Summary

Statutory interest payable on proven debts from a surplus in an administration under the Insolvency (England and Wales) Rules 2016 r.14.23(7)amounted to "yearly interest" under the Income Tax Act 2007 s.874. The interest was therefore subject to deductions of income tax.

Facts

The administrators of Lehman Brothers International (Europe) appealed against a decision that statutory interest payable on proved debts in the administration was "yearly interest".

The administration had a substantial surplus after payment of sums owed to creditors. Under the Insolvency (England and Wales) Rules 2016 r.14.23(7), the surplus therefore had to be applied to pay interest on proved debts in respect of the periods during which they had been outstanding since the date the company had entered administration. The rate of interest was determined by the Judgments Act 1838 s.17, namely 8% per annum. The issue was whether the interest was "yearly interest" under the Income Tax Act 2007 s.874. If it was, income tax had to be deducted and paid to HMRC. The statutory interest amounted to approximately £5 billion, and the amount of potential tax was therefore considerable. The judge at first instance found that the interest was not yearly interest because yearly interest had to accrue over time. The Court of Appeal disagreed, finding that there was no such requirement, and that because the interest was compensation for the proving creditors being kept out of their money for a substantial time, it had the requisite long-term quality sufficient for it to be categorised as yearly.

Held

Authorities on "yearly interest" - There was no definition of "yearly interest" anywhere in the 2007 Act, so its full meaning could only be addressed by reference to its historical deployment. The authorities were relevant by analogy because statutory interest payable from a surplus realised in a distributing administration was sui generis. The authorities could broadly be divided into two groups. The first addressed the question of whether interest which accrued over time was properly to be categorised as yearly interest. The second addressed the question of whether an entitlement to money described as interest, but which did not accrue over time, could properly be regarded as yearly interest (see paras 6, 20 of judgment).

Interest which accrued over time - The jurisprudence in relation to the first group of authorities had been reduced to the following five propositions in Inland Revenue Commissioners v Hay 1924 S.C. 521: (a) interest payable in respect of a short loan was not yearly interest; (b) for interest to be yearly, the loan in respect of which it was paid had to have a measure of permanence; (c) the loan had to have the nature of an investment; (d) the loan must not be repayable on demand; (e) the loan had to have a "tract of future time". Those propositions remained the best convenient summary of the jurisprudence about the meaning of yearly interest in the context of interest which accrued over time, whether purely contractual or statutory in origin, Bebb v Bunny 69 E.R. 436, Gosling & Sharpe v Blake (Surveyor of taxes) (1889) 23 Q.B.D. 324, Cooper (A Bankrupt), Re [1911] 2 K.B. 550, Gateshead Corp v Lumsden [1914] 2 K.B. 883, Garston Overseers v Carlisle (Inspector of Taxes) [1915] 3 K.B. 381 and Corinthian Securities Ltd v Cato [1970] 1 Q.B. 377 considered, Hay applied (paras 30, 33).

Interest which did not accrue over time - The second group of authorities was concerned with interest payable after the event as compensation for the payee being kept out of money or property during some earlier period. The interest did not accrue during the period in question. In the instant case, it could not be known during the period in respect of which interest was calculated whether it would be payable at all. The interest was not payable over a period of time; it was payable in a single lump sum. In that respect, it had much more in common with the second group of cases than the first. It could not generally be said from the commencement of an administration whether there would be a surplus out of which statutory interest would become payable. Such surpluses were rare. In determining whether such interest was to be treated as yearly interest, the period of durability which had to be identified was the period in respect of which the interest was calculated. In the instant case, that period was fixed by the date of commencement of the administration and the date upon which the proving creditors were paid their debts, Barlow v Inland Revenue Commissioners 21 T.C. 354, Regal (Hastings) Ltd v Gulliver [1967] 2 A.C. 134, Riches v Westminster Bank Ltd [1947] A.C. 390, Jefford v Gee [1970] 2 Q.B. 130 and Chevron Petroleum (UK) Ltd v BP Petroleum Development Ltd [1981] S.T.C. 689 applied (paras 20, 47-49, 52, 54). The administrators contended that income tax was levied by reference to the source of the relevant income, whereas the only source from which interest under r.14.23 could be said to derive was the combination of a realised surplus and the administrators' decision that it was time to pay it. If that were correct, the second group of cases would have been wrongly decided because the interest under review did not have a source in the sense of some kind of durable investment. The obligation to deduct tax from interest under s.874 did not depend on whether the interest was taxable in the hands of the recipient. It was artificial to regard the source of statutory interest as having anything to do with realisation of the surplus, still less the administrators' decision to pay it. The statutory interest payable was yearly interest (paras 56-59, 61).

Appeal dismissed