Lehman Brothers International Europe (LBIE) went into administration in 2008 after its parent group declared bankruptcy during the financial crisis.
However, the European company had generated a roughly £7bn surplus. An estimated £5bn was payable as statutory interest and all unsecured creditors had been repaid the sums owed prior to 2014.
“We welcome the Supreme Court ruling that confirms our analysis and means over £5bn is in scope of withholding tax rules,” a HMRC spokesperson said.
They said this was another example of “robust challenges” from the Revenue securing money for public funds.
In the UK, companies are usually required to withhold tax at 20% on interest payments.
Until late 2015, HMRC had said that any interest paid in the course of the administration or liquidation could be paid without deducting income tax, but later changed its position.
The High Court agreed that creditors should not pay income tax on interest earned while their money was tied up in the collapsed bank.
HMRC’s appeal was upheld by the Court of Appeals in 2017, which also refused the administrators permission to appeal its decision – this lead to PwC’s appeal to the Supreme Court.
In yesterday’s judgement the High Court dismissed the appeal, therefore confirming that income tax must be deducted before statutory interest is paid to creditors.
“We are pleased that the Supreme Court has handed down this important decision on a technical tax issue,” a PwC spokesperson said.
“It provides the clarification needed in the rare circumstances where insolvency officeholders pay interest to creditors out of an estate’s surplus -having paid creditors in full- as has been achieved in the case of LBIE, and other UK Lehman companies, by PwC,” they added.
However, PwC also raised questions regarding the £1bn in withholding tax payments to HMRC that it claims LBIE has made to date.
“Notwithstanding the court judgement consideration must now be given by HMRC as to how much of the £1bn is repayable to creditors because of double taxation treaty claims or other reasons,” the spokesperson said.
“We understand that a large number of double taxation treaty claims have already been made by creditors.” HMRC said it was unable to comment on these details.