In The Queen on the application of Aozora GMAC Investment v HMRC [2017] EWHC 2881 (14 November 2017), the High Court dismissed a claim for judicial review of HMRC’s decision to apply ICTA 1988 s 793A in circumstances where its own guidance suggested that it was not applicable.
Aozora UK was the wholly owned subsidiary of a Japanese company, Aozora Japan. Aozora UK owned a subsidiary in the USA, Aozora US. During accounting periods ending 31 March 2007 to 31 March 2009, Aozora UK had made loans to Aozora US, and received interest payments. The US had imposed 30% withholding tax on the interest received and Aozora UK was liable to corporation tax in the UK on interest. It was denied relief under ICTA 1988 s 790, on the basis that ICTA 1988 s 793A applied to prevent the relief from applying.
Aozora UK argued that HMRC’s international manual (INTM151060) contained a representation by HMRC that gave rise to a legitimate expectation that it would be taxed in accordance with the manual, whether or not the terms of the manual were accurate, and that it would be conspicuously unjust and an abuse of power for HMRC to resile from the alleged representation.
The court accepted that the manual did contain a representation by HMRC. It pointed to the general notice contained in the manual which stated that ‘readers may assume that the guidance will be applied in the normal case’. Furthermore, there was no authority suggesting that a statement of the law, or an interpretation of the law, contained in a particular guidance, could not in principle constitute a relevant representation.
The question was therefore whether the guidance was comprehensive, in so far as it purported to explain the legal and practical effect of s 793A(3). The court noted that the manual contained the following statement: ‘At 1 April 2003 the only provision to which s 793A applies is Article 24(4)(c) of the new UK/US DTA.’ The court concluded that given the clear and unequivocal guidance of the manual, the ‘ordinarily sophisticated taxpayer’ was not required to look beyond the UK/Us tax treaty Art 24(4)(c), which had no relevance to Aozora.
However, the court found that Aozora’s adviser, Deloitte, had not relied on the relevant representation but on its own analysis. In addition, Aozora was unable to establish that, by reason of its ‘putative reliance’ on the relevant representation, it had suffered substantial detriment. In particular, it was plausible that Aozora Japan would have set up a subsidiary in the UK even if it had been aware of the tax implications, since the UK was an attractive financial centre.
Why it matters: Robustly rejecting HMRC’s argument that taxpayers should look beyond the guidance contained in its manuals, the court noted: ‘I suppose that some ordinarily sophisticated taxpayers might have been suffering acute anxiety and in that condition asked themselves whether, as an objective matter, and exercising exorbitant prudence, they should look beyond the Article of the treaty that had been uniquely identified for them by HMRC, towards other parts of the tax treaty.’ However, such an unusually anxious taxpayer would have found that unilateral tax credit under s 790A(3) was available even if an applicable tax treaty denied credit.
In The Queen on the application of Aozora GMAC Investment v HMRC [2017] EWHC 2881 (14 November 2017), the High Court dismissed a claim for judicial review of HMRC’s decision to apply ICTA 1988 s 793A in circumstances where its own guidance suggested that it was not applicable.
Aozora UK was the wholly owned subsidiary of a Japanese company, Aozora Japan. Aozora UK owned a subsidiary in the USA, Aozora US. During accounting periods ending 31 March 2007 to 31 March 2009, Aozora UK had made loans to Aozora US, and received interest payments. The US had imposed 30% withholding tax on the interest received and Aozora UK was liable to corporation tax in the UK on interest. It was denied relief under ICTA 1988 s 790, on the basis that ICTA 1988 s 793A applied to prevent the relief from applying.
Aozora UK argued that HMRC’s international manual (INTM151060) contained a representation by HMRC that gave rise to a legitimate expectation that it would be taxed in accordance with the manual, whether or not the terms of the manual were accurate, and that it would be conspicuously unjust and an abuse of power for HMRC to resile from the alleged representation.
The court accepted that the manual did contain a representation by HMRC. It pointed to the general notice contained in the manual which stated that ‘readers may assume that the guidance will be applied in the normal case’. Furthermore, there was no authority suggesting that a statement of the law, or an interpretation of the law, contained in a particular guidance, could not in principle constitute a relevant representation.
The question was therefore whether the guidance was comprehensive, in so far as it purported to explain the legal and practical effect of s 793A(3). The court noted that the manual contained the following statement: ‘At 1 April 2003 the only provision to which s 793A applies is Article 24(4)(c) of the new UK/US DTA.’ The court concluded that given the clear and unequivocal guidance of the manual, the ‘ordinarily sophisticated taxpayer’ was not required to look beyond the UK/Us tax treaty Art 24(4)(c), which had no relevance to Aozora.
However, the court found that Aozora’s adviser, Deloitte, had not relied on the relevant representation but on its own analysis. In addition, Aozora was unable to establish that, by reason of its ‘putative reliance’ on the relevant representation, it had suffered substantial detriment. In particular, it was plausible that Aozora Japan would have set up a subsidiary in the UK even if it had been aware of the tax implications, since the UK was an attractive financial centre.
Why it matters: Robustly rejecting HMRC’s argument that taxpayers should look beyond the guidance contained in its manuals, the court noted: ‘I suppose that some ordinarily sophisticated taxpayers might have been suffering acute anxiety and in that condition asked themselves whether, as an objective matter, and exercising exorbitant prudence, they should look beyond the Article of the treaty that had been uniquely identified for them by HMRC, towards other parts of the tax treaty.’ However, such an unusually anxious taxpayer would have found that unilateral tax credit under s 790A(3) was available even if an applicable tax treaty denied credit.
