Hargreaves Property Holdings Limited v The Commissioners for HMRC

The essence of the new approach was to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description. Of course this does not mean that the courts have to put their reasoning into the straitjacket of first construing the statute in the abstract and then looking at the facts. It might be more convenient to analyse the facts and then ask whether they satisfy the requirements of the statute. But however one approaches the matter, the question is always whether the relevant provision of the statute, upon its true construction, applies to the facts as found. As Lord Nicholls of Birkenhead said in MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311, 320, para 8: ‘The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case.’”

Cases such as these gave rise to a view that, in the application of any taxing statute, transactions or elements of transactions which had no commercial purpose were to be disregarded. But that is going too far. It elides the two steps which are necessary in the application of any statutory provision: first, to decide, on a purposive construction, exactly what transaction will answer to the statutory description and secondly, to decide whether the transaction in question does so. As Ribeiro PJ said in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46, para 35:

There are numerous authoritative statements in modern case law which emphasise the central importance in interpreting any legislation of identifying its purpose.”

The result of applying the purposive approach to fiscal legislation has often been to disregard transactions or elements of transactions which have no business purpose and have as their sole aim the avoidance of tax. This is not because of any principle that a transaction otherwise effective to achieve a tax advantage should be treated as ineffective to do so if it is undertaken for the purpose of tax avoidance. It is because it is not generally to be expected that Parliament intends to exempt from tax a transaction which has no purpose other than tax avoidance. As Judge Learned Hand said in Gilbert v Comr of Internal Revenue (1957) 248 F 2d 399, 411, in a celebrated passage cited (in part) by Lord Wilberforce in Ramsay [1982] AC 300, 326:

See also Collector of Stamp Revenue v Arrowtown Assets Ltd (2003) 6 ITLR 454 , paras 112–113 (Lord Millett NPJ).

Another aspect of the Ramsay approach is that, where a scheme aimed at avoiding tax involves a series of steps planned in advance, it is both permissible and necessary not just to consider the particular steps individually but to consider the scheme as a whole. Again, this is no more than an application of general principle. Although a statute must be applied to a state of affairs which exists, or to a transaction which occurs, at a particular point in time, the question whether the state of affairs or the transaction was part of a preconceived plan which included further steps may well be relevant to whether the state of affairs or transaction falls within the statutory description, construed in the light of its purpose…

The decision of the House of Lords in the Barclays Mercantile case [2005] 1 AC 684 made it clear beyond dispute that the approach for which the Ramsay line of cases is authority is an application of general principles of statutory interpretation…”

In the task of ascertaining whether a particular statutory provision imposes a charge, or grants an exemption from a charge, the Ramsay approach is generally described—as it is in the statements quoted above—as involving two components or stages. The first is to ascertain the class of facts (which may or may not be transactions) intended to be affected by the charge or exemption. This is a process of interpretation of the statutory provision in the light of its purpose. The second is to discover whether the relevant facts fall within that class, in the sense that they “answer to the statutory description” (Barclays Mercantile at para 32). This may be described as a process of application of the statutory provision to the facts. It is useful to distinguish these processes, although there is no rigid demarcation between them and an iterative approach may be required.

Both interpretation and application share the need to avoid tunnel vision. The particular charging or exempting provision must be construed in the context of the whole statutory scheme within which it is contained. The identification of its purpose may require an even wider review, extending to the history of the statutory provision or scheme and its political or social objective, to the extent that this can reliably be ascertained from admissible material.

Likewise, the facts must be also be looked at in the round. In Inland Revenue Comrs v McGuckian [1997] 1 WLR 991, 999, Lord Steyn explained that it was the formalistic insistence on examining steps in a composite scheme separately that allowed tax avoidance schemes to flourish. Sometimes looking at a composite scheme as a whole allows particular steps which have no commercial purpose to be ignored. But the requirement to look at the facts in the round is not limited to such cases. Thus, in Scottish Provident [2004] 1 WLR 3172 where the taxing statute granted an allowance which depended upon the taxpayer having an entitlement to a specified type of property (gilts), a view of the facts in the round enabled the House of Lords to conclude that a legal entitlement to gilts generated by one element in a larger scheme failed to qualify because the entitlement was intended and expected to be cancelled out by an equal and opposite transaction.”

As pointed out in oral argument, the more recent case law has also cautioned against a distinction drawn by Lord Hoffmann in MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311, [2001] STC 237 (“MacNiven”) between legal and commercial concepts, which was relied on by Mr Way. In Rossendale, Lord Briggs and Lord Leggatt said this about a similar point raised in that case:

Lord Briggs and Lord Leggatt explained that stamp duty was not a good example because Ramsay had been applied in that context, referred to other judicial and extra-judicial criticisms of the distinction and then said:

In summary therefore, there is no special category of statutory concept that is immune from purposive construction. It has been applied not only to transactions but to other concepts including “entitlement” and “entitled”. In both Scottish Provident and Rossendale that concept was interpreted as requiring a “real and practical entitlement”. Lord Hoffmann’s distinction in MacNiven between legal and commercial concepts was not intended to “provide a substitute for a close analysis of what the statute means”. Rather, in all cases the court or tribunal must consider “whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically”.

The case law on beneficial ownership and beneficial entitlement

There is no doubt that the term “beneficial ownership” and the related term “beneficially entitled” have been interpreted in a particular, and now relatively well-established, manner in domestic tax legislation.

Wood Preservation concerned an agreement to sell shares in the taxpayer companies, which were subsidiaries of a common parent company. The sale was conditional but the relevant condition was eventually waived by the purchasing company, as it was entitled to do under the terms of sale. Shortly before the waiver occurred the parent company (and seller of most of the shares) transferred its business to the subsidiaries. The subsidiaries claimed that this entitled them to benefit from the trading losses that the parent had previously incurred. That depended on the parent retaining beneficial ownership of at least three quarters of the shares at the point that the business was transferred. The taxpayers argued that the existence of the condition meant that this was the case.

In the High Court Goff J decided the appeal in favour of the Inland Revenue, based on the purchaser’s ability to waive the condition and so render the agreement unconditional, in which case the purchaser could have obtained specific performance. In such a case, based on Parway Estates Ltd v Inland Revenue Commissioners (1957) 45 TC 135 (“Parway Estates”), beneficial ownership would be regarded as having not only left the sellers but arrived in the hands of the purchaser.

The Court of Appeal dismissed the taxpayers’ appeal. It was undisputed that an unconditional contract would have resulted in beneficial ownership of the shares having passed to the purchaser ([1969] 1 WLR 1077, 1095C). The Inland Revenue argued that, although the sale was conditional, the parent had not retained beneficial ownership for the purposes of the legislation in circumstances where it was not free to dispose of the shares elsewhere, had agreed not to take a dividend and was bound to transfer the shares at any time if the condition was waived: the shares were “like a tree which the owner could not sell and could not cut down and of which he could enjoy none of the fruit” (pp.1095-1096).

Lord Donovan construed beneficial ownership in the context of the legislation in question, which was intended to allow losses to be used following a business transfer “where there was a substantial measure of identity between the two companies”. Here the parent was “bereft of the rights of selling or disposing or enjoying the fruits of [the] shares”, so it would be a “misuse of language” to say that it still remained the beneficial owner (p.1096). It had “ceased to be able to appropriate to itself any of the benefits of ownership”. Lord Donovan made clear that he was not attempting an exhaustive definition, and that he was not saying that the purchaser became the beneficial owner while the condition operated.

Both Harman LJ and Widgery LJ agreed. Harman LJ observed that the parent had “parted with everything” apart from legal ownership and that beneficial ownership must include “the right at least to some extent to deal with the property as your own”, rather than a “mere legal shell”; the parent was “tied hand and foot” (pp.1096-1097).

Ayerst concerned the same legislation as Wood Preservation. In that case a parent company was placed in compulsory winding up. During the course of the liquidation its business was transferred to a subsidiary, which then claimed to be entitled to use the parent’s tax losses. Upholding decisions of Templeman J and the Court of Appeal, the House of Lords concluded that the winding up order had divested the parent of beneficial ownership of its assets, which included the shares in its subsidiaries that were needed to establish the required shareholding relationship.

Lord Diplock, with whom other members of the Appellate Committee agreed, noted that the archetype of a situation where legal ownership “did not carry with it the right of the owner to enjoy the fruits of it or dispose of it for his own benefit” was a trust ([1976] AC 167, 177). However, it was not necessary to identify some other person in whom beneficial ownership vested. Examples of that included estates in administration and bankruptcy. Winding up was no different. After referring to earlier case law that had considered the effect of a winding up order on beneficial ownership and the use of that term in tax legislation since 1927, Lord Diplock concluded at p.181 that:

In Sainsbury the supermarket chain sought to group relieve losses incurred in what was then a joint venture with a Belgian company in respect of Homebase. In outline, the agreed economic split was 70:30 in favour of Sainsbury, but the legal structure ensured that Sainsbury owned the necessary 75% of the share capital for group relief purposes. The group relief rules required the shares to be beneficially owned by Sainsbury. The Inland Revenue argued that this requirement was not met because Sainsbury had entered into put and call options with its joint venture counterparty pursuant to which either party could require 5% of the share capital to be sold by Sainsbury to the counterparty at a price equal to the amount paid up on the shares plus interest at 1% over base rate, less any dividends paid. The effect of the option pricing was to allow the parties to be placed in a similar economic position to the originally contemplated 70:30 split.

The Court of Appeal agreed with Millett J that group relief was available. Lloyd LJ, who gave the lead judgment, considered the statutory framework and then gave detailed consideration to earlier authorities, including but not limited to Ayerst and Wood Preservation. He noted that the term “beneficial ownership” is “very well established” ([1991] 1 WLR 963, 969H). After considering authorities that included Parway Estates he commented that there was “good authority for the view that ‘the beneficial owner’ of shares, when that term is used in a statute in contrast to the registered holder, means the equitable owner; neither more nor less”. That included a purchaser under a specifically enforceable contract, but not the holder of an unexercised option (p.972).

Lloyd LJ then considered whether Wood Preservation had the effect that Sainsbury had nevertheless lost beneficial ownership, and concluded that it did not. He noted that Goff J had approached Wood Preservation much as Lloyd LJ had approached the instant case, by considering whether specific performance was available, but in the Court of Appeal “things took a different turn” (p.973G).

Wood Preservation was of course binding on the Court. It meant that “we cannot decide the first question on the straightforward ground which I would otherwise favour, that beneficial ownership and equitable ownership are one and the same thing”. Instead it was necessary to “look into the nature and extent of the rights retained by the taxpayer” (p.975E-G). However, Lloyd LJ was not persuaded that Sainsbury retained no more than “a mere legal shell”, and refused to go further by applying the “balanced judgment” invited by Mr Park for the Revenue. If a dividend was paid it would have been received by Sainsbury, and it made no difference that an equivalent amount would be deducted from the option exercise price (p.976).

Nourse LJ’s concurring judgment commented as follows about the use of the term “beneficial ownership” in the relevant statutory context, which was a definitional provision (s.532 Income and Corporation Taxes Act 1970):

Nourse LJ referred to Wood Preservation as a “difficult decision”, in which he considered that Goff J adopted the correct approach in not distinguishing between equitable and beneficial ownership. Parway Estates was not referred to by the Court of Appeal in Wood Preservation but it was unclear on what basis it could be distinguished, despite the different statutory context. Nourse LJ was “unwilling to apply [Wood Preservation] to any case where the vendor retained more than a mere legal shell of ownership” (p.979).

Bupa turned on another aspect of the group relief regime, namely the requirement that in addition to beneficial ownership of shares, the shareholder would be “beneficially entitled” to the relevant percentage of any distribution of profits or of assets on a winding up. In that case the Bupa group acquired 46.8% of the ordinary shares of a reinsurer and sought consortium relief (an equivalent to group relief in a joint venture context) in respect of its losses. HMRC refused relief on the grounds that Bupa had entered into a contractual commitment to pay earn-out consideration equal to 100% of any distribution received up to a benchmark amount, and 95% thereafter, within 10 business days of a distribution being made to it.

The Upper Tribunal considered the purpose of the consortium relief provisions. It approved (at [51]) a submission that “entitlement” was used rather than ownership because the legislation focused on notional future events. (I should mention that, while I understand that observation in the context with which Bupa was concerned, as Mr Vallat KC pointed out for HMRC s.933 is different because it looks at actual, not notional, payments.) The Upper Tribunal also considered that the effect of the case law was that beneficial entitlement is not synonymous with equitable entitlement, but the latter may be sufficient to confer the former ([53] to [61]). The Upper Tribunal went on to consider Ramsay principles, rejecting HMRC’s argument that if the transactions had been effected solely for tax avoidance purposes (which HMRC were not entitled to argue on the facts, see at [21]) they could be disregarded for that reason alone.

The Upper Tribunal found at [75] that Bupa had more than a mere legal shell. It could spend any distribution received elsewhere (albeit it would then have to fund the earn out from another source). It was not a trustee of any funds received. It was also entitled to the benefit of, and exposed to, currency fluctuations for the 10 day period, would have been entitled to interest on any deposit of the funds and could have assigned its rights to the distributions. Noting observations in Sainsbury, the Upper Tribunal thought it helpful to identify where beneficial entitlement would lie if not with Bupa, the answer being that it was not realistic to treat it as being anywhere else ([76]-[79]). The taxpayer’s case was supported by Piggott v Staines Investment Co Ltd [1995] STC 114, where dividends paid up a corporate chain were held not to be capable of being recharacterised as involving a single direct payment ([80]-[82]). The position could have been very different if Bupa had not had access to the benefits of ownership of any cash received: [89].

A number of principles can be derived from these authorities.

First, while perhaps not strictly a term of art, the concept of beneficial ownership is well established: Sainsbury. In essence, it means ownership for the benefit of the person in question: Wood Preservation.

Secondly, there is a significant degree of overlap between beneficial ownership and equitable ownership. In particular, a purchaser under a specifically enforceable contract can have beneficial ownership of the asset it has agreed to buy: Parway Estates. However, the concepts are not entirely co-extensive: Sainsbury and Bupa. (I note that one reason why this must be so is that the concept of beneficial ownership needs to be capable of operating in legal systems that do not have the same legal traditions, including – as was fairly pointed out in Bupa – Scotland.)

Thirdly, the fact that the concept of beneficial ownership is well established does not mean that the usual approach to statutory construction is to be ignored. In each of Wood Preservation, Sainsbury and Bupa the term was construed in the context of the legislative scheme in question. As I have already explained, and whatever terminology is used, legislation must be construed purposively to ascertain whether it was intended to apply to the transaction, viewed realistically.

Fourthly, consistent with the fundamental requirement of ownership for the benefit of the person in question, or “ownership with benefits”, a person who is the legal owner of property will not be its beneficial owner if they do not in fact have any of the benefits of ownership, such that they hold only a “mere legal shell”. The facts of Wood Preservation provide a good example of this. The parent company could derive no economic benefits from the shares, whether through dividends, disposal or otherwise, but was instead compelled to transfer them to the purchaser as soon as the condition was satisfied or waived at the purchaser’s option. (The position would no doubt have been the same if the shares had been registered in the name of a nominee and the parent company’s title was therefore equitable. It would still have lost the benefits of ownership as a result of the terms of the sale.)

Fifthly, in certain circumstances it is possible for a property owner not to possess, or to lose, beneficial ownership without it vesting anywhere else: Ayerst.

Finally, I would agree with the Upper Tribunal in Bupa that the concept of “beneficial entitlement” should be construed with regard to the authorities that consider the concept of beneficial ownership. In broad terms, therefore, it can be construed as “entitlement with benefits”. If the person in question would, in truth, have none of the benefits that entitlement would ordinarily bring, they will not be beneficially entitled.

Application to this case

I am satisfied that the FTT and UT correctly concluded that Houmet was not beneficially entitled to the interest assigned to it.

In my view the FTT was right to say at para. 130 that the concept of beneficial entitlement in s.933 ITA 2007 should not be interpreted in accordance with the approach taken by the Court of Appeal in Indofood. We are concerned with domestic tax legislation and not an “international fiscal meaning”.

The particular legislation with which we are concerned is Part 15 of ITA 2007. The starting point is the obligation to deduct tax from UK source yearly interest pursuant to s.874 and account for it to HMRC. The aim of that, longstanding, obligation is obvious. It provides a ready tax collection mechanism in respect of UK source income, whereby tax is accounted for on behalf of the recipient of the interest shortly after the payment, in circumstances where it might otherwise not be paid at all, or at least where payment may be substantially delayed. As explained by Patten LJ in HMRC v Lomas [2017] EWCA Civ 2124, [2018] STC 385 at [6], the deduction mechanism “gives HMRC the assurance that it will be collected”.

The obligation in s.874 applies to all payments by companies and certain other entities, and payments to any person whose usual place of abode is outside the UK. That last category provides a good illustration of the tax collection function. HMRC will ordinarily not be in a position to collect tax directly from non-residents.

The exception for payments between corporate entities now contained in Chapter 11 of Part 15 was first introduced by s.85 Finance Act 2001. The Explanatory Notes to the Finance Bill explained the purpose of the new exception as being to remove “burdensome requirements” to withhold tax, in particular by putting non-bank lenders “in a similar competitive position to banks”, which could already receive interest gross.

The fact that the scope of the exception was confined to UK resident companies and UK permanent establishments of non-UK resident companies reflects the intention, apparent from the Explanatory Notes, for the exception to apply only where the recipient was within the charge to UK corporation tax in respect of the interest. This is reinforced by s.934(4) (see [‎8] above). Bearing in mind that payees within the charge to corporation tax should in any event make returns of their income to HMRC and account for any tax properly due, the restriction is not surprising.

Sections 933 and 934 ITA 2007 require “the person beneficially entitled to the income in respect of which the payment is made” to be a UK resident company or a non-UK resident company trading through a UK permanent establishment. In an ordinary case the scope of the exception might be expected to be co-extensive with the interest being taken into account for corporation tax purposes. In particular, if the payee would not benefit from the income because it receives it in a fiduciary or other representative capacity (for example, as an agent), then it would not meet the requirements of ss.933 or 934 and it would also not be within the charge to corporation tax in respect of it. This is because s.6(1) Corporation Tax Act 2009 provides that a company is “not chargeable to corporation tax on profits which accrue to it in a fiduciary or representative capacity except as respects its own beneficial interest (if any) in the profits”.

In most cases, therefore, a UK resident company that is legally (or equitably) entitled to interest income and does not receive it on behalf of anyone else would be expected to be able to benefit from the exception in s.933. In that connection, I would not wish to be taken as endorsing the suggestion in para. 28 of the UT’s decision that mere payment on by the recipient company to an entity outside the UK may be enough to disapply s.933 because “there is the same underlying concern that tax on the income will not in practice be able to be collected”. In principle, a company subject to corporation tax will be taxable on its profits, which will be computed taking into account both its income and any properly deductible expenses. The fact that expenses may offset part or even the whole of the income will not by itself disapply s.933.

Rather, the question here is whether there is anything about the interest payments to Houmet, in the context of the scheme of which they formed part, that makes a difference. The FTT found that, on the facts of this case, there was. In my view it was both entitled and correct to reach that conclusion.

Like the UT, I would not decide the case based only on an analogy with McGuckian, although the FTT was not wrong to refer to it. Rather, I would first emphasise that, as both Rossendale and earlier cases such as Scottish Provident illustrate, concepts which have legal meanings cannot be construed and applied in isolation from the statutory context and purpose of the legislation. Just like other concepts they may be amenable to the application of Ramsay principles. Secondly, I would repeat that beneficial ownership or entitlement cannot always simply be equated with equitable ownership or entitlement.

As is well-established, the statutory provisions, construed purposively, must be applied to a transaction viewed realistically. Rossendale reiterates that the result may be to disregard steps that are solely aimed at avoiding tax and confirms that even “legal” concepts like “entitled to possession” can in appropriate cases be construed as requiring a “real and practical entitlement”. Both Scottish Provident and Rossendale considered the concept of “entitlement” or “entitled” rather than beneficial entitlement, but in both the concept was nevertheless construed as requiring a “real and practical entitlement” (see [‎30] above). We are concerned with the words “beneficially entitled”, which as already discussed broadly means “entitlement with benefits” and cannot simply be equated with equitable ownership. Nothing in the context and purpose of Part 15 ITA 2007 indicates that the words “beneficially entitled” should be confined to a test of equitable entitlement rather than an entitlement which carries at least some of the benefits of ownership (consistently with the previous case law on beneficial ownership and beneficial entitlement). Further, the fact that the legislation refers to “beneficially entitled” makes it a clearer candidate than the legislation in either Scottish Provident or Rossendale for a construction which focuses on some form of “real and practical entitlement”.

I do not consider that the fact that Houmet may have been required to bring the interest receipts into account for corporation tax purposes (whether it properly did so being unknown) is sufficient to avoid the need to focus on whether it did, in fact, obtain any benefit from its entitlement to the interest. Put another way, the requirement for the interest to fall within the charge to corporation tax in the hands of the recipient does not negate the need to determine whether the test of beneficial entitlement is met.

The FTT was faced with extremely limited evidence about Houmet and its role in the arrangements. As it observed at para. 140, no explanation was provided for its role in the structure or of the reasons for the assignments to it. Taking account of that point, the fact that Houmet as well as Storrier and the Guernsey Trusts were each managed by Mercator, and the fact that “Houmet was invariably assigned the right to interest only a very short time before the interest was paid by the Appellant so that the commercial reasons for its participation in the refinancing structure are far from obvious”, the FTT was driven at paras. 142-143 to the “inescapable conclusion on the facts” that the only reason for Houmet’s involvement in the refinancing structure was to provide an alternative argument based on s.933. Its involvement was solely to secure a UK tax advantage.

The FTT further found at para. 151 that there was an extremely close correlation between the revenue as shown in the available accounts of Houmet and the amount of interest paid in the years to which those accounts related. This led the FTT to conclude at para. 153 that the interest was not received as nominee or trustee for another person, such that Houmet was beneficially entitled to such part of the interest as exceeded the amount paid for the assignments. However, that amount was likely to be de minimis.

The FTT also had very little evidence about the details of the assignments and none about precisely how the funding arrangements worked. That meant that Hargreaves, on whom the burden of proof lay, was unable to do anything more than assert that Houmet did not act as a fiduciary, on the basis that its obligation to pay for the assignment did not result in the interest receipts being impressed with any form of trust.

The FTT accepted that Houmet did not act as a trustee, but rightly concluded that that was not enough for Hargreaves to succeed. Hargreaves was unable to establish that, viewed realistically, the transactions conferred any benefit of an entitlement to the interest. There was no evidence to suggest that Houmet could have used the funds received for any other purpose, or that it could benefit from them in any other manner. There was no indication that it derived any meaningful margin or other profit from its participation in the arrangements. Further, Houmet’s involvement was entirely ephemeral, being confined to successive assignments of interest very shortly before the loans in question were repaid. There is no suggestion that Houmet was either at risk as to the amount that might be paid, such that it might not be put in funds to pay for the assignment to it, or that it might be able to benefit from the receipt being higher than anticipated. On the former point (risk), I note that the terms of the assignments to Houmet are unknown, the evidence being limited to notices of assignment and demands for the interest (see para. 16(12) of the FTT’s decision). It was therefore not established that Houmet’s obligation to pay for the assignment was an unconditional one, rather than being entirely dependent on, and co-extensive with, the receipt of the interest.

As a result, Hargreaves could not demonstrate that Houmet had any of the benefits that might be derived from any entitlement to, or receipt of, the interest. The fact that Houmet no doubt used (or was treated by the parties as using) the interest to pay for the assignment is, in the circumstances of its entirely tax-motivated and artificial involvement which was not demonstrated to give rise to any risk or meaningful reward, not sufficient to answer the statutory description in s.933.

Parliament cannot be taken to have intended that the exception in s.933 should extend to a company in the position of Houmet, which was involved on an ephemeral basis by way of steps that were entirely tax-motivated, and which has not been established as having benefited in any real sense from the interest that it paid away. Houmet’s involvement not only had no commercial purpose but had no practical or real effect.

Whether Khan and Good make any difference

I also agree with the submissions of Mr Vallat that neither Khan nor Good affect the conclusion that the tribunals reached.

A preliminary point to note is that both cases concerned taxing provisions that impose a charge on the person “receiving or entitled to” income. That is different to the language that we are concerned with. For example, it can include a person who receives income solely as a trustee.

In Khan, the taxpayer Mr Khan was an accountant who, in an ill-fated attempt to assist some clients, acquired a company with the intention of effecting an orderly winding up and benefiting from profits in the meantime (see Andrews LJ’s judgment at [17]). However, following a late change to the proposals Mr Khan sold most of the shares he had acquired back to the company immediately after their acquisition, setting off the buy-back price against a loan that the company had advanced to him to buy the shares.

HMRC claimed income tax on the basis that the buy-back involved a substantial income distribution. The charging provision required Mr Khan to be a person “receiving or entitled to” the income, which he said he was not. This court held that the price belonged to Mr Khan, and that (if relevant) he had also derived a real benefit because the distribution extinguished his liability to repay the loan.

Mr Way submitted that, similarly in this case, Houmet was enabled to pay the consideration for the assignment. That is so, but in the context of the legislation in issue and the nature of Houmet’s role, it is not enough. In Khan, both the statutory and factual context was quite different. Andrews LJ, with whom Dingemans and Peter Jackson LJJ agreed, reached the view that the statutory language was concerned with the transaction under which the distribution arose rather than with connected transactions looked at as a whole, and that the legislation applied to the person receiving the distribution or, if different, the person to whom it “belongs” (see at [52] and [57]). There was only one answer to the belonging question: Mr Khan ([83]). However, even if it was necessary to look beyond that and determine whether Mr Khan benefited from the distribution, applying Bupa, Sainsbury and Wood Preservation or Ramsay principles, then he had done so. If the transactions could be viewed as a composite whole then they could not be analysed as involving a distribution to the vendor shareholders (who had sold their shares before the distribution was made) rather than to Mr Khan, and Mr Khan derived a real benefit (see at [76] to [81], citing Piggott v Staines, a case referred to at [‎47] above).

Good concerned a failed film scheme where the taxpayer argued that he was not liable to income tax on certain payments that were applied in discharging amounts due under a loan taken out as part of the scheme. Again, the charging provision required him to be a person “receiving or entitled to the income”. In rejecting that argument Whipple LJ applied the Ramsay approach. She noted at [55] that the legislation in question did not incorporate a concept of beneficial entitlement, such that cases such as Bupa, Sainsbury and Wood Preservation were not of much assistance. She preferred to use the term “entitled” rather than the concept of belonging ([56]). She disagreed that the taxpayer had entirely alienated his rights to the payments, observing that the taxpayer derived a clear benefit from the payments and following earlier cases which had held that income could remain taxable where it was used to reduce a liability that the taxpayer had to a third party. On that basis Mr Good was entitled to the payments. That reasoning was supported by both Snowden LJ and King LJ at [93] and [110] respectively.

Khan was considered recently in Clipperton & Anor v HMRC [2024] EWCA Civ 180, but that does not add anything material for present purposes.

Neither Khan nor Good make a difference to this case. The statutory and factual contexts are different. The concept of “receiving or entitled to” income is a broad one that extends beyond beneficial entitlement, and in any event Mr Khan and Mr Good obtained real benefits from the payments to them, in a way that Houmet was not found to have done. In Khan the taxpayer became the owner of the company, as intended, and benefited from the distribution because it enabled him to satisfy a liability that he had undoubtedly taken on. Further, the transaction could not readily be recharacterized as involving a distribution to the sellers who had already transferred their shares. In Good, the taxpayer benefited through the reduction of his liability under the loan.

Conclusion

In conclusion on ground 1, I would dismiss Hargreaves’ appeal. The FTT and UT correctly concluded that Houmet was not beneficially entitled to the interest assigned to it.

Ground 2: yearly interest

To recap, ground 2 is whether interest paid on loans the duration of which was less than a year, but which were routinely replaced by further loans from the same lenders, was “yearly interest” within s.874 ITA 2007.

Both the FTT and UT correctly relied on the consideration of the concept of yearly interest by the Supreme Court in HMRC v the Joint Administrators of Lehman Brothers International [2019] UKSC 12, [2019] STC 661 (“Lehman”). In his review of the case law Lord Briggs (with whom the other members of the court agreed) said that Goslings and Sharpe v Blake (Surveyor of Taxes) (1889) 23 QBD 324, 2 TC 450 (“Blake”) established that:

Lord Briggs went on to endorse at [33] a summary by Lord Anderson in Inland Revenue Commissioners v Hay 1924 SC 521, 531, 8 TC 636, 646 (“Hay”) as remaining the “best convenient summary of the jurisprudence about the meaning of yearly interest”. The summary is as follows:

Blake concerned a three months’ bankers loan, which was held not to give rise to yearly interest in circumstances where it was clearly intended and understood to be a short-term loan. In contrast, an ordinary mortgage would give rise to yearly interest even if it contained a covenant to repay after six months, because it was well known in business that mortgages are very seldom repaid after six months (Lindley LJ’s judgment in Blake, (1889) 23 QBD 324, 330, cited by Lord Briggs in Lehman at [23]).

In this case the FTT found that the loans fulfilled an important commercial need for the business, and (being raised from connected parties) both left the borrower’s assets free from security and could be raised quickly and at minimal cost (para. 78 of the FTT’s decision). They were also repayable on demand (para. 79). However, there was a pattern under which loans were routinely replaced by a further loan from the same lender in the same or a larger amount. The FTT found that the enquiries made of lenders as to whether they wished to carry on lending were formalities, and a new loan was never declined (para. 87).

In my view the FTT and UT applied the correct legal approach. The FTT made no legal error in concluding that the interest was yearly interest because the loans were in the nature of long-term funding, were regarded by the lenders as an investment and formed part of the capital of the business, with a permanency that belied their apparent short-term nature (paras. 79, 81 and 82). It makes no difference to this whether an individual loan happened to last for less than a year. On a business-like assessment, those loans could not be viewed in isolation as short-term advances. In reality, as the FTT concluded at para. 86, the lenders provided attractive long-term funding in the nature of an investment.

Conclusion

In conclusion, I would dismiss Hargreaves’ appeal on both grounds. Houmet was not “beneficially entitled” to the interest assigned to it for the purposes of s.933 ITA 2007, and the interest on the loans was yearly interest even if the loan in question had a duration of less than a year.

Lord Justice Nugee:

I agree.

Lord Justice Peter Jackson:

I also agree.