BNP Paribas SA (London Branch)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 12 June 2017 |
| Neutral Citation | [2017] UKFTT 487 (TC) |
| Date | 12 June 2017 |
| Court | First-tier Tribunal (Tax Chamber) |
Judge Greg Sinfield, Judge Harriet Morgan
Michael Flesch QC, Richard Boulton QC and Michael Jones, counsel, instructed by Clifford Chance LLP, solicitors, appeared for the appellant
Giles Goodfellow QC and David Yates, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Corporation tax – Whether price of purchase of right to dividends deductible – Whether purchase and sale of right to dividends was trading transaction in course of appellant's trade – No – Whether purchase price expenditure incurred wholly and exclusively for purposes of the trade – no – whether HMRC permitted to argue point in relation to Income and Corporation Taxes Act 1988 (ICTA 1988), s. 730 that was not raised in closure notice and which they stated they were not pursuing – Yes – Whether price of sale of right to dividends disregarded for purposes of calculating appellant's trading profits under ICTA 1988, s. 730(3) – No – Appeal dismissed.
The First-tier Tribunal held that the price paid for the purchase of dividend rights in connection with a disclosable tax avoidance scheme was not deductible as expenses of a banking trade.
This case considered the tax consequences of the purchase and sale of a right to certain dividends by the London branch of BNP Paribas SA in the accounting period ended 31 December 2005. The taxpayer claimed that a deduction for a trading loss of c. £96m arising on the purchase of the dividend rights was deductible from the profits of its banking trade and that the sale price received was not a taxable receipt due to the operation of ICTA 1988, s. 730(3). The background facts are complicated but may be summarised as follows:
1) Dividend rights were created by a new company (HIL) issuing shares to BNP Luxembourg SA (BNP Lux), a non-UK resident subsidiary of BNP Paribas SA. The shares carried the right to a monthly fixed rate dividend and to a termination dividend.
2) The London branch bought the right to the dividends from BNP Lux who continued to own the shares.
3) The London branch sold the right to the shares to an unconnected party, Alliance & Leicester Investments Ltd (ALIL).
4) The group entered into various funding and hedging arrangements with ALIL to enable HIL to meet its financial obligations and to hedge the group's interest rate risk during the term of the transaction.
5) BNP Lux exited from the transaction in the following year by selling the shares to a UK subsidiary of BNP. BNP funded this acquisition by subscribing for shares in the subsidiary.
The first issue was whether the purchase and sale of the right to the dividends was made in the course of BNP's banking and financial trade. HMRC took the view that the transaction was undertaken with the object of achieving the benefit of the tax loss under the provisions of ICTA 1988, s. 730(3). As the transaction was not undertaken in the course of a trade, no tax deduction was available. BNP argued that fiscal motive was not relevant. Fiscal motive does not prevent a trading transaction from being regarded as such and there were other commercial reasons for the transaction i.e. that the group effectively borrowed £150m at an attractive rate which resulted in a pre-tax saving of £1.1m and a considerable after-tax profit taking into account the s. 730 benefit.
The second issue was that, even if it is held that the purchase and sale of the dividend rights was part of the trade of the London branch, the price paid was not deductible because it was not incurred wholly and exclusively for the purposes of the branch trade.
The third issue was whether s. 730(3) had the effect, as BNP argued, of excluding the sale price received by the London branch from being brought into account as a taxable receipt. BNP argued that the meaning of the provision is entirely clear from the wording used and that it simply excludes the proceeds from being brought into account for any tax purposes including as a receipt of a financial trader's trade. HMRC argued that s. 730(3) does not apply to a subsequent sale by a financial trader or that it only applies to prevent the proceeds of such a sale from being taxed as pure income profit in the trader's hands. It does not, in their view, exclude receipts of a trade from being brought into account in the computation of the overall trading profit.
The fourth issue was whether HMRC were entitled to raise the s. 730 issue at all, on the basis that it was not within the scope of the conclusion or amendment made by the closure notice so that it is not part of the appeal.
The First-tier Tribunal (FTT) found in favour of HMRC on all matters under consideration. As to whether the London branch was trading, the argument that the obtaining of the s. 730 benefit itself renders the arrangement commercial, as more than covering the lack of a deduction for the fixed rate dividends, is wholly circular. As in the cases of FA & AB Ltd v Lupton (Inspector of Taxes) TAX[1971] 47 TC 580 and Thomson v Gurneville TAX[1971] 47 TC 633, on an objective assessment, the transaction was designed, intended and implemented as a tax recovery device and not as part of the London branch's financial trade. This is a case where the transaction is simply a tax recovery device for the obtaining of a tax loss where there is no economic loss. In those circumstances, it can hardly be said, as it was not in those cases, that the commercial justification for the transaction is the very fact that it is designed to obtain the tax recovery. The activities did not therefore form part of the trading activities of the London branch.
On the wholly and exclusively point, whilst there were commercial effects of the transaction, these were introduced and designed with the objective of enhancing the prospect of achieving the s. 730 benefit. Whilst the papers prepared for internal approval purposes refer in headline terms to the benefit of the so called “cheap” funding, the focus of the papers is on the tax effect of the transaction. Minutes of internal meetings reveal no consideration of the commercial merits of the transaction other than the obtaining of the tax benefit. The correspondence and the papers acknowledge that, in fact, the benefit for the BNP group was obtained immediately such that it would be in its interests to terminate the arrangements with ALIL immediately. The structuring team were remunerated by reference to the potential tax benefit and it had been accepted that the transaction would not have happened but for the potential obtaining of the tax benefit and that it was, at least, a main purpose of the transaction. Accordingly, the expenditure incurred by the London branch in acquiring the dividend rights from BNP Lux was not incurred wholly and exclusively for the purposes of the trade of the London branch but (at least in part if not solely) for the purpose of obtaining the s. 730 benefit for the BNP Group.
On the closure notice point, it was clear from the correspondence that the focus of HMRC's enquiry, and of the conclusion they then reached, was on whether the transaction resulted in an allowable trading loss of over £91m as the London branch claimed. At the point when the closure notice was issued, HMRC had two reasons for asserting that it was not, both of which looked at the taxation of the transaction in its entirety. On that basis, we do not regard the conclusions or amendment set out in the closure notice, as assessed according to the context of the enquiry and related correspondence, to be confined to the narrow point that the London branch was not entitled to a tax deduction for the price paid for the dividend rights. Looked at in context, HMRC concluded the enquiry by taxing the transaction as though it were not a trading one, or as though it is to be disregarded for fiscal purposes. This argument could therefore be raised within the scope of the conclusions embodied by the closure notice as interpreted in its context and there were no case management reasons why it would be inappropriate to do so.
On the s. 730 issue, the FTT found it very difficult to see that the legislature intended the meaning of the provision which BNP argued for on the basis that certain other manifestly absurd tax effects would be “made good”, as BNP asserted, through the combined effect of the income and capital gains rules. Such a hybrid approach would be highly unusual and of itself gives rise, as HMRC noted, to a number of problems. The FTT appreciated that this interpretation means that, in practice, the application of s. 730(3) is limited to cases where the dividend income provisions apply which is a narrow range of cases. However, it did not see that of itself affects matters. Section 730 is a relatively narrow anti-avoidance provision applicable in limited circumstances. That there are only limited situations in which there could be a double tax charge on the sales proceeds as “income” is not perhaps surprising. It followed that s. 730(3) did not operate to exclude the proceeds of sale realised by the London branch from being brought into account.
There were significant sums at stake in this complicated tax avoidance case and the judgment was a lengthy one as can be seen from the case report which runs to some 150 pages. The technical s. 730 point is now largely of historical interest only as the loophole was closed shortly after the transaction was disclosed to HMRC under the DOTAS rules. The aspects of the judgment relating to the existence of a trade are however be of ongoing relevance, as is the analysis of whether the expenditure was incurred wholly and exclusively for the purposes of the trade. Overall, the judgment supports the view that activities undertaken primarily for tax avoidance purposes may not constitute a trade in the first place and, even if they do, may not be wholly and exclusively incurred for the purposes of that trade.
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Gill
...that expert evidence should be admitted to assist the Tribunal in reaching its conclusions as it did in BNP Paribas SA (London Branch) [2017] TC 05941.[12] Mr Afzal, for Mr Gill, submits that expert evidence is unnecessary. He says that the Tribunal is quite capable of determining the issue......
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Towers Watson Ltd
...they put forward. It is worth mentioning however certain factual features of the FTT's decision in BNP Paribas SA (London Branch) [2017] TC 05941 which I was referred to. As Mr Jones, for HMRC notes, there, not only was the particular amendment made by the closure notice inconsistent with t......