GDF Suez Teesside Ltd v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 17 February 2017 |
| Neutral Citation | [2017] UKUT 68 (TCC) |
| Date | 17 February 2017 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2017] UKUT 0068 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mr Justice Newey, Judge Colin Bishopp
Mr Jonathan Peacock QC and Mr Richard Boulton QC, instructed by Slaughter and May, appeared for the appellant
Mr David Milne QC and Miss Elizabeth Wilson, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Corporation tax – Avoidance scheme – Transfer of contingent, unrecognised, claim against third party to subsidiary in exchange for shares – Subsidiary recognising value of asset despite contingency but parent not recognising shares – Whether accounting GAAP-compliant – Yes – Loan relationship rules – Whether Finance Act 1996 (FA 1996), s. 84(1) engaged – Yes – Recognised value of asset to be brought into account as credit in parent's corporation tax computation – Appeal dismissed.
Procedure – Opening of enquiry – Whether error in identification of accounting period invalidates enquiry – No, if intention clear.
The Upper Tribunal upheld the First-tier Tribunal decision in GDF Suez Teesside Ltd [2015] TC 04590 that GAAP-compliant debits and credits arising in respect of a tax avoidance scheme did not fairly represent the profits arising to the company.
The taxpayer, Teesside Power Ltd (TPL) (now GDF Suez Teesside Ltd), was owed significant debts following the collapse of the Enron group of companies. It was common ground that the debt claims 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.
In connection with a tax avoidance scheme notified to HMRC under the rules for the Disclosure of Tax Avoidance Schemes, 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 Upper Tribunal upheld the determination of the First-tier Tribunal (FTT) 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. The Upper Tribunal also upheld the FTT judgment 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, the FTT had determined that this taxable credit should be determined by reference to the third party valuation report.
The Upper Tribunal permitted the taxpayer to raise an additional matter not considered by the FTT in relation to the validity of the enquiry into the taxpayer's return. As the letter which opened the enquiry had erroneously referred to an incorrect accounting period, the taxpayer argued that HMRC's enquiry into the taxpayer's return was not valid. The Upper Tribunal rejected this argument following Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, distinguishing Bayliss v Gregory [1989] 1 AC 398 and Sokoya [2009] TC 00125, and potentially overruling Mabbutt [2016] TC 05075.
In line with established case law, this case confirms 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 to a company. The fairly represents override has been repealed for accounting periods beginning on or after 1 January 2016 therefore this aspect of the judgment is of limited ongoing relevance. New loan relationship and derivative contract anti-avoidance rules should counteract any similar tax advantage after 1 April 2016. The procedural aspects of the judgment are of note as they potentially reject the decision in Mabbutt [2016] TC 05075.
[1] This case concerns the effectiveness of a tax avoidance scheme of which the appellant, Teesside Power Limited (“TPL”, now renamed “GDF Suez Teesside Limited”), made use in 2006–2007. HM Revenue and Customs (“HMRC”) contend that the scheme did not achieve its aim and, on this basis, issued closure notices assessing TPL to tax on profits of some £200 million. TPL appealed to the First-tier Tribunal (“the FTT”), but in a decision (“the Decision”) released on 11 August 2015 the FTT (Judge Rachel Short and Mr Nigel Collard) ruled in favour of HMRC. TPL now appeals against the Decision.
[2] TPL's liability to tax is said to have arisen under the provisions relating to “loan relationships” to be found in the Finance Act 1996 (“FA 1996”). The dispute between the parties turns on whether amounts fell to be brought into account for the purpose of Chapter II of Part IV of FA 1996 on the transfer by TPL of certain claims it held to a wholly-owned subsidiary. Among other things, the case raises issues as to the meaning and implications of the words “fairly represent” in section 84(1) of FA 1996.
[3] From 1993, TPL owned and operated a power station at Redcar and Cleveland. It entered into “off-take” agreements with Enron Capital Trade Resources Limited (“ECTRL”) and Enrici Power Marketing Limited (“Enrici”), each of which was part of the Enron group of companies, under which ECTRL and Enrici contracted to buy the majority of the output of the power station. Enron Corporation (“EC”) guaranteed ECTRL's and Enrici's obligations.
[4] As is well known, the Enron group collapsed. In 2001, EC filed for relief under Chapter 11 of the United States Bankruptcy Code and ECTRL went into administration. Administrators were appointed in respect of Enrici on 12 January 2006 and the company went into creditors' voluntary liquidation on 21 December of that year.
[5] TPL had very substantial claims against the Enron group. In 2005, a US Bankruptcy Court allowed TPL's proofs of claim totalling $907,720,278 against EC (“the Enron Claim”) and ECTRL admitted a liability to TPL of £360,767,273 (plus interest) in a settlement deed (“the ECTRL Claim”). In November 2006, EC and the administrators of ECTRL issued letters recognising the extent of TPL's claims against the companies. In February 2007, Enrici's administrators accepted that that company owed TPL £101,071,188 (“the Enrici Claim”). We will refer to the Enron Claim, the ECTRL Claim and the Enrici Claim together as “the Claims”.
[6] By 5 December 2006, TPL had received cash distributions in respect of the Enron Claim of, in aggregate, some £120 million plus shares in Portland General Electric (“Portland”) worth about £14 million. These were recognised as exceptional items in the profit and loss account in TPL's financial statements for the periods ended 31 December 2005 and 5 December 2006. Corporation tax was paid on the amounts received.
[7] On 1 December 2006, TPL established a wholly-owned subsidiary, Teesside Recoveries and Investments Limited (“TRAIL”), which was incorporated and tax-resident in Jersey. For the purposes of United Kingdom corporation tax, it was a “controlled foreign company”.
[8] On 5 December 2006, TPL assigned to TRAIL:
- Its rights in relation to its proofs of claim against EC which had been recognised by the United States Bankruptcy Court (i.e. the Enron Claim) in consideration for the issue to TPL of 101,100,347 ordinary shares in TRAIL; and
- Its rights under the settlement deed with ECTRL (i.e. the ECTRL Claim) in consideration for the issue to TPL of 93,799,491 ordinary shares in TRAIL.
[9] On 2 March 2007, TPL assigned to TRAIL its rights in respect of the Enrici Claim in consideration for the issue to TPL of 5,154,631 ordinary shares in TRAIL.
[10] The fair value of each of the Claims assigned was equal to the fair value of the shares in TRAIL issued in consideration for it. In a memorandum dated 5 December 2006, Carval Investors LLC (“Carval”) had valued the Enron and ECTRL Claims at, respectively, $199,698,461 (equating to 22 cents per dollar or £101,100,347) and £93,799,491 (or 26 pence per pound) (this was an arm's length, third party...
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