Law Report: Missed tax on rent cannot be deducted later: Tenbry Investments Ltd v Peugeot Talbot Motor Co Ltd - Chancery Division (Mr Evans Lombe QC, sitting as a deputy High Court judge): 2 October 1992

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If a tenant fails to deduct, from instalments of rent payable to his landlord, the tax for which he is assessable, pursuant to section 349(1) of the Income and Corporation Taxes Act 1988, he cannot afterwards deduct it from, or set it off against, subsequent rent instalments.

Mr Evans Lombe QC, sitting as a deputy High Court judge, gave judgment for the plaintiff landlords, Tenbry Investments Ltd, on a claim for arrears of rent unpaid by the defendant tenants, Peugeot Talbot Motor Co Ltd.

The plaintiffs claimed pounds 50,000 plus interest, being a quarter's instalment of rent becoming due on 25 March 1991, pursuant to a 25- year lease dating from 19 March 1990, in respect of premises at Mile End Road, east London.

The lease provided for rent to be paid 'without deduction (except such as the tenant may be required by law to deduct notwithstanding any stipulation to the contrary)'.

The defendants initially paid the rent in full but in March 1991 they realised they should have been deducting tax pursuant to the provisions of the 1988 Act. More than pounds 50,000 should by then have been deducted.

When the next quarterly instalment fell due, the defendants claimed to be entitled to set off against it the amount they should have deducted previously and for which they were liable to account to the Revenue.

Fay Stockton (Taylor Joynson Garrett) for the plaintiffs; Jonathan Peacock (Wragge & Co, Birmingham) for the defendants.

MR EVANS LOMBE QC, said it was common ground that the combined effect of section 4, 43, 349, 350 and Schedule 16 to the 1988 Act was to require the defendants, 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 821 permitted a tenant to make adjusting deductions in respect of instalments of rent paid after the commencement of a tax year but before the rates of tax were finally fixed by the coming into force of the relevant finance Act. However, the defendants accepted that they had failed to take advantage of this provision and could not rely on it now. The defendants also conceded that their failure to make deductions from earlier instalments of rent constituted voluntary payments to the plaintiffs under a mistake of law, and accordingly they could not claim restitution of those sums from the plaintiffs.

The defendant could only resist the plaintiffs' claim on the basis that a construction of section 349(1) permitted the defendant now to deduct, from instalments of rent now becoming due, the tax which should have been deducted from the earlier instalments. The important words of section 349(1) were: '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 (1937) (16 ATC, 218) the Court of Appeal, when construing the then equivalent of what was now section 348 of the 1988 Act, namely rule 19 of the All Schedules Rules to the Income Tax Act 1918, held that once a payment falling within the rule had been completely made without deduction, the right to deduct was lost.

What constituted 'payment' depended on the agreement under which it was made. In that case the payment, by a husband to his wife under a separation agreement, was an annual sum. Where payments in respect of any year were in arrears, it remained open to the payer to deduct the tax becoming due in that year from the remaining payments for that year.

The defendants argued that the Taylor decision did not apply to the present issue, since deductions under section 348 were permissive, while those under section 349 were compulsory. Section 349 should therefore be construed more liberally, so that the right to deduct was not lost when payments were complete.

The position adopted by the plaintiffs in this case lacked merit, but his Lordship was compelled to the conclusion that he could not accept the defendants' contention. The words 'shall on making payment deduct' used by section 349(1) were plain and were to be compared with the words 'shall be entitled on making such payment, to deduct' in rule 19. His Lordship could not place on section 349 any different construction than that placed on rule 19 by the Court of Appeal in Taylor v Taylor. Once a relevant payment was complete, the right to deduct tax in respect of that payment was lost.

The next question was what constituted the 'payment' in this case. To contend that it was a yearly payment, albeit payable in quarterly instalments, would not, even if correct, help the defendants. The year in question must be that from the first rental date under the lease. Four quarterly payments having been made, the right to deduct was lost.

The defendants argued that the court should adopt tax years and regard the amount becoming due in each tax year as the relevant 'payment'. On this basis, when the March 1991 quarterly instalment became due, the 1990 tax year remained open and deductions could still be made in respect of tax which should have been deducted earlier.

But in his Lordship's judgment, the words 'any payment' in section 349(1) plainly referred to any payment of rent, on making which the payer was directed to deduct 'out of it' the 'amount of tax thereon'. The legislature was plainly contemplating deductions from each separate payment as it was made.

Thus the right to deduct arose when the payment was made and was lost in respect of that payment if it was made gross.