Andrew Chappell v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Patten,Lord Justice Sales,The Chancellor of the High Court |
| Judgment Date | 04 August 2016 |
| Neutral Citation | [2016] EWCA Civ 809 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2014/3399 |
| Date | 04 August 2016 |
[2016] EWCA Civ 809
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
Mr Justice Simon and Judge Greg Sinfield
Royal Courts of Justice
Strand, London, WC2A 2LL
THE CHANCELLOR OF THE HIGH COURT
Lord Justice Patten
and
Lord Justice Sales
Case No: A3/2014/3399
David Ewart QC and Edward Waldegrave (instructed by GRM Law Solicitors) for the Appellant
David Goy QC and Aparna Nathan (instructed by The General Counsel and Solicitor to HM Revenue and Customs) for the Respondents
Hearing date: 12 July 2016
Approved Judgment
Introduction
This is an appeal by the taxpayer, Mr Chappell, against an amendment made to his self-assessment tax return for the year 2005–06. The purpose and effect of the amendment (made by a closure notice dated 1 November 2010) was to disallow a deduction from his total income for that year totalling £303,123. The effect of the deduction (if allowable) would have been to reduce Mr Chappell's total income from £553,321 to £250,198. On that basis he would have been entitled to claim a repayment of income tax of £131,039.48.
Mr Chappell's entitlement to make this deduction depends upon two payments of £4,164 and £298,969 (I have rounded up the sums) which he made to a company called Barsbury Limited ("Barsbury") being "manufactured overseas dividends (" MOD's") within the meaning of paragraph 4(1) of Schedule 23A to the Income and Corporation Taxes Act 1988 ("TA 1988"). If that is right then the payments fall to be treated as annual payments within s.349(1) TA 1988 as a result of the operation of regulation 2B of the Income Tax (Manufactured Overseas Dividends) Regulations 1993 SI 1993/2004 ("the 1993 Regulations").
The taxpayer claims that as annual payments they are deductible in full from his total income. The Commissioners' case in response to this was that the payments are not so deductible either because as annual payments they are not deductible unless paid with a deduction of tax (which in this case is excluded by regulation 2B(3)) or more fundamentally because on their true construction the provisions of paragraph 4(1) and regulation 2B have no application to the transaction under which the payments came to be made. This is because the contract for the payments was part of a purpose-made tax scheme composed of transactions which had no commercial or other purpose apart from the avoidance of tax.
The Commissioners succeeded on both these arguments before the First-tier Tribunal ("the FtT") (see [2013] UKFTT 098 (TC)) and on appeal before the Upper Tribunal ("the UT") (Simon J and Judge Greg Sinfield) (see [2014] UKUT 0344 (TCC)). But as I shall explain HMRC's two arguments involve very different constructions of the relevant statutory provisions which cannot both be right. By the end of the hearing Mr Goy QC had confirmed that the Commissioners wished to rely on the second of their two arguments which is founded on the line of authorities beginning with the decision of the House of Lords in W. T. Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300, [1981] STC 174 (" Ramsay"). If that construction is wrong and the payments made by Mr Chappell do constitute MOD's and are deductible then the Commissioners contend that relief is only available to Mr Chappell in respect of higher rate tax as a result of the operation of s.3 TA 1988. The Commissioners failed in this argument before the FtT but succeeded in it on appeal to the UT. It is of course only of relevance if Mr Chappell succeeds in his appeal against the UT's construction of paragraph 4(1).
The statutory provisions
The references which follow are all to provisions of TA 1988 unless otherwise stated.
Section 736A provides:
"736A. Manufactured dividends and interest.
Schedule 23A to this Act shall have effect in relation to certain cases where under a contract or other arrangements for the transfer of shares or other securities a person is required to pay to the other party an amount representative of a dividend or payment of interest on the securities".
Paragraph 4(1) of Schedule 23A states:
"This paragraph applies in any case where, under a contract or other arrangements for the transfer of overseas securities, one of the parties (the "overseas dividend manufacturer") is required to pay the other ("the recipient") an amount representative of an overseas dividend on the overseas securities; and in this Schedule the "manufactured overseas dividend" means any payment which the overseas dividend manufacturer makes in discharge of that requirement."
The critical terms in paragraph 4(1) are defined in paragraph 1(1) as follows:
""dividend manufacturer" has the meaning given by paragraph 2(1) below;
"dividend manufacturing regulations" means regulations made by the Treasury under this Schedule;
"interest manufacturer" has the meaning given by paragraph 3(1) below;
"manufactured dividend", "manufactured interest" and "manufactured overseas dividend" shall be construed respectively in accordance with paragraphs 2, 3 and 4 below, as shall references to the gross amount thereof;
"overseas dividend" means any interest, dividend or other annual payment payable in respect of any overseas securities;
"overseas dividend manufacturer" has the meaning given by paragraph 4(1) below;
"overseas securities" means—
(a) shares, stock or other securities issued by a government or public or local authority of a territory outside the United Kingdom or by any other body of persons not resident in the United Kingdom; and
(b) …
"overseas tax" means tax under the law of a territory outside the United Kingdom;
"overseas tax credit" means any such credit under the law of a territory outside the United Kingdom in respect of overseas tax as corresponds to a tax credit;
"prescribed" means prescribed in dividend manufacturing regulations;
…
"securities" includes any loan stock or similar security;
"transfer" includes any sale or other disposal;
…
"United Kingdom equities" means shares of any company resident in the United Kingdom;
"United Kingdom securities" means securities of the government of the United Kingdom, of any public or local authority in the United Kingdom or of any company or other body resident in the United Kingdom or of any company or other body resident in the United Kingdom, but does not include … United Kingdom equities."
Schedule 23A also contains (in paragraph 8(1)) a power to make regulations which:
"may make provision for –
(a) such … manufactured overseas dividends as may be prescribed,
(aa) such persons who receive, or become entitled to receive, … manufactured overseas dividends as may be prescribed, or
(b) such … overseas dividend manufacturers as may be prescribed,
to be treated in prescribed circumstances otherwise than as mentioned in paragraph … 4 above for the purposes of such provisions of the Tax Acts as may be prescribed.
…"
This power has been exercised in the form of the 1993 Regulations which adopt the defined terms used in Schedule 23A: see regulation 2(1). Regulation 2B provides:
"(1) For the purposes of the provisions of the Tax Acts relating to the charge to tax under Schedule D, paragraph 4(2) and (3) of Schedule 23A shall not apply to a manufactured overseas dividend paid in the circumstances prescribed in paragraph (2).
(2) The circumstances prescribed are where the manufactured overseas dividend is representative of an overseas dividend on an overseas security that represents a loan relationship.
(3) Where the payer of a manufactured overseas dividend to which paragraph (2) applies is neither a company nor carrying on a trade in circumstances where the manufactured overseas dividend is taken into account in computing the profits of that trade, the manufactured overseas dividend shall be treated, for the purposes of the provisions of the Tax Acts relating to the charge to tax under schedule D and so far as the payer is concerned, as if the amount paid was an annual payment, within section 349(1) of the Taxes Act, but so that no amount is required to be deducted on account of income tax from the amount of the payment, or accounted for under section 350 of that Act.
(4) Where the recipient of a manufactured overseas dividend to which paragraph (2) applies is neither a company nor carrying on a trade in circumstances where the manufactured overseas dividend is taken into account in computing the profits of that trade, the manufactured overseas dividend shall be treated, for the purposes of the provisions of the Tax Acts relating to the charge to tax under schedule D and so far as the recipient is concerned, as an overseas dividend of an amount equal to the amount of the manufactured overseas dividend received by him, but not so as to entitle the recipient to claim relief under Part XVIII of the Taxes Act in respect of any tax attributable to the manufactured overseas dividend received.
(5) For the purposes of paragraph (2), an overseas security shall be taken to represent a loan relationship if a company holding that security would have a loan relationship within the meaning of section 81 of the Finance Act 1996.
…"
As one can see from regulation 2B(1) and (2), the 1993 Regulations disapply the provisions of paragraph 4 of Schedule 23A in cases where the transfer of the overseas security and the payment of the MOD is made in the context of a loan relationship. In such cases the critical provisions are regulations 2B (3) and (4). Individuals who are not trading so as to be required to include the MOD's in their calculation of profits are allowed to treat the MOD's as annual payments under s.349(1) for the purposes of their own Schedule D self-assessment and are not obliged...
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