HM Revenue and Customs v DCC Holdings (UK) Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 08 May 2007 |
| Date | 08 May 2007 |
| Court | Special Commissioners (UK) |
special commissioners decision
Charles Hellier
John Gardiner QC and Philip Walford instructed by Reynolds Porter Chamberlain LLP for the Appellant
Michael Furness QC and Michael Gibbon instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents
Gilt repo - Purchase and resale of gilts - Interest paid to interim holder not required to be paid to original holder but recognised in repurchase price - Application of Finance Act 1996 schedule 9 subsec-or-para 15FA 96, Sch. 9, para. 15 - Related transaction - Effect of Income and Corporation Taxes Act 1988 section 737A section 730AICTA 1988, s. 737A to 737C and ICTA 1988, s. 730A - Effect of Finance Act 1996 section 97FA 96, s. 97 - Approach to Finance Act 1996 section 84 section 86FA 96, s. 84 - FA 96, s. 86 determining which authorised accounting method to use
A special commissioner decided that the use of an accounting method as respects the circumstances giving rise to a deemed loan relationship event was the use of the accounting method as respects that event for the purposes of Finance Act 1996 section 85FA 1996, s. 85. Therefore the actual accounts of the taxpayer had to be interrogated to determine what sums arose in respect of those events. In the present case, the sums which arose and which fairly represented those events were: nil in respect of the gilt interest received; £1.8m credit in respect of the Income and Corporation Taxes Act 1988 section 730AICTA 1988, s. 730A loan; and nil in respect of the Income and Corporation Taxes Act 1988 section 737As. 737A deemed interest. Therefore the net credit arising to the taxpayer was £1.8m.
In 2001 the taxpayer entered into a number of sale and repurchase transactions with X Bank as a result of which it made an economic and accounting profit of £1.8m. It claimed that the effect of the manufactured payment provisions in ICTA 1988, s. 730A to 730C, 737A to 737E and Income and Corporation Taxes Act 1988 schedule 23ASch. 23A and the loan relationship rules in FA 1996 was that for corporation tax purposes those repos delivered to it a loss of £27m. The Revenue claimed that, properly construed, the legislation delivered a corporation tax profit of £1.8m.
A repo was a transaction under which shares or securities were sold by the original owner to an interim holder, coupled with an agreement that they be bought back. In this case gilts were sold by X Bank to the taxpayer and then some days later sold back by the taxpayer to X Bank. During the period of the repo the interim holder had full ownership of the securities: it could sell them and then buy back the same or other securities to satisfy its obligation to resell securities to the original owner at the end of the repo, or it could simply hold on to the securities throughout the period; and if the interim holder received interest or a dividend on the securities, it received it beneficially and not as trustee for the original owner.
Where the sale and repurchase price of the securities was fixed at the outset by the terms of the repo agreement, the economic effect of the repo could be that of secured lending by the interim holder to the original owner. If, during the period the securities were held by the interim holder, interest or a dividend was paid on the securities, the repo agreement would deal with that payment in one of two ways, each of which preserved the economic effect of secured lending.
In this case the taxpayer entered into five repos in its accounting period ending on 31 March 2002 with X Bank. In each case it bought gilts from X Bank for a fixed price and resold them to X Bank several days later for a fixed price. In each case the taxpayer received interest on the gilts while it held them. In each case the repos were "net paying" repos in which no separate payment representing the interest was paid to X Bank but the repurchase price it received was lower reflecting the interest the taxpayer had received.
The taxpayer's case was that it should bring into account in respect of the gilt interest only a debit of £28.8m and therefore was to be treated as making a loan relationship loss of £27m (£28.8m less £1.8m). The Revenue contended that in ascertaining the amounts to be taken into account the same sum had to be taken into account in respect of the coupon actually received by the taxpayer as for the manufactured interest deemed to be paid by it: as a result those amounts would net off leaving the Income and Corporation Taxes Act 1988 section 730As. 730A credit of £1.8m as the net chargeable amount, which was equivalent to the economic and accounting profit.
Whether the taxpayer became a party to the loan relationships represented by the gilts for the purposes of Finance Act 1996 section 84FA 1996, s. 84; if it was to be treated as a party to the gilts, whether the taxpayer should bring credits into account in respect of those loan relationships; and whether the taxpayer should bring debits into account by virtue of Income and Corporation Taxes Act 1988 section 737AICTA 1988, s. 737A and Finance Act 1996 section 97FA 1996, s. 97.
The special commissioner (Charles Hellier) (dismissing the appeal) said that Finance Act 1996 section 85FA 1996, ss. 85 and 86 made clear that where the company's accounts used an authorised method of accounting in respect of a loan relationship then that was the method to be used in s. 84. The evidence as to the basis of accounting used by the taxpayer led to the conclusion that it was, as respects the gilts, an authorised basis of accounting, thus that actual basis was what was relevant in applying s. 84.
Section 85 did not suppose or require that there was only one possible accruals method of accounting or only one possible mark to market method. Section 86 determined which accounting method was to be used where more than one method was authorised. It provided that if a method which was, or equated to, an authorised method was used in the statutory accounts as respects a loan relationship then that method (or the one it equated to) was the one to be used for the purposes of s. 84. If no method was determined by that process then an accruals basis was to be used.
The evidence was that the method of accounting used in the taxpayer's statutory accounts for the repo transactions was in accordance with the then applicable accounting requirements. It was therefore a method which conformed to normal accountancy practice. Accordingly, if that method was applied to the taxpayer's loan relationships and was an accruals basis or a mark to market basis, it had to be used in applying s. 84 to those loan relationships. That method was used as respects each of those loan relationships and it was an accruals basis which complied with s. 85. Accordingly the method authorised for the purposes of s. 84 was the method used in the taxpayer's accounts and expounded in the evidence relating to the proper accounting for repos. It was only if the taxpayer did not use an authorised accounting method as respects any of the circumstances constituting those loan relationships that a potentially different accruals method might be required to be used (s. 86(4)).
Further, the consequence of both s. 97 of FA 1996 and s. 730A was to require the circumstances which gave rise to the legal construct 'loan relationship' to be treated for the purposes of s. 84 as the loan relationship they were deemed to constitute (in the same way a loan might be defined in s. 81 to be a loan relationship so that s. 84 would apply to it). If an authorised method was used in the proper accounts as respects those facts so it had to be used for s. 84.
Section 730A characterised the price differential as interest; s. 84 then required a search of the accounts for the sums which arose by virtue of the application in those accounts of the authorised method which represented that price differential. Those sums plainly emerged from evidence of the actual accounting. The application of proper accounting and s. 84 to the difference treated as interest by s. 730A(2) and brought into Ch. II by s. 730A(6) was a credit of £1.8m for the taxpayer and a debit for X Bank (assuming it to be a UK corporate) of the same amount.
Absent s. 97 the manufactured payment by A or X would not be recognised by the loan relationship legislation: it was not interest and probably not a profit or loss which arose to a company from its loan relationships, and might therefore not fall into s. 84(1)(a) or (b). There would therefore be no deduction in respect of the payment or any charge in respect of the receipt. Section 97(2) remedied that state of affairs (or cleared up any uncertainty) by providing that the manufactured payment was to be treated as interest under a loan relationship.
Section 97(2) applied for the purposes of Ch. II: it therefore required the manufactured payment to be treated as interest on a loan relationship for the purposes of s. 84, and s. 84 would determine the debit which arose. The words "by virtue of this section" in s. 97(3) did not change that approach: the fact that the debit might be calculated under s. 84 did not mean that it did not arise by virtue of the deeming in s. 97. The words "by virtue of" did not mean or imply that the only source of the debit was that section.
Section 97 was characterising some part of the transaction as the payment of interest, thus the debits and credits to be brought into account in respect of the transaction were those accounting sums which together fairly represented circumstances which gave rise to the s. 737A manufactured interest of £28.8m (the s. 97(4) circumstance); the actual coupon received of £28.8m; and the s. 730A deemed interest of £1.8m on the transaction. Those sums, on the basis of the evidence were respectively: nil (because there was no amount representing that payment); nil...
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