The Commissioners for HMRC v Lomas & Ors (Administrators of Lehman Brothers International (Europe))

Interest need not accrue as a current liability in real time in order to be yearly interest. Retrospectively calculated statutory compensation for the deprivation of money can have the requisite quality of recurrence.

Whether interest is yearly depends on its character and statutory context, rather than solely on the period ultimately covered. Interest imposed for an unlimited period, calculated at an annual rate and capable of continuing throughout a prolonged administration is not analogous to a short-term loan. Statutory interest payable from an administration surplus under Insolvency Rules 1986, rule 2.88(7), was therefore yearly interest for section 874 of the Income Tax Act 2007.

Lehman Brothers International (Europe) entered administration in 2008. Its administration produced a substantial surplus after payment of proved debts. This entitled creditors to statutory interest under rule 2.88(7) of the Insolvency Rules 1986.

HMRC contended that the interest was yearly interest within section 874 of the Income Tax Act 2007. If so, the joint administrators had to deduct basic-rate income tax when making the payments. Hildyard J held that the interest was not yearly interest because it did not accrue prospectively from day to day: [2016] EWHC 2492 (Ch).

HMRC appealed. The central issue was whether retrospective statutory interest, payable only once a surplus existed, could nevertheless be yearly interest.

1. Appeal allowed. The statutory interest payable from the surplus was yearly interest within section 874 of the Income Tax Act 2007. The administrators were therefore required to deduct basic-rate income tax when making the payments.

2. Statutory interest was interest for section 874. Interest is compensation for the deprivation of the use of money. It may arise under contract, statute, judgment, equity or restitution. The fact that a payment is assessed retrospectively and becomes enforceable only on an award does not alter its intrinsic character as interest. [1947] AC 390 established that statutory interest awarded for an earlier period was interest of money.

3. The word yearly did not require a presently enforceable liability accruing prospectively throughout the relevant period. The authorities treated a retrospective calculation as accruing de die in diem for this purpose. The inquiry was instead whether the obligation had the character and capability of a continuing, rather than short-term, liability. The length of the actual period was relevant but not conclusive.

4. The statutory entitlement under rule 2.88(7) arose only if a surplus remained after payment of proved debts. That feature did not make it short-term interest. The obligation was unlimited in duration, was calculated by an annual rate, contemplated an administration that could continue for a prolonged period, and in fact related to a lengthy administration. It satisfied the description of yearly interest in (1854) 1 K & J 216. It was materially different from interest on a fixed short loan or a debt which could be called in at any time.

5. Hildyard J's contrary approach was inconsistent with the reasoning in [1947] AC 390 and with authorities holding retrospectively assessed compensatory interest to be yearly interest. Lady Justice Gloster and Lord Justice David Richards agreed with Lord Justice Patten.

• Court of Appeal (Civil Division): HMRC's appeal was allowed in [2017] EWCA Civ 2124. The court held that the statutory interest was yearly interest for section 874 of the Income Tax Act 2007.

• High Court, Chancery Division, Companies Court: Hildyard J held that the statutory interest was not yearly interest: [2016] EWHC 2492 (Ch).