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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Hargreaves Property Holdings Ltd v Revenue And Customs [2024] EWCA Civ 365 (15 April 2024) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2024/365.html Cite as: [2024] EWCA Civ 365, [2024] STC 925, [2024] BTC 13 |
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ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
MRS JUSTICE BACON AND JUDGE SWAMI RAGHAVAN
[2023] UKUT 120 (TCC)
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE NUGEE
and
LADY JUSTICE FALK
____________________
HARGREAVES PROPERTY HOLDINGS LIMITED |
Appellant |
|
- and – |
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THE COMMISSIONERS FOR HIS MAJESTY'S REVENUE AND CUSTOMS |
Respondents |
____________________
Richard Vallat KC and Calypso Blaj (instructed by HMRC Solicitor's Office and Legal Services) for the Respondents
Hearing date: 12 March 2024
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Crown Copyright ©
Lady Justice Falk:
Introduction
Factual background
"12. The appellant's group acquired property primarily for property investment purposes. In the relevant period the properties held were in the UK, such that the income and capital gains of the group were made in the UK (§16(1)). Some of the group's loan funding took the form of unsecured borrowing from directors of the group, founder family members, Gibraltar-resident trusts of which they were settlors and/or beneficiaries, and the group's FURBS (funded unapproved retirement benefit scheme) ("the lenders") (§16(3)). Before 2004 the loans were provided "somewhat informally". In November 2004 the group restructured its loans with the intention that the loan interest would not be subject to UK tax, but would still generate relief for the UK group companies (§16(6)–(7)).
13. The new arrangements involved the following steps (§§16(7) and (9)):
(1) Shortly before the interest was paid by the group borrowing company, the relevant lender assigned for consideration the right to interest to a third party. This was initially a Guernsey-resident company [Storrier Trading Limited] ("Storrier"), run by Mercator, a group providing trust and corporate administration services. In subsequent years, this role was fulfilled by one of two Guernsey resident trusts also managed by Mercator (the "Guernsey Trusts").
(2) At the same time, the lender assigned the principal to another company within the appellant's group. In later years after 2009 this step was omitted and both the principal and interest were assigned to the same third party.
(3) One or two days after the assignment, the appellant paid the interest and principal to the relevant third party.
(4) Arrangements were made for the relevant lender to advance an amount generally at least as large as the original loan amount principal to fund the above payment.
14. Interest and principal on the lender's new advance were in turn assigned as in step 1 above. The above process of assignment, repayment by the appellant and re-advance by the original lender continued throughout the period relevant to the appeal (October 2010–March 2015). In relation to interest payments made from 2012 onwards, Storrier [or the relevant Guernsey Trust] assigned the right to interest to a UK-resident company, Houmet Trading Limited ("Houmet"), also managed by Mercator, with the result that the appellant made interest payments to Houmet.
15. The loan documentation also changed to contain terms that (i) the loan was repayable on 30 days' notice by the lender or any time by the appellant; (ii) all payments were to be made in Gibraltar from a source outside the UK; (iii) no assets in the UK were secured; and (iv) Gibraltar law was the governing law and Gibraltar courts had exclusive jurisdiction. The revolving facility agreement with the FURBS contained similar terms, but referred instead to Jersey law and the Jersey courts (§16(12))."
The relevant legislation
"874 Duty to deduct from certain payments of yearly interest
(1) This section applies if a payment of yearly interest arising in the United Kingdom is made–
(a) by a company,
(b) by a local authority,
(c) by or on behalf of a partnership of which a company is a member, or
(d) by any person to another person whose usual place of abode is outside the United Kingdom.
(2) The person by or through whom the payment is made must, on making the payment, deduct from it a sum representing income tax on it at the basic rate in force for the tax year in which it is made.
(3) But see–
(a) sections 875 to 888 as to circumstances in which the duty to deduct a sum under this section is disapplied; and
(b) Chapter 11 (payments between companies etc) for a further exception from the duty to deduct under this section."
"929 Overview of Chapter
(1) This Chapter makes provision allowing some payments made by companies, local authorities and qualifying partnerships to be paid gross where they would otherwise be subject to specified duties to deduct sums representing income tax under this Part.
(2) Section 930 disapplies specified duties to deduct where a payment is made by a company, local authority or qualifying partnership which reasonably believes that the payment is an excepted payment.
…
(5) Sections 933 to 937 make provision as to when a payment is an excepted payment.
(6) Section 938 deals with what happens when a company, local authority or qualifying partnership makes a payment without deducting a sum representing income tax under a reasonable but incorrect belief that the payment is an excepted payment.
930 Exception from duties to deduct sums representing income tax
(1) The duties to deduct sums representing income tax mentioned in subsection (2) do not apply to a payment if–
(a) it is made by a company, local authority or qualifying partnership, and
(b) at the time the payment is made, the company, authority or partnership reasonably believes that it is an excepted payment.
(2) The duties to deduct are those under–
(a) section 874(2) (certain payments of yearly interest),
…
933 UK resident companies
A payment is an excepted payment if the person beneficially entitled to the income in respect of which the payment is made is a UK resident company.
934 Non-UK resident companies
(1) A payment is an excepted payment if each of the following conditions is met in relation to the payment.
(2) The person beneficially entitled to the income in respect of which the payment is made must be a non-UK resident company.
(3) The non-UK resident company must carry on a trade in the United Kingdom through a permanent establishment.
(4) The payment must be one that is required to be brought into account in calculating the chargeable profits (within the meaning given by section 19 of [the Corporation Tax Act] 2009) of the non-UK resident company.
938 Consequences of reasonable but incorrect belief
(1) This section applies if–
(a) a payment is made by a company, local authority or qualifying partnership without a sum representing income tax on the payment being deducted from it,
(b) at the time the payment is made, the company, authority or partnership reasonably believes that it is an excepted payment,
(c) one of the duties to deduct sums representing income tax mentioned in section 930(2) would apply to the payment if the company did not so believe, and
(d) the payment is not an excepted payment at the time it is made.
(2) This Part has effect in relation to the payment as if section 930(1) had never disapplied the duties to deduct mentioned in section 930(2)."
a) The obligation to deduct tax from yearly interest is "switched off" if a corporate payer reasonably believes that the payment is an "excepted payment".
b) The categories of excepted payment include situations where the person "beneficially entitled" to the income is either a UK resident company (s.933) or a non-resident company within the charge to corporation tax in respect of it by reference to a trade carried on through a UK permanent establishment (s.934).
c) If, despite the payer's reasonable belief at the time of the payment, it transpires that the payment was not in fact an excepted payment, then the duty to deduct, and the consequential obligation to account for the tax deducted, are treated as not having been switched off.
Ground 1: s.933 ITA 2007 and "beneficially entitled"
The decisions below in summary
Submissions for Hargreaves
The relevance of purposive construction
"32. The essence of the new approach was to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description. Of course this does not mean that the courts have to put their reasoning into the straitjacket of first construing the statute in the abstract and then looking at the facts. It might be more convenient to analyse the facts and then ask whether they satisfy the requirements of the statute. But however one approaches the matter, the question is always whether the relevant provision of the statute, upon its true construction, applies to the facts as found. As Lord Nicholls of Birkenhead said in MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311, 320, para 8: 'The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case.'"
"36. Cases such as these gave rise to a view that, in the application of any taxing statute, transactions or elements of transactions which had no commercial purpose were to be disregarded. But that is going too far. It elides the two steps which are necessary in the application of any statutory provision: first, to decide, on a purposive construction, exactly what transaction will answer to the statutory description and secondly, to decide whether the transaction in question does so. As Ribeiro PJ said in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46, para 35:
'the driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.'"
"10. There are numerous authoritative statements in modern case law which emphasise the central importance in interpreting any legislation of identifying its purpose."
"11. The result of applying the purposive approach to fiscal legislation has often been to disregard transactions or elements of transactions which have no business purpose and have as their sole aim the avoidance of tax. This is not because of any principle that a transaction otherwise effective to achieve a tax advantage should be treated as ineffective to do so if it is undertaken for the purpose of tax avoidance. It is because it is not generally to be expected that Parliament intends to exempt from tax a transaction which has no purpose other than tax avoidance. As Judge Learned Hand said in Gilbert v Comr of Internal Revenue (1957) 248 F 2d 399, 411, in a celebrated passage cited (in part) by Lord Wilberforce in Ramsay [1982] AC 300, 326:
'If … the taxpayer enters into a transaction that does not appreciably affect his beneficial interest except to reduce his tax, the law will disregard it; for we cannot suppose that it was part of the purpose of the Act to provide an escape from the liabilities that it sought to impose.'
See also Collector of Stamp Revenue v Arrowtown Assets Ltd (2003) 6 ITLR 454 , paras 112–113 (Lord Millett NPJ).
12. Another aspect of the Ramsay approach is that, where a scheme aimed at avoiding tax involves a series of steps planned in advance, it is both permissible and necessary not just to consider the particular steps individually but to consider the scheme as a whole. Again, this is no more than an application of general principle. Although a statute must be applied to a state of affairs which exists, or to a transaction which occurs, at a particular point in time, the question whether the state of affairs or the transaction was part of a preconceived plan which included further steps may well be relevant to whether the state of affairs or transaction falls within the statutory description, construed in the light of its purpose…
13. The decision of the House of Lords in the Barclays Mercantile case [2005] 1 AC 684 made it clear beyond dispute that the approach for which the Ramsay line of cases is authority is an application of general principles of statutory interpretation…"
"15. In the task of ascertaining whether a particular statutory provision imposes a charge, or grants an exemption from a charge, the Ramsay approach is generally described—as it is in the statements quoted above—as involving two components or stages. The first is to ascertain the class of facts (which may or may not be transactions) intended to be affected by the charge or exemption. This is a process of interpretation of the statutory provision in the light of its purpose. The second is to discover whether the relevant facts fall within that class, in the sense that they "answer to the statutory description" (Barclays Mercantile at para 32). This may be described as a process of application of the statutory provision to the facts. It is useful to distinguish these processes, although there is no rigid demarcation between them and an iterative approach may be required.
16. Both interpretation and application share the need to avoid tunnel vision. The particular charging or exempting provision must be construed in the context of the whole statutory scheme within which it is contained. The identification of its purpose may require an even wider review, extending to the history of the statutory provision or scheme and its political or social objective, to the extent that this can reliably be ascertained from admissible material.
17. Likewise, the facts must be also be looked at in the round. In Inland Revenue Comrs v McGuckian [1997] 1 WLR 991, 999, Lord Steyn explained that it was the formalistic insistence on examining steps in a composite scheme separately that allowed tax avoidance schemes to flourish. Sometimes looking at a composite scheme as a whole allows particular steps which have no commercial purpose to be ignored. But the requirement to look at the facts in the round is not limited to such cases. Thus, in Scottish Provident [2004] 1 WLR 3172 where the taxing statute granted an allowance which depended upon the taxpayer having an entitlement to a specified type of property (gilts), a view of the facts in the round enabled the House of Lords to conclude that a legal entitlement to gilts generated by one element in a larger scheme failed to qualify because the entitlement was intended and expected to be cancelled out by an equal and opposite transaction."
"53. The description of the concept of entitlement to possession in section 65(1) of the 1988 Act as 'an intrinsically legal one' seems to hark back to a distinction drawn in the speech of Lord Hoffmann in MacNiven (at para 58) between 'commercial concepts' and 'purely legal concepts'. Lord Hoffmann took as an example stamp duty payable on 'a conveyance or transfer on sale' and stated:
'the statutory language defines the document subject to duty essentially by reference to external legal concepts such as 'conveyance' and 'sale'. If a transaction falls within the legal description, it makes no difference that it has no business purpose. Having a business purpose is not part of the relevant concept.'"
"56. The opportunity to clarify the position in English law arose in the Barclays Mercantile case [2005] 1 AC 684. In its joint opinion (at para 38) the Appellate Committee of the House of Lords explained that Lord Hoffmann's distinction, while "not an unreasonable generalisation" was not intended to provide a substitute for a close analysis of what the statute means. It certainly did not justify the assumption that an answer can be obtained by classifying all concepts a priori as either commercial or legal. That would be the very negation of purposive construction, as Ribeiro PJ had pointed out in Arrowtown.
57. We think it important also to note that the conclusions reached in MacNiven and in Barclays Mercantile itself that the statutory provisions relied on in those cases were intended to apply to particular transactions undertaken solely for the purpose of obtaining tax relief were, in each case, the result of a close analysis of the legislation and the relevant facts, following the Ramsay approach, and not of a determination that the Ramsay approach did not apply in the first place.
58. On the same day as Barclays Mercantile, Lord Nicholls also gave the joint opinion of the Appellate Committee, similarly constituted, in Scottish Provident [2004] 1 WLR 3172. The question in that case depended on what the taxing statute meant by 'a contract under which … a qualifying company has any entitlement … to become party to a loan relationship', the latter term being defined as including a government security. The concept of 'entitlement' is of course the concept used in section 65(1) of the 1988 Act, which the Court of Appeal in the present case considered to be an 'intrinsically legal one'. In Scottish Provident, however, the House of Lords was not deterred by the 'legal' nature of the concept from giving it a practical meaning. It was held that the provision did not apply to a legal entitlement which was intended and expected to be cancelled by an equal and opposite obligation, as there was in these circumstances no entitlement to gilts 'in a practical sense' (para 19). As Lord Reed JSC observed in UBS [2016] 1 WLR 1005, para 71, the statutory provision was therefore construed as being concerned with a real and practical entitlement.
59. In a similar way in the present case we consider that the words 'entitled to possession' in section 65(1) of the 1988 Act as the badge of ownership triggering liability for business rates are properly construed as being concerned with a real and practical entitlement which carries with it in particular the ability either to occupy the property in question, or to confer a right to its occupation on someone else, and thereby to decide whether or not to bring it back into occupation."
The case law on beneficial ownership and beneficial entitlement
"… not only was there a consistent line of judicial authority that upon going into liquidation a company ceases to be 'beneficial owner' of its assets as that expression has been used as a term of legal art since 1874, but also there has been a consistent use in taxing statutes of the expressions 'beneficial owner' and 'beneficial ownership' in relation to the proprietary interest of a company in its assets which started with the Finance Act 1927, where the context makes it clear that a company upon going into liquidation ceases to be 'beneficial owner' of its assets as that expression is used in a taxing statute."
"Although I might not, with Lord Diplock, have gone so far as to think that the expression 'beneficial ownership' is a term of art, it is certainly one which has for several centuries had a very well recognised meaning amongst property lawyers. And there can be no doubt that, in enacting a provision such as section 532(3), Parliament must have intended to adopt that meaning. It means ownership for your own benefit as opposed to ownership as trustee for another. It exists either where there is no division of legal and beneficial ownership or where legal ownership is vested in one person and beneficial ownership or, which is the same thing, the equitable interest in the property in another."
Application to this case
Whether Khan and Good make any difference
Conclusion
Ground 2: yearly interest
"… the question whether the interest is 'yearly' or 'short' depends upon a business-like rather than dry legal assessment of [a loan's] likely duration."
"Now the authorities referred to by Crown Counsel seem to me to establish these propositions, five in number:- (First), that interest payable in respect of a short loan is not yearly interest … (Second), that in order that interest payable may be held to be yearly interest in the sense of the Income Tax Acts, the loan in respect of which interest is paid must have a measure of permanence. (Third), that the loan—and this is pretty well expressing the second proposition in another form—must be of the nature of an investment... (Fourth), that the loan must not be one repayable on demand.... (Fifth), that the loan must have a 'tract of future time'... These propositions are perhaps one proposition expressed in different forms, but they are the result of the authorities."
Conclusion
Lord Justice Nugee:
Lord Justice Peter Jackson: