Murphy & Anor v Revenue And Customs [2023]: Landmark Interpretation of ESC B18 in Non-Resident Trusts

Introduction

Murphy & Anor v Revenue And Customs [2023] EWCA Civ 497 is a pivotal case heard by the England and Wales Court of Appeal (Civil Division) on May 15, 2023. The appellants, Mr. Hugh Murphy and Mrs. Winifred Linnett, challenged the interpretation of an extra-statutory concession, ESC B18, issued by Her Majesty's Revenue and Customs (HMRC). The core issue revolved around whether ESC B18 allows UK resident beneficiaries of non-resident trusts to claim credit for UK income tax paid by the trustees on income distributed to them, irrespective of when that income arose.

The appellants, directors and beneficiaries of the "Charles Street Group Funded Unapproved Retirement Benefit Scheme" Trust, sought to claim tax credits for distributions they received from a non-resident trust. HMRC contended that such claims under ESC B18 were limited to income arising within six years before the end of the assessment year. The initial judgment by Chamberlain J upheld HMRC's interpretation, leading to the appellants' appeal.

Summary of the Judgment

The Court of Appeal, contrary to the initial judgment, sided with the appellants. Lord Justice Newey concluded that the ESC B18 (1999) concession allows UK resident beneficiaries of non-resident trusts to claim tax credits for UK income tax paid by trustees without the restrictive six-year limitation. This interpretation was grounded in a natural reading of the concession's language, the absence of explicit limitations in the 1999 version, and considerations of European Union (EU) law implications.

The appellate court emphasized that the concession should be understood in a manner that does not inadvertently discriminate against non-resident trusts, aligning with EU principles of non-discrimination and free movement. The decision effectively removes a significant barrier for beneficiaries seeking tax credits for trustee-paid UK income tax, broadening the scope and utility of ESC B18.

Analysis

Precedents Cited

The judgment extensively referenced pivotal cases that delineate the interpretation of extra-statutory concessions:

R v Inland Revenue Commissioners, Ex p National Federation of Self-Employed and Small Businesses Ltd [1982] AC 617 – Established the broad managerial discretion of HMRC in formulating tax policies.
R (Wilkinson) v Inland Revenue Commissioners [2005] UKHL 30 – Emphasized HMRC's authority to address minor anomalies through discretionary policy implementation.
R v Inland Revenue Commissioners, Ex p M.F.K. Underwriting Agents Ltd [1990] 1 WLR 1545 – Affirmed that published concessions by HMRC can be binding, forming an enforceable legitimate expectation for taxpayers.
R (Accenture Services Ltd) v Revenue and Customs Commissioners [2009] EWHC 857 (Admin) – Highlighted that the proper interpretation of concessions is a matter for the courts.
R (Davies) Revenue and Customs Commissioners [2011] UKSC 47 – Reinforced the notion that an "ordinarily sophisticated taxpayer" can be expected to understand and rely on published HMRC guidance.
R (Ellis) v Secretary of State for the Home Department [2020] UKUT 82 (IAC) – Clarified that UK courts do not allow decision-makers to interpret policies beyond their objective meanings.

These precedents collectively underscored the court’s role in interpreting HMRC concessions objectively, ensuring that taxpayers’ legitimate expectations based on clear and unambiguous guidance are upheld.

Legal Reasoning

The Court of Appeal meticulously dissected the language of ESC B18 (1999), distinguishing between its multiple concessions:

Concession 1: Allows beneficiaries to claim relief based on income arising within six years.
Concession 2: Similar to Concession 1 but applies to non-resident trusts.
Concession 3: Specific to UK beneficiaries of non-resident trusts, allowing them to claim credit for UK tax paid by trustees as if the trust were UK-resident, without the six-year limitation.

The appellants argued that Concession 3 was distinct and should not inherit the six-year restriction applied to Concessions 1 and 2. Lord Justice Newey analyzed the structural and contextual elements of ESC B18 (1999), noting that while Concessions 1 and 2 logically carry the six-year limit, Concession 3, by referencing Section 687 of the Income and Corporation Taxes Act 1988—which lacks such a limitation—should be interpreted without the six-year restriction.

Additionally, the court considered the relevance of EU law, which prohibits discriminatory practices based on nationality. The interpretation favoring the appellants ensured compliance with EU principles by preventing tacit discrimination against non-resident trusts.

The court also weighed the historical iterations of ESC B18, acknowledging that while earlier versions introduced the six-year limit, the 1999 revision's clarity and structural distinctions supported a broader interpretation for Concession 3.

Impact

This Judgment has profound implications for tax law, particularly concerning discretionary trusts and the application of extra-statutory concessions:

Enhanced Clarity: Provides a clearer understanding of ESC B18's provisions, especially concerning non-resident trusts.
Tax Credit Accessibility: Expands beneficiaries' ability to claim tax credits without being constrained by the six-year income limit, promoting fairness.
Compliance with EU Law: Aligns UK tax practices with EU non-discrimination principles, potentially averting future legal conflicts.
Precedential Value: Sets a significant precedent for interpreting HMRC concessions, emphasizing the importance of logical structure and statutory context.
Administrative Practice: May necessitate revisions in HMRC's approach to processing ESC B18 claims, ensuring they recognize the broader interpretation.

Future cases involving ESC B18 or similar concessions will likely reference this Judgment, shaping the landscape of tax credit claims for beneficiaries of non-resident trusts.

Complex Concepts Simplified

            Extra-Statutory Concession (ESC): These are discretionary policies or guidelines issued by HMRC that are not part of the formal tax legislation but are intended to guide taxpayers and HMRC in the interpretation and application of the tax laws.
        

            ESC B18: A specific concession that allows beneficiaries of discretionary trusts to claim relief or credit against their tax liabilities for tax already paid by the trustees on the income that was distributed to them.
        

            Discretionary Trust: A trust where the trustees have discretion over how the income and capital are distributed to beneficiaries, rather than having to follow a fixed distribution schedule.
        

            Discretionary Trustees: Individuals or entities responsible for managing a discretionary trust, making decisions about the distribution of income and capital to beneficiaries.
        

            Six-Year Income Limit: A stipulation that limits the income considered for tax credit claims to income that arose within six years before the end of the assessment year in which the payment was made.
        

            Legitimate Expectation: A principle in administrative law where individuals are entitled to expect that a public authority will act in a certain way based on the authority's established practices or policies.
        

Conclusion

The Court of Appeal's decision in Murphy & Anor v Revenue And Customs [2023] EWCA Civ 497 marks a significant evolution in the interpretation of HMRC's extra-statutory concessions, particularly ESC B18. By recognizing that Concession 3 within ESC B18 (1999) does not impose a six-year income limit, the court has broadened the scope for UK resident beneficiaries of non-resident trusts to claim tax credits. This aligns with principles of fairness and non-discrimination, ensuring that tax policies are applied consistently and justly across different trust structures.

Moreover, the Judgment underscores the judiciary's role in interpreting discretionary guidelines in a manner that upholds taxpayers' legitimate expectations, provided the guidance is clear and unambiguous. This decision not only benefits the appellants but also sets a precedent that enhances the transparency and reliability of HMRC's policy statements, fostering greater trust and clarity in tax administration.

In the broader legal context, this case exemplifies how courts balance statutory interpretation, administrative discretion, and overarching legal principles such as those dictated by EU law. It serves as a cornerstone for future cases involving the interpretation of extra-statutory concessions, emphasizing the necessity for clarity and fairness in the formulation and application of tax policies.