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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Murphy & Anor v Revenue And Customs [2023] EWCA Civ 497 (15 May 2023) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2023/497.html Cite as: [2023] WLR(D) 220, [2023] EWCA Civ 497 |
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ON APPEAL FROM THE HIGH COURT OF JUSTICE
KING'S BENCH DIVISION
ADMINISTRATIVE COURT
Mr Justice Chamberlain
Strand, London, WC2A 2LL |
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B e f o r e :
LADY JUSTICE ANDREWS
and
LADY JUSTICE FALK
____________________
(1) HUGH ![]() (2) ![]() |
Claimants/Appellants |
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- and - |
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THE COMMISSIONERS FOR HIS MAJESTY'S REVENUE AND CUSTOMS |
Defendants/ Respondents |
____________________
Aparna Nathan KC and Ishaani Shrivastava (instructed by The General Counsel and Solicitor to HM Revenue and Customs) for the Respondents
Hearing date: 20 April 2023
____________________
Crown Copyright ©
Lord Justice Newey:
The facts
ESC B18 in context
The Finance Act 1973
"(1) Where, in any year of assessment, trustees make a payment to any person in the exercise of a discretion exercisable by them or any person other than the trustees, then, if the sum paid is for all the purposes of the Income Tax Acts income of the person to whom it is paid (but would not be his income apart from the payment), the following provisions of this section shall apply with respect to the payment in lieu of section 52 or 53 of the Taxes Act [i.e. the Income and Corporation Taxes Act 1970].
(2) The payment shall be treated as a net amount corresponding to a gross amount from which tax has been deducted at a rate equal to the sum of the basic rate and the additional rate in force for the year in which the payment is made; and the sum treated as so deducted shall be treated—
(a) as income tax paid by the person to whom the payment is made; and
(b) so far as not set off under the following provisions of this section, as income tax assessable on the trustees.
(3) The following amounts, so far as not previously allowed, shall be set against the amount assessable (apart from this subsection) on the trustees in pursuance of subsection (2)(b) above:
(a) the amount of any tax on income arising to the trustees and charged at the additional as well as at the basic rate in pursuance of section 16 of this Act …."
"(1) Subsection (2) of this section shall apply if a payment made by trustees falls to be treated as a net amount in accordance with section 17(2) of this Act and the income arising under the trust includes income in respect of which the trustees are entitled to credit for overseas tax under Part XVIII of the Taxes Act (in that subsection referred to as 'taxed overseas income').
(2) If the trustees certify—
(a) that the income out of which the payment was made was or included taxed overseas income of an amount and from a source stated in the certificate; and
(b) that that amount arose to them not earlier than in the year 1973-74 and not earlier than six years before the end of the year of assessment in which the payment was made;
the person to whom the payment was made may claim that the payment, up to the amount so certified, shall be treated for the purposes of the said Part XVIII as income received by him from that source and so received in the year in which the payment was made."
ESC B18 (1978 version)
"B18. Payments out of a discretionary trust: entitlement to relief from United Kingdom tax under the provisions of the Income Tax Acts or of double taxation agreement.
If a payment made by Trustees falls to be treated as a net amount in accordance with Section 17(2), Finance Act 1973 and the income arising under the Trust includes income in respect of which the beneficiary would, if such income came to him directly instead of through Trustees, be entitled to relief under the provisions of the Income Tax Acts, e.g.
Section 27, Income and Corporation Taxes Act 1970 (claims for personal reliefs by non-residents);
Section 99, Income and Corporation Taxes Act 1970 (claims for exemption from tax on certain United Kingdom Government Securities held by persons not ordinarily resident in the United Kingdom);
Sections 100 and 159, Income and Corporation Taxes Act 1970 (claims for exemption from United Kingdom tax or income from overseas securities by persons not resident in the United Kingdom);
or under the terms of a double taxation agreement,
such relief will be granted to the beneficiary on a claim made by him to the extent that the payment is of income which arose to the Trustees not earlier than in the year 1973-74 and not earlier than six years before the end of the year of assessment in which the payment was made, provided that the Trustees have submitted for each year Trust Returns which are supported by the relevant income tax certificates and which detail all sources of trust income arising and payments made to beneficiaries.
A similar concession will operate where the payment made by the Discretionary Trustees is not within Section 17(2), Finance Act 1973 but constitutes income arising from a foreign possession (e.g. where non-resident Trustees exercise their discretion outside the United Kingdom) provided the Trustees:
(i) submit Trust Returns, supported by the relevant income tax certificates, which detail all sources of Trust income arising and payments made to beneficiaries; and
(ii) pay the Additional Rate Tax chargeable on the United Kingdom income of the Trust in accordance with Section 16, Finance Act 1973."
The Income and Corporation Taxes Act 1988
"(1) Where, in any year of assessment, trustees make a payment to any person in the exercise of a discretion exercisable by them or any person other than the trustees, then, if the sum paid is for all the purposes of the Income Tax Acts income of the person to whom it is paid (but would not be his income apart from the payment), the following provisions of this section shall apply with respect to the payment in lieu of section 348 or 349(1).
(2) The payment shall be treated as a net amount corresponding to a gross amount from which tax has been deducted at a rate equal to the sum of the basic rate and the additional rate in force for the year in which the payment is made; and the sum treated as so deducted shall be treated—
(a) as income tax paid by the person to whom the payment is made; and
(b) so far as not set off under the following provisions of this section, as income tax assessable on the trustees.
(3) The following amounts, so far as not previously allowed, shall be set against the amount assessable (apart from this subsection) on the trustees in pursuance of subsection (2)(b) above—
(a) the amount of any tax on income arising to the trustees and charged at the additional as well as at the basic rate in pursuance of section 686 …."
Section 809 of ICTA 1988 was in comparable terms to section 18 of FA 1973, reading:
"(1) In any case where—
(a) a payment made by trustees falls to be treated as a net amount in accordance with section 687(2) and the income arising under the trust includes any taxed overseas income, and
(b) the trustees certify that—
(i) the income out of which the payment was made was or included taxed overseas income of an amount and from a source stated in the certificate, and
(ii) that amount arose to them not earlier than six years before the end of the year of assessment in which the payment was made;
then the person to whom the payment was made may claim that the payment, up to the amount so certified, shall be treated for the purposes of this Part as income received by him from that source and so received in the year in which the payment was made.
(2) In subsection (1) above "taxed overseas income", in relation to any trust, means income in respect of which the trustees are entitled to credit for overseas tax under this Part."
ESC B18 (1994 version)
"B18: Payments out of discretionary trusts
UK Resident Trusts
A beneficiary may receive from trustees a payment to which section 687(2), Income and Corporation Taxes Act (ICTA) 1988 applies. Where that payment is made out of the income of the trustees in respect of which, had he received it directly, the beneficiary would
• have been entitled to relief under sections 47, 48 or 123 ICTA 1988 ;* or
• have been entitled to relief under the terms of a double taxation agreement; or
• not have been chargeable to UK tax
the beneficiary may claim those reliefs or, where he would not have been chargeable, repayment of the tax treated as deducted from the payment (or an appropriate proportion of it).
Relief will be granted to the extent that the payment is out of income which arose to the trustees not earlier than six years before the end of the year of assessment in which the payment was made, provided that the trustees have made trust returns for each year which are supported by the relevant income tax certificates and which give details of all sources of trust income and payments made to beneficiaries.
Non-resident trusts
A similar concession will operate where a beneficiary receives a payment from discretionary trustees which is not within section 687(2), ICTA 1988 but is income arising from a foreign possession (e.g. where non-resident trustees exercise their discretion outside the UK).
Where a non-resident beneficiary receives such a payment out of income of the trustees in respect of which, had he received it directly, the beneficiary would have been liable to UK tax then he
• may claim relief under Section 278 ICTA 1988* (if entitled); and
• may be treated as if he received that payment from a UK resident trust but claim credit only for UK tax actually paid by the trustees on income out of which the payment is made.
A UK beneficiary of a non-resident trust may claim credit for UK tax actually paid by the trustees on the income out of which the payment is made as if the payment were from a UK resident trust.
This treatment will only be available where the trustees:
- make trust returns, supported by the relevant income tax certificates, giving details of all sources of trust income and payments made to beneficiaries; and
- pay tax at the rate applicable to trusts chargeable on the UK income of the trust under section 686, ICTA 1988.
No credit is given for tax treated as paid on income received by the trustees (for example foreign income dividends) which would not be available for set off under Section 687(2) if that section applied, and that tax is not repayable.
___________________________________________________
* The relevant reliefs are
- exemption from tax on certain UK Government securities held by persons not ordinarily resident in the UK (Section 47 ICTA 1988);
- exemption from UK tax on income from overseas securities held by persons not resident in the UK (Sections 48 and 123 ICTA 1988);
- personal reliefs for certain non-residents (Section 278, ICTA 1988)."
"The Inland Revenue have today published a revised version of extra-statutory concession B18 which applies where a beneficiary receives income from a discretionary trust. The concession enables the beneficiary to claim certain reliefs or credits to set against his tax liability on that income.
The concession allows some beneficiaries of trusts with income taxable in the UK to claim reliefs to which they would not otherwise be entitled, by treating them as if they had received the income directly. The amendment now being made to the concession ensures that it also applies to allow UK resident beneficiaries of non-resident trusts to claim credit for UK tax paid by the trustees. The Inland Revenue have always viewed the concession as enabling credit for this tax to be claimed, and the amendment is made to correct a possible defect of the previous wording. The text has also been re-ordered and amended to take into account changes to the taxation of trusts introduced by Finance Act 1993."
ESC B18 (1999 version)
"B18: Payments out of discretionary trusts
UK Resident Trusts A beneficiary may receive from trustees a payment to which Section 687(2) ICTA 1988 applies.
Where that payment is made out of the income of the trustees in respect of which, had it been received directly, the beneficiary would
- have been entitled to exemption in respect of FOTRA Securities issued in accordance with Section 154 FA 1996; or
- have been entitled to relief under the terms of a double taxation agreement; or
- not have been chargeable to UK tax because of their not resident and/or not ordinarily resident status
the beneficiary may claim that exemption or relief or, where the beneficiary would not have been chargeable, repayment of the tax treated as deducted from the payment (or an appropriate proportion of it). For this purpose, the payment will be treated as having been made rateably out of all sources of income arising to the trustees on a last in first out basis.
Relief or exemption, as appropriate, will be granted to the extent that the payment is out of income which arose to the trustees not earlier than six years before the end of the year of assessment in which the payment was made, provided the trustees:
- have made trust returns giving details of all sources of trust income and payments made to beneficiaries for each and every year for which they are required, and
- have paid all tax due, and any interest, surcharges and penalties arising, and
- keep available for inspection any relevant tax certificates.
Relief or exemption, as appropriate, will be granted to the beneficiary on a claim made within five years and ten months of the end of the year of assessment in which the beneficiary received the payment from the trustees.
Non-resident trusts
A similar concession will operate where a beneficiary receives a payment from discretionary trustees which is not within section 687(2) ICTA 1988 (i.e. where non-resident trustees exercise their discretion outside the UK).
Where a non-resident beneficiary receives such a payment out of income of the trustees in respect of which, had it been received directly, it would have been chargeable to UK tax, then the beneficiary
- may claim relief under Section 278 ICTA 1988 (personal reliefs for certain non-residents); and
- may be treated as receiving that payment from a UK resident trust but claim credit only for UK tax actually paid by the trustees on income out of which the payment is made. The beneficiary may also claim exemption from tax in respect of FOTRA Securities issued in accordance with Section 154 FA 1996 to the extent that the payment is regarded as including interest from such securities.
A UK beneficiary of a non-resident trust may claim appropriate credit for tax actually paid by the trustees on the income out of which the payment is made as if the payments out of UK income were from a UK resident trust and within Section 687(1) ICTA 1988.
This treatment will only be available where the trustees:
- have made trust returns giving details of all sources of trust income and payments made to beneficiaries for each and every year for which they are required, and
- have paid all tax due and any interest, surcharges and penalties arising, and
- keep available for inspection any relevant tax certificates.
Relief or exemption, as appropriate, will be granted to the beneficiary on a claim made within five years and ten months of the end of the year of assessment in which the beneficiary received the payment from the trustees.
No credit will be given for UK tax treated as paid on income received by the trustees which would not be available for set off under Section 687(2) ICTA 1988 if that section applied, and that tax is not repayable (for example on dividends). However, such tax is not taken into account in calculating the gross income treated as taxable on the beneficiary under this concession."
i) The paragraph breaks in ESC B18 (1994) between the first and second sentences and immediately before the sentence beginning "This treatment" have been removed in ESC B18 (1999);
ii) The words "out of UK income" and "and within Section 687(1) ICTA 1988" have been inserted into the sentence in ESC B18 (1999) beginning "A UK beneficiary of a non-resident trust";
iii) The sentence beginning "This treatment" now speaks of "have made" and "have paid" rather than "make" and "pay" and has an extra bullet point ("keep available for inspection any relevant tax certificates");
iv) The paragraph beginning "Relief or exemption" has been added both at the end of the section of ESC B18 dealing with "UK Resident Trusts" and as the penultimate paragraph in the section headed "Non-resident trusts".
The Income Tax Act 2007
"This change does not affect the operation of ESC B18, which enables UK resident beneficiaries who receive discretionary payments to have a credit for the tax paid by non-UK resident trustees on United Kingdom source income."
Extra-statutory concessions: legal principles
"enables the commissioners to formulate policy in the interstices of the tax legislation, dealing pragmatically with minor or transitory anomalies, cases of hardship at the margins or cases in which a statutory rule is difficult to formulate or its enactment would take up a disproportionate amount of parliamentary time".
"proceed on the basis that the representations in the booklet for which the appellants contend must have been clear; that the judgment about their clarity must be made in the light of an appraisal of all relevant statements in the booklet when they are read as a whole; and that, in that the clarity of a representation depends in part upon the identity of the person to whom it is made, the hypothetical representee is the 'ordinarily sophisticated taxpayer' irrespective of whether he is in receipt of professional advice".
The Judgment
"Thus, even without applying the principle [that 'any ambiguity should in general be resolved against the taxpayer'], I would have rejected the Claimants' case on the proper interpretation of ESC B18. But if, contrary to my view, ESC B18 is ambiguous between HMRC's and the Claimants' interpretations, that principle would resolve this claim in HMRC's favour: on no view can it be said that the Claimants' case clearly falls within ESC B18. The concession was not 'clear, unambiguous and devoid of relevant qualification' on this point. That being so, the precondition for the invocation of a substantive legitimate expectation is not satisfied."
The parties' cases in outline
Discussion
ESC B18 (1999)
The significance (if any) of EU law
The significance (if any) of ESC B18 (1999)'s genesis
Conclusion
The significance of practice, manuals and commentaries
"61 HMRC's dealings with individual taxpayers are private. Its evidence in these proceedings is that it has consistently applied the 6-year income limit to UK resident beneficiaries of non-UK resident trusts; and that other than the Claimants' there has only been one query about this practice. But an ordinarily sophisticated taxpayer would not necessarily have any means of knowing this. The Claimants did not, and nor did their accountants, at least until HMRC responded to their query in 2018. In my judgment it would be incompatible with the objective approach to interpretation of policy to attach weight to the existence of a long-standing practice if the practice is visible only to HMRC.
62 I therefore attach no weight to the fact that, according to their evidence, HMRC has always interpreted ESC B18 in the manner for which they now contend."
Conclusion
Lady Justice Andrews:
Lady Justice Falk: