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Lomas & Ors v HM Revenue and Customs – Court of Appeal decision

Lomas & Ors v HM Revenue and Customs – Court of Appeal

Was statutory interest paid to creditors in insolvency proceedings ‘yearly interest’ which, if it were, would be subject to a deduction of basic rate income tax?

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Following the administration of Lehman Brothers International (Europe), there is a substantial surplus in the administration (presently estimated to be between £6.6 billion and £7.8 billion). Some of this surplus will be used to pay statutory interest to creditors under the insolvency rules. Statutory interest arises once creditors have received payment in full of their debts at the outset of the insolvency procedure (administration in this case) and is an additional amount payable out of any remaining surplus as ‘interest’ on the creditor debts in respect of the periods during which they have been outstanding since the start of the insolvency procedure. This decision concerns whether this statutory interest, when paid, is 'yearly interest' for tax purposes. If so, the Joint Administrators will be required to deduct basic rate income tax from the payments made. If it is not ‘yearly interest’ then there is no requirement to deduct income tax from such payments.

The case had initially been heard in the High Court where HMRC’s appeal was dismissed and it was held that statutory interest was not ‘yearly interest’. In considering HMRC’s appeal Lord Justice Pattern concluded that statutory interest was yearly interest, reversing the High Court decision. The following summarises Lord Justice Pattern’s observations:

  • Statutory interest is ‘interest’ – common ground and authority in Riches v Westminster Bank Ltd [1947] AC 390 which held that a damages or a compensating payment could be ‘interest of money’;
  • Riches gave authority for retrospective payments to have the quality of recurrence to be ‘interest’ rather than damages;
  • Jefford v Gee [1970] 2 QB 130, [1970] 1 All ER 1202 goes on to conclude that interest paid retrospectively on damages was ‘yearly interest of money’;
  • Riches confirms it is not necessary for interest to accrue prospectively in real time to be yearly interest and this principle applies equally to statutory interest;
  • The anticipated period of an insolvency at its outset could be unlimited – on this basis it satisfied the definition in Bebb v Bunny (1854) 1 K & J 216, 69 ER 436 that it was payable year to year whilst accruing from day to day; and
  • Statutory interest was therefore ‘yearly interest’.

The penultimate point is of particular interest as the intention of the administrators would be to pay creditors as soon as practicable and thus the mere possibility of the insolvency lasting in excess of 12 months is deemed sufficient to treat statutory interest as ‘yearly interest’.

For further information please contact:

Gavin Little

Rob Norris

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