Revenue & Customs v Bank of Ireland Britain Holdings Ltd

Tax legislation must be construed purposively, but a court cannot correct clear and unambiguous deeming provisions merely because their application produces an anomalous fiscal result. Under section 730A of the Income and Corporation Taxes Act 1988, deemed interest on a sale and repurchase transaction arises from a deemed loan by the interim holder. It is therefore taxable in the hands of that interim holder, even where a third party receives the repurchase price. The statutory source of the deemed interest cannot be transferred by treating the payment as part of the repurchase price or by assigning the right to receive it alone. For section 338(5)(b), the value and sufficiency of consideration for a deemed manufactured dividend are assessed by reference to the real-world arrangements and obligations, not by entering an artificial deemed transaction.

The Commissioners for Her Majesty’s Revenue and Customs appealed from a decision of the Special Commissioners concerning a tripartite securities sale and repurchase scheme involving Bank of Ireland Britain Holdings Ltd, Bank of Ireland, Birkdale and Portrush. Dividends were paid while the securities were held by Bank of Ireland and subsequently by the respondent. The statutory provisions deemed a manufactured overseas dividend to have been paid by the respondent and increased the repurchase price for the purposes of section 730A.

The issues were whether the resulting deemed interest was taxable in the hands of the respondent or Bank of Ireland, and whether the deemed manufactured overseas dividend was deductible as a charge on income.

1. Deemed interest. The appeal was dismissed on the first issue. Section 730A(2)(a) treats the price difference as interest paid by the repurchaser on a deemed loan from the interim holder. The statutory language identifies the interim holder as the deemed lender and does not deem the loan to be made by the person who receives the repurchase price.
2. The deemed interest is a wholly notional payment. It is quantified by reference to the repurchase price, but section 730A(3) shows that it is not itself part of that price. The deemed loan supplies the source linking the notional interest to the applicable charging provisions. A direction to pay interest, or an assignment of the right to receive interest without transferring the underlying loan, would not transfer the taxable source.
3. The resulting potential double taxation and fiscal anomaly did not justify a different construction. Parliament could have deemed part of the repurchase price to be interest or deemed the loan to have been made by the reseller, but had done neither. The deemed interest was therefore income of Bank of Ireland, not of the respondent.
4. Deductibility. The deemed manufactured overseas dividend was deductible. Section 338(5)(b) concerns the consideration for the real-world transactions and obligations undertaken by the relevant person. Since the respondent received valuable and sufficient consideration for those transactions, the statutory condition was satisfied. The Revenue’s proposed analysis of the artificial deemed world was rejected.
5. Section 737A(5)(a), which deems the obligation to pay the manufactured dividend to arise under the arrangements for the transfer of the securities, supported assessing consideration by reference to the actual arrangements. Section 125(2)(b) was not engaged because all consideration in money or money’s worth for the respondent’s actual obligations had been brought into account. The appeal was dismissed.

• High Court (Chancery Division): dismissed the Revenue’s appeal from the decision of the Special Commissioners released on 6 June 2006.