Fidex Limited v The Commissioners for Her Majesty's Revenue & Customs, TC 02626
| Jurisdiction | UK Non-devolved |
| Judge | John L WALTERS QC |
| Judgment Date | 02 April 2013 |
| Neutral Citation | [2013] UKFTT 212 (TC) |
| Respondent | The Commissioners for Her Majesty's Revenue & Customs |
| Appellant | Fidex Limited |
| Reference | TC 02626 |
| Court | First-tier Tribunal (Tax Chamber) |
[2013] UKFTT 212 (TC)
TC02626
Appeal number: TC/2010/08369
CORPORATION TAX – loan relationships – debit under paragraph 19A,
Schedule 9, Finance Act 1996 in respect of the difference in the accounting
value of loan relationships on a change of accounting practice – appellant
company changing accounting practice from UK GAAP to IFRS at the 2004
year-end – appellant claiming the debit in the 2005 accounting period –
whether there was as a matter of fact the relevant difference in the
accounting value – expert evidence as to UK GAAP and IFRS considered –
found that there was the relevant difference in accounting value – whether
in that case the debit was not to be brought into account, as being
attributable to an unallowable purpose, under paragraph 13, Schedule 9,
Finance Act 1996 – found that the appellant’s tax avoidance purpose was
achieved at the 2004 year-end – there were no times during the 2005
accounting period during which the appellant had an unallowable purpose
such that on a just and reasonable apportionment any part of the debit was
to be attributed to it – appeal allowed
FIRST-TIER TRIBUNAL
TAX CHAMBER
FIDEX LIMITED Appellant
- and -
THE COMMISSIONERS FOR HER MAJESTY’S Respondents
REVENUE & CUSTOMS
TRIBUNAL:
JUDGE JOHN WALTERS QC
JOHN ROBINSON
Sitting in public at Bedford Square, London on 14, 15, 16, 17 and 18 May 2012
(The Tribunal received further written submissions dated 1, 13 and 18 June
2012)
Michael Flesch QC and Richard Boulton QC, instructed by Clifford Chance
LLP, for the Appellant
John Tallon QC and Charles Bradley, instructed by the General Counsel and
Solicitor to HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2013
2
DECISION
Introduction – the Paragraph 19A Issue and the Paragraph 13 Issue
1. The Appellant, Fidex Limited (“Fidex”) appeals against an amendment to its corporation
tax return for the year ended 31 December 2005 (“the 2005 Year”). That amendment was
made by the Respondents (“HMRC”) by a closure notice dated 2 August 2010.
2. The amendment was to disallow a loan relationship debit of €83,849,399 claimed by
Fidex.
3. The background to the dispute can be explained in general terms as follows, taking facts
from a Statement of Agreed Facts supplied by the parties.
4. Fidex prepared its accounts for the year ended 31 December 2004 (“the 2004 Year”)
applying UK GAAP (UK Generally Accepted Accounting Practice). In those accounts Fidex
showed, within shareholders’ funds on its balance sheet, certain redeemable preference shares
(“the Preference Shares”) issued on 22 December 2004 to Swiss Re Financial Products
Corporation (“Swiss Re”) at a value corresponding to the net proceeds1 of their issue. The
Preference Shares were divided into four classes (A to D) and each class was referenced to a
particular bond owned by Fidex (collectively, “the Relevant Assets”). The Relevant Assets
were loan relationships and were recognised at their full value as assets in Fidex’s balance
sheet as at 31 December 2004.
5. At a meeting of the board of Fidex on 22 December 2004, the board resolved to adopt the
use of International Financial Reporting Standards (“IFRS”) in place of UK GAAP with
effect from 1 January 2005.
6. Following the adoption of IFRS as from 1 January 2005, the Preference Shares were
classified as liabilities of Fidex and derecognised. The Relevant Assets were, as to 95% of
their value, also derecognised in Fidex’s balance sheet (5% of their value continued to be
recognised as the value to Fidex of the Relevant Assets adopting IFRS). These
derecognitions reflected differences between the closing balances on the balance sheet as at
31 December 2004 and the opening balances as at 1 January 2005.
7. Fidex claims that in these circumstances the effect of paragraph 19A of Schedule 9 to the
Finance Act 1996 (hereinafter “Paragraph 19A”) is to allow a debit in the 2005 Year to
reflect the difference between the carrying value of the Relevant Assets in the balance sheet
as at 31 December 2004 (the end of the 2004 Year) and the carrying value of the Relevant
Assets recognised as at 1 January 2005.
8. Paragraph 19A relevantly provides as follows:
‘(1) This paragraph applies where –
(a) There is a change of accounting policy in drawing up a company’s accounts
from one period of account (“the earlier period”) to the next (“the later period”), and
(b) The approach in each of those periods accorded with the law and practice
applicable in relation to the period.
1 ‘Net proceeds’ are r elevantly defi ned in Financial Reporting Standard 4 as the ‘fair val ue of the
consideration received on the issue of a capital instrument after deduction of issue costs’ (ibid. [11]) – as per Mr
Martin’s evidence. This is the meaning we have attributed to this agreed fact.
3
(2) This paragraph applies, in particular, wh ere –
(a) The company prepares accounts for the earlier period in accordance with UK
generally accepted accounting practice and th e for the later per iod in accordance with
international accounting standards ...
(3) If there is a difference between –
(a) the accounting value of an asset or liability representing a loan relationship of the
company at the end of the earlier period, and
(b) the accounting value of that asset or liability at the beginning of the later period,
a corresponding debit or credit (as the case may be) shall be brought into account for the purposes
of this Chapter [viz: Chapter 2, Finance Act 1996] in the later period.
(4) In sub-paragraph (3) “accounting value” means ... the carryi ng value of th e asset or liability
recognised for accounting purposes.’
9. Fidex claims to bring into account in the 2005 Year a debit of €83,849,399 pursuant to
sub-paragraph (3) of Paragraph 19A.
10. HMRC resist the claim on two grounds. First, they submit that UK GAAP did not allow
for the Preference Shares and the Relevant Assets (except as to 5% of their value) to be
recognised in the accounts for the 2004 Year and that Fidex’s accounts for that year did not
give a true and fair view of its position or accord with the requirements of sub-paragraph
(1)(b) of Paragraph 19A. We refer to this issue for the Tribunal’s determination as “the
Paragraph 19A Issue”.
11. Secondly, HMRC submit that, even if we decide the Paragraph 19A Issue in favour of
Fidex, the debit of €83,849,399 must not be brought into account for the purposes of Chapter
2, Finance Act 1996, that is, for corporation tax purposes, because the debit is in respect of
loan relationships (the Relevant Assets) which are ‘attributable to [an] unallowable purpose’
within paragraph 13, Schedule 9, Finance Act 1996 (hereinafter “Paragraph 13”). We refer to
this issue for the Tribunal’s determination as “the Paragraph 13 Issue”.
12. Paragraph 13 provides relevantly as follows:
‘13 (1) Where in any accounting period a l oan r ela tionship of a com pany has an unallowable
purpose –
(a) the debits, and
(b) the credits in respect of exchange gains,
which, for that period fall, in the case of that company, to be brought into account for the purposes
of this Chapter shall n ot include so much of the debits or credits (as the case may be) as respects
that relationship as, on a just and reasonabl e apportionment, is attributable to the unallowable
purpose.
...
(2) For the purposes of th is paragraph a loan r el ationship of a company shall be taken to have an
unallowable purpose in an accounting period where the purposes for which, at times during that
period, the company –
(a) is a party to the relationship, or
(b) enters into transactions which are related tran sactions by reference to that
relationship,
To continue reading
Request your trial