England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		17/03/2004

Mr Justice Lightman:

INTRODUCTION

1. This is an appeal by the appellant Mr André Agassi ("Mr Agassi") against a decision of the Special Commissioners ("the Decision") handed down on the 29^th July 2003. By the Decision, the Special Commissioners dismissed the appeal in principle by Mr Agassi against amendments to assessments for the years 1998/1999. The issue of law raised on this appeal is whether Mr Agassi can be assessed to income tax under section 556 of the Income and Corporation Taxes Act 1988 ("the 1998 Act") in respect of payments connected with his activities here as a sportsman made by foreign companies with no tax presence in the United Kingdom to the foreign company with no tax presence here which Mr Agassi owns.
2. Mr Agassi is an international tennis player ordinarily resident and domiciled outside the United Kingdom ("the UK"). During the relevant tax years he was a resident of the USA. Like many sportsmen in his position: (1) he set up a company, Agassi Enterprises Inc. ("the Company") controlled by himself and through the Company he entered into endorsement contracts with two manufactures of sports clothing and equipment, Nike Inc ("Nike") and Head Sports AG ("Head") neither of which is resident or has a tax presence in the UK; (2) he comes to the UK for a limited number of days a year in order to play in tournaments such as Wimbledon; and (3) he receives from those manufacturers payments made to the Company which derive (at least in part) from playing in those tournaments.
3. On the 15^th November 1999 Mr Agassi submitted a UK self assessment tax return which showed a loss in the UK of £63,689 on a gross income of £54,601. This included endorsement income of £7,206 from Head and £35,755 from Nike.
4. On the 6^th December 1999 the Inland Revenue ("the Revenue") opened an enquiry under section 9A of the Taxes Management Act 1970 ("the TMA") and on the 7^th April 2000 the Revenue issued a closure notice under section 28A(5) of the TMA based (in part) on income calculations of £23,750 from Head and £102,158 from Nike. The closure notice set out a charge of £27,520.40 and a notice of Revenue Amendment under section 28(4) of the TMA was issued on the 2^nd June 2000 in accordance with that figure.
5. Mr Agassi appealed against the notice of Revenue Amendment and an appeal proceeded before the Special Commissioners. The Commissioners dismissed the appeal. Mr Agassi now appeals against that dismissal to the High Court.

LEGAL FRAMEWORK

6. Section 18(1)(a)(iii) of the 1988 Act provides that tax is to be charged under Schedule D in relation to gains arising or accruing?

"(iii) to any person, whether a Commonwealth citizen or not, although not resident in the United Kingdom … from any trade, profession or vocation exercised within the United Kingdom."

7. It is common ground that a charge is thereby imposed on the gains irrespective of (1) the residence or nationality of the recipient; (2) where the payment is made; and (3) whether the payment is made by a person with any connection with the UK. The scope of the section is however narrowly confined. The payment has to be made to the person to be charged and the payment has to be made in respect of gains made from his trade exercised within the UK. There was also (in the absence of provision to counter it) scope for evasion of tax (in particular) by sportsmen and entertainers because at the time that the precursor to section 556 was enacted payment of tax pursuant to Schedule D Cases I and II was required to be made on a preceding year basis and sportsmen and entertainers could come here, earn, get paid and leave before and without ever paying the tax charge. To fill the gaps exposed and counter the risks of evasion, Parliament enacted Schedule 11 Finance Act 1986 now replaced by the 1988 Act Part XIII, Chapter III, which embraces sections 555 to 558.
8. Sections 555 and 556 (so far as material) read as follows:

"ENTERTAINERS AND SPORTSMEN

555 Payment of tax

(1) Where a person who is an entertainer or sportsman of a prescribed description performs an activity of a prescribed description in the United Kingdom ("a relevant activity"), this Chapter shall apply if he is not resident in the United Kingdom in the year of assessment in which the relevant activity is performed.

(2) Where a payment is made (to whatever person) and it has a connection of a prescribed kind with the relevant activity, the person by whom it is made shall on making it deduct out of it a sum representing income tax and shall account to the Board for the sum.

(3) Where a transfer is made (to whatever person) and it has a connection of a prescribed kind with the relevant activity, the person by whom it is made shall account to the Board for a sum representing income tax….

(6) This section shall not apply to payments or transfers of such a kind as may be prescribed….

(8) Where in accordance with subsections (2) to (7) above a person pays a sum to the Board, they shall treat it as having been paid on account of a liability of another person to income tax or corporation tax; and the liability and the other person shall be such as are found in accordance with prescribed rules….

556 Activity treated as trade etc and attribution of income

(1) Where a payment is made (to whatever person) and it has a connection of the prescribed kind with the relevant activity, the activity shall be treated for the purposes of the Tax Acts as performed in the course of a trade, profession or vocation exercised by the entertainer or sportsman within the United Kingdom, to the extent that (apart from this subsection) it would not be so treated.

This subsection shall not apply where the relevant activity is performed in the course of an office or employment.

(2) Where a payment is made to a person who fulfils a prescribed description but is not the entertainer or sportsman and the payment has a connection of the prescribed kind with the relevant activity—

(a) the entertainer or sportsman shall be treated for the purposes of the Tax Acts as the person to whom the payment is made; and

(b) the payment shall be treated for those purposes as made to him in the course of a trade, profession or vocation exercised by him within the United Kingdom (whether or not he would be treated as exercising such a trade, profession or vocation apart from this paragraph)….

(5) This section shall not apply unless the payment or transfer is one to which section 555(2) or (3) applies, and subsections (2) and (3) above shall not apply in such circumstances as may be prescribed."

9. Pursuant to the 1988 Act, the Income Tax (Entertainers and Sportsmen) Regulations 1987 ("the Regulations") in Regulation 3(2) prescribes the connection between the payment and the activity for the purposes of sections 555 and 556:

"a payment or transfer made for, [or] in respect of, or which in any way derives either directly or indirectly from the performance of the relevant activity has a connection of the prescribed kind with the relevant activity;"

and in Regulation 6 prescribes the relevant activity:

"(1) Subject to this regulation, any activity performed in the United Kingdom by an entertainer (whether alone or involving others) of any of the descriptions in paragraph (21 is an activity of a prescribed description ' relevant activity') for the purposes of … these Regulations;

(2) a relevant activity to which paragraph (1) refers is an activity performed in the United Kingdom by an entertainer in his character as an entertainer on or in connection with a commercial occasion or event…"

10. It is common ground that, if the 1988 Act did not include section 556(5), Mr Agassi could be assessed to income tax under section 556 of the 1988 Act in respect of payments connected with his activities here as a sportsman made by foreign companies to the Company. But Mr Agassi contends that the liability to such assessment is precluded by the provisions of that subsection.
11. According to Mr Agassi: (1) section 556(5) provides that section 556 does not apply unless the payment is one to which section 555(2) applies; (2) section 555(2) does not apply to a payment made by a person who has no tax presence in the United Kingdom; and accordingly (3) Mr Agassi cannot be assessed in respect of the payments made by Nike and Head.
12. In the course of the hearing before the Special Commissioners and in the Decision various alternative constructions and applications of section 556(5) were canvassed. The exercise required is however in my judgment reasonably straightforward. Section 556 provides for treating the activity of sportsmen and entertainers as a trade and attributes a payment irrespective of to whom it is made as his income. Section 556(5) provides that section 556 shall not apply to a payment unless it is a payment to which section 555(2) applies. The question accordingly arises whether the payments by Nike and Head in this case were payments falling within section 555(2). Section 555 requires those making a payment to a non-resident sportsman or entertainer which has the prescribed connection with a relevant activity to deduct income tax and account for it to the Revenue. On the face of it the payments made in this case fall within the language used. But Mr Agassi argues that the 1988 Act should not be construed as biting and imposing any obligation to account on a foreigner making the payment who has no connection with the UK. For this contention Mr Agassi relies on the decision of the House of Lords in Clark v. Oceanic Contractors 56 TC 183. The House of Lords held in that case that there was to be implied into the PAYE collection mechanism a territorial limitation. The authoritative statement of principle is to be found in the speech of Lord Wilberforce at p.227-8. Lord Wilberforce said:

"Returning to s.204 of the Act of 1970, the Respondent company's contention is that though expressed in general terms, it must be limited in some way, limited, it suggests, by reference to the territorial principles of legislation. There is no doubt of the existence of such a general principle. 'English legislation is primarily territorial' (per the Earl of Halsbury in Cooke v Charles A. Vogeler Company [1901] AC 192, at page 107) or 'prima facie territorial' (per Brett L.J. in Ex parte Blain (1879) 12 Ch D 522, at page 526). And the principle was expanded in the same case by James L.J. in often quoted words. There is, he said a

'broad, general, universal principle that English legislation, unless the contrary is expressly enacted or so plainly implied as to make it the duty of an English Court to give effect to an English statute, is applicable only to English subjects or to foreigners who by coming into this country, whether for a long or a short time, have made themselves during that time subject to English jurisdiction… But, if a foreigner remains abroad, if he has never come into this country at all, it seems to me impossible to imagine that the English legislature could have ever intended to make such a man subject to particular English legislation'.

Lord Herschell applied this principle to income tax in Colquhoun v. Brooks (1889) 14 App Cas 493, at page 504 in these words: 'The Income Tax Acts, however, themselves impose a territorial limit, either that from which the taxable income is derived must be situate in the United Kingdom or the person whose income is to be taxed must be resident there'. This was a simple statement about liability to pay income tax and as such is still broadly correct. But since 1889 many extensions have been made in the law, and successive statutes must be examined to see what limit has been imposed in particular cases."

13. Lord Scarman (at page 221) said that the territorial principle is simply a rule of construction to be applied unless the contrary is expressly enacted or plainly to be implied.
14. The principle is accordingly broadly correct that English legislation (and in particular English tax legislation) is to be construed as territorial, but on many occasions statutes have been held on their true construction to have extra territorial effect and it is necessary to see what limit is imposed in case of the provisions of the 1988 Act in question on the liability of the person making the payment to account for part of that payment to the Revenue and for this purpose why such a limitation should be so imposed.
15. The context in this case, as it appear to me, is critical. The context is: (a) legislation imposing a charge for income tax on non residents carrying on entertainment and sporting activities here and which by section 18(1)(a)(iii) imposes a charge on the entertainer or sportsman irrespective of the connection of the person making the payment with the UK; and (b) legislation which intends by sections 555 and 556 to extend the ambit of the charge created by section 18(1)(a)(iii) and prevent avoidance and evasion. Read in the context, it is clear that, even as the absence of any connection of the person making the payment with the UK is irrelevant for the purposes of section 18(1)(a)(iii), so it also must be irrelevant for the purposes of the extension of its ambit by section 555(2). This conclusion is reinforced by a further consideration. Section 18(1)(a)(iii) (as I have already said and as is common ground) operates to create a charge on the person receiving the payment irrespective of the identity of the person making the payment. It is common ground that section 556 subjects non-residents to tax, if the payment is made by an English company or a foreign company with a tax presence here. The question raised is whether they are intended to be excused from liability if instead they are paid by a foreign company with no tax presence here. In my judgment it would be absurd to attribute to the legislature the intention that liability could in any and all cases be avoided by the simple expedient of channelling the payment through a foreign company with no tax presence here. If this were the case, the tax would effectively become voluntary.
16. As it seems to me, in the case of sections 555 and 556, the plain and obvious intention of the legislature was to impose an obligation on the person making the payment irrespective of his tax presence here. Reading section 555(2) in the context of the legislation as a whole and of its evident purpose, the 1988 Act manifests the intention that section 555(2) shall impose liabilities and obligations on parties with no tax presence in the UK who make the connected payments and therefore in this case on Nike and Head, and accordingly section 556(5) affords Mr Agassi no escape route from liability. The liabilities imposed on Nike and Head may prove unenforceable, but that does not mean that section 555(2) does not apply to the payments in question. Section 555(2) applies to the payments and the duty is imposed on Nike and Head to pay. That is sufficient to trigger section 556.
17. For these reasons I dismiss this appeal.