INLAND REVENUE COMMISSIONERS Vs AKEN.

Fox L. J. - This is an appeal by the taxpayer. Marion Aken, from a decision of Mr. Piers Ashworthy Q. C., sitting as a deputy judge of the Queens Bench Division, whereby he ordered summary judgment under Order 14 for payment to the Inland Revenue Commissioners of the sum of Pounds 58,000-odd in respect of income tax and interest thereon.

For some years until 1983 the taxpayer was a prostitute; her earnings from prostitution were substantial and they came to the attention of the revenue in about 1980, partly in consequence of a television programme in which she appeared and spoke of her earnings. The years of assessment with which we BBX are concerned are as follows :

When the statement of claim was delivered in this case. The taxpayer wrote a letter, which was treated as her defence. She objected that the sums assessed did not take into account her outgoings, but her main contention was that if she was living on immoral earnings, the taxation of those earnings meant that the Crown would be living on immoral earnings as well. That contention, in a more elaborate and sophisticated form, remains largely her defence.

The deputy judge considered two questions : (1) In the events which occurred, is the taxpayer entitled, in collection proceedings in the present case, to rely on the contention that the profits of prostitution are not chargeable to tax ? (2) If the taxpayer is entitled to rely on such a defence, is it a good defence in law ? The judge answered "Yes" to the first question and "No" to the second. The result is that the taxpayer has no defence to the Order 14 proceedings, and judgment was accordingly entered for recovery of the Pounds 58,000-odd to which I have already referred.

I turn to the first question considered by the judge : can the defence be raised at all ? All the assessments except those for 1980-81 and 1982-83, were dealt with by an agreement u/s 54 of the Taxes Management Act, 1970. By sub-sections (1) and (2) it is provided :

"(1) Subject to the provisions of this section, where a person gives notice of appeal and, before the appeal is determined by the commissioners the inspector or other proper officer of the Crown and the appellant come to an agreement, whether in writing or otherwise, that the assessment or decision under appeal should be treated as upheld without variation, or as varied in a particular manner or as discharged or cancelled, the like consequences shall ensue for all purposes as would have ensued if, at the time when the agreement was come to, the commissioners had determined the appeal and had upheld the assessment or decision without variation, had varied it in that manner or had discharged or cancelled it, as the case may be. (2) Subsection (1) of this section shall not apply where, within 30 days from the date when the agreement was come to, the appellant gives notice in writing to the inspector or other proper officer of the Crown that he desires to repudiate or resile from the agreement."

It is common ground that in respect of the seven years to which I have referred, the inspector and the taxpayer agreed on assessments of the amounts of which tax is now sought, to be recovered. These agreements were made on behalf of the taxpayer by her accountants. No notices under subsection (2) repudiating or resiling from the agreement were made in respect of any of those agreements. Thus, by section 54, the like consequences ensued for tax purposes as if the commissioners had determined the appeals and upheld the assessments in the amounts agreed.

As to the appeals procedure in regard to tax assessments, section 29(1) of the Taxes Management Act 1970 provides : "Except as otherwise provided, all assessments to tax shall be made by an inspector. . ." Sub-section (6) provides :

"After the notice of assessment has been served on the person assessed, the assessment shall not be altered except in accordance with the express provisions of the Taxes Acts."

Section 31(1) provides :

"An appeals may be brought against an assessment to tax by a notice of appeal in writing given within thirty days after the date of the notice of assessment."

"Normally the appeal which is permitted by that provision is to the general commissioners, but in certain cases which are specified in the statute the appeal will be to the special commissioners. Section 50(6) provides :

"If, on an appeal, it appears to the majority of the commissioners present at the hearing, by examination of the appellant on oath or by affirmation, or by other lawful evidence, that the appellate is overcharged by any assessment, the assessment shall be reduced accordingly, but otherwise every such assessment shall stand good."

Section 56 provides for an appeal from the commissioners to the High Court by way of case stated on a question of law, and by subsection (6) it is provided :

"The High Court shall hear and determine any question or questions of law arising on the case, and shall reverse, affirm or amend the determination in respect of which the case has been stated, or shall remit the matter to the commissioners with the opinion of the court thereon, or may make such other order in relation to the matter as to the court may seem fit."

Provisions are included in section 56 for appeal to the Court of Appeal and, with leave, to the House of Lords. Section 46(2) provides :

"Save as otherwise provided in the Taxes Acts, the determination of the General Commissioners or the Special Commissioners in any proceedings under the Taxes Acts shall be final and conclusive."

The words "save as otherwise provided" I take to be a reference to the section 56 provisions for appeal by way of case stated to the High Court. Section 68 provides :

"(1) Any tax may be sued for and recovered from the person charged therewith in the High Court as a debt due to the Crown, or by any other means whereby any debt of record or otherwise due to the Crown can, or may be at any time, be sued for and recovered. . ."

The view of the judge was this : the revenue contend that the taxpayers earnings as a prostitute are taxable as profits of a trade under Case I of Schedule D. He was of the opinion that if such earnings were not the earnings of trade, then the inspector was acting ultra vires in assessing the earnings at all. As to the agreement reached between the revenue and the taxpayer, acting by her accountant, the judge said that could not confer on the inspector any power which he did not otherwise have. He said :

"it is not stated in the Taxes Acts that the profits of prostitution are not taxable, but Mr. Macdonald submits that is the effect of the words used, and in my judgment he is entitled to raise that defence in these proceedings and I must consider it."

The judge then proceeded to consider that matter and he decided against the taxpayer.

The Crown submitted that the taxpayer is not entitled, in these collection proceedings, to raise the question of the validity of the assessment.

The first question we have to decide is : what is the effect of the agreement u/s 54 of the Act, to which I have referred, disregarding, for the moment, any consequences of the fact that the receipts in question were derived from prostitution. The agreement was an agreement within section 54(1) of the Taxes Management Act 1970; the same consequences therefore ensue as would have ensued if, at the time of the agreement made, the commissioners had determined the appeals by varying or otherwise dealing with the assessments in the manner agreed. It is true that, strictly, the agreement cannot have all the same consequences as would have ensued from a determination by the commissioners, because the taxpayer could not, having agreed u/s 54, ask for a case to be stated for the decision of the High Court. However I find it difficult to believe that Parliament did not intend, so far as practicable and bearing in mind that the appeal is not being proceeded with, that the agreement would not have the full force and effect of a determination in like terms by the commissioners. In my view the provisions of section 54(1) do not make sense on any other basis. The section must be given a sensible meaning in the context in which it is operating.

The significant consequences, for present purposes, is that section 46(2) of the Act of 1970 applies, which provides :

"Save as otherwise provided in the Taxes Acts, the determination of the general commissioners or the special commissioners in any proceedings under the Taxes Acts shall be final and conclusive."

There is nothing otherwise provided in the Taxes Acts which says that the imputed determination consequent on a section 54 agreement is not final and conclusive. Consequently, it can be sued on under the provisions in section 68 which enables the amount agreed to be recovered in the High Court as a debt due to the Crown.

In my judgement there is no hardship upon a taxpayer in that result since the taxpayer has chosen to enter into a section 54 agreement, and has not taken advantage of the opportunity of resiling from it during the 30-day period permitted by section 54(2) of the Act. On no view of the matter it seems to me can the agreement itself be left unenforceable. It was on any view a binding agreement entered into for good consideration from the commissioners and it is an enforceable agreement as such according to its terms.

The result in my view is that the agreement is binding on the taxpayer. However, it is said that the inspector was not entitled to make assessments at all because the profits of prostitution are not assessable to tax, and that accordingly such assessments were ultra vires and of no effect. In my opinion there are two objections to that submission. The first is that it is not open to the taxpayer in collection proceedings to raise such a contention. If it is to be raised, it must be raised on the appeal and argued therein. If the appeal was not pursued, it is no longer open to the taxpayer to raise it.

In Inland Revenue Commissioner v. Pearlberg [1953] 1 W.L.R. 331, the taxpayer was assessed to Schedule A tax. He did not appeal. The commissioners instituted proceedings against him for recovery of the tax in question. The taxpayer sought to resist those proceedings on the ground that he was at no time the owner/occupier or landlord of the premises in question, and therefore was not within the statutory charge to tax. The Court of Appeal rejected that submission and held that he was not entitled to raise that defence in collection proceedings. Denning L.J., with whom Morris L. J. agreed, said, at p. 333 :

"If we were to allow the [taxpayer] to raise these matters, it would mean that the High Court would become the Tribunal to decide questions of fact and law on tax assessments, whereas they have been decided to the general satisfaction by the commissioners for a great many years, with an appeal on points of law by case stated to the High Court."

In IRC v. Soul [1976] 51 STC 86, the taxpayer was assessed to tax and appealed to the Commissioners. The assessments for three of the years in question were confirmed, and in respect of the last three years were adjusted in favour of the taxpayer. The taxpayers asked for a case to be stated for the determination of the High Court. However, the fact that an appeal by way of case stated was pending does not alter the taxpayers liability under the assessment (see section 56(9) of the Taxes Management Act 1970). The crown therefore sought to collect the tax by writ in the High Court. The taxpayer asserted that he had an arguable defence to the claim. The Court of Appeal rejected that the Bridge L. J., with whom the other members of the court agreed, said, at p.87 :

"the short answer to Mr. Souls point is that it is not now open to him in the present proceedings to raise any issue by way of challenge to the assessments raised against him by the Commissioner of Inland Revenue, in the first place, and confirmed by the general commissioners on appeal. That is the clear result of the decision of this court in. . . the IRC v. Pearlberg."

The statutory machinery for an appeal from a notice of assessment is exclusive machinery, and when it has been exhausted to the point of appeal to the general commissioners, and notwithstanding that there is a case stated to the High Court pending it is not open to the taxpayer to dispute his liability in proceedings brought by the commissioners to enforce the assessments against him.

In In re Vandervells Trusts [1971] AC 912, Viscount Dilhorne said :

"but where the correctness of an assessment, and so the liability to pay income tax or surtax, is challenged, that can only, in my opinion, be decided by the special or general commissioners."

I refer also to the speech of Lord Diplock in that case, at p.944.

That then is the true principle applicable in these cases, namely, that the statutory machinery is exclusive machinery for an appeal from a notice of assessment. There is normally no other. However, I do not say there are no cases in which, exceptionally, a challenge by way of judicial review or otherwise to a decision of the revenue would be possible. There may be cases where, for example, there has been some abuse of power or unfairness, which would justify the intervention of the court : see for example Reg v. IRC Ex parte Preston [1985] AC 835. But that is exceptional. Normally the statutory machinery under the Taxes Management Act 1970 is the exclusive machinery for challenge to an assessment by a taxpayer. In my judgment there is nothing in the present case which comes near to such impropriety by the revenue as to justify departure from the normal procedure.

That brings me to the second point. It is said by the taxpayer that the inspector acted ultra vires by assessing her, because, it was submitted, prostitute cannot be assessed on income derived from prostitution. Therefore, it was submitted the assessments were invalid and cannot be proceeded on. In my opinion the function of the inspector is to form a view as to whether certain receipts of the taxpayer are, or may be, within the statutory charge to tax. The opinion which he forms may sometimes be wrong-although on occasions it may take a long time to determine whether such opinion was correct or not. But the fact that an inspectors view of such a matter is ultimately held to be wrong does not mean he was acting ultra vires in making the assessment in the first place.

It was said that the liability to tax is statutory, and if the activity in question does not come within the statutory language-for example trade in the present case-that there is no authority to issue an assessment in respect of receipts of such activity. That in my judgment is confusing the question of an ultimate liability to tax with an inspectors power to issue an assessment. Of course there are many questions concerning liability to tax which are difficult. There have been hundreds of cases litigated as to what is "trade." But an inspector can do no more than to form a view and the fair and proper administration of the tax machinery in any way requires that any decision he makes should be condemned as ultra vires if, in the end, it is proved that he is wrong. The position is that it is the function of the general or special commissioners, under the statutory machinery, to decide whether the assessment is correct, or not. In my view the taxpayer is adequately protected by the exclusive statutory machinery which allows three appeals without leave and a fourth to the House of Lords with leave. In my opinion the taxpayer is not entitled to raise the question of the validity of the assessments in collection proceedings.

In relation to the year 1982-83, the claim is for non-postponed tax agreed u/s 55(7) of the Taxes Management Act 1970, pending the hearing of an appeal. This seems to me to be governed by the same principles as I have already indicated in that the statute imposes express liability to pay the tax. Therefore, in my judgment, the taxpayer is precluded from raising the present point in relation to that matter also.

I turn to the question whether the taxpayers earnings were liable to tax. There is charged to tax under Schedule D the annual gains or profits arising or accruing to any person residing in the United Kingdom from any trade, profession or vocation. Are the earnings of prostitution the earnings of a trade as the Crown contends ? In my opinion they are. In Ransom v. Higgs [1974] 1 W.L.R. 1594, Lord Reid said :

"The Income Tax Acts have never defined trade or trading farther than to provide that trade includes every trade, manufacture, adventure or concern in the nature of trade. As an ordinary word in the English language trade has or has had a variety of meanings or shades of meaning. Leaving aside obsolete or rare usage it is sometimes used to denote any mercantile operation, but it is commonly used to denote operations of a commercial character by which the trader provides to customers for reward some kind of goods or services. The contexts in which the word trade has been used in the Income Tax Acts appear to me to indicate that operations of that kind are what the legislature has primarily in mind."

Lord Cross said, at p. 1622 :

"A man cannot be trading or engaged in an adventure in the nature of trade unless there is some one with whom he is trading-some one to whom he supplies something such as goods or services for some return."

Lord Morris of Borth-y-Gest said, at p.1607 :

"quite lacking are the indicia which are common to so many forms of trading activity. Mr. Higgs was not himself concerned in any buying or selling activity. He gave no services. He supplied nothing."

It seems to me that the provision of services for reward can properly be called "trade." A prostitute does provide services for reward, and accordingly her activities in my view come within the charge to trade in Schedule D.

The Crown does not accept that the illegality of the activities which constitute a trade will prevent it from being a trade within Schedule D. However, I do not need to deal with that; prostitution is not illegal under English law-and that is not in dispute before us. Many of the activities which are associated with prostitution are in fact illegal-for example, the keeping of a brothel or letting premises for use as a brothel or soliciting. But prostitution itself is not illegal. Mr. Macdonald, for the taxpayer, placed reliance on a decision of the Supreme Court of Ireland in Hayes v. Duggan [1921] I.R. 406. That was a case concerning a bookmaker who was assessed for profits derived from the running of sweepstakes. It was held that it was not within the contemplation of the Income Tax Act 1918 that such profits should be taxable. However I do not consider that that case is of assistance to the taxpayer. Sweepstakes constituted offences under the statutes prohibiting lotteries. As FitzGibbon J. said, the profits were exclusively derived from a criminal enterprise. Kennedy C.J. said, at p.416 : "The question is whether the Legislature has imposed the income tax on the gains of unlawful and criminal enterprises." He said further, at pp.416-417 :

"I have, after much consideration of the matter, come to the definite opinion that income derived from criminal enterprises, that is to say, from enterprises prohibited by law and punishable as offences against the State, is not within the contemplation of the income tax legislation, and, while not expressly brought within that legislation, cannot be supposed to be contemplated by it."

Hayes v. Duggan was not followed by Rowlatt J. in Mann v. Nash [1932] 1 K.B. 752 or by Finlay J. in Southern v. A. B. Ltd., [1933] 1 K.B. 713. However, it is not necessary for me to reach any conclusion as to whether profits from an illegal trade are assessable to income tax under the present law of England. The taxpayers evidence is that she was a prostitute from 1973 to 1983, which covers the period of the assessments. The first assessment was in respect of professional fees; the others were in respect of profits from prostitution. In 1973 and in 1976 the taxpayer was convicted of keeping a brothel. But there is no evidence as to her earnings from brothel-keeping which is a criminal activity. On the face of it, since she admits to being a prostitute from 1973 to 1983, those assessments relate to the profits of prostitution-which is not unlawful. In any event, it seems to me there is no evidence that such profits represent earnings from an illegal trade.

As regards the propriety of the Crown seeking to recover tax on the proceeds of prostitution, I adopt the words of Rowlatt J. in Mann v. Nash [1932] 1 K.B. 752 :

"The revenue authorities, representing the state, are merely looking at an accomplished fact. It is not condoning it, or taking part in it. It merely finds profit made from what appears to be trade, and the revenue laws say that profits made from a trade are to be taxed".

In my judgment the taxpayer fails on both the points which have been raised, and this appeal should be dismissed.

PARKER L.J. I agree. As to whether prostitution is a trade within the meaning of Case I of Schedule D in section 109 of the Income and Corporation Taxes Act, 1970, there can I think be no doubt that it is a trade within the ordinary meaning of that word. It consists in the supply of services for reward on a commercial basis. Although the bargains made between the prostitute and her clients are unenforceable as being contra bonos mores neither bargains made nor the services supplied are illegal in the sense of being prohibited either at common law or by statute and made subject either to civil or criminal sanctions. Both bargains and services are immoral, but that is all.

It was submitted, however, that taxation of the profits of prostitution cannot have been within the contemplation of Parliament and that "trade" must therefore be construed as excluding prostitution, principally on the ground that, so it was said, a person who practises or carries on the activities involved must inevitably, in so doing, commit offences against the criminal law. In the alternative it was submitted that if the activities are to be carried on without committing offences, the restrictions on the normal attributes or indicia of a trade are such that it cannot be regarded as a trade.

As to the alternative ground, I say only this, that if a plumber chooses to ply his trade without doing any of those things which would constitute crimes if done by a prostitute, he is plainly still carrying on a trade. The submission is that this is only so because he could lawfully do such things if he wished. One has only to state the submission to realise that it must be wholly untenable. The plumber from first to last is carrying on a trade.

As to the first and principal ground, the English authorities are all against the taxpayer, but it was submitted that the decision of the Irish Supreme Court in Hayes v. Duggan [1929] IR 406 is in her favour. In his skeleton argument Mr. Macdonald put it thus : "The acceptable rationale of Hayes v. Duggan. . . . is that the state should prevent what it prohibits and makes unlawful rather than tax it..." In that case, to which Fox L.J. has referred in some detail, the following observations were made-first in the judgment of Kennedy C.J. at p. 416 :

"We are only concerned with the gains alleged to have been derived by him from two independent transactions, each of which would be an offence against the statutes prohibiting lotteries, rendering the appellant liable to be indicted and exposing him to the severe penalties prescribed by the Lotteries Acts. The question is whether the legislature has imposed the income tax on the gains of unlawful and criminal enterprises".

Then further in his judgment, he said, at pp. 416-417 :

"I have, after much consideration of the matter, come to the definite opinion that income derived from criminal enterprises, that is to say, from enterprises prohibited by law and punishable as offences against the state, is not within the contemplation of the income tax legislation, and, while not expressly brought within that legislation, cannot be supposed to be contemplated by it. Reflection on the matter, I think, demonstrates this to be the true view. In the first place, the legislature cannot be supposed to contemplate the carrying on of that which it has prohibited and made criminal. In my opinion, the business profits and gains to which the income tax legislation is directed are lawful business profits and gains."

Finally, in his judgment he said, at p. 418 :

"In my opinion, therefore, the determination of the special commissioners was correct and the appeal should be allowed. I wish, however, to make it clear that this judgment is limited to the case of profits derived from a wholly unlawful business or enterprise or transaction. I am not prepared, as at present advised, to follow the view suggested by Scrutton L. J. in Inland Revenue Commissioners v. Alexander von Glehn and Co., Ltd. [1920] 2 K.B. 553, as to the case of lawful businesses carried on in whole or part in an unlawful manner. As it does not arise in this case, I reserve it for future consideration..."

FitzGibbon J., said, at p. 418 :

"... I have come to the conclusion that profits and gains exclusively derived farom a criminal enterprise were not within the contemplation of the legislature when it passed the Income Tax Act 1918. It is clear that the carrying on of a lottery or sweepstakes is a criminal act punishable by indictment, and not merely a business which may be carried on subject to penalties".

Finally in his judgment FitzGibbon J. said, at p. 419 :

"I can see a broad distinction between cases in which it appears, from investigation into the accounts of a lawful business, that a portion of the profits may have been derived from illegal methods of conducting it, and cases such as the present one, where the entire transaction or trade is illegal per se. A publican, part of whose profits were made by sales during prohibited hours; a pawnbroker or marine store dealer, part of whose profits were derived from receipt of stolen goods, could not, in my opinion, claim exemption from taxation for that part of his profits upon the ground that they were earned by crime."

Turning to the judgment of Murnaghan J., he said at p. 421 :

"I find it difficult to accept the view that that statute intended to subject to tax the profits derived from operations which were prohibited by law, and made criminal acts."

In my judgment the taxpayer gains nothing from that case. It is made abundantly clear in all three judgments that they were dealing only with a case where the very activity from which the profits were derived was itself prohibited by Parliament and made a criminal act. It is true that in the judgments there is use of word "unlawful," but it is perfectly plain that where so used it is not referring to an activity other than an activity expressly prohibited by Parliament.

In the case of prostitution it is not prohibited; it is not a criminal offence; it is not subject to criminal sanctions. It is not even an activity which may be lawfully carried on subject to penalties. It is a lawful activity, in the course of which offences may or may not be committed. Should they be so committed, the prostitute may no doubt be convicted and sentenced according to law, but as is accepted, prostitution itself is not unlawful. What the prostitute will be doing in such cases is simply committing offences in the course of carrying on an unprohibited and thus lawful, albeit immoral, trade. As with a bookmaker, she cannot enforce her bargains, but in my judgment she, like the bookmaker, is trading and is taxable. The Revenue will not, by taxing her, be seeking to share the profits of a criminal or prohibited act. It is unnecessary to consider whether the courts in this country should follow the actual decision in Hayes v. Duggan on this occasion, and I do not propose to say anything on that subject.

As to the question whether the taxpayer is entitled to raise the defence at all, it is not, in the light of the conclusions above, strictly necessary to determine the matter. It was, however, fully argued and the Crown is understandably anxious that the judges decision that the defence was open to her should not stand. I therefore deal with it shortly. It was expressly accepted by the taxpayer that it will only be in rare cases that a challenge to an assessment or to an agreement u/s 54 or 55 of the Taxes Management Act 1970 can be made otherwise than by way of the statutory machinery provides by that Act. I am content to accept the possibility that such cases may arise, not only by way of judicial review proceedings, but also by way of defence to proceedings to recover tax-although such cases must, in my view, be rare in the extreme. I am quite satisfied, however, that this is not such a case.

The taxpayer, faced with assessments, had the option of pursuing the statutory appeals procedure. Had she done so and the commissioners found against her, she could then have required the commissioners to state a case for the opinion of the High Court. Thereafter she could have appealed to this court and again, albeit with leave, to the House of Lords. There is therefore no question whatever of the final and conclusive provision, which has already been cited, being an "ouster" clause, and it is only where one is dealing with an ouster clause that the point which is sought to be raised before us comes in question.

Instead the taxpayer chose the alternative course of making agreements u/s 54-or in one case u/s 55. No doubt she did so because she consideration it to be a wise course to take. She made a bargain. It is a binding bargain. It is nothing more than an ordinary compromise of a dispute, and a valid one, at that.

The only qualification to the final and conclusive provision in section 46(2) of the Taxes Management Act 1970 (so far as anyone has been able to discover) is the provision for a case to be stated. That provision clearly cannot apply in the case of an agreement. The commissioners had not considered the matter, and are therefore not in a position to state a case. In the result, it appears to me plain that it is final and conclusive and cannot be challenged in any proceedings at all.

If, however, I were wrong about that, it would not avail the taxpayer because if, by some ingenious method, the commissioners could be persuaded to state a case, any appeal would have been long since out of time, and in any event, the agreed amount would have been payable in the mean-time under the provisions of the section. The attempt to escape from that position on the ground that if the point of law raised is a good one the assessments on the appellant were ultra vires, I find is wholly untenable. The question whether certain profits or gains fall within or without a particular case is the very question which Parliament, subject to the appeal procedure, has committed to the commissioner. They may get the answer right-or-wrong-as indeed may the inspector in the first place, but the only route by which the question whether the inspector or commissioners were right or wrong is the route specified by the Taxes Management Act.

Accordingly, for the reasons given by Fox L. J., and for the short, additional reasons given in this judgment, I too would dismiss the appeal.

SIR GEORGE WALLER. I agree with the judgments of Fox and Parker L. JJ. and do not wish to add anything.

Appeal dismissed with costs save that in relation to costs incurred while taxpayer legally aided, order not to be enforced without further order of court.

Leave to appeal refused.

26 July. The Appeal Committee of the House of Lords (Lord Keith of Kinkel, Lord Brandon of Oakbrook and Lord Ackner) dismissed a petition by the taxpayer.

Solicitors : Bond and Partners; Solicitor of Inland Revenue.

H.D.