The Court of Appeal in Good v HMRC [2023] EWCA Civ 114 upheld the decision of the Upper Tribunal in examining the meaning of “entitled to” in the context of Section 611 of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”). Section 611 of the ITTOIA imposes income tax on a person “receiving or entitled to” income under a film rights scheme.

Factual background

The taxpayer had participated in a film rights scheme, which was a tax avoidance scheme to generate a tax loss for the taxpayer.

The taxpayer acquired film distribution rights, which he later assigned in return for an entitlement to an ongoing share in film profits plus minimum annual payments (“MAPs”). In order to acquire the film distribution rights, the taxpayer borrowed money from a third party (the “Lender”). In a preordained and deliberate way, the MAPs were of such an amount sufficient for the taxpayer to meet his loan obligations. By way of security, the taxpayer assigned the benefit of, and granted security over, the MAPs to the Lender. The taxpayer also directed the MAPs to be paid to the Lender directly, to be applied to interest and repayment of the loan.

The question was whether the taxpayer was “entitled to” the MAPs for the purposes of s 611 ITTOIA.

Judgment

The Court of Appeal held that the phrase “entitled to” in the context of s 611 ITTOIA should be given its ordinary meaning. HMRC accepted that to be entitled, the person had to retain more than the “mere legal shell.”

The Ramsay principle was invoked in the context of interpreting the question of “entitlement” – s 611 ITTOIA was interpreted purposefully and the transaction was viewed realistically. On a purposive reading of “receiving or entitled to,” it was held that focus had to be on the particular transaction under which the distribution arose, and not on the connected transactions considered as a composite whole.

Viewing the particular transaction, even if the income had been assigned absolutely to the Lender as security, the Court of Appeal held that, following previous cases, the taxpayer derived a benefit from the payment received by a third party (i.e., the Lender), with the benefit being the fact that Lender’s receipt of the MAPs would reduce the taxpayer’s obligation under the loan owed to the Lender. The assignment of the income to the Lender did not affect this conclusion.

Based on the above, the Court of Appeal held that the taxpayer was “entitled to” the MAPs under s 611 ITTOIA.

As a supporting argument, the Court of Appeal held that the taxpayer actually retained a right of reversion in the MAPs, given that contractually the taxpayer could call for a reassignment of the MAPs once the loan was repaid (even though this would not happen realistically under the scheme). Furthermore, in this particular case, the assignment of MAPs was not absolute, but actually conditional, because the MAPs were assigned only until repayment in full (as opposed to an outright assignment with a proviso for reassignment on repayment). Therefore, the Court of Appeal held that the assignment was not a legal assignment, but only an equitable assignment.

Conclusion

Like the many other meanings of “entitlement” and “beneficial entitlement,” “entitlement” in this context is not determined by reference to equitable entitlement or ownership as a matter of law. The Court of Appeal in this case held that the taxpayer was entitled to the income, even if he had divested all of its interest in the income to the Lender as a security and had not received the income.

While the facts of this case considered income under a film rights scheme, the Court of Appeal echoed the Court of Appeal in Khan [2021] EWCA 624 (a case that considered distributions) that the phrase “the person receiving or entitled to” should have a consistent meaning wherever it appears in ITTOIA.

It is also interesting to note that courts have invoked the Ramsay principle in the interpretation of “beneficial entitlement” in the domestic UK law context, such as the First-tier Tribunal in Hargreaves Property Holdings Limited v Commissioners for HMRC [2021] UKFTT 390 (TC). Hargreaves Property involved an artificial arrangement to benefit from a withholding tax exemption, so it remains to be seen whether the decision in Good v HMRC will affect the invocation of the Ramsay principle in other contexts.

However, the Court of Appeal also emphasised that “entitled to” is not the same as “beneficial ownership” and “beneficial entitlement,” so the authorities on “beneficial ownership” and “beneficial entitlement” should not necessarily be read across to “entitlement” in ITTOIA.