Biffa (Jersey) Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 23 October 2014 |
| Neutral Citation | [2014] UKFTT 982 (TC) |
| Date | 23 October 2014 |
| Court | First Tier Tribunal (Tax Chamber) |
[2014] UKFTT 982 (TC)
Judge Greg Sinfield, Ian Menzies Conacher ACIB, CTA, FCA
Jonathan Peacock QC and Philip Walford, counsel, instructed by Deloitte LLP, accountants, appeared for the Appellant
Sam Grodzinski QC and David Yates, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Corporation tax - Deemed loan transactions under the Income and Corporation Taxes Act 1988 ("ICTA 1988"), Income and Corporation Taxes Act 1988 section 730As. 730A - Whether effect of the Finance Act 2003 ("FA 2003"), Finance Act 2003 section 195s. 195 that acquisition of own shares disregarded for purposes of Income and Corporation Taxes Act 1988 section 730As. 730A - No - Alternatively whether the Finance (No 2) Act 2005 ("F(No 2)A 2005"), Finance (No. 2) Act 2005 section 27s. 27 applies in relation to £214,108,391 paid by BCHL to BJL on 25 September 2008 - No - Appeal dismissed.
The First-Tier Tribunal found that arrangements involving an intra-group repo transaction designed to secure a tax deduction for the financing cost by the repo borrower with no equivalent taxable credit for the financing income of the repo lender were ineffective. Provisions relating to a company purchase of own shares did not apply such that the repo lender but not the repo borrower fell outside the terms of the repo rules. The tax arbitrage rules did not apply to the arrangements.
This case involved a complicated series of intra-group financing transactions designed to secure a tax deduction for the financing costs of a sale and repurchase (repo) agreement in one group company, the repo borrower, in circumstances which were intended not to give rise to a tax charge on the financing income in another group company, the repo lender. The applicable repo rules at that time were to be found in ICTA 1988, Income and Corporation Taxes Act 1988 section 730As. 730A and provided that, where the repurchase price was greater than the sale price, the difference between the two prices was to be treated as a payment of interest in the hands of the repo borrower. In the hands of the repo lender, an equivalent amount would have been taxable had Income and Corporation Taxes Act 1988 section 730As. 730A also applied to the lender. It was the taxpayer's contention that Income and Corporation Taxes Act 1988 section 730As. 730A did not, on the facts of the case, apply to the lender because the shareholding which was subject to the repo agreement had been acquired by the lender as a result of a purchase of own shares. The intention was that Finance Act 2003, Finance Act 2003 section 195s. 195, which had been introduced in connection with company law changes allowing listed companies to hold their own shares as treasury shares, would have operated such that the purchase of own shares by the repo lender was not to be treated as an acquisition of an asset. Accordingly, the taxpayer contended that the repo lender was treated by Finance Act 2003 section 195s. 195 as never having acquired the shares and consequently that the repo rules did not apply to the repo lender. The First-Tier Tribunal (FTT) did not accept this proposition, holding that the effect of Finance Act 2003 section 195s. 195 is that the shares acquired are not to be treated as assets of the acquiror, not that no shares are acquired. The repo rules therefore applied to both the repo lender and the repo borrower and the scheme was ineffective.
Having already dismissed the taxpayers appeal, it was not necessary for the FTT to consider whether a person could be regarded as having transferred shares to another if the other does not acquire them. Nevertheless the FTT considered that the phrase "has transferred any securities to another person" requires the other person to have received the securities. This meant that if the FTT was wrong on Finance Act 2003 section 195s. 195 (such that the repo lender had not in fact acquired any shares) it followed that the repo borrower would not have transferred shares to the repo lender and that the repo rules would not have applied to the repo lender as a consequence.
All things considered, this is a fair outcome. The arrangements were disclosed to HMRC under the Disclosure of Tax Avoidance Scheme rules and is the lead case for similar points of law arising in relation to transactions undertaken by another corporate group. The case is of interest, not just for its guidance on the interaction between the purchase of own share rules in FA 2003, Finance Act 2003 section 195s. 195 with the repo rules in ICTA 1988, Income and Corporation Taxes Act 1988 section 730As. 730A as they were enacted at the time, but also for its consideration of some of the qualifying conditions for a "receipts case" in the tax arbitrage rules of Finance (No. 2) Act 2005, Finance (No. 2) Act 2005 section 26s. 26. Although it was not necessary to consider the operation of these rules to arrive at its judgment, the FTT went on to conclude that the tax arbitrage rules would not have applied in the circumstances of the case. In particular, condition B of Finance (No. 2) Act 2005 section 26s. 26(3) would not have been satisfied. This required that the repo borrower had made a "qualifying payment" to the repo lender however on the facts of the case a "qualifying payment" had not been made by the repo borrower but by another group company.
[1]This is an appeal by Biffa (Jersey) Limited ("BJL") against an amendment made by the Respondents ("HMRC") to BJL's corporation tax self-assessment return ("CTSA") for the accounting period from 12 to 30 September 2008. BJL is a company incorporated in Jersey and a UK-resident member of the Biffa group for the purposes of corporation tax. The amendment increased BJL's profit for the period for corporation tax purposes by £14,108,391. The amount of £14.1 million related to transactions entered into by BJL and other members of the Biffa group in 2007 and 2008.
[2]The facts are described more fully below but the key transactions were as follows (all numbers are rounded). On 12 September 2007, BJL was formed in Jersey and issued ten thousand no par ordinary shares ("BJL Shares") to Biffa Corporate Holdings Limited ("BCHL"). Two weeks later, on 26 September, BJL issued 200 million BJL shares to BCHL for £200 million. On the same day, all the BJL shares held by BCHL were transferred to Biffa Holdings Limited ("BHL") by share exchanges via another group company. On the next day, 27 September, BHL sold 200 million BJL shares to BJL for £200 million. BJL cancelled the shares. Also on 27 September 2007, BJL agreed to issue 200 million BJL shares to BCHL on 26 September 2008 for £214 million and, under a separate agreement, BHL agreed to buy 200 million BJL shares from BCHL on 26 September 2008 for £214 million. Just under one year later, on 25 September 2008, BJL issued 200 million BJL shares to BCHL for £214 million. On the following day, 26 September 2008, BCHL sold 200 million BJL shares to BHL for £214 million.
[3]BHL considered that, under Income and Corporation Taxes Act 1988 section 730Asection 730A of the Income and Corporation Taxes Act 1988 ("ICTA 1988"), the difference between:
(2) the amount (£200 million) which it received on the sale of the BJL shares to BJL in September 2007 and
(3) the amount (£214 million) which it paid to buy the BJL shares from BCHL in September 2008
should be treated as interest on a deemed loan of £200 million by BJL to BHL. BHL treated the £14 million as an interest expense and apportioned it between its two relevant accounting periods, namely periods ended 28 March 2008 and 27 March 2009. In its CTSA returns for the periods, BHL deducted £14 million when calculating its profits for the purposes of corporation tax. HMRC now accept (although they did not always do so) that BHL was entitled to deduct £14 million as deemed interest in computing its profits for corporation tax purposes.
[4]In its CTSA returns for the relevant accounting periods, BJL described the £14 million as "Income on buy-back and issue" but did not include it when computing its liability to tax. BJL contended that the effect of Finance Act 2003 section 195section 195 of the Finance Act 2003 ("FA 2003"), which provides that the acquisition by a company of its own shares is not to be treated as the acquisition of an asset by the company, was that, from BJL's perspective, the transactions did not fall within Income and Corporation Taxes Act 1988 section 730Asection 730A(1) ICTA 1988.
[5]The transactions were notified to HMRC under the Disclosure of Tax Avoidance Scheme (DOTAS) rules and allocated reference number 21163256. Notwithstanding the DOTAS notification, BJL's position was and remained that the transactions were entered into for genuine commercial reasons, namely to recapitalize the group's main trading company, Biffa Waste Services Limited ("BWSL").
[6]HMRC did not accept that the transactions had a bona fide commercial purpose. HMRC took the view that the transactions were a tax avoidance scheme designed to achieve a corporation tax deduction for BHL without any corresponding taxable receipt by BJL. HMRC submitted that the scheme failed because BJL's analysis of the effect of Finance Act 2003 section 195section 195 FA 2003 was wrong. HMRC's position was that Finance Act 2003 section 195section 195 did not disapply Income and Corporation Taxes Act 1988 section 730Asection 730A ICTA 1988. HMRC contended that BJL was liable to tax on the £14 million that Income and Corporation Taxes Act 1988 section 730Asection 730A deemed to be interest paid by BHL on a deemed loan by BJL. If Income and Corporation Taxes Act 1988 section 730Asection 730A applies, HMRC accept that they are limited to recovering tax in relation to the deemed interest accruing during BJL's second accounting period from 12 to 30 September 2008 as that is the period to which the closure...
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