Hugh Murphy v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Newey,Lady Justice Andrews,Lady Justice Falk |
| Judgment Date | 15 May 2023 |
| Neutral Citation | [2023] EWCA Civ 497 |
| Docket Number | Case No: CA-2021-001799 |
| Court | Court of Appeal (Civil Division) |
[2023] EWCA Civ 497
Lord Justice Newey
Lady Justice Andrews
and
Lady Justice Falk
Case No: CA-2021-001799
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
KING'S BENCH DIVISION
ADMINISTRATIVE COURT
Mr Justice Chamberlain
[2021] EWHC 1914 (Admin)
Royal Courts of Justice
Strand, London, WC2A 2LL
William Massey KC and Ben Elliott (instructed by Howes Percival LLP) for the Appellants
Aparna Nathan KC and Ishaani Shrivastava (instructed by The General Counsel and Solicitor to HM Revenue and Customs) for the Respondents
Hearing date: 20 April 2023
Approved Judgment
This judgment was handed down remotely at 10.30am on 15 May 2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
This appeal raises an issue as to the construction of an extra-statutory concession, ESC B18, issued by the respondents, HM Revenue and Customs (“HMRC”). Among other things, ESC B18 can enable a UK resident beneficiary of a non-resident trust to claim credit for UK income tax which the trustees of the trust paid on income subsequently distributed to the beneficiary. The question in the present case is whether, as HMRC contend, credit can be claimed only in relation to income which arose to the trustees not earlier than six years before the end of the year of assessment in which the payment to the beneficiary was made. Chamberlain J (“the Judge”) accepted this, but the appellants, Mr Hugh Murphy and Mrs Winifred Linnett, dispute that ESC B18 imposes such a limitation.
The facts
The appellants are the beneficiaries of a discretionary settlement known as “the Charles Street Group Funded Unapproved Retirement Benefit Scheme” (“the Trust”). The Trust was set up in 1998 by Charles Street Buildings (Leicester) Limited, of which each appellant was a director.
While the appellants have at all material times been resident in the UK, the trustees of the Trust have always been resident for UK tax purposes in Guernsey, and not in the UK. The trustees received UK source income in the form of interest on which they were liable to pay, and in fact paid, UK income tax. The net amounts generated further income as overseas bank interest.
On 26 September 2018, Magma Chartered Accountants (“Magma”) wrote to HMRC on behalf of the appellants and the trustees of the Trust asking for confirmation that ESC B18 would apply to distributions which the trustees were considering making to the appellants. Magma sought HMRC's agreement that the appellants would be granted credit for UK income tax which had been paid on Trust income regardless of whether the income had arisen within the previous six years or longer ago.
On 20 November 2018, HMRC replied that, in their view, ESC B18 claims by both UK beneficiaries of non-resident trusts and non-resident beneficiaries of UK resident trusts could be made only in respect of a payment out of income received not more than six years before the year of assessment of the payment. Magma requested reconsideration, but in the meantime the trustees of the Trust varied the deed governing it so as to allow its assets to be distributed and, on 25 January 2019, the entire trust fund was distributed to the appellants in the UK. Mr Murphy and Mrs Linnett received respectively £7,329,856.22 and £1,832,464.06.
The distributions constituted income in the hands of the appellants for UK income tax purposes for the tax year 2018–2019. The appellants paid income tax on the distributions, but also made claims for credit under ESC B18 for the UK income tax which the Trust had borne on the income out of which the distributions had been made. The claims related to all relevant tax years, not just the last six.
HMRC gave credit for UK income tax paid by the trustees on UK source Trust income arising in tax years from and including 2012–2013 and have repaid the tax so paid. However, they rejected the claims for credit in respect of earlier years. HMRC acknowledge that, on their interpretation of ESC B18, relief was given in error in relation to the income arising in 2012–2013.
On 8 August 2019, the appellants issued judicial review proceedings. The claim came before the Judge, who, in a judgment dated 13 July 2021 (“the Judgment”), dismissed it. The appellants now appeal against that decision.
ESC B18 in context
The Finance Act 1973
As its heading indicates, section 16 of the Finance Act 1973 (“FA 1973”) imposed a “[c]harge to additional rate of certain income of discretionary trusts”. In addition to the basic rate of income tax, income arising to trustees which “[was] to be accumulated or which [was] payable at the discretion of the trustees or any other person” was subject to “the additional rate”. UK resident trustees were liable for the “additional rate” on all income, whatever its source, while non-resident trustees had to pay the “additional rate” on UK source income.
Section 17 of FA 1973 provided for a credit mechanism to prevent income being taxed twice: both as income received by trustees and on its distribution to beneficiaries. But for section 17, the beneficiaries would be liable for tax on the distribution even though the income distributed had already been taxed in the hands of the trustees. Section 17 addressed the issue as regards UK resident trustees. So far as material, it provided:
“(1) Where, in any year of assessment, trustees make a payment to any person in the exercise of a discretion exercisable by them or any person other than the trustees, then, if the sum paid is for all the purposes of the Income Tax Acts income of the person to whom it is paid (but would not be his income apart from the payment), the following provisions of this section shall apply with respect to the payment in lieu of section 52 or 53 of the Taxes Act [i.e. the Income and Corporation Taxes Act 1970].
(2) The payment shall be treated as a net amount corresponding to a gross amount from which tax has been deducted at a rate equal to the sum of the basic rate and the additional rate in force for the year in which the payment is made; and the sum treated as so deducted shall be treated—
(a) as income tax paid by the person to whom the payment is made; and
(b) so far as not set off under the following provisions of this section, as income tax assessable on the trustees.
(3) The following amounts, so far as not previously allowed, shall be set against the amount assessable (apart from this subsection) on the trustees in pursuance of subsection (2)(b) above:
(a) the amount of any tax on income arising to the trustees and charged at the additional as well as at the basic rate in pursuance of section 16 of this Act ….”
The payment received by a beneficiary was thus treated as a net amount from which basic and additional rate tax had already been deducted. The notional deduction was deemed both to have been paid by the beneficiary as income tax and to be income tax for which the trustees were assessable. The trustees could, however, set off any income tax for which they were otherwise liable or had already paid on the trust income, with the result that, provided that they incurred such tax (i.e. that the trustees had what has been described as “tax capacity”), the income was taxed only once.
By reason, however, of the latter part of section 17(1) of FA 1973 (“the following provisions … shall apply with respect to the payment in lieu of section 52 or 53 of the Taxes Act” – emphasis added), section 17 applied only if trustees were UK resident. Where trustees were not UK resident, they were liable to income tax on UK source income and a UK resident beneficiary to whom net income was distributed would be taxed again without any credit for the tax paid by the trustees.
Section 18 of FA 1973 dealt with the position where trustees received income which was eligible for relief from double taxation under a double tax treaty or the UK's unilateral relief rules. In such a case, a beneficiary to whom income was paid on would still be treated as receiving a net amount after deduction of income tax, but, not themselves having paid UK income tax (or the full amount of UK tax), the trustees stood to be liable for the amount notionally deducted from the payment to the beneficiary. The trustees could therefore be taxed twice on non-UK source income: both in the country from which the income originated and on the payment to the beneficiary, without effective relief for the foreign tax.
Section 18 of FA 1973 ameliorated the position by allowing a beneficiary to claim to “look through” the trust to the source of the income. It read:
“(1) Subsection (2) of this section shall apply if a payment made by trustees falls to be treated as a net amount in accordance with section 17(2) of this Act and the income arising under the trust includes income in respect of which the trustees are entitled to credit for overseas tax under Part XVIII of the Taxes Act (in that subsection referred to as ‘taxed overseas income’).
(2) If the trustees certify—
(a) that the income out of which the payment was made was or included taxed overseas income of an amount and from a source stated in the certificate; and
(b) that that amount arose to them not earlier than in the year 1973–74 and not earlier than six years before the end of the year of assessment in which the payment was made;
the person to whom the payment was made may claim that the payment, up to the amount so certified, shall be treated for the purposes of the said Part XVIII as income received by him from that source and so received in the year in which the payment was made.”
The effect was to relieve trustees of the liability otherwise...
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