Upper Tribunal Tax and Chancery Chamber

[2024] UKUT 00152 (TCC)

Fecha: 21-Feb-2024

The relevant provisions of the UK-Ireland treaty

The relevant provisions of the UK-Ireland treaty

10.

The FTT quoted Article 12 of the UK-Ireland treaty in full at [72] of the Decision the material parts of which are:

(1)

Interest derived and beneficially owned by a resident of a Contracting State shall be taxable only in that State.

(2)

The term "interest" as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and other debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises but shall not include any income which is treated as a distribution under Article 11

…

(5)

The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt-claim in respect of which the interest is paid to take advantage of this Article by means of that creation or assignment.

11.

The original treaty having been amended in 1998, those were the provisions of the UK-Ireland treaty in force at the material time. Before that amendment, Article 12(5) contained an exception for “bona fide commercial” transactions and read as follows:

(5)

The provisions of this Article shall not apply if the debt-claim in respect of which the interest is paid was created or assigned mainly for the purpose of taking advantage of this Article and not for bona fide commercial reasons.

12.

It was common ground that the process by which SICL transferred the SAAD Claim to BLM involved an “assignment of the debt-claim in respect of which the interest is paid” so that Article 12(5) was capable of application. The central question before the FTT was whether the main purpose, or one of the main purposes, of any person concerned with that assignment was to take advantage of Article 12(1) of the treaty by means of that assignment.

13.

Before the FTT, there was some debate as to the proper approach to the construction of Article 12(5). However, the following conclusions of the FTT are now common ground:

(1)

Determining a person’s main purpose involves a question of fact which is to be answered “upon consideration of all the relevant evidence… and the proper inferences to be drawn from that evidence” ([86(3)]) - see IRC v Brebner [1967] 2 AC 18).

(2)

Article 12(5) is concerned with the subjective purposes of the persons concerned.

(3)

Article 12(5) cannot be considered solely by reference to the stated subjective intentions of the relevant persons. Even if a witness correctly and honestly describes what was in their mind at the relevant time in terms that do not refer to the treaty, it remains possible that the person still has a main purpose of taking advantage of Article 12 (see [47] of the judgment of Newey LJ in Travel Document Service and another v HMRC [2018] STC 723).

(4)

Nor can Article 12(5) be addressed solely by reference to those persons’ conscious motives. Subconscious motives are capable of amounting to “purposes” as well, particularly since some consequences of an action are so inevitably and inextricably involved in the action that, unless merely incidental, they must be taken to be a purpose of that action (see the judgment of Millett LJ in Vodafone Cellular Ltd v Shaw [1997] STC 734 at 742h).

(5)

The “inevitable and inextricable consequences” of the Assignment form part of the overall factual matrix to be considered when reaching a conclusion as to a person’s subjective intentions. However, the mere fact that the Assignment had certain inevitable and inextricable consequences does not of itself mean that achieving those consequences was the purpose or a main purpose of that assignment.

(6)

The concept of a “main purpose” carries with it some connotation of importance. It does not just require the purpose to be “more than trivial” (see [48] of Newey LJ’s judgment in Travel Document Service).

(7)

Something can be a “main purpose” if it is one of several main purposes.

(8)

SICL could be a “person concerned” with the assignment of the SAAD Claim even though it was not a resident of Ireland or the UK.

(9)

HMRC have the burden of proving that Article 12(5) applies.

14.

Two aspects of the FTT’s construction of Article 12(5) are disputed:

(1)

The FTT found that the phrase “take advantage” in Article 12(5) has a “negative sense” in conveying the concept that entering into an assignment of a debt-claim with a main purpose of benefiting from Article 12(1) by means of that assignment amounts to an abuse of the Article. However, the FTT concluded that Article 12(5) is not confined to abusive transactions which involve artificial steps or arrangements. In its Respondent’s Notice, BLM invites this Tribunal to conclude that the FTT was wrong and that Article 12(5) is limited to transactions that involve artificial steps or arrangements.

(2)

At [149] and [150], the FTT found that a transferor of an interest-bearing debt has a main purpose of “taking advantage” of Article 12(1) of the treaty only if the transferor knows that the purchaser is entitled to the benefit of Article 12(1) specifically. It would not be enough for the transferor to know merely that the purchaser is entitled to some exemption from UK income tax on the interest even if, as matters transpire, the purchaser’s exemption does stem from Article 12(1) of the treaty. HMRC challenge this conclusion of law.