HSBC Life (UK) Ltd v Stubbs ; Nationwide Life Ltd v Crisp ; Abbey Life Assurance Company Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 06 November 2001 |
| Date | 06 November 2001 |
| Court | Special Commissioners (UK) |
special commissioners decision
Malachy Cornwell-Kelly, Theodore Wallace.
1. These appeals, which involve five taxpayer companies, concern issues which, we were told, affect a considerable number more. In formal terms, the appeals are against assessments to corporation tax for accounting periods starting with the year ending on 31 December 1996 to that ending on 31 March 1999. They arise from contracts by life insurance companies with derivatives dealers to cover the risk element in index-linked bonds issued by the life companies.
2. The issues in the appeals turn on the proper construction of provisions in the Finance Act 1996 introducing a new basis for the taxation of profits or losses arising from what the Act terms "loan relationships". No point arises on the transitional provisions introducing that regime. The essential question raised is whether receipts from the various transactions which we describe below, which are the making of contracts for financial futures, are subject to the loan relationship regime, and are consequently brought into account as income charged to corporation tax under Case III of Sch. D, or whether they are only taxed on the I-E basis according to capital gains tax rules when realised.
3. It is common ground that tax considerations played a decisive part in the choice of structures by the taxpayers, who stated openly that they had consciously sought to avoid their transactions falling within the loan relationship regime. It is also common ground that the transactions were genuine transactions and not shams, but the Crown allege that the deliberately tax-efficient structuring of the business affects the commercial and legal characterisation of what was done.
4. Fifty three representative transactions were initially in evidence but we were, in the event, invited to make our decision by reference to six of these, with the caveat that findings of fact would be needed for all the representative transactions which do not provide for settlement by cash, or by cash with an option to take shares. We have proceeded on that basis.
5. The principal legislation relevant to these appeals is contained inFinance Act 1996Ch. II of Pt. IV of the 1996 Act, and in Sch. 9 to the Act. The relevant provisions of the 1996 Act are as follows:
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80. Taxation of loan relationships
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(2) For the purposes of corporation tax all profits and gains arising to a company from its loan relationships shall be chargeable to tax as income in accordance with this Chapter.
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(3) To the extent that a company is a party to a loan relationship for the purposes of a trade carried on by the company, profits and gains arising from the relationship shall be brought into account in computing the profits and gains of the trade.
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(4) Profits and gains arising from a loan relationship of a company that are not brought into account under subsection (2) above shall be brought into account as profits and gains chargeable to tax under Case III of Schedule D.
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(5) …
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(6) Subject to any express provision to the contrary, the amounts which in the case of any company are brought into account in accordance with this Chapter as respects any matter shall be the only amounts brought into account for the purposes of corporation tax as respects that matter.
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81. Meaning of "loan relationship" etc.
(1) Subject to the following provisions of this section, a company has a loan relationship for the purposes of the Corporation Tax Acts wherever-
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(a) the company stands (whether by reference to a security or otherwise) in the position of a creditor or debtor as respects any money debt; and
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(b) that debt is one arising from a transaction for the lending of money;
and references to a loan relationship and to a company's being a party to a loan relationship shall be construed accordingly.
(2) For the purposes of this Chapter a money debt is a debt which falls to be settled-
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(a) by the payment of money; or
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(b) by the transfer of a right to settlement under a debt which is itself a money debt.
(3) Subject to subsection (4) below, where an instrument is issued by any person for the purpose of representing security for, or the rights of a creditor in respect of, any money debt, then (whatever the circumstances of the issue of the instrument) that debt shall be taken for the purposes of this Chapter to be a debt arising from a transaction for the lending of money.
(4) For the purposes of this Chapter a debt shall not be taken to arise from a transaction for the lending of money to the extent that it is a debt arising from rights conferred by shares in a company.
(5) For the purposes of this Chapter-
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(a) references to payments or interest under a loan relationship are references to payments or interest made or payable in pursuance of any of the rights or liabilities under that relationship; and
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(b) references to rights or liabilities under a loan relationship are references to any of the rights or liabilities under the agreement or arrangements by virtue of which that relationship subsists;
and those rights or liabilities shall be taken to include the rights or liabilities attached to any security which, being a security issued in relation to the money debt in question, is a security representing that relationship.
(6) In this Chapter "money" includes money expressed in a currency other than sterling.
82. Method of bringing amounts into account
(1) For the purposes of corporation tax-
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(a) the profits and gains arising from the loan relationships of a company, and
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(b) any deficit on a company's loan relationships,
shall be computed in accordance with this section using the credits and debits given for the accounting period in question by the following provisions of this Chapter.
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93. Relationships linked to the value of chargeable assets
(1) This section applies in the case of any loan relationship of a company that is linked to the value of chargeable assets unless it is one the disposal of which by the company would fall to be treated as a disposal in the course of activities forming an integral part of a trade carried on by the company.
(2) The amounts falling for any accounting period to be brought into account for the purposes of this Chapter in respect of the relationship shall be confined to amounts relating to interest.
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(6) For the purposes of this section a loan relationship is linked to the value of chargeable assets if, in pursuance of any provision having effect for the purposes of that relationship, the amount that must be paid to discharge the money debt (whether on redemption of a security issued in relation to that debt or otherwise) is equal to the amount determined by applying a relevant percentage change in the value of the chargeable assets to the amount falling for the purposes of this Chapter to be regarded as the amount of the original loan from which the money debt arises.
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(9) If-
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(a) there is a provision which, in the case of any loan relationship, falls within subsection (6) above,
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(b) that provision is made subject to any other provision applying to the determination of the amount payable to discharge the money debt,
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(c) that other provision is to the effect only that the amount so payable must not be less than a specified percentage of the amount falling for the purposes of this Chapter to be regarded as the amount of the original loan, and
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(d) the specified percentage is not more than 10 per cent,
that other provision shall be disregarded in determining for the purposes of this section whether a relationship is linked to the value of chargeable assets.
103. Interpretation of Chapter
(1) In this Chapter-
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"debt" includes a debt the amount of which falls to be ascertained by reference to matters which vary from time to time;
"debtor relationship", in relation to a company, means any loan relationship of that company in the case of which it stands in the position of a debtor as respects the debt in question;
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"loan" includes any advance of money, and cognate expressions shall be construed accordingly;…
6. The two provisions relevant in relation to capital gains tax are:
(a) In the Income and Corporation Taxes Act 1988:
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128. Commodity and financial futures etc.: losses and gains
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Any gain arising to any person in the course of dealing in commodity or financial futures or in qualifying options, which [is not chargeable to tax in accordance with Schedule 5AA and] apart from this section would constitute profits or gains chargeable to tax under Schedule D otherwise than as the profits of a trade, shall not be chargeable to tax under Schedule D.
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In this section "commodity or financial futures" and "qualifying options" have the same meaning as in section 143 of the 1992 Act, and the reference to a gain arising in the course of dealing in commodity or financial futures includes any gain which is regarded as arising in the course of such dealing by virtue of subsection (3) of that section.
The words in square brackets were inserted by the Finance Act1997 with effect for chargeable periods ending after 4 March 1997 in respect of profits or gains realised after that date. Schedule 5AA concerns guaranteed returns on transactions in futures and options: neither side contended that it was material.
(b) In the Taxation of Chargeable Gains Act 1992:
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143. Commodity and financial futures and qualifying options
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(1) If, apart from section 128 of the Taxes Act, gains arising to any person in the course of dealing in commodity or financial futures or in qualifying options would constitute, for the purposes of the Tax Acts, profits or gains...
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