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High Court of Ireland Decisions |
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You are here: BAILII >> Databases >> High Court of Ireland Decisions >> Murtagh (Inspector of Taxes) v. Rusk [2005] IEHC 316 (11 October 2005) URL: http://www.bailii.org/ie/cases/IEHC/2005/H316.html Cite as: [2005] IEHC 316 |
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Neutral Citation No: [2005] IEHC 316
THE HIGH COURT
(REVENUE)
record no. 2003/835 R
BETWEEN:-
P.V. MURTAGH (INSPECTOR OF TAXES)
APPLICANT
-and-
MR. SAMUEL RUSK
RESPONDENT
MR. JUSTICE T.C. SMYTH DELIVERED JUDGMENT AS FOLLOWS ON TUESDAY 11TH OCTOBER 2005
MR. JUSTICE SMYTH: This matter comes before the court by way of case stated by the Appeal Commissioner, John O'Callaghan, pursuant to Section 941 of the Taxes Consolidation Act 1994 for the opinion of the High Court on foot of the following agreed facts:-
(a) The Respondent was resident in the UK for all of the tax years up to 1995/1996.
(b) The Respondent was beneficial holder of all 100 issued ordinary shares in S&D Management Ltd. up to 14th February 1996.
(c) S&D Management Ltd. was, at all material times, resident in the UK.
(d) The Respondent disposed of his entire interest in the issued share capital of S&D Management Ltd. to Kingspan Group Ltd. under the terns of an agreement in writing dated 14th February 1996. The said agreement had a completion date of 12th March 1996.
(e) Kingspan Group Ltd. is a public company incorporated in England and was at all material times resident in the UK.
(F) Under Clause 3.1 of the said agreement the purchase consideration payable to the Respondent for his shares was £9,250,000 sterling. Payment, pursuant to Schedule 1, was to be by way of the issue of Loan Stock as follows: Loan Stock A in the amount of £3,875,000 sterling on 16th September 1996 and carrying a rate of 6%; Loan Stock B in the amount of £3,875,000 sterling maturing on 1st February 1997 and carrying an interest rate of 6%, and Loan Stock C in the amount of £1,500,000 sterling maturing on 1st February 1997 and having a zero rate of interest. The Schedule provided that the certificate and related instruments were to be held in the Northern Bank (IOM) Ltd., P.O. Box 113, 49, Victoria Street, Douglas, Isle of Man.
The Loan Stock certificates and related Instruments were issued under seal in the UK on 11th March 1996 and were physically taken to the Isle of Man where they were held up to and until the relevant maturity dates.
(g) Interest was paid on the due dates directly into the Respondent's bank account with the Northern Bank in the Isle of Man. Kingspan made the interest payments from funds held in bank accounts in the UK and the interest was paid on each occasion subject to a deduction of UK income tax at the standard rate.
(h) Each series of the Loan Stock was redeemed at the maturity dates provided for in the agreement set out at (f) above.
(i) No amount of money, being either the interest payable on the Loan Stock or the capital repayment on maturity, was remitted to the Republic of Ireland.
(j) The Respondent took up residence in a property in the Republic of Ireland on 15th March 1996 and used the property as his main residence up to July 1997, when he returned to the UK.
(K) The Respondent was resident (for income tax purposes) in the Republic of Ireland for the year of assessment 1996/1997.
(l) The Respondent was resident (for income tax purposes) in the Republic of Ireland during the tax year 1995/1996. He was not domiciled nor was he ordinarily resident (within the income tax statutory definition of the term) in the Republic of Ireland at any time. The Respondent's wife was not resident, domiciled or ordinarily resident in the Republic of Ireland at any time.
The question posed by the Appeal Commissioner was; Was he correct, on the foregoing facts, in deciding that the relevant tests whether the interest paid on the Loan Stock is assessable under Schedule 6,
Part III, paragraph 1 of the Income Tax Act, 1967 is determined by the location of the loan notes themselves rather than the location where the interest was paid or the proper law of the agreement?
In this case, the Inspector of Taxes appeals against the decision of the Appeals Commissioner delivered on 13th December 2000, which held that the interest on unsecured Loan Stock paid by the Kingspan Group to the Respondent was not chargeale to tax under Case III of Schedule D by virtue of Section 76 of the Income Tax Act 1967. Essentially the Appellant contended that the Commissioner was wrong in holding that the source of the interest was the Isle of Man and not the United Kingdom.
It was submitted that Section 53 of the Act of 1967 charges tax on income arising "from" securities and possessions outside the State under Case III of Schedule D. However, Section 76, a computational section, provides for a fuller amount of the income to be taken into account subject to certain deductions viz deductions as would be allowed as if the income were received in the State, foreign income tax, and the annual interest payable out of the income to a non-resident. Subsections 2 and 3 of Section 67, however, provide that a person who is not domiciled or ordinarily resident in the State is not chargeable to tax, except only remittances received in the State. Accordingly a citizen of the United Kingdom, temporarily resident in the State, is not liable to Irish income tax in respect of his foreign income unless he remitted it to this country.
However, Article 1 of the Sixth Schedule to the Act of 1967 removes the limitations in S. 76 (2) (vide Part III of the Sixth Schedule with reference to Part I thereof, i.e. the Double Taxation Agreement concluded between the State and the United Kingdom) as a result of which a citizen of the United Kingdom who is resident in the State becomes liable to income tax on the full amount of any income arising from securities and possessions "in", not "from" the United Kingdom.
The issue as identified by Mr. Fulham SC for the Inspector was framed thus – whether interest paid on the Loan Stock arises in the United Kingdom or whether the United Kingdom is the source for the interest paid. The Appellant submitted that the interest received by the Respondent was "a profit or gain arising in Great Britain" and therefore taxable in the State for the following reasons:-
1. The source of the Loan Stock and interest thereon is Kingspan Ltd., a company registered in the UK.
2. The conduct giving rise to the obligation to pay the interest is governed by the law of the United Kingdom and was executed and enforceable in the United Kingdom.
3. The instrument giving effect to the issue of the Loan Stock was drawn up and executed in the UK following a resolution passed at a Board Meeting of Kingspan Ltd. held in the UK.
4. The Instruments and the Loan Stock are governed by and are to be construed in accordance with English law.
5. The interest was paid out of funds in the UK.
6. The interest was paid under deduction of UK tax.
The Appellant largely relied on the decision of Westminister Bank Executor and Trustee Company (Channel Islands) Ltd. –v- National Bank of Greece, S.A. 46 TC 472 wherein the House of Lords considered the source of interest payable on bearer bonds issued in Greece and payable either in London or in Athens. (The bearer bonds, unlike the Loan Notes in the instant case, were not under seal). Mr. Fulham directed the attention of the Court to passages of the views of Lord Hailsham L.C. at pages 493/4. There, the Lord Chancellor, having cited a passage from the judgment of Lord Herschell in Colquhoun –v- Brooks (1889) 14 APP Cas 493 at p. 504 who said:
"The income Tax Acts themselves impose a territorial limit; either that from which the taxable income is derived must be situate in the United Kingdom, or the person whose income is to be taxed must be resident there."
He went on to note how the issues in the case were put to their Lordships. It is recorded that Counsel for the Commissioner of the Inland Revenue:-
"…. Submitted that the only question of substance in the case was whether or not the source of the payments by the Appellants (as guarantors in default of payment of the interest by the principle debtors) was or was not situated within the United Kingdom. He went on to submit that if the source were within the United Kingdom, the income would be taxable under Case III and so subject to a deduction of tax under Section 170 [of the Income Tax Act 1952, 15 & 16, Geo. 6 and 1 Eliz. 2, chapter 10 of the United Kingdom], but that if it were not, it would not be so taxable under Schedule D, or indeed under the Income Tax Acts at all, in the hands of the Respondents, since it would then be either a foreign security within Case IV of a foreign possession within Case V and not be taxable in the hands of a recipient not resident in the United Kingdom. In short, it would be caught by the territorial limitation laid down by Lord Herschell."
The House of Lords, in the events of the bearer bonds involved in the case, came to the conclusion that "the source of the obligation in question was situated outside the United Kingdom" and was not taxable in the hands of the recipient. In his speech,
Lord Hailsham noted that:-
(A) The obligation was (i) undertaken by a principal debtor which was a foreign corporation, (ii), secured by lands and public revenues in Greece.
(B) The discharge of the debtor's obligation involved either (i) a remittance from Greece or (ii) at the option of the holder, a cheque issued within Greece. It was held that not withstanding that it carried on acquired business in London, the Defendant acquired no obligation different from that imposed on the original guarantor by the term of the bonds and, the bonds being a foreign source, the payments fell within Case IV of Schedule D and were not payable under deduction of tax.
In my judgement, the Westminister Bank case is one that stands on its own facts, which are clearly distinguishable from those in the instant case. Indeed, Mr. McCann SC submitted that the Loan Stock certificate, otherwise the Loan Notes, were not registered on any register maintained by Kingspan Group Ltd. or any other company in the group and most particularly that the Loan Notes, being under seal, were specialty debts and therefore in the absence of any register, the debt was where they happened to be. They were situate in the Isle of Man as they were being physically held in the Northern Bank in Douglas – in short the situs, (to adopt the language in the Westminister Bank case at page 495, [Letter D]) of the Loan Notes was outside the United Kingdom. The right to receive interest arose from the Loan Notes and not from Kingspan Group Ltd. who was the promisor and payer of the interest on the debt: the source of the interest paid on the Loan Notes was the Loan Notes themselves. The Respondent submitted that the consequence of the Loan Notes being situate in the Isle of Man was that profits or gains were taxable only to the extent that they were remitted to this State and as none of the income had been remitted, no charge to Irish income tax arose.
The importance of the notion that the Loan Notes are specialty debts was fundamental to the Respondent's case. The expression was considered in the judgment of the Privy Council in Rex –v- Williams [1942] AC 541 at 555, delivered by Viscount Maughan wherein he stated as follows:
"The word "specialty" is sometimes used to denote any contract under seal, but it is more often used in the sense of meaning a specialty debt, that is an obligation under seal securing a debt or a debt due from the Crown or under statute (see Royal Trust Co. –v- Attorney General for Alberta). Such an obligation was for centuries treated as very different from an ordinary debt. Indeed, the act of creating a specialty by deed was at one time possible only to the men of the highest rank. Unlike debt, it was enforced by an action of covenant; Holdsworth,
A History of English Law, 3rd ed., Vol. iii, p.417. The deed itself was the foundation of the action, the original debt, if any, being merged. The terms of the deed were conclusive. Specialty debts, until recent times, conferred special rights. They used to rank in the administration of the estate of a deceased person in priority to simple contract debts; and, unlike such debts, were enforceable against the real estate. They were said to be "of a higher nature" than debts by contract. It is therefore not surprising that specialty debts by deed were treated from an early date as bona notabilia where the deeds were found at the time of the death, unlike ordinary debts, which were said "to follow the person of the debtor". That this is still the rule was decided in the House of Lords in the well-known case of Commissioner of Stamps –v- Hope."
This extensive quotation is to give context or reference that In re Finance Act, 1894 and Deane [1936] I.R. 556 a Divisional Court of the High Court, following Commissioners of Stamps –v- Hope [1891] AC 476, determined that the locality of the specialty debt is the place where the instrument happens to be (in the case of the life assurance policy involved, at the date of death of the creditor in Dean's case) per Hanna J. at P.569 of the report. In the Conflict of Laws (Dicey and Morris) 12th ed. 1993 Vol. 2 under the title Law of Property – nature and situs of Property – Specialties, and learned authors observe:
"For taxation purposes, a debt due on a deed or other specialty is situate in the country where the deed itself is situate from time to time and not in a country where the debtor resides."
Notwithstanding the want of attraction that as a matter of law, serious consequences may flow from a peripatetic source of income, in the case of a specialty, the situs of the specialty debt must be taken into consideration. The fact that these decisions may appear remarkably dated in their approach and that its analysis may be out of place in Ireland is not for me, in my judgment, to adjust. This is a matter for the legislature. That is matter for judicial restraint. It is not a matter where legal fashion or jurisprudential contemporary thinking must necessarily or can necessarily be brought to adjust taxation arrangements. A disinclination to regard sources of income (which was the perception of the Special Commissioner in Haftom Properties Ltd. –v- McHugh, 1987, STC 16 of the Lord Chancellor's view in Westminister Bank) does not give rise to an entitlement to follow such a course. Anomalous though it be, it seems to me that the Appeal Commissioner came to the correct view on the agreed facts. Even if "No simple single legal test can be employed" (per Lord Nolan in Commissioners of Inland Revenue –v- Orion Caribbean Ltd. (in voluntary liquidation) 1997, STC 923 per Nolan at 930), the Appeal Commissioner taking into account the situs of the speciality debt in conjunction with all of the other facts, and in particular (f), (g) and (i) was entitled to come to the decision which he did.
I answer the question posed in the affirmative.
END OF JUDGMENT
| MR. JUSTICE SMYTH: | There is no application, Mr. Fulham, but in fairness, Mr. McCann did say he wouldn't be here. |
| MR. FULHAM: | He did say he wouldn't be here, my Lord. |
| MR. JUSTICE SMYTH: | Would the essential thing to do . . . . Oh, there is somebody here. |
| MS. KILLEEN: | My Lord, I appear on behalf of the Respondent. I am from Mr. McCann's office and may I apply for costs? |
| MR. FULHAM: | I can't resist that, my Lord. |
| MR. JUSTICE SMYTH: | Very well. Costs will follow the event. |
| MR. FULHAM: | Does your Lordship have a written judgement? |
| MR. JUSTICE SMYTH: | I have, as promised, delivered it on time. It is in manuscript form. It will be with you hopefully in corrected form on the basis of the good sense of your solicitor and Mr. McCann's engaging the services of Gwen Malone, who will provide a service of that calibre and you will have it within 48 hours duly approved. |
| MR. FULHAM: | I am obliged to your Lordship for the expeditious way in which you have dealt with it. |
| MR. JUSTICE SMYTH: | All right. Thank you very much |
END OF HEARING
Approved Smyth J.
