Chapter Two – Pervasive Legal Concepts Flashcards
2.1 Introduction
The three different legal systems in the UK share common features. This chapter shows some basic legal concepts that are common.
2.2 Legal Persons
Tax is payable by a legal entity, it is essential to identify legal entities, this necessity also arises because the entities may be:
• Media through which transactions are conducted or activities carried on
• Vehicles adopted for the purposes of investment
• Media through m
• Which property is held
• Media by which certain objectives are achieved
A large number of legal entities are referred in UK tax legislation. Including individuals, persons and companies.
Individuals – the entity here is referred to as a human being. They have legal personality because they are capable of enjoying rights and bearing duties, they can sue or be sued, and they have legal attributes (residence etc)
Persons – where used it takes the definition of the Interpretation Act 1978 which states “a person included a body of persons corporate or unincorporate”. The word persons in tax legislation refers to an individual, a corporate body or juristic persons and an unincorporated body of persons or non-juristic persons.
Juristic persons (Corporations) – they are persons that are not human beings. They are created by the law and exist only in law, they have no tangible existence, but have a legal personality. In tax legislation a company is defined in a number of different ways but that is common is that a company includes a body corporate. So, a company is a common type of juristic person.
Classification of corporations:
Corporations can be classified by their nature and purpose. They may be political in nature, corporations grouped in this way may include the crown, local government authorities and other public bodies exercising administrative or advisory functions. Corporations may be formed for the advancement of arts and science or for charitable purposes.
Corporations can be classified according to their method of creation. The law provides for a large number of mechanisms for the creation of a corporation. For example, created under the Companies Act 2006, formed under the Royal Charter and may be statutory corporations formed for public benefit by an Act of Parliament. The document which creates a corporation is known as its constitution and sets out what the corporation is able to do.
Types of Corporation
All corporations are either a corporation sole or a corporation aggregate. A corporation sole (office or post) is a body corporate constituted in a single person that has the capacity of acting as if it were an individual. A corporation sole has a double capacity, its corporate capacity and its natural or individual capacity.
A corporation aggregate is a collection of persons united into one body under a special name. the corporate aggregate is by law given the capacity as acting as if it were an individual. Its abilities and powers are limited only according to the design of its constitution. They have only a single capacity, namely its corporate capacity. It can only conduct business through the agency of human beings. For example, may only enter into a contract only if a human being (normally director) enters into a contract on behalf as its agent.
Attributes of corporations
Both sole corporations and corporations aggregate have perpetual succession, meaning although members change the corporation continues to exist. In the case of a corporation sole, succession is perpetual but not always uninterrupted or continuous. There may be periods during the existence of the corporation sole in which the office is vacant (for example a seat in Parliament).
Another characteristic is that is has continuous identity, meaning the original members and their successors are one. Once a liability or obligation has become binding on a corporation, it will bind its successors even though they are not expressly named. Access to the income and property of the corporation by its members is not automatic, they do not have unrestricted ability to remove profits from the corporation.
Nature of corporations
Nature is that corporations are recognised by law as having a personality which is distinct from the separate person/persons that form the body. The corporation is said to be opaque.
The nature of the corporation may be shown by contracting it with the individuals who constitute it and whom it resides. In corporation law members are wholly different from the corporation. The liabilities and property of the corporation are separate from its members. A number of corporations may form new, separate corporations.
Non-juristic persons
The interpretation act 1978 says an unincorporated body of persons is also a person for tax purposes. However unincorporated associations despite being persons are not their own legal personality according to the law, they are persons but without their own existence. They are transparent, they do not exist independently of the persons that have created them. The following are key entities or bodies of persons that are non-juristic persons:
• An English partnership
• The trustees of a trust
• The personal representatives of the estate of a deceased person
• Sports, social or other clubs created as unincorporated associations
Juristic and non-juristic persons: a tax context
Often tax law follows the general law when taxing an entity. For example, TCGA 1992 s.59(1) states ‘where two or more persons carry on a trade or business in partnership tax in respect of capital gains… be assessed and charged on them separately’. This is similar to ITTOIA 2005 S.848 for income tax treatment.
Other occasions tax law will deem entities that are opaque (bodies corporate) in the general law to be transparent for tax purposes. TCGA 1992 S.59(1) applies equally to a Scottish partnership, so capital gains accruing to a Scottish partnership on the disposal of partnership assets are charged on the partners separately and not the partnership.
Conversely, although some bodies of persons are transparent in the general law, tax law may deem them to be opaque. ITA 2007 s.474 provides that for the purposes of income tax, the trustees of a settlement are together treated as a single person. This is contrary to general law which recognises only the separate legal capacity of each trustee.
Foreign entities
For the perspective of UK tax law, you must decide if a foreign entity is a corporation. UK tax law does not just follow the characterisation of the entity according to foreign law, it applies the characteristics of law for UK tax purposes. For example, a French SNC is a corporation in French law but treated as a partnership for English law purposes. The factors considered deciding if a foreign entity has a legal personality is:
• Does the entity have a legal existence separate from the persons who have an interest in it
• Does the entity issue share capital or something which serves the same function
• Is business carried on by the entity itself or jointly by the persons who have an interest in it that are separate and distinct from the entity
• Are the interested persons entitled to a share in its profits as they arise or does the amount of profits which they are entitled to depend on a decision by the entity or its members.
• Who is responsible for the debts incurred as a result of the carrying of the business, it is the entity or the persons
• Do the assets used for carrying on the business belong beneficially to the entity or to the persons who have an interest in it
An overall conclusion is reached from looking at all the factors together, although some have more significance than others.
2.3 The Distinction Between Questions of Fact and Questions of Law
In constructing a legal argument based on tax law the law must be applied to the facts of a case in order to reach a conclusion. Law and fact must be distinguished.
Disputes between a taxpayer and HMRC which cannot be solved between themselves can be refer the dispute to the courts. The first port is the Tax Chamber of the first-tier tribunal. If either party is dissatisfied with the outcome it can be referred to the Upper Tribunal but only on a point of law and not on point of fact. Meaning the findings of the judges of the First-tier tribunal on the facts of the case are determinative, judges hearing on appeal cannot reverse the findings of fact. Furthermore, a taxpayer or HMRC cannot introduce new facts once their dispute has gone on appeal to the Upper Tribunal and any other appeal court.
Questions of fact
This is a question as to the existence of some phenomenon in the world around us. These phenomena are proved either by direct evidence (eg statements of witnesses or the production of documents) or by the agreement by the parties to a dispute. The facts that be found are for example that certain documents were created and signed and that certain letters were sent and received. Questions of fact include:
• The truth of documents produced in evidence
• The ordinary or popular meanings of the words used in statute
• Business and accountancy maters: the principles of generally accepted accountancy practice (GAAP) are matters of fact and not rules in the same legal sense
• Matters of impression and degree, such as “how many sales of pictures will make a person a picture dealer”, usually a question of fact
• Matters of expert opinion
• The provisions of overseas law and in tax context, the provisions of non-tax law in the UK
Questions of law
This is a question about the content of legal rules and how they operate in relation to facts. Questions of law include:
• A proper understanding and application of the law. Question is to whether the wrong rule has been applied to the facts and hence a wrong conclusion has been reached or where the law has been misunderstood
• A failure to ask the proper question to which any legal test has to be applied
• The interpretation of words in a document or of a piece of legislation if those words have a special meaning. Their ordinary meaning, however, is a question of fact
• The application of the meaning of a word to the facts of a case is a question of fact. In the case Clark v Perks 2001, the Court of Appeal laid down the meaning of the word ship and sent the case back to the First-tier Tribunal to decide if an oi rig fitted the definition of a ship
Inferences of fact
A distinction is drawn between primary facts and inferences of fact. Primary facts are facts which are observed by witnesses and proved by oral testimony, or facts proved by the production of a thing itself, such as an original document. The conclusions drawn by primary facts are inferences deducted by a process of reasoning from them. If those conclusions can be drawn by laypersons, they are likely to be conclusions of fact (i.e. secondary facts). However, a question of law may arise from drawing an inference and that is whether the conclusion was one which could reasonably be drawn from the primary facts.
The drawing of inferences from the primary facts giving rise to the question of law is often the basis of an appeal in tax cases. In the case Edwards v Bairstow it was explained that a question of law arises in the following circumstances:
• Where the inference drawn from primary facts is inconsistent and is contradictory. Meaning the inference does not logically accord with and follow the primary facts.
• Where there is no primary evidence to support the inference drawn
• Whether the inference drawn by first-tier tribunal was one which could reasonably be drawn. Where the reasonable inference drawn contradicts the actual conclusion reached then a question of law arises.
There are examples where appeals have succeeded on the application of the test in Edwards case:
• Richardson v Delany 2001 – First Tier Tribunal found an employee was given notice of termination legally and the sums paid to the employee were damages (compensation) for breach of contract. The Upper Tribunal reversed the decision because the First-tier Tribunal’s finding was not supported by the facts – bringing a contract of employment to an end in a lawful manner cannot give rise to a payment in the nature of damages.
• Bird v Martland 1982 – taxpayer received a sum of money from employer for being deprived of the use of his company car. First-tier tribunal found that the payment was not earnings of the employee. On appeal the decision was reversed on the grounds the true and only possible conclusion from the facts found was that the sum was earnings
• Leeds Permanent Building Society v Proctor 1982 the question was determined whether certain decorative screens were plant. The First tier Tribunal found the functions of the screens was to attract customers and that they were not plant. The decision was overturned because the conclusion was inconsistent with the primary facts found proved.
