Pardoe (Inspector of Taxes) v Entergy Power Development Corporation
| Jurisdiction | England & Wales |
| Judgment Date | 23 February 2000 |
| Date | 23 February 2000 |
| Court | Chancery Division |
Chancery Division.
Lightman J.
Christopher Tidmarsh (instructed by the Solicitor of Inland Revenue) for the Crown.
Felicity Cullen (instructed by Herbert Smith) for Entergy.
The following cases were referred to in the judgment:
Borger dec'd, In the will of [1912] VLR 310
IR Commrs v McGuckian TAXTAX[1997] BTC 346; 69 TC 1
Corporation tax - Deduction of tax from payments to non-residents - Direction issued to US company to deduct tax from payment to non-resident company as consideration for purchase of shares in UK company - Direction issued before contract while negotiations continuing - Whether "any person entitled " included a person who might become entitled in the future - Whether direction valid - Income and Corporation Taxes Act 1988 section 777 subsec-or-para (9)Income and Corporation Taxes Act 1988, s. 777(9).
This was an appeal by the Revenue from a decision of the special commissioners that a direction by the Revenue pursuant toIncome and Corporation Taxes Act 1988 section 777 subsec-or-para (9)s. 777(9) of the Income and Corporation Taxes Act 1988 that tax should be deducted from a payment to a non-resident was not valid.
In 1997 a US company ("Entergy"), which operated in London through a subsidiary service company with premises in London, was negotiating with a company based in Cyprus for the purchase of a company ("KPL") incorporated and resident for tax purposes in the UK.
A direction under Income and Corporation Taxes Act 1988 section 777 subsec-or-para (9)s. 777(9) was issued on 28 July 1997 while negotiations continued. On 1 September 1997 an agreement governed by English law was entered into in Cyprus whereby the taxpayer acquired the entire share capital of KPL from the Cyprus company. The direction required the US company to deduct tax under Income and Corporation Taxes Act 1988 section 349s. 349 from any purchase consideration paid to the Cyprus company on the ground that it was selling shares in a company owning land in the UK within Income and Corporation Taxes Act 1988 section 776s. 776.
Entergy contended that the Cyprus company was not at the time of the issue of the direction "a person entitled to any consideration or other [taxable] amount" in the absence of a binding contract as required byIncome and Corporation Taxes Act 1988 section 777 subsec-or-para (9)s. 777(9).
The Revenue contended that the word "entitled" in Income and Corporation Taxes Act 1988 section 777 subsec-or-para (9)s. 777(9) was not restricted to those presently entitled and that the legislation should be construed with regard to its purpose, namely to protect the Revenue where potentially taxable sums were paid to persons abroad. If no direction could be made until there was a binding contract, the application of the section and enforcement of assessments would be very difficult.
Held, dismissing the Revenue's appeal:
1. Construing the phrase "any person entitled" in Income and Corporation Taxes Act 1988 section 777 subsec-or-para (9)s. 777(9) in the context of Income and Corporation Taxes Act 1988 section 775 section 776ss. 775 and 776, to which it was supplemental, in its ordinary usage, it meant "any person presently entitled" and would not normally include a person prospectively entitled if some event happened in the future, and looking at the expression in the statutory context of the Act as a whole, there was nothing to indicate a wider meaning. Since the meaning of the phrase was clear, it was not appropriate to have regard to the purpose of the legislation.
2. This may leave a yawning gap in the protection available to the Revenue which ought to be filled, but whether the gap ought to be filled and how it should be filled are matters for the legislature, and not the court.
By originating motion pursuant to the Taxes Management Act 1970, Taxes Management Act 1970 section 56As. 56A (as substituted by SI 1994/1813SI 1994/1813 with effect from 1 September 1994) the taxpayer appealed against the following decision of the special commissioners (Mr THK Everett and Dr John Avery Jones CBE), released on 10 May 1999.
Entergy Power Development Corporation ("Entergy") appeals against an assessment to income tax laid on it pursuant to Income and Corporation Taxes Act 1988 section 349s. 349 of the Income and Corporation Taxes Act 1988 following the service on it by the Revenue of a direction pursuant to Income and Corporation Taxes Act 1988 section 777 subsec-or-para (9)s. 777(9) of the same Act.
The evidence before us consisted of a statement of agreed facts and two bundles of agreed documents. No oral evidence was adduced but in its absence there were produced to us an affidavit sworn by Mr Frederick Francis Nugent, an officer of Entergy and two affidavits sworn by Mr Ian Kerr McNeill, a solicitor and an employee of Entergy Enterprises Inc ("EEI"), a company associated with Entergy.
The agreed statement of facts reads as follows:
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1.1 In June 1997, Entergy began negotiations with a company known as Citrucy Ltd ("Citrucy") for the purchase of the entire issued share capital of Kingsnorth Power Ltd ("KPL"), a wholly owned subsidiary of Citrucy.
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1.2 Entergy is a company incorporated and generally resident for tax purposes in the United States of America. Entergy and EEI (a company associated with Entergy) executed an underlease of offices at 2 George Yard, London dated 17 December 1996. EEI provides services to Entergy under the terms of a service agreement dated 8 August 1994. EEI is a company incorporated with limited liability in the USA and is registered at Companies House as an overseas company under Companies Act 1985 section 691s. 691 of the Companies Act 1985 with number FC 019149. EEI's registered place of business in England is 2 George Yard, Lombard Street, London EC3V 9DH.
The statement that "Entergy is … generally resident for tax purposes in the United States of America" is meant to indicate that the Revenue have accepted for the purposes of this hearing that Entergy is not resident in the UK but reserves its position in the event that it may wish to challenge that statement in other proceedings.
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1.3 Citrucy is a company incorporated in Cyprus but Entergy has no further information as to the jurisdictions in which Citrucy may be taxable.
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1.4 KPL is a company incorporated and resident for tax purposes in the UK.
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1.5 Entergy understands from Citrucy that, at the relevant time in 1997, it was only one of several parties interested in acquiring the share capital in KPL.
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2. Both Citrucy and Entergy retained legal advisers in the UK for the purposes of negotiating the terms of the sale and purchase agreement.
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3.1 Before Entergy began negotiations for the acquisition of KPL, London Electricity plc (which at the relevant time was a subsidiary of Entergy Corporation, the parent company of Entergy) had been interested in acquiring the shares of KPL through a joint venture with other non-connected companies. The purchase did not proceed, however, and Entergy began negotiations for the purchase of KPL. The Special Compliance Office of the Inland Revenue had made enquiries under their information seeking powers contained in Income and Corporation Taxes Act 1988 section 778s. 778 of the Income and Corporation Taxes Act 1988 ("the 1988 Act") of London Electricity plc in relation to the possible sale of KPL and were informed by the tax manager of London Electricity plc that the purchase by the joint venture companies was not proceeding but that Entergy had commenced negotiations for the acquisition of KPL. The tax manager of London Electricity plc gave the names of Mr Ian McNeill, an employee of EEI (based in London) and Mr John Achterhof of EEI (based in the US) to the Special Compliance Office as appropriate persons to deal with any Inland Revenue inquiries.
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3.2 The Special Compliance Office contacted Mr McNeill and requested an address for service of a direction under Income and Corporation Taxes Act 1988 section 777 subsec-or-para (9)s. 777(9) of the 1988 Act and the London address of EEI was given. On 28 July 1997 the Special Compliance Office of the Inland Revenue issued a direction ("the direction") under Income and Corporation Taxes Act 1988 section 777 subsec-or-para (9)s. 777(9) of the 1988 Act directing Entergy to withhold tax from any purchase consideration paid by Entergy to Citrucy for the shares in KPL as if the consideration was a payment to which Income and Corporation Taxes Act 1988 section 349s. 349 the 1988 Act applied.
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3.3 The direction was served at the registered place of business in the UK of EEI. Receipt of the direction was acknowledged in a letter dated 28 July 1997.
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3.4 At the time of issue of the direction there was no contract or other agreement between Entergy and Citrucy for the sale and purchase of the shares in KPL.
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3.5 Entergy understands from Citrucy that the Inland Revenue issued several similar directions to other potential purchasers of the shares in KPL from Citrucy at about the same time as the direction was issued to Entergy.
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4.1 On 1 September 1997 an agreement ("the agreement") governed by English law was executed in Cyprus whereby Entergy acquired the entire issued share capital of KPL from Citrucy.
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4.2 In order to enable compliance with the direction, the agreement provided for the deduction of an amount representing tax at the basic rate from the purchase consideration paid to Citrucy. (Copies of the relevant...
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