[2024] UKUT 00152 (TCC)

We consider that the core purpose of Article 12 of the UK-Ireland treaty is simply to determine which of the two treaty States (the UK and Ireland) should have taxing rights over interest with a source in one of the States where it is beneficially owned by a resident of the other. The UK-Ireland treaty has expressly provided that, as between the UK and Ireland, unless Article 12(5) applies, it is the residence State alone that has taxing rights in relation to interest arising in the source State so long as the person in the residence State beneficially owns the interest. HMRC submitted before us that the purpose of Article 12(1) of the UK-Ireland treaty is to facilitate and encourage lending between the UK and Ireland by seeking to eliminate the risk of double taxation on such loans. We are prepared to accept that this is a purpose of Article 12, but do not consider that it is the only purpose. In any event, this appeal concerns the means by which the contracting States have sought to achieve the overall objective of Article 12. They have done so by giving the residence State the sole taxing rights over interest unless Article 12(5) applies.

The situation provided for in the UK-Ireland treaty can be contrasted with that provided for in the UK’s treaty with the Cayman Island where, as explained above, there is no equivalent provision to Article 12 of the UK-Ireland treaty. The UK-Cayman Islands treaty does not allocate taxing rights as between the UK and Cayman Islands. Relief from double taxation is instead afforded by Article 11 of that treaty: the Cayman Islands would credit the UK tax paid against any Cayman Island tax.

If Article 12(5) of the UK-Ireland treaty is applicable in relation to the Assignment, the position would be, in substance, as it is under the UK-Cayman Islands treaty: the UK’s domestic taxing rights would apply and any double taxation of the interest would be relieved through the application of Article 21 of the UK-Ireland treaty.

In determining whether there has been abuse of the UK-Ireland treaty in the case of the assignment of the SAAD Claim, the question has to be answered by reference to both contracting States. It is, as BLM submits, wrong in principle to answer the question as if Article 12 proceeds from a starting point that interest on the SAAD Claim “should” be subject to UK WHT since that was the pre-existing position while SICL held it. Article 12(5) is not to be read as if it were a provision contained in a UK statute (concerned only with UK taxation) and as providing for a UK tax advantage to be eliminated if a party had a main purpose of avoiding UK taxation.

In our view, the correct starting point is the proposition that, unless there is an abusive arrangement falling within Article 12(5), BLM, a resident of Ireland and beneficial owner of the SAAD Claim, is to be taxed only in Ireland on the Post-Administration Interest. The question, therefore, is whether there is something abusive, in the particular circumstances of this case, for Ireland alone to tax interest beneficially owned by a company resident in its territory.

We now turn to HMRC’s specific criticism of the FTT’s self-direction as to the meaning of Article 12(5) in considering whether SICL (as the seller of the SAAD Claim) had a main purpose of taking advantage of Article 12(1) of the treaty. HMRC’s interpretation of Article 12(5) was put in these terms in their skeleton argument:

We accept that a tribunal of fact considering Article 12(5) may well consider it relevant to determine the extent of a person’s knowledge of the treaty, including whether a party has taken steps to disguise their knowledge or avoid obtaining specific knowledge of its provisions. But those matters would simply form part of the factual enquiry to determine whether a person concerned in the creation or assignment of a debt claim has a main purpose of improperly taking advantage of the Article 12(1) of the UK-Ireland treaty. We respectfully consider that the FTT went too far in saying, at [150], that a necessary condition for Article 12(5) to apply was that SICL knew that the purchaser of the SAAD Claim would be relying on Article 12(1) specifically. We consider that to be an unjustified gloss on the actual words chosen by the contracting States in concluding the treaty.

However, we cannot accept HMRC’s submission either. Their submission seeks always to apply Article 12(5) of the UK-Ireland treaty in a case where the person assigning the interest on a debt claim (in this case, SICL) knew that the purchaser would not suffer UK WHT and consequently sought to obtain an economic advantage for itself by sharing in the saving of UK WHT in circumstances where the purchaser had an exemption from UK WHT. The only thing that mattered was that the exemption was actually attributable to the UK-Ireland treaty even if the seller did not know the basis of the purchaser’s exemption.

In our view, it is a question for the FTT to determine the subjective purposes of both the seller and the purchaser and, in so doing, to consider all the circumstances of the case. But the question before the FTT is, as we have explained above, directed at determining whether there has, by means of the particular transaction concerned, been an abuse of the UK-Ireland treaty.

HMRC’s submission, although expressed as a purposive construction of Article 12(5), in effect turns the provision into something fundamentally different: the provision would be read as if it were directed at the avoidance of UK WHT by the seller and was applicable whether or not the seller actually knew the basis on which the purchaser did not suffer a UK tax charge. In our judgment, even read purposively, that is not what Article 12(5) says. Nor do we consider that HMRC’s submission is consistent with the purpose and object of Article 12 of the UK-Ireland treaty as we have explained it.