Burton (HM Collector of Taxes) v Mellham Ltd (2006)
Failure to pay advance corporation tax did not carry a statutory liability to pay interest forever afterwards if the principal liability had been discharged or satisfied otherwise than by payment.
The appellant company (M) appealed against the decision ((2003) EWCA Civ 173) that the respondent Revenue was entitled to interest on certain unpaid advance corporation tax. In 1997 M had received dividends from an American subsidiary of approximately £21.75m and had paid to its holding company a dividend of £1.4m. In consequence M had become liable to pay advance corporation tax of £350,000. That payment if duly made would have been taken into account in determining the mainstream corporation tax payable by M but M did not pay the advance corporation tax on the due date. Interest ran on the unpaid tax under the Taxes Management Act 1970 s.87(1). M was late in putting in its mainstream corporation tax return for the relevant period which incorporated a repayment claim and there was then a long delay in settling a dispute about double taxation relief. M's income for the 1997 accounting period consisted of two payments from the American subsidiary, the dividend of £21.75m and an interest payment of about £313,000, which by itself attracted a corporation tax liability of £100,000. The Revenue issued proceedings claiming corporation tax and interest. M admitted liability for £100,000 of tax and summary judgment was given for that sum. The judge and Court of Appeal held that interest had continued to accrue on the unpaid advance corporation tax and rejected M's contention that by way of set-off it had made a "payment" of the tax due for the purposes of s.87 of the 1970 Act and the Income and Corporation Taxes Act 1988 s.246N(2).
If M had duly paid its advance corporation tax and had then put in its mainstream corporation tax return more promptly, and if the Revenue had promptly accepted M's claims to foreign income dividend relief and double taxation relief, it would have been apparent on the due date that M's liability to mainstream corporation tax was limited to £100,000, and that the other £250,000 paid in advance corporation tax attracted relief by way of repayment under s.246N(2) of the 1988 Act, and that repayment would have carried interest under s.826(1)(aa) of the 1988 Act from October 1, 1998, the date when mainstream corporation tax became due. That interest would have run against the Revenue and in favour of M. Parliament could not have intended that in the circumstances which had happened there would be a perpetual liability to pay interest on the unpaid advance corporation tax, subject only to a discretionary (and possibly dubious) official power of remission. The notion of a perpetual liability to pay interest, subject only to the possibility of administrative remission, could not be justified on grounds of policy. Set-off was a general principle founded in simple convenience and fairness, and it should be taken to apply generally to all liquidated cross-claims unless excluded by statute or contract. There was no good reason why "payment" in s.87(1) should not include other forms of discharge or satisfaction. M's claim to double taxation relief could not properly be described as an impermissible attempt at self-help. It had a statutory claim to relief which was eventually conceded in its entirety. Set-off was available and it did not matter that the advance corporation tax was never actually paid, Safa Ltd v Banque du Caire (2000) Lloyd's Rep Bank 323 considered. M had not by its conduct disentitled itself to a set-off. The Revenue was entitled to interest only on the admitted sum of £100,000 until payment and on the sum of £250,000 until October 1, 1998.