Attribution of notional capital to permanent establishments

Irish Bank and Irish Nationwide both of which were tax resident in Ireland traded in the UK through permanent establishments. They claimed deductions for interest incurred for the purpose of their UK trade. HMRC refused on the basis that TA 1988 s 11AA(3)(b) precluded such deductions. It said the returns submitted by the taxpayers understated the amount of equity capital each permanent establishment was deemed to hold so overstated the amount of loan capital and the associated interest charges.

The taxpayers said the attribution of a notional level of capital differing from the actual level employed in the permanent establishment as s 11AA(3) required was incompatible with the provisions of Art 8 of the double taxation convention between the UK and the Republic of Ireland (Double Taxation Relief (Taxes on Income) (Republic of Ireland) Order SI 1976/2151) and that the terms of the latter...