Anson v Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Reed,Lord Neuberger,Lord Clarke,Lord Sumption,Lord Carnwath |
| Judgment Date | 01 July 2015 |
| Neutral Citation | [2015] UKSC 44 |
| Court | Supreme Court |
| Date | 01 July 2015 |
[2015] UKSC 44
Lord Neuberger, President
Lord Clarke
Lord Sumption
Lord Reed
Lord Carnwath
Appellant
Jonathan Peacock QC Richard Keen QC John Brinsmead-Stockham
(Instructed by Ernst & Young LLP)
Respondent
David Ewart QC Julian Ghosh QC James Henderson
(Instructed by HMRC Solicitor's Office)
Heard on 27 and 28 October 2014 and 30 April 2015
(with whom Lord Neuberger, Lord Clarke, Lord Sumption and Lord Carnwath agree)
This appeal is concerned with the interpretation and application of a double taxation agreement between the United Kingdom and the United States of America. The appellant, Mr Anson was at all material times resident but non-domiciled in the UK for UK tax purposes. He was liable to UK income tax on his UK sourced income and on foreign income remitted to the UK. He was non-resident in the US for US tax purposes, but was liable to US federal and state taxes on his US sourced income.
Mr Anson was at all material times a member of a Delaware limited liability company, which was classified as a partnership for US tax purposes. As a member of an entity classified as a partnership, Mr Anson was liable to US federal and state taxes on his share of the profits. Mr Anson remitted the balance to the UK, and was therefore liable to UK income tax on the amounts remitted, subject to any double taxation relief which might be available. The respondent Commissioners decided that Mr Anson was not entitled to any double taxation relief, on the basis, put shortly, that the income which had been taxed in the US was not his income but that of the limited liability company. The question is whether they were correct to do so.
The relevant period comprises the seven UK tax years running from 6 April 1997 to 5 April 2004. Throughout that period, Mr Anson was a member of HarbourVest Partners LLC ("the LLC"), a limited liability company formed under the law of Delaware and carrying on business in Boston, Massachusetts. The LLC was originally formed in 1996, when its founder members, including Mr Anson, provided the necessary capital. The amount paid was returned to the members in 1999 by way of distribution.
The business of the LLC consisted of the management of a number of venture capital funds. It had no economic interest in the funds, or in the gains or losses from fund investments, but earned fees from its investment management activities. Its accounts were made up in respect of calendar years, which were also US tax years.
The LLC was established under the Delaware LLC Act ("the LLC Act"), and under the terms of a limited liability company agreement ("the LLC agreement") governed by Delaware law. The most significant provisions of the LLC Act will be mentioned shortly.
The LLC agreement was an agreement between the members: the LLC itself was not party to it. Article IV dealt with members' capital accounts. In particular, section 4.1 provided for the crediting to each member's capital account of his capital contributions, and for the debiting to his account of all distributions made to him. Section 4.2 required the members' capital accounts to be adjusted, at least annually, in specified respects. In particular, it provided (read short) that "all gross income and gains … realized during the period in question … shall … be credited, and all losses, deductions and expenses … during the period in question … shall … be debited, to the respective capital accounts of the members pro rata", in accordance with ratios prescribed in the agreement, and subject to specified adjustments. Mr Anson's profit share was 11.5%, which was similar to his ownership interest.
Article V set out the provisions relating to distributions. Section 5.1 provided:
"Subject to the provisions of this article V, to the extent cash is available, distributions of all of the excess of income and gains over losses, deductions and expenses allocated in accordance with section 4.2 with respect to any calendar year will be made by the company at such time within seventy-five (75) days following the end of such calendar year and in such amounts as the managing members may determine in their sole discretion. The managing members may from time to time in their discretion make additional distributions in accordance with the provisions of this article V."
Mr Anson was not a "managing member" during the relevant period.
Among the other provisions of the LLC agreement, it is necessary to note article XI, which dealt with dissolution, and made provision in that eventuality for the sale of the assets, the allocation of losses or gains to members in accordance with section 4.2, and distributions to the members. Under article 12.2, members were entitled on request to access to the books and records and to information about the business.
During each calendar year, all the LLC's income and gains were credited, and all losses, deductions and expenses were debited, to its members' capital accounts on a quarterly basis, in accordance with section 4.2. The excesses of the income and gains over the losses, deductions and expenses – that is to say, the profits — were distributed to the members on a quarterly basis in arrears, in accordance with section 5.1, on the basis of the ratios set out in the LLC agreement.
The following matters of Delaware law were agreed by the expert witnesses who gave evidence before the First-tier Tribunal (Judges John F Avery-Jones CBE and Ian Menzies-Conacher FCA) ("the FTT") and were found as facts:
i) The LLC was a legal entity which was brought into existence by executing a certificate of formation, filing of that certificate with the Delaware Secretary of State, and entering into an LLC agreement.
ii) The business of the LLC was carried on by the LLC itself, rather than by its members, in the sense that the LLC as an entity with separate legal existence was engaged in business. The members were however active in the business, each member being required by the LLC agreement to devote at least 90% of his full business time to the advancement of the LLC's business and interests.
iii) The assets used for carrying on the business of the LLC belonged beneficially to the LLC and not to the members.
iv) The LLC was liable for the debts incurred as a result of carrying on its business. The members had no liability for the liabilities of the LLC.
The FTT made the following additional findings in relation to the nature of a member's interest in a Delaware LLC, and in the LLC in particular:
i) A Delaware "limited liability company interest" is defined by section 18–101(8) of the LLC Act as "a member's share of the profits and losses of a limited liability company and a member's right to receive distributions of the limited liability company's assets".
ii) That interest is in principle assignable, except as provided in the LLC agreement. The assignee has no right to participate in the management of the business except as provided in the agreement and with the approval of all the other members. An assignee does not become a member but becomes entitled to the same economic interest as the assignor.
iii) In the present case, the LLC agreement provided that a member's interest could not be transferred except for sales by a former member (a) under provisions giving the LLC a right of first refusal before any such sale, (b) to a person engaged in the full time business of the LLC, with the written consent of the managing members and two-thirds of the other original members, or (c) on death.
iv) Section 18–503 of the LLC Act provides that "the profits and losses of a limited liability company shall be allocated among the members, and among classes or groups of members, in the manner provided in a limited liability company agreement".
v) "A limited liability company interest is personal property. A member has no interest in specific limited liability company property" (section 18–701 of the LLC Act).
vi) Subject to the LLC agreement, the members manage the LLC and vote in proportion to their interest in profits.
vii) The LLC agreement provided that the operation and policy of the LLC was vested in the managing members, who had power to contract on its behalf, but certain matters, such as mergers and incurring liabilities of more than $500,000 in a year, required the consent of the members.
viii) The interest of a member in the LLC was not similar to share capital, but was more similar to partnership capital in an English partnership.
The parties' expert witnesses were asked to address a number of questions which had been listed in an Inland Revenue tax bulletin 39 issued in February 1999 (and subsequently repeated in later bulletins), following the decision of the Court of Appeal in Memec plc v Inland Revenue Comrs [1998] STC 754, as factors which would be considered for the purpose of deciding whether a UK resident with an interest in a foreign entity should be taxed on his share of the profits of the foreign entity as they arose or only when he received a distribution of profits from the entity. One of those questions was the following:
"Are the persons who have an interest in the entity entitled to share in its profits as they arise; or does the amount of profits to which they are entitled depend on a decision of the entity or its members, after the period in which the profits have arisen, to make a distribution of its profits?"
Mr Anson's expert, Mr Abrams, treated the question as asking whether there was an automatic entitlement to share in profits, or whether any such entitlement depended, as in the case of a dividend, upon a decision taken after the end of the relevant period. He focused particularly upon section 4.2 of the LLC agreement,...
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