Stagecoach Group Plc and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 24 February 2016 |
| Neutral Citation | [2016] UKFTT 120 (TC) |
| Date | 24 February 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge J Gordon Reid QC, FCIArb; Dr Heidi Poon
Nicola Shaw QC and Michael Firth, barrister, instructed by KPMG LLP (UK), appeared for the Appellants;
Julian Ghosh QC, Ruth Jordan and Barbara Belgrano, barristers, instructed by the Office of the Advocate General appeared on behalf of HM Revenue and Customs, for the Respondents.
Corporation tax – Loan relationships – Repairing balance sheet of group company – Intra group Forward Subscription Agreement – Price of shares calculated by reference to inter-company loan relationship – Generally accepted accounting practice – Whether debit representing cost of shares was a debit in respect of loan relationship with a subsidiary – No – Whether in the alternative – Arbitrage rules applied requiring recalculation of income for the purposes of corporation tax – Yes – Whether recalculated sum chargeable to corporation tax – Yes – Corporation Tax Act 2009 (“CTA 2009”), s. 2, 5, 320 and 307, 979 Taxation (International and other Provisions) Act 2010 (“TIOPA 2010”), s. 249–258 – Appeal dismissed.
The First-tier Tribunal (FTT) dismissed the appeal by Stagecoach Group plc (Group) against enquiry closure notices issued by HMRC denying a tax deduction for a “derecognition” debit under the Corporation Tax Act 2009 (“CTA 2009”), s. 320, finding that the debit, which formed part of a scheme notified to HMRC under DOTAS provisions, was not a loan relationships debit but a debit in respect of the recapitalisation of a subsidiary and no deduction under CTA 2009, Pt. 5 (loan relationships) was allowed. The FTT further held that, as a consequence, the arbitrage notice issued to Stagecoach Holdings Limited (Holdings) (the subsidiary company) under the Taxation (International and Other) Provisions Act 2010 (“TIOPA 2010”), s. 249 was not required and Holdings appeal was allowed.
The Appellants were Stagecoach Group plc (Group) and one of its (indirect but wholly owned) subsidiaries Stagecoach Holdings Limited (Holdings) and the appeals had been designated as lead cases under the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273), rule 18(2)(b).
In December 2009, Group loaned £88m to Stagecoach Transport Holdings plc (Transport). Transport was a direct subsidiary of Group and the parent of Holding's parent company. The loan was due to be repaid on 31 March 2010 but was then extended until 31 December 2010.
In early 2010, Holdings balance sheet showed net liabilities of £10.8m and Holdings was technically insolvent. Advice was sought from KPMG on recapitalising Holdings. The thrust of the advice given by KPMG was that if the recapitalisation proceeded by way of a forward subscription agreement (FSA), the contingent subscription amount would not be taxable in the hands of Holdings and would be given tax relief as a “derecognition debit”. In other words, tax relief could be obtained for the cost of a share subscription in Holdings without Holdings being taxable on the monies it received. The arrangements were notified to HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) provisions, described as “Tax-efficient recapitalisation of subgroup by derecognition …” and a scheme reference number was issued.
In October 2010, Group and Holdings entered into the FSA pursuant to which Holdings agreed to issue 20,000 ordinary shares of £1 each to its parent company Integrated Transport Company Ltd (ITCO) on 31 December 2010 and Group agreed to pay the nominal subscription amount of £20,000 plus a contingent subscription in a sum equal to 22.4% of the principal and interest repaid to Group under the Transport loan up to a maximum of £20m. On entering into the agreement and following UK GAAP and FRS 26, Group derecognised an amount equal to £19.735m representing the 22.4% of the principal amount of its loan to Transport that would now pass to Holdings. The accounting entries were debit (increasing) the cost of investment in Holdings and credit (decreasing) the loan receivable due from Transport.
The nominal subscription amount of £20,000 was paid to Holdings the following day. On 31 December Transport repaid the full amount of its loan plus interest and as 22.4% of the amount received exceeded the £20m limit, a payment of £19.980m (£20m minus the £20,000 already paid) was made to Holdings. Holdings issued £20,000 shares of £1 each to ITCO.
In its corporation tax return, Group brought into account a non-trading deficit of £37.7m in respect of its loan relationships for the accounting period ended 30 April 2011. Within this amount was the loan relationship derecognition debit claimed under CTA 2009, s. 320 pursuant to the FSA with Holdings. In its corporation tax return for the period ended 30 April 2011, Holdings did not recognise as taxable any amounts received from Group under the terms of the FSA. HMRC issued Holdings with an arbitrage notice under TIOPA 2010, s. 249 and Group with an enquiry closure notice concluding that Group was not entitled to claim a deduction for the derecognised amounts representing the proportionate share of the loan asset to be passed to Holdings. Group appealed the closure notices and Holdings appealed the abritrage notice.
The parties presented the FTT with a list of issues to be determined:
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Issue aa: whether the debit claimed by the Appellant (Group) is in respect of a company's loan relationship within CTA 2009, s. 320;
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1) Issue a: whether the deductibility of debits under CTA 2009, s. 320 was subject to the provisions of CTA 2009, s. 307(3);
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2) Issue b: if so, whether CTA 2009, s. 307(3) required the debits and credits to be tested to establish their nature;
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3) Issue c: if so, the issue of whether the debits claimed by the Appellants fairly represented losses arising from their respective loan relationships under CTA 2009, s. 307;
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4) Issue d: whether there was an amount to be brought into account under the relevant provisions of TIOPA 2010, and in particular whether the receipt scheme conditions in TIOPA 2010, s. 250 were satisfied;
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5) Issue e: whether, under TIOPA 2010, s. 254(1)(b), each of the receipt scheme conditions has to be met in relation to the company at the time the notice is given, so that notices given after the “schemes” have been completed were invalid (this issue was subsequently withdrawn);
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6) Issue f: whether there could be a charge to tax under Case VI of Sch. D in the relevant periods, as stated in HMRC's closure notices.
Dealing with issue (aa) first, the FTT determined that the debit to investments was not a loan relationships debit. The loan by Group to Transport already existed when the FSAs were entered into and the debit brought into account. The debit was in respect of the recapitalisation of the subsidiary through the medium of an FSA and that was the transaction. The pre-existing loan relationship was incidental; it was essentially the mechanism by which the contingent subscription amount was calculated and that sum was not in respect of the loan relationship, it was in respect of the FSA which determined its amount and specified the obligations to be implemented in respect of it. The debit was not a loss from a loan relationship, it did not represent a loss at all. The loan principal and interest were repaid in full and that loan relationship led to a profit not a loss. The debit represented increased investment in the subsidiary and future economic benefit.
CTA 2009, s. 320 was to be construed in the context of the overall purpose of CTA 2009, Pt. 5, namely to determine how profits and deficits arising to a company from its loan relationship were to be brought into account for corporation tax purposes. CTA 2009, s. 320 gave relief for an expense in respect of a company's loan relationship where because, and only because, of the accounting treatment (debiting the balance sheet rather than the profit and loss account), that relief would otherwise be denied. But the debit in question did not create a deficit in respect of a loan relationship.
Accordingly, the FTT answered issue (aa) by holding that the debit claimed by Group was not in respect of a company's loan relationship within CTA 2009, s. 320. On that basis Group's appeal failed. The receipt notice on Holdings was no longer required and would fall away and the appeal against Holdings was, therefore, to be allowed. However, given the decision could be appealed, the FTT continued to set out their views on the remaining issues albeit noting that these views were obiter.
The FTT noted that it was difficult to accept that a loan relationship on which a creditor received full payment including interest and thus made a profit, somehow yielded a relievable loan relationship loss but even if, contrary to their view, the debit to investments was somehow a debit in respect of a loan relationship falling within CTA 2009, s. 320, it did not fall within the debits specified in s. 307(3) and could not be brought into account in determining Group's profit and losses for corporation tax purposes. Accordingly, the FTT answered issue (a) by holding that the deductibility of debits under CTA 2009, s. 320 was subject to the provisions of s. 307(3); issue (b) by holding that s. 307(3) required the debits and credits to be tested to establish their nature, and issue (c) by holding that the debit claimed by Group did not fairly represent losses arising from its loan relationships under s. 307.
Turning to issues (d) and (f), the FTT noted that tax arbitrage was the exploitation of asymmetries between different tax regimes to achieve a reduction in the overall tax liability of entities such as companies, often in a group. Usually, there was a mismatch between two tax regimes or codes, e.g. where a tax deduction by one company was not matched by a taxable receipt of another company. Such mismatches and other contrived arrangements to avoid tax were the subject of anti-arbitrage rules in TIOPA...
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