HM Revenue and Customs v George Anson

JurisdictionEngland & Wales
JudgeLady Justice Arden,Lord Justice Lloyd,Lord Justice Laws
Judgment Date12 February 2013
Neutral Citation[2013] EWCA Civ 63
Docket NumberCase No: A3/2012/0966
CourtCourt of Appeal (Civil Division)
Date12 February 2013

[2013] EWCA Civ 63

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM Upper Tribunal

TAX AND CHANCERY CHAMBER

MANN J

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

Lord Justice Laws

Lady Justice Arden

and

Lord Justice Lloyd

Case No: A3/2012/0966

Between:
Her Majesty's Revenue and Customs
Respondent
and
George Anson
Appellant

Jonathan Peacock QC (instructed by Ernst & Young LLP) for the Appellant

David Ewart QC & James Henderson (instructed by HM Revenue and Customs) for the Respondent

Hearing date: 17 October 2012

Lady Justice Arden
1

The appellant, Mr George Anson, is a member of a Delaware limited liability company or "LLC", known as HarbourVest LLC ("HV"). This is a very profitable entity. HV is treated as "tax transparent" in the USA, meaning that its members pay tax on their share of its profits and the LLC pays no tax. This is because under the relevant federal and state law the profits of such entities are treated as the profits of the members for fiscal purposes unless the members have elected otherwise in the prescribed way. That election was not made in this case. At the time that these profits arose, Mr Anson was resident but not domiciled in the UK for tax purposes and he was liable to pay UK tax only on income remitted to the UK but that included his share of the profits of HV for the fiscal years 1998 to 2004, the years with which we are concerned, unless any double tax relief ("DTR") or domestic unilateral relief was available. The issue on this appeal relates only to DTR.

2

The respondent, Her Majesty's Revenue and Customs ("HMRC"), seeks to levy tax on Mr Anson's share of HV's profits. In its decision dated 3 August 2011, the Upper Tribunal (Tax and Chancery Chamber) (Mann J) upheld HMRC's contentions.

3

Mr Anson's case is that he is entitled to DTR. Accordingly, the question to be decided on this appeal is whether Mr Anson is entitled to DTR under the terms of the UK/US Double Tax Convention of 31 December 1975 ( SI 1980/568) (applying to all the fiscal years in issue save the last) ("the 1975 Convention") and UK/US Double Tax Convention of 24 July 2001 ( SI 2002/2848) (in relation to 2003/4) ("the 2001 Convention").

4

The question in issue falls to be determined by reference to the relevant provisions of the 1975 Convention and the 2001 Convention. There is no material difference between the two Conventions.

5

It is common ground that, to obtain DTR, Mr Anson must establish that his share of HV's profits is the same profits as those by reference to which he was taxed in the US. These words are set out in article 23 of the 1975 Convention, which I have set out in the annex to this judgment.

6

In essence, HMRC contends that Mr Anson's share of HV's profits represents income received by him from his investment in HV, and that these are not the same as the profits which HV made. It does not seek to levy tax on Mr Anson on the basis that profits of HV can be attributed to him for tax assessment purposes.

7

The First-tier Tribunal (Mr John F. Avery-Jones CBE and Mr Ian Menzies-Conacher FCA) ("FTT") came to a different conclusion from the Upper Tribunal ("the Upper Tribunal"). The FTT considered that the members' arrangements for automatically allocating profits to members meant that the profits of HV had belonged to Mr Anson throughout. The Upper Tribunal considered that the FTT had applied the wrong test and that the profits sought to be taxed in the UK were not the same as those taxed in the US. I examine the members' arrangements as part of the background below.

8

Mr Anson has already paid federal and state tax in the US on his share of HV's profits at the rate of 45%. The practical implications of this question are that, if the Upper Tribunal's decision stands, Mr Anson will be liable to pay tax at the rate of 22% of the whole out of the remaining 55% of his income, making an effective rate of tax of 67%. If the appeal succeeds he will pay no further tax in addition to that already paid in the US.

9

Having considered the submissions of counsel and the decisions of the FTT and Upper Tribunal, I conclude that the decision of the Upper Tribunal discloses no error of law. I shall amplify below my reasons in paragraphs 57 to 86 below, but in summary they are as follows:

i) The relevant test for determining whether a person is taxed on the same profits or income in both jurisdictions is whether the source of the profits or income in each jurisdiction is the same.

ii) Where the taxpayer became entitled to the profits of an entity because of some contractual arrangement to which he is a party, he must show that the contract is actually the source of the profit, rather than a mechanism to secure a right to a profit derived from another source. This will in general mean that, as the judge held, he has to show a proprietary right to the profits.

iii) The Upper Tribunal was right to conclude that the FTT erred in law in so far as it held that the profits of HV belonged to the members.

iv) The Upper Tribunal was also right to conclude that on the facts of this case the profits of HV did not belong to its members.

10

The UK/US Exchange of Notes dated 24 July 2001 is a quite separate matter. Mr Anson does not have permission to appeal on this matter and accordingly he has first to obtain that permission. I will deal with his application when I have dealt with the appeal. For the reasons given in paragraph 87 to 93 below, I would refuse the appellants permission to rely on the UK/US Exchange of Notes dated 24 July 2001 at this late stage.

11

I have used the term "tax transparent" in paragraph 1 above to denote the arrangements under US federal and state law for imposing tax on certain entities. The parties to this appeal have also used this expression but without defining it. They have similarly used the expression "opaque" as meaning the opposite state of affairs. In line with my first reason in paragraph 9 above, I propose to use the term "tax transparent", in relation to UK tax, to describe the income of a member of an entity which is to be regarded as having the same source for the purposes of UK tax law as that of the entity from which it is derived. For this purpose, an entity includes a partnership or a trust which does not have a separate legal personality.

12

Before I explain my reasons I will set out the background and briefly summarise the reasoning of the FTT and Upper Tribunal.

BACKGROUND

(a) Relevant features of an LLC

13

The FTT heard expert evidence as to foreign law and made detailed findings on this subject.

14

It is common ground that an LLC is an entity which is separate from its members and that an LLC holds its undertaking and assets separately from its members. This is an indication that profits derived from its trading are those of the LLC and not those of its members. Profits are after all simply the sum which remains after an account of the results of the trading are drawn up.

15

The LLC is a creature of the Delaware LLC Act.

16

The principal characteristic of an LLC is that the statutory framework provides a number of default rules but otherwise enables parties to structure the internal workings of the LLC by agreement. Thus:

i) Profits and losses of the LLC are allocated to the members either as agreed in "an LLC agreement" or in proportion to the agreed values of their contributions.

ii) The LLC agreement can regulate members' voting rights but in default the Delaware LLC Act specifies the voting rights of managing and non-managing members.

iii) Members have interests in the profits and assets of the LLC, which they can assign, but the LLC has no share capital.

iv) Members have capital accounts to which the LLC's profits are credited and losses debited. Members benefit rateably from any credit for tax purposes.

v) Distribution and reserving policy is controlled by the "managing members". Accordingly managing members could determine the timing and amount of distributions out of members' capital accounts. It follows that members cannot compel the distribution of their capital accounts to themselves.

(b) HV LLC agreement (28 January 1997)

17

The members of HV entered into an LLC agreement dated 28 January 1997. HV is not a party to the LLC agreement. The provisions principally relevant for the purposes of this appeal are those dealing with capital contributions and capital accounts.

18

The members made initial capital contributions and agreed to make additional capital contributions when required by the managing members.

19

Article IV provided for the crediting to members' capital accounts of capital contributions and all gross income and capital gains, and for the debiting to such accounts of distributions and all losses and expenses. There were complex provisions for determining the basis of allocation as between different members but we are not concerned with these provisions.

20

Article V then dealt with distributions of net profits. This had four parts dealing with respectively: distributions; set off of sums due from members to HV; the creation of reserves, and the withholding of taxes. The first part begins as follows:

"Subject to the provisions of this Article V, to the extent cash is available, distributions of all of the excess of income and gains or losses, deductions and expenses allocated in accordance with Section 4.2 with respect to any calendar year will be made by the Company at such time within seventy-five (75) days following the end of such calendar year and in such amounts as the Managing Members may determine in their sole discretion. The Managing Members may from time to time in their discretion make additional...

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