GDF Suez Teesside Ltd (Formerly Teesside Power Ltd)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 11 August 2015 |
| Date | 11 August 2015 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Rachel Short, Nigel Collard (Member)
Mr Peacock QC of 11 New Square Lincoln's Inn and Mr Boulton QC of One Essex Court Temple, instructed by Slaughter and May appeared for the Appellant
Mr Milne QC and Ms Wilson, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Corporation tax – Loan relationships – Transfer of contingent debt asset – No profit recognised in accounts – Finance Act 1996 (FA 1996), s. 84 – Fairly represents profits – Whether accepted accounting method – Impact of override in FA 1996, s. 84 – Held – Taxpayer's accounts GAAP compliant – No alternative set of GAAP compliant accounts – FRS 5 substance approach does not produce fair representation of profits– FA 1996, s. 84 override applied – Appeal dismissed.
For the purposes of the loan relationships legislation, the First-tier Tribunal found that the GAAP-compliant accounting treatment of an assignment of contingent third-party debt claims for nil accounting value by a company to its subsidiary in consideration for an issue of shares by the subsidiary did not fairly represent the profits arising on the assignment of the debt claims. The GAAP-compliant accounting treatment was over-ridden for tax purposes and replaced with a taxable credit based on the fair value of the debt claims.
This case involved a tax avoidance scheme notified as such under the rules for the Disclosure of Tax Avoidance Schemes. The taxpayer, Teesside Power Ltd (TPL) (now GDF Suez Teesside Ltd), was owed significant debts following the collapse of the Enron group of companies by certain members of that group as a consequence of their failure to fulfil contracts for the purchase of electricity. The debt claims were accepted by the administrators of the relevant Enron companies and it was common ground that they represented loan relationships for tax purposes. In the accounts of TPL, the claims were accounted for at nil value because they were contingent assets for accounting purposes in accordance with FRS 12 which required that contingent assets are not recognised in financial statements unless the realisation of the profit is virtually certain. To do otherwise might result in the recognition of profit that may never be realised. Although the accounting value of the debt claims was nil, a third party valuer estimated that the claims had a commercial value in the region of £200m.
TPL assigned the debt claims to a subsidiary company in consideration for an issue of shares to TPL by the subsidiary. As the debt claims were the subsidiary's only assets, this meant that the commercial value of the subsidiary's shares was equal to the commercial value of the debt claims. However, as the debt claims had no value for accounting purposes in TPL's accounts under the historical cost convention, the cost of the investment in the subsidiary's shares in the accounts of TPL was also nil notwithstanding the £200m commercial valuation i.e. there was no requirement to fair value the cost of investment at £200m and recognise an equivalent credit to the statement of recognised gains and losses (STRGL).
In the accounts of the subsidiary the debt claims were recognised at their commercial valuation of £200m together with an equivalent credit to share capital in respect of the shares issued to TPL. This meant that an accounting profit would only arise in the accounts of the subsidiary to the extent that a subsequent realisation of the debt claims exceeded the accounting carrying value of £200m. This achieved a step-up in the base cost of the debt claims and might result in the avoidance of tax on up to £200m of the proceeds of the claims or a deferral of tax until such time as TPL disposed of its shares in the subsidiary.
The First-tier Tribunal determined that the accounting treatment adopted was in accordance with GAAP rejecting HMRC's alternative submission that the correct GAAP compliant accounting treatment should have been to recognise a credit of £200m in STRGL. Nevertheless, the FTT also held that the profits arising as a consequence of the GAAP-compliant accounting treatment did not fairly represent the profits arising in respect of the transaction looking at all the circumstances of the case. It followed that, in accordance with Finance Act 1996, s. 84(1), the accounting treatment should be over-ridden for tax purposes and replaced with a taxable credit which fairly represented the profits arising. On the facts of this case, this taxable credit could be determined by reference to the third party valuation report.
In line with established case law, this case provides further confirmation that, for the purpose of the loan relationships legislation, taxable profits do not necessarily follow the GAAP-compliant accounting treatment in circumstances where the accounting debits and credits do not fairly represent the profits and losses arising. Much of the FTT's judgment in this case was taken up with a detailed technical analysis of the accounting treatment adopted by the taxpayer; the alternative accounting treatment that HMRC believe should have been adopted; and whether either or both were GAAP-compliant. In the event this analysis was largely unnecessary in view of the application of the fairly represents over-ride. It should also be noted that, subject to enactment of Finance Bill 2015, the fairly represents over-ride will be repealed for accounting periods beginning on or after 1 January 2016. In the absence of the fairly representsover-ride for such accounting periods, new loan relationship and derivative contract anti-avoidance rules to be introduced at the same time should counteract any tax advantage arising in similar circumstances.
[1] This appeal relates to taxable profits which HMRC say arise to the Appellant as a result of the transfer of loan relationships to a subsidiary company on 5 December 2006 and 2 March 2007. Specifically HMRC believe that the Appellant should bring an amount of £194,899,838 into charge to tax as a loan relationship credit for its accounting period ending 5 December 2006 and an amount of £5,154,631 for its accounting period ending 30 September 2007.
[2] The Appellant, which was then known as Teesside Power Limited, (TPL) operated, at Redcar and Cleveland, the UK's largest Combined Cycle Gas Turbine power station (Teesside Power Station) from 1993 onwards. The power station was built, owned and operated by the Appellant. The Appellant's business included selling electricity on a wholesale basis to customers such as Enron Corporation and British Energy.
[3] TPL held long-term power purchase agreements with Enron Capital Trade Resources Limited (ECTRL) and Enrici Power Marketing Limited (Enrici) which required ECTRL and Enrici to purchase electricity from TPL at agreed volumes and prices. ECTRL and Enrici had contracted to buy the majority of the output of the power station under off-take agreements. ECTRL and Enrici were part of the Enron group of companies. Enron Corporation (EC) guaranteed the off-takeagreements entered into by Enrici and ECTRL.
[4] The Enron group collapsed into bankruptcy during the term of the purchase agreements. As a result, ECTRL and Enrici (and EC as guarantor) owed substantial amounts to TPL for failure to continue to perform under the contracts. Substantial claims were submitted by TPL against the Enron group for failing to fulfil the contracts. Claims (reflected in the amounts set out below) were subsequently agreed.
[5] Following Enron's collapse, PriceWaterhouseCoopers (PwC) were appointed administrators of ECTRL on 29 November 2001 under the Insolvency Act 1985. The Appellant was a significant creditor in the ECTRL administration. The Appellant's ECTRL claim (the ECTRL Claim) was the subject of a settlement deed dated 27 September 2005, under which ECTRL admitted a liability to the Appellant of £360,767,273 together with accruing interest.
[6] EC filed for Chapter 11 bankruptcy protection in the US on 4 December 2001. A US Bankruptcy Court Order dated 29 September 2005 allowed the Appellant's claims as general unsecured claims in the aggregate amount of $907,720,278 (which equated to £621,138,061 at the exchange rate prevailing at 31 December 2001). The Appellant was described as a Class 4 Creditor in relation to this claim. (the Enron Claim)
[7] The US Bankruptcy court approved the plan to distribute EC's assets to creditors on 15 July 2004, and the plan became effective on 17 November 2004.
[8] Enrici was placed into administration in the UK on 12 January 2006 and went into creditors' voluntary liquidation on 21 December 2006. The Appellant was a creditor as to £101,071,188.
[9] On 16 March 2007, the High Court sanctioned a Scheme of Arrangement allowing the administrators of ECTRL to realise and repay assets to its creditors, including the Appellant. EC and the administrators of ECTRL issued letters on 15 and 17 November 2006 respectively, recognising the extent of the Appellant's claims against them. The administrators of Enrici issued a letter on 19 February 2007 recognising the extent of the Appellant's claims. (the Enrici Claim).
[10] In respect of the Enron Claim, the Appellant received cash distributions out of the bankruptcy estate from time to time prior to 5 December 2006, which in aggregate amounted to £120,682,000, and a distribution of shares with a value of £13,942,000. The amounts were broken down as follows:
Received before 31 December 2005:
Cash distribution
£13,286,000
Received after 31 December 2005:
Valuation of 808,093 Portland
General Electric Shares
£13,942,000
Cash distribution
£60,699,000
Total
£87,927,000
Received 1 January 2006 to 5...
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