Bricom Holdings Ltd v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 25 July 1997 |
| Date | 25 July 1997 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Millett Otton and Beldam LJJ.
Andrew Park QC and Felicity Cullen (instructed by Simmonds) for Bricom.
Launcelot Henderson QC and Michael Furness (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Hughes v Bank of New Zealand ELR[1938] AC 366
IR Commrs v Australian Mutual Provident Society ELR[1947] AC 605
Ostime (HMIT) v Australian Mutual Provident Society ELR[1960] AC 459
Polydor Ltd v Harlequin Record Shop UNK[1980] FSR 194
Strathalmond (Lord) v IR Commrs WLR[1972] 1 WLR 1511
Corporation tax - Double taxation relief - Controlled foreign company in receipt of UK source interest - Whether interest received by foreign company chargeable profits to be imputed to UK parent - Whether interest excluded from chargeable profits of parent by Netherlands Double Taxation Treaty - Double Taxation Relief (Taxes on Income) (Netherlands) Order 1980 (SI 1980/1961), art. 11 -Income and Corporation Taxes Act 1988 section 747 subsec-or-para (4)Income and Corporation Taxes Act 1988, s. 747(4)(a).
This was an appeal by the taxpayer directly to the Court of Appeal with leave granted pursuant to the Rules of the Supreme Court, O. 59, r. 25 against a decision of the special commissioners that interest received by a foreign controlled company was not exempt from being apportioned to its shareholders under Income and Corporation Taxes Act 1988 section 747s. 747 of the Income and Corporation Taxes Act 1988 by art. 11 of the double taxation agreement between the UK and the Netherlands.
The taxpayer was incorporated and resident in the UK and was an indirect wholly owned subsidiary of the Bricom Group Ltd ("BGL"). It had a wholly owned direct subsidiary ("Spinneys") which was incorporated and resident in the Netherlands.
Spinneys was an investment holding company which had lent surplus cash at interest to BGL. BGL duly paid interest to Spinneys, which was taxable in the Netherlands.
Assessments were raised on the taxpayer by reference to the UK source interest received by Spinneys from BGL on the footing that Spinneys was a controlled foreign company within the meaning of Income and Corporation Taxes Act 1988 section 747 subsec-or-para (1)s. 747(1) of the 1988 Act, which provided for income of such a company to be attributed to its UK resident shareholders.
The taxpayer did not dispute that Spinneys was a controlled foreign company and that, but for the provisions of the double taxation agreement with the Netherlands, it would be unable to challenge the assessments. But it claimed that the terms of art. 11 of the agreement exempted it from liability.
The Revenue accepted that the effect of the agreement was to exempt the interest itself from UK corporation tax and not merely the resident of the Netherlands who received it. The benefit of the exemption, therefore, was capable of benefiting the taxpayer. However, whileart. 11(1) of the treaty would prevent the interest paid by BGL to Spinneys from being chargeable to UK corporation tax, the Revenue claimed that the assessments were not precluded by the terms of the agreement because they were not assessments to corporation tax on the exempted interest, but on a notional sum to which art. 11 did not apply.
The special commissioners held that the interest was to be apportioned to the taxpayer under Income and Corporation Taxes Act 1988 section 747 subsec-or-para (4)s. 747(4)of the 1988 Act because the interest had lost its character as interest in the assessment process. The assessment was not an assessment to corporation tax but a sui generis assessment on a notional sum eqivalent to corporation tax.
The taxpayer contended in the Court of Appeal that Income and Corporation Taxes Act 1988 schedule 24 subsec-or-para 1para. 1(1) of Sch. 24 required Spinneys to be regarded as having dual residence, both in the Netherlands and the UK. That being so, at the first stage involved in an assessment under Income and Corporation Taxes Act 1988 section 747s. 747, i.e. in ascertaining its profits, a UK source of income was to be excluded and was simply not apportioned to the taxpayer. If Spinneys' chargeable profits included the UK source, what was to be apportioned was not "a sum equal to chargeable profits", but the chargeable profits themselves, which were exempted by art. 11 of the double taxation agreement.
Held, dismissing the taxpayer's appeal:
1. The assumption required by Income and Corporation Taxes Act 1988 schedule 24 subsec-or-para 1Sch. 24, para. 1(1) was that the company was hypothetically resident in the UK, not that it was resident in both the UK and the Netherlands. The chargeable profits referred to in Income and Corporation Taxes Act 1988 section 747 subsec-or-para (4)s. 747(4)(a) were to be ascertained at the first stage without reference to the double taxation agreement. They were to be measured by reference to the total income of the controlled foreign company inclusive of UK source income.
2. The "chargeable profits" as defined by Income and Corporation Taxes Act 1988 section 747 subsec-or-para (6)s. 747(6)(a) were a purely notional sum. They did not represent any profits of Spinneys on which UK corporation tax was chargeable, for there were no such profits. Nor did they represent any actual payments or receipts of Spinneys, whether of interest or anything else. They were merely the product of a mathematical calculation made on a hypothetical basis. The "chargeable profits" defined by Income and Corporation Taxes Act 1988 section 747 subsec-or-para (6)s. 747(6)(a) existed only as a measure of imputation. What was apportioned to the taxpayer under Income and Corporation Taxes Act 1988 section 747s. 747, and subjected to tax, was not Spinneys' actual profits but a notional sum, the product of an artificial calculation.
3. Where tax was charged on a conventional or notional sum which existed only as the product of a calculation, the fact that one of the elements in the calculation was measured by reference to the amount of exempted income did not make the exempted income itself the subject of the tax. The correct analysis was that the interest received by Spinneys was not included in the sum apportioned to the taxpayer on which tax was chargeable. It merely provided a measure by which an element in a conventional or notional sum was calculated, and it was that conventional or notional sum which was apportioned to the taxpayer and on which tax was charged.
IR Commrs v Australian Mutual Provident SocietyELR [1947] AC 605, as explained by Lord Radcliffe in Ostime (HMIT) v Australian Mutual Provident SocietyELR [1960] AC 459 at p. 479 applied.
Pursuant to leave granted by Millett LJ on 18 October 1996, under the Rules of the Supreme Court, O. 59, r. 25, Bricom Holdings Ltd appealed directly to the Court of Appeal against the following decision of the special commissioners (Stephen Oliver QC and Dr JF Avery Jones (1997) Sp C 76).
1. Bricom Holdings Ltd has been assessed under the Income and Corporation Taxes Act 1988 section 747 subsec-or-para (4)Income and Corporation Taxes Act 1988, s. 747(4)(a) for the three calendar year periods 1990, 1991 and 1992. The amounts comprised in the assessments are, in each case, sums equal to corporation tax on the whole of the "chargeable profits" of Spinneys International BV ("Spinneys") less amounts of "creditable tax". Bricom Holdings appeals against each of the three assessments.
2. Spinneys was incorporated in and is resident in the Netherlands. It is an investment holding company and carries on business as a restaurant operator through a branch in Singapore. All the shares in Spinneys are owned by Bricom Holdings which is resident in the UK. Bricom Holdings' ultimate 100 per cent parent (through a chain of three 100 per cent-owned intermediate companies, one of which is The Bricom Group Ltd) is Securum Industrial Holdings Ltd. Securum Industrial Holdings and the three intermediate companies are resident in the UK. The Bricom Group Ltd is the immediate subsidiary of Securum Industrial Holdings and at all material times it has been the borrower of substantial amounts from Spinneys to whom it has paid interest.
3. Spinneys received interest from The Bricom Group Ltd in its three accounting periods 1 November 1989 to 31 October 1990, 1 November 1990 to 31 October 1991 and 1 November 1991 to 14 April 1992. As between the UK and the Netherlands that interest has been covered by art. 11 of the UK-Netherlands Double Taxation Convention of 7 November 1980 (SI 1980/1961). That article reads as follows:
(1) Interest arising in one of the States which is derived and beneficially owned by a resident of the other state shall be taxable only in that other State.
4. But for art. 11 the Bricom Group Ltd would have been required to deduct income tax from the interest payable to Spinneys and to have accounted for that tax to the UK Inland Revenue. This is because the interest is taxable here under Income and Corporation Taxes Act 1988 schedule DSch. D Case III. Income and Corporation Taxes Act 1988 section 349 subsec-or-para (2) section 349 subsec-or-para (2)Section 349(2)(a) and (c) of the 1988 Act require deduction at source and Income and Corporation Taxes Act 1988 section 350 subsec-or-para (4) schedule 16s. 350(4) and Sch. 16 contain the rules for accounting for the tax.Income and Corporation Taxes Act 1988 section 788Section 788 gives statutory effect to art. 11 which, in terms ofIncome and Corporation Taxes Act 1988 section 788 subsec-or-para (3)s. 788(3)(a), is part of an arrangement which provides "for relief from income tax". SI 1970/488Regulation 2(2) of the Double Taxation Relief (Taxes on Income) (General) Regulations 1970, (SI 1970/488), made under what is now Income and Corporation Taxes Act 1988 section 791s. 791 of the 1988 Act, provides that a notice may be given...
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