Travel Document Service and Another v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 07 February 2017 |
| Neutral Citation | [2017] UKUT 45 (TCC) |
| Date | 07 February 2017 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2017] UKUT 45 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
The Hon Mr Justice Arnold and Judge Timothy Herrington
Nicola Shaw QC and Michael Firth, instructed by Deloitte 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 – Use of total return swap over shares in subsidiary to create a deemed creditor relationship – Value of shares depressed by novating liability for large loans to subsidiary – Whether loan relationships had unallowable purpose – Whether debits attributable to unallowable purpose.
The Upper Tribunal upheld the First-tier Tribunal decision in Travel Document Service Ltd [2015] TC 04728 that the loan relationship unallowable purpose rules applied to disallow debits arising in connection with a tax avoidance scheme.
This appeal relates to a complicated tax avoidance scheme designed to bring a shareholding in a subsidiary company within the scope of the Shares with Guaranteed Returns etc anti-avoidance rules in FA 1996, s. 91B. These rules, designed to deal with a number of avoidance schemes which exploited the legal form of shares while seeking to replicate a return economically equivalent to interest, operated by deeming the shareholding to represent rights under a creditor loan relationship. The rules were re-enacted in CTA 2009, Pt. 6, Ch. 7 until their repeal with effect from 22 April 2009.
The First Appellant, Travel Document Services Ltd, entered into a complicated tax avoidance scheme which brought its holding of a subsidiary company's shares within the loan relationship rules by entering into a derivative contract in the form of a total return swap and subsequently depressed the value of the shares by novating a loan liability into the subsidiary from another group company. The effect was to accrue a loan relationship debit in the First Appellant by reference to the reduction in the fair value of the subsidiary's shares. The subsidiary (the Second Appellant, Ladbroke Group International Ltd) accrued conventional loan relationship debits as a result of its liability to interest on the loans novated to it. It is worth noting at the outset that the provisions of FA 1996, s. 91B were triggered by the entering into of the swap.
It was accepted that the provisions of FA 1996, s. 91B applied to deem the shareholding in the subsidiary as a creditor loan relationship. The appeal essentially involved a consideration of whether the loan relationship unallowable purpose rules in FA 1996, Sch. 9, para. 13 could apply to a deemed loan relationship in the same way as they applied to an actual loan relationship.
The taxpayer argued before the First-tier Tribunal (FTT) that it would make no sense to attribute its motives for holding the underlying shareholding in the subsidiary as being its motive for holding a deemed loan relationship because it could not have a motive for holding something it did not in fact own. Although both the taxpayer and HMRC argued that it was necessary to ascertain the First Appellant's motive for holding the subsidiary's shares, the FTT held that on any rational analysis, the First Appellant's purposes in causing the satisfaction of the provisions of FA 1996, s. 91B must be treated as being its purposes for being party to the deemed loan relationship. These provisions were satisfied by the entering into of the swap; therefore, the motive for entering into the swap was the appropriate test under the legislation. And because the First Appellant had already accepted one of the main motives for entering into the swap was to facilitate the tax advantage, it followed that the First Appellant had an unallowable purpose thoughout the period in which it was deemed to hold the loan relationship by virtue of FA 1996, s. 91B. Also, standing back and considering the legislation in the round it was appropriate that the general scheme and policy of an anti-avoidance provision which had been carefully phrased in quite broad and general terms should apply to what might be called deemed loan relationships. The Upper Tribunal upheld the FTT judgment finding that there is no conceptual or practical difficulty in identifying the subjective purposes of a party to a deemed loan relationship (one applies the test to the real-world transaction with its real-world rights and liabilities as if it was a loan relationship) and that the First Appellant's purposes in owning the shares during the period included making them fall within the shares with guaranteed returns etc. legislation and then depreciating them so as to secure a tax advantage.
With regard to the Second Appellant, the FTT held that the loan relationship debits arising to the Second Appellant also had an unallowable purpose. These debits related to an actual loan relationship not a deemed loan relationship therefore it was not necessary to consider the deemed loan relationship point above. The Upper Tribunal upheld this judgment.
With regard to the amount of each debit which should be attributed to the unallowable purpose, the FTT judged, in the case of both taxpayers, that the whole of the debits arising should be attributable to the unallowable purpose, notwithstanding that this gave rise to an asymmetric tax disadvantage to the group as a whole. In this regard, the legislation simply did not require symmetry of treatment. The Upper Tribunal also upheld this judgment.
This judgment represents another taxpayer defeat in a line of tax avoidance schemes designed to exploit aspects of the loan relationship rules. The specific rules in point were the shares with guaranteed returns anti-avoidance provisions of FA 1996, s. 91B however the real focus of the judgment was on the loan relationship unallowable purpose rules and, in particular, the principle that deemed loan relationships should be treated in the same way as actual loan relationships for the purposes of these rules. The shares with guaranteed returns rules were repealed with effect from 22 April 2009 however the unallowable purpose rules remain effective therefore this judgment has continuing relevance for the interpretation of those rules.
[1] These are appeals from a decision of the First-Tier Tribunal (Tax) (Judge Kevin Poole and Julian Sims FCA CTA) dated 19 November 2015 [2015] TC 04728 dismissing appeals by Travel Document Service (“TDS”) and Ladbroke Group International (“LGI”), which are both members of the Ladbroke Group of companies, against decisions by the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) to disallow non-trading loan relationship debits of £253,939,631 claimed by TDS for its accounting period ended 31 December 2008 pursuant to section 91B of the Finance Act 1996 (“FA96”) and non-trading loan relationship debits of £9,953,748 and £2,181,479 claimed by LGI for its accounting periods ended 31 December 2008 and 31 December 2009 respectively. These debits were incurred in connection with a notifiable tax avoidance scheme devised by Deloitte LLP and advised upon by Slaughter and May. The First-Tier Tribunal upheld HMRC's contention that the debits were not allowable by virtue of the “unallowable purpose” rule contained in paragraph 13 of Schedule 9 FA96.
[2] The First-Tier Tribunal had the benefit of an agreed statement of facts which set out details of the relevant transactions. In addition, it received evidence from Philip Turner, Head of Group Tax and Strategic Planning of the Ladbroke Group and also a director of TDS, as to the context in which, and purpose for which, the transactions were undertaken. The...
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