“… although the decisions were not binding on him in the way that a decision of the Court of Appeal would be binding, the decision of a High Court Judge ought to be followed by another [High Court] judge unless that judge thinks that the earlier decision was clearly wrong”
“I can only say for myself that I think the modern practice, and the modern view of the subject, is that a judge of first instance, though he would always follow the decision of another judge of first instance, unless he is convinced the judgment is wrong, would follow it as a matter of judicial comity.” 20. As HMRC (or its predecessor, the Inland Revenue) would always have been a party to a tax appeal the position would be as stated in the letter, of6 June 2013 , sent by HMRC to the directors of Poldi, under its new name, seeking consent to rely on the unpublished decision of the Special Commissioner, ie that: HMRC has copies of all decisions made in the various tax courts, because, of course, it is always a party to such proceedings. … This means that HMRC has the ability to draw upon some decisions of the tax courts that are not freely available to the general taxpayer This clearly raises the question of fairness and whether HMRC should be permitted to rely on an unpublished (as opposed to an unreported) decision not freely available to the general taxpayer, especially as we are obliged to give effect to the overriding objective, contained in Rule 2 of the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 (the “Tribunal Rules”), to “deal with cases fairly and justly” which includes dealing with a case in ways which “are proportionate” to the “resources of the parties”. 21. Given that the judicial function of the Special Commissioners was originally derived from s 130 ands 131 of the Income Tax Act 1842 there must be thousands of unpublished decisions known by and available only to HMRC. In our view, given that a persuasive authority, unless considered to be wrong, will as a matter of judicial comity be followed by the FTT, it cannot be right or just for HMRC to have such an advantage over a taxpayer. As Lord Diplock said in Fothergill v Monarch Airlines Limited[1981] AC 251 at 279 “Elementary justice or, to use the concept often cited by the European Court, the need for legal certainty demands that the rules by which the citizen is to be bound should be ascertainable by him (or, more realistically, by a competent lawyer advising him) by reference to identifiable sources that are publicly accessible.” 22. Therefore, irrespective of any assurance that may be given, we do not consider that it is proper for HMRC to cite an unpublished decision of the Special Commissioners before the FTT. 23. However, HMRC did just this in Perrin and, as we have previously mentioned (at paragraph 10, above), it would appear that Poldi was relied on at least to some extent by Judge Hellier in his decision. Therefore, given his reference and apparent reliance on Poldi , which for the reasons above we consider to be wrong, we decline to follow Perrin and, like the Special Commissioner in Henke , consider the issue raised by this appeal, namely whether interest paid to an overseas recipient arose in the United Kingdom, “afresh, without reference to any other decision” of the Special Commissioners or the FTT. Whether Interest “arising in United Kingdom” 24. Each of the parties advocated a different approach to this issue. Mr Vallat submitted it was a matter of balancing various factors including, eg the residence of the debtor, the substantive origin of funds out of which the interest was paid, the situs or location of the debt and the jurisdiction in which proceedings might be brought to enforce the interest obligation. However, Mr Kessler invited us to reject such a multi-factorial approach and conclude that the source of interest is located in the place where credit is provided. Despite these differences in approach it was common ground that the test for the source of interest is distinct from source of trading income and also distinct from situs of the debt. It is also not disputed that no guidance is to be found in the legislation and therefore it is necessary to examine the relevant authorities. 25. In what is accepted to be the leading authority, Westminster Bank Executor and Trustee Co (Channel Islands) Limited v National Bank of Greece SA (1970) 46 TC 472 (the “Greek Bank Case”) the House of Lords considered whether the coupons on certain Greek Bank debts, which could only be enforced and paid in London, comprised “income arising from securities out of the United Kingdom” (within Case IV of Schedule D) and not liable to income tax or comprised income from a source in the United Kingdom (which was chargeable under Case III) and liable to a deduction of income tax. 26. Lord Hailsham LC, with whom Lords Upjohn, Donovan, Pearson and Viscount Dilhorne agreed, said, at 493-494: “We thought it right to invite Mr. Warner (instructed by the Commissioners of Inland Revenue) to address the House as amicus curiae. He 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 interest by the principal debtors) was or was not situated within the United Kingdom. He went on to submit that if this source were within the United Kingdom the income would be taxable under Case III and so subject to deduction under section 170 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 or a foreign possession within Case V and not 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 in the passage quoted above. For my part, I accept the simple view of the matter as submitted by Mr. Warner, although it is in some ways simpler than the reasons which commended themselves either to Donaldson J. or to the members of the Court of Appeal, both of whom decided the case against the present appellants on grounds which were not identical either with the above view or with one another. I have come to the conclusion that the source of the obligation in question was situated outside the United Kingdom. This obligation was undertaken by a principal debtor which was a foreign corporation. That obligation was guaranteed by another foreign corporation which, as was conceded before us, had at no time any place of business within the United Kingdom. It was secured by lands and public revenues in Greece. Payment by the principal debtor of principal or interest to residents outside Greece was to be made in sterling and either at the offices of Hambros Bank or Erlangers Ltd. or (at the option of the holder) at the National Bank of Greece in Athens, Greece, by cheque on London. Whichever method of payment was selected, it was pointed out before us that, whatever use were made of the option, discharge of the principal debtor's obligation would have involved in the ordinary course either a remittance from Greece to the paying agents specified in the bond or, at the option of the holder, a cheque issued within Greece, though drawn on London and presumably payable there out of funds remitted by the debtors from abroad. It was also pointed out that the bond contained no provision for payment by the guarantor at any particular place or in any particular country. The only circumstances relied on by the appellants as supporting their contention that the obligation was located inside the United Kingdom were as follows. Although the original guarantor had no branch in the United Kingdom, the present appellants had acquired one on the universal succession comparatively recently in London. Moreover it was urged that, since discharge of the obligations under the bond in Greece had been caught by the moratorium enacted by the Greek Government, it followed that the only place at which the obligation could have been discharged or enforced was in London. Speaking for myself, I do not see how an obligation originally situated in Greece for the purposes of British income tax could change its location either by reason of the fact that one guarantor had been substituted for another, or by reason of the fact that the second guarantor so substituted subsequently acquired a London place of business or by reason of the fact that the Government of Greece had by retrospective legislation altered, by moratorium and substitution of a new guarantor for the purposes of Greek law, the obligations imposed upon the principal debtor and the guarantor. The appellants acquired no obligation different from that of the original guarantors, and that was the obligation imposed on the original guarantors by the terms of the bond. In my view, the bond itself is a foreign document and the obligations to pay principal and interest to which the bond gives rise were obligations whose source is to be found in this document.” 27. Hafton Properties Limited v McHugh (HM Inspector of Taxes) (1986) 59 TC 420 was a pre-1994 decision of Special Commissioner that was reported because of an appeal to the High Court on a different point. In this case under an original loan agreement an American company borrowed from an American bank with the loan being secured on property in the United States. Hafton, a United Kingdom resident company, purchased the property subject to the mortgage and the debt remained in the name of the original debtor and payments were made from income arising from the United States property. The Special Commissioner (Brian O’Brien), having considered the Greek Bank Case, said, at 472: “Mrs. Picard [for the Inland Revenue] submitted, (rather at the last moment) that the proper inference to be drawn from the evidence before me, and in particular the fact that Hafton was servicing the debt, was that there was a novation of the personal debt: so that Hafton became vis-a-vis the Dollar Bank, the debtor under the Note. Mrs Picard accordingly submitted that Hafton is the ultimate debtor, that Hafton is resident in the United Kingdom, and therefore that the debt is located in the United Kingdom. The situs of the debt locates, in her submission, the source of income, and therefore the source of income is a United Kingdom source. For my part I would have great difficulty in accepting Mrs. Picard's approach, even if I accepted that Hafton had become the debtor under the Note. It is true that in one respect the Greek Bank Case is different from this one, in that in that case the debtors (both original and substituted) were at all times essentially Greek in character. Nevertheless I collect from Lord Hailsham's speech a clear disinclination to regard sources of income as being peripatetic. He looked to the nationality (if I may so put it) of the document creating the obligation, and, applying the sentence which I have already read from that speech to the present case, there can be no doubt that the obligation here was American in character.” 28. We were also referred to Inland Revenue Commissioner s v Viscount Broome’s Executors (1935) 19 TC 667 in which the executors of a Kenya resident debtor who were resident in the United Kingdom paid the interest in the United Kingdom out of United Kingdom funds. Finley J decided “with hesitation” in “the very special facts” of the case that interest arose in the United Kingdom. However, the case was not cited before the House of Lords in the Greek Bank Case or the Special Commissioner in Hafton Properties and we agree with Mr Vallat who, in his skeleton argument, submitted that this case “has to be read carefully in the light of the Greek Bank Case (in particular to the extent that Finlay J held that the source of the obligation changed when it was acquired by the United Kingdom resident executors).” 29. In addition to these authorities, which Mr Kessler submitted failed to provide us with any satisfactory guidance on the approach to be adopted in determining the location of the source of interest and did not support the multi-factorial approach advanced by HMRC, we were referred to Privy Council and Commonwealth authorities which, Mr Kessler contended, did provide a satisfactory solution to the question of identifying the source of interest. 30. In Studebaker Corporation of Australasia v Commissioner of Taxation (1921) 29 CLR an Australian company paid interest on a trade debt arising on the purchase of cars from America under an agreement made in the USA with an American company. Under the relevant legislation income means “ income derived from any source in the State or earned in the State”, and “nothing in the Act shall apply to…. income derived from sources outside the State .”
“Thus in Nathan’s Case and in Murray v Federal Commissioner of Taxation the fact that the income was payable and paid out of Australia did not negative the fact that its source was within Australia. So, here, the attribution of locality to the obligation to pay interest is not decisive. The facts must be examined, and when we find the interest arises from business transacted and wholly carried out in America the conclusion must be that it was not derived from any source in New South Wales.” 31. The South African case of IRC v Lever Brothers [1946] AD 441 considered the principles to be applied in determining the source of income in circumstances in which an English company had sold assets to a Dutch company but had not been paid. The assets of the Dutch company were purchased by a South African company which undertook to pay the debt and interest to the English company. The statutory provision with which the South African court was concerned provided: “gross income” means the total amount which has been received by or which has accrued to a taxpayer from a source within the Union or which is deemed to be within the Union … 32. In his judgment in the case Watermeyer CJ said, at 451: “As a rule, the lender either gives credit to the borrower or transfers to him certain rights of obtaining credit which had previously belonged to the lender and this supply of credit is the service which the lender performs for the borrower, in return for which the borrower pays him interest. Consequently, this provision of credit is the originating cause or source of the interest received by the lender.”
“No business was carried on by Levers in South Africa, no contract was made by them in South Africa, no services were rendered by them in South Africa and no obligation rested on either party was performed or was to be performed in South Africa. In fact there were no activities of any sort by Levers in South Africa except possibly those connected with the flotation of Overseas Holdings in South Africa. Consequently, according to the meaning which, in my opinion has been given to the word “source” by the decisions of the Privy Council and of this Court, the source of income which the Commissioner wishes to tax was not located in South Africa.” 33. A similar issue came before the New Zealand Court of Appeal in Commissioner of Inland Revenue v NV Philips Gloeilampenfabrieken[1955] NZLR 868 (NZ CA). In that case a New Zealand company owed a trading debt to a Dutch company (“the old debt”). It borrowed to pay the old debt and a new debt (“the new debt”) which arose under a loan agreement made in the Netherlands and governed by Dutch law came into existence. The money was not received in New Zealand but was set against the old debt. The New Zealand Revenue sought to tax the Dutch company under legislation that provided that “ all income derived from New Zealand shall be assessable for income tax, whether the person deriving that income is resident of New Zealand or elsewhere ”
“The ordinary meaning of “source” is the starting-point which, when used in relation to physical things, eg a river, is a matter of location. But it is a word of flexible meaning, especially when used of something non-material or abstract. It can, and often does, mean the chief or prime cause of something. What has to be determined is the sense in which the Legislature used the word in [the legislation]. The test – what a practical man would regard as the real source as a practical hard matter of fact – which was formulated in Nathan v Federal Commissioner of Taxation ((1918) 25 CLR 183 ), approved as it has been by the Privy Council in Liquidator, Rhodesia Metals Ltd (In Liqd) v Commissioner of Taxes ([1940] AC 774 ) must be adopted. The answer which I should expect the “practical man” to make to a question – What was the source of the money which was received by the Dutch Company? – would be the loan it made which means in effect the lending of the money – the transaction. The money was paid because the New Zealand company had contracted to pay it; so that, in some sense it can be said that the obligation which had been entered into was the source of the payment made. But one must look behind that. It is seldom that a person makes a payment except under an obligation to do so, and it is, I think, unreal and incompatible with a practical approach to regard the obligation as the source. It is what produced the obligation that is important. … An obligation is seldom, if ever, accepted in vacuo: it requires some transaction to give it birth. The obligation arises from something which has been, or will be, done to warrant it, eg rendering services, making land or other property available. The practical man, in regarding the loan as the source of the payment, would mean, I think, the conduct or the action which was the reason for the obligation being accepted. That was the view taken by Watermeyer, CJ in the South African case of IRC v Lever Brothers that “source” does not mean the quarter whence the moneys come, but the originating cause of the payment being made – the quid pro quo which the recipient of the money gave to entitle him to receive payments from time to time; that in the case of a loan, the lender provides money for the borrower, who, in return, pays interest until such time as he makes repayment.”