Agassi v. Robinson (Her Majesty's Inspector of Taxes)

The House of Lords considered the construction of sections 555 and 556 of the Income and Corporation Taxes Act 1988 and the related 1987 Regulations, in the context of receipts paid to a non-resident entertainer's controlled foreign company in connection with activities performed in the United Kingdom. The central issue was whether section 555(2) should be given a literal effect so as to impose a duty to deduct basic-rate tax on any payer whose payment had a prescribed connection with a relevant activity, irrespective of the payer's residence or tax presence, or whether a territorial limitation should be implied to exclude payers with no United Kingdom presence.

The majority held that the statutory language of section 555(2) should be given its natural meaning and that no territorial limitation should be implied. The court reasoned that to imply such a limitation would allow easy avoidance of the primary charge created by section 556 and would defeat the clear legislative intendment to tax commercial receipts connected to United Kingdom activities, including receipts paid to entities controlled by the entertainer. The court distinguished the payer's duty to deduct (a collection mechanism) from the entertainer's primary liability and concluded that, on construction, section 555(2) applies to payments satisfying its two statutory conditions (a payment made and a prescribed connection with a relevant activity) irrespective of the payer's foreign status.

Background and facts:

• The appellant (Her Majesty's Inspector of Taxes) challenged the taxpayer Mr Andre Agassi's position that certain overseas payments received by a company he controlled were not caught by the collection and charging provisions for non-resident entertainers and sportsmen.
• Mr Agassi, not resident or domiciled in the United Kingdom, performed in United Kingdom tennis tournaments in the year in question. Payments were made by two foreign companies (Nike Inc. and Head Sport AG) to Agassi Enterprises Inc., a company owned and controlled by Mr Agassi. The payments had a prescribed connection with relevant activities performed in the United Kingdom.

Procedural posture: The Special Commissioners declined to read a territorial limitation into section 555(2); Lightman J in the High Court agreed with the Special Commissioners. The Court of Appeal ([2004] EWCA Civ 1518) reached a different view, leading to this appeal to the House of Lords.

Nature of the claim / relief sought: The Revenue sought to uphold an amendment to Mr Agassi's self-assessment made after a closure notice, asserting that the overseas payments to Agassi's company were within the scope of sections 555 and 556 and therefore taxable and subject to collection by deduction at source.

Issues framed:

• Whether section 555(2) should be given its literal, territorial-neutral effect so as to require any payer whose payment had the prescribed connection to deduct and account for basic-rate tax, irrespective of the payer's residence or United Kingdom presence.
• Whether a territorial limitation should be implied into section 555(2) in light of the general presumption against extra-territorial effect and practical enforcement concerns.
• The relationship between the payer's duty to deduct under section 555(2) (collection machinery) and the entertainer's primary liability under section 556.

Court’s reasoning:

• The majority concluded that the legislative intendment of the Finance Act 1986 (now sections 555–558 of the 1988 Act) was to bring within charge to tax profits or gains connected to United Kingdom activities of non-resident entertainers and sportsmen and payments to controlled companies should not be permitted to defeat that charge.
• The court set out a twofold test for section 555(2): (i) a payment has been made (other than a payment of a kind prescribed as excluded), and (ii) the payment has a connection of the prescribed kind with the relevant activity. If both are satisfied, section 555(2) applies for the purposes of section 556(5), regardless of the payer's identity or residence.
• The court rejected the implication of a territorial exception into section 555(2) because it would frustrate Parliament's evident objective and permit easy tax avoidance by routing payments through foreign payers with no United Kingdom presence.
• The majority acknowledged that practical enforcement against a foreign payer might be difficult, but held that such enforcement difficulties do not justify reading down clear statutory language where the legislative scheme aims to tax such receipts.

Disposition: The appeal was allowed and the statutory language given its natural meaning; costs were awarded to the Revenue here and below.

Appeal allowed. The House of Lords held by a majority that section 555(2) of the Income and Corporation Taxes Act 1988 should be given its natural, literal effect and is not to be read down by an implied territorial limitation excluding payers who neither reside nor carry on trade in the United Kingdom. Where a payment has been made (not being of a prescribed excluded kind) and has a connection of the prescribed kind with a relevant activity, section 555(2) applies for the purposes of section 556(5), and payments to companies controlled by the entertainer may therefore be within the charge under section 556.

Special Commissioners: ruled against the taxpayer's construction. High Court (Lightman J): upheld the Special Commissioners' decision. Court of Appeal: reversed the lower courts ([2004] EWCA Civ 1518). House of Lords: allowed the Revenue's appeal and resolved the construction issue ([2006] UKHL 23).