Fidex Limited v The Commissioners for Her Majesty's Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 November 2014 |
| Neutral Citation | [2014] UKUT 0454 (TCC) |
| Appellant | FIDEX LIMITED |
| Respondent | REVENUE & CUSTOMS |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
| Appeal Number | FTC/71/2013 |
[2014] UKUT 0454 (TCC)
Appeal numbers: FTC/71/2013 and FTC75/2013
Procedure - appeal against closure notice - reliance on grounds for
amendment not stated in closure notice- Tower McCashback considered
Corporation tax – loan relationships – application of paragraph 13 Sch9 FA
1996 to debit arising under para19A
UPPER TRIBUNAL
TAX AND CHANCERY CHAMBER
FIDEX LIMITED Appellant in
Appeal no
FTC/75/2013,
and
Respondent
in Appeal no
FTC/71/2013
- and -
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE & CUSTOMS Respondents
in Appeal no
FTC/75/2013
and
Appellant in
Appeal no
FTC/71/2013
TRIBUNAL:
Mr Justice Barling
Mr Charles Hellier
Sitting in public in London on 13, 14 and 15 May 2014
Michael Flesch QC instructed by Clifford Chance LLP for Fidex Limited
John Tallon QC and Charles Bradley, instructed by the General Counsel and
Solicitor to HM Revenue and Customs, for HM Revenue and Customs
© CROWN COPYRIGHT 2014
DECISION
Introduction
1. This is a single decision relating to two appeals against two decisions of the First-
tier Tax Tribunal (the “FTT”). One appeal is by Fidex Limited (“Fidex”) and is 5 against a decision that the effect of a particular closure notice was not to prevent
HMRC arguing that paragraph 13 of Schedule 9 to the Finance Act 1996 (“the FA”)
applied to deny Fidex a claimed loss; the other appeal is by HMRC against a decision
that paragraph 13 did not deny Fidex the benefit of that loss.
2. Until 2002 Fidex was an orphan company associated with BNP Paribas. The 10 shares in its holding company (“FHL”) were held by a charitable trust. It had been
used to repackage bonds issued by a number of different companies: it bought bonds,
entered into derivatives, and issued its own commercial paper which carried some of
the economic characteristics of the bonds it had purchased.
3. Initially Fidex’s debts and assets were not consolidated in BNP Paribas group 15 accounts. But the accounting practice changed: Fidex’s commercial paper programme
was terminated in 2002 and it was left holding a portfolio of some 22 bonds of
varying maturities.
4. In 2004 Swiss Re proposed a tax avoidance scheme to BNP Paribas. The object of
the scheme was to create a tax loss in Fidex’s 2005 accounting period, and to enable 20 that loss to be surrendered to companies in the BNP Paribas group. The BNP Paribas
group decided to implement the scheme and paid Swiss Re a fee for its idea.
5. In broad outline the following steps were taken in 2004 in what was called Project
Zephyr:
(1) Fidex was brought back into the BNP Paribas tax group by the 25 acquisition of FHL's shares by BNP Paribas (so that the expected losses
might be group relieved against taxable profits of companies in the group);
(2) Fidex issued to Swiss Re four classes of preference shares, each of
which had rights which matched those of one of four sets of bonds held by
the company; 30
(3) Fidex decided that, for the year ending 31 December 2005, it would
change the accounting principles used in making up its accounts from UK
Generally Accepted Accounting Practice (“UK GAAP”) to International
Financial Reporting Standards ("IFRS”).
6. The terms of each of the classes of preference shares gave the holders rights which 35 reflected Fidex's rights in relation to the four different bond holdings. The rights of
each class of preference share entitled the holders to amounts equal to 95% of the
amounts Fidex received from the corresponding bonds. Under the terms of the
subscription agreement Fidex undertook to Swiss Re not to dispose of its interest in
3
the relevant bonds while Swiss Re remained the holder of the related preference
shares.
7. The economic effect of each issue of preference shares was that Fidex had
disposed of 95% of its interest in the related bonds to Swiss Re.
8. Under UK GAAP Fidex's 2004 accounts showed both the preference shares and 5 the bonds on Fidex's balance sheet; in Fidex’s 2005 accounts, under IFRS, neither the
preference shares nor 95% of the bonds were shown on its balance sheet since the
terms of the preference shares so matched and cancelled the economic qualities of the
bonds (or of 95% of the bonds) that the IFRS accounting policy required them to be
"derecognised". 10
9. Paragraph 19A of Schedule 9 to the FA provided that if by reason of a change in
accounting policy the carrying value of a loan relationship in a company’s accounts
changed between the end of one period (in this case 2004) and the beginning of the
next (in this case 2005) the difference should be treated as deductible or taxable in the
later year (depending on whether it was respectively a decrease or an increase in 15 carrying value). The reduction of the carrying value of the bonds was €84m, and
Fidex claimed a debit of that amount in its tax computations for 2005 giving rise to a
trading loss.
10. The magic in this scheme was that the existence of the preference shares coupled
with the change in accounting policy would mean that paragraph 19A would deliver a 20 loss equal to 95% of the value of the bonds, without any economic loss being suffered
by Fidex.
11. Before implementing the scheme the BNP Paribas group took external legal and
accounting advice. A number of internal documents describing the scheme and its
risks and benefits were before the FTT. The FTT quoted an extract from one in its 25 second decision at [146]. This included the following statement:
"The risk transfer of €84 million of bonds is structured such that it results in the
BNP P[aribas] UK group being able to claim a UK tax deduction for €84
million ... as a result of the application of the transitional rules for UK taxpayers
moving accounting basis from UK GAAP to IFRS on 1 January 2005." 30
12. The scheme was notified to HMRC as a tax avoidance scheme, and Fidex, when it
made its tax return for 2005, notified HMRC that it had used the scheme.
13. HMRC opened an enquiry into Fidex's tax return for 2005. They disputed the way
in which the bonds had been or should be accounted for. They argued that the
carrying value of 95% of the bonds was nil both at the end of 2004 and at the 35 beginning of 2005 so that no difference and no debit or loss arose under paragraph
19A. The correspondence continued on this issue for over three years.
14. Then on 2 August 2010 HMRC issued a closure notice in which they indicated
that the company’s return should be amended so as to reduce the claimed trading loss
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