The anonymised tribunal case of Swift last year has now been appealed to the Upper Tribunal and is now known as Anson v HMRC FTC39/2010. Coincidentally this also related to relief for US tax (groan!) but stick with it because is contains an interesting feature.
The case concerned a claim for double taxation relief by Mr Anson in respect of tax paid by a Delaware LLC. Mr Anson had been taxed in the US on the profits of the LLC on the basis that the LLC was transparent. Mr Anson received those profits from the LLC on which he was taxable in the UK. He claimed double taxation relief on the basis that the US tax “shall be allowed as a credit against any UK tax computed by reference to the same profits or income by reference to which the US tax is computed” under the UK/US treaty.
Unfortunately however HMRC did not agree. They regarded the LLC as opaque and therefore there was no entitlement to double taxation relief. The prospect of being taxed in both countries with no relief is the stuff of nightmares – particularly having regard to current rates of tax.
The first tier tribunal found that Mr Anson was entitled to credit on the grounds that he had an interest in the profits of the LLC – but the Upper Tribunal has decided that was wrong. He did not have any interest in the profits under English Law – it was just that the US tax code imposed a transparency for US tax purposes. Therefore the profits on which the tax had been paid in the US were the profits of the LLC and Mr Anson was taxed on something else – his distribution from the LLC. These were different sources of income and the test for relief under the treaty was not satisfied.
However, this may not be the end of the matter. Mr Anson has another argument – that if the transfer of assets abroad provisions in Section 739 TA 1988 (now Section 720 ITA 2007) apply, then the income of the LLC would be treated for all the purposes of the Income Tax Acts as his income. Sounds good.
Unfortunately, the first tier tribunal decided that Section 739 did not apply because of the bona fide commercial exemption in Section 741 – in other words there was no tax avoidance purpose.
The point is now to be reconsidered by the Upper Tribunal (at a fresh hearing) and this could be very interesting. Section 741 would appear to be available only to the taxpayer and not something able to be claimed by HMRC. It says that Section 739 “shall not apply if the individual shows in writing or otherwise to the satisfaction of the Board” that no tax avoidance purpose was involved. It is clear that Mr Anson did no such thing. It could be said that the exemption in Section 741 (and its latest incarnation in Sections 736-742 Income Tax Act 2007) provides a compulsory exclusion from the transfer of assets abroad provisions if the facts fit. However such a conclusion is difficult to reach in the light of the condition that the individual has to satisfy the Board in writing that the conditions apply. We shall see.