Landlord and tenant — Rent — Where landlord a company resident outside the UK and tenant obliged to deduct tax from rent — Whether tenant entitled to deduct from future rents tax omitted to be deducted from past rents
By a lease
dated March 19 1990 the plaintiff, Tenbry Investments Ltd, a company resident
in Jersey, let to the defendant, Peugeot Talbot Motor Co Ltd, premises at Mile
End Road, London E1. By clause 2 of the lease the yearly rent was payable ‘without
deduction except such as the tenant may be required by law to deduct’. From the
commencement of the lease until December 25 1990 the defendant paid the yearly
rent at the rate of £50,000 per quarter, without deduction, directly into the
plaintiff’s bank account in Jersey. On March 11 1991 the defendant’s managers
realised the tax should have been deducted from the rent payments pursuant to
the provisions of the Income and Corporation Taxes Act 1988 and such deductions
should have amounted to rather more than £50,000 by that date. The gale of rent
due on March 25 1991 was not paid by the defendant on the grounds that it was
entitled to set off against that sum the amount which the defendant ought to
have deducted from earlier instalments of rent and for which it was liable to
account to the Inland Revenue: see sections 4, 43, 349, 3502 of, and Schedule
16 to, the Income and Corporation Taxes Act 1988. On March 19 1991 the
plaintiff appointed an agent in the UK and directed the defendant to make all
further rent payments to that agent. The defendant failed to take advantage of
section 821 of the 1988 Act in making adjusting deductions in respect of
instalments of rent paid after the commencement of a tax year, but before the
rates of tax are finally fixed by the coming into force of a relevant finance
Act. The plaintiff claimed the rent due for March 25 1991. The defendant relied
on section 349(1) of the 1988 Act contending that it was entitled to make the
appropriate deductions.
deduct’ used in section 349(1) are plain and to be compared with the words
which were being construed by the Court of Appeal in Taylor v Taylor.
Once a relevant payment is complete the right to deduct tax in respect of that
payment is lost. The power conferred by the section on the payer is to be able
on making any payment to deduct out of it a sum representing the amount of the
tax on that payment. It is not possible to construe the yearly rent as one
payment thus permitting a deduction in respect of the whole year against a
particular quarter’s rent. The legislature plainly contemplated deductions from
each separate payment as it is made.
The following
cases are referred to in this report.
Johnson v Johnson
Taylor
v Taylor XV1 ATC 218
This was a
claim for arrears of rent by the plaintiff, Tenbry Investments Ltd, against the
defendant, Peugeot Talbot Motor Co Ltd, due under the lease dated March 19 1990
in respect of premises at Mile End Road, London E1.
Fay Stockton
(instructed by Taylor Joynson Garrett) appeared for the plaintiff; Jonathan
Peacock (instructed by Wragge & Co, of Birmingham) represented the
defendant.
Giving
judgment, Mr E C EVANS LOMBE QC said: In this case the plaintiff, Tenbry
Investments Ltd, a company resident outside the UK, in Jersey, claims against
the defendant, Peugeot Talbot Motor Co Ltd, £50,000 with interest, being a
quarter’s instalment of rent becoming due on March 25 1991, pursuant to a lease
dated March 19 1990 whereby the plaintiff let to the defendant certain premises
at Mile End Road, London E1.
The defendant
was the assignee from the original lessee. By clause 2 of the lease, the
plaintiff let the premises at Mile End Road to the defendant for a term of 25
years from March 19 1990. The tenant:
. . . paying
therefore unto the landlord yearly during the term and so in proportion for any
period less than a year and whether demanded or not but without deduction
except such as the tenant may be required by law to deduct, notwithstanding any
stipulation to the contrary. Basic Rent, the Basic Rent which shall be in
advance and by means of a banker’s standing order if required by the landlord
by equal quarterly payments in each of the rent days except the first payment
which should be made on the date hereof and be in respect of the period from
and including the 19th day of March 1990 to the rent day next following the
date hereof.
There then
followed provisions for the payment of insurance, rent and further rent, being
VAT and other payments becoming due under the provisions of the lease.
On the day the
lease was entered into the defendant paid £2,287.67 advance rent covering the
period until the next rent day provided for in the lease. That was March 22
1990, when a sum of £50,000 was paid by the defendant to the plaintiff, being a
full quarter’s rent in advance without deduction.
On July 6,
September 29 and December 25 1990 similar payments of £50,000, being a
quarter’s rent without deduction, were paid by the defendant to the plaintiff.
All the payments of rent which I have described were paid directly into the
plaintiff’s bank account in Jersey.
On March 11
1991 the defendant’s managers realised that they should have been deducting tax
from the rent payments which they had made pursuant to the provisions of the
Income and Corporation Taxes Act 1988, which I will set out later in this
judgment. In respect of the instalments of rent already paid, such deductions
should have amounted to rather more than £50,000.
On March 25
1991 a further quarter’s instalment of rent became due but was not paid by the
defendant on the grounds that the defendant was entitled under the provisions
of the 1988 Act to set off
earlier instalments of rent and for which it was liable to account to the
revenue. The plaintiff did not accept that the defendant was entitled to act in
this way and these proceedings were commenced by a writ issued by the plaintiff
on June 14 1991.
In the
meantime, on March 19 1991, the plaintiff had appointed an agent in the UK for
the management of its properties and had directed the defendant to make all
further rent payments to that agent.
It is common
ground that by the combined effect of sections 4, 43, 349, 350 of, and Schedule
16 to, the Income and Corporation Taxes Act 1988, the defendant was obliged, on
making payments of rent, to deduct a sum equal to the basic rate of income tax
applicable at the time and to account for that tax to the revenue. Section
43(1), so far as material, provides as follows:
Section 78 of
the Management Act (taxation of non-residents in name of agent) shall not apply
to tax on profits or gains chargeable to tax under Schedule A, or on any of the
profits or gains chargeable under Case VI of Schedule D — . . .
(b) which arise under the terms of a lease, but
to a person other than the landlord, or otherwise arise out of any disposition
or contract such that if they arose to the person making it they would be
chargeable under Schedule A, where payment is made (whether in the United
Kingdom or elsewhere) directly to a person whose usual place of abode is
outside the United Kingdom, but Sections 349(1) and 350 shall apply in relation
to the payment as they apply to annual payments charged with tax under Case III
or IV of Schedule D and not payable out of profits or gains brought in to
charge to income tax.
Accordingly,
section 43 applies the provisions of sections 349(1) and 350 to the payments of
rent made by the defendant to the plaintiff direct to its bank account in
Jersey. Section 349(1) provides materially as follows:
Where. . . [(c)
any rent . . .] is not payable or not wholly payable out of profits or gains
brought into charge to income tax, the person by or through whom any payment
thereof is made shall, on making the payment, deduct out of it a sum
representing the amount of income tax thereon.
Section 350(1)
provides:
Where any
payment within section 349 is made by or through any person, that person shall
forthwith deliver to the inspector an account of the payment, and shall be
assessable and chargeable with income tax at the basic rate on the payment, or
on so much thereof as is not made out of profits or gains brought in to charge
to income tax.
Section 350(4)
provides:
Section 349
and this section has effect subject to the provisions of Schedule 16 which has
effect for the purposes of regulating the time and manner in which companies
resident in the United Kingdom —
(a) are to account for and pay income tax in respect
of payments from which tax is deductible under Section 349, and . . .
Para 2(1) of
Schedule 16 provides:
A company
shall for each of its accounting periods make, in accordance with this
Schedule, returns to the collector of the relevant payments made by it in that
period and of the income tax for which it is accountable in respect of those
payments.
There then
follow provisions requiring such company to make quarterly returns by
prescribed dates in respect of such payments and deductions.
Section 821 of
the 1988 Act permits a payer of rent in the position of the defendant to make
adjusting deductions in respect of instalments of rent paid after the
commencement of a tax year but before the rates of tax are finally fixed by the
coming into force of the relevant Finance Act. The Finance Act 1990 came into
force on July 26 1990. However, the defendant accepts that it failed to take
advantage of the provisions of section 821 to make deductions from the next
instalment of rent becoming due as provided for in section 821 and,
accordingly, can base no part of its defence to the plaintiff on the provisions
of that section.
The defendant
also concedes that the failure to make deductions from instalments of rent
constitutes voluntary payments by the defendant to the plaintiff, under a
mistake of law and, accordingly, the defendant is not in a position to claim
restitution by the plaintiff of the sums it failed to deduct and for which it
may become assessable to tax by the revenue.
Clause 2 of
the lease entitles the plaintiff to receive payment of the rent by quarterly
payments without deduction except such as the tenant may be required by law to
deduct notwithstanding any stipulation to the contrary. It follows that the
defendant can resist the plaintiff’s claim only on the basis that a
construction of section 349(1) permits the defendant now to deduct from
instalments of rent becoming due the tax which should have been deducted from
the earlier instalments. It was not suggested in the course of the defendant’s
submissions that the defendant had any other defence.
The important
words which fall to be construed in section 349(1) are ‘where any rent is not
payable out of profits the person by or through whom any payment thereof is
made shall on making the payment deduct out of it a sum representing the amount
of Income Tax thereon’. In Taylor v Taylor, XVI ATC 218 the Court
of Appeal was construing the then equivalent of what is now section 348 of the
1988 Act, namely r 19(1) of the All Schedules Rules to the Income Tax Act 1918
which provided:
Where any
annual payment (whether payable as a personal debt or obligation by virtue of
any contract or whether payable half-yearly or at any shorter or more distant
periods) is payable wholly out of profits or gains brought into charge to tax,
no assessment shall be made upon the person entitled to such annual payment,
but the whole of the profits or gains shall be assessed and charged with tax on
the person liable to the annual payment without distinguishing the same; and
the person liable to make such payment shall be entitled on making such payment
to deduct and retain thereout a sum representing the amount of the tax thereon
at the rate or rates of tax in force during the period in which the said
payment was accruing due. The person to whom such payment is made shall allow
the deduction upon receipt of the residue of the same, and the person making
the deduction shall be acquitted and discharged of so much money as is
represented by the deduction, as if that sum had been actually paid.
The Court of
Appeal was construing r19(1) in a case where a husband had been making payments
to his wife, provided for under a separation agreement, from his taxable
income, gross, without deduction of the tax thereon. He unsuccessfully
attempted to resist a claim, brought under the provisions of the deed of
separation, for unpaid instalments, on the ground that he was entitled to set
off against those instalments the amount of the tax he had failed to deduct
previously. In his judgment at p220, Slesser LJ says:
By August
1932 the whole of the weekly payments up to that date had been made. The right
under Rule 19 in [the All Schedule Rules] the husband is to be entitled, on
making such payments, to deduct and retain the amount of the tax. In my opinion,
up to August 1932, he had made such payments, and he had omitted to make any
deductions, and it is not open to him now, therefore, under the wording of the
rule, to make a deduction on making such payments; because, in August 1932,
there were no payments in arrear, and the only payments had all been completely
made, and his right of deduction had gone. But the position thereafter is, in
my opinion, different; after August 1932 he was at all times in arrear with his
payments, and at no time after that date can it be said that he had made his
payments so as to prevent his availing himself of the right which he has of
making the deductions under Rule 19.
Later, at
p221, Slesser LJ continues:
I would add,
in answer to the argument addressed to us by Mr Jacob, only that, in my view,
it is not right, in dealing with Rule 19, to have regard to the fact that the
payments were made actually week by week. The basis upon which this could be
taken to be an annual payment is to be found in the authorities to the effect that
it is an annuity, because it provides for payment for more than one year, and
the mere fact that it is paid in periods of less than a year seems to me to be
expressly reserved in the language of Rule 19 itself where, giving the right of
deduction, the rule says: ‘whether payable half-yearly or at any shorter time
or more distant periods’.
In my
opinion, whenever the payment for the whole year under consideration has not
been made, it is still open to the person making such payment to deduct and
retain thereout a sum representing the amount of tax thereon, notwithstanding
that, for some particular weeks during that period, the payments had been made
in full. The rule points, in my opinion, to the year as the standard to be
considered, and not the week, the half-year, or any shorter period . . .
The Court of
Appeal therefore concluded that once a payment falling within the rule had been
completely made without deduction the right to deduct was lost. What
constituted a payment for the purposes of the rule was to be derived from the
agreement pursuant to which the payment was to be made. In that case the
payment was the annual sum becoming due under the provisions of the agreement
between the August of each succeeding year. Where, however, payments in respect
of any year were in arrear it remained open to the payer to deduct the tax
becoming due in that year from the remaining payments referable to that year.
It mattered not that the agreement provided that the yearly payments were to be
made by weekly or other instalments, some of which might have been paid in
full.
Mr Peacock for
the defendant contends that the decision in Taylor v Taylor is
inapplicable to the issue before me. It is certainly not a decision construing
section 349 or its then equivalent under the All Schedules Rules, namely
r21(1). Mr Peacock contended that the essential difference between sections 348
and 349 is that. whereas
interest whether deductions were made or not, because they would get their tax
anyway, under section 349 deduction is compulsory and if the payer fails to
deduct he can be assessed for the sums not accounted for (see Schedule 16),
interest runs in respect of sums unpaid (section 87 of the Taxes Management
Act), and there are statutory penalties for failure to account for tax under
section 98 of that Act. It follows, so he submits, that section 349(1) should
be construed more liberally in favour of the payer so that the right to deduct
is not lost when payments are complete.
The position
adopted by the plaintiff in this case lacks merit, but I am reluctantly
compelled to the conclusion that I cannot accept Mr Peacock’s contention. The
words ‘shall on making the payment deduct’ used by the subsection are plain and
are to be compared with the words ‘shall be entitled on making such payment to
deduct’ which were the words being construed by the Court of Appeal in Taylor
v Taylor.
In my
judgment, I cannot place on the words used in section 349 any different
construction than that placed by the Court of Appeal on the equivalent words in
r19(1) and must hold that once a relevant payment is complete the right to
deduct tax in respect of that payment is lost.
The next
question to be considered is what is the payment for the purposes of the
present case and can any relevant payment be said to remain open so as to
entitle the defendant to deduct tax becoming due in respect of that
payment? To contend that the payment in
question here was a yearly payment, albeit payable by quarterly instalments and
so, if in arrears, the payer would be entitled to deduct from the arrears of
tax not deducted from earlier instalments would not, even if correct, help the
defendant. If the approach of the court in Taylor v Taylor is
adopted, the year in question must be the year from the first rental date
provided for by the lease. Four quarterly payments having subsequently been
made, payment in respect of that year is complete and, following, the right to
deduct is lost. There are no other relevant payments.
Mr Peacock,
however, drew my attention to the case of Johnson v Johnson,
another decision of the Court of Appeal applying r19 of the All Schedules Rules
to payments being made under a separation agreement. By contrast with Taylor
v Taylor and for a reason which does not emerge from the report, the
Court of Appeal in that case appear to have adopted tax years and the amounts
becoming due during each tax year as the relevant payment. Mr Peacock, as an
alternative submission, urged that there should be a similar approach in the
present case. On that basis when the March 1991 quarterly rent payment became
due the tax year 1990 to 1991 remained open and deductions could be made from
the instalment of rent then due in respect of the amounts of tax which should
have been deducted from the three rental payments made in that tax year.
I am unable to
accept that submission also. On this issue the words used by section 349(1)
differ materially from the words used by section 348 and 19(1) of the All
Schedules Rules. In particular, in section 349 only the word ‘any’ appears in
the phrase ‘the person by whom any payment thereof is made’. ‘Any payment’ in
that phrase plainly refers to any payment, inter alia, of rent. The power
as conferred by the section on the payer is to be able on making any payment to
deduct out of it, ie the payment, a sum representing the amount of the tax
thereon, ie on that payment.
Furthermore,
the method of accounting for sums deducted prescribed for deductions made under
section 349 by section 354, which I have already partly quoted above, make
plain that the legislature was contemplating deductions from each separate
payment as it is made.
In my
judgment, therefore, the right to deduct under section 349(1) by contrast with
section 348 arises when any relevant payment is made and is lost in respect of
that payment if it is made gross. For these reasons, in my judgment, the
plaintiff’s action succeeds.
Judgment for
the plaintiff with costs.
