Introduction

Good v Commissioners of HM Revenue and Customs ([2023] EWCA Civ 114) is a pivotal case adjudicated by the England and Wales Court of Appeal (Civil Division) on February 10, 2023. The dispute arose from discovery assessments issued by HM Revenue and Customs (HMRC) against Mr. Good, a taxpayer involved in a film rights exploitation scheme orchestrated by Scion Structured Products Ltd ("Scion"). The core issue revolves around the tax liability of Mr. Good concerning "Minimum Annual Payments" (MAPs) received as part of his investment in the scheme, challenging the application of sections 609-611 of the Income Tax (Trading and Other Income) Act 2005 ("ITTOIA").

Summary of the Judgment

The Court of Appeal upheld the decisions of both the Upper Tribunal (UT) and the First Tier Tribunal (FTT), dismissing Mr. Good's appeal against HMRC's discovery assessments totaling approximately £180,000 for the tax years 2010/11, 2011/12, and 2012/13. The court affirmed that the MAPs constituted taxable income under sections 609-611 of the ITTOIA, categorizing Mr. Good as "entitled to" the income despite the assignment of MAPs to the lender as security for the loan in the scheme. The court rejected Mr. Good's arguments that the assignment nullified his entitlement to the income and maintained that the economic reality of the arrangements demonstrated his beneficial ownership and control over the MAPs for tax purposes.

Analysis

Precedents Cited

The judgment extensively references several pivotal cases to shape the legal reasoning:

• Bostan Khan v HMRC [2021] EWCA Civ 624: This case established the interpretation of "entitled to" within ITTOIA, emphasizing that entitlement includes both receipt and beneficial interest.
• Ingenious Games v HMRC [2019] UKUT 266 (TCC): Highlighted the significance of viewing transactions in their economic substance rather than their legal form.
• Peracha v Miley [1990] STC 512: Demonstrated that assigning income does not negate the assignor's entitlement if they derive economic benefit from the assignment.
• Dunmore v McGowan [1978] STC 217: Reinforced that beneficial ownership persists even when income is directed to a third party.
• Durham Bros v Robertson [1898] 1 QB 765: Clarified the nature of statutory vs. equitable assignments, emphasizing the requirement for absolute assignments under section 136 of the Law of Property Act 1925.

These precedents collectively support the court’s stance that beneficial entitlement to income remains intact despite legal assignments, particularly when the economic reality indicates ongoing benefit to the assignor.

Legal Reasoning

The court employed a purposive approach to statutory interpretation, adhering to the principles outlined in the Ramsay doctrine and affirmed by the Supreme Court in UBS AG v Revenue and Customs Commissioners [2016] UKSC 13. The key legal reasoning includes:

• Entitlement vs. Receipt: The court differentiated between the concepts of being "entitled to" income and actually "receiving" it. It affirmed that entitlement can exist without physical receipt if the individual benefits economically from the income.
• Effect of Assignment: The court determined that the conditional assignment of MAPs did not entirely divest Mr. Good of his entitlement. The MAPs were still linked to his obligation to repay the loan, thereby retaining a beneficial interest.
• Substance Over Form: Emphasized the economic reality of the scheme, asserting that the true nature of transactions outweighs their formal legal structuring in determining tax liability.
• Statutory Interpretation: The court adhered to the ordinary meanings of statutory terms, concluding that "entitled to" encompasses beneficial ownership within the context of ITTOIA sections 609-611.

The tribunal’s comprehensive analysis ensured that the substance and commercial reality of the transactions dictated the tax obligations, rather than any intricate legal maneuvers intended to obscure beneficial ownership.

Impact

This judgment has significant implications for tax law, particularly concerning the treatment of assigned income and the interpretation of entitlement within tax statutes:

• Clarification of "Entitlement": The case provides a clear interpretation of "entitled to" in the context of ITTOIA, emphasizing that beneficial ownership and economic benefit are critical in determining tax liability.
• Guidance on Assignments: Establishes that conditional assignments do not absolve individuals of tax responsibilities if they continue to derive economic benefits from the assigned income.
• Prevention of Tax Avoidance: Reinforces the anti-avoidance measures within ITTOIA by ensuring that economic realities cannot be masked by legal structuring to evade tax.
• Influence on Future Cases: Sets a precedent for how courts should approach similar disputes, particularly those involving complex financial arrangements and security assignments.

Taxpayers and legal practitioners must now consider the substantial economic implications of their financial arrangements, ensuring that genuine beneficial interests are transparently reflected to avoid unintended tax liabilities.

Complex Concepts Simplified

Discovery Assessments

Discovery assessments are additional tax assessments made by HMRC when they uncover undisclosed income or discrepancies in previously submitted tax returns. In this case, HMRC issued discovery assessments against Mr. Good based on MAPs that were deemed taxable income.

Minimum Annual Payments (MAPs)

MAPs refer to fixed payments that Mr. Good received annually as part of the film rights scheme. HMRC contended that these payments constituted taxable income, whereas Mr. Good argued that they should not be subject to income tax due to the assignment to the lender.

Sections 609-611 of ITTOIA

These sections deal with the tax on income from non-trade businesses, specifically focusing on income derived from the exploitation of films and sound recordings. Section 611 notably defines the person liable for such tax as the person "receiving or entitled to" the income.

Security Assignment

A security assignment is a legal arrangement where rights to certain income are assigned to a lender as security for a loan. In this case, Mr. Good assigned his rights to MAPs to the lender to secure repayment of his loan, which HMRC argued did not negate his tax liability.

Conclusion

The Good v Commissioners of HM Revenue and Customs judgment underscores the judiciary's commitment to interpreting tax law in light of economic realities and substantive ownership, rather than mere legal formalities. By affirming that Mr. Good remained "entitled to" the MAPs despite their assignment to the lender, the Court of Appeal has solidified the principle that beneficial ownership and economic benefit are paramount in determining tax liabilities under ITTOIA. This decision not only impacts future tax assessments but also serves as a cautionary tale for structuring financial arrangements that may inadvertently trigger significant tax obligations.