[2024] UKUT 00152 (TCC)

The Respondent company (“BLM”) is resident in Ireland for the purposes of the UK-Republic of Ireland double taxation convention (“the UK-Ireland treaty” or “the treaty”). In 2018 it took an assignment (the “Assignment”) of a debt claim (the “SAAD Claim”) from SAAD Investments Company Limited (“SICL”), a company resident in the Cayman Islands. As a result of the Assignment, BLM became entitled to receive payments of yearly interest in the administration of Lehman Brothers International (Europe) (“LBIE”), which was a company resident in the United Kingdom.

As a result of ss. 368(2) and 369 of the Income Tax (Trading and Other Income) Act 2005, interest with a source in the United Kingdom is subject to income tax in the hands of a non-UK resident company. It was not in dispute that the interest in respect of the SAAD Claim had a UK source. A UK resident person (such as LBIE) paying yearly interest to a non-UK resident is subject to an obligation under s.874 of the Income Tax Act 2007 (“ITA 2007”) to deduct an amount representing income tax on the interest at the basic rate of income tax (which was 20% at the relevant time). The income tax deducted then discharges in full the liability of the non-UK resident company to income tax on the interest: see ss.815, 816(1)(a) and 825(2)(a) of that Act. We refer to the amount withheld from the interest as “UK WHT”.

The UK’s domestic taxing provisions have effect subject to any applicable double tax convention which has been incorporated into UK law under s.2 of the Taxation (International and Other Provisions) Act 2010 (“TIOPA”). If the UK is a party to a convention that allocates sole taxing rights to the other contracting party in respect of particular income, the effect of s.6 of TIOPA is that the domestic tax provisions charging the income to UK tax have no effect.

Article 10 of the UK-Cayman Islands double tax convention provides that “items of income not dealt with in the foregoing Paragraphs of this Arrangement arising in a Territory and paid to a resident of the other Territory may be taxed in the first-mentioned Territory.” As interest is not dealt with in the preceding provisions of the treaty, the UK’s domestic tax provisions described above apply. Relief from double taxation is afforded by Article 11 of that treaty: the Cayman Islands would give a credit for the UK tax against any Cayman Islands tax chargeable in respect of the same interest.

Consequently, if SICL had retained the SAAD Claim, the interest payable by LBIE in respect of that claim would have been subject to an obligation to deduct an amount representing income tax at a rate of 20%. The tax deducted would have satisfied SICL’s liability to UK income tax. Any relief for double taxation available under the law of the Cayman Islands (as a credit against UK tax) would have eliminated any double taxation but, economically, SICL would have been subject to a tax cost of at least 20% of the interest.

By contrast, Article 12(1) of the UK-Ireland treaty provides that interest derived and beneficially owned by a resident of a Contracting State is taxable only in that State. Once the SAAD Claim was assigned to BLM, it was beneficially owned by it and, as an Irish resident, it follows that, if Article 12(1) of the treaty applied, the interest in respect of the SAAD Claim was taxable only in Ireland. In that case, s.6 of TIOPA would have applied and the UK domestic taxing provisions would not have been engaged.

However, the application of Article 12 was subject to an anti-abuse measure (Article 12(5)). If Article 12(5) applied (so that Article 12(1) did not), both the UK and Ireland retained their taxing rights in respect of the SAAD Claim interest. The interest would then be taxable in the UK as described above and would also be subject to Irish corporation tax so far as it comprised part of the Irish company’s taxable income. Under Article 21(1)(a) and (3) of the UK-Ireland treaty any UK income tax would be allowed as a credit against any Irish tax computed by reference to the same income.

At the relevant time, trading income was subject in Ireland to a corporation tax rate of 12.5% while a higher rate of 25% applied to income from an excepted trade (as defined in Part 2 of the Taxes Consolidation Act 1997) and to non-trading income (for example, rental and investment income). There was no evidence before the FTT as to how the SAAD Claim interest was actually taxed in Ireland in the hands of BLM. But it is clear that, as with the case of the application of the UK-Cayman Islands treaty to SICL, BLM would be subject to an absolute cost of at least 20% of the interest if Article 12(1) of the UK-Ireland treaty did not apply.

In its decision (the “Decision”) reported at Burlington Loan Management DAC v HMRC [2022] UKFTT 290 TC, the First-tier Tribunal (Tax Chamber) (the “FTT”) concluded that the Assignment did not engage Article 12(5) of the UK-Ireland treaty. The question raised in this appeal is whether we should interfere with that conclusion. References to numbers in square brackets are to paragraphs of the Decision unless the context indicates otherwise.