“The credits and debits to be brought into account in the case of any company in respect of its loan relationships shall be the sums which, in accordance with an authorised accounting method and when taken together, fairly represent, for the accounting period in question – (a) all profits, gains and losses of the company, including those of a capital nature, which (disregarding interest and any charges or expenses) arise to the company from its loan relationships and related transactions; and (b) all interest under the company’s loan relationships and all charges and expenses incurred by the company under or for the purposes of its loan relationships and related transactions.”
“ Transactions associated with loans or credit (1) This section applies as respects any transaction effected with reference to the lending of money or the giving of credit, or the varying of the terms on which money is lent or credit is given, or which is effected with a view to enabling or facilitating any such arrangement concerning the lending of money or the giving of credit. (2) Subsection (1) above has effect whether the transaction is effected between the lender or creditor and the borrower or debtor, or between either of them and a person connected with the other or between a person connected with one and a person connected with the other. … (5) If under the transaction a person assigns, surrenders or otherwise agrees to waive or forgo income arising from any property (without a sale or transfer of the property) then, without prejudice to the liability of any other person, he shall be chargeable to tax under Case VI of Schedule D on a sum equal to the amount of income assigned, surrendered, waived or forgone.”
“(1) For the purposes of corporation tax all profits and gains arising to a company from its loan relationships shall be chargeable to tax as income in accordance with this Chapter. … (5) Subject to any express provision to the contrary, the amounts which in the case of any company are brought into account in accordance with this Chapter as respects any matter shall be the only amounts brought into account for the purposes of corporation tax as respects that matter.”
“(1) The Schedule referred to as Schedule D is as follows— Schedule D Tax under this Schedule shall be charged in respect of— ( a ) the annual profits or gains arising or accruing— (i) to any person residing in the United Kingdom from any kind of property whatever, whether situated in the United Kingdom or elsewhere, and (ii) to any person residing in the United Kingdom from any trade, profession or vocation, whether carried on in the United Kingdom or elsewhere, and (iii) to any person, whether a Commonwealth citizen or not, although not resident in the United Kingdom from any property whatever in the United Kingdom or from any trade, profession or vocation exercised within the United Kingdom, and ( b ) all interest of money, annuities and other annual profits or gains not charged under Schedule A or under ITEPA 2003 as employment income, pension income or social security income, and not specially exempted from tax. (2) Tax under Schedule D shall be charged under the Cases set out in subsection (3) below, and subject to and in accordance with the provisions of the Tax Acts applicable to those Cases respectively. (3) The Cases are— … Case VI: tax in respect of any annual profits or gains not falling under any other Case of Schedule D and not charged by virtue of Schedule A or by virtue of ITEPA 2003 as employment income, pension income or social security income.”
“It seems to me to be a general principle of Income Tax Law that a person in order to be taxable in a particular year must have an income arising from a source existing in that year and in order to justify this assessment the Crown must show some reason for departing from that general principle. It is admitted that if the taxation be in respect of a trade, or business, or an office, or of property the taxpayer must continue in the year of charge to carry on the trade or business or hold the office or the property. It was, however, contended for the Crown that the principle did not apply in this case because by the first rule of the Third Case the duty to be charged was computed according to the profits of the preceding year, and, therefore, if the last year was not taxed because there was no source, one year escaped taxation altogether. I do not think the first rule has this effect. The provision as to computation of profits is the same as that in respect of trades, etc., in the first rule of the First Case, and it is admitted that in that instance the trade must exist in the taxable year in order to make the taxpayer liable. I see no reason for construing the same provision in a different way in the two rules; both refer to methods of computation only, and are not directed to whether there is a taxable income or not. Besides, as pointed out in Dowell's Income Tax Laws, 7th Edition, page 300, the Third Case originally dealt with property which must have existed in the hands of the taxpayer in the taxable year in order to make him liable, and it can hardly have been intended by the insertion of the second rule to alter the effect of the first. if the first year does escape taxation, it is because the Legislature has not inserted in the second rule of the Third Case such a provision as is found in the first rule of the First Case. It is suggested by the Commissioners that the profits of the first year might be taxed under the Sixth Case. I do not think it necessary to decide that point, for even if they be not taxable it does not in my opinion show that the taxpayer can be taxed in respect of a source of income which does not exist.”
“[19] The source doctrine argument relied on a general principle of tax law that, given the schedular structure of the United Kingdom income tax and corporation tax on income, and given also that income tax and corporation tax on income are annual taxes, taxpayers are not taxed on income in the general sense of the term, but rather on specified kinds of income from specified sources. [20] Further, and critically for the argument in this case, the taxpayer must possess the sources in the year of assessment or accounting period in which the income arises. If the taxpayer receives income from a source which the taxpayer no longer possesses in the year or accounting period of receipt, the effect of the source doctrine is that, in principle and subject to any detailed statutory provision to the contrary, the income is not taxable.”
“The deemed loan is still from the interim holder, notwithstanding the tripartite nature of the arrangements, and that deemed loan is the only source (albeit a deemed source) from which taxable interest can arise. The interest must therefore be taxable in the hands of the owner of that source (the interim holder), whether or not the interim holder also receives the repurchase price. The legislative scheme, for better or for worse, is to treat the interim holder as the deemed lender of the original sale price for the life of the repo, and it is therefore in the hands of the interim holder that the deemed interest is taxable.”
“Nor do I agree that a person other than the original lender can be taxable on the interest from a loan, unless the taxable source itself has been transferred. A mere direction to pay the interest to a third party, for example, or a mere assignment of the right to receive the interest without an assignment of the underlying loan agreement itself, would not, as I understand it, suffice to make the third party taxable on the interest in place of the original lender.”
“[46] This conclusion is also supported by, but is not dependant upon, BH's argument that the law has required that a source of income be identified before the income itself can be taxed: Brown v National Provident Institution; Ogston v Provident Mutual Life Association[1921] 2 AC 222 , 8 TC 57 . [47] Receipt, of itself, is not a determinant of any possible tax liability. An assignee of the right to receive interest (without assignment of the loan relationship) would not be taxable on the amount of that interest under the loan relationship provisions because he has no relevant loan relationship.”
“‘Profits or gains’ mean something which is in the nature of interest or fruit, as opposed to principal or tree. The other class of case that one can rule out is that of gifts. A person may have an emolument by reason of a gift inter vivos or testamentary, or he may acquire an emolument by finding an article of value or money, or he may acquire it by winning a bet. It seems to me that all that class of cases must be ruled out, because they are not profits or gains at all. Without pretending to give an exhaustive definition, I think one may take it as clear that where an emolument is received, or, rather, where an emolument accrues, by virtue of some service rendered by way of action or permission, or both, at any rate that is included within the words ‘profits or gains.’”
“It seems to me that running through the cases there is the concept that as a general rule two requirements must be satisfied for a payment to amount to interest, and a fortiori to amount to 'interest of money'. First, there must be a sum of money by reference to which the payment which is said to be interest is to be ascertained. A payment cannot be 'interest of money' unless there is the requisite 'money' for the payment to be said to be 'interest of'. Plainly, there are sums of 'money' in the present case. Second, those sums of money must be sums that are due to the person entitled to the alleged interest; and it is this latter requirement that is mainly in issue before me. I do not, of course, say that in every case these two requirements are exhaustive, or that they are inescapable. Thus I do not see why payments should not be 'interest of money' if A lends money to B and stipulates that the interest should be paid not to him but to X: yet for the ordinary case I think that they suffice.”
“(1) Where in any accounting period a loan relationship of a company has an unallowable purpose,— (a) the debits, and … which, for that period fall, in the case of that company, to be brought into account for purposes of this Chapter shall not include so much of the debits … given by the authorised accounting method used as respects that relationship as, on a just and reasonable apportionment, is attributable to the unallowable purpose. (1A) Amounts which, by virtue of this paragraph, are not brought into account for the purposes of this Chapter as respects any matter are in consequence also amounts which, in accordance with section 80(5) of this Act, are not to be brought into account for the purposes of corporation tax as respects that matter apart from this Chapter. (2) For the purposes of this paragraph a loan relationship of a company shall be taken to have an unallowable purpose in an accounting period where the purposes for which, at times during that period, the company— (a) is a party to the relationship, or … include a purpose (“the unallowable purpose”) which is not amongst the business or other commercial purposes of the company. (3) For the purposes of this paragraph the business and other commercial purposes of a company do not include the purposes of any part of its activities in respect of which it is not within the charge to corporation tax. (4) For the purposes of this paragraph, where one of the purposes for which a company— (a) is a party to a loan relationship at any time, or … is a tax avoidance purpose, that purpose shall be taken to be a business or other commercial purpose of the company only where it is not the main purpose, or one of the main purposes, for which the company is a party to the relationship at that time … (5) The reference in sub-paragraph (4) above to a tax avoidance purpose is a reference to any purpose that consists in securing a tax advantage (whether for the company or any other person). (6) In this paragraph— “tax advantage” has the same meaning as inChapter I of Part XVII of the Taxes Act 1988 (tax avoidance).”
“If with intent a person kills a fly by squashing it, it cannot be said that because his avowed purpose was ‘to kill the fly’, it was not also to squash it. His purposes may stop short at the killing: his purpose of killing the fly by squashing does not mean that he had a purpose of leaving a mess on the window, but it must encompass the intended means of achieving the killing.”
“The object of the taxpayer in making the expenditure must be distinguished from the effect of the expenditure. An expenditure may be made exclusively to serve the purposes of the business, but it may have a private advantage. The existence of that private advantage does not necessarily preclude the exclusivity of the business purposes. For example a medical consultant has a friend in the South of France who is also his patient. He flies to the South of France for a week, staying in the home of his friend and attending professionally upon him. He seeks to recover the cost of his air fare. The question of fact will be whether the journey was undertaken solely to serve the purposes of the medical practice. This will be judged in the light of the taxpayer's object in making the journey. The question will be answered by considering whether the stay in the South of France was a reason, however subordinate, for undertaking the journey, or was not a reason but only the effect. If a week's stay on the Riviera was not an object of the consultant, if the consultant's only object was to attend upon his patient, his stay on the Riviera was an unavoidable effect of the expenditure on the journey and the expenditure lies outside the prohibition in s 130.”
“If Lord Brightman's consultant had said that he had given no thought at all to the pleasures of sitting on the terrace with his friend and a bottle of Côtes de Provence, his evidence might well not have been credited. But that would not be inconsistent with a finding that the only object of the journey was to attend upon his patient and that personal pleasures, however welcome, were only the effects of a journey made for an exclusively professional purpose. This is the distinction which the commissioner was making and in my opinion there is no inconsistency between his conclusion of law and his findings of fact.”
“My Lords, I would only conclude my judgment by saying, when the question of carrying out a genuine commercial transaction, as this was, is considered, the fact that there are two ways of carrying it out - one by paying the maximum amount of tax, the other by paying no, or much less, tax - it would be quite wrong as a necessary consequence to draw the inference that in adopting the latter course one of the main objects is, for the purposes of the section, avoidance of tax. No commercial man in his senses is going to carry out commercial transactions except upon the footing of paying the smallest amount of tax involved. The question whether in fact one of the main objects was to avoid tax is one for the Special Commissioners to decide upon a consideration of all the relevant evidence before them and the proper inferences to be drawn from that evidence.”
“The observations of Cross J. call attention to the need when determining whether the obtaining of a tax advantage was a main object of an ordinary commercial transaction, to consider with care the significance to the taxpayer of the tax advantage. The tax advantage may not be a relevant factor in the decision to purchase or sell or in the decision to purchase or sell at a particular price. Obviously if the tax advantage is mere ''icing on the cake'' it will not constitute a main object. Nor will it necessarily do so merely because it is a feature of the transaction or a relevant factor in the decision to buy or sell. The statutory criterion is that the tax advantage shall be more than relevant or indeed an object; it must be a main object. The question whether it is so is a question of fact for the Commissioners in every case.”
“In determining whether this tax avoidance purpose was a main purpose, we do not agree with Mr Southern [counsel for the taxpayer] that a commercial purpose will always cancel out any fiscal purpose. Whether it does so depends on the weight given to the commercial purpose. Mr Southern suggests that commercial purposes have some greater intrinsic weight than tax purposes, because any commercial purpose will always trump a fiscal purpose. We do not find anything in the drafting of paragraph 13 or in any of the case authorities referred to, to suggest that this is the correct approach.”