Peninsular & Oriental Steam Navigation Company
| Jurisdiction | UK Non-devolved |
| Judgment Date | 29 May 2013 |
| Neutral Citation | [2013] UKFTT 322 (TC) |
| Date | 29 May 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 322 (TC)
Sir Stephen Oliver QC, Helen Myerscough FCA
Jonathan Peacock QC and Philip Walford, counsel, appeared for the Appellant
David Goldberg QC and Nicola Shaw QC, instructed by the General Counsel for HMRC, appeared for the Respondents
Corporation tax - double taxation relief ("DTR") - dividends paid between related companies: relief for UK and underlying taxes - "rate-boosting" - Australian subsidiary of claimant company held all shares in UK unlimited company - Australian subsidiary subscribed for further shares in unlimited company - cancellation of those further shares and reduction of capital by unlimited company - subscription monies relating to cancelled shares credited to reserves - reserves represented by subscription monies released by way of "interim dividend" to Australian company - no UK tax borne on reserves out of which "interim dividend" was paid - whether Income and Corporation Tax 1988 ("ICTA 1988"), Income and Corporation Taxes Act 1988 section 801s. 801(4B) applied to increase underlying tax available for credit in hands of claimant company - no - appeal dismissed
The First-tier Tribunal dismissed the taxpayer company's appeal against HMRC's amendment to its tax computation for the relevant year, reducing its claim for DTR for the purposes of corporation tax. The taxpayer's claim for DTR was unsound in law, having regard to the strict wording of the computational rules in ICTA 1988, Income and Corporation Taxes Act 1988 part XVIII chapter 2Pt. XVIII, Ch. 2. Furthermore, the so-called dividends from the taxpayer's subsidiary were introduced for the purposes of the scheme and for no other purpose. None of such dividends ever became distributable reserves in any real sense of the subsidiary. Thus, in reality, there was no dividend for the purposes of the taxpayer's claim for DTR.
The taxpayer was a publicly-quoted parent company of a group, with a worldwide transport and logistics business. A company ("POAL") was the principal holding company for the group's Asia-Pacific operations and was resident in Australia. Trading operations and property disposals in Australia had produced substantial cash surpluses.
On 26 May 2004, POAL declared an interim dividend of $75m, payable on 27 May 2004, from the profits of the year ended 31 December 2004 of POAL and its subsidiaries. The rate of underlying tax in Australia was then just under ten per cent. In 2004, the taxpayer was aiming to "rebase" its dividend policy by bringing A$155m from POAL to the taxpayer. But, were that amount to be paid up by way of dividend from POAL, it would be exposed to a corporation tax charge under ICTA 1988, Income and Corporation Taxes Act 1988 section 18s. 18, Sch. D, case V at a 30 per cent rate with credit for barely ten per cent of underlying tax.
The taxpayer was informed by its accountants that ICTA 1988, Income and Corporation Taxes Act 1988 section 801s. 801(4B) made it possible to enhance the credit to 30 per cent. A scheme to achieve that result was sketched out to enable the taxpayer to receive dividends of A$155m from POAL with sufficient credit for deemed underlying tax. The machinery involved the making of a dividend of some A$193m by a UK resident subsidiary of POAL, which did not need to be passed on, by way of dividend, from POAL to the taxpayer. The participants in the scheme included the UK resident subsidiary ("AG"), whose role was to make the A$193m dividend. All of AG's shares were owned beneficially by an Australian resident company ("LPL"), which was owned as to 99 per cent by POAL and, indirectly, as to 1 per cent by the taxpayer.
In its corporation tax computation for the relevant year, the taxpayer claimed DTR of £20,841,750.30 in respect of the dividends of A$75m and A$80m. On 21 January 2011, HMRC amended that tax computation by reducing the taxpayer's claim for DTR from £20,841,750.30 to £6,768,343.19.
The taxpayer contended that the payment of A$193,766,877 made to LPL on 19 November 2004 was a dividend from AG for the purposes of the DTR code. The dividends of 30 November 2004 paid by POAL to the taxpayer represented the AG dividends which were taxable under ICTA 1988, Income and Corporation Taxes Act 1988 section 18s. 18, Sch. D, Case V. As the taxpayer owned more than ten per cent of POAL, it was entitled to credit for underlying tax in respect of those dividends on the strength of ICTA 1988, Income and Corporation Taxes Act 1988 section 799 section 801ss. 799 and 801, with particular reference to Income and Corporation Taxes Act 1988 section 801s. 801(4A)-(4C).
HMRC contended that the taxpayer's credit was limited to £7,029 976.19, which was the capped amount of the tax actually borne by POAL and LPL. To the extent that the claim was based on the "dividend" said to have been paid by AG to LPL, it was excessive and wrong in law as £14,073,407.11 should be excluded from DTR. The so-called dividend of AG had no relevance to the operation of the DTR code. The amount paid to LPL by AG should properly be recognised as the repayment of a loan. Furthermore, the taxpayer could only claim credit relief in respect of the so-called dividend from AG if, making the statutory assumption that LPL was a UK resident company, LPL could have claimed relief in respect of that dividend. As AG had paid no tax in the relevant period, LPL could not have maintained any claim for relief in respect of a dividend paid to it. Thus, the taxpayer's claim was precluded by the express terms of ICTA 1988, Income and Corporation Taxes Act 1988 section 801 subsec-or-para 2s. 801(2).
The Tribunal held that the taxpayer's claim for DTR was unsound in law, having regard to the strict wording of the computational rules in ICTA 1988, Income and Corporation Taxes Act 1988 part XVIII chapter 2Pt. XVIII, Ch. 2. ICTA 1988, Income and Corporation Taxes Act 1988 section 801s. 801(4A)-(4C) were introduced into the code by Finance Act 2001 to correct the perceived anomaly that existed where a UK resident company, whose shares were owned by a related intermediate overseas holding company. The profits of the UK company at the bottom might have been fully subjected to UK tax, but the rate of the underlying tax might have been abated by the effect of reliefs from and allowances against the corporation tax. The mechanism of ICTA 1988, Income and Corporation Taxes Act 1988 section 801 subsec-or-para 4Bs. 801(4B) topped up the amount of underlying tax in relation to the DTR claim made by the UK claimant company receiving dividends representing the taxed profits of the bottom company. It had the effect of preserving the benefit of the reliefs and allowances given to the bottom UK company. Moreover, the present claim for relief, based as it was on tax that had never been payable, was completely at odds with the terms of ICTA 1988, Income and Corporation Taxes Act 1988 part XVIII chapter 1Pt. XVIII, Ch. 1, which granted the relief in respect of tax payable.
Furthermore, the scheme was designed and implemented for no reason other than tax avoidance. It depended on the alchemy of turning share capital into distributable reserves almost overnight. The trick was written into the script of the charade. Neither the words of a statute nor principles of proper accounting were designed to cope with tricks, unless the statutory words were targeted anti-avoidance provisions. The only conclusion that the Tribunal could reach was that the A$193m was introduced for the purposes of the scheme and for no other purpose. When the scheme was "done", the money was to be restored to the taxpayer by the preordained route. It was absolutely alien to the scheme that AG should benefit from its participation, save for £50,034 left in the company. There was no risk that any of the participants, companies or directors, would step out of line. On that basis, AG held the "subscription monies" for the sole purpose of the scheme and to restore it to where it came from. None of the A$193m ever became distributable reserves in any real sense of AG. By making the payment on 15 November 2004 that purported to be a dividend, AG was returning money that was no longer required. There was, in reality, no dividend for the purposes of the taxpayer's claim for DTR.
The taxpayers will learn from this decision the effect of the operation of DTR under ICTA 1988, Income and Corporation Taxes Act 1988 section 801s. 801 on the taxpayers' credit, for the purposes of computing their corporation tax. The relief under that provision will not apply, unless the taxpayers prove that payment of dividends between related companies was in fact made. For commentary on double taxation relief, see CCH British Tax Reporter at 772-300.
[1]The Appellant ("P&O") appeals against an amendment made by HMRC (on 21 January 2011) to P&O's tax computation for the year ended 31 December 2004. The amendment reduced P&O's claim for double tax relief ("DTR") for the purposes of corporation tax from £20,841,750.30 to £6,768,343.19.
[2]P&O claimed entitlement to a DTR credit of £21,103,383 in respect of certain payments made to it, directly or indirectly, by related companies. P&O says of those payments that they were all dividends. The claim was later reduced by other reliefs to £20,841,750. Of that amount the actual "underlying tax" paid by those related companies was £7,194,025. P&O's tax return was amended to reflect only the "capped" underlying tax actually paid (of £7,029,973) and to exclude the figure of £14,073,407 (that had been claimed by P&O on the basis that it represented "deemed" underlying tax for DTR purposes).
[3]In this Decision all statutory references are, unless otherwise stated, to Income and Corporation Tax 1988.
[4]The expression "capped" in relation to underlying tax means the maximum amount permitted to be brought into account in claiming credit having regard to the...
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Peninsular & Oriental Steam Navigation Company v Revenue and Customs Commissioners
...dividend argument”). [5] In essence both the First-tier Tribunal (“the FTT”) (Sir Stephen Oliver QC and Helen Myerscough FCA), [2013] TC 02725, and the Upper Tribunal (“UT”) (Proudman J and Colin Bishopp), [2015] BTC 520, upheld HMRC's rejection of the appellant's DTR claim. I have come to ......
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Peninsular & Oriental Steam Navigation Company v Revenue and Customs Commissioners
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