Respondents v. Inland Revenue
Commissioners Appellants
[1992] 3 W.L.R. 366
House of Lords
HL
Lord Keith of Kinkel, Lord Goff of Chieveley, Lord Jauncey of Tullichettle, Lord Browne-Wilkinson and Lord Slynn of Hadley
1992 March 17, 18, 19, 23; March 24, 25, 26; July 20
Glidewell, Ralph Gibson and Butler-Sloss L.JJ.
1991 March 18, 19, 20, 21, 22; May 22
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APPEAL from Nolan J.
On 16 June 1986, 15 September 1986 and 16 March 1987 the plaintiff, Woolwich Equitable Building Society (now the Woolwich Building Society), made payments to the defendants, the Inland Revenue Commissioners, in the sums of £ 42,426,431, £2,856,820 and £11,714,969 respectively pursuant to demands made by the revenue under the Income Tax (Building Societies) Regulations 1986. On 31 July 1987 Nolan J. [1987] S.T.C. 654 held that the regulations were ultra vires and of no effect in so far as they purported to provide for the imposition of tax on dividends and interest paid by building societies prior to 6 April 1986. The payments were repaid to Woolwich with interest from 31 July 1987. Woolwich, in an action for money had and received, sought to recover interest from the dates the payments were made.
On 12 July 1988 Nolan J. [1989] 1 W.L.R. 137 held that the right to repayment arose only at the moment of the decision as to the invalidity of the Regulations and therefore refused the claim to interest from the time that the payments were made.
By a notice of appeal dated 26 July 1988 Woolwich appealed on the grounds, inter alia, that (1) the judge wrongly held that Woolwich was not entitled to an order for repayment of the sums paid pursuant to the revenue's unlawful demand by way of money had and received on the basis that it discharged no lawful obligation and in particular (a) wrongly held that it was plain from the decided cases that the courts had not extended the general principle of restitution to those who had submitted to unauthorised demands for tax; (b) relied on William Whiteley Ltd. v. The King (1909) 101 L.T. 741 which was either distinguishable or was wrongly decided, and (c) relied on a passage in Birks, Introduction to the Law of Restitution (1985), at p. 295, that there was no such right as Woolwich contended for without examining the cases said to support that view or examining the further cases relied on by Woolwich as being 76inconsistent with that view; (2) the judge wrongly held that the payments were not made under duress, notwithstanding that the same were plainly not made voluntarily or with intent to close the transaction; alternatively the judge failed to have regard to the special position of the Crown to apply pressure to the subject; (3) the judge wrongly held that the unacceptable conclusion that the revenue were under no obligation to repay could be avoided by the finding of an implied contract by the revenue to repay the sums paid when and if their demand was held to have been unlawful.
By a respondent's notice under R.S.C., Ord. 59, r. 6(1)(b ) dated 27 September 1988 the Crown sought to have the judge's decision affirmed on the additional and alternative grounds that (1) if, contrary to the judge's decision, no agreement for the repayment of the money was to be implied, then the payments made by Woolwich were voluntary and no right to repayment ever arose; and (2) alternatively, if no agreement was to be implied, once the dispute was resolved in Woolwich's favour, it became unconscionable for the revenue to retain the money paid by Woolwich and it was open to the court to impose on the revenue a constructive trust in respect of that money.
The facts are set out in the judgment of Ralph Gibson L.J.
Representation
John Gardiner Q.C., Nicholas Underhill and Jonathan Peacock for Woolwich.
Anthony Grabiner Q.C. and Alan Moses Q.C. for the Crown.
Cur. adv. vult.
22 May. The following judgments were handed down
GLIDEWELL L.J.
In his judgment, Ralph Gibson L.J. explains the judicial review proceedings which resulted in the relevant parts of the Income Tax (Building Societies) Regulations 1986 (S.I. 1986 No. 482) being declared ultra vires and therefore void in so far as they purported to require the payment by building societies of tax on dividends and interest paid by such societies for the period immediately preceding 6 April 1986. He also summarises the circumstances in which the Woolwich Equitable Building Society ("Woolwich") paid the total sum of £56,998,000 to the revenue, including the relevant correspondence before and at the time of payment, and the history of this action. I gratefully adopt what Ralph Gibson L.J. says.
I therefore need only summarise briefly certain of the facts referred to by Nolan J. and Ralph Gibson L.J. in their judgments, which are in my view necessary for the determination of this appeal. They are: (i) from the start, Woolwich challenged the validity of the regulations, even when they were in draft. (ii) The form on which Woolwich was required to make a return for the period ending 31 May 1986 and for subsequent quarterly periods, and the accompanying notes for guidance, made it clear that when each form was returned to the revenue it had to be accompanied by payment of the amount calculated in accordance with the form. There was also in the notes a reminder that interest was 77 chargeable on tax paid late, which was not an allo-wable deduction for tax purposes. (iii) All three payments made by Woolwich were made without prejudice to their contention that the regulations were ultra vires. (iv) At the same time as it made the first payment on 16 June 1986 - to be precise on the following day - Woolwich applied for leave to move for judicial review of the validity of the regulations. (v) Nolan J. summarised the factors which induced Woolwich to make the three payments in the following terms [1989] 1 W.L.R. 137, 142-143:
"First and foremost, the requirements of the Regulations as amplified in communications from the revenue amounted on their face to lawful demands from the Crown. Woolwich would have expected any refusal of payment to lead to collection proceedings which would have been gravely embarrassing for Woolwich, the more so as it would have been the only building society refusing to pay. Any publicity suggesting that Woolwich might be in difficulty in meeting its financial obligations, or that alone amongst building societies it was pursuing a policy of confrontation with the revenue, might have damaging effects far outweighing Woolwich's prospects of success on the issue of principle. Secondly, Woolwich feared that if it failed in its legal arguments it might incur penalties. Thirdly, the three payments to which I have referred formed parts of larger quarterly payments, the other parts of which were agreed to have been correctly charged. At the time when the payments were made, it had not been possible to identify the amounts in dispute. Fourthly, Woolwich was not, of course, to know at the time of the payments that it would succeed in the judicial review proceedings. Had Woolwich failed in those proceedings, it would have faced a bill for interest, which would not have been deductible for tax purposes, in an amount far exceeding the net return which Woolwich could have obtained from investing the money withheld."
The judge found in relation to these reasons, at p. 143:
"It seems to me, judging from the language of paragraph 4(1) of Schedule 20 to the Finance Act 1972, that Woolwich could reasonably have anticipated at least the raising of an assessment under paragraph 4(3), and possibly the issue of a writ pursuant to section 68 of the Taxes Management Act 1970 with the result in either case of highly undesirable publicity for Woolwich if it had withheld the very large sums claimed by the revenue to be due . . . The substantial point made by Woolwich in the first of its reasons for making the payment lies in the damage to its reputation which it feared from failing to meet an ostensibly lawful claim for tax, and the importance of this factor is something upon which the judgment of Woolwich is entitled to respect. Again, although the risk of penalty proceedings must have seemed remote, there being no question of negligence, let alone fraud, on the part of Woolwich, and although Mr. Green and Mr. Bousher say that in practice there was no risk of penalty proceedings at all, I can understand that the prospect of being even technically in breach of a penal provision if it failed in the judicial review proceedings is one which would weigh 78 with Woolwich. And there can be no dispute about the significance of the interest factor. Subject to the outcome of the present case, the scales in this respect were tilted heavily in favour of the revenue. I accept that, as a practical matter, Woolwich had little choice but to make the three payments."
Nolan J. gave his decision in the judicial review proceedings on 31 July 1987. He declared the Regulations ultra vires and void. Before that date, the writ in the present action claiming repayment of the capital sum with interest had been issued. Although the revenue appealed against Nolan J.'s decision, by agreement pending the hearing of the appeal it made repayment of the capital sum, leaving the issue as to whether the interest was payable to be decided later. Woolwich's claim therefore is to interest on the capital sum, calculated from the various dates on which it paid the three sums which make up the total to the date of Nolan J.'s judgment in the judicial review proceedings. The claim is made under section 35A of the Supreme Court Act 1981 which, so far as is relevant, provides:
"(1) . . . in proceedings . . . before the High Court for the recovery of a debt . . . there may be included in any sum for which judgment is given simple interest, at such rate as the court thinks fit or as rules of court may provide, on all or any part of the debt . . . in respect of which judgment is given, or payment is made before judgment, for all or any part of the period between the date when the cause of action arose and - (a) in the case of any sum paid before judgment, the date of the payment; . . ."
It follows that in order to succeed in its claim to interest Woolwich must show (i) that the revenue was under a legal obligation to repay the capital sum, and thus owed Woolwich a debt; and (ii) that Woolwich had a right to be repaid, so that its cause of action arose, at the dates on which it made the three payments which together totalled £56,998,211.
The case argued for Woolwich before Nolan J. and in this court can be summarised as follows: (i) the primary submission of Mr. Gardiner is that a subject who makes a payment in response to an unlawful demand for tax, or any like demand, i.e. a demand for which there is no basis in law, immediately acquires a prima facie right to be repaid the amount so paid; this is a distinct head of the law of restitution; (ii) alternatively, Woolwich made payment under duress, and thus had an immediate right to claim repayment.
The response of Mr. Grabiner for the Crown, before this court as before Nolan J., is (i) there is no such general principle as that suggested by Woolwich; (ii) the facts of this case do not come within the established principles of restitution of sums paid under duress; (iii) thus the revenue were under no obligation to make any repayment, and did so only as a matter of grace; (iv) alternatively, Nolan J. was correct to find an implied agreement that the revenue would hold the moneys paid by Woolwich as a deposit on account of tax which might be held to have been due at the dates of payment. The judge held that on this basis Woolwich only became entitled to reclaim the money once the risk that the tax might be due was set at nought and thus interest only began to 79 run from that date, i.e. the date of Nolan J.'s judgment in the judicial review proceedings.
The principal issue is therefore, is there such a general principle of law as that for which Woolwich contends? If so, what, if any, are the limitations on the operation of that principle? This issue, which is obviously of considerable importance, has been much discussed by distinguished academic commentators, but has not been directly the subject of any modern decided case.
I think it right to draw a distinction between cases in which a plaintiff claims restitution, i.e. repayment from a defendant who is a private citizen or body or who, although acting on behalf of a public body, had received the payment in the course of a commercial transaction between them, and cases in which the defendant is an instrument or officer of central or local government, exercising a power to require payment of a tax, customs duty, licence fee or other similar impost. Cases in the first category are clearly part of ordinary private law. Cases in the second category, however, seem to me properly to fall in the sphere of what is now called public law. The main distinguishing feature between the two types of case is that in the public law cases there is no question of the defendant having given, offered, or purported to give any consideration for the payment by the plaintiff. The payment is required under what purports to be a statutory power entitling the defendant to claim such a payment, sometimes in return for a licence, in other cases simply as part of a general power to levy a tax or customs duty.
The argument which Mr. Gardiner advances in support of his primary proposition that, since the revenue were not empowered to demand or receive the payments of tax under the invalid regulation, it was repayable immediately to Woolwich when paid, is based in part on general principle, and in part on previous decided cases. I will examine each in turn.
General principles
Mr. Gardiner starts by reminding us of the words of article 4 of the Bill of Rights 1688:
"That levying money for or to the use of the Crown, by pretence of prerogative, without grant of Parliament, for longer time, or in other manner than the same is or shall be granted is illegal."
As to the general principles of the law of restitution, in a well known passage in his judgment in Moses v. Macferlan (1760) 2 Burr. 1005, 1012, Lord Mansfield C.J., described the basis of the action for money had and received, i.e. for restitution:
"it lies for money paid by mistake; or upon a consideration which happens to fail; or for money got through imposition, (express or implied;) or extortion; or oppression; or an undue advantage taken of the plaintiff's situation, contrary to laws made for the protection of persons under those circumstances. In one word, the gist of this kind of action is, that the defendant, upon the circumstances of the 80 case, is obliged by the ties of natural justice and equity to refund the money."
In the House of Lords in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [1943] A.C. 32 L ord Wright said at the beginning of his speech, at p. 61:
"The claim was for money paid for a consideration which had failed. It is clear that any civilised system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is to prevent a man from retaining the money of or some benefit derived from another which it is against conscience that he should keep. Such remedies in English law are generically different from remedies in contract or in tort, and are now recognized to fall within a third category of the common law which has been called quasi-contract or restitution."
On the following page Lord Wright quoted the passage from the judgment of Lord Mansfield C.J. which I have set out above.
Clearly in the circumstances of the present case there was no question of consideration for the payment by Woolwich to the revenue. The question is, to use Lord Mansfield's phraseology, was the revenue's demand for the tax an implied imposition, or did the revenue take an undue advantage of Woolwich? Is it obliged by the ties of natural justice and equity to refund the money?
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