Lease — Rent payable on property by equal quarterly instalments — Tenant under statutory obligation to deduct tax from payments of rent — Error in failing to deduct tax from earlier rent instalments — Whether tenant entitled to withhold rent as set-off — Action for payment of rent due — Landlord resisting defendant’s claim — High Court holding that landlord’s action succeeded
T was a company resident outside the UK in Jersey. It claimed against P the sum of £50,000 plus interest, being a quarter’s instalment of rent becoming due on March 25 1992. The rent was claimed pursuant to a lease dated March 19 1990, whereby T let to P premises at Mile End Road, London E1, for a term of 25 years. On March 11 1991, P’s managers realised that they should have been deducting tax from the payments of rent pursuant to the Income and Corporation Taxes Act 1988. In respect of instalments of rent already paid, tax deductions should have amounted to over £50,000.
On March 25 a further quarter’s instalment became due but was not paid by P on the ground that P was entitled to set-off against that sum the amount which P ought to have deducted from the earlier instalments of rent and for which it was liable to account to the Revenue. It was common ground that the combined effect of sections 4, 43, 349 and 350 of and Schedule 15 to the 1988 Act was that P 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. P argued that section 349(1) permitted it now to deduct from instalments of rent becoming due, the tax which should have been deducted from the earlier instalments. Section 349(1) provided that where any rent was not payable out of profits, the person by or through whom any payment thereof was made should, “on making the payment”, deduct out of it a sum representing the amount of income tax thereon.
Held P was not entitled to set-off the tax which it should have deducted earlier against payments of rent becoming due.
1. The words “shall on making the payment due” used in section 349(1) were plain and had to be construed as meaning that once a relevant payment was complete, the right to deduct tax in respect of that payment was lost: see Taylor v Taylor, Annotated Tax Cases vol XVI at p 218.
2. The words “any payment” in section 349 plainly referred to any payment, inter alia, of rent. The payer was then directed by the section on making any payment to deduct “out of it”, ie that payment, “a sum representing the amount of tax thereon”, ie on payment.
3. Furthermore, the method of accounting for sums deducted prescribed for deductions made under section 349 by section 350(4) made plain that the legislature was contemplating deductions from each separate payment as it was made. Therefore, the right to deduct under section 349(1) arose when any relevant payment was made and was lost in respect of that payment if it was made gross.
Fay Stockton (instructed by Taylor Joynson & Garrett) appeared for Tenbry Investments Ltd; Jonathan Peacock (instructed by Wragge & Co, of Birmingham) appeared for Peugeot Talbot Motor Co Ltd.
