Fidex Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 02 April 2013 |
| Neutral Citation | [2013] UKFTT 212 (TC) |
| Date | 02 April 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 212 (TC)
Judge John Walters QC, John Robinson
Michael Flesch QC and Richard Boulton QC, instructed by Clifford Chance LLP, appeared for the Appellant
John Tallon QC and Charles Bradley, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Corporation tax - loan relationships - debit under FA 1996, Finance Act 1996 schedule 9 subsec-or-para 19ASch. 9, para. 19A, 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 FA 1996, Finance Act 1996 schedule 9 subsec-or-para 13Sch. 9, para. 13 - 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
The First-tier Tribunal decided that the difference in the value of a taxpayer company's loan relationships on a change of accounting practice, i.e. from UK generally accepted accounting practice ("UK GAAP") in the earlier accounting period to international financial reporting standards ("IFRS") in the later accounting period, should be brought into account in the later period as debit pursuant to Finance Act 1996 ("FA 1996"), Finance Act 1996 schedule 9 subsec-or-para 19ASch. 9, para. 19A(3). The taxpayer's accounts for the earlier period showed a true and fair view since the taxpayer was required under the Companies Act 1985 ("CA 1985") and the accounting standard FRS 4 to report the preference shares in the accounts for that period in shareholders' funds, analysed as attributable to non-equity shares. The Tribunal also decided that the debit to be brought into account pursuant to FA 1996, Finance Act 1996 schedule 9 subsec-or-para 19ASch. 9, para. 19A(3) was not attributable to an unallowable purpose and, therefore, not excluded by FA 1996, Finance Act 1996 schedule 9 subsec-or-para 13Sch. 9, para. 13. At no time during the later period did the taxpayer have tax avoidance as a purpose for being party to the loan relationships.
The taxpayer company appealed against HMRC's amendment to its corporation tax return for the year ended 31 December 2005 ("the 2005 year"), disallowing its claim for a loan relationship debit of 83,849,399.
The taxpayer prepared its accounts for the year ended 31 December 2004 ("the 2004 year") applying UK GAAP. In those accounts, the taxpayer showed certain redeemable preference shares within the shareholders' funds on its balance sheet. Those preference shares were issued on 22 December 2004 to a company at a value corresponding to the net proceeds of their issue ("the Project Zephyr transaction"). They were divided into four classes and each class was referenced to a particular bond owned by the taxpayer ("the relevant assets", collectively). The relevant assets were loan relationships and were recognised at their full value as assets in the taxpayer's balance sheet in the 2004 year.
On 22 December 2004, the taxpayer's board resolved to adopt the use of IFRS in place of UK GAAP with effect from 1 January 2005. Following the adoption of IFRS, the preference shares were classified as the taxpayer's liabilities and were derecognised. The 95 per cent of the relevant assets' value were also derecognised in the balance sheet. The remaining five per cent was continued to be recognised as the value of the relevant assets to the taxpayer adopting IFRS. Those 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.
The taxpayer contended that the effect of FA 1996, Finance Act 1996 schedule 9 subsec-or-para 19ASch. 9, para. 19A was to allow a debit in the 2005 year in respect of such differences in the relevant assets' value. Under CA 1985 and FRS 4, the taxpayer was required to report the preference shares in the accounts for the 2004 year in shareholders' funds, analysed as attributable to non-equity shares.
HMRC contended that UK GAAP did not allow for the preference shares and the 95 per cent of the relevant assets to be recognised in the accounts for the 2004 year. The taxpayer's accounts for that year did not give a true and fair view of its position or accord with the requirements under FA 1996, Finance Act 1996 schedule 9 subsec-or-para 19ASch. 9, para. 19A(1)(b). Alternatively, the debit should not be brought into account for corporation tax purposes under FA 1996, Ch. 2. That debit was in respect of loan relationships which were attributable to an "unallowable purpose" within FA 1996, Finance Act 1996 schedule 9 subsec-or-para 13Sch. 9, para. 13.
(2) Whether the conditions in FA 1996, Finance Act 1996 schedule 9 subsec-or-para 19ASch. 9, para. 19A applied so that the GAAP difference in value of the relevant assets between the 2004 UK GAAP and the 2005 IFRS should be brought as the debit into the 2005 year.
(3) Whether in the 2005 year, the relevant assets had an unallowable purpose under FA 1996, Finance Act 1996 schedule 9 subsec-or-para 13Sch. 9, para. 13.
Held, allowing the taxpayer's appeal:
The Tribunal accepted the evidence of the taxpayer's expert witnesses as to the correct accounting treatment of the preference shares. CA 1985 and FRS 4 had established specific requirements for accounting for preference shares. Therefore, the taxpayer had no choice but to record the preference shares and to continue to recognise the 95 per cent of the relevant assets in the accounts for the 2004 year. That was by representing the preference shares as shareholders' funds attributable to non-equity interests in order to account consistently and properly for the Project Zephyr transaction. As the preference shares were accounted for in the taxpayer's accounts for the 2004 year as part of shareholders' funds, it followed that the 95 per cent of the relevant assets had also to be included in the balance sheet as a balancing item. Thus, the taxpayer's accounts for the 2004 year showed a true and fair view.
FA 1996, Finance Act 1996 schedule 9 subsec-or-para 19ASch. 9, para. 19A(3) provides that FA 1996, Finance Act 1996 schedule 9 subsec-or-para 19ASch. 9, para. 19A applies 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. Here, the Tribunal found that following the adoption of IFRS in the taxpayer's accounts for the 2005 year, 95 per cent of the relevant assets and the linked preference shares were derecognised. The consequence was a GAAP difference of 83,849,399 between 2004 UK GAAP and 2005 IFRS in so far as accounting derecognition of assets was concerned. Thus, the conditions under FA 1996, Finance Act 1996 schedule 9 subsec-or-para 19ASch. 9, para. 19A applied and the identified GAAP difference was required to be brought as debit into the 2005 year pursuant to FA 1996, Finance Act 1996 schedule 9 subsec-or-para 19ASch. 9, para. 19A(3).
The Tribunal also held that it was required by FA 1996, Finance Act 1996 schedule 9 subsec-or-para 13Sch. 9, para. 13 to examine the loan relationships which the taxpayer had in the 2005 year and decide whether at any time, the main purpose or one of the main purposes for which it was a party to those loan relationships was a tax avoidance purpose. The tax avoidance purpose was achieved by the taxpayer's retention of the legal title to the relevant assets to the end of the 2004 year. At no time during the 2005 year did the taxpayer have tax avoidance as a purpose for being party to the loan relationships constituted by the relevant assets. Even if "times" was to mean "any time", on any just and reasonable apportionment no part of FA 1996, Finance Act 1996 schedule 9 subsec-or-para 19ASch. 9, para. 19A debit would be attributed to that scintilla temporis. Therefore, no part of FA 1996, Finance Act 1996 schedule 9 subsec-or-para 19ASch. 9, para. 19A debit fell to be excluded from the debits falling to be brought into account by the taxpayer into the 2005 year.
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...
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