Burlington Loan Management DAC
| Jurisdiction | UK Non-devolved |
| Judgment Date | 22 August 2022 |
| Neutral Citation | [2022] UKFTT 290 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2022] UKFTT 290 (TC)
Tribunal Judge Tony Beare, Ms Rebecca Newns
First-Tier Tribunal (Tax Chamber)
Income tax – Appeal by the Appellant, an Irish resident company, against a refusal by the Respondents to repay to the Appellant income tax withheld at source in respect of interest paid on a debt owed by a UK resident company –Refusal based on the Respondents' view that Article 12(1) of the double tax treaty between the UK and the Republic of Ireland (the Treaty) did not apply to the interest as a result of Article 12(5) of the Treaty, which precluded the article from applying where one of the persons concerned with the assignment had a main purpose of taking advantage of the article by means of the assignment – Held that Article 12(5) of the Treaty did not apply to the Appellant in respect of the interest because no person who was concerned with the assignment of the debt had obtaining the benefit of Article 12(1) of the Treaty by means of the assignment as one of its main purposes.
In Burlington Loan Management DAC [2022] TC 08572, the First-tier Tribunal (FTT) determined that the knowledge of each party to a transaction of the entitlement, or otherwise, of the other party, to relief from withholding tax under a double tax treaty, was not sufficient to conclude that one or other party had a main purpose of taking advantage of the treaty. This was the case notwithstanding that such knowledge had affected the consideration paid under the transaction.
The appellant, Burlington Loan Management DAC (BLM) acquired a claim for interest due on a loan owed by a UK subsidiary of Lehman Brothers. When the claim was met and the interest paid, withholding tax was deducted. BLM made a claim to HMRC for a refund of the tax withheld under Article 12(5) of the double tax treaty between the UK and the Republic of Ireland. This was denied by HMRC. Under Article 12(5), the provisions of Article 12(5) were not to apply where an assignment was entered into and a person concerned in the transaction had a main purpose of taking advantage of the Article. HMRC considered the assignment of the claim to BLM was to take advantage of Article 12(5).
BLM appealed on the basis that no person had a main purpose of taking advantage of Article 12(5).
Background
The assignment in question was between BLM and a Cayman Islands company, SAAD Investments Company Ltd (SICL). SICL had held a debt claim against Lehman Brothers International (Europe) - LBIE - an unlimited UK tax resident company, since LBIE had gone into administration in September 2008. The principal of the claim had been paid to SICL in 2016, but SICL still held a claim against interest due on the debt - the “Interest Claim”.
BLM was one of a number of companies that had participated in the active market in claims arising from the LBIE administration and had acquired many such claims from LBIE creditors. There was no dispute that BLM was tax resident in the Republic of Ireland and entitled to treaty benefits under the UK/Ireland double tax treaty.
There had been various Court judgments determining how interest was to be calculated on claims arising from the LBIE administration. A Court of Appeal decision in December 2017 had also determined that post-administration interest was “yearly interest” and subject to withholding tax (later upheld in the Supreme Court – R & C Commrs v Joint Administrators of Lehman Bros International (Europe) (in administration) [2019] BTC 9). SICL, as a Cayman Islands company, would have suffered such withholding, with no ability for relief under a tax treaty.
BLM made a “relief at source” application for the Interest Claim. HMRC notified BLM that the application required review. The Interest Claim was discharged in full in July 2018. In the absence of a relief at source direction, the Interest Claim was paid to BLM net of 20% withholding tax. The claim for relief at source was then converted to a claim for refund of tax.
In May 2020, HMRC issued a closure notice refusing the repayment of the £18.15m tax withheld on the Interest Claim, on the basis that the main purpose, or one of the main purposes of the assignment of the Interest Claim was to take advantage of Article 12(5) of the UK/Ireland double tax treaty.
The issue
It was agreed that, absent the provisions of Article 12(5), BLM was entitled to a repayment of withholding tax. The only issue was therefore whether the main purpose, or one of the main purposes, of the assignment was for a person to take advantage of Article 12(5). To resolve the question, the FTT considered that the meaning of each of “main purpose”, “a person” and “take advantage” in Article 12(5) had to be examined.
The principal disagreement between the parties on the meaning of “main purpose” was whether in determining a person’s subjective purpose for a course of action, only “conscious” motives should be considered, or whether consequences inevitably and inextricably following a course of action must be taken as a purpose. HMRC favoured the view that such consequences should be considered, whilst for BLM it was argued that the case law from which this was derived did not apply to Article 12(5).
Regarding whether there were persons concerned with the assignment, it was argued for BLM that SICL could not be considered such a person as it was not a resident of either of the contracting states under the treaty, and the treaty should only apply to such residents. HMRC’s view was that the limitation of the treaty to residents of the contracting states only applied to the specific giving of reliefs, and, otherwise, the treaty could be read to include other persons. In particular, Article 12(5) could be read to include SICL.
The positions concerning the meaning of “take advantage” take up a significant part of the judgment. The question of whether this phrase in this context should be confined largely to artificial arrangements (the view of BLM) or has a wider meaning (the view of HMRC) was argued at some length. Counsel for BLM also argued that the relevant person (under Article 12(5)) had to have a specific main purpose of taking advantage of Article 12(5) for the provision to bite.
The FTT analysis
In its analysis of the issues, the FTT followed the principles of treaty interpretation that have featured in other recent decisions such as Irish Bank Resolution Corporation Ltd (in special liquidation) & Anor v R & C Commrs [2020] BTC 26 and Aozora GMAC Investments Ltd [2021] TC 08082. Unilateral statements made by one of the contracting states are not aids to interpreting the treaty (even where such statements are made in Parliament), nor is HMRC guidance.
The FTT did consider that the decision in R & C Commrs v BlackRock Holdco 5, LLC[2022] BTC 519 was helpful in determining the “ordinary meaning” of main purpose. This decision suggested that “inevitable and extricable consequences” were not the sole benchmark for determining subjective consequences but did form part of the overall factual matrix to be considered.
Turning to who was a person “concerned” with the assignment for the purposes of Article 12(5), the FTT concluded (and agreed with HMRC) this could include a person who was not a resident of one of the contracting states – it was possible for a person to obtain an advantage under Article 12(5) without being such a resident, and this was one of the reasons for Article 12(5). However, the person concerned must have a main purpose of taking advantage of Article 12(5) for Article 12(5) to be engaged; without such a specific purpose, the Article could not be engaged. In this the FTT agreed with Counsel for BLM.
It was in the context of the meaning of “take advantage” that much of the discussion around what were appropriate interpretative sources took place. The FTT could find nothing in admissible sources to support the contention that the phrase should be confined to artificial arrangements, and therefore agreed with HMRC it could have a wider meaning.
There was also discussion as to whom the burden of proof fell upon in this case. The FTT concluded that the burden of proof fell on HMRC to demonstrate a person had a main purpose of seeking to take advantage of “Article 12”.
Having concluded its review of the questions of law, the FTT then stated its findings of fact in relation to both BLM and SICL. These were stated at some length. In summary for BLM:
- It was aware that SICL would suffer UK withholding tax if it received the Interest Claim proceeds.
- It considered it would not suffer the cost of UK withholding tax.
- It knew it was not the only prospective buyer.
- The price it was prepared to pay took into account the cashflows it expected (this was the primary driver of the purchase), the value of the claim to SICL and the potential that other buyers were in the market.
In respect of SICL, the facts can be summarised as follows:
- It was aware it would suffer UK WHT on the Interest Claim pay-out.
- It was aware that there were buyers in the market who would not suffer this cost.
- It wished to achieve the best possible value for the claim.
- At the time it agreed commercial terms, it did not care who the broker was on-selling the Interest Claim to.
- Although it did eventually ask who the end-purchaser was, the FTT was satisfied that this was not for tax reasons.
- It knew BLM was tax resident in Ireland when it sold the claim.
- It knew that the broker was highly unlikely to sell the Interest Claim to another person after the identity of BLM was disclosed to it.
Applying the facts it had determined, to its analysis of the law, the FTT posed and answered four questions.
Did BLM have a main purpose of taking advantage of Article 12(5)?
The FTT concluded it did not. The fact it was entitled to treaty benefits was part of the “setting” for its activities (of which obtaining the Interest Claim was only a part). It took account of the treaty position in deciding how much to pay for...
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