In A V Lomas and others v HMRC[2016] EWHC 2492 (11 October 2016), the Court of Appeal held that statutory interest paid to creditors under the Insolvency Rules 1986 r 2.88 was not yearly interest under ITA 2007 s 874.
The administration of Lehman Brothers International (Europe) (started in 2008) had generated a substantial surplus (estimated around £7bn) which was to be used, inter alia, to pay statutory interest to creditors under the Insolvency Rules 1986 r 2.88. The issue was whether this statutory interest, when paid, would be yearly interest for the purposes of ITA 2007 s 874. If so, the joint administrators would be required to deduct basic rate income tax from the payments made and to account for the same to HMRC. If the interest was not yearly interest, no such obligation would exist and payments would be made gross.
The Court of Appeal noted that yearly interest was not defined in the legislation and that its nature had been ‘explored and illuminated in numerous cases, but remained, in certain respects, elusive’. It also referred to the Waterfall applications (Lomas v Burlington Loan Management [2015] EWHC 2269) as authority for the proposition that the statutory right to interest under r 2.88 arose only if and when a surplus was established; and did not accrue over the period between the commencement of the administration and the payment of dividend or dividends on the proved debts.
The court added that statutory interest was of ‘a very different nature from that payable on contractual debts, judgment debts or other analogous debts’. There was no loan, no investment, no judgment, no period of accrual, no right unless and until a surplus was established and no quality or capability of recurrence. It was an arrangement statutorily imposed on the creditors for the equitable distribution of surplus and there was no discernible intention in the relevant provisions to create ‘anything akin to a loan or investment’.
Finally, the Court of Appeal fiercely criticised HMRC for creating some ‘regrettable confusion’. Until late 2015, HMRC’s published position was that, in accordance with its Insolvency Manual (para 7433), any statutory interest paid in the course of administration (or subsequent liquidation) could be paid without any obligation to deduct income tax; however, it now took the line that such payments should be made subject to deductions. The Court of Appeal concluded: ‘It is of real importance, both in terms of good governance and a fair market, that HMRC should make every effort to ensure that this sort of thing does not happen again.’
Why it matters: The sums involved were considerable. The joint administrators estimated the value of statutory interest calculated from the date of administration to the date of the final dividend to be in the region of £5bn. Furthermore, the significance of the issue for HMRC was made greater by the fact that many of the creditors entitled to interest were non-resident and therefore cannot be charged to tax in relation to UK source interest beyond any amount deducted at source (ITA 2007 ss 811 and 815). The court pointed out that this may explain HMRC’s departure from its initial published statements to the effect that no deduction at source was required.
In A V Lomas and others v HMRC[2016] EWHC 2492 (11 October 2016), the Court of Appeal held that statutory interest paid to creditors under the Insolvency Rules 1986 r 2.88 was not yearly interest under ITA 2007 s 874.
The administration of Lehman Brothers International (Europe) (started in 2008) had generated a substantial surplus (estimated around £7bn) which was to be used, inter alia, to pay statutory interest to creditors under the Insolvency Rules 1986 r 2.88. The issue was whether this statutory interest, when paid, would be yearly interest for the purposes of ITA 2007 s 874. If so, the joint administrators would be required to deduct basic rate income tax from the payments made and to account for the same to HMRC. If the interest was not yearly interest, no such obligation would exist and payments would be made gross.
The Court of Appeal noted that yearly interest was not defined in the legislation and that its nature had been ‘explored and illuminated in numerous cases, but remained, in certain respects, elusive’. It also referred to the Waterfall applications (Lomas v Burlington Loan Management [2015] EWHC 2269) as authority for the proposition that the statutory right to interest under r 2.88 arose only if and when a surplus was established; and did not accrue over the period between the commencement of the administration and the payment of dividend or dividends on the proved debts.
The court added that statutory interest was of ‘a very different nature from that payable on contractual debts, judgment debts or other analogous debts’. There was no loan, no investment, no judgment, no period of accrual, no right unless and until a surplus was established and no quality or capability of recurrence. It was an arrangement statutorily imposed on the creditors for the equitable distribution of surplus and there was no discernible intention in the relevant provisions to create ‘anything akin to a loan or investment’.
Finally, the Court of Appeal fiercely criticised HMRC for creating some ‘regrettable confusion’. Until late 2015, HMRC’s published position was that, in accordance with its Insolvency Manual (para 7433), any statutory interest paid in the course of administration (or subsequent liquidation) could be paid without any obligation to deduct income tax; however, it now took the line that such payments should be made subject to deductions. The Court of Appeal concluded: ‘It is of real importance, both in terms of good governance and a fair market, that HMRC should make every effort to ensure that this sort of thing does not happen again.’
Why it matters: The sums involved were considerable. The joint administrators estimated the value of statutory interest calculated from the date of administration to the date of the final dividend to be in the region of £5bn. Furthermore, the significance of the issue for HMRC was made greater by the fact that many of the creditors entitled to interest were non-resident and therefore cannot be charged to tax in relation to UK source interest beyond any amount deducted at source (ITA 2007 ss 811 and 815). The court pointed out that this may explain HMRC’s departure from its initial published statements to the effect that no deduction at source was required.
