Fidex Ltd v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judge | Lord Justice Kitchin,Sir Stephen Richards,Lady Justice Arden |
| Judgment Date | 21 April 2016 |
| Neutral Citation | [2016] EWCA Civ 385 |
| Docket Number | Case No: A3/2015/0418 |
| Court | Court of Appeal (Civil Division) |
| Date | 21 April 2016 |
[2016] EWCA Civ 385
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX & CHANCERY CHAMBER)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lady Justice Arden
Lord Justice Kitchin
and
Sir Stephen Richards
Case No: A3/2015/0418
Michael Flesch QC (instructed by Clifford Chance LLP) for the Appellant
John Tallon QC and Charles Bradley (instructed by HM Revenue & Customs) for the Respondents
Hearing dates: 2/3 March 2016
Introduction
This appeal is concerned with a tax avoidance scheme called Project Zephyr. The object of this scheme was to create a loss of around €84 million in the hands of the appellant ("Fidex") which would be available for group relief throughout the BNP Paribas group of companies of which Fidex forms a part.
On 13 November 2014 the Upper Tribunal (Tax and Chancery Chamber) (the "UT") released a decision dealing with two appeals from the First-tier Tribunal (the "FTT"). The first was an appeal by Fidex from a decision of the FTT released on 7 November 2011 that the terms of a particular closure notice did not preclude the respondents ("HMRC") from arguing that paragraph 13 of Schedule 9 to the Finance Act 1996 (the "1996 Act") applied so as to deny Fidex the benefit of the loss which it claimed. The second was an appeal by HMRC against the decision of the FTT released on 2 April 2013 that, upon its proper application, paragraph 13 did not in fact deny Fidex the benefit of that loss.
The UT dismissed the first appeal but allowed the second. It held that the essential conclusion in the closure notice was that the debit corresponding to the claimed loss should not have been brought into account and that the paragraph 13 issue constituted an additional ground on which HMRC could seek to uphold that conclusion. It went on to hold that the debit in issue arose because of the Project Zephyr transaction and this constituted an unallowable purpose. In the view of the UT, the debit could only be attributed to that purpose and the FTT erred in principle in failing so to find.
Fidex now appeals to this court with permission granted by Sir Robin Jacob on the papers by order dated 18 March 2015. The appeal gives rise to two issues, namely:
i) whether the terms of the closure notice precluded HMRC from raising the paragraph 13 issue (the closure notice issue); and
ii) whether the UT fell into error in finding that the debit in issue was wholly attributable to an unallowable purpose (the paragraph 13 issue).
For reasons which I develop below I believe that the UT came to the correct conclusion on both issues and that this appeal must be dismissed.
The background
The background is set out in the decision of the UT from [2] to [19]. The following summary is drawn in large part and with gratitude from that decision.
Fidex and its holding company, Fidex Holdings Ltd ("FHL"), were established in about 1998 as an off-balance sheet group of companies sponsored by BNP Paribas. The shares in FHL were held by a charitable trust. Fidex acquired a diversified portfolio of highly rated bonds and issued its own commercial paper into the debt capital market.
In 2001 it became necessary to consolidate Fidex's debts and assets into the BNP Paribas group accounts and, as a result, Fidex's commercial paper issuance programme was brought to an end. However, Fidex continued to hold a number of bonds with varying maturity dates extending to 2012 which were now entirely debt financed by BNP Paribas.
Against this background it was decided to refinance the Fidex group and bring it into the BNP Paribas group structure, and then to bring about an orderly disposal of the Fidex bond portfolio. As part of this restructuring and as a precursor to the disposal of the Fidex bond portfolio, BNP Paribas decided to adopt Project Zephyr, a tax avoidance scheme which had been proposed to it by Swiss Re. The object of the scheme was to create a tax loss in Fidex's 2005 accounting period and to enable 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.
In broad outline, Project Zephyr involved the following steps. First, Fidex was brought back into the BNP Paribas group by the acquisition of FHL's shares by BNP Paribas.
Second, Fidex issued to Swiss Re four classes of preference shares, each of which had rights which matched those of four bonds which Fidex held. The terms of each of the classes of preference shares conferred on Swiss Re an entitlement to 95% of the amounts Fidex received from the bond to which those shares related. The economic effect of this arrangement was that Fidex had disposed of 95% of its interest in the bonds to Swiss Re.
Third, Fidex undertook to Swiss Re not to dispose of its interest in the bonds while Swiss Re remained the holder of the related preference shares.
Fourth, 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").
Fidex's 2004 accounts, prepared under GAAP, showed both the preference shares and the bonds on its balance sheet. However, in Fidex's 2005 accounts, prepared under IFRS, neither the preference shares nor 95% of the bonds were shown on its balance sheet since the terms of the preference shares and the economic qualities of the bonds cancelled each other out and the IFRS accounting policy required them to be "derecognised".
Paragraph 19A of Schedule 9 to the 1996 Act provided that if such a change in accounting policy in drawing up a company's accounts from one period to the next created a difference in the accounting value of an asset representing a loan relationship of the company at the end of the earlier period and the beginning of the later period then a corresponding debit or credit had to be brought into account in the later period. The bonds were a loan relationship and the reduction in their value was €84 million. So in its tax return for 2005 Fidex claimed a debit of €84 million, giving rise to a corresponding trading loss.
As the UT explained, the magic of Project Zephyr was that the existence of the preference shares coupled with the change in accounting policy would deliver a trading loss equal to the reduction in value of the bonds, without any economic loss being suffered by Fidex.
On 3 September 2007 HMRC opened an enquiry into Fidex's tax return for 2005. They disputed the way in which the four bonds had been accounted for. They argued that the value of 95% of the bonds was nil both at the end of 2004 (when UK GAAP applied) and the beginning of 2005 (when IFRS applied). In other words, they challenged the way the bonds had been treated in the earlier period under UK GAAP. They maintained there was no difference in value under paragraph 19A(3) of the 1996 Act and so also no paragraph 19A(3) debit. Correspondence on this issue continued for nearly three years.
On 2 August 2010 HMRC issued a closure notice. I must return to the precise terms of this notice later in this judgment but for present purposes it is sufficient to say that in the notice HMRC reduced the amount available for Fidex to surrender as group relief by €84 million. A review upheld that conclusion.
There followed an appeal by Fidex to the FTT. In their statement of case for the FTT hearing, HMRC raised, for the first time, an alternative case that the debit should not have been brought into account for tax purposes by reason of paragraph 13 of Schedule 9 to the 1996 Act. They sought to argue that Fidex had an unallowable purpose in being party to a loan relationship within the meaning of paragraph 13 and it was therefore denied the benefit of any debits that arose under paragraph 19A.
Fidex thereupon applied to the FTT to strike out this new case. That application came on for hearing before Judge Sir Stephen Oliver QC on 10 October 2011. It argued that the Tribunal's jurisdiction was limited to the conclusion in the closure notice that, having regard to the proper application of paragraph 19A, the debit to be brought into account did not include the €84 million. The operation of paragraph 13 was not mentioned in the closure notice and so, Fidex continued, the FTT had no jurisdiction to hear any argument based upon it. By his decision dated 7 November 2011 (TC/2010/08369) Sir Stephen Oliver refused the application. He held that the conclusion stated in the closure notice was that there was no loss in the sum of €84 million; and that the expressed ground for that conclusion was that there was no paragraph 19A(3) difference or debit.
The substantive appeal was heard by the FTT (Judges John Walters QC and John Robinson) over five days in May 2012. Fidex again sought to bring the debit of €84 million into account pursuant to paragraph 19A. This was resisted by HMRC on two grounds: first, that there was no paragraph 19A difference because UK GAAP did not allow the bonds to be recognised in the accounts for 2004; and second, that the debit was attributable to an unallowable purpose within the meaning of paragraph 13.
In its decision dated 2 April 2013 (TC/2010/08369), the FTT found in favour of Fidex on both issues. So far as the second was concerned, it held that Fidex did have an unallowable purpose in 2004 but this purpose was achieved at the end of...
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