Amalgamated Metal Corporation Plc
| Jurisdiction | UK Non-devolved |
| Judgment Date | 25 September 2017 |
| Neutral Citation | [2017] UKFTT 705 (TC) |
| Date | 25 September 2017 |
| Court | First Tier Tribunal (Tax Chamber) |
[2017] UKFTT 0705 (TC)
Judge Barbara Mosedale
Mr F Fitzpatrick QC appeared for the appellant
Mr R Baldry QC and Ms E Wilson, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Jurisdiction – Appellant not seeking to challenge amendment to tax return in this tribunal as its grounds of challenge beyond tribunal's jurisdiction – But appellant seeking ruling on whether receipt income or capital – Whether tribunal has jurisdiction – No – Appeal struck out.
Jurisdiction – Appellant not seeking to challenge amendment to tax return in this tribunal as its grounds of challenge beyond tribunal's jurisdiction – But appellant seeking ruling on whether receipt income or capital – Whether tribunal has jurisdiction – No – Appeal struck out.
Corporation tax – Whether damages paid for solicitor's negligence in settling a claim based on Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v IR Commrs [2007] BTC 509 taxable as income – Whether payment of ACT in breach of treaty right created a relevant non-lending relationship – Yes – Whether in alternative taxable under CTA 2009, s. 979 as other income – Yes – Appeal would be dismissed if not struck out.
The First-tier Tribunal held that a receipt of damages representing interest on unlawfully paid advance corporation tax was taxable under the loan relationship rules.
This case involved the tax treatment of a compensation payment received by the taxpayer from its tax agent, a firm of solicitors. The agent had agreed the value of a settlement from HMRC to the taxpayer in contravention of the taxpayer's instructions. In particular, the taxpayer would have been entitled, following Sempra Metals Ltd [2007] BTC 509 (Sempra), to a settlement payment incorporating compound interest had the agent not erroneously settled on a simple interest basis. The agent paid damages in the region of £7.7m to the taxpayer by way of compensation.
The taxpayer's position was that the damages were capital in nature rather than income and, consequently, that the taxpayer was entitled to the benefit of ESC D33 under which compensation received in connection with a non-capital gains tax asset is exempt from capital gains tax up to a limit of £500,000. HMRC's position was that the damages were subject to tax as income either under the loan relationship rules or as miscellaneous income not otherwise chargeable to tax. Although the First-tier Tribunal (FTT) considered that it did not have the jurisdiction to hear the appeal because it related to the applicability of an extra-statutory concession, it was nevertheless prepared to make a ruling on the income/capital question just in case it was wrong on the question of jurisdiction.
The first issue to be addressed was whether the damages created a relevant non-lending relationship within CTA 2009, Pt. 6 which deems that certain non-lending relationships must be treated as loan relationships. The taxpayer argued that the advance corporation tax (ACT) payments underlying its Sempra Metals claim were lawfully due and therefore unable to comprise a money debt owing to the taxpayer. The FTT held that there was nothing in the relevant precedents to support this position and, in their view, the ACT payments were not lawfully due. It followed that the taxpayer stood in the position of a creditor in relation to a money debt because the ACT paid by the taxpayer was owed to the taxpayer by HMRC.
The next question was whether this was a debt on which interest was payable to the taxpayer or, as the taxpayer argued, an amount that was calculated as interest but not actually interest. In this regard the FTT held that there is no essential incompatibility with an award of compensation made by a court with interest – if the award is of an income nature compensating for being kept out of a sum of money for a period of time, it is interest. Furthermore, the Courts were clear in both Sempra and Metallgesellschaft (Metallgesellschaft Ltd (Case C-397/98) [2001] BTC 99) that the character of the award was interest; it was referable to a principle sum (the ACT) and was a payment measured by reference to the time that the sum was outstanding.
The taxpayer's final point was that, even if the damages were calculated by reference to the ACT, it was an award representing subtraction of benefit from HMRC. On this point the FTT held that, while the justification for awarding interest was to extract unjust enrichment from HMRC, it was an award to reflect use of a principle sum over time. It does not make it any the more or less interest because it was measured by reference to the debtor's cost of borrowing rather than the creditor's rate of interest on deposits. As the payment by the agent to the taxpayer clearly related to the interest that HMRC owed to the taxpayer, the payment was within the scope of the loan relationship rules so far as they apply to relevant non-lending relationships in CTA 2009, Pt. 6.
Finally, although not strictly necessary in the light of its foregoing conclusions, the FTT also held that the damages would have been taxable as miscellaneous income not otherwise chargeable to tax under CTA 2009, s. 979.
The FTT held that a receipt of damages representing interest on unlawfully paid advance corporation tax was taxable as income under the loan relationship rules. The taxpayer's position that a payment computed as interest is not necessarily interest was not accepted. The FTT were clear that if a payment is computed by reference to the amount, and time outstanding, of a principle sum then it is interest, even if paid as damages or as restitution.
The unusual feature of this case was that, because the outcome of the capital/income question had direct consequences for the applicability of an extra-statutory concession (D33), the FTT did not have the jurisdiction to hear the appeal. The entire judgment was made just in case the FTT was wrong on the jurisdiction question. This means that the judgment is not binding even if not appealed.
HEADING |
PARAGRAPH NUMBER |
JURISDICTION |
3 |
The dispute is over the applicability of an ESC |
6 |
A right to appeal free-standing decisions |
11 |
No right to appeal aspects of a decision not under appeal |
14 |
Conclusion |
22 |
THE INCOME/CAPITAL DISPUTE |
26 |
The facts |
26 |
The ACT background |
25 |
Metallgesellschaft |
30 |
The test cases |
33 |
The relevance of the ACT litigation to AMC |
37 |
The settlement of AMC's claims |
39 |
The dispute with Wragge |
43 |
The witnesses |
49 |
Outline of the legal dispute |
55 |
(A) The loan relationship rules |
62 |
Whether the payment of ACT created a relevant non-lending relationship |
62 |
Was there a money debt? |
68 |
Was the ACT due? |
73 |
(a) Metallgesellschaft |
75 |
(b) Deutsche Morgan Grenfell Group plc v IR Commrs [2006] BTC 781 |
84 |
(c) DMG – which judgments to prefer? |
92 |
(d) Test Claimants in the Franked Investment Income Group Litigation v IR Commrs [2010] BTC 265 |
101 |
(e) BAT Industries plc [2017] TC 06000 |
107 |
Conclusion on money debt |
110 |
Was it “a debt on which interest is payable to … the company”? |
116 |
Was it calculated as interest but not interest? |
121 |
(a) Metallgesellschaft |
122 |
(b) definition of interst |
127 |
(c) the award in Sempra |
131 |
(d) conclusion |
140 |
Was it a free-standing award? |
141 |
(a) Sempra |
142 |
(b) Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] 2 AC 669 |
154 |
(c) Metallgesellschaft |
160 |
(d) conclusion |
162 |
Was the award one of subtraction of benefit? |
163 |
(a) discussion |
164 |
(b) conclusion |
171 |
Conclusion on whether it was “a debt on which interest is payable to … the company” |
172 |
Relevant matters? |
175 |
Was the Wragge payment interest? |
182 |
Were the damages in respect of a relevant non-lending relationship? |
195 |
Was it a related transaction? |
205 |
Definition of related transaction |
208 |
Was the Wragge payment a profit from a related transaction? |
214 |
Was s 481(3)(c) in force? |
220 |
(B) Miscellaneous income otherwise not chargeable to tax |
228 |
Were the damages income? |
232 |
London & Thames Haven Oil Wharves Ltd v Attwooll (HMIT) (1966) 43 TC 491 |
233 |
Qualification on Attwooll |
240 |
Extinquishment of cuase of action is a capital receipt? |
246 |
Attwooll is not applicable after introduction of CGT? |
254 |
Attwooll is not applicable two stages removed from income? |
257 |
What were the damages paid for? |
266 |
Are the damages within the scope of s 979? |
275 |
Interest is not within s 979? |
283 |
Conclusion |
290 |
Overall conclusion and appeal rights |
291 |
[1] I shall refer to the appellant company, as it was referred to in the hearing, as “AMC”. On 8 April 2011, AMC was awarded damages of £7,655,473.13 by a judgment of the High Court against its former solicitors (“Wragge”). While receipt of the damages was recorded in its accounts, it did not declare receipt of this sum in its tax return. HMRC opened an enquiry and then on 24 April 2013 amended AMC's return to increase its trading income by the amount of the damages, and consequently to significantly increase its tax liability.
[2] On 2 May 2013, the appellant appealed the amendment to HMRC; on 16 April 2015 it appealed the amendment to this Tribunal.
[3] Rather bizarrely for a tax appeal, AMC's position given in its counsel's skeleton argument was that AMC agreed that the sum paid by Wragge was subject to corporation tax and that “the assessment made by HMRC should be upheld”, a statement I cannot ever recall reading in a skeleton argument submitted by an appellant before.
[4] It was established at the outset of the hearing that the appellant does not really think that the amendment is correct; its position is that the Tribunal's limited jurisdiction means that this Tribunal must uphold the amendment, even though the appellant does not think the amendment was correct in law. Even so, that scarcely explains why the appellant has brought the case to the Tribunal as even it considers that I must dismiss their appeal.
[5] Just...
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