Stagecoach Group PLC & Stagecoach Holdings LTD v The Commissioners for Her Majesty's Revenue & Customs, TC 04866
| Jurisdiction | UK Non-devolved |
| Judge | J Gordon REID QC |
| Judgment Date | 10 February 2016 |
| Neutral Citation | [2016] UKFTT 0120 (TC) |
| Respondent | The Commissioners for Her Majesty's Revenue & Customs |
| Appellant | Stagecoach Group PLC & Stagecoach Holdings LTD |
| Reference | TC 04866 |
| Court | First-tier Tribunal (Tax Chamber) |
[2016] UKFTT 0120 (TC)
TC04866
Appeal number:TC/2013/07413; TC/2013/07414
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 re-calculation of income for
the purposes of corporation tax - yes; whether re-calculated sum chargeable
to corporation tax - yes; Corporation Tax Act 2009, ss 2, 5, 320 and 307, 979
dismissed.
FIRST-TIER TRIBUNAL
TAX CHAMBER
(1) STAGECOACH GROUP PLC &
(2) STAGECOACH HOLDINGS LIMITED Appellants
- and -
THE COMMISSIONERS FOR HER MAJESTY’S Respondents
REVENUE & CUSTOMS
TRIBUNAL:
JUDGE J GORDON REID QC, FCIArb
DR HEIDI POON
Sitting in public at George House, Edinburgh on 13, 14, 15 and 16 July 2015
Nicola Shaw QC and Michael Firth, barrister, instructed by KPMG LLP (UK),
for the Appellants;
Julian Ghosh QC, Ruth Jordan and Barbara Belgrano, barristers, instructed by
the Office of the Advocate General on behalf of HM Revenue and Customs, for
the Respondents.
© CROWN COPYRIGHT 2016
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DECISION
Introduction
1. In outline, the commercial background to these two lead appeals is a scheme for 5 the recapitalisation of two companies (Stagecoach Holdings Ltd [Holdings], the
second appellant and Stagecoach Services Ltd [Services] by its ultimate parent,
Stagecoach Group plc [Group], the first appellant, by means of forward subscription
agreements [FSAs], between Group and Holdings and Group and Services. The FSAs
provided that Group’s funding would be calculated largely by reference to sums to be 10 paid in repayment by another subsidiary, Stagecoach Transport Holdings plc
(Transport), of a pre-existing loan to it from Group, with the funding for the share
subscription capped at £20m.
2. In exchange for the funding by Group, Holdings and Services agreed to issue
ordinary shares to their immediate parent companies, The Integrated Transport 15 Company Ltd (ITCO), and Stagecoach Bus Holdings Limited (Bus) respectively. The
fiscal consequences of the accounting treatment of these arrangements were the
subject of these appeals. The accounting treatment was not in dispute although it
featured prominently in the evidence and in submissions.
3. These appeals raise two broad issues. The first relates to the statutory loan 20 relationship regime in Part 5 of the Corporation Taxes Act (CTA) 20091 and its
application to the scheme. The question arises whether the sum of about £39,471,087,
derecognised (removed from part of the parent’s [Group] balance sheet), debited to
investments in Group’s balance sheet and subsequently paid to Holdings and Services
as part of the recapitalisation transactions, falls to be treated as a deduction in 25 computing the ultimate parent company’s (Group’s) profits for corporation tax
purposes. The derecognition reduced the sum recorded in Group’s balance sheet
attributable to the pre-existing loan (a financial asset) granted by it to another
subsidiary (Transport). The debit increased the sum recorded in the Group’s Balance
Sheet attributable to investments (which included Group’s investment in its various 30 subsidiaries including Holdings and Services). This first issue affects the first
appellant, Group.
4. The second broad issue is whether, if the loan relationship regime is otherwise
applicable and the sum deductible, the deduction is nevertheless, in effect, negated by
the arbitrage rules contained in Part 6 of the Taxation (International and Other 35 Provisions) Act 2010 (TIOPA). Part 6 contains a number of provisions intended to
prevent the exploitation of tax differences in the treatment of deductions and receipts.
In considering this issue, it is assumed that the deduction from Group’s taxable profits
is justified.
1 Various provisions of Part 5 have been amended by Sch edule 7 to the Finance (No 2) Act 2015, but
these are not relevant for the purposes of the present appeals.
3
5. The question is whether those rules require each of the two recapitalised
companies to increase their taxable income by the sum paid to each of them by Group
under the FSAs (£19,735,543.50 - being one half of £39,471,087), thus in effect
taxing the sum deducted by Group. This issue affects Holdings, the second appellant;
it is one of these recapitalised companies. The other is Services. 5
6. A Hearing took place at George House, Edinburgh on 13, 14, 15 and
16 July 2015. The appellants were represented by Nicola Shaw QC, and Michael
Firth, barrister of the English Bar on the instructions of KPMG LLP (UK) [KPMG].
Ms Shaw led the evidence of John Hamilton CA, Taxation Director of Group; he
spoke to his signed witness statement. HMRC were represented by Julian Ghosh QC, 10 of the English and Scottish Bars, and Ruth Jordan and Barbara Belgrano, barristers of
the English Bar, on the instructions of Eric Brown of the Office of the Advocate
General on behalf of HMRC. Mr Ghosh led the expert evidence of Peter Drummond,
CA, who spoke to his Report dated 28 January 2015.
7. Various bundles of documents, authorities, skeleton arguments and a Statement 15 of Agreed Facts were also produced. The appellants arranged for the proceedings to
be recorded, and (instantaneously) transcribed by stenographers. A transcript of the
whole proceedings is available.
8. Although mentioned separately from time to time in the documents, evidence
and submissions, there is no significant distinction to be drawn between the 20 recapitalisations of Holdings and Services.
Procedural History
9. Group and Holdings submitted their corporation tax self-assessments for the
period ending 30 April 2011 on 27 April 2012. Enquiries were opened into the
returns2 on 31 July 2012. A Receipt (arbitrage) Notice was issued to Holdings under 25 section 249 TIOPA but it did not amend its return.
10. On 27 September 2013, HMRC issued to Group a notice of completion of
enquiry (Closure Notice3) and two letters explaining the basis on which the Closure
Notice proceeded. Essentially, HMRC said there should be no deduction from taxable
profits of Group in respect of the derecognition of the loan asset because a debit that 30 meets the conditions set out in s320 can be brought into account only if the conditions
of s307(3) are satisfied. These conditions, it was said, cannot be met because the
debit is not one which fairly represents a loss arising from Group’s loan relationships.
They further explained that if there was no such allowable deduction, the arbitration
notices and the alleged consequent tax liability of Holdings and Services would not 35 be pursued. But if HMRC are wrong and there should be such a deduction, the
arbitration notices and consequent tax liability of Holdings and Services would be
pursued.
2 Under paragraph 24 of Schedule 18 to the Finance Act 1998
3 FA 1998 Schedule 18 paragraph 32
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