Prudential Plc v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Moses,Lord Justice Laws,Lord Justice Mummery |
| Judgment Date | 25 June 2009 |
| Neutral Citation | [2009] EWCA Civ 622 |
| Docket Number | Case No: A3/2008/2225 |
| Court | Court of Appeal (Civil Division) |
| Date | 25 June 2009 |
[2009] EWCA Civ 622
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT (CHANCERY DIVISION)
The Chancellor of the High Court
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Mummery
Lord Justice Laws and
Lord Justice Moses
Case No: A3/2008/2225
Mr Jonathan Peacock QC and Mr Jolyon Maugham (instructed by Michael Welch & Co) for the Appellant
Mr J Ghosh QC and Miss E Wilson (instructed by the Solicitor for HM Revenue & Customs) for the Respondent
Hearing date: 4th June, 2009
Lord Justice Moses :
Prior to its repeal by the Finance Act 2002, Chapter II of Part IV of the Finance Act 1994 contained a statutory code for the taxation of currency contracts. In 2002 Prudential entered into two foreign exchange hedging transactions, the first with the Royal Bank of Scotland (“the RBS hedge”), the second with Goldman Sachs International (“the GSI hedge”). Following Ernst and Young LLP's presentation of a tax-efficient method of hedging exchange rate risks, the transactions were structured so that two payments, called “the front end payments”, were made at the inception of the two hedging transactions.
Prudential claimed that those two front end payments were “qualifying payments” under “qualifying contracts” for the purposes of the statutory code; they were payments made in consideration of RBS and GSI entering into the hedging contracts. If that was correct, those two payments, of £105 million, (amount B, in the algebraic statutory code) exceeded the amount of “qualifying payments” received (amount A) by £105m. Prudential did not receive any qualifying payments. Accordingly, it sought a deduction in its corporation tax return in that amount.
The Revenue said that those payments were not qualifying payments. Deductible qualifying payments do not include the principal paid on the acquisition or sale of foreign currency. They were no more than prepayments of part of the final exchange of principal under the hedging agreements. The Special Commissioners agreed with the Revenue that the two front end payments were not qualifying payments and dismissed Prudential's appeal [2008] STC (SCD) 239. On Prudential's appeal, the Chancellor agreed [2008] EWHC 1839(Ch) [2008] STC 2820. Prudential advances its arguments for a third time with the permission of a single judge of this court. Unless it succeeds, two further issues, as to the meaning of the allocation provisions under s.155(4) and(5), and as to whether the main purpose was tax avoidance, unallowable by virtue of s.168A, both of which the Special Commissioners decided against Prudential (§§ 59–87), do not arise.
Now that four judges have considered Prudential's contention, it is tempting to think that it would be a matter of supererogation to give, for the third time, an account of the relevant facts and a recitation of the relevant statutory provisions. The facts can be found in §§ 9–44 of the decision of the Special commissioners and in §§ 16–23 of the judgment of the Chancellor. The statutory provisions are set out in §§ 45–51 of the Special Commissioners' decision and §§ 8–15 of the judgment of the Chancellor.
Both hedges were made for the legitimate commercial purpose of protecting Prudential, in the case of the RBS hedge, against an increase in the value of Euros relative to Sterling and, in the case of the GSI hedge, against diminution in the value of the US Dollar relative to Sterling. The need for the RBS hedge arose out of the issue of €500 million debt, with a maturity date on 19 December 2021 but which could be called in by Prudential on its tenth anniversary. The need for the GSI hedge arose in consequence of a loan by Prudential's, “treasury” subsidiary, PFUK, of $250m.
It was agreed that in March 2002 the spot rate for €500m was £309m. But for the presentation by Ernst & Young to Prudential's tax team, Prudential would have paid £309m for €500m. But under the terms of the confirmation of the RBS Hedge, contractually effective pursuant to the standard form ISDA Agreement, Prudential agreed to pay RBS £65m on 12 th March 2002. This was described as an “Additional payment…in consideration of (RBS) entering into this Transaction”. Under the terms of confirmation, Prudential agreed to pay £244m in exchange for €500m from RBS on 19 June 2002.
It was agreed that, in August 2002, the spot rate for $250m was £163m. Prudential decided to follow the same structure it had adopted, in the earlier hedge, at the suggestion of Ernst & Young. But for that decision, Prudential would have sold $250m to GSI for £163m. On 23 rd August 2002 under the terms of the contractually binding confirmation, Prudential agreed to pay GSI £40m, described as “an Additional payment…in consideration of GSI entering into this Transaction”. Under the terms of the confirmation, Prudential agreed to pay GSI $250m and GSI agreed to pay Prudential £203m on 25 th November 2002.
To qualify under the statutory scheme, a currency contract must contain a provision under the contract for the exchange of one currency for another, at the same time on maturity of the contract (ss147(1) and 150(1) and (2)). To enter into the calculation of profit or loss, a payment under a currency contract must be a qualifying payment (s.155(2) and (5), and s.153(1)(d)). In the instant appeal the only candidates were the payments of £65m under the RBS hedge and £40m under the GSI hedge. Qualification depended on establishing a:
“….provision under which the qualifying company—
…
(b) becomes subject to a duty to make a payment in consideration of another person's entering into the contract…”(s.151(1)(b)).
Whilst s.151(1)(b) envisages that the obligation to make the payment will arise under the very contract which the counter-party entered in consideration of such a payment, s.153(2) includes within the definition of “qualifying payment”, a payment :
“… which, if it were a payment under the contract, would be a payment falling within section 151 above”.
There are two essential features of the qualifying payment identified in s.151(1)(b): firstly, that it should have the function of an inducement to the counter-party to enter into the contract, and secondly, that it is distinct from payments, such as principal payments on maturity, made in fulfilment of the contract itself. These were features recognised by the Special Commissioners and by the Chancellor (§40). I can do no better than to recall the Special Commissioners' affirmation of these important features of the statutory scheme and the reasoning which followed:—
“54. The words of s...
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