18, 30; Moffat, above n 16, 884. 33 34 35 36 37

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Although at the time it was argued that the purposes of the Preamble were mainly concerned with the relief of poverty, and this is consistent with its historical and legislative context, the actual wording left it open to a broader range of philanthropic activities.40 Various phrases in the Preamble, particularly those referring to young tradesmen and craftsmen and educational purposes, could clearly be interpreted as being unrelated to poverty.41 It is also important to note that the purposes listed are almost all secular, with religion only appearing in the very practical reference to the ‘repair of . . . churches’.

T H E PR E A M B L E A S A ME T H O D F O R T H E D E L I VE RY O F S O C I A L S E RVI C E S

The Statute of Elizabeth was closely related to, and enacted just after the Poor Law Act of 1601.42 This latter statute introduced a form of taxation and required local parishes to provide relief for their own poor. In fact, both statutes were part of a series of legislative enactments aimed at poor relief. Other legislation enacted around this time dealt with: preventing the decay of townships;43 the punishment of ‘rogues, vagabonds, and sturdy beggars’;44 the erection of hospitals and work houses;45 and measures for the relief of the indigent.46 The Tudor state’s industrial and social policy was aimed at ensuring that those who could work did and that relief was provided to the ‘deserving poor’.47 The state was concerned with maintaining order and preserving the prosperity of all classes by keeping down the cost of food, keeping employment constant, regulating employer–employee relations and monitoring trade conditions.48 Relieving the poor was inextricably linked with maintaining public order in Elizabethan England, as WK Jordan suggests: Even the great Elizabethan poor laws, opening up as they did a new and vastly important additional area of responsibility, sprang at least from the intense Tudor preoccupation with the maintenance of order and were set upon sound bases of responsibility only after the Tudor society had struggled valiantly for

40 41 42 43 44 45 46 47 48

Chesterman, above n 2, 26–27. Ibid, 27. 43 Eliz 1, c 2, An Act for the Relief of the Poor. 39 Eliz 1, c 1. Ibid, c 4. Ibid, c 5. 39 Eliz 1, c 3. Chesterman, above n 2, 19; Bromley, above n 14, 179–180; Fishman, above n 18, 17. Fishman, ibid, 19; Leonard, above n 10, ch 2.

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three generations to deny that there was even a problem with which government could or need be concerned.49

The 1601 Poor Law consolidated and replaced all the earlier laws relating to the relief of poverty. It maintained the rationale of punishing what were referred to as the ‘unworthy poor’ (those who could work but refused) and making the poor the responsibility of the local community rather than the central government.50 The early poor laws created a system of poor relief, but this was based on the assumption that sufficient funds would be raised. Taxation for poor relief, however, was resisted on the basis that it is was not the state’s duty to relieve the poor.51As a consequence, primary relief of poverty was still with the private sector.52 The legal stability and accountability of charitable gifts became a major concern as the government hoped to use private philanthropy for the relief of the poor rather than relying on unpopular taxation.53 The more money raised privately, the less that would have to be raised through taxes. The Statute of Elizabeth was therefore enacted to create an effective system of oversight of charities.54 As part of this system, the Preamble expressed the state’s agenda for charitable giving.55 A consideration of the objects listed in the Preamble establishes that they reflect the Elizabethan political, economic and social programmes rather than any general philanthropic purposes.56 The Preamble defined a broad range of charitable responsibilities and created a public–private partnership between the state and wealthy philanthropists to deal with the most pressing issues of that time, vagrancy and poverty.57 It became part of a legislative package that resulted in the charitable sector being the means of its social service delivery, by punishing the unworthy poor and providing for the poor it considered worthy, such as the aged, impotent and injured soldiers and mariners, as well as supporting other areas that were considered of public benefit, such as assistance to schools and scholars in universities, repair of bridges and churches, and education of orphans. The wealthy were exhorted through the Preamble to support the areas that the state approved of and, by doing this, their charitable bequests were protected by the regulatory system that the statute established.58 Not only did the state Jordan, above n 2, 46. Bromley, above n 14, 200. P Slack, ‘Poverty and Social Regulation’ in C Haigh (ed), The Reign of Elizabeth I (London, Palgrave Macmillan, 1984), 233. 52 C Hill, The Century of Revolution 1603–1714 (London, Routledge, 1982), 20. 53 Fishman, above n 18, 24. 54 Jones above n 3, ch 3; Chesterman above n 2, 16, 24–28. 55 Bromley, above n 14, 180. 56 Ibid, 180, 182–92. 57 Fishman, above n 18, 7–8. 58 Report of the Committee on the Law and Practice Relating to Charitable Trusts, Lord Nathan (1952), 18 [74]. 49 50 51

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determine which causes were worthy of support and protection, it also ensured that it was not financially responsible for the assistance.59 The Poor Law Act of 1601 established that the local parish was responsible for the poor and the Preamble encouraged private philanthropy to assume much of the burden.60

T H E RO L E O F T H E P R E A M B L E I N T H E S E VE N T E E N T H A N D EIGHTEENTH CENTURIES

Between the enactment of the Statute of Elizabeth and the Mortmain and Charitable Uses Act 1736 (the Mortmain Act) there was little judicial discussion of whether or not a particular object was charitable.61 If a judge was called on to categorise an object as charitable there was general agreement that, if it fell within the Preamble, it was charitable. An early example is a trust for the repair of a church, which was considered charitable as it fell within the specific wording of the Preamble.62 This attitude continued through the remainder of the eighteenth century. In 1750, for example, a trust for the establishment of learning was stated to be charitable as it was within the Preamble.63 However, there were also charitable uses that were deemed to be within the equity of the statute but outside its literal wording.64 By the end of the eighteenth century the English courts had consistently accepted that the purposes listed in the 1601 Preamble were all examples of charitable objects. They did not, however, consider that from a legal perspective this list was exhaustive.65 If a trust purpose fell within the Preamble, then it was considered charitable;66 however, if it was not specifically within the Preamble it could still be considered charitable if it was within its spirit. Sir Lloyd Kenyon MR considered that, though ‘in statute Bromley, above n 14, 180. Bromley, ibid, 178, 180; Fishman, above n 18, 24, 27; A Dunn, ‘Charity Law—A Political Scandal?’ (1996) 2 Web Journal of Current Legal Issues, available at http://webjcli.ncl.ac.uk/ 1996/issue2/dunn2.html (accessed on 16 October 2007), 9. 61 Jones, above n 3, 58, 120. 62 Attorney-General v Ruper (1722) 2 P Wms 125, 125, 126 (Sir Joseph Jekyll). 63 Attorney-General v Whorwood (1750) 1 Ves Sen 534, 537 (Lord Chancellor Hardwicke). 64 Eg Turner v Ogden (1787) 1 Cox 316, 317 (Sir Lloyd Kenyon MR), where the court held that a legacy payable out of land for preaching a sermon on Ascension Day, keeping the church bells in repair, playing certain psalms and paying choristers was charitable; Townley v Bedwell (1801) 6 Ves 194, a testamentary bequest to establish botanical gardens which was held to be charitable. 65 Jones, above n 3, 121–22; H Picarda, ‘The Preamble to the Statute of Charitable Uses 1601: Peter Pan or Alice in Wonderland?’ (2002) 8 Third Sector Review: Charity Law in the Pacific Rim 229, 230. 66 Eg Attorney-General v Ruper, above n 62, 126, in which the court upheld as charitable a purpose for the repair of a church on the basis that it was within the Preamble to the Statute of Elizabeth. 59 60

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43 Eliz there is a great enumeration of charitable uses . . . the statute does not affect to mention all’.67 A trust could also be determined as charitable where it was of a public nature or for the advancement of religion, other than the repair of church buildings.68 For example, in 1767 Lord Camden described a charitable gift as ‘a gift to a general public use, which extends to the poor as well as the rich [of which there are] many instances in the statute of 43 Eliz carrying this idea, as for building bridges’.69

D E V E L O P M E N T S I N T H E AT T I T U D E O F T H E JU D I C I A RY TO C H A R I TA B L E B E QU E S T S

The Influence of the Mortmain Act on the Definition of Charity The sixteenth century saw the introduction of legislation preventing the disposition of land to religious and charitable organisations through the enactment of the Mortmain Act 153170 and the Chantries Acts of 154571 and 1547.72 This was due to a range of factors, including the Church’s inability to deal with the growing rate of poverty experienced by working people, the misapplication by the Church of charitable funds and the desire by the Crown to increase its treasury.73 Subsequently, the legislature of the late seventeenth and early eighteenth centuries became responsive to the needs of large landowners who were resisting the claims of poor relief and social welfare.74 Again social factors were at play, in particular the significant change in the attitude of the ruling classes towards the poor, to whom they had begun to adopt a fairly repressive approach.75 Uprisings by the poor were no longer considered a threat and so close regulation of their situation was not considered necessary.76 There was generally great hostility to dispositions of land to charities as it was felt that land should not be ‘taken out of commerce’77and that: 67 Turner v Ogden, above n 64, where the court held that a legacy payable out of land for preaching a sermon on Ascension Day, keeping the church bells in repair, playing certain psalms and paying choristers was charitable. 68 Chesterman, above n 2, 54. 69 Jones v Williams (1767) Amb 651, 652. 70 23 Hen VIII, c 10. 71 37 Hen VIII, c 4. The Chantries Act was officially called the Dissolution of Colleges Act. 72 1 Edw VI, c 14. 73 Petrow, above n 2, 45. 74 Jones, above n 3, 106; Chesterman, above n 2, 36. 75 Chesterman, ibid, 32–33. 76 Ibid, 32. 77 Ibid, 36.

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by the specious pretence of charity, the solicitations of those who are interested in charitable foundations, and the pride and vanity of the donors, it is to me highly probable, that too great a part of the lands in this kingdom may soon come to be in Mortmain, to the prejudice of the nation in general, and to the ruin or unjust disappointment of many a man’s poor relations.78

It was in this context that Parliament enacted the Mortmain Act.79 This legislation was enacted to settle disputes between charities and private citizens over the validity of supposed dispositions concerning land. It prescribed that land or money used to purchase land should not be devised ‘in trust, or for the benefit of any charitable use whatsoever’ unless executed by a deed before ‘two credible witnesses’ at least one year before the donor’s death and enrolled in Chancery within six months of its execution.80 These precautions were particularly aimed at fears that the clergy would terrorise the gentry into making death-bed devises to charity to the ruin of their heirs.81 A landed would-be philanthropist could no longer wait until his imminent decease before he passed his land to charity, nor could the clergy or any other spokesman for charity exercise ‘undue influence’ over him so as to extract a gift of real estate at this late stage.82 At the same time there developed judicial hostility to charitable bequests which were at the expense of the deceased’s family.83 In 1721 Lord Harcourt remarked that he liked ‘charity well’ but he would ‘not steal leather to make poor men shoes’.84 Subsequently Lord Nothingham commented: It is true, and I am sorry for it, that there are old precedents in this court, where, by a perverse and mistaken construction of the statute of Elizabeth, this Court enabled persons to give to charities, who had no power to do so by [common] law; and it is as true that these precedents not only injured private families, but became a public nuisance . . .85

The terms of the Mortmain Act enabled the judiciary to protect families’ interests in land by deciding that a testator’s bequest was charitable.86 The result was that the bequest was avoided and the property was inherited by the heir or next-of-kin.87 In Townley v Bedwell88 a gift of a mixed fund of real and personal property was made for the purpose of establishing a perpetual botanical garden. The gift was avoided on the basis that it was 78 79 80 81 82 83 84 85 86 87 88

W Cobbett, The Parliamentary History of England (London, TC Hansard, 1811) 1144–45. 9 Geo 11, c 36. Petrow, above n 2, 48. For the full text see Jones, above n 3, Appendix J 257. Jones, above n 3, 109. Chesterman, above n 2, 37. Jones, above n 3, 106; Chesterman, ibid, 55. Attorney-General v Sutton (1721) 1 P Wms 754, 765–66. Attorney-General v Bradley (1760) 1 Eden 482, 487. Jones, above n 3, 128; Ely, above n 25, 7–8. See Eg Townley v Bedwell (1801) 6 Ves 194. (1801) 6 Ves 194.

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for a charitable purpose. Other examples include Turner v Ogden,89 where the court held that a legacy payable out of land for preaching a sermon on Ascension Day, keeping the church bells in repair, playing certain psalms and paying choristers was charitable and therefore could be struck down; and Jones v Williams,90 where a bequest of £1,000 payable from the sale of land for the purpose of bringing spring water to the town of Chepstow for the perpetual use of its inhabitants was charitable and consequently void. In fact, there is no reported case of a gift avoiding the Mortmain Act on the basis that its object was not charitable.91 It can be seen that, where land was in issue, the Mortmain Act exerted an influence on the judiciary contrary to the Preamble to the Statute of Elizabeth. A Chancery judge who wished to protect the interests of heirs was encouraged in cases potentially covered by the Act to widen the concept of ‘charitable’ if by doing so he could succeed in bringing the gift within the Act and therefore declaring it void.92 On the other hand, where the gift was of personal property, it was in the family’s or heirs’ best interests that the term ‘charitable’ was given a narrow meaning, so that testamentary gifts would fall outside this definition and therefore ultimately fail for uncertainty.93 In both cases, the aim was for the charity to miss out, but the routes by which this was achieved were very different. As land was still the main source of wealth and the value of any personalty that was bequested relatively minor, the judiciary were strongly motivated to expand the classes of charitable purpose.94 During the nineteenth century the motivation of the judiciary to broaden the concept of charitable in order to bring a bequest within the Mortmain Act can be seen. For example, in Trustees of the British Museum v White95 the court held invalid a gift of land to the British Museum on the basis that ‘every gift for a public purpose, whether local or general, is within the [Mortmain Act], although not a charitable use within the common and narrow sense of these words’.96 As WRA Boyle stated, ‘the limits assigned to the statute of Elizabeth are sufficiently entensive to take in almost every act, purpose, or object which can be considered as having any legitimate connection with charity’.97 In cases where the bequest was of personal property, the family’s interests could be protected by giving ‘charitable’ a narrow meaning which (1787) 1 Cox 316. (1767) Amb 651. Jones, above n 3, 128. Ibid, ch 9; Chesterman, above n 2, 55–6; Ely, above n 25, 7–8. Jones, ibid, 108. Ibid. (1826) 2 Sim & St 594. Ibid, 596 (Leach MR). WRA Boyle, A Practical Treatise on the Law of Charities (London, Saunders and Benning, 1857) 60. 89 90 91 92 93 94 95 96 97

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resulted in the trust falling outside this narrow charitable concept. Once the trust was held not to be charitable, the bequest could then be held invalid under general trust law on the grounds of uncertainty and revert to the next-of-kin.98 The most significant example of this line of reasoning can be found in Morice v Bishop of Durham.99 In this case the testatrix had left her residual personal property on trust for her executor, the Bishop of Durham, ‘to such objects of benevolence and liberality as [he], in his own discretion, should most approve of’.100 The family objected on the basis that the trust was not charitable due to uncertainty, and that it was also invalid under trust law because it lacked a human beneficiary to enforce it. The judge at first instance agreed that the trust was not charitable. In coming to his conclusion, he stated that: ‘Those purposes are considered charitable, which that Statute [the Statute of Elizabeth] enumerates, or which by analogies are deemed within its spirit and intendment; and to some such purpose every bequest to charity generally shall be applied’.101 The judge therefore considered that the Preamble (and any purpose within its spirit) was the defining limit of ‘charitable purpose’. Lord Eldon, on appeal, confirmed the decision at first instance by specifically declaring that: it is the duty of such trustees, on the one hand, and of the Crown, upon the other, to apply the money to charity, in the sense, which the determinations have affixed to that word in this Court: viz either such charitable purposes as are expressed in the Statute [the Statute of Elizabeth], or to purposes having analogy to those. I believe, the expression ‘charitable purposes’, as used in this Court, has been applied to many Acts described in that Statute, and analogous to those, not because they can with propriety be called charitable, but as that denomination is by the Statute given to all the purposes described.102

It should be noted that, in the course of the argument, counsel for the family had argued that charitable purposes should be classified into four categories: the relief of the poor, advancement of learning, advancement of religion and the advancement of objects of general public utility.103 This description was subsequently adopted by the English court and has formed the foundation of English and other common law decisions ever since.104

98 Jones, above n 3, 108; Chesterman, above n 2, 55; Moffat, above n 16, 99 (1804) 9 Ves 399, (1805) 10 Ves 522. 100 (1804) 9 Ves 399, 399. 101 Ibid, 405 (Grant VC). 102 (1805) 10 Ves 522, 541. 103 Ibid, 532 (Mr Romilly). 104 Adopted by Lord Macnaghten in Commissioners for Special Purposes

Pemsel [1891] AC 531, 583.

887.

of Income Tax v

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The decision of Morice v Bishop of Durham ensured that the Preamble became more prominent and authoritative in charity cases. It gradually led to the view that the Preamble was the source of the definition of charity from a legal perspective, and this is shown by subsequent cases. For example, in James v Allen105 a bequest to such ‘benevolent’ purposes ‘as the trustees in their integrity and discretion may unanimously agree on’ failed for uncertainty, with the court stating that a charitable purpose should be either one of the purposes set out in the Statute of Elizabeth or analogous to such purposes.106 In Vezey v Jamson107 a trust for ‘charitable or public purposes’ failed on the basis that it was too general and undefined, and the court cited Morice v Bishop of Durham as authority for this.108

The Impact of Income Tax on the Interpretation of ‘Charity’ and ‘Charitable’ In 1799 the British government imposed its first income tax. The legislation was introduced by William Pitt the Younger in his budget of December 1798 to pay for weapons and equipment in preparation for the Napoleonic wars. Pitt’s new graduated income tax began at a levy of two pence in the pound (0.8333%) on incomes over £60 and increased up to a maximum of two shillings (10%) on incomes of over £200. Within this statute was an exemption from income tax of any ‘corporation, fraternity or society of persons established for charitable purposes only’.109 This exemption appears to have its origins in the 1671 and 1688 land tax exemptions for hospitals and charitable institutions, which were then continued in the income tax context.110 In 1816 income tax temporarily ceased; however, it was reintroduced in 1842 with the same exemption.111 This exemption from income tax was not popular with everyone, and William Gladstone, as Chancellor of the Exchequer, argued that it should be limited to the relief of hospitals, colleges and almshouses in his budget statement in 1863.112 He was, (1817) 3 Mer 17. Ibid, 19. (1822) 1 Sim & Stu 69. Ibid, 71 (Sir John Leach VC) Income Tax Act 1799, s 5. JF Avery Jones, ‘The Special Commissioners from Trafalgar to Waterloo’ in J Tiley (ed), Studies in the History of Tax Law (Oxford, Hart Publishing, 2007) vol 2, 3, 14–16. 111 Income Tax Act 1842, s 61, No VI, sch A; s 88, sch C. 112 (1863) 3 Hansard 170, 200–47; WE Gladstone, The Financial Statements of 1853, 1860–1863. To which are added, A Speech on Tax-Bills, 1861, and on Charities, 1863 (1853, 1860–63), 370, 426–61. 105 106 107 108 109 110

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however, defeated and the exemption for all charities remained.113 In his argument, Gladstone explained that the original exemption had been warranted at a time when the state made no provision for education or for the poor and that the situation in 1863 was very different, and therefore the exemption was no longer needed.114 The insertion of this exemption gave rise to the issue of the meaning of ‘charitable’ in a fiscal context. There was, however, no judicial consideration of this question for many years due to the fact that until 1874 there was no avenue for an appeal from the Income Tax Commissioners to the courts.115 The issue first came to the courts in 1888 in a Scottish case called Baird’s Trustees v Lord Advocate,116 in which the court held that ‘charitable’ required some element of relief for the poor or deprived. This view was overturned some three years later. The watershed decision on the meaning of ‘charitable’ in an income tax context is Commissioners for Special Purposes of Income Tax v Pemsel.117 This case dealt with a trust of land in England which provided that half of the rents and profits from the land were to go towards the maintenance, support and advancement of missionary establishments of the Protestant Episcopal Church (commonly known as the United Brethren) amongst heathen nations. Until 1886, the Income Tax Commissioners had granted tax exemptions to the trustees in respect of this trust, under an exemption provision in the Income Tax Act 1842 applying to the rents and profits of lands vested in trustees for ‘charitable purposes’ as long as they were applied for charitable purposes. In 1886 the Commissioners, under the influence of Gladstone’s stricter administration of charities,118 withdrew the exemption. The trustees were successful in an appeal to the Court of Appeal and the appeal of the Commissioners to the House of Lords was dismissed by a majority of 4:2. The House of Lords decision held that, for the purposes of exemption from income tax, the definition of ‘charitable purposes’ followed the general law definition which derived from the Preamble to the Statute of Elizabeth. Lord Macnaghten delivered the leading judgment, with which Lords Watson and Morris concurred. He stated: and those Courts, as they were bound to do, construed the words ‘charitable uses’ in the sense recognised in the Court of Chancery, and in the Statute of 113 J Warburton, ‘Charity—One Definition for All Tax Purposes in the New Millennium?’ [2000] British Tax Review 144, 144. 114 Gladstone, above n 112, 368. 115 Chesterman, above n 2, 59. 116 (1888) 15 Sess Cas (4th Series) 688. 117 [1891] AC 531. 118 M McGregor-Lowndes, ‘The Australian Definition of Charity’, paper presented at the National Centre on Philanthropy and the Law, Defining Charity, 14th Annual Conference, New York, 24–25 October 2002, 8.

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Elizabeth, as their proper meaning. I have dwelt for a moment on this point, because it seems to me that there is a disposition to treat the technical meaning of the term ‘charity’ rather as the idiom of a particular Court than as the language of the law of England. And yet of all words in the English language bearing a popular as well as a legal signification I am not sure that there is one which more unmistakeably has a technical meaning in the strictest sense of the term, that is a meaning clear and distinct, peculiar to the law as understood and administered in this country, and not depending upon or coterminous with the popular or vulgar use of the word.119

Lord Macnaghten decided that the technical legal meaning of the word ‘charitable’ was appropriate. He argued that the aim of the Statute of Elizabeth was to provide new machinery for the reformation of abuses in regard to charities and that the objects stated in the Preamble were only examples of charitable purposes but which had become, by the practice of the Court, an index or chart.120 He then traced the history of ‘charity’ from the Statute of Mortmain in 1736 and the fact that the courts had based their decisions under this enactment on the Preamble and its spirit and intendment. His historical view of the legal definition of ‘charitable’ was, on this basis, limited to the common law precedents established by the courts since 1736.121 Lord Herschell agreed that the trust in question was charitable, but with slightly different reasoning. He stated that ‘charities’ and ‘charitable purpose’ should not be limited to the relief of poverty122 and gave examples of many charitable objects, such as hospitals, an institution for rescuing shipwrecked mariners and an institution for the protection of young children. In each case, he argued, it is not their poverty which requires relief but their helplessness. 123 Although concluding that the popular meaning of charitable should be applied, he defined this very broadly as covering ‘. . . the relief of any form of necessity, destitution, or helplessness which excites the compassion or sympathy of men, and so appeals to their benevolence for relief’.124 Furthermore, Lord Herschell extended such relief to spiritual support when he said: Nor am I prepared to say that the relief of what is often termed spiritual destitution or need is excluded from this conception of charity. On the contrary, no insignificant portion of the community consider what are termed spiritual necessities as not less imperatively calling for relief, and regard the relief of them not less as a charitable purpose than the ministering to physical needs; and I do not believe that the application of the word ‘charity’ to the former of these purposes 119 120 121 122 123 124

[1891] AC 531, 581–82. Ibid, 581. Ibid, 581, 582. Ibid, 571. Ibid, 571–72. Ibid, 572.

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is confined to those who entertain the view which I have just indicated. It is, I think, constantly and generally used in the same sense quite irrespective of any belief or disbelief in the advantage or expediency of the expenditure of money on these objects.125

The trust was therefore held to be charitable, even though it was not for the relief of poverty or destitution as the Special Commissioners had argued was a requirement. The decision confirmed that, as long as the purpose of the charity fell within the Preamble or its ‘spirit’ and a sufficiently large group of the public stood to benefit, it was charitable. Lord Macnaghten substantially restated, although without acknowledging its source, the classification which Romilly had argued for in Morice v Bishop of Durham126 when he said: ‘Charity’ in its legal sense, comprises four principal divisions: trusts for the relief of poverty; trusts for the advancement of education; trusts for the advancement of religion; and trusts for other purposes beneficial to the community, not falling under any of the preceding heads.127

As far as the taxation of charities was concerned, the House of Lords made little reference to this. Lord Macnaghten asserted that the policy of taxing charities had nothing to do with him, yet indicated the he was reluctant to permit the administrators of the Inland Revenue to upset established practice. I cannot help reminding your Lordships, in conclusion, that the Income Tax Act is not a statute which was passed once for all. It has expired, and been revived, and re-enacted over and over again; every revival and re-enactment is a new Act. It is impossible to suppose that on every occasion the Legislature can have been ignorant of the manner in which the tax was being administered by a department of the state under the guidance of their legal advisers, especially when the practice was fully laid before Parliament in the correspondence to which I have referred (‘Charities,’ 1865).128

In conclusion, he considered: With the policy of taxing charities I have nothing to do. It may be right, or it may be wrong; but speaking for myself, I am not sorry to be compelled to give my voice for the respondent. To my mind it is rather startling to find the established practice of so many years suddenly set aside by an administrative department of their own motion, and after something like an assurance given to Parliament that no change would be made within the interposition of the Legislature.129 125 126 127 128 129

Ibid. (1805) 10 Ves 522, 532. [1891] AC 531, 583. Ibid, 590–91. Ibid, 591.

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The leading judgment of Lord Macnaghten in Pemsel can therefore be interpreted in its historical and political context.

The Modern Common Law Definition of ‘Charity’ To fall within the legal definition of charitable under the common law, the purpose of the entity must be either stated in the Preamble or within the spirit and intendment of the Preamble to the Statute of Elizabeth.130 Objects which are neither listed in the Preamble nor within its spirit and intendment are not charitable no matter how beneficial to the public.131 As Lords Simonds stated in 1949: From the beginning it was the practice of the Court to refer to the preamble of the Statute in order to determine whether or not a purpose was charitable. The objects there enumerated and all other objects which by analogy ‘are deemed within its spirit and intendment’ and no other objects are in law charitable.132

The purpose of the charity must also satisfy two aspects. First, is the purpose or object ‘beneficial’ in itself? Secondly (with the exception of trusts for the relief of poverty), is it of benefit to the community or a sufficient section of the community?133 In order to assist in determining whether a purpose is within the spirit of the Preamble, Lord MacNaghten suggested that the legal meaning of ‘charity’ could be classified into the following four separate divisions: —the relief of poverty; —the advancement of education; —the advancement of religion; or —for other purposes beneficial to the community.134 The classification of charitable purpose into these four areas was seen as a milestone and has been consistently used in judicial considerations ever since.135 How these categories have been applied by the courts will now be discussed. 130 Morice v Bishop of Durham (1804) 9 Ves 399, 405 (Sir William Grant MR), (1805) 10 Ves 522; Williams Trustees v Inland Revenue Commissioners [1947] AC 447; Scottish Burial Reform and Cremation Society v Glasgow Corporation [1968] AC 138; Royal National Agricultural and Industrial Association v Chester (1974) 3 ALR 486. 131 H Picarda, The Law and Practice Relating to Charities, 3rd edn (London, Butterworths, 1999) 10. 132 Gilmour v Coats [1949] AC 426, 443. 133 Above n 131, 20. 134 Commissioners for Special Purposes of Income Tax v Pemsel [1891] AC 531, 583. 135 Eg Salvation Army (Victoria) Property Trust v Shire of Fern Tree Gully (1952) 85 CLR 159, 173; Ashfield Municipal Council v Joyce (1976) 10 ALR 193; Commissioner of Taxation v The Triton Foundation (2005) 226 ALR 293, 299 (Kenny J).

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The Relief of Poverty The charitable class of relief of poverty clearly covers relief of absolute destitution, although it is not confined to this.136 The term is broader and also includes assistance to the aged and impotent and those who are physically and mentally weak injured or temporarily or permanently incapacitated.137 Poverty is regarded as a relative term and does not need to be abject poverty or destitution.138 For example, in Re Niyazi’s Will Trusts a gift to establish a working men’s hostel was held to be for the relief of poverty.139 In Australia, those lacking the resources to obtain what is necessary for a modest standard of living in the Australian community may be accepted as suffering poverty.140 To relieve poverty implies that the people in question have a need attributable to their condition which requires alleviating, and which those people cannot alleviate or would have difficulty alleviating by themselves.141 It does not matter whether the relief of poverty is through direct means, such as donating money or providing goods and services, or through indirect means, such as donations to entities that assist the poor or that provide accommodation.142 Advancement of Education Education for the purposes of the definition of charity has been given a wide meaning to include systematic instruction and training in knowledge beneficial to human kind.143 The activities of schools, universities, colleges and institutes will usually be acceptable.144 The definition also includes public art galleries and museums,145 student unions146 and learned societies.147 136 137 138

Re Gillespie (deceased) [1965] VR 402, 406. Hilder v Church of England Deaconess’ Institution Sydney Ltd [1973] 1 NSWLR 506, 511. Re Gillespie (deceased), above n 136, 406; Re Coulthurst [1951] Ch 661, 666 (Evershed

MR). [1978] 1 WLR 910. Ballarat Trustees Executors and Agency Company Limited v Federal Commissioner of Taxation (1950) 80 CLR 350. 141 Joseph Rowntree Memorial Trust Housing Association Ltd v Attorney-General [1983] 1 All ER 288, 295. 142 Re White’s Will Trusts [1951] 1 All ER 528. 143 Inland Revenue Commissioner v McMullen [1981] AC 1; also see J Brunyate, ‘The Legal Definition of Charity’ (1945) 61 The Law Quarterly Review 268, 272–73; Moffat, above n 16, 939. 144 Re Compton; Powell v Compton [1945] Ch 123, 136 (Lord Greene MR); Oppenheim v Tobacco Securities Trust Co Ltd [1951] AC 297, 306 (Lord Simonds); McMullen, above n 143. 145 In Re Allsop (deceased ); Gell v Carver (1884) 1 TLR 4; JC Abbott, J Cowan and F Torrance v J Fraser (1874) LR 6 PC 96; Re Holbourne [1885] 53 LT 212; British Museum v White [1826] 2 Sim & St 594. 146 London Hospital Medical College v Inland Revenue Commissioner (1976) 1 WLR 613. 147 Eg in Beaumont v Oliveira (1868–9) 4 LR Ch App 309 a geographical society was held to be charitable under this category; in Re Verrall; National Trust for Places of Historic Interest or 139 140

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Education is not limited to the general education of the young and need not be academic. Vocational training has been accepted as valid for the advancement of education. Examples include a farming training school,148 training in aviation,149 technical education,150 training in the construction industry,151 commercial education,152 economic and sanitary science,153 the arts of social intercourse,154 and the study of law and practical legal training.155 Kindergartens are also accepted as being for the advancement of education.156 Education for cultural purposes also falls within this heading. This includes music, dancing, drama and the fine arts.157 Organisations aimed at the education of the young in both mind and body have been considered for the advancement of education. Examples include a police citizen’s boys club158 and the boy scouts.159 The support of educational activities of charitable schools and colleges through, for example, providing scholarships160 and professorships161 is also included. A purpose that might not by itself be considered for the advancement of education and therefore charitable will be when incidental or integrated with a school or university’s educational purposes and activities. Examples include school excursions,162 university sporting programmes163 and facilities164, and a student loan fund.165 It is not enough, however, that the National Beauty v Attorney-General [1914–15] All ER Rep 546 a national trust for places of historic interest and national beauty was also held to be charitable. Re Tyrie (deceased) [1970] VR 264. Re Lambert (deceased) [1967] SASR 19. The Royal North Shore Hospital of Sydney v Attorney-General for New South Wales (1938) 60 CLR 396. 151 Barclay v Treasurer of Queensland (1995) 31 ATR 123. 152 Re Koettgen (deceased); Westminster Bank Ltd v Family Welfare Association Trustees Ltd [1954] Ch 252. 153 Re Berridge; Berridge v Tune (1890) 90 LT 55. 154 Re Shaw’s Will Trusts; National Provincial Bank Ltd v National City Bank Ltd [1952] Ch 163. 155 College of Law (Properties) Pty Ltd v Willoughby Municipal Council (1978) 38 LGRA 81; Smith v Kerr [1902] 1 Ch 774. 156 Hixon v Campbell (1924) 24 SR (NSW) 436; Kindergarten Union of NSW Incorporated v Waverley Municipal Council (1960) 5 LGRA 365. 157 Re Shakespeare Memorial Trust [1923] 2 Ch 398; Royal Choral Society v Inland Revenue Commissioners [1943] 2 All ER 101. 158 Greater Wollongong City Council v Federation of New South Wales Police Citizens Boys’ Club (1957) 2 LGRA 54. 159 The Boy Scouts Association, NSW Branch v Sydney City Council (1959) 4 LGRA 260; Re Webber (deceased); Barclays Bank Ltd v Webber [1954] 3 All ER 712. 160 Re Weaver; Trumble v Animal Welfare League of Victoria [1963] VR 257; Wilson v Toronto General Trusts Corporation [1954] 3 DLR 136. 161 Dorothea Yates v University College, London and C.T.D’Eyncourt (1874–5) 7 AC 438. 162 Re Mellody; Brandwood v Haden [1916–17] All ER Rep 324. 163 Inland Revenue Commissioners v McMullen [1980] 1 All ER 884; Kearins v Kearins (1957) SR (NSW) 286. 164 Re Mariette; Mariette v Aldenham school Governing Body [1914–15] All ER Rep 794. 165 Guaranty Trust Company of Canada v The Minister of National Revenue [1967] SCR 133. 148 149 150

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purposes are somehow related to the activities of the school or university; they must be integral to the educational purposes. An example of where such an association was not considered for educational purposes was a professional association of headmasters.166 Although many professional associations may operate educational activities, they are rarely exempt under this head because it is not the main object or activity of the whole organisation.167 Just increasing the sum of knowledge by research will not be charitable, as dissemination of the knowledge through teaching or publication is required.168 However, more recently it has been held that research in a useful subject of study will be charitable provided the results are to be disseminated, and ‘the court will be readily inclined to construe a trust for research as importing subsequent dissemination of the results thereof’.169 Frivolous subjects, such as the study of football or racing form or the public exhibition of junk, will generally not be regarded as educational.170 Political propaganda masquerading as education171 or cults or new age religions172 is not considered as being for the advancement of education. Charities for the Advancement of Religion For the purposes of charity law, ‘religion’, like ‘education’, is defined very broadly.173 Dal Pont explains that: The principal reason for the breadth of the definition of ‘religion’ is that it promotes religious liberty which is enshrined in the Australian Constitution . . . and it is moreover consistent with the law’s concern with protecting minorities. The law’s protection in this context is not directed to safe-guarding the tenet’s of each religion—it is accorded to preserve the dignity and freedom of persons to adhere to the religion of their choice.174

The charitable head for the advancement of religion requires there to be a body of persons whose beliefs and practices comprise: —a belief in and worship of a supernatural Being, Thing or Principle; and

166 R v The Special Commissioners of Income Tax; (Ex parte The Headmasters’ Conference); R v The Special Commissioners of Income Tax (Ex parte the Incorporated Association of Preparatory schools) (1925) 10 TC 73. 167 Royal College of Surgeons v National Bank Ltd [1952] AC 631; General Nursing Council for England and Wales v St Marylebone Borough Council [1959] AC 540; AAT Case 9723 (1994) 29 ATR 1102. 168 Taylor v Taylor (1910) 10 CLR 218. 169 McGovern v Attorney-General [1982] Ch 321, 352, Slade J. 170 Re Pinion (deceased); Westminster Bank Ltd v Pinion [1965] 1 Ch 85. 171 Bonar Law Memorial Trust Ltd v IRC (1933) 17 TC 508. 172 Cult Information Centre [1992] Ch Com Rep 1–3. 173 Dal Pont, above n 2,148. 174 Ibid, 149.

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—acceptance of canons of conduct which give effect to the belief, but which do not offend against the ordinary laws.175 This would include the major Christian denominations, such as the Roman Catholic, Anglican and Uniting churches, as well as Islam, Judaism and Buddhism. It also includes Jehovah Witnesses,176 the Free Daist Communion of Australia177and Scientology.178 Neither an atheist society nor freemasonry can be a charitable object under this heading, nor sects that are adverse to the very foundation of all religions and subversive of all morality.179 In Re Jones180 (the Freethinkers case) and Bowman v Secular Society Ltd,181 the organisations were not considered to have religious purposes because they worked against established religions or the idea of religion. Religion may be advanced in a number of ways, both direct and indirect. The building and repair of places of worship;182 promotion of worship183(eg provision of music, bell ringing, religious icons, a church choir);184 education, training and support of clergy;185 and spread of the religion (eg by books and missionary activities)186 are all considered to be advancing religion.

OT H E R PU R P O S E S B E N E F I C I A L TO T H E C O M M U N I T Y

Not all purposes which benefit the community are regarded as charitable. For a purpose to be charitable under this head, it must not only be of benefit to the public or a significant section of it, but also within the spirit and intendment of the Statute of Elizabeth.187 The process of reasoning by analogy to determine whether a purpose is within the spirit of the Statute of Elizabeth was described by Lord Reid in 1968 as: 175 Church of the New Faith v The Commissioner of Pay-roll Tax (Victoria) (1983) 154 CLR 120, 132, 137. 176 Appeal of Frank Gundy (1944) 61 WN (NSW) 102. 177 The Free Daist Communion of Australia Limited v Comptroller of Stamps (Vic) 88 ATC 2001. 178 Church of the New Faith, above n 175. 179 Thorton v Howe (1862) 31 Beav 14; Dal Pont, above n 2, 149. 180 [1907] SALR 1990 (Incorporated Body of Freethinkers of Australia). 181 [1917] AC 406. 182 Re Mitchner (deceased); Union Trustee Company of Australia v Attorney-General for the Commonwealth of Australia [1922] St R Qd 39. 183 Turner v Ogden (1787) 1 Cox 316. 184 Re Royce; Turner v Wormald [1940] 2 All ER 291. 185 Baptist Union of Ireland (Northern) Corporation Ltd v The Commissioners of Inland Revenue [1945] NILR 99. 186 Commissioners for Special Purposes of Income Tax v Pemsel [1891] AC 531. 187 Ibid, 583.

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The courts appear to have proceeded first by seeking some analogy between an object mentioned in the preamble and the object with regard to which they had to reach a decision. And then they appear to have gone further and to have been satisfied if they could find an analogy between an object already held to be charitable and the new object claimed to be charitable. And this gradual extension has proceeded so far that there are few modern reported cases where a bequest or donation was made or an institution was being carried on for a clearly specified object which was for the benefit of the public at large and not of individuals, and yet the object was held not to be within the spirit and intendment of the Statute of Elizabeth I.188

Specific purposes which have been held to fall within the head are: —assistance to visually impaired people,189 speech or hearing impaired people,190 the mentally ill,191 the underprivileged192 and orphans;193 —public works and services (eg the construction of public halls,194 bridges, community facilities and museums);195 —protection of lives and property (eg rescue organisations,196 fire brigades,197 protection of historic buildings); —preservation of public order (eg increasing police efficiency,198 increasing the efficiency of the armed forces199); —resettlement and rehabilitation (eg demobilised soldiers,200 refugees, disaster funds); 201 —care of youth (eg correctional youth homes);202 —the protection of the environment, both flora and fauna;203

188 Scottish Burial Reform and Cremation Society Ltd v Glasgow City Corporation [1968] AC 138, 146–147. 189 Re Inman (deceased) [1965] VR 238. 190 The President, Councillors and Ratepayers of the Shire of Nunawading v The Adult Deaf and Dumb Society of Victoria (1921) 29 CLR 98. 191 The Diocesan Trustees of Church of England in Western Australia v The Solicitor-General; The Home of Peace for the Dying and Incurable v The Solicitor-General (1909) 9 CLR 757. 192 Salvation Army (Victoria) Property Trust v Fern Tree Gully Corporation (1952) 85 CLR 159. 193 The Attorney General for New South Wales v The Perpetual Trustee Company Limited and others (1940) 63 CLR 209. 194 Monds v Stackhouse (1948) 77 CLR 232. 195 Re Gwilym (deceased) [1952] VLR 282. 196 Re Clarke (deceased); Bracey v Royal National Lifeboat Institution [1923] All ER Rep 607. 197 Re Wokingham Fire Brigade Trusts [1951] Ch 373. 198 Chesterman v Mitchell (1924) 24 SR (NSW) 108. 199 Re Driffill [1950] Ch 92. 200 Verge v Somerville [1924] AC 496. 201 Re North Devon and West Somerset Relief Fund Trusts; Hylton (Baron) v Wright [1953] 2 All ER 1032. 202 The Perpetual Trustee Company, above n 193. 203 Attorney-General (NSW) v Sawtell [1978] 2 NSWLR 200.

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—aid to indigenous persons;204 —the promotion of a culture of innovation and entrepreneurship;205 —assistance to business and industry;206 and —the protection or benefit of animals (eg animal refuges and protection societies).207

T H E E L E M E N T S O F ‘ B E N E F I T ’ AN D ‘ P U B L I C B E N E F I T ’

The Requirement of ‘Benefit’ The public benefit requirement has two distinct components. First, there must be an objectively measurable and socially useful benefit conferred; and secondly, the benefit must be available to a sufficient section of the community to be considered a public benefit.208 The first requirement means in essence that in order to have a ‘charitable purpose’ there must be some tangible benefit of an entity’s objectives. This is not interpreted narrowly and extends beyond material benefit to other forms of benefit, including social, mental and spiritual.209 The benefit must be real or substantial,210 although it is not limited to purely material considerations.211 At common law the purposes of a group of cloistered and contemplative nuns were not considered charitable as the benefit of prayer and the example of pious lives were considered too vague and incapable of proof to be a benefit.212 This has now been amended by statute in Australia,213 and in fact some commentators consider that this case would not be viewed favourably by modern Australian and New Zealand courts.214 Nevertheless, this case remains an example where the value of the benefit itself was in question. It is not enough that the objects of the charity fall within one of the categories established in Pemsel’s case; they must also be expressed in a 204 Aboriginal Hostels Ltd v Darwin City Council (1985) 75 FLR 197; Flynn v Mamarika (1996) 130 FLR 218. 205 Commissioner of Taxation v The Triton Foundation (2005) 226 ALR 293, [31], [32]. 206 Tasmanian Electronic Commerce Centre Pty Ltd v Commissioner of Taxation (2005) 219 ALR 647, [56]. 207 Re Inman (deceased) [1965] VR 238. 208 Vancouver Society of Immigrant & Visible Minority Women v Minister of National Revenue [1999] 169 DLR (4th) 34, 68. 209 Dal Pont, above n 2, 14–15. 210 Re Pinion (deceased), above n 170. 211 Dal Pont, above n 2, 14–15. 212 Gilmour v Coats [1949] AC 426, 446–47 (Lord Simonds). 213 This situation has been amended by legislation in Australia and is now considered charitable under s 5 of the Extension of Charitable Purpose Act 2004 (Cth). 214 Dal Pont, above n 2, 171.

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manner intended to promote public benefit. As Lord Justice Chadwick said in Southwood v Attorney-General: The question, which the court had to address in each case, was whether the objects to be pursued, although expressed to be of a charitable nature within the spirit and intendment of the preamble . . . should be recognised as being for the public benefit in the sense in which that concept had come to be understood in the light of the many decisions in this area of the law. It was not enough that the objects should be expressed to be the advancement of education; it was necessary that the advancement of education in the manner intended should promote public benefit.215

In this case, the court was considering whether an organisation for the education of the public into acceptance that peace was best secured by ‘demilitarisation’ was for the public benefit. The court concluded that it was not in a position to determine if this view was or was not for the benefit of the public and held that the entity was not charitable.216 A further example of the difficulty in evaluating ‘benefit’ is evinced in the case of Re Pinion (deceased); Westminster Bank Ltd v Pinion.217 In this case, the testator had left various items to the National Trust, which argued that they had educational value. Expert evidence, however, established that they in fact offered very little, if any, educational benefit to the community and the court relied on this evidence to hold that the trust was not charitable.218 In cases where the merit or value of the disposition or other matters that are of relevance to its actual benefit to the public are in dispute the matter is resolved by the court, although it will be guided by expert evidence.219 As Russell J stated in Re Hummeltenberg, ‘In my opinion the question whether a gift is or may be operative for the public benefit is a question to be answered by the Court by forming an opinion upon the evidence before it’.220 An entity’s purpose is not beneficial if its aims are contrary to public policy,221 unlawful or for a lawful purpose that is to be carried out by unlawful means.222

Southwood v Attorney-General (2000) NLJ Rep 1017, 1017. Ibid. [1965] 1 Ch 85. Ibid, 107 (Harman LJ). Re Hummeltenberg [1923] 1 Ch 237, 242 (Russell J); Re Coats’ Trusts [1948] Ch 340, 347 (Lord Greene MR); Re Pinion (deceased), above n 170, 108 (Lord Russell). 220 Re Hummeltenberg [1923] 1 Ch 237, 242 (Russell J). 221 Perpetual Trustee Co (Ltd) v Robins (1967) 85 WN (Pt. 1) (NSW) 403, 411; See also Thrupp v Collett (No 1) (1858) 53 ER 844; Re MacDuff; MacDuff v MacDuff [1895] 2 Ch 451; Re Pieper (deceased); The Trustees Executors & Agency Co. Ltd v Attorney-General (Vic) [1951] VLR 42. 222 Auckland Medical Aid Trust v Commissioner of Inland Revenue [1979] 1 NZLR 382, 395. 215 216 217 218 219

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The Second Element: The Benefit must Be for the Public or a Section of the Public As well as being of actual benefit to the public, the second aspect of the public benefit requirement provides that a charitable purpose must benefit the community or an appreciable section of the community, although the cases have never specifically formulated a definition of what this means.223 Whilst this section of the public can be small, it should not be ‘numerically negligible’.224 The test requires that the beneficiaries (ie the section of the community) are linked by some criteria other than personal relationships. Assistance to family members to complete their schooling might be a charitable thing to do but there is no public benefit as they are not, for this purpose, a section of the community, whereas donating money to a particular organisation which assists disadvantaged persons in gaining an education has a public benefit. Such a gift would benefit a section of the public. Clearly, not all charities are for the benefit of the entire community, and the very fact that they are charities often necessitates that they are trying to assist a section of the community that has special needs or disadvantages.225 The unsuccessful cases have generally failed because the class or groups of members of the public are linked by a relationship to someone or something.226 This is not considered to be in the public benefit as the quality which distinguishes them from other members of the public depends on their relationship to another person or entity. For example, a religious college failed the test of being a charitable institution as it was only open to the descendents of particular persons.227 An institution for the benefit of employees of a particular company is not charitable,228 neither is a school for the children of freemasons,229 or a mutual benefit society such as a friendly society or a trade union.230 In these cases, the benefits were intended for people in their capacity as employees, relatives or members rather than as a segment of the public. An institution for the benefit of persons in a particular geographic location, on the other hand, would be for the public benefit, as here the quality which links the group is 223 Verge v Somerville [1924] AC 496, 499; Oppenheim, above n 144, 305–06 (Lord Simonds). 224 Oppenheim, above n 144, 306 (Lord Simonds); Aboriginal Hostels Ltd v Darwin City Council (1985) 75 FLR 197, 209 (Nader J). 225 For a detailed discussion of the role of charities refer Dal Pont, above n 2. 226 Eg Re Compton, above n 144; Oppenheim, above n 144; Thompson v Federal Commissioner of Taxation (1959) 102 CLR 315. 227 Beatrice Alexandra Victoria Davies v Perpetual Trustee Co (Ltd) (1959) 59 SR(NSW) 112. 228 Re Compton, above n 144; Oppenheim, above n 144. 229 Thompson, above n 226. 230 Re Hobourn Aero Components Ltd’s Air Raid Distress Fund [1946] Ch 194.

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not their personal relationship but their physical location.231 As theoretically anyone can move to a particular location, the section of the public benefited is not restricted by something outside its control, such as a family or employment relationship. Lord Greene MR expressed this principle in Re Compton; Powell v Compton: [T]hey do not enjoy the benefit, when they receive it, by virtue of their character as individuals but by virtue of their membership of their specified class. In such a case the common quality which unites the potential beneficiaries into a class is essentially an impersonal one. It is definable by reference to what each has in common with the others, and that is something into which their status as individuals does not enter. Persons claiming to belong to the class do so not because they are AB, CD and EF but because they are poor inhabitants of the parish. If, in asserting their claim, it were necessary for them to establish the fact that they were individuals AB, CD and EF, I cannot help thinking that on principle the gift ought not to be held to be a charitable gift, since the introduction into their qualification of a purely personal element would deprive the gift of its necessary public character.232

If benefits are restricted to family members or friends, the courts have considered that there is no public benefit.233 As Farwell J said in Re Delaney, ‘[t]here is, in truth, no ‘charity’ in attempting to improve one’s own mind or save one’s own soul. Charity is necessarily altruistic and involves the idea of aid or benefit to others . . .’234

Public Benefit Test Not a Requirement Where the Charitable Purpose is the Relief of Poverty One important exception to the rule that a charity must be for the benefit of the public or a section of the public is a charity that is for the relief of poverty. This was confirmed by Lord Greene MR in Re Compton; Powell v Compton. 235 This approach has been upheld in subsequent cases.236 There are two main reasons usually given for this exception.237 In Re Compton; Powell v Compton Lord Greene MR considered that because the exception had been in existence for many generations and that many trusts had been founded with the exception in mind it was too late for the Re Compton, above n 144, 129–30; Verge v Somerville [1924] AC 496, 499. [1945] Ch 123, 129–30. Yeap Cheah Neo v Ong Cheng Neo (1875) LR 6 PC 381; Ip Cheung-Kwok v Sin Hua Bank Trustee Ltd [1990] 2 HKLR 499. 234 Re Delaney; Conoley v Quick [1902] 2 Ch 642, 648–49. 235 [1945] Ch 123. 236 Eg Dingle v Turner [1972] AC 601, 623 (Lord Cross); Re Hobourn, above n 230, 203–07 (Lord Greene MR); Re Scarisbrick [1951] 1 Ch 622, 649–52 (Jenkins LJ). 237 For a detailed discussion see Dal Pont, above n 2, 121. 231 232 233

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principle to be overturned.238 Secondly, Lord Greene stated that there may be some special quality in gifts for the relief of poverty that put them in a class by themselves. He felt that the relief of poverty may be of such benefit to the community that this outweighs the fact that the relief is confined to family members.239 This exception was confirmed in the 1997 decision of Alice Springs Town Council v Mpweteyerre Aboriginal Corporation.240 In this case, the Northern Territory Court of Appeal held that the corporation’s aim of assisting needy Aboriginal people fell within a trust for the relief of poverty and that therefore there was no public benefit requirement.241 This does not, however, mean that a trust for a very restricted group of poor beneficiaries will be charitable. In Re Scarisbrick242 Jenkins LJ stated that a gift to a narrow class of near relations in need would not be a gift for the relief of poverty in the charitable sense.243 Some commentators have stated that, whilst a benefit to the public or a section of the public is still required for charities established to relieve poverty, distinct groups of persons may be considered as sections of the public in cases dealing with poverty where they might be not considered thus in other circumstances.244 For example, a trust for the relief of poor relations or poor employees has been held to be charitable245 although a trust for the education of relations or employees would not have been.246 A distinction must therefore be drawn between gifts for the relief of poverty amongst a class of persons (which will be charitable) and mere gifts to private individuals which have as their object the relief of poverty amongst those specific people (which will not be charitable).247 A gift can be determined as charitable where there is evidence that the object or purpose was to create a trust in which no one has a personal right, or otherwise shows a purpose that goes beyond merely benefiting the statutory next of kin or a narrow class of near relatives of the donor or persons defined in some other personal manner.248 For example, in Re Scarisbrick249 a trust for ‘such relations’ of the children of the testatrix ‘as in the opinion of the survivor of [them] shall be in needy circumstances’ was upheld as a trust for the purpose of relieving poverty. Re Compton, above n 144, 139. Ibid. (1997) 139 FLR 236. Ibid, 252. [1951] 1 Ch 622. Ibid, 650–51. See, eg PS Atiyah, ‘Public Benefit in Charities’ (1958) 21 Modern Law Review 138, 148. Gibson v South American Stores [1950] Ch 177. Oppenheim, above n 144; Re Compton, above n 144, 139. Dal Pont, above n 2, 122. Re Scarisbrick [1951] 1 Ch 622, 655 (Jenkins LJ); Re Segelman (deceased) [1996] Ch 171, 183 (Chadwick J); 249 [1951] 1 Ch 622. 238 239 240 241 242 243 244 245 246 247 248

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A further example is Re Hilditch (deceased),250 where the gift was to provide ‘a home for poor and distressed Freemasons’ who were also members of a particular masonic lodge. It was held to be charitable as the trust was not limited in time and also was to take effect only on the death of a class of persons most of whom were younger than the testator and therefore likely to outlive him.251

SUMMARY

The history of the legal definition of ‘charity’ shows that this development must be viewed in the context of the historical, political and economic situation of the seventeenth and eighteenth centuries. Commencing with the Preamble in 1601, it was drafted with the state’s agenda for charitable giving in mind, rather than contemplating a list of altruistic purposes that were considered worthy of charitable relief.252 When drafting the Preamble, the government did not consider from a public policy perspective which areas were most important for the benefit of its citizens but, rather, listed Elizabethan political, economic and social programmes with the government hoping that the wealthy would be encouraged to implement and fund these particular areas in order to relieve them from this necessity.253 The Statute of Elizabeth was closely related to, and enacted just after, the Poor Law Act of 1601.254 Both statutes were part of a series of legislative enactments aimed at poor relief. The Tudor state’s industrial and social policy was aimed at ensuring that those who could work did and that relief was provided to the ‘deserving poor’.255 The state was concerned with maintaining order through relieving poverty and preserving the prosperity of all classes. The political and economic landscape subsequently changed, and the legislature became hostile to charitable bequests. This culminated in the enactment of the Mortmain Act, which exerted a contrary influence on the judiciary to the Preamble to the Statute of Elizabeth. The courts, in line with the legislation, also favoured the interests of a testator’s family over the interests of charities. The effect of the Mortmain Act was to encourage the judiciary in cases potentially covered by the Act (ie bequests of land) to widen the concept of ‘charitable’ so that the gift could be declared void.256 The opposite reasoning came to the same conclusion where the gift was of 250 251 252 253 254 255 256

(1985) 39 SASR 469. Ibid, 473 (King CJ). Bromley, above n 14, 178. Fishman, above n 18, 30. 43 Eliz 1, c 2, An Act for the Relief of the Poor. Chesterman, above n 2, 19; Bromley, above n 14, 179–80; Fishman, above n 18, 17. Jones above n 3, ch 9; Chesterman, ibid, 55–56; Ely, above n 25, 7–8.

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personal property.257 The aim in either situation was for the charity to miss out and, as land was still the main source of wealth in England, the judiciary were strongly motivated to expand the classes of charitable purpose.258 This line of judicial reasoning led to the decision in Pemsel in 1891 which confirmed a broad view of charitable in the fiscal context. This view was based on the Preamble using as a guide the categories argued in Morice v Bishop of Durham, ironically a case dealing with personal property. The reasoning in Pemsel resulted in the application of the Preamble, or its spirit and intendment, to decisions on whether or not an entity is charitable with the most important implications being for the revenue authorities. Although the enactment of the Charities Act 2006 (UK), c 50 may limit further reliance on the Preamble in the UK, the fact that section 2(4) recognises as charitable any ‘charitable purposes under existing charity law’ indicates that its influence still remains. The Preamble and subsequent judicial decisions are still relied on in most common law countries, including Australia, and are particularly relevant to taxation law.

257 258

Jones, ibid, 108. Ibid.

13 Remembering the ‘Forgotten Man’ (and Woman): Hidden Taxes and the 1936 Election HI DDEN TAXES AND THE 1936 ELECTI ON

MARJORIE E KORNHAUSER MARJ ORI E E KORNHAUS ER

The forgotten man is remembered in time to pay the government’s bill.1

The 1936 US presidential election posed a major challenge for Republicans. Given Roosevelt’s popularity, the Republicans would lose an election based simply on a personal comparison of the two candidates;2 yet a campaign based on issues was also problematic. Republicans’ habitual direct attacks on the vast array of New Deal programmes and regulations appealed to the business community, the wealthy and political conservatives, but not to average voters, the beneficiaries of many of these programmes. Similarly, attempts to undermine the programmes indirectly by attacking the unfairness of the income and estate taxes which helped fund them appealed to the wealthy but were ineffectual with the common man, who did not pay these taxes. More general attacks on the administration’s inefficiency, extravagant spending and wastefulness lacked the immediacy necessary to mobilise the majority of voters to oppose Roosevelt. The public was also tiring of the Republicans’ traditional, but vague, appeal to patriotism—that the New Deal was abandoning American democratic ideals and leading the country down the path to socialism.3 1 ‘Coughlin Attacks Roosevelt as Red’, NY Times, 3 August 1936, 8. The connection between the ‘forgotten man’ and taxes pre-dates the New Deal. Fifty years earlier, William Graham Sumner commented that the forgotten man was often a forgotten woman. WG Sumner, The Forgotten Man (1883), available at http://www.swarthmore.edu/SocSci/rbannis1//AIH19th/ Sumner.Forgotten.html (last accessed on 28 January 2010). 2 WE Leuchtenburg, The FDR Years: On Roosevelt & His Legacy (New York, Columbia University Press, 1995) 5. 3 T Catledge, ‘Republicans To Launch a New Kind of Campaign’, NY Times, 16 August 1936, E3.

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The Republicans needed an issue that touched the masses directly. The issue they chose was hidden taxes. The campaign argued that New Deal programmes were not free but, rather, were funded by the very people they were supposed to help—the common or ‘forgotten’ men and women, who paid in the form of hidden taxes. In effect, Republicans argued, as historian Mark Leff would do more than 50 years later, that Franklin Roosevelt’s tax agenda was symbolic only.4 The hidden tax campaign argued that Roosevelt’s ‘soak the rich’ taxes—the undistributed profits tax, excess profits tax, inheritance taxes and increased income taxes—disguised a reality where the burden of paying for government rested on common, ordinary people. Although the forgotten people paid no income or estate taxes, they paid ‘hidden taxes’ every day on everything they bought—from bread to electricity. Moreover, Republicans argued, these taxes had increased under Roosevelt. By stressing the issue of hidden taxes, they sought to reveal Roosevelt’s hypocrisy and raise the common man’s ‘tax consciousness’, thereby undermining his/her support for Roosevelt and his programmes. Once the masses were sensitised to taxes, the Republicans hoped to convince them that under Landon the government could provide the necessary relief and economic stimulants in a less costly, more ‘American’ manner than Roosevelt, whose extravagant, wasteful programmes, they claimed, were endangering recovery and American democracy. In an era when most Americans did not pay income tax, the political use of hidden taxes as a cudgel to bludgeon the opposition was not new. In 1924, for example, the Democrats had derided the Republican’s ‘Mellon’ plan as reducing income taxes on the rich while taxing the common man on everything from his pig and pig’s squeal to the ‘blisters on his hands’ and his laugh.5 Proponents of the Mellon Plan, however, responded that, although the common man did not pay income taxes, these taxes were shifted onto him.6 By 1935 Republicans and other conservatives were attacking Roosevelt for increasing hidden taxes. By early 1936, their assault on Roosevelt’s use of hidden taxes was in high gear, employing a variety of media and techniques, ranging from traditional political speeches in Congress and elsewhere7 to more modern radio ‘talks’.8 Still others resorted to even 4 M Leff, The Limits of Symbolic Reform: The New Deal and Taxation, 1933–1939 (New York, Cambridge University Press, 1984). 5 This is from the much repeated Democratic ditty mocking the Mellon plan. See, eg ‘“Death and Taxes” and Hypocrisy’ (1993) 60 Tax Notes 1393. 6 ‘Open Week’s Drive for Tax Reduction’, NY Times, 6 April 1924, 2:1. See also 65 Cong Rec 2445–48 (1924) (Reps Young (ND) and Kearns (OH)). But see 65 Cong Rec 2449 (1924) (Rep Dickinson of MO). 7 See, eg FA Hartley Jr, ‘Hidden Taxes: Are You Tax-Conscious?’ (1936) 2 Vital Speeches of the Day 424 (from Cong Rec, 16 March 1936). 8 ‘Dickinson Tells Tax Load Hidden by New Dealers’, Chicago Daily Tribune, 15 May 1936, 10 (talk by Senator Dickinson, R-Iowa). See also, advertisement for a radio talk by R McCormick Adams called ‘The Rising Flood of Hidden Taxes’ in Chicago Daily Tribune 7

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newer publicity techniques and more outright entertainment, such as the ‘pro-Constitution, anti-Bureaucracy Show’—a travelling exhibit created by the Sentinels of the Republic, a conservative ‘non-partisan’ group, which used film, cartoons, news and advertising techniques to graphically illustrate the vast amount of money ‘squandered under present day Bureaucracy’ and ‘the effect of such waste on the average worker’s income, cost of living and taxes’.9 Despite the numerous Republican attacks on hidden taxes, the Party’s national platform did not even refer to them. Indeed, focusing more on Roosevelt’s extravagant spending, it barely mentioned taxes at all. The keynote speech at the June Republican convention, in contrast, did mention them,10 but the decision to focus on hidden taxes did not occur until shortly after the convention. In early August, 2 months after its nominating convention, newspapers announced the Republican Party’s decision to make hidden taxes a major campaign theme. Republican officials believed, and contemporary commentators agreed, that the issue had the potential to galvanise the common man into rejecting Roosevelt.11 There were, however, several obstacles to realising this potential. The first obstacle was not unique to hidden taxes, but plagued the entire Republican campaign—the difficulty of unseating the popular Roosevelt, especially given Roosevelt’s appealing public persona and Landon’s poor speaking ability.12 The second hurdle attached specifically to taxation. Tax was, as one commentator called it, a ‘cold’ topic.13 The Republicans dealt with the first problem by creating a May 1936, 16. There was some concern about the (over)use of the radio for political purposes. See, eg ‘The Fortune Quarterly Survey: IV’(April 1936) 13 Fortune 104 (discussing ‘uproar’ over political use of radio, extent of politics on the radio, and public’s tolerance). 9 ‘Unique in Public Affairs’, Sentinels of the Republic, Bulletin No 4, January 1936. Glencairn Museum, Raymond and Mildred Pitcairn Archives, Political Collection, Box Sentinels of the Republic, file Sentinels #3. 10 F Steiwer, ‘Three Long Years’ (1936) 2 Vital Speeches of the Day 573, 578. The 1936 Republican platform paid little attention to taxes other than to argue generally that it would: ‘Use the taxing power for raising revenue and not for punitive or political purposes’ and ‘Revise the federal tax system and coordinate it with state and local tax systems’. The platform pledged to balance the budget by cutting expenditures rather than spending, but still be able to aid the economically distressed (both individuals and the general economy) because it would eliminate the waste and extravagance of the Roosevelt administration. Most importantly, the platform stated that it would save American way of life which Roosevelt was destroying by accumulating too much power in the executive branch, transferring powers from states to the federal government and over-regulating business. The 1936 Republican platform, available at http://www.presidency.ucsb.edu/showplatforms.php?platindex=R1936. See also n 2, 109. 11 Catledge, above n 3. 12 W Irwin, Propaganda and the News or What Makes You Think So? (reprint Westport, CT, Greenwood Publishing, 1970; original New York and London, McGraw-Hill, 1936) 249, 304 (FDR had a ‘rich’ voice) and 304 (FDR’s ‘radio’ voice was an asset reflecting his ‘engaging personality’); Leuchtenburg above n 2, 115. 13 Catledge, above n 3. ,

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‘new kind’ of campaign in which a ‘“Humanized” Advertising Drive Will Replace the Old Style Oratory’.14 They turned the entire campaign over to the professionals—publicity agents, journalists, advertising experts—to use modern advertising techniques, propaganda and the media in an attempt to ‘sell’ Landon, just as they would sell any product.15 They also employed these same techniques to solve the second problem, humanising taxes, by showing the average, forgotten people in precise detail how much of their hard-earned money was being spent each day on hidden taxes. Their ultimate goal was to build Mr Roosevelt into the symbol of all high taxes, actual or potential, Federal or local, and to present him to the laboring masses, particularly those who have just gone back to work, as a constant threat to their daily employment.16

In essence, the Republican campaign, including the hidden tax campaign, was a negative one, a technique the Democrats had used in 1932 to tie Hoover to the depression.17 As Turner Catledge reported in the New York Times, the real goal of the hidden tax campaign was to frighten the masses with the spectre of higher taxes due to Roosevelt’s extravagant spending.18 His fellow reporter at the Times, Arthur Krock, agreed that the Republicans might have a ‘winning argument’ if they could convince people that taxes under Landon would be lower than under Roosevelt, but that ‘of course’ the Republican argument was ‘more political than factual’ since they, like the Democrats, still needed taxes to pay ‘the costs of the fight against the depression’.19 The Republican National Committee (RNC) established a taxpayers’ division, allegedly in response to ‘nationwide’ concern about taxes,20 to deal with taxes. Headed by St Louis attorney Robert Kratky, the division mounted a national drive to fight the New Deal’s ‘ruthless’ and wasteful tax programme. This campaign used the same variety of media and approaches that the larger Republican campaign did: traditional speeches, the newer but now expected radio talks, as well as cartoons, participatory events and planned media ‘news’.

Ibid. T Catledge, ‘Landon’s “Idea” Men Map Tax Campaign’, NY Times, 12 August 1936, 10; Catledge, above, n 3; RD Casey, ‘Republican Propaganda in the 1936 Campaign’ (1937) 1 Public Opinion Quarterly 27. (Although the Democrats also used the media, the Republican campaign interesting for its concentrated use of professionals, its ‘enlargement of old techniques and addition of new ones; and, finally, its all-time record set for distribution of propaganda’.) 16 Catledge, above n 3. 17 See, eg E Hanson, ‘Official Propaganda and the New Deal’ (1935) 179 Annals of the American Academy of Political & Social Science 176, 177. 18 Cateldge, above n 3. 19 A Krock, ‘Balancing of Budget Still President’s Goal’, NY Times, 16 August 1936, F3. 20 ‘GOP Forms Campaign Unit on Tax Issues’, Washington Post, 16 August 1936, M2; ‘GOP Notes’, Chicago Defender, 22 August 1936, 4. 14 15

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On 26 August Landon delivered his first major speech on taxes in Buffalo, NY, explaining the Republican position. Although the Republican Party favoured generous spending for ‘money for relief and emergency purposes’, the current administration was spending wastefully; moreover, it could not fund its programmes by ‘soaking the rich’, as Roosevelt claimed. The rich simply did not have enough money—even if Treasury were to confiscate all incomes above $5,000.21 Government finances, Landon stated, functioned on the same principles as family budgets. The government is ‘almost a member of our family’ to whom the family is giving an increasing amount of its money in the form of hidden taxes—rising from 41% of federal revenues in 1932 to 51% in 1936— with most of them falling on people with incomes of $2,500 or less income, as any housewife knows.22 Hidden taxes, Landon said, were on everything—food, clothes, movies and baseball games; he drove the point home with specifics: in a 10 cent loaf of bread, 20% or 2 cents went to taxes; ‘if we smoke a package of cigarettes a day we pay $22 a year in taxes’.23 The federal government was living beyond its means, and like any family that did so, was leaving ‘a heritage of debts and mortgages . . . a staggering public debt [that] closes the door of opportunity to the youth of America, just as certainly as a staggering private debt’.24 The federal government, he stated, needed to end its ‘spendthrift ways, balance the budget, and generally return to the sound principles individuals use in their own finances’. Moreover, it should meet its leaner needs primarily through income taxes, not hidden ones, so that everyone knows he is paying his fair share.25 The RNC later distributed a handbook, ‘The New Deal Versus the American System’, confirming the points of his speech with ‘official’ Treasury statistics showing that the 60% of all federal taxes derived from hidden taxes, an increase under Roosevelt.26 Reaction to Landon’s speech was mixed. Pro-Republican papers such as the Chicago Daily Tribune heralded Landon’s Buffalo speech as ‘a Triumph of Common Sense’ that ‘should go far to win the election for him’.27 Senator Robinson (D-Ark), on the other hand, in a speech over CBS radio, ‘derided’ Landon’s speech as ‘the most confused and confusing dissertation on the vital subject of taxation which the public has heard in 21 See, eg F Waltman, ‘“Cockeyed” Exactions Hits Little Fellow, Holds Kansan in Buffalo’, Washington Post, 27 August 1936, 1, 5. Newspapers reprinted the complete speech, as was usual for important speeches. See, eg ‘Text of Governor Landon’s Attack on Roosevelt Debt and Taxes’, NY Times, 27 August 1936, 9. 22 NY Times, ibid, 9. 23 Ibid. 24 Ibid. 25 Ibid. 26 ‘“Warning” over Tax Signs Wins Scorn of GOP’, Chicago Daily Tribune, 22 September 1936, 10. 27 Editorial, ‘A Triumph of Common Sense’, Chicago Daily Tribune, 27 August 1936, 14.

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recent years’. 28 He noted, for example, that Landon’s statement regarding the many taxes on bread failed to mention that none of those taxes were federal taxes. Many journalists and newspapers were more balanced. Although they recognised that Landon’s Buffalo speech distorted the hidden tax issue, they also noted that he was not the only one to do so. As a New York Times editorial noted, people should not expect the truth from political campaigns. Candidates relate only favourable facts, claim credit for good results (even if they were not responsible for them) and assign blame for negative events to others (even if they were responsible for them)..29 The Christian Science Monitor dryly commented: ‘The important thing to bear in mind in the debate on hidden taxes is that both the main presidential candidates are against them’.30 However, even while acknowledging the political nature of any tax discussion, many analysts still approved of the Republicans for raising the tax issue on the grounds that it would help facilitate establishing a sounder tax system—one based on a broader income tax.31 The Buffalo speech was Landon’s first on hidden taxes, but not his last. He, as well as other Republican officials, continued to lambaste the New Deal for increasing hidden taxes, thus forcing Roosevelt and the Democrats to respond and counterattack.32 As the media noted, however, both sides obfuscated the issue more than they illuminated it. This was to be expected, the press noted, because the very term ‘hidden taxes’ had no exact definition, but was ‘largely a popular or political’ one, generally meaning indirect taxes hidden in the price of consumer purchases.33 Since ‘hidden taxes’ was a political term, commentators were not surprised that ‘partisan zeal’ led the Republicans to ignore many important facts: they ‘Robinson Derides Landon Tax Ideas’, NY Times, 29 August 1936, 4. Editorial, ‘The “Truth” About Taxes’, NY Times, 31 August 1936, 14. See also A Krock, ‘Landon’s Chance Seen in Personal Contrast, NY Times, 30 August 1936, E3; Editorial, ‘Landon on Taxation’, NY Times, 27 August 1936, 20. (The Buffalo speech was ‘probably the most effective he has made thus far in the campaign’.) HBE, ‘Economics in the Campaign’, Christian Science Monitor, 31 August 1936, 1. 30 ‘Hiding Facts on Hidden Taxes’, Christian Science Monitor, 27 October 1936, 20. 31 Eg Editorial’, ‘Concealed Taxation’, NY Times, 18 September 1936, 22 (suggesting broadening the income tax base as an alternative, but recognising neither party was willing to talk about that); Krock, above n 19. 32 Eg JA Hagerty, ‘Landon Demands Rival “Be Candid”’, NY Times, 23 October 1936, 1, 17 (Landon replying to FDR’s tax speech at Worcester by saying that FDR misrepresents how many hidden taxes his administration has). Eg ‘Gov Landon’s Chicago Address Attacking New Deal Expenditures’, NY Times October 1936, 8; ‘President Hit Tax Foes’, NY Times, 22 October 1936, 1 (declaring that hidden taxes had declined under his administration and that he was guided by democratic principles of ability to pay and not ‘special privilege’). 33 T Catledge, ‘War on “Hidden Taxes” May Lead to Revision’, NY Times, 13 September 1936, B6; HBE, ‘Economics in the Campaign’, Christian Science Monitor, 31 August 1936, 1. Accord, HM Finley, ‘Hidden Taxes and the Cost of Living’, LA Times, 17 October 1936, A4 (‘the tax people pay without realizing they are being taxed. It’s the one for which they get no tax bill. It’s the one tacked onto the prices of everything they buy’). 28 29

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disregarded, for example, the fact that most hidden taxes were not federal; they failed to note that the repeal of prohibition was a major reason for the increase in hidden taxes during Roosevelt’s administration; and neither party admitted that they would undoubtedly retain the biggest hidden taxes—liquor, tobacco and tariffs.34 ‘Partisan zeal’ might also explained why Republicans usually neglected to mention that the ‘average’ family they referred to as being so heavily burdened by hidden taxes—those with an income between $2,500 and $5,000 a year—were not average at all. Seventy-one per cent of families had less than $2,500 of income a year.35 By early October the hidden tax campaign was in high gear. As one reporter commented, people were hearing the term hidden taxes ‘everywhere—at political meetings, at clubwomen’s gatherings, when people meet in the street’.36 The prominence of this issue was not simply the result of speeches and pamphlets. Indeed, these traditional tools of political campaigns were not the focus of the Republicans’ hidden tax campaign. From the campaign’s outset in early August, the new professional ‘idea’ men—the ‘surveyors of advertising’—charged with ‘unselling’ Roosevelt and ‘selling’ Landon, had decided that these traditional approaches did not have ‘drawing power’ and were not ‘clicking’.37 They needed more dramatic methods of conveying their message and so developed several. For example, the RNC’s Taxpayers’ Division constructed two exhibits in Chicago concerning spending and taxing, and also provided the local Republican taxpayers’ club with photographs and instructions for setting up similar displays; eventually 2,200 exhibits were set up.38 The centrepiece of the hidden tax effort was the butcher shop campaign.39 The idea was simple. The campaign placed blackboards in 34 See, eg CF Hughes, ‘The Merchant’s Point of View’, NY Times, 20 September 1936, F8; Catledge, ibid; eg ‘Roosevelt Tax Claims Upset by Treasury Data’, Chicago Daily Tribune, 26 October 1936, 8 (RNC claiming that Treasury statistics showed that Roosevelt ‘misrepresented’ the facts regarding ‘hidden’ taxes at his Worcester, MA speech). See also ‘Colonel Frank Knox, The Most Expensive Amateur Hour in History’ (1936) 2 Vital Speeches of the Day 746, 748 (August 13th speech; under Roosevelt income taxes declined and hidden taxes on the masses increased from 40 to 60%) (Knox was the Republican candidate for vice president); A Evans, ‘Disclose 2,700 Taxes on You and the Missus’, Chicago Daily Tribune, 2 September 1936, 5. (Robert Kratky, director of the RNC’s tax division giving a detailed list of the ‘1,200 taxes on articles entering into the daily life of the ‘Forgotten Man’, [and] 1,500 taxes touch his wife and the household’. Notice that the number keeps changing even for the Republicans. Landon, in his Buffalo speech at the end of August, claimed that hidden taxes had risen only to 51% of federal revenues, but he specifically said federal taxes, while Knox might have been including state and local taxes. Speakers often did not distinguish between federal and other taxes.) 35 ‘Family of Four Pays $183 Year Indirect Taxes’, Christian Science Monitor, 27 April 1936, 15 (quoting a study by the Brookings Institute). 36 Finley, above n 33. 37 Catledge, above n 15. 38 Casey, above n 15. 39 Catledge, above n 3. The idea for this campaign may have derived from the 1935 housewives’ meat strikes protesting against increased food prices—especially meat—which some claimed were caused by the AAA processing tax. ‘Roosevelt Orders Food Cost Survey’,

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butcher shops. Each blackboard displayed three columns: the first listed the price of the meat (eg a pork roast), the second listed the amount of the tax and the third listed the total price. The only way to distinguish this board from an ‘ordinary blackboard, possibly bought by the butcher himself’ was the phrase: ‘Don’t blame your butcher—meat is low, taxes are high’.40 The purpose of the blackboard, of course, was ‘to make the housewife tax-conscious and tax-resentful at the moment when she is most susceptible, namely, when paying her meat bill’.41 Not surprisingly, the board did not list which taxes were federal and which were not.42 On 10 August national headquarters received an order for 2,000 blackboards, crayons and erasers.43 The plan was to extend the project to other types of stores later.44 The first blackboards were displayed at butcher shops approximately one month later and received the attention the ‘idea’ men sought. Newspapers thoroughly covered the campaign and reactions to it. Attorney-General Homer S Cummings threatened to prosecute any butcher displaying such information for violating a rarely—if ever—used 1918 federal statute, imposing a $1,000 fine and/or jail ‘for attributing part of the cost of a product to a tax when such a statement was known to be false or the tax was not as large as alleged’.45 Allegedly issuing the warning because of complaints the Justice Department had received, he called the placards ‘politically inspired’.46 The RNC responded that Democrats did ‘not want the housewife or the workingman to find out how much tax they are paying for Roosevelt [sic] waste and extravagance. The New Deal wants them to believe that the wicked rich are paying all the taxes’.47 Moreover, the RNC stated that the Justice Department could not be acting in response to ‘a storm of complaints’ because at that point in time only a few blackboards had been distributed and only one displayed.48 The RNC asserted it would ‘welcome a few prosecutions instead of just intimidating propaganda, designed to scare people to stop them from NY Times, May 29, 1935, 27; ‘Meat Price Strike Scored As Red Plot’, NY Times 10 June 1935, 11; ‘Dealers Find Mayor Lax in Meat Strike’, NY Times, 14 June 1935, 17; ‘Housewives Demand a Food Price Inquiry’, NY Times, 21 June 1935, 4; ‘Meat Strike Laid to AAA Tax’, NY Times, 30 July 1935, 13. (There were strikes in numerous cities, including New York, Chicago and Detroit.) ,

Catledge, above n 15. Ibid. Cateledge, above n 3. Catledge, above n 15. Ibid. ‘Warns of Tax Placards’, NY Times 17 September 1936, 9; CF Hughes, ‘The Merchant’s Point of View’, NY Times, 20 September 1936, F8. 46 ‘Warning Given on Telling Tax’, LA Times, 17 September 1936, 5. 47 ‘Republican Committee Replies’, NY Times 17 September 1936, 9. 48 Ibid. 40 41 42 43 44 45

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talking about high taxes imposed by the New Deal’.49 Within a week, the RNC almost got its wish. Mrs Rosemary B Chappel, chairwoman for the Southern California chapter of the Independent Coalition of American Women—with an alleged membership of 400,000—challenged Cummings to arrest her. While distributing pamphlets concerning the affect of ‘extravagance and governmental waste’ on the ‘humblest housewife’, she proclaimed, ‘I’ll be glad to go to jail to bring home to the people how hidden taxes are eating holes in all our pocketbooks’.50 Other conservative, anti-Roosevelt groups took up the RNC’s campaign. The Crusaders, a conservative organisation fighting for ‘sound’ government,51 produced several films, one of which was entitled Don’t Blame Your Butcher. Although the film showed in 29 states, it was not shown in Pennsylvania because, they alleged, of political pressure on the distributor. The Crusaders responded by placing large ads in Pennsylvania newspapers entitled ‘CENSORED! . . . IS THIS RUSSIA?’, which reproduced all the scenes from the film. The film itself enacted the butcher placard campaign: a female customer says the price of meat is more than she wants to pay; the butcher replies that everyone—rich or poor—pays taxes and points to a sign ‘giving facts that every man, woman and child should know about taxes’.52 Although the hidden tax campaign was aimed at everyone—men and women, blacks53 and whites—women played a major role both as targets and participants, as the butcher campaign shows. As targets, the campaign primarily focused on average, ‘forgotten’ women in their traditional private roles as wives and mothers. However, it also appealed to women in their public roles as citizens, voters and workers. Women participated in the campaign as both public and private actors. Many participants were active in the Republican Party; others were clubwomen; some were even celebrities. Although these participants appealed to the ‘common’ woman, and often characterised themselves as such, in reality, many did not fit the description. 49 Ibid; ‘Warning Given on Telling Taxes’, LA Times, 17 September 1936, 5; ‘Warns of Tax Placards’, NY Times, 17 September 1936, 9 (‘The Republican national committee today likened Attorney General Homer S Cummings’ threat [delivered last week] to prosecute butchers displaying chars showing the multiplicity of taxes paid on meats to “the petty tyranny” of jailing a pants presser under the NRA’); ‘GOP Committee Invites Test Cases’, LA Times, 17 September 1936, 5. 50 ‘Hidden taxes Ruling Defied’, LA Times, 24 September 1936, 2. 51 See 1936 Lobbying Investigation, P1731; Testimony of Fred G Clark, National Commander of the Crusaders (8 April 1936), P1733. 52 Advertisement, Philadelphia Inquirer, 19 October 1936, 13. See also ‘Crusaders Dispute Censors Right to Bar Film in Pennsylvania’, Christian Science Monitor, 20 October 1936, 4 (most of the large city newspapers did not report this). The ad ended by stating that it was ‘a paid protest against suppression of free speech—not a political advertisement’. 53 See, eg ‘GOP Notes’, Chicago Defender, 29 August 1936, 5. (‘This tax issue is not merely a white man’s problem. It is of vital importance to every Negro who must pay rent and buy any commodity from hairpins to motor cars.’)

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Women’s private aspects dominated, regardless of whether women were targets or participants. This was natural, given women’s traditional role as housewives,54 but the Republicans’ constant comparison of the federal budget to the family budget increased this emphasis. Landon’s major tax speech in August noting that ‘the housewife knows, better than anybody’, about rising costs of living was typical of this appeal, as was his flattery of women: ‘And you cannot long fool her with the pretense that only the rich will pay’.55 At the Waldorf-Astoria the following month, Landon again spoke of women’s knowledge of—and responsibility for—the family’s budget and welfare as well as the danger taxes (both direct and hidden) create for families in the present and in the future by burdening their children.56 The press followed suit, constantly referring to women as housewives and noting that it was women who most felt the taxes as they spent the family budget.57 Women also participated in the hidden tax campaign as housewives. Not surprisingly, they discussed taxes at their club meetings,58 but they were also politically involved. They actively campaigned for Landon as housewives protesting the effect of Roosevelt’s hidden taxes on them as housewives. For example, in New York, women, working under the aegis of the RNC’s women’s division, distributed shopping bags comparing the price of various common food and clothing articles in 1933 and 1936; they also exhibited baskets showing this relative purchasing power to women’s clubs and on a sound truck that canvassed neighbourhoods.59 Similarly, on the opposite coast of the country, the women’s division of the Southern California Republican Campaign Committee planned a series of rallies against hidden taxes.60 Also in California, the actress Jane Kerr helped organise a ‘Housewives’ Crusade’ ‘to make a direct assault on high prices which affect the home’.61 Kerr’s involvement illustrates the dual roles of women in the mid-1930s: she appealed to women in their private roles as housewives, but her effectiveness derived from the public aspect of her womanhood (her celebrity). Although the primary role for women—especially married women—in 1936 was still a domestic one, the public aspect of women was increasingly important. More women (especially single women) worked outside the home, and many were politically engaged, either participating within 54 S Ware, Holding Their Own: American Women in the 1930s 14 (Boston, MA, Twayne, 1982). 55 Landon’s Buffalo speech, above n 21. 56 ‘Landon Sees Trend to Curb Freedom’, NY Times, 24 September 1936, 16. 57 See, eg Finley, above n 33. (Hidden takes are ‘distinctly’ the average housewife’s problem.) 58 Ibid. 59 ‘Republicans Show Rise in Food Costs’, NY Times, 2 October 1936, 11. 60 ‘Hidden Taxes to be Told’, LA Times, 29 September 1936, 4. 61 ‘Housewives Start Crusade against High Living Costs’, LA Times, 13 October 1936, A1.

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the two established parties or acting independently.62 The Republicans, as well as other conservative groups, recognised this growing importance of the public nature of women in their hidden tax campaign by appealing directly to women’s public role, addressing them as wage earners and voters. Even when appealing to the more traditional domestic nature of women, they emphasised the more public aspects of that role: women as budget managers and as investors in the future. The Landon radio clubs, for example, sponsored ‘afternoon radio discussions of national questions’, including the issue of hidden taxes, which was a concern not just for housewives, they claimed, but business women, too.63 The conservative anti-Roosevelt group Women Investors in America appealed to all aspects of women—as mothers, businesswomen, investors, and taxpayers.64 Although its newspaper ad soliciting members did not mention the election, it clearly identified taxes as the enemy. Picturing a newborn baby, it ordered baby to ‘Get to Work’ to pay the $432.47 in all types of taxes (including hidden taxes) that baby would owe to pay back government debt.65 It then challenged Mothers who spend 85 per cent of the family income. . . who are the beneficiaries of 80 per cent of all life insurance policies. . . who own practically 50 per cent of our industries . . . and who decide what is good for us and what is not

to do something about that.66 In September, the noted Hearst columnist and financial writer Merryle Stanley Rukeyser wrote an article in The Delineator, a popular women’s fashion magazine, in the form of a letter from a typical clubwoman to her husband.67 The letter described a fellow clubwoman’s comments at a club meeting analogising the national budget to the family budget and urging club members to sign ‘a Declaration against Indefensible Spending’ and 62 See, eg CE Rymph, Republican Women: Feminism and Conservatism (Chapel Hill, NC, University of North Carolina Press, 2006); G Jeansonne, Transformation and Reaction: America 1921–1945 (Long Grove, IL, Waveland Press, 2004); J Benowitz, Days of Discontent: American Women and Right-Wing Politics, 1933–1945 (de Kalb, IL, North Illinois University Press, 2002); S Ware, Partner and I: Molly Dewson, Feminism, and New Deal Politics (New Haven, CT, Yale University Press, 1987); S Ware, Holding Their Own: American Women in the 1930s (Boston, MA, Twayne, 1982) 14–16. 63 ‘Women Voters Urged to Weigh Election Issues’, Washington Post 2 Novermber 1936, x3; ‘Suffolk Women in Rally’, NY Times, 5 September 1936, 6 (discussing the role of all New Deal taxes—including hidden ones—in harming business); ‘Roosevelt Spending Scored by Women’, NY Times, 1 September 1936, 5 (women speakers in the RNC sponsored ‘Common Sense in Government’ series). 64 ‘Patriotic Societies’, Chicago Daily Tribune, 14 February 1936, 10. The organisation was a ‘non-partisan’ group with the dual goal of awakening women to the ‘stake they hold in the nation’s wealth and prosperity’ and protecting and promoting business, investments, and ‘the basic American distinction between sovereignty and government’ (ibid). 65 Advertisement, NY Times, 21 October 1936, 21. 66 Ibid. 67 MS Rukeyser, ‘A Pledge—Can You Honestly Sign It?’, The Delineator, September 1936, 28–30. ,

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send it to their congressmen. Those comments—together with a letter from her husband ‘making it clear that our little family is turning over enough money to tax collectors each year to send Bud to college for one year’—awakened the writer to political consciousness. Her group, she continued, was ‘hoping to interest other women’s clubs throughout the country, and we are asking them to hold similar joint meetings with men’s societies’. The letter ended, however, by reassuring her husband that her new political consciousness had not endangered her traditional caretaking role: ‘Don’t get too uneasy about my new passion for national economy. I’ll still have plenty of time left over to devote to Bud and Marilyn. . . and their daddy.’ The article itself ended with an Editor’s note requesting its female readers to sign the pledge (reproduced in the article, more available free on request),68 send it to their congressmen, read it at their own club meeting and get their ‘husband, sons, friends in the movement’. The article thus skilfully encouraged women in their newer public role as voters to be politically active while still emphasising their traditional domestic role. In October the Massachusetts Federation of Taxpayers published a pamphlet, ‘For Want of a Nail’, written by women and ‘primarily’ for women, addressing women as housewives, businesswomen, investors and voters. The women particularly, must be shown that all their household affairs are riddled by taxes . . . Women have important interests to protect, for they hold approximately twenty-five per cent of the jobs and own approximately forty-three per cent of the property is this state.69

The pamphlet highlighted that women were active participants in the hidden tax campaign. Not only were they appealed to as voters to simply vote; the pamphlet also urged women to actively campaign against hidden taxes. It encouraged them to become knowledgeable about taxes, to join taxpayer associations and to become actively involved in the ‘taxpayers’ 68 The Pledge read:‘Whereas our nation is but a collection of families and, even as one family which lives beyond its income must run into debt, so must a nation; and Whereas the Federal Treasury is an empty purse save for what we ourselves contribute in taxes; and Whereas the funds in the national coffers are being depleted by raids from selfish communities; and Whereas our national Congressmen are spokesmen for our wishes; Now therefore, I, a voter of ___ hereby pledge myself not to support any movement for unnecessary Federal expenditures for indefensible projects or jobs in my community. Furthermore, I demand that my representatives in Congress shall vote against Federal appropriations for indefensible projects or jobs in other communities, I demand that my representatives in Congress consider all proposed expenditures on the basis of the welfare of the nations as a whole, uninfluenced by selfish demands of any community, block, minority pressure group, political party or entrenched special interests. Signature’ 69 ‘For the Want of a Nail’, prepared by Dorothy Worrell (MA Federation of Taxpayers, 1936) unpaginated pages 1 and 6. Newspapers also mentioned this financial importance of women. See, eg ‘Army of Hidden Taxes Found Boosting Cost of Daily Needs’, Christian Science Monitor, 12 October 1936, 10.

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movement’.70 It asked women readers to ‘help in the educational work being promoted by the women’s groups. Where one woman alone can do nothing,—a thousand women acting together can accomplish much’.71 Women did act—individually and collectively—as both the ‘For Want of a Nail’ pamphlet and The Delineator’s hypothetical clubwoman advocated and this chapter has described. Their actions did not go unnoticed. As more than one newspaper noted, ‘Mrs Average Housewife is taking a real and personal interest in this campaign’ and warned that ‘When the family budget keepers of America hoist the danger signal, experienced politicians stand from under’.72 Politicians paid attention, too. Towards the end of the campaign season, John D M. Hamilton, RNC chair, commented that ‘Women numbering nearly 1,000,000, representing all classes, especially the careful housewife, were working actively for the party, their chief interest being due to increasing living costs, and fears of heavier taxation and lesser returns from stocks and bonds’.73 He acknowledged that if the Republicans won the election it would be ‘due greatly to the splendid, patriotic work of the women of this country’.74 Neither the women’s splendid work nor the once-promising hidden tax campaign was able to achieve a Republican victory. Attacks on other aspects of the Roosevelt administration similarly failed—including the campaign’s focus during the last days of the campaign on the soon-to-take-effect social security tax.75 Some attributed Landon’s loss to the ‘idea’ men who had managed the entire presidential campaign, as well as creating the butcher shop tax campaign. These people, it was argued, were too politically inexperienced and too poorly organised, and talked too much about spending and taxation but not enough about the candidates.76 Not only was taxation a difficult issue, but—according to some analysts—the candidates and their personalities were as important—or more so—than any issue.77 Yet focusing on the candidates would also have been problematic for Landon, given Roosevelt’s popularity. In light of the numerous difficulties facing the Republicans, the choice of hidden taxation as a major campaign issue was logical, even though it did not bring the electoral success its creators envisioned. The hidden tax campaign also failed to achieve the broader goal that many contemporaries hoped it would accomplish. Despite the clearly ‘For the Want of a Nail’, ibid (unmarked), 6. Ibid. Finley, above n 33. ‘Stress Tax on Pay in Final Drive’, NY Times, 26 October 1936, 3. Ibid. Ibid. Casey, above n 15, 28–32. RD Casey, ‘Party Campaign Propaganda’ (1935) 179 Annals of the American Academy of Political & Social Science 96, 103 (‘personalities are often more important than principles’); A Krock, ‘The Paramount Issue: Roosevelt’, NY Times, 4 October 1936, SM1 (‘Men are nearly always, if not always, the campaign issue in this country’). 70 71 72 73 74 75 76 77

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recognised constraints of a political debate about hidden taxes—including evasion, misrepresentation and confusion—many commentators and even some politicians thought the campaign had intrinsic merit. They believed that the mere revelation of hidden taxes—and the burdens they placed on the common man—would force Congress to enact a sounder tax system using more obvious taxes—such as a broader based income tax. Here, too, the campaign failed. Reform did not occur and ‘hidden’ taxes remained an important part of the federal tax system. Despite its ultimate failure, the hidden tax campaign did succeed in more immediate goals. It gained a lot of media attention and engaged voters in political action. Its tactics remain in use today. Modern anti-tax campaigns, using populist rhetoric and exploiting modern media, are remarkably similar to those used in the 1936 campaign: partisan attacks that confuse more than they illuminate (the effects of tax cuts and their burdens), catchy phrases (the death tax), attention-getting gimmicks (re-enacting the Boston Tea Party by dumping the Internal Revenue Code into Boston Harbor), and the same strident rhetoric about soaking the rich and burdening the forgotten (middle class) taxpayer. The end results appear to be the same today as they were in 1936. The masses do not achieve any better understanding of true tax burdens, and establishing the foundations of a better tax system through tax reform remains a dream.