BUPA Insurance Ltd v Revenue and Customs Comrs

JurisdictionUK Non-devolved
Judgment Date16 June 2014
Neutral Citation[2014] UKUT 262 (TCC)
Date16 June 2014
CourtUpper Tribunal (Tax and Chancery Chamber)

[2014] UKUT 0262 (TCC)

Upper Tribunal (Tax and Chancery Chamber)

The Hon Mrs Justice Asplin and Judge Julian Ghosh QC

Bupa Insurance Ltd
and
Revenue and Customs Commissioners

Jonathan Peacock QC and John Brinsmead-Stockham (instructed by Slaughter and May) appeared for the Appellant

Richard Bramwell QC (instructed by the General Counsel and Solicitor to HM Revenue and Customs) appeared for the Respondents

Corporation tax - Group relief - Consortium relief - Income and Corporation Taxes Act 1988 ("ICTA 1988"), Income and Corporation Taxes Act 1988 section 403Cs. 403C - Meaning of "beneficial entitlement".

The Upper Tribunal has allowed the taxpayer's appeal against HMRC's amendment of its 2006 tax return refusing a claim for consortium relief: the contractual arrangements between the various parties had not deprived the link company of "beneficial entitlement" to any distribution (actual or notional) made by the surrendering company for the purposes of ICTA 1988, Income and Corporation Taxes Act 1988 section 403Cs. 403C(2)(b).

Summary

Prior to 2006, CX Reinsurance Company Limited (CX) was a 100 per cent subsidiary of T Limited (T). On 21 March 2006, T sold 46.18 per cent of the A ordinary shares in CX to Bupa Finance plc (BF) and 41.17 per cent of the A ordinary shares to Nationwide Building Society, with T retaining 12.65 per cent. BF and Nationwide also acquired certain of the B ordinary shares in CX. BF's A shares entitled it to receive 46.18 per cent of every distribution made by CX on the A shares.

Under the share purchase agreement by which BF acquired its shares in CX from T, BF agreed to pay to T, by way of "Earn-out" consideration for the shares, an amount equal to any "Distribution" (as defined) received by BF from CX, and to do so within ten business days of receipt of any such distribution. Once cumulative distributions had reached US$171m, the earn-out consideration payments would reduce to an amount equal to 95 per cent of any further distribution over and above that benchmark figure (T's group actuaries had estimated there was a slightly better than even prospect that the benchmark figure of US$171m would be exceeded).

T also had the right, under the share purchase agreement, to require distributions to be paid into an Escrow account, but it never exercised that right.

For its accounting period ended 31 December 2006 (which was a short accounting period commencing on 21 March 2006), CX had trading losses of some US$475m. These mainly consisted of carried forward losses, but were treated as losses of that single accounting period by virtue of a Finance Act 2000, Finance Act 2000 section 107s. 107 election (available to insurance companies).

The taxpayer, Bupa Insurance Ltd, was a 100 per cent subsidiary of BF. Bupa Insurance made a consortium claim to around £96m of CX's total losses for its own accounting period which also ended on 31 December 2006 (CX was the "consortium company" and BF the "link company" for these purposes). The claim, if valid, would reduce Bupa Insurance's corporation tax liability by some £29m. Pursuant to the terms of a tax agreement, entered into at the same time as the share purchase agreement, a sum of around £13m was payable by Bupa Insurance to CX for these losses.

The essential elements of the transactions in question had been notified to HMRC by T's accountants under the DOTAS legislation. HMRC commenced an enquiry into Bupa Insurance's tax return for the 2006 accounting period, in which the claim to consortium relief had been made, and formally refused such claim by amending that return in a closure notice in May 2011. Bupa Insurance appealed to the Tribunal.

In a Statement of Agreed Facts and Issues prepared by the parties, the "sole issue to be determined [in the appeal]" had been identified as whether in the relevant period BF (as a link company) was "beneficially entitled" to a percentage of any profits available for distribution to equity holders of the consortium company. If yes, Bupa Insurance, being grouped with the link company BF, would be entitled to its claim to consortium relief.

Decision

The Tribunal determined as follows:

  1. (2) Firstly, it did not agree that HMRC could advance a new submission that BF had a sole "tax avoidance" purpose in acquiring the 46.18 per cent of A shares in CX from T. To do so would involve fact finding, which this appeal (taken before the Upper Tribunal) was not set up to do. In addition, the appeal was designated a "lead case", in part on the basis that the only issue in dispute was whether or not BF was "beneficially entitled" to distributions made by CX.

  2. (3) As regards the statutory language in Income and Corporation Taxes Act 1988 section 403Cs. 403C(2)(b), in the context of a cash distribution the Tribunal said it took the rights relevant to demonstrating a "beneficial entitlement" to distributions as a right to assign the benefit of the distribution and to enjoy its "fruits" - being the right to ownership of any interest earned on the cash distribution and (since BF had a sterling functional currency) a right to enjoy any foreign currency profits on distributions received.

  3. (4) The Tribunal did not consider the nature of the Earn-out mechanism deprived BF of beneficial entitlement to distributions received from CX. BF certainly had "more than a mere legal shell" in relation to its entitlement to any dividend (actual or notional) made by CX. BF was entitled to use any distribution proceeds (to satisfy the Earn-out consideration) or not as BF's commercial affairs dictated. It was entitled to the benefits (and exposed to the risks) of any foreign currency fluctuations for cash distributions made in US$, for ten days (irrespective of whether the distribution was used to fund the payment of the earn-out consideration or not); and entitled to any interest arising on a cash distribution for ten days (and indefinitely if the Earn-out consideration was financed from other sources).

  4. (5) The Tribunal said the analysis might have been different if the facts had been that BF had no access to any of the benefits of ownership of the cash between receipt of the distribution and payment of the Earn-out consideration (so no right to assign the distribution, no right to interest or to take the benefit of/be exposed to foreign currency fluctuations). But that was not the case. HMRC had, too, run their case on the basis that the share purchase agreement of itself "deprived BF of a beneficial entitlement to distributions received from CX, irrespective of the commercial circumstances of (sic) CX": thus (the Tribunal said) the Carreras Group Ltd v Stamp CommrTAX[2004] BTC 8077 and IR Commrs v Scottish Provident InstitutionTAX[2004] BTC 426 cases did not assist HMRC.

  5. (6) The Tribunal said its positive conclusion that BF had a beneficial entitlement to CX's distributions was consistent with the further conclusion that the relevant beneficial entitlement could not "realistically" be said to be in suspense or rest with any other party.

  6. (7) The Tribunal had invited submissions from the parties on the Indofoods case (Indofood International Finance Ltd v JP Morgan Chase Bank NATAX[2006] BTC 8003). This was because the term "beneficial ownership", in relation to interest, had been construed by the Court of Appeal in that case. The Tribunal said that both parties agreed that Indofoods was not relevant to this appeal, on the basis that the meaning ascribed to "beneficial ownership" was an "international fiscal meaning" appropriate to double taxation treaties, informed at least by various materials which were not relevant to the construction of Income and Corporation Taxes Act 1988 section 403Cs. 403C; and thus that the authorities which have construed "beneficial ownership" to which the Tribunal had referred (Wood Preservation Ltd v Prior (HMIT)TAX(1968) 45 TC 112, Ayerst (HMIT) v C & K (Construction) LtdTAX(1975) 50 TC 651, J Sainsbury plc v O'Connor (HMIT)TAX[1991] BTC 181), were undisturbed by Indofoods.

  7. (8) The Tribunal determined that the taxpayer's appeal be allowed.

Comment

The Tribunal decision, with its focus on "more than a mere legal shell", harked back to some of the older "beneficial ownership" cases. Because the tax at stake on this appeal was large, and the appeal was also designated a "lead case", one might expect HMRC to run this further.

Introduction

[1]This appeal concerns the meaning of "beneficial entitlement". In particular, it concerns whether a corporate shareholder, which receives a distribution on shares it holds in a subsidiary company is deprived of a "beneficial entitlement" to that distribution by reason of a contractual obligation to pay an equivalent sum to another party. We set out the relevant statutory context below.

The facts

[2]Mr Peacock QC, who appeared for Bupa Insurance Ltd ("Bupa Insurance") and Mr Bramwell QC, who appeared for The Commissioners for Her Majesty's Revenue and Customs ("HMRC") prepared a Statement of Agreed Facts and Issues. We have annexed this to our Decision as a Schedule.

[3]The facts which are relevant to the appeal are as follows: at the material times, CX Reinsurance Company Limited ("CX Re") was a UK tax resident and UK incorporated limited company. CX Re carried on a trade of reinsurance. At the material times, CX Re was "in run-off", meaning that it had stopped writing new reinsurance contracts, so that its trade consisted of carrying out its reinsurance contracts and managing its portfolio of investments. At all material times CX Re's functional currency was US dollars. And at all material times, CX Re had no profits available for distribution.

[4]Prior to 20th March 2006, CX Re was a 100% subsidiary of Tawa UK Limited (now Tawa Plc; "Tawa"). On 20th March 2006, Tawa sold part of its shareholding to two individuals, Mr Paul Jardin and Mr Philip Marcell. On 21st March 2006, Tawa sold a further part of its shareholding to Bupa...

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