UBS AG v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Mr Justice Etherton |
| Judgment Date | 07 February 2006 |
| Neutral Citation | [2006] EWHC 117 (Ch) |
| Docket Number | Case No: CH2005/APP/0539 |
| Court | Chancery Division |
| Date | 07 February 2006 |
[2006] EWHC 117 (Ch).
Chancery Division.
Etherton J.
John Gardiner QC and Jolyon Maugham (instructed by McDermott Will & Emery UK LLP) for the taxpayer.
David Ewart (instructed by HMRC Solicitors) for the Crown.
The following cases were referred to in the judgment:
Boake Allen Ltd v R & C CommrsUNK [2006] EWCA Civ 25
Fothergill v Monarch Airlines LtdELR [1981] AC 251
IR Commrs v Commerzbank AGTAXTAX [1990] BTC 172; 68 TC 252
IR Commrs v Universities Superannuation Scheme LtdTAX [1997] BTC 3
Memec plc v IR CommrsTAX [1998] BTC 251
NEC Semi-Conductors Ltd v IR CommrsUNKTAX [2006] EWCA Civ 25; [2004] BTC 208
Pirelli Cable Holding NV v IR CommrsUNKTAX [2003] EWCA Civ 1849; [2004] BTC 50
Sema Group Pension Scheme Trustees v IR CommrsTAXTAX [2003] BTC 106 (CA); [2002] BTC 109
Corporation tax - Tax credit - Double tax agreement - Non-discrimination - Whether UK permanent establishment of Swiss company entitled to payment of tax credit on dividends - Whether right to tax credits incorporated into UK law - Income and Corporation Taxes Act 1988, Income and Corporation Taxes Act 1988 section 243 section 788 subsec-or-para 3ss. 243, 788(3)(a), (d) - UK-Switzerland Double Taxation Convention 1977 - Double Taxation Relief (Taxes on Income) (Switzerland) Order 1978 (SI 1978/1408).
This was an appeal by the taxpayer, a Swiss bank, as successor to Swiss Bank Corp ("SBC"), against a decision of the special commissioners ((2005) Sp C 480) refusing a claim for relief under s. 243 of the Income and Corporation Taxes Act 1988 in respect of SBC's London branch for the accounting periods ending on 31 December 1993, 31 December 1995 and 31 December 1996.
SBC was a bank resident in Switzerland that owned a number of subsidiaries operating in many countries. At all material times, it carried on a banking business in London through a branch ("the taxpayer"). The agreed corporation tax computations showed that, in the relevant years, the taxpayer had accumulated substantial trading losses. The taxpayer was recognised as a market maker on the London Stock Exchange. In the course of its activities, it received dividends from UK resident companies and received and paid manufactured dividends (within ICTA 1988, s. 737 and Sch. 23A). Dividends were received in respect of securities held by the taxpayer on the applicable dividend record date. Manufactured dividends received arose primarily in consequence of stock lending transactions engaged in by the taxpayer over dividend payment record dates or purchases which remained unsettled over those dates. During the relevant years, the surplus of UK dividends (and manufactured dividends) received by the taxpayer over manufactured dividends paid amounted to £233,282,021 ("the distributions"). Had the taxpayer been a person resident in the UK, the distributions would have carried tax credits, under ICTA 1988, s. 231, of £58,320,506.
The taxpayer claimed pursuant to ICTA 1988, s. 788(6) relief under s. 788(3)(a). The basis of that claim was that art. 23 (the non-discrimination article) of the UK-Switzerland Double Taxation Convention ("the Treaty") should have effect to provide relief for the taxpayer so that it should be entitled to claim under ICTA 1988, s. 243 for those years the same relief as would be available to a UK resident company carrying on the same activities as the taxpayer. The claim was refused by the Revenue and the taxpayer appealed.
The special commissioners agreed with the taxpayer that the Treaty entitled it to relief under s. 243 but held that such rights had not been incorporated into UK law by s. 788(3)(a) ((2005) Sp C 480).
The taxpayer challenged the commissioners' finding on the meaning and effect of s. 788(3)(a) but raised a new argument that its right under the Treaty had been incorporated into UK law by s. 788(3)(d). The Revenue challenged the commissioners' finding that the Treaty conferred on the taxpayer an entitlement to tax credits under s. 243 in respect of dividends received by the branch during the relevant accounting periods.
Held, allowing the appeal:
1.The taxpayer's claims to s. 243 tax credits were within art. 23 of the Treaty. Payment of the tax credit was part of the levying of taxation and, in circumstances such as the present, tax was less favourably levied on the taxpayer within art. 23(2) by virtue of the inability of the taxpayer (as a foreign company unable to receive or make franked payments), on the one hand, and the ability of a UK company, on the other hand, to invoke s. 243.
2.The application of the second basic element of the imputation principle (i.e. that the recipient of the dividend was given a tax credit) in the particular circumstances of s. 243 could not fairly be described as "relief from … corporation tax" within s. 788(3)(a). The payment of the tax credit resulting from the application of s. 243 was anomalous. The tax credit payable to the company invoking s. 243 did not reduce any corporation tax liability of the company and was not a repayment of corporation tax deducted or withheld at source. There was no discernible reason for the tax credit other than as the anomalous continuation of an aspect of the tax regime before the introduction of the imputation system in 1973. However, the tax credit claimed was a tax credit under s. 231 in respect of qualifying distributions made to the taxpayer by companies which were resident in the UK within the express words in s. 788(3)(d). The taxpayer was seeking the same tax credit that a UK company could procure by invoking s. 243.
3.The expression "tax credit" was defined in s. 832(1) as a "tax credit under section 231". Section 238(1) similarly defined "tax credit" as meaning "a tax credit under section 231". Section 242(1)(c) expressly conferred on the company an entitlement to have paid to it "the amount of the tax credit" in the circumstances specified in s. 242. In this case the parties were agreed that there was to be implied in s. 243 a similar right to payment of the tax credit under that section as was to be found in s. 242(1)(c). It followed that the tax credit available under the express provisions of s. 242(1)(c) and under an implied provision in s. 243 was a "tax credit under section 231" within the definition of "tax credit" in s. 832(1). It was also clear, therefore, that the reference in that definition was to the tax credit described in s. 231(1), and not the particular tax credit payable in the particular circumstances specified in s. 231(2) and (3). It followed that the reference to "a tax credit under section 231" in s. 788(3)(d) was also a reference to the tax credit specified in s. 231(1), and was not confined to the particular tax credit payable in the particular circumstances specified in s. 231(2) and (3), but extended to the tax credit payable pursuant to s. 242(1)(c) and 243. (Pirelli Cable Holding NV v IR Commrs [2004] BTC 50 considered.)
4.If, as was common ground, s. 788(3)(d) embraced s. 231(3), then the legislation undoubtedly contemplated the payment of a tax credit to a foreign individual even where, were the individual a UK taxpayer, there would be no charge to income tax because, for example, the taxpayer's personal allowances and reliefs exceeded taxable income, including the dividends, and even though there had been no deduction or withholding of tax at source. If that anomalous financial benefit was extended to a foreign individual, there was no obvious reason to adopt a forced interpretation of s. 788(3)(d) in order to prevent its extension to a foreign company.
Etherton J: Introduction
[1] This is an appeal by UBS AG, a Swiss bank, as successor to Swiss Bank Corp ("SBC"), from a decision of the Special Commissioners (John S Avery Jones and Julian Ghosh) on 7 June 2005 ("the Decision") dismissing an appeal from the refusal by the Commissioners of Inland Revenue of a claim for relief under Income and Corporation Taxes Act 1988 section 243s. 243 of the Income and Corporation Taxes Act 1988 ("the Taxes Act") in respect of SBC's London branch ("the Branch") for the accounting periods ending on 31 December 1993, 31 December 1995 and 31 December 1996.
[2] References in this judgment to statutory provisions are, unless otherwise indicated, references to the provisions of the Taxes Act in force at the relevant time.
[3] The Appellant claims that, by virtue of Article 23(2) of the double taxation convention between the UK and Switzerland ("the Treaty"), it is entitled to the same tax credits under s. 243 on dividends received by the Branch during the relevant accounting periods as could be claimed by a UK resident company ("a UK company").
[4] The Special Commissioners agreed with the Appellant that the Treaty entitles the Appellant to relief under s. 243, but held that such right under the Treaty has not been incorporated into UK law by Income and Corporation Taxes Act 1988 section 788 subsec-or-para 3s. 788(3)(a).
[5] On this appeal, the Appellant challenges the Special Commissioners' finding on the meaning and effect of s. 788(3)(a). The Appellant also raises on the appeal, without objection by the Respondents, the Commissioners of Her Majesty's Revenue and Customs ("HMRC"), a new argument that its right under the Treaty to s. 243 tax credits has been incorporated into UK law by s. 788(3)(d).
[6] HMRC challenge, by a Respondents' Notice, the Special Commissioners' finding that the Treaty confers on the Appellant an entitlement to tax credits under s. 243 in respect of dividends received by the Branch during the relevant accounting periods.
[7] There was an agreed statement of facts before the Special Commissioners as follows:
(1)UBS AG ("UBS") is a bank resident in Switzerland, Swiss Bank Corporation ("SBC") and Union Bank of Switzerland each having merged into UBS in 1998 by way of mergers under Swiss...
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