First-tier Tribunal (Tax)

[2010] UKFTT 506 (TC)

TC00761

Appeal numbers TC/2009/12230

TC /2009/12231

TC /2009/12232

FIRST-TIER TRIBUNAL TAX

Income Tax –

DECISION NOTICE

Rule 35(2) The Tribunal Procedure (First Tier Tribunal) (Tax Chamber) Rules 2009

Mr Jason Pope (deceased)

Mrs Genevra Pope

Mr Alan Pope

Appellants

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE and CUSTOMS (Income Tax) Respondents

TRIBUNAL: Rachel Short (Chair)

William Haarer

Sitting in public in Exeter on 21 April 2010

© CROWN COPYRIGHT 2010

DECISION

Having heard Mrs Pope on behalf of the Appellants and Mr Conway and Mr Williams for the Respondents, the Tribunal decided that the appeals should be dismissed.

Mrs Pope is appealing against tax assessments on herself, her husband Alan Pope and her son Jason Pope, in respect of payments made under a life assurance policy written in the name of Jason Pope by the Equitable Life Assurance Company (“Equitable”)

The basis of the appeals concerns the correct tax treatment of payments made under that life assurance contract to compensate for a delay in the payment of the life assurance proceeds.

It has been agreed between all the parties that the points of principle were common to all three appeals and that they should therefore be heard together.

Agreed Facts:

Mrs Pope’s son, Jason Pope (“Jason”) was a geologist, employed at the relevant time by Diamond Works Ltd, a mining company in Angola.

On 8 November 1998 it is believed that Jason was abducted by Unita rebels in Angola and nothing has been heard from him since.

Jason had entered into a life assurance policy (the “Life Assurance Policy”) with Equitable dated 15 April 1996 on his own life and in respect of which he was the donee.

After Jason’s disappearance, Mrs Pope was appointed to act on Jason’s behalf under a power of attorney dated 30 January 1998.

After protracted negotiations between Mrs Pope acting on Jason’s behalf and Equitable,  Equitable agreed to make a payment under the Life Assurance Policy of the principal amount insured (£100,000) plus an additional amount, expressed by Equitable as “interest” of £36,425.97.

Payment of this amount was agreed on 29 September 2002 under the terms of a Deed of Discharge signed by Mrs Pope in her capacity as attorney for her son Jason and Mr and Mrs Pope as Jason’s next of kin. The terms of that Deed of Discharge were that payment was to be made to Mr and Mrs Pope as Jason’s next of kin.

In fact the proceeds of the Life Assurance Policy were transferred almost immediately into a bank account in the name of Jason Pope. On the 8 November 2002 the monies in that account were transferred by Mrs Pope in her capacity as Jason’s attorney into an offshore account in Jason’s name.

Mrs Pope entered into a deed to swear to Jason’s death and obtain a grant of representation in respect of Jason’s estate on 2 June 2005, although no hard evidence of Jason’s death has ever been produced. It was only at this stage that Mrs Pope accepted that her son was dead.

The parties agreed that this hearing should consider only the points of principle in dispute.

The Arguments:

There are three points at issue between the parties: whether the “Extra Payment” of £36,425.97 should be treated as exempt from tax under s 329 Income and Corporation Taxes Act 1988 (“TA 1988”)  (now s 751 Income Tax (Trading and Other Income) Act 2005, “ITTOIA”); whether the Extra Payment can properly be treated for tax purposes as a payment of interest; and if the Extra Payment is a payment of interest, whether it falls to be taxed on Mr and Mrs Pope or as part of the estate of Jason Pope in accordance with s 59(1) TA 1988, (now s 371 ITTOIA).

Can the Extra Payment be treated as exempt under s 329 TA 1988?

Mrs Pope asked the Tribunal to consider, as a matter of equity, whether the exemption from tax provided for damages for personal injury and death under s 329 TA 1988 should be extended to payments such as the one which had been paid out under Jason Pope’s Life Assurance Policy.

Mrs Pope accepted that the law as currently drafted did not seem to extend to this type of payment, however she contended that it was open to the Tribunal to extend the current exemption to include payments under life assurance contracts.

Mrs Pope referred us to an Issue Paper recently published by the English and Scottish Law Commission considering some aspects of insurance contract law and the need for reform in this area. This included evidence that in applying current law in this area the Financial Service Ombudsman does not apply the law in circumstances where it is considered to give an unfair result.

Mrs Pope argued that on the basis of jurisprudence it was possible to interpret existing legislation in order to give a just, fair and consistent result and this was in line with the Law Commission’s recommendations in the field of non life insurance.

On that basis, in Mrs Pope’s view, it should be open to this Tribunal to interpret s 329 TA 1988 to include payments made under life assurance contracts such as the payment made by Equitable to Jason.

HMRC argued that Mrs Pope was requesting a change of law which was outside the remit of the Tribunal. Any such law change could only be requested through channels such as the Law Commission.

HMRC did not consider that it was possible to interpret the existing legislation in a way which was sufficiently broad to include payments under life assurance contracts.  HMRC referred to the authority of Black Clawson International Ltd v Papierwerke A.G ([1975] UKHL 2), to suggest that where the legislation is clear, there is no room for an interpretation which moves away from the intended application of the law.

Can the Extra Payment be treated as a payment of something other than interest for tax purposes?

Both HMRC and Mrs Pope referred to the UK case authorities which consider the definition of interest, such as re Euro Hotels (Belgravia) Ltd ([51] TC 293) and Westminster Bank Limited v Riches ([28] TC 159) although they drew different conclusions from these authorities.

Both HMRC and Mrs Pope agreed that the test of whether a payment is truly interest is a test of substance as well as form. The fact that a payment is described as a payment of interest is not enough in itself to decide the character of the payment.

The Tribunal was referred, by both Mrs Pope and HMRC to a number of letters in which both Equitable and Mrs Pope referred to the Extra Payment as a payment of interest. Mrs Pope argued however that she was using the term interest not in a technical sense, but merely in a commercial sense as part of the negotiations with Equitable.

Mrs Pope argued that although the Extra Payment might be described as interest in form, in substance it was a payment of compensation, relating to difficulties and traumas arising from the late payment under the Life Assurance Policy.

Mrs Pope argued that the Extra Payment was a payment of a capital nature, being a lump sum payment, which could not be treated as a trading receipt and that this was the way in which the Courts had viewed compensation payments in general.

Mrs Pope suggested that since the Life Assurance Policy referred to interest being due at a rate which was in Equitable’s “absolute discretion”, that rate could therefore be zero. The interest payments were ex-gratia and therefore could not be treated as interest because they were not based on a contractual obligation to pay.  She also stated that there is no presumption in law that interest should be payable. Interest is only payable to the extent that there is a contractual agreement for interest to be charged.

Mrs Pope’s other technical argument was that in order for interest to be due, there has to be a debt outstanding and that given that Jason’s death was not confirmed at the date when the Extra Payment was made, there was no debt under the Life Assurance Policy in respect of which interest could run. Interest cannot be back-dated and therefore payments made referring to the assumed date of Jason’s death in November 1998 could only be compensation for delay in payment but not true interest.

Finally, Mrs Pope said that all of the case authorities cited dealing with the definition of interest should be distinguished from her case because they deal with interest payments in a commercial context and not in the circumstances of someone’s death.

HMRC referred the Tribunal to the authorities also cited by Mrs Pope but in particular the definition of interest in the Westminster Bank Limited case and the test referred to by Megarry J in Euro Hotels; there must be a sum of money due to the person entitled to receive the interest by reference to which the interest is ascertained. In their view these tests were met: there was a sum of money due (the £100,000), the interest was calculated by reference to that sum, (as reflected in the Deed of Discharge), for the period from 8 November 1998 until 4 October 2002 and the payment of interest was made to the persons entitled to the debt, Mr and Mrs Pope.

HMRC referred to the correspondence between Mrs Pope and Equitable (particularly the letters of 3 July 2002, 13 September 2002, 27 August 2002, and 26 Sept 2002) to which the Tribunal were referred, as evidence for the fact that Equitable certainly believed the payments to be correctly characterised as interest and that Mrs Pope herself referred to the Extra Payment as an interest payment in that correspondence on a number of occasions.

If the Extra Payment is a payment of taxable interest, who is liable for the tax on that payment?

In accordance with s 59(1) TA 1988 (now s 371 ITTOIA) the person who is liable to tax on interest is the person who receives or is entitled to the interest.

35. Mrs Pope argued that the interest payment should be treated as owned for tax purposes by the estate of her son Jason Pope because he was both entitled to and received the interest.

36. He was named as the donee under the Life Assurance Policy and the terms of the Deed of Discharge did not override the Life Assurance Policy, they were merely additional conditions which had to be fulfilled in order to obtain payment under the Life Assurance Policy. Jason was the person who was entitled to the Extra Payment.

37. The funds paid by Equitable had been transferred directly into an account in her son’s name, initially in the UK and then offshore, as evidenced by the payment instructions signed by Mrs Pope on 29 September 2002 and the account opening documents dated 16 October 2002. They should not therefore be treated as sums to which she or her husband had access.  She viewed them as sums held on trust for her son, whom she still believed to be alive. The funds were not received by Mr or Mrs Pope, they were transferred directly to Jason’s estate.

38. Mrs Pope referred to authorities such as Aplin v White (H M Inspector of Taxes)  ([49] TC 93) and Dewar v CIR  ([19] TC 561) concerning the tax liabilities of individuals who claimed they had no “entitlement” to the payments of interest in question.

39. In Mrs Pope’s view she and her husband had no “entitlement” to this income until the Grant of Representation was made over Jason’s estate in June 2005.

40. HMRC argued that, despite the fact that Jason was the donee under the terms of the original Life Assurance Policy, the Deed of Discharge was a separate contract which over-rode and cancelled that contract.

41. It was clear that the beneficiaries under the Deed of Discharge were Mr and Mrs Pope as Jason’s next of kin, they were therefore the persons on whom the liability to pay tax on the interest payments fell. On the terms of the Deed of Discharge Mr and Mrs Pope were entitled to the Extra Payment.

The decision:

42. Both Mrs Pope and HMRC provided clear and cogent arguments in respect of a dispute which had been on going between them for some time.

43. The Tribunal had some sympathy for Mrs Pope’s position and were impressed with the manner in which she presented her carefully thought out arguments in respect  of what had clearly been a very traumatic experience. They could not however comply with her suggestion that the Tribunal change the law in this area: it is clearly not within the Tribunal’s powers to make changes to the law.

44. Nor did the Tribunal think that the current legislation could be interpreted sufficiently widely to enable the result which Mrs Pope was seeking to achieve. The wording of the relevant section, (s 329 TA 1988, now s 751 ITTOIA) was clear and payments under a life assurance policy were of a different kind than damages payments made in respect of personal injury or death.  This is despite the fact that the reason for the payment (death) could be the same in both cases.

45. On the second point, the Tribunal agreed with HMRC that the Extra Payment fulfilled all of the requirements to be treated as a payment of interest and considered that there was good evidence from the correspondence to which the Tribunal had been referred, that both Equitable and Mrs Pope had assumed that this was the correct characterisation of the payment. For example in her letter to Equitable of 27 August 2002 Mrs Pope wrote;

“I am therefore requesting a return of all premiums paid since that date, the sum assured of £100,000 and interest compounded from that date to the date of receipt of monies due”.

46 The labelling of the payment as interest is not the definitive test, but here, in addition, all of the relevant conditions referred to in the Euro Hotels case were satisfied in respect of the Extra Payment. The Extra Payment was made by reference to the Death Benefit as defined in the Deed of Discharge. Under that agreement there was a specific sum owing from an agreed date and the Extra Payment was calculated by reference to that sum. The Extra Payment was payable to the persons to whom the debt was due, Mr and Mrs Pope as Jason’s next of kin.

47. While it might be correct to describe the Extra Payment as a payment of compensation, as Mrs Pope considered it to be, that does not mean that it cannot also be treated as a payment of interest. The authorities cited such as the Westminster Bank case make it clear that a sum awarded as interest does not lose its character as interest just because it is awarded as compensation.

48. The Tribunal did not accept that the interest payments could properly be treated as ex-gratia. The terms of the Life Assurance Policy clearly contemplated that interest would be payable in respect of late payment of claims, the fact that the rate to be imposed was discretionary did not alter that fundamental contractual entitlement.

49. At the time when the Extra Payment was agreed between Mrs Pope and Equitable an assumed date of death for Jason and therefore an assumed due date for payment under the Life Assurance Policy were agreed. As a result there was a specific debt to which the payment related and interest had not been “back dated” to a period when the debt was not in existence.

50. Finally, the Tribunal concluded that persons who were taxable on the Extra Payments made under the Deed of Discharge were Mr and Mrs Pope and not the estate of Jason Pope.

51. The effect of the Deed of Discharge was as a stand alone contract which nullified the terms of the original Life Assurance Policy.  Recital G to the Deed of Discharge states that “The Society and the Attorney and the Next of Kin have agreed to effect payment of the Death Benefit under the terms of this Deed” and clause 2 states “By giving effect to payment of the Death Benefit to the Next of Kin the Society shall be making a full and final discharge of all legal and beneficial interests under the Policy”.

52. The Deed of Discharge was intended to be, and did operate as, a stand alone deed which overrode the original Life Assurance Policy.

53. The persons to whom payment was due under the Deed of Discharge and who were therefore “entitled” to the interest for the purpose of s 59(1) TA 1988 were Mr and Mrs Pope as Jason’s next of kin. The fact that payment had been immediately passed on to an account in the name of Jason Pope, and that Mrs Pope considered herself to be acting as a trustee for her son, did not alter the legal entitlement of Mr and Mrs Pope to that payment.

54. In this regard the position of Mr and Mrs Pope could be distinguished from cases such as Dewar in which interest was disclaimed before any entitlement arose.

55. As a result of the direct transfer of the sums to an account in Jason’s name, Mr and Mrs Pope had arguably not “received” the Extra Payment, but that is not enough to take them outside the taxing provisions of s 59(1) as the persons legally entitled to the payment.

56. This was a hearing to agree points of principle and the Tribunal has concluded on that basis that the appeals should be dismissed. The Tribunal did not consider the quantum of tax payable by the relevant parties. It is for the parties to agree the quantum of tax due and if they cannot reach agreement to revert to the Tribunal.

 This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

TRIBUNAL JUDGE

RELEASE DATE: 15 October 2010