Garrett Paul Curran v HMRC
| Jurisdiction | UK Non-devolved |
| Judgment Date | 14 August 2012 |
| Neutral Citation | [2012] UKFTT 517 (TC) |
| Date | 14 August 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2012] UKFTT 517 (TC)
Judge Roger Berner, Nigel Collard
Malcolm Gammie QC, instructed by Herbert Smith LLP, appeared for the Appellant
Jonathan Fisher QC and Hui Ling McCarthy, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Income tax - claim for relief for interest paid under ICTA, Income and Corporation Taxes Act 1988 section 353s. 353 - whether payment of net present value of interest to accrue was "interest" eligible for relief - whether interest paid in excess of a reasonable commercial rate - whether interest relief was sole or main benefit expected to accrue to taxpayer from the transaction under which the interest was paid - ICTA, Income and Corporation Taxes Act 1988 section 787s. 787Settlement agreement - TMA, Taxes Management Act 1970 section 54s. 54, CRCA, Commissioners for Revenue and Customs Act 2005 section 5s. 5 - whether ultra vires as a forward tax agreement - whether voidable for material non-disclosure - whether applicable for periods after disposal by taxpayer of relevant investments
The First-tier Tribunal decided that a taxpayer's discounted payments were payments of interest because it did not in any way affect the fact that the calculation of the interest reflected the period for which he was entitled to the use of the principal sum. The headline rate on each of the taxpayer's loans was a reasonable commercial rate since it was the use or deprivation of the principal amount that gave interest its character. The rate of interest, therefore, fell to be assessed by the same criterion, and not by valuation. The Tribunal also decided that the restriction on grant of interest relief under the Income and Corporation Taxes Act 1988 ("ICTA 1988"), Income and Corporation Taxes Act 1988 section 787s. 787 did not apply since interest relief was not the sole or main benefit that might be expected to have accrued to the taxpayer. In respect of the settlement agreement between the taxpayer and HMRC, the Tribunal held that it was valid because HMRC's acceptance of the tax repayments constituted acceptance of the letter of offer and side letter which reflected the negotiated terms reached during the settlement meeting between them and the taxpayer. The Taxes Management Act 1970 ("TMA 1970"), Taxes Management Act 1970 section 54s. 54 gave effect to the settlement agreement from the time HMRC accepted the taxpayer's letter of offer in writing. The Tribunal also held that the clause in the settlement agreement which related to tax years after each of the relevant payment was not ultra vires since it involved compromise of an existing liability or claim for relief which was clearly within the powers of HMRC. The Tribunal found there was no evidence on which it might be objectively concluded that HMRC placed any reliance on the non-disclosure in entering into the agreement. Thus, there was no material non-disclosure by the taxpayer such as to render the settlement agreement voidable. Finally, the Tribunal decided that since the settlement agreement made it clear that the deemed payments were to be treated as payments of qualifying interest or as interest eligible for relief, the clause in the settlement agreement dealing with the relevant payments should be construed as such under ICTA 1988, Income and Corporation Taxes Act 1988 section 353s. 353.
The taxpayer appealed against HMRC's closure notice issued on 31 October 2008 in respect of his self-assessment for the year ended 5 April 2007. He also appealed against the notices of assessment under TMA 1970, Taxes Management Act 1970 section 36s. 36.
The taxpayer was a managing director in an investment bank. He made three payments ("the payments") in respect of three loans ("2002 loan", "2003 loan" and "2007 loan"). The money from the loans was used to finance the acquisition of loan notes ("2002 note" and "2003 note") in two close companies carrying on property investment business. In each case, the payments satisfied in full the taxpayer's obligation to pay interest under the relevant loan. Tax relief was claimed under the Income and Corporation Taxes Act 1988 ("ICTA 1988"), Income and Corporation Taxes Act 1988 section 353s. 353.
On 3 November 2005, a settlement meeting was held between the taxpayer and an HMRC officer ("Ms F") setting out the basis on which the taxpayer claimed relief for interest in the 2001-02 and 2002-03 tax years. On 1 November 2007, HMRC accepted in writing the letter of offer by the taxpayer which reflected the negotiated terms reached during the settlement meeting. A settlement agreement was subsequently entered into between the taxpayer and HMRC in settlement of his income tax position in respect of the tax years 2001-02 and 2002-03. It related specifically to the tax treatment of the payments made by the taxpayer in respect of the 2002 and 2003 loans.
HMRC disputed the claims for relief and opened an enquiry into the taxpayer's tax return for the year ended 5 April 2007 (the "2007 investigation"). In relation to the 2007 investigation, HMRC issued a closure notice pursuant to TMA 1970, Taxes Management Act 1970 section 28As. 28A, denying the interest relief claimed by the taxpayer (the "closure notice"). The taxpayer appealed against the closure notice pursuant to s. 28A. On 16 January 2009, HMRC issued five discovery assessments for the tax years 2001-02 to 2005-06, inclusive, the effect of which was for the HMRC to resile from the settlement agreement (the "discovery assessments"). The taxpayer then made protective appeals against the discovery assessments and issued judicial review proceedings in respect of the HMRC's decision to resile from the settlement agreement.
HMRC submitted that the payments were not payments of interest at all; rather, they were capital payments. They were payments, not of interest itself, but in lieu of interest payable under the loan agreements, the effect of the present value discount being to capitalise the future income stream and extinguish the relevant lenders' rights to receive all future interest payments. The payments were repayments of the loan principal. In the circumstances of the payments, the interest rate paid in respect of the loans was grossly in excess of a commercial rate. The rate had to be determined by reference, not to the principal amount outstanding, but to the net present value of what was outstanding, or to the amount required to be paid under the reduced principal payment amount ("RPPA") formula. HMRC also argued that the provisions under ICTA 1988, Income and Corporation Taxes Act 1988 section 787s. 787 applied so as to deny the taxpayer interest relief.
HMRC contended that the settlement agreement was concluded on 1 November 2007, the date when HMRC formally accepted the taxpayer's letter of offer and accompanying side letter of 2 December 2005. They submitted that the settlement agreement was voidable in respect of the 2002 and 2003 payments as a result of material non-disclosure by the taxpayer to HMRC. On the discovery of the material non-disclosure, HMRC avoided the settlement agreement by raising the discovery assessments and making the amendments.
HMRC submitted that if the settlement agreement was not voidable, its effect for the relevant tax years was constrained for several reasons. First, TMA 1970, Taxes Management Act 1970 section 54s. 54 could not apply to the settlement agreement for the tax year 2002-03 because there was no open appeal. In relation to 2001-02, the terms of the settlement agreement were limited to the year under assessment (2001-02 only) because TMA 1970, Taxes Management Act 1970 section 54s. 54 gave the agreement the like effect as a decision of the (then) general or special commissioners. In any event, HMRC had a general power to enter into the settlement agreement and were therefore bound by it. Second, clause 6 of the settlement agreement comprised a forward tax agreement into which HMRC had no capacity to enter. Lastly, if HMRC was bound by clause 6 of the settlement agreement, interest relief ceased to be available from the date (3 April 2006) on which the taxpayer disposed of the loan notes acquired with the 2002 and 2003 loans. HMRC also submitted that the settlement agreement did not apply to the 2007 payment.
The taxpayer argued that the settlement agreement was a binding contract by 2 December 2005. He disputed that there was any non-disclosure. He said that even if there were such non-disclosure it would not have been reasonable for HMRC to have relied upon it.
As to HMRC's contention as to the effect of the settlement agreement for the relevant tax years if it was not voidable, the taxpayer submitted that since he appealed HMRC's original decision to refuse interest relief, TMA 1970, Taxes Management Act 1970 section 54s. 54 could cover the appeal in relation to 2001-02 and 2002-03. He said that the forward tax agreement was not ultra vires and was binding for future years on HMRC. He argued that clause 6 did not operate subject to any such condition, and that the relief provided by clause 6 continued to apply notwithstanding the disposal of the 2002 and 2003 notes.
Finally, the taxpayer argued that the 2007 payment was materially identical to the 2002 and 2003 payments, and when it was paid, there had been no material change in the law. Thus, HMRC should be held to its position in the settlement agreement in determining the tax treatment of the 2007 payment.
(2) Whether the payments in 2002, 2003 and 2007 were payments of "interest".
(3) Whether those payments were at a rate in excess of a reasonable commercial rate.
(4) Whether ICTA 1988, Income and Corporation Taxes Act 1988 section 787s. 787 restricted interest relief in respect of those payments.
(5) Whether the settlement agreement between the taxpayer and HMRC was valid.
(6) Whether TMA 1970, Taxes Management Act 1970 section 54s. 54 was applicable in relation to the...
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