Bricom Holdings Ltd v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 03 April 1996 |
| Date | 03 April 1996 |
| Court | Special Commissioners (UK) |
special commissioners decision
Mr Stephen Oliver QC and DR JF Avery Jones CBE.
Andrew Park QC and Felicity Cullen, counsel instructed by Ms G Hemsley, student member of the Institute of Taxation for the taxpayer.
Launcelot Henderson QC, counsel instructed by the Solicitor of Inland Revenue.
Corporation tax - Double taxation relief - Controlled foreign company in receipt of UK source interest - Whether interest received by foreign company to be imputed to UK parent as chargeable profits - Whether interest excluded from chargeable profits by Double Taxation Treaty between the Netherlands and the UK - Double Taxation Relief (Taxes on Income) (Netherlands) Order 1980, (SI 1980/1961), art. 11(1) -Income and Corporation Taxes Act 1988 section 747 subsec-or-para (4)Income and Corporation Taxes Act 1988, s. 747(4)(a).
1. Bricom Holdings Limited has been assessed under Taxes Act 1988 section 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 United Kingdom. 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 United Kingdom. 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 - 31 October 1990, 1 November 1990 - 31 October 1991 and 1 November 1991 - 14 April 1992. As between the United Kingdom and the Netherlands that interest has been covered by Article 11 of the UK-Netherlands Double Taxation Convention of 7 November 1980 (SI 1980/1961). That Article reads as follows:-
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(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 Article 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 United Kingdom Inland Revenue. This is because the interest is taxable here under Schedule D Case III. Taxes Act 1988 section 349(2)(a) and (c) require deduction at source and section 350(4) and Schedule 16 contain the rules for accounting for the tax. Section 788 gives statutory effect to Article 11 which, in terms of section 788(3)(a), is part of an arrangement which provides "for relief from income tax". Regulation 2(2) of the DTR (Taxes on Income) (General) Regulations 1970 (SI 1970/488), made under what is now section 791, provides that a notice may be given by the Board directing that in circumstances where a treaty exempts interest payable to a non-resident beneficial owner, the person paying the interest is not to deduct tax.
5. On 20 December 1994 the Board served notices on all the five United Kingdom resident companies which directly or indirectly had 100 per cent share-holding interests in Spinneys. Each notice for each of Spinneys' three accounting periods to 31 October 1990, 31 October 1991 and 14 April 1992 identified Spinneys as a controlled foreign corporation (a "CFC"). Each notice specified amounts referred to as "chargeable profit" and as "creditable tax".
6. We take as an example one such notice served on Bricom Holdings. This recited that Bricom Holdings, as it appeared to the Board, had an interest in Spinneys at some time during Bricom Holdings' twelve month accounting period to 31 December 1990. The notice went on to give Bricom Holdings notice that the Board had made a direction, on 5 December 1994, under section 747(1) the effect of which was that the provisions of Chapter IV Part XVII would apply in relation to Spinneys for that period. Referring to Spinneys it specified 1 November 1989 - 31 October 1990 as "the accounting period", £14,365,491 as "the chargeable profits" and £340,338 as "the creditable tax".
7. On 7 January 1995 an assessment addressed to Bricom Holdings was issued. This referred to the period 1 January 1990 to 31 December 1990. It was headed "Notice of Assessment under section 747(4)(a)…" The "Assessment" details specified "Apportionment of whole profits of Spinneys", the amount being £14,365,491. Tax at the appropriate rate (34.25 per cent) was £4,920,180; after deducting the "apportioned creditable tax" of £340,338, the net tax payable by Bricom Holdings was £4,579,842.
8. Notices, followed by assessments for Bricom Holdings' next two accounting periods, were issued in similar form and on the same dates as those referred to above. £5,876,621 was assessed on Bricom Holdings for the period to 31 December 1991 and £3,385,672 was assessed for the period to 31 December 1992. Bricom Holdings appealed against the three notices of direction and the three notices of assessment. The grounds of appeal were that the assessments were incorrect because they included amounts "attributable to interest accruing to a Dutch resident company contrary to the provisions of Article 11" of the Treaty. Hence the issue in this appeal, put shortly, is whether Article 11 exempts the interest in question for purposes of the section 747(4)(a) assessments.
9. We now relate the directions, notices and assessments referred to above to the statutory words.
10. The directions (of which an example is summarised in paragraph 6 above) were given under section 747(1) which gives the Board power to direct that the provisions of Chapter IV are to apply. That, and the next subsection, read as follows:-
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(1) If the Board have reason to believe that in any accounting period a company -
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(a) is resident outside the United Kingdom, and
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(b) is controlled by persons resident in the United Kingdom, and
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(c) is subject to a lower level of taxation in the territory in which it is resident,
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and the Board so direct, the provisions of this Chapter shall apply in relation to that accounting period.
(2) A company which falls within paragraphs (a) to (c) of subsection (1) above is in this Chapter referred to as a "controlled foreign company".
There was no dispute that the three conditions were satisfied. Spinneys is therefore a CFC.
11. Apportionment of the chargeable profits and the creditable tax in relation to the relevant accounting periods of the CFC is covered by subsection (3). This directs apportionment:
in accordance with section 752 among the persons…who had an interest in the controlled foreign company at any time during that accounting period.
There is no dispute that Bricom Holdings, as sole shareholder in Spinneys, is potentially liable to apportionment of the whole of the chargeable profits and the whole of the creditable tax of the CFC, ie Spinneys.
12. Section 747(4)(a) is the statutory authority for the assessment (summarised in paragraph 7 above) appealed against. So far as is relevant section 747(4) reads as follows:-
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(4) Where, on such an apportionment of the controlled foreign company's chargeable profits for an accounting period as is referred to in subsection (3) above, an amount of those profits is apportioned to a company resident in the United Kingdom then, subject to subsection (5) below -
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(a) a sum equal to corporation tax at the appropriate rate on that apportioned amount of profits, less the portion of the controlled foreign company's creditable tax for that period (if any) which is apportioned to the resident company, shall be assessed on and recoverable from the resident company as if it were an amount of corporation tax chargeable on that company;
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The "appropriate rate" is defined at the end of the subsection as:
…and for the purposes of paragraph (a) above "the appropriate rate" means the rate of corporation tax applicable to profits of that accounting period of the resident company in which ends the accounting period of the controlled foreign company to which the direction under subsection (1) above relates....
The amount identified by section 747(4)(a), therefore, is a sum equal to corporation tax at the appropriate rate on the apportioned amount (ie 100 per cent) of Spinneys' chargeable profits for its accounting period to 31 October 1990 less the 100 per cent of Spinneys' creditable tax apportioned to Bricom Holding for the same accounting period. And that sum is assessable and recoverable "as if it were an amount of corporation tax chargeable on" Bricom Holdings.
13. Chargeable profits are defined in Section 747(6)(a). This reads:-
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(6) In relation to a company resident outside the United Kingdom -
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(a) any reference in this Chapter to the chargeable profits for an accounting period is a reference to the amount which, on the assumptions in Schedule 24, would be the amount of the total profits of the company for that period on which, after allowing for any deductions available against those profits, corporation tax would be chargeable; and
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(b) any reference in this Chapter to profits does not include a reference to chargeable gains but otherwise (except as provided by paragraph (a) above again has the same meaning as it has for the purposes of corporation tax.
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The relevant assumptions in Schedule 24 are, first, that the CFC, ie Spinneys, was...
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