Fidex Ltd v Revenue and Customs Comrs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 November 2014 |
| Neutral Citation | [2014] UKUT 454 (TCC) |
| Date | 13 November 2014 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2014] UKUT 0454 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mr Justice Barling, Mr Charles Hellier
Michael Flesch QC instructed by Clifford Chance LLP appeared for Fidex Limited
John Tallon QC and Charles Bradley, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for HM Revenue and Customs
Procedure - Appeal against closure notice - Reliance on grounds for amendment not stated in closure notice - R & C Commrs v Tower MCashback LLP 1[2011] BTC 294 considered.Corporation tax - Loan relationships - Application of Finance Act 1996 ("FA 1996"), Finance Act 1996 schedule 9Sch. 9, para. 13 to debit arising under FA 1996, Finance Act 1996 schedule 9Sch. 9, para. 19A.
Fidex Ltd (Fidex) had appealed the First-tier Tribunal (FTT) decision in Fidex LtdTAX[2011] TC 01550 on a procedural point that HMRC should not be able to raise new arguments before the court where they were not specifically addressed in a closure notice. The Upper Tribunal (UT) dismissed the appeal. HMRC had appealed the decision by the FTT in Fidex LtdTAX[2013] TC 02626 that Finance Act 1996, Finance Act 1966 schedule 9Sch. 9, para. 13 did not deny Fidex the loss. The UT allowed HMRC's appeal.
This is a single decision relating to two appeals against two decisions of the FTT. One appeal is by Fidex and is against a decision that the effect of a particular closure notice was not to prevent HMRC arguing that Finance Act 1996, Finance Act 1996 schedule 9Sch. 9, para. 13 applied to deny Fidex a claimed loss; the other appeal is by HMRC against a decision that para. 13 did not deny Fidex the benefit of that loss.
Until 2002 Fidex was an orphan company associated with BNP Paribas. Initially Fidex's debts and assets were not consolidated in BNP Paribas group 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. 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 that loss to be surrendered to companies in the BNP Paribas group. The economic effect of the scheme was that Fidex had disposed of 95% of its interest in the related bonds to Swiss Re by way of issue of preference shares.
This scheme meant that the existence of the preference shares coupled with a change in accounting policy would mean that Finance Act 1996, Finance Act 1996 schedule 9Sch. 9, para. 19A would deliver a loss equal to 95% of the value of the bonds, without any economic loss being suffered by Fidex.
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 beginning of 2005 so that no difference and no debit or loss arose. The correspondence continued on this issue for over three years. 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 by €84m. There was then a review which upheld the conclusions in relation to para. 19A, and Fidex appealed to the FTT.
In its statement of case for the FTT hearing, HMRC raised for the first time a new attack on the scheme. They said that the anti-avoidance provisions of para. 13 applied to deny Fidex the benefit of any debits which arose under para. 19A. Para. 13 provides among other things that a debit does not arise to the extent it is attributable to a main tax avoidance purpose. Fidex applied to the FTT to strike out this part of HMRC's case. It said that, given the terms of the closure notice, HMRC were prevented from raising this issue. The strike out application was heard by Sir Stephen Oliver QC on 10 October 2011. He refused the application. Fidex appealed against that decision. This is the appeal on what we shall call the "Closure Notice Issue".
The substantive appeal in respect of the closure notice was then heard in May 2012. At the hearing HMRC argued both (a) that because of the way the accounting ought to work para. 19A did not give rise to a debit of €84m in 2005, and (b) that if it did, para. 13 applied to deny Fidex the loss which would arise. The FTT (John Walters QC and John Robinson) held in favour of Fidex on both issues. HMRC has not appealed against the FTT's finding in relation to the first issue, but it appeals against the FTT's conclusions in relation to para. 13. This is the "Paragraph 13 Issue".
In relation to the "Closure Notice Issue" the UT ruled that it would be wrong to prevent HMRC from raising an issue on the grounds that it was not specifically raised in the closure notice. The judgment notes that this would "allow form to triumph over substance". Nor would the restriction represent an appropriate balance between the protection of the taxpayer on the one hand, and the public interest in the collection of the correct amount of tax, on the other. Therefore the appeal by Fidex was dismissed.
The "Paragraph 13 Issue" was considered next. Amongst other arguments, Fidex had sought to argue that a main purpose of tax avoidance had ceased before 2005 and this had been accepted by the FTT and also that if the tax avoidance purpose was there in 2005 then none of the debit would fall to be taxed as none would be attributed on a "just and reasonable" apportionment to that unallowable purpose as accounting value differences had crystallised in 2004. The UT rejected the FTT finding that the tax avoidance purpose had ceased by 2005 on the grounds that the tax avoidance purpose could not be achieved unless the bonds were held in 2005. Also the UT rejected Fidex's argument that even if the unallowable purpose had reached 2005 it was only applicable for a single moment in time and could therefore not qualify as an unallowable purpose within the legislation. Also in apportioning the debit the UT disagreed with the FTT in that it views the other purposes of the transaction as the debit solely arose because of the overarching desire to obtain the tax advantage. Thus the UT held that the debit was wholly attributable to an unallowable purpose of Fidex and therefore the appeal by HMRC was allowed.
The UT achieved two major things in this case. It ensured that procedural points are not too narrowly construed that they can hinder the process of achieving the correct tax result coupled with protecting public interest and also, and importantly, the decision gives clarity over unallowable purpose and the width of interpretation given to para. 13. This is an important decision against deemed tax avoidance schemes.
[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 against a decision that the effect of a particular closure notice was not to prevent HMRC arguing that Finance Act 1996 schedule 9paragraph 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 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 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 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:
(2) Fidex was brought back into the BNP Paribas tax group by the 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);
(3) 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;
(4) 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 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 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 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...
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