Summary

The statutory interest to be paid under the Insolvency Rules 1986 r.2.88(7) out of a surplus in an administration was not "yearly interest" within the meaning of the Income Tax Act 2007 s.874. The administrators therefore had no obligation to account for income tax on the interest payments.

Facts

The applicant administrators sought directions as to whether statutory interest payable to creditors under the Insolvency Rules 1986 r.2.88(7) was "yearly interest" within the Income Tax Act 2007 s.874.

The company had been in administration for eight years. There was a substantial surplus in the administration which was to be used to pay statutory interest to creditors under r.2.88(7). If the statutory interest was "yearly interest" within s.874, the administrators would be required to deduct basic rate income tax from the payments made and account for that to HMRC. If it was not yearly interest, no such obligation would exist and payments would be made gross. In Lehman Brothers International (Europe) (In Administration), Re [2015] EWHC 2269 (Ch) it was held that the right to statutory interest under r.2.88 was not a right to interest accruing due from time to time and that it was a purely statutory entitlement arising once there was a surplus after payment of the debts proved and payable only out of that surplus.

Held

(1) The statutory right to interest was sui generis and was not to be equated with a right to interest which accrued over time, Lehman Brothers applied. Accrual signified that a certain sum was being added over time, so that at any given time the amount accrued could be ascertained. A sum which did not in fact become payable unless and until a right arose "at the end of the day" could not be characterised as "accruing". Although statutory interest was "interest" for the purposes of tax legislation, it was interest of a very different nature from that payable on contractual debts, judgment debts or other analogous debts. The right to payment of statutory interest under r.2.88(7) was in the nature of an arrangement statutorily imposed on the creditors for the equitable distribution of the surplus. That was some way away from any of the cases where a payment or commitment to pay interest had been found to be "yearly interest". There was no loan, no investment, no judgment, no period of accrual, no right unless a surplus was established, and no quality or capability of recurrence, Gateshead Corp v Lumsden [1914] 2 K.B. 883, Farmer (Surveyor of Taxes) v Scottish North American Trust Ltd [1912] A.C. 118 and Moss Empires Ltd v Inland Revenue Commissioners [1937] A.C. 785 applied. There was only a moratorium and a scheme of distribution mandated by the statute. No intention to make anything akin to a loan or investment was discernible or to be inferred from the fact of the statutory moratorium, which had nothing to do with the parties' intention. The fact that no interest was payable unless a surplus was available, and the fact that there was no accrual, nor any prospective expectation of it, demonstrated that any interest payable out of surplus had none of the characteristics of "yearly interest" save that payment would, in the instant case, be in respect of a period of over a year, which did not suffice. More generally, the scheme of distribution could not be equated to an arrangement for the payment of yearly interest within s.874. The statutory interest did not have the quality of yearly interest and was not subject to any deduction obligation (see paras 16, 56-62, 73, 78 of judgment).

(2) Statements made on HMRC's behalf in its correspondence and in its Insolvency Manual had caused regrettable confusion. It was unsatisfactory that HMRC should issue inconsistent or confusing statements and fail to involve a relevant specialist team or make proper internal checks when giving formal confirmation of their position, which they had to expect to be relied on. In cases such as the instant, debt could be traded; a change in HMRC's stance could confound the commercial expectations of traders and the market (paras 80-84).