Mjp Media Services Ltd v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Etherton,Lord Justice Lewison,Lord Justice Rix |
| Judgment Date | 28 November 2012 |
| Neutral Citation | [2012] EWCA Civ 1558 |
| Docket Number | Case No: A3/2011/2831 |
| Court | Court of Appeal (Civil Division) |
| Date | 28 November 2012 |
[2012] EWCA Civ 1558
IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM UPPER TRIBUNAL
MR JUSTICE ARNOLD
FTC/69/2010
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Rix
Lord Justice Etherton
and
Lord Justice Lewison
Case No: A3/2011/2831
David Goldberg QC and Hui Ling McCarthy (instructed by Berwin Leighton Paisner) for the Appellant
David Ewart QC and James Rivett (instructed by Treasury Solicitors) for the Respondent
Hearing dates : 29th October 2012
This is an appeal by the taxpayer, MJP Media Services Limited ("MJP"), from the decision dated 2 September 2011 of Mr Justice Arnold sitting as the Upper Tribunal ("the UT's decision") By that decision the UT dismissed the taxpayer's appeal from the decision dated 1 July 2010 of the First-Tier Tribunal (Sir Stephen Oliver QC and Ms Anne Redston) ("the FTT") dismissing MJP's appeal from the disallowance by the respondents, the Commissioners for Her Majesty's Revenue and Customs ("the Revenue"), of a deduction of £6,690,000 included in MJP's 2004 corporation tax computation. That deduction had been included by MJP as a loan relationship debit for the purposes of Chapter II of Part IV of the Finance Act 1996 (" FA 1996").
The Revenue contended, and the UT and the FTT held, that in respect of the £6,690,000 there was no loan relationship within section 81 of FA 1996 ("section 81"). Whether, in reaching those decisions, the FTT and the UT made an error or errors of law is what is in issue on this appeal.
The background
For the period in question MJP was a wholly owned subsidiary of Carat International ("Carat"), and Carat was a wholly owned subsidiary of Aegis plc ("Aegis"). Aegis was listed on the London Stock Exchange. It carried on an advertising business. The companies used the accruals basis of accounting.
Between 2001 and 2004 a series of inter-company transactions took place between MJP and Aegis. Four of those transactions are at the heart of these proceedings. By 1 January 2004 Aegis was indebted to MJP in the sum of £6,815,366.
At some date between 1 January 2004 and 26 March 2004 Aegis and MJP entered into a written agreement which bore the description "Inter Group Loan Agreement" ("the Loan Agreement") and was expressed to be effective from 1 January 2004. The Loan Agreement stated that the "Initial Amount of Loan/Advance" was £6,815,366. Immediately before 26 March 2004 Aegis owed MJP £6,893,977, being the £6,815,366 specified in the Loan Agreement and accrued interest of £78,611. On 26 March MJP executed a deed of waiver ("the Deed of Waiver") under which it waived its claim to £6,704,000 of that outstanding indebtedness. The amount owed by MJP to Aegis was, therefore, reduced to £189,977.
MJP claimed a deduction of £6,690,000 in its 2004 corporation tax computation, being the waived amount reduced by a foreign exchange difference of £14,000.
The legislation
The relevant provisions of FA 1996 are set out in the Appendix to this judgment.
At the heart of MJP's case is the submission that each of the four transactions, on which it relies, gave rise to a debt due from Aegis to MJP and was a "transaction for the lending of money" within section 81(1)(b).
The 4 transactions
The following is a very brief summary of the way the FTT described the 4 transactions, but without reference to all the arguments and evidence placed before the FTT. It is intended to be purely for the purposes of identifying the transactions and not for their legal characterisation or evaluation for tax purposes.
The first transaction: £686,500 ("Transaction 1")
As at 31 December 2000, according to the MJP ledger, MJP owed £293,244 to Aegis. On 30 July 2001 Aegis made a VAT payment of £101,500 on behalf of MJP, increasing the balance on the intercompany account to £394,744.
A sum of £686,500, described as "payment", is shown in an entry dated 3 September 2001 in MJP's inter-company ledger account with Aegis; there is a matching entry in MJP's ledger for its Lloyds bank account, labelled "Aegis Group plc."
It was MJP's case that this transfer was made in cash, and that the contra entry in the ledger account for Lloyds bank demonstrated that this was so. The Revenue's case was that this transaction was not a cash transfer to Aegis, but a payment to a third party.
As a result of this transaction Aegis owed MJP £291,756 (£686,500–£394,744) at the beginning of 2002.
The second transaction: £830,500 ("Transaction 2")
On 5 June 2002 MJP's inter-company account with Aegis shows a further debit of £830,500, again described as "payment". This is matched by a credit of the same amount and on the same date in the ledger account for MJP's Lloyds Bank account, labelled "Aegis Group plc".
This transaction appears on a bank statement submitted as evidence. It shows a sum of £830,500 paid out on 13 June 2002 and gives reference number 000145. The presence of the reference number shows that the payment had been made by cheque.
The Nominal Audit Trail record, which consisted of extracted entries from Aegis's ledger setting out transactions between MJP and Aegis, has an entry dated 25 June 2001, showing a receipt by Aegis of £850,500. This is described as "MJP re I/Co MJP", and under Journal Type is printed "2961 Cashb". MJP's case is that this is a record of the cash turning up in Aegis.
It was the Revenue's case that the £830,500 had been made to a third party, and not to Aegis.
The third transaction: £6,101,401 ("Transaction 3")
At the beginning of 2002 Aegis owed over £6m to Carat, MJP's parent company. This is shown in Carat's statutory accounts. MJP's internal records show that Carat in turn owed £6,101,401 to MJP.
MJP's case before the FTT was that in September 2002 a circular transfer of cash took place, by which Aegis repaid £6,101,401 it owed to Carat; Carat repaid the same sum to MJP, and MJP then paid this amount to Aegis. Accordingly, Aegis had exactly the same money as before, but it was now in debt to MJP rather than to Carat.
MJP contended that the evidence for the first step, the repayment by Aegis of £6.1m owed to Carat, can be seen in Carat's statutory accounts for the year ended December 31 2002, which show that the debt owed by Aegis to Carat had gone down by more than £6.1m. As regards the second step, MJP's inter-company balance with Carat shows a debt owed to MJP of £6,101,410 at 1 January 2002, but on 4 September 2002 the same ledger account shows a credit of the same amount, in effect eliminating Carat's debt to MJP.
MJP's ledger account with Aegis shows that MJP was no longer owed £6.1million by Carat; instead, it was owed the same amount by Aegis. MJP's 2002 statutory accounts also show Aegis's debt to MJP increased by £6.1m during 2002.
The Revenue's case was that no cash changed hands and that what had happened was that MJP took over Aegis's debt to Carat in exchange for cancelling Carat's own debt.
The fourth transaction: £883,418 ("Transaction 4")
MJP's inter-company account with Aegis shows a further transaction of £883,418. This is dated 11 September 2003 and is described as "payment". The effect of the entry was to increase the debt owed by Aegis to MJP.
The matching entry of the same date and amount is shown in MJP's ledger account setting out its balances with National Westminster Bank. It is labelled "Aegis Group plc". MJP's case is that this was a further advance of cash.
The Revenue's case was that this was not a cash payment to Aegis, but a payment to a third party on Aegis's behalf.
The FTT's decision
The FTT recorded (in [11] to [14]) the witness statements that were made and the oral evidence that was given. Witness statements were provided on behalf of MJP by seven individuals. They were Colin Richards, Head of Aegis Group Tax; Michael Parry, Aegis Group Transfer Pricing Manager and a director of MJP; John Ross, Aegis Group Company Secretary; Susan Walker, Aegis Tax Compliance Manager; Alicja Lesniak, Aegis Chief Financial Officer and a director of Aegis; Lynda Poor, Head Office Reporting Manager, and Susan Frogley, Chief Finance Office of Aegis Media and a director of Carat.
Mr Richards, Mr Parry, Mr Ross and Ms Frogley gave oral evidence and were cross-examined. Mr Richards and Mr Parry are qualified accountants. Mr Richards joined Aegis in March 2002. Mr Parry and Mr Ross were employed by Aegis throughout the period under consideration.
Ms Lesniak gave evidence as to the role of Mr Ross and his authority to act on behalf of Aegis. The rest of her evidence, and that of Ms Poor and Ms Frogley, concerned the extraction of documents for the purposes of MJP's appeal.
The FTT observed that only four bank statements were provided to the Tribunal, being a single page from MJP's NatWest account and three sequential statements from Lloyds TSB. Furthermore, none of the witnesses was personally involved in any of the Transactions and none of them had made the entries in the financial records relating to the Transactions. They were simply using their financial training to interpret the records. There was no witness from Aegis' treasury department, which had responsibility for managing the group's funds and would have been best placed to explain what had happened to the bank statements. The FTT described (at [39]) Mr David Goldberg QC, MJP's counsel, taking them "through a jigsaw of accounting entries, mostly from MJP's ledger,...
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