The below is a quick snapshot of three recent tax-related developments in the insolvency and restructuring sphere.
Farnborough – appointment of a receiver and tax grouping
The Court of Appeal recently handed down its judgment in the case of Farnborough Airport Properties Co and another v Revenue and Customs Commissioners, which concerned the effect of the appointment of a receiver on tax grouping. Affirming the decision of the Upper Tribunal, the Court held that the appointment effectively denied the parent company control of the subsidiary under receivership, thereby breaking the UK tax group and prohibiting a claim for group relief.
The focus of the judgment was the statutory requirement that, for two companies to be grouped, there must be no arrangements such that, at some time during or after the current period, a person (or persons together) has or could obtain control of the first company and not the second (emphasis added).
- Control: in order for a person to control a company, that person must be able to secure that the affairs of the company are conducted in accordance with its wishes. The Court held that, once the receivers were appointed, the shareholders could no longer intervene and run the company in accordance with their wishes and, therefore, did not control the company.
- Arrangements: the Court held that the term ‘arrangements’ should not be given a restricted meaning and although an ‘arrangement’ requires an element of deliberate planning or co-ordination, this was satisfied here as the receivers’ appointment was deliberate.
The Court did not consider whether the receivers themselves had acquired control of the company to which they were appointed or whether any other entity had control of such company following the receivers’ appointment.
HMRC preferred creditor status
As anticipated in last year’s Autumn Budget, HMRC has launched its consultation “Protecting your taxes in insolvency”, proposing to make HMRC a secondary preferential creditor for taxes paid by employees and customers.
HMRC’s rationale is that, when a business enters insolvency, taxes paid to it in good faith by its employees and customers should continue to fund public services, rather than being distributed to other creditors. However, there is a concern in the market that this change could (i) unnecessarily harm unsecured creditors; (ii) result in increased costs associated with lending, particularly from floating charge lenders; and (iii) lead to additional administrative complexity for insolvency practitioners. The change is particularly surprising, given that HMRC’s preferential status in insolvencies was only recently abolished in 2003.
The closing date for comments is 27 May 2019 and the expectation is that any new legislation in this area will take effect for insolvencies commencing on or after 6 April 2020.
Withholding tax on statutory interest
The Supreme Court recently handed down its judgment in the case of Revenue and Customs Commissioners v Joint Administrators of Lehman Brothers International (Europe), which concerned the withholding tax position for payments of statutory interest. Affirming the decision of the Court of Appeal, the Supreme Court found statutory interest to be “yearly interest” and subject to deduction of UK tax.
The administration of Lehman Brothers International (Europe) (“LBIE”) had resulted in a surplus available for distribution to creditors of approximately £7bn, thereby giving rise to an obligation to pay statutory interest under rule 14.23(7) of the Insolvency Rules 2016. The Supreme Court held that the relevant period for determining whether statutory interest is “yearly interest” is the period during which the loss of the use of money or property by the creditor has been incurred notwithstanding that, in this case, it could not be known at the outset of the LBIE administration (a) whether statutory interest would ever be payable and (b) what the relevant period for calculating any statutory interest payment would be.
In short, if there is over a year between commencement of an administration and the payment of proved debts, a payment of statutory interest will likely constitute “yearly interest” and UK withholding tax may apply to it.
In coming to this decision, the Supreme Court applied Chevron Petroleum (UK) Ltd v BP Petroleum Development Ltd  STC 689, Riches v Westminster Bank Ltd  AC 390 and IRC v Hay (1924) 8 TC 636.