Tax Case

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Tax Case

Interest remedy

The claimant, a subsidiary company resident in the United Kingdom, paid dividends to its German parent, and paid the appropriate advance corporation tax. This could later be offset against its corporation tax liability. At the material time, section 247, Taxes Act 1988 allowed United Kingdom resident subsidiary and parent companies to make a group income election, permitting a dividend to be paid without the liability to pay advance corporation tax. Later, the European Court of Justice ruled that it went against Article 52 (now Article 43) of the European Community Treaty, not to allow such an election by a non-resident company, and that compensation should be paid to companies which had suffered in this way. Various multi-national groups and their United Kingdom subsidiaries subsequently began claims in the English courts.

The two points at issue were:

• whether the calculation of interest over the period from the date when advance corporation tax was paid until when it was set off against corporation tax should be effected on the basis of compound or simple interest;


• whether interest for the period from when the cause of action accrued until the date of judgment should be calculated on a compound or simple basis.

Mr Justice Park said that a compound interest calculation in respect of the first point would result in full compensation. European Community law required the compensation to be full, not partial, and therefore this was the law to be followed, not the national law.

With regard to the second point, the judge said that the recoverable interest should be calculated on a simple basis. Section 35A was the source of the claim for interest in this respect, and restricted the interest to simple interest.

(Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v Commissioners of Inland Revenue and another, Chancery Division, 16 June 2004.)

Correctly determined

The Inland Revenue said that the defendant taxpayer had understated his income from his two restaurants. An appeal before the General Commissioners was adjourned to allow the parties to agree figures. The tax Inspector wrote to the defendant's accountant saying that he would ask the General Commissioners to determine the assessments in a given sum, on the basis that the figures had been agreed by the parties. This was done by the Commissioners, but the defendant applied for them to review their determination, saying that it was based on a mistake, i.e. the figures were not agreed. The application was refused, so the defendant appealed to the county court. Judgment was given for the Collector of Taxes, on the ground that the district judge was bound by the figure contained in the certificate under section 70, Taxes Management Act 1970. The defendant appealed, but this was dismissed, so he appealed to the Court of Appeal.

In the Court of Appeal, it was held that the county court had no appellate authority, and there was no basis on which to say that the evidence of the section 70 certificate was insufficient. Further, the General Commissioners had made a determination. They had not been asked to deliberate on the issues, so they had not done so.

The appeal was dismissed.

(Ahluwalia v McCullough, Court of Appeal, 23 June 2004.)

Purpose of loan

The taxpayer was the sole director and shareholder of a company. He obtained a bank loan in order to refinance existing borrowings, and gave the bank as security, legal charges over two properties which he owned. A year later, he sold one of the properties, and realised a capital gain. Out of the proceeds he made a payment to the company's loan account to reduce the indebtedness of that account, and claimed the amount against his liability to chargeable gains.

The Inspector rejected the claim, but accepted that it was difficult to separate the taxpayer's affairs from those of his company.

At an appeal hearing before the General Commissioners, it was found that the loan had not been used wholly for the purposes of the company's trade, and that it was not a qualifying loan within section 253(1), Taxation of Chargeable Gains Act 1992. The taxpayer appealed.

Mr Justice Patten said that where a new loan was used to refund an existing loan, standing in place of existing borrowing, the change in funding could be ignored for the purposes of section 253. The issue in hand was whether the residual indebtedness represented money which had been spent for a qualifying purpose.

However, section 253(1)(a) did not apply to convert non-qualifying loans into qualifying loans, through a refinancing exercise which left the existing indebtedness in place, but on improved terms. The General Commissioners had been entitled to conclude that the taxpayer had not shown that the company had used its overdraft to further its own trade, as opposed to bestowing a gratuitous benefit on its controlling shareholder. A replacement loan could be treated as a qualifying one if the existing loan had been used wholly on the borrower's trade.

The taxpayer's appeal failed.

(Robson v Mitchell, Chancery Division, 8 July 2004.)

Issue: 3967 / Categories: