Agassi v HM Inspector of Taxes

The Court of Appeal allowed the appeal. The central legal question was whether section 555(2) of the Income and Corporation Taxes Act 1988, which imposes a duty on payers to deduct tax on payments connected with entertainers' or sportsmen's activities in the United Kingdom, has extraterritorial effect and so applies to foreign payers with no UK tax presence. The court held that the territoriality principle is a strong rule of statutory construction and, absent clear words to the contrary, legislation imposing a duty to collect or account for tax should not be read as applying extraterritorially.

The court concluded that the special scheme for entertainers and sportsmen in sections 555 and 556 was primarily a collection mechanism and that its language did not clearly displace the territoriality principle so as to impose the section 555(2) collection obligation on payers with no UK presence. Because section 555(2) did not apply to the foreign payers (Nike and Head), section 556(2) did not operate to treat the appellant as the person to whom the payments were made. The appeal was therefore allowed and the appellant was not chargeable on the payments made to his wholly-owned foreign company.

The appellant, an internationally resident tennis player ordinarily resident and domiciled outside the United Kingdom, challenged tax assessments based on payments made to a company he controlled. The company (Agassi Enterprises Inc) received endorsement payments from two foreign manufacturers (Nike Inc and Head Sports AG). The Special Commissioners had held, and Mr Justice Lightman had upheld on different grounds, that the appellant could be assessed to UK income tax because sections 555 and 556 of the Income and Corporation Taxes Act 1988 made the payments attributable to him.

Nature of the claim: challenge to the view that payments made to a controlled foreign company were to be treated as made to the entertainer/person for UK tax purposes by virtue of ss 555–556, and that payer obligations under s 555(2) applied to foreign payers with no UK tax presence.

Procedural history: decision of the Special Commissioners was upheld by Lightman J in the Chancery Division; appeal was heard in the Court of Appeal (Buxton LJ, Sedley LJ, Jacob LJ).

Issues framed:

• whether s 555(2) should be construed as imposing a collection obligation on payers with no UK tax presence (extraterritorial effect);
• whether s 556(2) could treat payments made to a controlled company as made to the entertainer where the payer was outside the UK;
• the role of the territoriality principle (as explained in Clark v Oceanic Contractors Inc) in construing taxing and collection provisions;
• the relevance of the consolidating nature of the 1988 Act and the purpose of the Schedule 11 scheme introduced by the Finance Act 1986.

Court's reasoning: the court analysed the statutory scheme and the Regulations, emphasising that the territoriality principle is a longstanding and powerful rule of statutory construction particularly relevant to taxing or collection provisions. The court rejected the Revenue's argument that the purpose of Schedule 11 was to extend the charge to tax such that s 555(2) must apply extraterritorially, noting the legislative history and consolidating character of the 1988 Act and the absence of clear words displacing the territoriality principle. The penal and potentially unenforceable character of the collection obligation against foreign payers was a further reason to apply the territoriality principle. The court concluded that s 555(2) did not extend to Nike and Head and therefore s 556(2) did not attribute the payments to the appellant. The appeal was allowed and a declaration made to that effect.

Wider comment: the court observed that while Parliament might in future legislate to extend collection obligations extraterritorially, it had not done so in the enacted scheme and courts should not rewrite taxing statutes to produce that effect.

Appeal allowed. The Court of Appeal held that section 555(2) of the Income and Corporation Taxes Act 1988 should not be given extraterritorial effect absent clear words to that effect. Applying the territoriality principle and having regard to the consolidating character of the 1988 Act, the court concluded that the collection obligation in s 555(2) did not apply to foreign payers with no UK tax presence, and therefore section 556(2) did not treat payments made to the appellant's controlled foreign company as payments to him for UK tax purposes. The appellant was not chargeable on those payments.

This appeal was from the decision of Mr Justice Lightman in the High Court of Justice, Chancery Division, which had upheld a decision of the Special Commissioners. The Court of Appeal ([2004] EWCA Civ 1518) allowed the appeal and reversed Lightman J's conclusion that sections 555 and 556 rendered the appellant taxable in respect of payments to his controlled foreign company. (The Special Commissioners' citation is not given in the judgment.)