Two taxpayers have won their case at the Court of Appeal (CoA) concerning an extra-statutory concession (ESC B18) relating to non-UK resident discretionary trusts. The two taxpayers had always been UK tax resident and the discretionary trust had always been non-resident, the trustees were based in Guernsey. The trust was set up by a company the two taxpayers were directors of at the time. The trust then earned UK source interest income and paid UK tax on that UK source income. From the net amounts the trusts then earned overseas bank interest income.
The trusts then sought to distribute the income to the beneficiaries. An accountant, on behalf of the taxpayers and Guernsey trustees, wrote to HMRC to request confirmation that a tax credit would be available to the taxpayers for the entire tax that the trustees had paid over. Critically, the accountants stated that the credit would be for all tax ever paid by the trustees and would not be limited to a six-year period before the end of the tax year in which the payment was made. HMRC disagreed and said that their general practice was to only give credit for the tax paid in the last six years.
The trustees nevertheless distributed the funds to the two taxpayers and each taxpayer made claims for tax credits for the all the tax paid irrespective of when it was paid. HMRC disallowed the claims for the earlier periods and the taxpayers sought a judicial review. The High Court sided with HMRC and dismissed the taxpayers’ case. The taxpayers appealed to the CoA who have now found in favour of the taxpayers, holding that a fair reading of the extra-statutory concession meant that the time limit was not applicable as this is not how the hypothetical ‘ordinarily sophisticated taxpayer’ would interpret the extra-statutory concession. The possibility that the time limit could have breached EU law also pointed in the taxpayers’ favour when considering how to interpret the extra-statutory concession.
The decision can be found at: Hugh Murphy & Anor. v The Commissioners for HMRC – Find case law (nationalarchives.gov.uk)
This is a good result for the taxpayers concerned and any individual that may be in receipt of trust income from overseas trusts that have paid UK tax on UK source income. While this is a fairly rare occurrence the judgement confirms that HMRC’s practices for many years had not been in accordance with its own issued extra-statutory concessions that do give rise to an ‘enforceable substantive legitimate expectation’.
Please contact us if you have any questions regarding income tax or the treatment of trust income on either the trustees or beneficiaries.
