Bristol & West Plc v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 14 February 2014 |
| Neutral Citation | [2014] UKUT 73 (TCC) |
| Date | 14 February 2014 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2014] UKUT 0073 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Mr Justice Peter Smith
Graham Aaronson QC & James Henderson, instructed by Herbert Smith Freehills LLP, appeared for the Appellants
Kevin Prosser QC & James Rivett, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondent
Taxation of profits made on sale or transfer of derivatives under Finance Act 2002Finance Act 2002 ("FA 2002") - Whether transfer disregarded between subsidiaries where one of the companies is not subject to the regime under the 2002 Act - Closure Notice - Whether effective when sent by mistake known to the tax payer company.Held: The transfer was not to be disregarded for the purposes of the 2002 Act but the Closure Notice was effective and prevented HMRC from seeking to claim tax in that tax year arising out of the transfer between the two companies - Appeal allowed.
The Upper Tribunal ("UT") have allowed a taxpayer's appeal finding that although the group neutrality rule in Finance Act 2002 ("FA 2002"), Finance Act 2002 schedule 26Sch. 26, para. 28(3) (now Corporation Taxes Act 2009 ("CTA 2009"), Corporation Tax Act 2009 section 625s. 625) did not apply so as to produce the tax advantage sought and that the enquiry closure notice issued by HMRC in error was valid and prevented HMRC from pursuing the derivatives transaction further.
The taxpayer company appealed two issues determined by the First-tier Tribunal ("FTT"). The first issue was whether documentation issued by HMRC amounted to a closure of the enquiry with the effect that HMRC were prevented from pursuing the tax sought on the transactions any further, and the second issue, in the event that the closure issue was unsuccessful, was whether the disposal by the taxpayer company to another group company of a derivatives contract succeeded in achieving the tax advantage of a base cost uplift without a corresponding tax charge on the transferor.
An enquiry closure notice had been issued by HMRC in error without including any additional profits or tax that HMRC had previously indicated was due in respect of the derivatives transaction. HMRC immediately identified their error and emailed the taxpayer company notifying that the closure notice had been issued in error and then followed up with a letter confirming that because closure notices had been issued in error, HMRC would instead be amending the returns under Finance Act 1998, Finance Act 1998 schedule 18 subsec-or-para 34Sch. 18, para. 34(1).
The FTT had determined that because the taxpayer company had been aware that the closure notices were issued in error and that HMRC had not completed their enquiries that nothing had performed the function of notifying the taxpayer that the enquiries had been completed and so no closure notice had been issued. The UT, however, disagreed finding that the closure notices were valid. Although HMRC had a clear desire to continue to pursue their enquiry, the letter to the taxpayer company confirmed HMRC's stance that the closure notices were valid (and not void) and whilst this was under the mistaken belief that they could allow the closure notices to go ahead and yet still continue the investigation by other means, they were bound by the consequences of that mistake.
On the second issue, the taxpayer company had contended that because it and the other group company that was party to the transaction had different accounting period ends, it fell within the FA 2002 derivatives contract regime (now CTA 2009, Corporation Tax Act 2009 part 7Pt. 7) whereas the other group company did not (its next accounting period would be its first to fall within the regime). This meant that in the taxpayer company's books the disposal was disregarded (by FA 2002, Finance Act 2002 schedule 26Sch. 26, para. 28 (now CTA 2009, Corporation Tax Act 2009 section 625s. 625)) so the disposal proceeds were not taxable but the acquisition cost was still reflected in the books of the other group company.
On this issue, the UT agreed with the FTT's construction of para. 28 and declined to imply any other provisions or to vary the provisions to give effect to the scheme proposed by the taxpayer company. The FTT had found that the literal meaning of para. 28(3) was that both the transferor and transferee must be taxed in a matching manner and as para. 28(3) could not be applied to both companies it simply did not operate which meant the disposal proceeds were taxable.
This case highlights that in considering grounds for appealing assessments, procedural matters such as the validity of HMRC documents, should not be overlooked. In this case HMRC had issued a valid closure notice and were bound by that even though it was issued entirely by mistake and notwithstanding the taxpayer company was made aware that it was a mistake. Therefore, even though the UT found in favour of HMRC on the tax issue, the appeal was nevertheless allowed on the grounds that a valid closure notice had been issued.
[1]The Appellant Bristol & West Plc ("B&W") appeals against the decision of the First-tier Tax (Judge Nowlan and Mrs Lousada) ("the FTT") dated 8th April 2013.
[2]B&W sought permission to appeal two of the three issues decided by the FTT and it was granted permission to appeal in respect of those issues by Notice dated 19th June 2013.
[3]The first of the two issues is a procedural one. In outline HMRC in error produced and sent out a document headed "Notice of completion of Enquiry" in respect of B&W's accounting period ending 31st March 2004. A subsequent letter then confirmed to B&W that the enquiry stage was at an end. This occurred without including the additional profits and tax previously said by HMRC to be due as a result of the novation of certain interest rate swaps from the Appellant to another group company, Bank of Ireland Business Finance Ltd ("BIBF"), on 29th August 2003. The issue is whether HMRC can now say that the enquiry stage actually continued and rely on a much later closure letter and consequent amendment to B&W's 2004 return which did include adjustments in respect of the novation ("the Closure Notice Issue"). If HMRC cannot do that no additional tax is due from B&W for the year ending 31st March 2004.
[4]The second issue ("the Disregard Issue") only arises if B&W is unsuccessful on the Closure Notice Issue. However the Disregard Issue is relevant also to accounting periods subsequent to the period ending 31st March 2004. B&W contended that it was subject to a new regime for taxation of derivative contracts enacted by the Finance Act 2002 ("FA 2002") even if BIBF was not.
[5]The FTT decided on the procedural issue that the purported notice of 31st October 2007 was not a Closure Notice so that HMRC could make later adjustments to the return occasioned by HMRC's contentions concerning the taxation of the derivatives.
[6]In respect of the Disregard Issue the FTT decided that B&W could not rely upon the disregard of a transaction provided by paragraph 28 of Finance Act 2002 schedule 26Schedule 26 FA 2002 because that only applied if both the transferor and the transferee companies were under the regime set up in FA 2002. At all times BIBF was not in that regime because its accounting period was not covered by the relevant provisions (see below).
[7]The third issue before the FTT has not been challenged by B&W.
[8]B&W entered into interest rate swap contracts in order to hedge fixed rate mortgages and fixed rate savings products. It was accepted by all parties that the entry into these was for entirely commercial hedging reasons.
[9]As a result of interest rate movements certain of B&W's swaps were "in the money". By that it is meant that the present value of the payments to be received by B&W over the remaining life of the swaps exceeded the present value of the payments to be made by B&W to the counterparty to the swaps.
[10]On 29th August 2003 B&W novated 220 interest rate swaps to BIBF in consideration of a payment to B&W of approximately £91,000,000. This was accepted as being the market value of the novated swaps as at 29th August 2003.
[11]This novation transaction was carried out by B&W purely in the hope of securing a tax advantage. I should explain what that tax advantage was perceived to be.
[12]The FA 2002 had replaced the swaps regime of FA 1994 and came into force in relation to companies for the first accounting period to commence after 1st October 2002. B&W's accounting period had commenced 1st April 2003 and so B&W was in the regime whereas BIBF's accounting period had commenced on 1st September 2002 and so BIBF was not.
[13]The attempt was to have that transaction disregarded as regards B&W's trading activities in the year ending 31st March 2004 to take advantage of the disregard provisions in Finance Act 2002 schedule 26Schedule 26 FA 2002 (paragraph 28). By contrast BIBF was not within the regime in that tax year and therefore would not be treated as the transferor company for the purposes of FA 2002. Thus the transaction would be entered in BIBF's books with an acquisition price of £91,000,000 which would be the base for any taxation it might incur on a subsequent disposal of those novated contracts. The difference therefore was that the £91,000,000 "disappeared" from B&W's accounts but did not "reappear" in BIBF's accounts. There would therefore be a tax saving on the part of B&W if the scheme was successful.
[14]HMRC's contention in relation to the novation was that the roll over provision set out in paragraph 28 did not apply and B&W should be taxed on the entire £91,000,000.
[15]A more detailed analysis factually is set out in the FTT decision. For the purpose of this decision no further facts are required to be set out.
[16]On 22nd November 2005 HMRC gave notice of enquiry into B&W's tax return...
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