TC03026: Versteegh Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 06 November 2013 |
| Neutral Citation | [2013] UKFTT 642 (TC) |
| Date | 06 November 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 642 (TC)
Judge Roger Berner, Judge Guy Brannan.
Kevin Prosser QC and James Henderson, instructed by PricewaterhouseCoopers Legal LLP, appeared for the Appellants
Julian Ghosh QC and Elizabeth Wilson, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Corporation tax - tax avoidance scheme designed to achieve loan relationship debit in borrowing company in a group without a corresponding tax charge in any other group company - loan structured to provide a return in the form of preference shares issued by the borrower, not to the lender but to another group company (the share recipient).Lead case issues: (1) was the lender taxable under Finance Act 1996Finance Act 1996 ("FA 1996") (loan relationships) - application of Financial Reporting Standard 5: Reporting the Substance of Transactions ("FRS 5") to the accounts of the lender - was the lender taxable under Income and Corporation Taxes Act 1988 ("ICTA 1988"), Income and Corporation Taxes Act 1988 section 786s. 786 - effect of FA 1996, Finance Act 1996 section 80s. 80(5); (2) was the share recipient taxable on its receipt of the preference shares under ICTA 1988, Income and Corporation Taxes Act 1988 section 18Sch. D, Case VI; and (3) on the limited basis of the question put to the tribunal, did the unallowable purposes rule in FA 1996, Finance Act 1996 schedule 9Sch. 9, para. 13 result in the borrower's debit in respect of the issue of the preference shares under the loan agreement not being taken into account under FA 1996.
This is the lead case appeal for groups which entered into a tax avoidance scheme designed to create a deduction in one group company for an intragroup loan without giving rise to taxable income in another. The First-tier Tribunal accepted one of the arguments put forward by HMRC. This is enough to render the scheme ineffective.
A number of groups of companies had entered into a scheme designed to achieve a corporation tax deduction in one group company for the costs of an intragroup loan without giving rise to taxable income in any other group company. This was the lead case appeal. Under the scheme, one group company ("the Lender") made a loan to another group company ("the Borrower"). The terms of the loan required repayment of the principal to the Lender, and obliged the Borrower to issue irredeemable preference shares ("the Shares"), in an amount equivalent to a market rate of interest on the sum lent for the period of the loan, not to the Lender but to another group company ("the Share Recipient"). The loan was repaid at the end of the loan period, and the Shares were issued by the Borrower to the Share Recipient. The financial statements of the Lender for the relevant year (the "Accounts") did not recognise any interest income or other profit on the Loan.
It fell to the First-tier Tribunal to determine the following issues:
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(2) Regarding the Lender, did the value of the Shares issued to the Share recipient form part of the profits of the lender:
(a) Under FA 1996, Finance Act 1996 part 4 chapter 2Pt. 4, Ch. 2 (the loan relationship rules; since rewritten as CTA 2009, Corporation Tax Act 2009 part 5Pt. 5) on the ground that the Accounts were incorrect in that the only and correct interpretation of GAAP required the Lender to recognise interest income on the Loan; or
(b) Under ICTA 1988, Income and Corporation Taxes Act 1988 section 786 subsec-or-para 5s. 786(5) (now CTA 2010, Corporation Tax Act 2010 section 779 subsec-or-para 1s. 779(1)-(4));
(3) Regarding the Share Recipient, did the value of the Shares issued to the Share recipient form part of the profits of the Share Recipient under Sch. D, Case VI (now CTA 2009, Corporation Tax Act 2009 section 979s. 979); or
(4) Regarding the Borrower, did the unallowable purposes provision of FA 1996, Finance Act 1996 schedule 9 subsec-or-para 13Sch. 9, para. 13 (now CTA 2009, Corporation Tax Act 2009 section 441ss. 441 and 442) apply so that the Borrower was not entitled to bring into account any debit in respect of the loan under the loan relationship rules. The First-tier Tribunal were asked to decide this issue by reference to certain agreed facts only, namely: that the Borrower had a commercial need for the borrowing; that the only reason for the borrowing's design, structure and terms was to obtain a tax advantage; and that all parties to the borrowing were aware of the tax avoidance motive at the time they entered into the arrangements.
The First-tier Tribunal decided the first and third issues in favour of the Appellants. With regard to the first issue, the First-tier Tribunal found that the Accounts were not incorrect and that the value of the Shares issued to the Share recipient did not form part of the profits of the lender under the loan relationship rules. With regard to the third issue, HMRC argued that the presence of the agreed facts meant it was inevitable that the unallowable purposes rule would apply, whatever other facts might be found. This argument was rejected by the First-tier Tribunal: "In the same way that the mere presence of a commercial purpose cannot rule out the existence of tax avoidance as being a main purpose, the mere existence of a tax advantage, known to the taxpayer, does not on its own render the obtaining of that advantage a main purpose. All the authorities point to the question being one of degree and significance to the taxpayer, and that the question is one of fact for the tribunal, having regard to all the circumstances." A "full factual enquiry" is necessary to determine whether a party entered into an arrangement with a main purpose of securing a tax advantage.
The second issue turned on whether the Share Recipient had a source of income from which the Share issue was derived, so as to be a receipt of income under Sch. D, Case VI. Counsel for the Share Recipient argued that there was no taxable source of the receipt, the Shares being simply a one-off gift to the Share Recipient. The First-tier Tribunal rejected this argument, finding for HMRC. The source of the receipt was the loan agreement and the shares were interest on the loan. As the loan relationship provisions do not apply, the receipt is taxable on the Share Recipient under Sch, D, Case VI.
In this case, HMRC lost a number of battles but won the war: the fact that the share issue is taxable on the recipient renders the scheme ineffective. This is an important victory for HMRC. This case is the lead appeal concerning a tax scheme used by a number of groups of companies and the tax at stake is likely to be significant.
The section of the judgment dealing with the unallowable purposes rule is interesting. HMRC argued that the presence of a tax avoidance motive means that the unallowable purposes rule has to apply. This argument found little favour with the First-tier Tribunal: "The mere fact that tax informs the choice of transaction does not itself give rise to a necessary inference that the obtaining of a tax advantage was a main object or purpose." Each case must be judged on its facts.
For commentary on the unallowable purposes rule, see the CCH Tax Reporter at 717-280.
[1]A number of groups of companies have entered into a scheme designed to achieve a corporation tax deduction in one group company for the costs of an intra-group borrowing, but without any concomitant taxable accrual or receipt in the group company making the loan, or in any other group company.
[2]HMRC seek to challenge the effectiveness of that scheme on a number of grounds. These appeals are lead cases for those groups who have undertaken the scheme, which is very simple to explain. One group company ("the Lender") made a loan to another group company ("the Borrower"). The terms of the loan required repayment of the principal to the Lender, and obliged the Borrower to issue irredeemable preference shares ("the Shares"), in an amount equivalent to a market rate of interest on the sum lent for the period of the loan, not to the Lender but to another group company ("the Share Recipient"). The loan was repaid at the end of the loan period, and the Shares were issued by the Borrower to the Share Recipient. The financial statements of the Lender for the relevant year, that ended 31 December 2003 ("the Accounts"), did not recognise any interest income or other profit on the Loan.
[3]In this lead case appeal, three of the appellants are members of the Commercial Estates group: Versteegh Limited was the Lender, Nestron Limited was the Borrower and Spritebeam Limited was the Share Recipient. For ease of recognition we shall use those descriptions, rather than the company names, throughout this decision. The fourth appellant, Prowting Limited ("Prowting"), is a member of another group (the Westbury group) that undertook the scheme. It was in the same position as the Share Recipient, and has been included as a lead case only because there was a difference in accounting treatment between it and Spritebeam Limited. However, nothing turns on that, and we shall therefore refer only to Spritebeam Limited as the Share Recipient.
[4]Under rule 18 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 ("the Tribunal Rules"), the following are the common or related issues:
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(2) regarding the Lender, whether the value of the Shares issued to the Share Recipient forms part of the profits of the Lender:
(a) under Finance Act 1996 part 4 chapter 2Chapter 2 of Part 4 to the Finance Act 1996 ("FA 1996") (loan relationships), on the ground that the Accounts are incorrect in that the correct and only application of GAAP required the Lender to recognise interest income on the Loan; or
(b) under Income and Corporation Taxes Act 1988 section 786s 786(5) of the Income and Corporation Taxes Act 1988 ("ICTA");
(3) regarding the Share Recipient, if (but only if) the answer...
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