Coxon
| Jurisdiction | UK Non-devolved |
| Judgment Date | 08 February 2013 |
| Neutral Citation | [2013] UKFTT 112 (TC) |
| Date | 08 February 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 112 (TC)
Judge Peter Kempster, Mrs Rayna Dean FCA
Mr Lyn Hill (Elite Consultancy) appeared for the Appellant
Mr Phillip Jones (HMRC Appeals Unit) appeared for the Respondents
Income tax - overseas property purchase using borrowed funds - whether an "offset mortgage" - whether interest income on escrow account chargeable under ITTOIA 2005, Income Tax (Trading and Other Income) Act 2005 part 4Pt. 4 - whether relieved under ITTOIA 2005, Income Tax (Trading and Other Income) Act 2005 part 8Pt. 8 - appeal dismissed
The First-tier Tribunal held that a taxpayer's loss of a large amount of money in relation to a property he purchased in Cyprus could not relieve him of any tax liability on the interest credited to an escrow account established for the purpose of the purchase. The fact that the escrow account, including the added interest, had been charged by a bank and retained under the security arrangements did not affect the taxability of the interest income on the account holder. Furthermore, the escrow account was not part of a Cypriot-style offset mortgage where there was no taxable interest. In the contract between the taxpayer and a bank, the interest was calculated and actually credited to the escrow account without any reference to the funds due under the loan agreement. Finally, Income Tax (Trading and Other Income) Act 2005 ("ITTOIA 2005"), Income Tax (Trading and Other Income) Act 2005 section 841 subsec-or-para 3s. 841(3)(a) (in Pt. 8) did not apply since the bank's security charge over the escrow account was a contractual restriction that was insufficient to cover an inability to transfer funds to the UK.
The taxpayer appealed against HMRC's discovery assessment in respect of the interest that was credited to his escrow account in the tax years 2007-08 to 2009-10.
In February 2007, the taxpayer and his wife entered into a contract to purchase a residential property in Cyprus "off plan". The property was not yet built; the vendor developer undertook to construct and deliver the property. To fund the purchase, the taxpayer paid a substantial deposit. For the balance, he entered into a loan agreement with a bank ("ABCL"), whereby he borrowed 553,000 Swiss Francs. The property purchase price was in Cypriot Pounds, so ABCL immediately swapped the Swiss Francs into Cypriot Pounds. ABCL then placed those Cypriot Pounds into an escrow account in the names of the taxpayer and his wife.
When Cyprus entered the Eurozone in January 2008, the escrow account was converted into Euros. The plan was that funds would be released to the developer against certificates of value as the development proceeded. In fact, although the property had never progressed beyond a shell and the developer appeared now to be insolvent, most of the contents of the escrow account had already been passed to the developer.
In 2011, HMRC opened an enquiry into the taxpayer's tax affairs; this was prompted by information they received that he had not returned certain deposit interest income.
The taxpayer contended that he had never received nor derived any benefit from the interest and, thus, it was not taxable. In the alternative, the escrow account was part of a Cypriot-style offset mortgage and, accordingly, there was no taxable interest income. If matters had progressed as expected, then no right to the interest on the escrow account would have accrued to the taxpayer. It would all have been offset against the sums due under the loan agreement. In the further alternative, the interest was not taxable pursuant to the foreign income special rules under ITTOIA 2005, Income Tax (Trading and Other Income) Act 2005 part 8Pt. 8. It was an unremittable foreign income under the laws of the territory where it arose, i.e. Cyprus.
Whether the taxpayer was liable to tax in respect of the interest that was credited to his escrow account in the relevant periods.
Held, dismissing the taxpayer's appeal:
In Dunmore v McGowan (HMIT)TAX(1978) 52 TC 307, Stamp LJ held that the interest which was credited to a deposit account was received by the account holder at the date when it was so credited, notwithstanding that it might not be paid until a future date. Here, the Tribunal held that the fact that the taxpayer had lost a large amount of money in relation to the property could not relieve him of any tax liability on interest credited to the escrow account. The fact that the escrow account, including the interest added to that account, had been charged by the bank, and retained under the security arrangements, did not affect the taxability of the interest income on the account holder.
The Tribunal also held that although the brochure prepared by ABCL likened the loan arrangements to a UK offset mortgage, the structure actually adopted was different. For an offset arrangement to have the desired tax effect, it required that the debit and credit balances owed to and from the bank were offset, with interest being charged or paid by reference to the net balance. It was not sufficient that interest was calculated separately on the debit and credit balances and then the two interest amounts were offset.
In the contract between the taxpayer and ABCL, the interest was calculated and actually credited to the escrow account without any reference to the funds due under the loan agreement. Furthermore, the Cypriot withholding tax was deducted by the bank from the full amount of interest credited. The interest expense and income were both present and the escrow account earned interest which was wholly used to offset part of the interest charged on the loan account. That was not sufficient to achieve the result sought by the taxpayer.
Finally, the Tribunal held that ITTOIA 2005, Income Tax (Trading and Other Income) Act 2005 section 841 subsec-or-para 3s. 841(3)(a) applied to overseas legislation, such as foreign exchange control restrictions, or blocked funds accounts arising from trading boycott sanctions. It was not sufficient to cover an inability to transfer funds to the UK because of a contractual provision restricting one party's ability to deal with those funds, i.e. ABCL's security charge over the escrow account. A contractual restriction, albeit one legally enforceable under Cypriot law, was insufficient to bring ITTOIA 2005, Income Tax (Trading and Other Income) Act 2005 section 841 subsec-or-para 3s. 841(3)(a) into play.
1.In February 2007 Mr Coxon and his wife entered into a contract to purchase a residential property ("the Property") in Cyprus "off...
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