The High Court held that the taxpayer, as the UK permanent establishment of a Swiss company, was entitled to claim payment of a tax credit on dividends under ICTA 1988, s. 243 and that effect could be given to payment of the credits since ICTA 1988, s. 788(3)(d) had incorporated such a right into UK law.

Facts

The taxpayer, a Swiss bank, as successor to Swiss Bank Corporation (‘SBC’) in respect of its UK branch appealed against refusal of a claim to relief under ICTA 1988, s. 243. SBC was a bank resident in Switzerland that owned a number of subsidiaries operating in many countries. At all material times, it carried on a banking business in London through a branch (‘the taxpayer’). The agreed corporation tax computations showed that, in the relevant years, the taxpayer had accumulated substantial trading losses. The taxpayer was recognised as a market maker on the London Stock Exchange. In the course of its activities, it received dividends from UK resident companies and received and paid ‘manufactured dividends’ (within ICTA 1988, s. 737 and Sch. 23A). Dividends were received in respect of securities held by the taxpayer on the applicable dividend record date. Manufactured dividends received arose primarily in consequence of stock lending transactions engaged in by the taxpayer over dividend payment record dates or purchases which remained unsettled over those dates. During the relevant years, the surplus of UK dividends (and manufactured dividends) received by the taxpayer over manufactured dividends paid amounted to £233,282,021 (the ‘distributions’). Had the taxpayer been a person resident in the UK, the distributions would have carried tax credits, under ICTA 1988, s. 231, of £58,320,506.

The taxpayer claimed pursuant to ICTA 1988, s. 788(6) relief under s. 788(3)(a). The basis of that claim was that art. 23 (the non-discrimination article) of the UK-Switzerland double taxation convention (‘the treaty’) should have effect to provide relief for the taxpayer so that it should be entitled to claim under ICTA 1988, s. 243 for those years the same relief as would be available to a UK resident company carrying on the same activities as the taxpayer. The claim was refused by the Revenue but the taxpayer appealed.

The special commissioners agreed with the taxpayer that the treaty entitled it to relief under s. 243 but held that such rights had not been incorporated into UK law by s. 788(3)(a) ((2004) Sp C 480).

The taxpayer challenged the commissioners’ finding on the meaning and effect of s. 788(3)(a) but raised a new argument that its right under the treaty had been incorporated into UK law by s. 788(3)(d). The Revenue challenged the commissioners’ finding that the treaty conferred on the taxpayer an entitlement to tax credits under s. 243 in respect of dividends received by the branch during the relevant accounting periods.

Issues

Whether the taxpayer's claims to tax credits under ICTA 1988, s. 243 were within art. 23 of the UK-Switzerland double taxation convention; whether the claim was a claim for ‘relief from corporation tax’ within ICTA 1988, s. 788(3)(a); and whether the taxpayer's right under the treaty to s. 243 tax credits had been incorporated into UK law by s. 788(3)(d).

Decision

Etherton J (allowing the appeal) said that the taxpayer's claims to s. 243 tax credits were within art. 23 of the treaty. Payment of the tax credit was part of the levying of taxation and, in circumstances such as the present, tax was less favourably levied on the taxpayer within art. 23(2) by virtue of the inability of the taxpayer (as a foreign company unable to receive or make franked payments) on the one hand, and the ability of a UK company to invoke s. 243, on the other hand.

However, the application of the second basic element of the imputation principle (i.e. that the recipient of the dividend was given a tax credit) in the particular circumstances of s. 243 could not fairly be described as ‘relief from corporation tax’ within s. 788(3)(a). The payment of the tax credit resulting from the application of s. 243 was anomalous. The tax credit payable to the company invoking s. 243 did not reduce any corporation tax liability of the company and was not a repayment of corporation tax deducted or withheld at source. That tax credit produced a financial benefit to the company invoking s. 243, but it had nothing to do with giving relief from corporation tax. There was no discernible reason for the tax credit other than as a hangover from, or rather the anomalous continuation of an aspect of, the tax regime before the introduction of the imputation system in 1973.

However, the tax credit claimed was a tax credit under s. 231 in respect of qualifying distributions made to the taxpayer by companies which were resident in the UK within the express words in s. 788(3)(d). The taxpayer was seeking the same tax credit that a UK company could procure by invoking s. 243. The expression ‘tax credit’ was defined in s. 832(1) to mean ‘a tax credit under section 231’. Section 238(1) similarly defined ‘tax credit’ for the purposes of Ch. V of Pt. VI as meaning ‘a tax credit under section 231’. Section 242(1)(c) expressly conferred on the company an entitlement to have paid to it ‘the amount of the tax credit’ in the circumstances specified in s. 242. In this case the parties were agreed that there was to be implied in s. 243 a similar right to payment of the tax credit under that section as was to be found in s. 242(1)(c). It followed that the tax credit to which a company was entitled under the express provisions of s. 242(1)(c) and under an implied provision in s. 243 was ‘a tax credit under section 231’ within the definition of ‘tax credit’ in s. 832(1).

It was also clear, therefore, that the reference in that definition was to the tax credit described in s. 231(1), and not the particular tax credit payable in the particular circumstances specified in s. 231(2) and (3). It followed that the reference to ‘a tax credit under section 231’ in s. 788(3)(d) was also a reference to the tax credit specified in s. 231(1), and was not confined to the particular tax credit payable in the particular circumstances specified in s. 231(2) and (3), but extended to the tax credit payable pursuant to s. 242(1)(c) and 243 (Pirelli Cable Holding NV v IR Commrs [2004] BTC 50 considered). The Revenue had adduced no admissible evidence to qualify that ordinary reading of the statutory language which did not lead to an anomalous result. If, as was common ground, s. 788(3)(d) embraced s. 231(3), then the legislation undoubtedly contemplated the payment of a tax credit to a foreign individual even where, were the individual a UK taxpayer, there would be no charge to income tax because, for example, the taxpayer's personal allowances and reliefs exceeded taxable income, including the dividends, and even though there had been no deduction or withholding of tax at source. If that anomalous financial benefit was extended to a foreign individual, there was no obvious reason to adopt a forced interpretation of s. 788(3)(d) in order to prevent its extension to a foreign company. Accordingly, on the new point which had not been before the commissioners, the appeal would be allowed.

Chancery Division. Judgment delivered 7 February 2006.