Revenue and Customs v Anson

For double tax relief under a double-tax convention, income taxed in two jurisdictions is the same only if its source is the same under the domestic tax law being applied. A contractual entitlement to receive an entity’s profits does not ordinarily make the entity’s trading profits the taxpayer’s profits. The taxpayer generally must show a proprietary right to the profits as they arise, or an equivalent interest in assets representing them. The court assesses the entity’s legal personality, ownership of assets, business, liabilities, allocation arrangements and related features. Automatic allocation provisions do not convert an entity’s profits into members’ profits where the entity trades as principal and retains the profits subject to reservations and deductions. A separately constituted entity can, unusually, remain tax transparent where the members have the necessary proprietary interest.

George Anson was a UK resident but non-domiciled member of HarbourVest LLC, a Delaware limited liability company treated as fiscally transparent in the United States. He sought double tax relief for US tax paid on his allocated share of HarbourVest’s profits under the UK/US Double Tax Convention of 31 December 1975 (SI 1980/568) and the UK/US Double Tax Convention of 24 July 2001 (SI 2002/2848).

The First-tier Tribunal held that the same profits had been taxed in both jurisdictions. The Upper Tribunal, in a decision dated 3 August 2011, reversed that conclusion and held that the profits belonged to HarbourVest, while Mr Anson had only a contractual entitlement to receive distributions. The appeal concerned the correct same-source test, the legal character of the member’s entitlement, and an application for permission to rely on an exchange of notes relating to the 2001 Convention.

1. Disposition. The appeal was dismissed unanimously. Permission to appeal on the additional ground concerning the UK/US Exchange of Notes dated 24 July 2001 was refused.
2. Article 23 of the UK/US Double Tax Convention of 31 December 1975 (SI 1980/568), and the materially identical provision in the 2001 Convention, required comparison of the profits or income taxed in each jurisdiction. The correct question was whether the source of the taxpayer’s income was the same as the source of the entity’s profits. The Court of Appeal applied the approach in Memec plc v IRC (1998) 71 TC 77.
3. Where a taxpayer’s entitlement arises under a contract, the court must decide whether the contract is itself the source of the profit or merely a mechanism by which an entity transfers a right to receive or retain its profits. A contractual right to receive a distribution is ordinarily insufficient. The taxpayer will generally need to establish a proprietary right to the profits as they accrue, or an interest in assets representing them. Relevant factors include separate legal personality, share capital, the person carrying on the business, whether allocation depends on a decision, liability for debts, ownership of assets and provisions concerning assignment.
4. Foreign law determines the nature and characteristics of the entity and the rights created by its agreement. The question whether those rights produce income of the members for domestic tax purposes is a question of domestic law. The First-tier Tribunal’s conclusion that the profits belonged to the members was therefore a conclusion on domestic tax law, not an unreviewable finding of foreign law. MCC Proceeds Inc v Bishopsgate Investment Trust [1999] CLC 417 did not prevent the Upper Tribunal from reviewing that conclusion.
5. HarbourVest was a separate legal entity, carried on the business as principal and owned its assets. The members had no proprietary interest in those assets. The reservations, set-off provisions, withholding arrangements and other qualifications meant that the amount credited to members was residual. Automatic allocation removed the need for a further resolution but did not alter the source of the profits. The members therefore received distributions out of HarbourVest’s profits, not the same profits taxed in the United States. A separate legal entity can exceptionally be tax transparent, as with the recognised example of a Scottish partnership, but the necessary proprietary features were absent here.
6. The exchange of notes point was raised late, there was a dispute about the mischief addressed which would require further evidence, and the wording was consistent with retaining the same-profits requirement. An intended alteration to Article 23 would have been expressed more directly.

1. Court of Appeal (Civil Division): On 12 February 2013, dismissed the appeal from the Upper Tribunal and refused permission to rely on the additional Exchange of Notes ground.
2. Upper Tribunal (Tax and Chancery Chamber): By decision dated 3 August 2011, allowed the appeal from the First-tier Tribunal, upheld HMRC’s contentions and held that HarbourVest’s profits were not the same profits as those taxed on Mr Anson in the United States.
3. First-tier Tribunal: Held that the same profits had been taxed in the United Kingdom and the United States and that Mr Anson was entitled to double tax relief.