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Advocates
- Appellant Jonathan Peacock QC Richard Keen QC John Brinsmead-Stockham (Instructed by Ernst & Young LLP)
- Respondent David Ewart QC Julian Ghosh QC James Henderson (Instructed by HMRC Solicitor's Office)
Judges
- Lord Clarke
- Lord Reed
- Lord Sumption
- Lord Carnwath
- Lord Neuberger, President
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Anson v. Revenue and Customs
Smart Summary
Factual and Procedural Background
The Appellant was resident but non-domiciled in the United Kingdom and a member of Company A, a Delaware limited liability company (“LLC”) carrying on investment-management business in The State. Under United States tax law the LLC was treated as a partnership, so the Appellant was assessed directly on an 11.5 % share of the LLC’s profits and paid U.S. federal and state tax on that amount. He later remitted the after-tax balance to the United Kingdom, where the Respondent Commissioners assessed UK income tax on the remittances but refused double-taxation relief.
The Appellant appealed. The First-tier Tribunal (“FTT”) allowed the appeal, holding that under Delaware law the profits belonged to LLC members as they arose, so UK and U.S. taxes were levied on the same income. The Upper Tribunal reversed that decision, and the Court of Appeal upheld the Upper Tribunal. The present judgment is the Supreme Court’s determination of the Appellant’s further appeal.
Legal Issues Presented
- Whether, for the purposes of Article 23(2)(a) of the 1975 UK/US Double Taxation Convention and the analogue provisions on unilateral relief, the UK tax on the Appellant’s remitted income was “computed by reference to the same profits or income” as the U.S. tax already paid.
- Whether, as a matter of UK tax law, the Appellant’s share of the LLC’s profits constituted his income as it arose (thereby matching the U.S. tax base) or only when profits were distributed to him.
- Consequently, whether the Appellant was entitled to credit relief against UK tax for the U.S. taxes paid.
Arguments of the Parties
Appellant's Arguments
- Delaware law and the LLC agreement automatically allocate profits to members as they arise; no further decision is needed to confer entitlement.
- Therefore, both the U.S. and UK assessments relate to the same underlying income, satisfying Article 23(2)(a).
- Even if U.S. tax were notionally on the LLC and UK tax on remittances, the wording “computed by reference to” is broad enough to equate the two bases.
Respondent Commissioners' Arguments
- The LLC, not its members, carries on the trade, owns the assets and first becomes entitled to the profits; members only obtain income upon a discretionary distribution.
- Consequently, the U.S. tax base (profits of the LLC) differs from the UK tax base (distributions to the Appellant), so Article 23(2)(a) is not satisfied.
- Reliance was placed on the “opacity” analysis adopted in Memec and on the absence of any proprietary interest of members in LLC assets.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|
| Memec plc v Inland Revenue Comrs [1998] STC 754 | “Transparency” vs “opacity” test for foreign entities in double-tax contexts. | Distinguished; Court held Memec concerned dividends and Article 23(2)(b), whereas the present case concerns Article 23(2)(a). |
| Reed v Young [1986] 1 WLR 649 | Profits and assets are distinct concepts; partners taxable on profits as they arise. | Used to reinforce that profit entitlement can arise absent proprietary asset rights. |
| Commissioners for General Purposes of Income Tax for City of London v Gibbs [1942] AC 402 | Partnership assessment principles. | Cited in contrasting English/Scottish partnership treatment. |
| MacLennan v Scottish Gas Board (1983, First Div.) | Scottish partnership has separate personality; partners lack direct proprietary asset rights. | Analogised to member rights in a Delaware LLC. |
| Arif v Excess Insurance Group Ltd 1987 SLT 473; Mitchell v Scottish Eagle Insurance Ltd 1997 SLT 793 | No insurable/proprietary interest of Scottish partners in partnership property. | Supports non-proprietary yet taxable partnership profits model. |
| Stainer's Executors v Purchase [1952] AC 280 | Identification of income source. | Referenced when analysing source of profits in Memec comparison. |
| Colquhoun v Brooks (1889) 14 App Cas 493 | Foreign partnership profits as foreign possessions income. | Historical backdrop for Case V assessments. |
| Cull v Commissioners of Inland Revenue [1940] AC 51 | Imputation system justification. | Context for historical treaty amendments. |
| Canadian Eagle Oil Co Ltd v The King [1946] AC 119 | Limitations of implied relief for double taxation. | Background to 1945 Convention drafting. |
| Barnes v Hely Hutchinson [1940] AC 81 | Distinction between company profits and shareholder dividends. | Illustrates need to separate income sources. |
| Gilbertson v Fergusson (1881) 7 QBD 562 | Early implied credit for underlying tax. | Historical context. |
| Biddle v Commissioner 302 US 573 (1938) | U.S. refusal of credit for foreign underlying tax. | Explains reciprocal treaty drafting. |
| Duckering v Gollan [1965] 1 WLR 680 | “Payable in respect of” vs “computed by reference to”. | Reason for wording change in 1966 Protocol and 1975 Convention. |
| Riverstone Meat Co Pty Ltd v Lancashire Shipping Co Ltd [1961] AC 807; Effort Shipping Co Ltd v Linden Management SA [1998] AC 605 | Use of background context in treaty interpretation. | Cited to justify taking pre-treaty law into account. |
| MacKinlay v Arthur Young McLelland Moores & Co [1990] 2 AC 239 | Assessment method for partners. | Background analogy. |
| Padmore v Inland Revenue Comrs [1987] STC 36 | Tax on partners despite non-receipt of cash. | Supports concept of entitlement without distribution. |
| Strathalmond v Inland Revenue Comrs [1972] 1 WLR 1511; Inland Revenue Comrs v Commerzbank AG; Inland Revenue Comrs v Banco do Brasil SA [1990] STC 285 | Liberal construction of treaties. | Guides interpretative stance. |
| Bayfine UK v Revenue and Customs Comrs [2012] 1 WLR 1630 | Article 23 “source” determined by treaty, not domestic law. | Applied to reject Respondent’s source argument. |
| Baker v Archer-Shee [1927] AC 844; Archer-Shee v Garland [1931] AC 212 | Importance of foreign-law evidence to determine entitlement to income. | Illustrates distinction between foreign law findings and UK tax application. |
| United Kingdom v Albania (Corfu Channel) [1949] ICJ 1 | General principle against treating treaty clauses as otiose. | Used when analysing wording of Article 23. |
Court's Reasoning and Analysis
Judge Reed, delivering the unanimous judgment, applied the Vienna Convention rules of interpretation, emphasising ordinary meaning, context and treaty purpose (avoidance of double taxation). Key steps were:
- Treaty interpretation. Article 23(2)(a) requires a factual comparison of the income taxed in each state; “source” is defined internally by Article 23(3), so domestic UK source concepts are irrelevant.
- Delaware law findings are factual. The FTT’s conclusion, based on expert evidence, that LLC profits are automatically allocated to members was a finding of foreign law and therefore of fact. The Upper Tribunal and Court of Appeal erred in treating it as a domestic-law conclusion.
- No proprietary right needed. Entitlement to profits in personam suffices; conflating ownership of assets with entitlement to profits repeats the “conceptual confusion” rejected in Reed v Young.
- Memec distinguished. Memec concerned Article 23(2)(b) and dividends; the present case concerns Article 23(2)(a) and direct business profits. The transparency test from Memec is not decisive here.
- Same income test met. Because the Appellant became entitled to his share of profits as they arose, U.S. and UK taxes were computed by reference to identical profits. UK tax was therefore creditable.
Holding and Implications
Holding: APPEAL ALLOWED. The Appellant is entitled to double-taxation relief under Article 23(2)(a) of the 1975 UK/US Convention (and the corresponding unilateral relief) for U.S. federal and state taxes paid on his share of the LLC’s profits.
Implications: The judgment confirms that, where foreign law gives members of an LLC or similar entity an automatic right to profits, UK tax treats those profits as the members’ income as they arise, enabling credit relief for foreign taxes already paid. The decision narrows reliance on “proprietary interest” tests and signals a pragmatic, treaty-focused approach to cross-border entity classification. No new domestic precedent was expressly created, but the ruling guides HMRC and taxpayers on LLC profit allocations and double-taxation claims.
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