Greene King Plc and another v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judge | Lord Justice Patten,Lord Justice Sales |
| Judgment Date | 27 July 2016 |
| Neutral Citation | [2016] EWCA Civ 782 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2014/2462 |
| Date | 27 July 2016 |
[2016] EWCA Civ 782
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
Mr Justice Mann
Royal Courts of Justice
Strand, London, WC2A 2LL
THE CHANCELLOR OF THE HIGH COURT
Lord Justice Patten
and
Lord Justice Sales
Case No: A3/2014/2462
John Gardiner QC and Michael Ripley (instructed by Reynolds Porter Chamberlain) for the Appellants
David Milne QC and Richard Vallat (instructed by General Counsel and Solicitor to HM Revenue and Customs) for the Respondents
Hearing dates: 5, 6, 7 July 2016
APPROVED JUDGMENT
The Chancellor (Sir Terence Etherton)
This appeal concerns the assessment of liability to corporation tax under the code for taxing "loan relationships" of companies in Chapter II of Part IV of the Finance Act 1996 ("the FA 1996"). The appeal concerns the tax consequences of two transactions carried out by the Greene King group of companies ("the GK group"). The transactions were structured in accordance with a scheme entitled "Project Sussex" devised and marketed by Ernst & Young ("EY").
The appeal is by Greene King plc ("PLC"), the UK parent company for the GK group, and Greene King Acquisitions Ltd ("GKA"), a wholly-owned subsidiary of Beards of Sussex Group Limited, itself a wholly owned subsidiary of PLC, from a decision of the Upper Tribunal ("the UT") (Mr Justice Mann) released on 22 April 2014 dismissing the appellants' appeal from the decision of the First Tier Tribunal ("the FTT") (Judge Colin Bishopp and Judge Alison McKenna) released on 14 June 2012. By its decision the FTT had itself dismissed the appeals of the appellants against two notices of amendment, issued by the respondents ("HMRC") on 6 January 2010, relating to their corporation tax returns for the periods ending 30 April 2003 and 30 April 2004.
This is a lead case for a number of other corporate groups who have undertaken similar transactions pursuant to EY's marketed scheme.
The transactions
The principal activities of the GK group are operating managed, tenanted and leased public houses, brewing beer and wholesaling beers, wines, spirits and soft drinks.
The transactions which are the focus of this appeal were undertaken, on 31 January 2003 and 5 September 2003 respectively, by the appellants and Greene King Brewing and Retailing Ltd ("GKBR"), another wholly owned subsidiary of PLC. GKBR is not a party to these proceedings. PLC's evidence was that it used the transactions as a way of providing finance to GKA enabling it to acquire and operate individual pubs and small pub portfolios.
The parties agreed a statement of facts, which is set out in full in the FTT's decision. The issues of principle arising from the second transaction are identical to those in the first transaction and so the FTT and the UT concentrated on an analysis of the first transaction. The submissions before us did the same. Accordingly, I shall not address the second transaction, the details of which can be obtained from the decision of the FTT.
The first transaction
For the purposes of this appeal, it is sufficient to set out the following facts relating to the first transaction. Fuller details can be obtained from the decision of the FTT.
On 20 October 2000 PLC lent £300 million to GKBR. On the same day GKBR created unsecured loan stock with a nominal value of £300 million, which was issued to PLC as security for the loan.
At all material times PLC was the sole holder of all the loan stock.
The terms of the loan stock were that it was to be redeemed on 4 May 2004, and in the meantime it bore interest at a floating rate which equated to LIBOR plus 1%, payable six monthly in arrears on 4 May and 4 November until redemption. There was an option to repay the loan and redeem the stock early.
On 31 January 2003 the terms of the loan were amended by agreement of PLC and GKBR. The interest rate was altered to a fixed rate of 4.75%, but the interest remained payable on the same dates. The option to redeem the stock early was removed.
On the same day PLC assigned to GKA its right to receive the interest on the loan stock (including interest accrued but not then due for payment), in consideration for which GKA issued to PLC 1.5 million £1 preference shares. The right to receive repayment of the loan principal remained with PLC.
The preference shares carried the right to a special dividend, defined as an initial dividend of 65 pence per share to be declared on 14 February 2003, and thereafter the right to a 5% annual dividend.
PLC immediately gave notice to GKBR of the assignment and directed GKBR to make future interest payments to GKA.
On 14 February 2003 the special dividend of 65 pence per share, amounting in total to £975,000, was declared by GKA. The dividend was to be paid on 2 May 2003, and it was duly paid on that date.
Three future payments of interest on the loan were due following the assignment and before redemption: £7,066,438 on 4 May 2003, £7,183,561 on 4 November 2003 and £7,066,438 on 4 May 2004. The total of these was £21,316,437 but for the sake of simplicity I shall treat the total in the rest of this judgment as £21.3 million.
The net present value ("NPV") of the three future interest payments, as at 31 January 2003, was calculated to be £20,548,372, using a discount rate of 5%. Again, for the sake of simplicity, I shall treat the NPV in the rest of this judgment as £20.5 million.
The accounting treatment of the first transaction
PLC made up its accounts to 4 May 2003. Following the assignment of the right to receive interest ("the interest strip") PLC continued to recognise the loan principal of £300 million in its accounts.
GKA also made up its accounts to 4 May 2003. After the assignment of the interest strip and the issue of the preference shares to PLC, GKA (1) recorded the right to receive the interest as a receivable from GKBR in its balance sheet at its NPV, (2) credited the nominal value of the preference shares as a non-equity capital instrument, and (3) credited to its share premium account the difference between the NPV of the interest strip and the nominal value of the preference shares.
Payments received following the assignment were credited against the balance sheet receivable, with the excess of the amounts actually received over the original NPV taken to GKA's profit and loss account.
GKBR also made up its accounts to 4 May 2003. The assignment of the interest strip did not give rise to any changes in GKBR's accounting treatment of the loan principal as a liability or the payments of interest on the loan, which were debited to its profit and loss account.
The dispute
After the appellants filed their tax returns, they received notices of amendment from HMRC. The amendments sought to increase the tax charge because HMRC considered that, while EY's scheme attempted to remove the money received by GKA pursuant to PLC's assignment of interest from the calculation of corporation tax, it did not succeed in doing so.
There are set out in the Appendix to this judgment the principal provisions of the loan relationships code in FA 1996 which related to the tax treatments of the two transactions at the relevant time and are relevant to this appeal. Those provisions, like the rest of the code, were superseded by Part 5 of the Corporation Taxes Act 2009 (" CTA 2009"), which has itself been the subject of further amendments since then.
Decision of the FTT
The hearing before the FTT lasted four days. Oral evidence was given by two witnesses of fact, Mr Bryndon Webb, who was the GK group's tax controller, and Mr Les Clifford, an EY partner responsible for the GK group's audit. Expert evidence was given, on behalf of the appellants, by Mr David Parish ACA, who was employed by RSM Tenon as a director of its audit, tax and advisory division, and, on behalf of HMRC, by Mr Mark Chandler FCA, who was employed by HMRC as an advisory accountant.
The FTT identified the following issues as arising:
Issue 1: Whether PLC should have accounted in its individual (or "solus") accounts for an additional £1.5 million (representing the nominal value of the preference shares received as consideration for the interest strip) as taxable profit in the year ending 4 May 2003.
Issue 2: Whether PLC is taxable under FA 1996 s. 84(1) on £20,453,476 (the aggregate of the sums referred to in the closure notices) as a loan relationship credit.
Issue 3: Whether GKA had a loan relationship with GKBR as result of the first transaction.
Issue 4: Whether FA 1996 s.84(2)(a) applied to the credits in GKA's accounts arising from the receipt of interest.
Issue 1 was not supported by Mr Chandler and so it was agreed that the answer to Issue 1 was negative.
The FTT said that the critical question in relation to Issue 2 was whether, as HMRC contended, PLC should have partially de-recognised the outstanding £300 million loan principal by discounting it by the £20.5 million NPV of the interest strip and should then have accreted that value progressively over the period remaining before redemption, bringing the accretions into profit and, accordingly, tax. The FTT found in favour of HMRC on this issue, holding (at paragraphs 71 to 74) that the reality of the transaction ought properly to be reflected by partial de-recognition of the loan and an addition to the value of PLC's investment in GKA, with the accretion from the NPV of the capital sum on the date of the assignment of the interest strip until redemption being brought into taxable profit.
The FTT considered that it was not necessary to answer Issue 3 as put but that the more...
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