Ball UK Holdings Ltd v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 10 December 2018 |
| Neutral Citation | [2018] UKUT 407 (TCC) |
| Date | 10 December 2018 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2018] UKUT 0407 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mrs Justice Falk, Judge Jonathan Cannan
Nicola Shaw QC, instructed by Hogan Lovells International LLP, appeared for the appellant
James Henderson, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Corporation tax – Loan relationships – Change in functional currency – Interpretation of FRS 23 – Principles to apply in determining whether accounts were in accordance with GAAP.
The Upper Tribunal (UT) upheld the First-tier Tribunal (FTT) decision in Ball UK Holdings Ltd [2017] TC 05920 that the change in functional currency for accounting purposes was not in accordance with the provisions of FRS 23 and therefore the exchange loss arising on transition was not allowable under the loan relationship rules.
The taxpayer company realised a significant foreign exchange loss as a result of changing its functional currency from sterling to US dollars. The company claimed corporation tax relief for the exchange loss under the loan relationships rules on the basis that the amounts had been recognised in determining the company's profit or loss for the period in accordance with generally accepted accounting practice (FA 1996, s. 85A). The FTT agreed with HMRC that the company's functional currency was sterling and that accounts should have been completed on that basis. Accordingly, corporation tax relief under the loan relationship rules was not allowed for the exchange loss.
The taxpayer company appealed to the UT on the basis that the FTT had made four errors of law:
- it had incorrectly held that there can be only one permissible interpretation of an accounting standard;
- it had misinterpreted the word autonomy in paragraph 11(a) of FRS 23;
- it had incorrectly held that para. 11(a) did not outweigh the other indicators in FRS 23; and
- it failed to have proper regard to the evidence as to the interpretation of FRS 23 adopted by accounting professionals in practice.
The UT began by considering whether the correct interpretation of accounting standards can be characterised as a matter of law or fact. In the view of the UT, it is a question of fact to be determined with the assistance of expert evidence. Therefore, the role of the UT in this instance was “to determine whether the conclusions reached by the FTT were ones that could properly be reached on the evidence”.
The UT dismissed the appeal on all 4 issues, finding that the intention must be for the standard to be interpreted in a “uniform way” (issue 1); the FTT was entitled to prefer the evidence given by HMRC's expert witness on the meaning of “autonomy” (issue 2); there was no material error by the FTT with regard to the weighting of factors (issue 3) and the FTT paid due attention to manuals produced by the larger accountancy firms, HMRC guidance and the audit reports (issue 4).
This case raises the question of the role of the courts in the correct interpretation of accounting standards. The FTT's findings are matters of fact and not law. The FTT should reach conclusions on the expert evidence, and the UT should determine whether those conclusions were ones that could properly be reached on that evidence.
[1] This appeal relates to a short, but important, point of law. It raises the question of the proper role of the Tribunal in disputes over the correct interpretation of accounting standards.
[2] The background facts can be stated very briefly. The appellant Ball UK Holdings Ltd (“Ball UK”) is a UK intermediate holding company indirectly owned by a US corporation, Ball Corporation (“Ball US”). It was set up in 2002 to hold certain UK subsidiaries acquired by Ball US as part of an acquisition of another group. Ball UK's material activities were limited to holding the shares in its subsidiaries, and borrowing from and making loans to group companies, including its subsidiaries. In 2005, prompted by changes in US tax law, it also paid a large dividend to its parent. At material times Ball UK undertook all its activities (and in particular its lending and borrowing activities) in sterling, with the exception of the derivative mentioned below. The interest rates on its borrowing and lending transactions were determined by reference to sterling LIBOR or other UK prime rates.
[3] For periods up to 31 December 2005 Ball UK's accounts were prepared in sterling in accordance with Statement of Standard Accounting Practice 20 (“SSAP 20”). Near the end of 2006, on the advice of PwC, a transaction was entered into with the intention of changing the “functional currency” used in preparing the accounts from sterling to US dollars, by triggering the right to move from SSAP 20 to Financial Reporting Standard 23 (“FRS 23”). Like SSAP 20, FRS 23 is a UK accounting standard, but it adopts the 2003 version of International Accounting Standard 21 (“IAS 21”).
[4] Under the transaction Ball UK entered into a derivative contract with a group member, worth about $30,000. This gave Ball UK the ability to choose to apply fair value accounting, which it did. The exercise of that choice in turn triggered a requirement to comply with FRS 26 and also with FRS 23, which determines functional currency. The derivative itself was not relevant to the determination of functional currency.
[5] Based on PwC's advice, the Ball group concluded that the effect of FRS 23 was to change the functional currency of Ball UK to US dollars. The result of this was to trigger a foreign exchange (“FX”) loss in its accounts for the year ended 31 December 2006. This arose because its assets and liabilities were revalued in the new currency. The accounts were audited by PwC, who confirmed that in their view they gave a true and fair view in accordance with UK generally accepted accounting principles (“GAAP”).
[6] The loss shown in Ball UK's accounts included a significant loss on its sterling denominated borrowings. Ball UK sought tax relief for this loss for corporation tax purposes under the “loan relationship” rules contained in what was then Chapter 2 of Part 4 of the Finance Act 1996 (“FA 1996”). The loss claimed for tax purposes was about £24.6m.
[7] In summary, the basis on which the Ball group concluded that a dollar functional currency was appropriate was because all material decisions in relation to Ball UK were taken by employees of Ball US. Ball UK's board had no real input into its decision-making process and was largely passive, confining themselves to checking that what they were being asked to do was in accordance with applicable law, and signing off on pre-typed resolutions. The First-tier Tribunal (“FTT”) found at paragraph 37 that although decisions made were legally resolved upon by Ball UK's board, they were in fact decided by persons acting on behalf of its ultimate parent, Ball US.
[8] HMRC disagreed with the conclusion that Ball UK had a dollar functional currency. HMRC's case is that Ball UK's functional currency was sterling and that the accounts should have been prepared on that basis.
[9] The only question in dispute is whether Ball UK's accounts were prepared in accordance with UK GAAP for the purposes of what was then s 85A Finance Act 1996. This provided:
(1) Subject to the provisions of this Chapter …, the amounts to be brought into account by a company for any period for the purposes of this Chapter are those that, in accordance with generally accepted accounting practice, are recognised in determining the company's profit or loss for the period.
[10] It is convenient to set out here relevant extracts from FRS 23. These comprise four introductory (unnumbered) paragraphs, extracts from the introduction to IAS 21 (set out in full in FRS 23, numbered with the prefix “IN”), paragraphs 1, 2, 8 to 13 and 17 from the standard itself, and certain paragraphs from the “Basis of Conclusions” that accompanied IAS 21.
Financial Reporting Standard 23 embodies IAS 21 “The effects of Changes in Foreign Exchange Rates” and some amendments to that standard adopted for entities subject to UK accounting standards.
The Statement of Standard Accounting Practice in FRS 23 is set out in paragraphs 1–62 and the appendix. All the paragraphs have equal authority. Paragraphs in bold type state the main principles.
Accompanying the Statement of Standard Accounting Practice is the basis for the conclusions reached in the Statement. This does not form part of the Statement.
The Statement of Standard Accounting Practice should be read in the context of its objective as stated in paragraphs 1–2, the Basis for Conclusions set out in paragraphs BC1–BC32, and the Accounting Standards Board's1“Foreword to Accounting Standards” and “Statement of Principles for Financial Reporting”.
…
…
IN3 For IAS 21 the Board's2 main objective was to provide additional guidance on the translation method and on determining the functional and presentation currencies. The Board did not reconsider the fundamental approach to accounting for the effects of changes in foreign exchange rates contained in IAS 21.
IN4 The main changes from the previous version of IAS 21 are described below.
…
IN6 The notion of “reporting currency” has been replaced with two notions:
- functional currency, i.e. the currency of the primary economic environment in which the entity operates. The term functional currency is used in place of measurement currency (the term used in SIC-1933) because it is the more commonly used term, but with essentially the same meaning.
- presentation currency, i.e. the currency in which financial statements are presented.
IN7 When a reporting entity prepares financial statements, the Standard requires each individual entity included in the reporting entity – whether it is a stand-alone entity, an entity with...
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