Neutral Citation Number: [2008] EWHC 1511 (Admin)

Case No: CO/5038/2006

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 4 July 2008

Before:
Mr Justice Collins
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Between:

	Japan Post
Japan Post Bank Co Ltd
Japan Post Insurance Co Ltd	Claimants	
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	Commissioners for HM Revenue & Customs	Defendant	
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(Transcript of the Handed Down Judgment of
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Mr D Goldberg, Q.C. & Mr Nikhil Mehta (solicitor advocate) (instructed by Messrs Cleary Gottlieb Steen & Hamilton LLP) for the Claimants 
Mr David Ewart, Q.C.  (instructed by the Solicitor to HMRC) for the Defendants

Hearing dates: 3 June 2008
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Judgment

Mr Justice COLLINS : 

1.	This claim has been said to be highly unusual, largely because the claimants are only entitled to make it because they are recognised as an arm of the Japanese government and so come within Section 232(3) of the Income and Corporation Taxes Act 1988 (ICTA), which concerns tax credits for non-U.K. residents and which provides:-
“Where a qualifying distribution is income of, or of the government of, any sovereign power or of any international organisation, that power, government or organisation shall be entitled to a tax credit in respect of the distribution to the same extent as a recipient mentioned in section 231(1).”
2.	The issue in this claim is whether on its true construction s.824 of ICTA entitles the claimants to what is called a repayment supplement which essentially is an amount representing interest payable because, until the tax credit was paid, the person concerned would have overpaid and so should be compensated for being kept out of his money for however long a period is involved in a particular case.
3.	The facts can be stated very briefly and are not in dispute.  Although there is more than one claimant, they are successors to the original one, which was Japan Post. It was not resident in  the U.K. and, as an arm of the Japanese Government, was entitled to sovereign immunity and so is not liable to pay any U.K. tax.  In the tax years 1997/98 and 1998/99 the original claimant received dividends from U.K. resident companies.  It is not necessary to consider the details of those dividends.  As a result, the claimant was entitled to tax credits and has been paid some, but not all, of those credits.  The amount at issue is substantial, being in the region of £1.7million.
4.	To understand the issue in this claim it is necessary to refer, albeit briefly, to the system which has given rise to tax credits.  At the material times, a U.K. resident company paying a dividend was obliged to pay advance corporation tax (ACT): ICTA s.14.  Such a dividend is known as a ‘qualifying distribution’.  Section 231(1) of ICTA provides as far as material:-
“… where a company resident in the U.K. makes a qualifying distribution and the person receiving the distribution is another such company or a person resident in the U.K., not being a company, the recipient of the distribution shall be entitled to a tax credit equal to such proportion of the amount or value of the distribution as corresponds to the rate of advance corporation tax in force for the financial year in which the distribution is made.”
Section 231(3) Provides:-
“… A person, not being a company resident in the U.K., who is entitled to a tax credit in respect of a distribution may claim to have the credit set against the income tax chargeable on his income … for the year of assessment in which the distribution is made and … where the credit exceeds that income tax, to have the excess paid to him.”
5.	As will, I think, be obvious, generally speaking the U.K. resident taxpayer who is entitled to a tax credit under s.231 will not have paid the amount in question in advance (since he did not pay the ACT) and so there will be no repayment (unless, in a given case, the credit exceeds the amount of income tax paid by him).  By virtue of s.232(3), the claimant is brought within the scope of s.231(1) and so is entitled to tax credits in respect of the dividends paid to it.  But, since the claimant is exempt from payment of income tax it is entitled to be paid the tax credits.
6.	It is to be noted that U.K. resident companies are only entitled to claim tax credits if, broadly speaking, they are exempt from payment of corporation tax (s.231(2)) or come within certain very limited provisions (see s.242).  It is unnecessary to go into further detail, save to say that the exempt categories are not extensive.  They include charities and some other specified entities.  Suffice it to say that  the claimant is to be regarded as a person entitled to a tax credit even though it pays no income or corporation tax and is not resident in the U.K.  It follows that the limitations in respect of companies set out in s.231(2) and the manner in which the credits can be used as set out in s.242 are not applicable.  Mr Goldberg, Q.C. in his most helpful skeleton argument in which he set out the relevant parts of the system of taxation as it applied in this case, said that the position of the claimant is, so far as the right to be paid tax credits is concerned, the same as that of a non-resident individual.  I do not think that is to be assumed.  Non-residents are entitled to tax credits if they come within s.232.  S.232(1) deals with a class of individuals who are entitled to and have claimed a particular relief and are thus treated as if they were resident in the U.K. S.232(2) deals with persons who receive income from a fund which particular provisions of the Act apply to; they are entitled to a tax credit ‘to the same extent as a recipient mentioned in section 231(1)’.  I make this reservation in respect of the use of the word ‘individual’ since, as will become apparent, it may be critical to decide whether this claimant is indeed to be regarded as if it was an individual when we come to consider the terms of s.824.
7.	In 1975 (Finance (No 2) Act 1975 s.46), broadly speaking, interest became payable by a taxpayer by reference to the date of the relevant assessment.  He had to pay on the basis of the assessment and adjustments either way might be made later. Those adjustments might show that there had been an overpayment and so a right to a repayment supplement was introduced.  Since payment of ACT on a dividend could be said (perhaps somewhat artificially) to represent a payment of tax on behalf of the recipient in respect of his own liability, the right to a tax credit arose and so the taxpayer should be treated and so entitled to a repayment supplement in the same way as any taxpayer who had overpaid.
8.	I must now set out the relevant provisions of s.824.  In order to decide on its true construction, it is in my view necessary to consider it in its original form and as amended so as to reach its present form.  As originally enacted, it provided as follows (so far as material):-
“824(1). Subject to the provisions of this section, where –
(a)	income tax has been paid by or on behalf of an individual for a year of assessment for which he was resident in the United Kingdom; and
(b)	A repayment of that tax of not less than £25 is made … after the end of the 12 months following that year of assessment
A repayment shall be increased under this section by an amount (a ‘repayment supplement’) equal to interest on the amount repaid [at a specified rate over a specified period]. ;(2) Subsection (1) above shall with the necessary modifications apply to the payment of the whole or part of a tax credit as it applies to a repayment falling within that subsection of income tax paid in the year of assessment to which the tax credit relates.
(9) Subsections (1) to (8) above shall apply in relation to a partnership, or a United Kingdom trust … or, in the case of a U.K. estate, the personal representatives of a deceased person as such … as they apply in relation to an individual. ”
9.	As is apparent, s.824 thus applied only to U.K. resident individuals.  The section was almost immediately amended to add surtax payments and, by means of a new subsection (1A), to vary the rate of interest applicable to a particular period.  In 1994, the self assessment system was introduced.  Section 59A was inserted into the Taxes Management Act 1970 to bring this into force.  This required amendment to s.824 to cover excess payments on account and payments of surcharges in respect of failures to pay on account (s.59C of the Taxes Management Act).  So far as material, s.824 in its present form reads:-
“(1) Subject to the following provisions of this section, a repayment made … of any of the following, namely –
(a)	an amount paid on account of income tax under section 59A of the Management Act;
(b)	any income tax paid by or on behalf of an individual for a year of assessment;
(c)	a surcharge imposed under section 59C of that Act; and
(d)	a penalty incurred by an individual under any of the provisions of that Act,
shall be increased under this section by an amount (a ‘repayment supplement’) equal to interest on the amount repaid … for the period (if any) between the relevant time and the date on which the order for the repayment is issued.
(2) Subsections (1) above shall with the necessary modifications apply to a payment of the whole or part of a tax credit as they apply to a repayment falling within subsection (1) of income tax paid in the year of assessment to which the tax credit relates.”
As is apparent, the amendment removed subsection (1A) but omitted to change the plurals in s.824(2).  That does not affect its construction.  Section 824(9) was amended and now reads:-
“(9) Subsections (1) to (8) above shall apply in relation to the trustees of a settlement or personal representatives as they apply in relation to an individual...”
10.	Mr Goldberg accepts that the claimant is not an individual and so, if s.824 is limited to individuals, it cannot be entitled to the supplement.  But s.824 is not limited to individuals.  So much is clear both from its heading “Repayment supplements: individuals and others” and from s.824(1)(a).  The heading may, however, have had regard to s.824(9).  It is concerned with income tax and so will relate only to those persons who are liable to pay income tax.
11.	There are four categories of persons who are income tax payers.  These are individuals, personal representatives, trustees and some non-resident companies.  Resident companies pay corporation tax, not income tax.  While the liability to income tax of non-resident companies is very limited, it exists and they are obviously not individuals, nor are they, unlike personal representatives or trustees, to be treated as individuals.
12.	Section 824 as originally enacted and as amended in 1988 was clearly limited to individuals.  While s.232 extended the right to receive tax credits to some non-U.K. residents, it did not in s.232(3) indicate that they should be treated as if they were individuals.  As I have already said, they are merely given the right to receive a credit which is to be calculated on the basis set out in s.231(1), namely one which is ‘equal to such proportion of the amount or value of the distribution as corresponds to the rates of advance corporation tax in force for the financial year in which the distribution is made’.
13.	Mr Goldberg’s submission is beguilingly simple.  He submits that the necessary modifications required by s.824(2) mean that, instead of referring to particular repayments, s.824(1) should read:-
“Subject to the provisions of this section, a payment of the whole or part of a tax credit shall be increased etc”
Since in its 1988 form the section was not concerned with payments made on account but with tax paid, it was deliberately limited to income tax paid by individuals.  Quite why that limitation was considered necessary I do not know nor was either counsel able to provide any explanation.  Equally, when the section was amended in 1994, a distinction was drawn between payments on account, which were not limited in s.824(1)(a) to individuals, and payments of tax which were (s.824(1)(b)).  No explanation for that has been forthcoming, save for the possibility that Parliament may have recognised that it was more likely that overpayments might reasonably have been made on account whereas that was less likely in respect of payments of tax.  But, whatever the reason, the distinction is there and the question is whether the amendments put the claimant into the shoes of a payer on account ((1)(a)) or of a payer of tax ((1)(b)).  Since in its 1988 version the right was limited to individuals and s.232(3) did not state that those such as the claimant should be treated as individuals for the purpose of tax credits, I do not think that there would have been an entitlement to the supplement under s.824.  Thus, as it seems to me, the claim must be based on the argument that in its present form, the section does extend to the claimant in the way submitted.  The modifications suggested by Mr Goldberg would, if correct, have entitled such as the claimant to the supplement even though Parliament had limited the right to individuals in respect of repayments.  It is difficult to see that it would, absent express words, have been appropriate to extend it in the way submitted.
14.	My attention was drawn to the Double Taxation Relief (Taxes on Income)(Japan) Order 1970 SI 1970 No.1948, one of a number of Conventions on relief from double taxation with foreign states.  Article 11(3)(b) provides so far as material:-
“A resident of Japan who receives a dividend from a company which as a resident of the U.K. shall [subject to certain conditions] be entitled to the tax credits in respect thereof to which an individual resident in the U.K. would have been entitled had he received that dividend, and to the payment of any excess of that tax credits over his liability to U.K. tax.”
15.	I do not think that assists.  It does not suggest that Japanese residents should be put in a better position than U.K. resident taxpayers and does not affect the proper construction of s.824.
16.	Mr Ewart submitted that the necessary modifications required by s.824(2) – and he was right to emphasise the word required – are to replace ‘repayment’ with ‘payment’, ‘income tax paid by or on behalf of’ with ‘tax credit paid to’ and ‘for’ with ‘in’ so that the subsection would read:-
“… a payment made … of any of the following namely … any tax credit paid to an individual in a year of assessment.”
I see no reason to believe that the addition of s.824(1)(a) to cover payments on account was  intended to or did confer on those such as the claimant an entitlement to the supplement.  Mr Goldberg submits that to construe the subsection as Mr Ewart would wish is to write in the need to limit it to individuals.  But the extension to such as the claimant could easily have been made clear.  It was not and I see no reason to disagree with Mr Ewart’s approach.
17.	It follows that this claim must be dismissed.