Jonathan Crowther analyses the Agassi case, which in its dealings with the seven levels of taxation, illustrates principles dealt with in past issues
The recent House of Lords case of Agassi v Robinson (HMIT) revolves around some of the principles discussed in the easy guide series, in particular the seven levels of taxation and the territorial scope of domestic tax rules.
The degree of confusion surrounding these areas is illustrated by the fact that there are three judgements in the case -two for HMRC (Lords Scott and Mance) and one for the taxpayer (Lord Walker) - and that the two judgements for HMRC seem to argue along different lines.
Andre Agassi is a well-known international tennis player who is neither resident nor domiciled in the UK and never has been. He owns a company that entered into contracts with Nike and Head Sport under which he would be paid for sponsoring or advertising their products essentially by using or wearing them.
HMRC argued since he was using or wearing these products in the UK, the fees earned which were attributable to his UK appearances (how this would be quantified is not discussed in the case) were subject to UK withholding tax, deductible by Nike and Head Sport from their payments to Agassi's offshore company and accountable to HMRC.
The taxpayer's argument was that since the payer and the payee were not resident the territoriality principle applied and the payments were outside of the scope of UK tax.
In the article on the seven levels of tax we saw that it is necessary to identify at the outset the primary charging statute. In this case the primary charging statute is ICTA 1988 s.18(1)(a)(iii):
Tax under Schedule D Case I shall be charged in respect of (a) the annual profits or gains arising or accruing (iii) to any person, whether a Commonwealth citizen or not, although not resident in the UK from any property whatever in the UK or from any trade, profession or vocation exercised within the UK.
The problem regarding sportsmen in connection with this charge is outlined by Lord Scott: "The first problem related to the concept of carrying on a trade, profession or vocation. Was a person who made only single or infrequent visits to this country, for example playing in, say, two tennis tournaments, carrying on a trade, profession or vocation in this country?
"Second, would income arising from commercial endorsements, such as wearing Nike tennis shoes and playing with a Head tennis racquet, be regarded as part of the profits or gains of carrying on the trade, profession or vocation?
"Third, the charge only applied to the person carrying on the trade, profession or vocation. Would payments made to a foreign company albeit controlled by the person exercising the trade, profession or vocation, be caught by the charge?
"And, fourth, collection of the tax from a foreign entertainer or sportsman, whose visits to this country might be sporadic and who would often have no assets in this country, was not always practicable. This was particularly so because the basis of assessment was the preceding year basis."
To address these problems, sections 555 and 556 of ICTA 1988 were introduced in the Finance Act 1996 to focus the s.18 charge specifically on sportsmen.
Lord Mance states that sections 555 and 556 were intended "not just to provide improved collection machinery but also to expand the ambit of the basic tax charge under Schedule D imposed by s.18(1)(a)(iii)".
He goes on to say that "it would be incongruous if a primary tax charge for payment in respect of a UK activity depended on whether the payment was or was not made by a person present there".
On that basis, the well-settled presumption against a statute being construed as having extra-territorial effect is irrelevant since the income assessed on Agassi arose from a commercial activity carried on within the UK, in other words displaying his sponsors' logos while playing in the UK.
The case, therefore, does not impact on the "well-settled presumption against a statute being construed as having extra-territorial effect" and the assessment was raised on Agassi rather than his non-resident sponsors.
Lord Walker's judgement turns on whether the charging section or the collection section takes precedence:
He said: "HMRC put the collection mechanism last in their list of changes, but the fact is that in the legislation it is put in the most prominent position, and the charging provisions in section 556 and the timing provisions in section 557 are all routed through the collection mechanism so as to apply only when it applies... HMRC argued that the collection mechanism was a tail that should not be allowed to wag the dog, but were driven to accept that the dog seems to come on stage tail first."
If Lord Walker was right, then the extra-territoriality principle would kill off section 555 and, therefore, the charging section would not, to continue the canine simile, get to bite.
"There was no incongruity about a primary tax charge being levied on a sportsman or entertainer who performed an activity in the UK and received or was treated as receiving a payment from whatever source for that activity. But it would be incongruous if a primary tax charge for payment in respect of a UK activity depended on whether the payment was or was not made by a person with a UK presence. The position regarding the liability of the payer of such a payment to make and account for deductions in respect of the basic rate of such tax was quite different."
So the case turns on which comes first: the collection mechanism section (when the taxpayer wins) or the charging section (when the taxpayer loses). Under the analysis of the seven levels of taxation, a collection mechanism is not a level of taxation as such and would therefore fall to be treated as irrelevant when considering whether the taxpayer was within the charge to tax.
The activities of Agassi in the UK fell within the definition of "relevant activity" in the charging section (which is simply a specification of the generic s.18 charging section, not a separate level of tax) and so Agassi falls to be charged. Had the payers been resident in the UK, the tax would have been collected by deduction but as they were not the tax was collectible by assessment on the taxpayer.
Agassi's offshore company is ignored since the charging section states that: "Where a payment is made (to whatever person) and it has a connection of the prescribed kind with the relevant activity, the activity shall be treated for the purposes of the Tax Acts as performed in the course of a trade, profession or vocation exercised by the entertainer or sportsman within the UK, to the extent that (apart from this subsection) it would not be so treated."
the last word
However, for those readers who may not be convinced, the last word is given to Lord Walker: "To put it at the lowest, it is not to my mind glaringly obvious that UK tax ought to be paid in respect of a non-resident sportsman's merchandising income received overseas from a manufacturer which is not resident (and has no tax presence) in the UK.
"But in HMRC's case it is unthinkable that Parliament should have had any other intention. In HMRC's case, Parliament must have intended that such a manufacturer (which might not be a large multinational, but a small company trading only in Taiwan or Thailand) would be in breach of its statutory duty, and exposed to penalties for breaching UK regulations of which it might have no knowledge.
"I am not persuaded that Parliament must have had that intention in enacting the Finance Act 1986. For my part, I would dismiss this appeal."key points
HMRC argued that fees earned by sportsman wearing sponsored goods in the UK would be subject to UK withholding tax
The case turned on which came first: the collection mechanism of the charging section
Lord Walker ruled that Agassi should be charged
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress