Travel Document Service & Ladbroke Group International v The Commissioners for HM Revenue & Customs
| Jurisdiction | England & Wales |
| Judge | Lady Justice Arden,Lord Justice Newey,Lord Justice Bean |
| Judgment Date | 20 March 2018 |
| Neutral Citation | [2018] EWCA Civ 549 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case Nos: A3/2017/0973 & 0974 |
| Date | 20 March 2018 |
[2018] EWCA Civ 549
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
(Mr Justice Arnold and Judge Timothy Herrington)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lady Justice Arden
Lord Justice Bean
and
Lord Justice Newey
Case Nos: A3/2017/0973 & 0974
Mr Jonathan Peacock QC and Miss Sarah Black (instructed by Enyo Law LLP) for the Appellants
Mr Julian Ghosh QC and Miss Elizabeth Wilson (instructed by General Counsel and Solicitor to HM Revenue and Customs) for the Respondents
Hearing dates: 20 & 21 February 2018
Judgment Approved
This case arises out of a tax avoidance scheme in which the appellants, Travel Document Service (“TDS”) and Ladbroke Group International (“LGI”), participated in 2008. TDS and LGI claimed debits in respect of the scheme (of more than £253 million in the case of TDS, some £12 million in the case of LGI) on the basis of the provisions in respect of “loan relationships” then to be found in the Finance Act 1996 (“ FA 1996”). The debits having been disallowed by HM Revenue and Customs (“HMRC”), TDS and LGI appealed to the First-tier Tribunal (“the FTT”) (Judge Kevin Poole and Mr Julian Sims FCA CTA), but the appeals were dismissed and the Upper Tribunal (Arnold J and Judge Timothy Herrington) subsequently agreed with the FTT. TDS and LGI now challenge the Upper Tribunal's decision in this Court.
Basic facts
TDS and LGI both belong to the Ladbroke group of companies (“the Group”). At the relevant times, TDS was a subsidiary of Ladbrokes plc, the Group's parent company, and itself owned LGI. LGI in turn held the shares in a company with two trading subsidiaries, Jack Brown (Bookmaker) Limited (“JBB”) and Ladbrokes Call Centre Limited (“LCC”). JBB was the lessee of numerous properties and LCC provided call centre services. As at 31 December 2007, LGI had an accumulated surplus of some £272 million.
The principal operating company of the Group was Ladbrokes Betting and Gaming Limited (“LBG”), another subsidiary of Ladbrokes plc. It had as a subsidiary Ladbrokes (Northern Ireland) (Holdings) Limited (“LNIH”), which itself owned a company based in Northern Ireland, North West Bookmakers Limited (“NWB”).
The Group had amongst its aims shortening its ownership chains, reducing the number of active UK subsidiaries and merging their businesses into LBG. To this end, it aspired to transfer the JBB business to LBG. At one stage, the Group envisaged transferring LCC's business to LBG as well, but it became apparent that that business was unlikely to have a long life.
By late January 2008, the Group had been approached by Deloitte with a proposal for a scheme to generate a substantial tax advantage while also allowing (a) LBG to gain the benefit of JBB's business in economic terms without the need to transfer all the leases that the latter held and (b) LGI's reserves to be extracted from it. The scheme was implemented using another subsidiary of TDS, Sponsio Limited (“Sponsio”).
The following transactions were entered into:
i) On 26 February 2008, Sponsio subscribed for some shares in LGI;
ii) On 28 February 2008, Sponsio borrowed £143,600,000 from Ladbrokes Group Finance plc (“LGF”), the principal financing company for the Group. Sponsio used £23,600,000 of the money to acquire LNIH from LBG and lent the remaining £120 million to LNIH. LNIH in turn made a loan of £120 million to NWB;
iii) On 29 February 2008, TDS entered into a total return swap (“the Swap”) with LBG over the shares the former held in LGI. This had a maximum term of five years but could be terminated earlier. In broad terms, it provided for LBG to pay TDS interest on the fair value of the LGI shares at the date of the Swap in return for TDS paying LBG an amount equal to the increase in the fair value of the LGI shares, thereby achieving a “synthetic” transfer of the JBB business. The Swap was thought to be desirable both to “buy time” to address issues relating to the JBB leases and because of the tax advantage that it could potentially enable the Group to obtain;
iv) On 6 March 2008, LBG decided to pay an interim dividend of £110 million. On the same day, Sponsio borrowed £110 million from LGF, and it lent this sum on to LBG;
v) On 11 March 2008, Sponsio novated its rights and obligations under its loans from LGF of £143,600,000 and £110 million (plus accrued interest) to LGI for nominal consideration. The Group had first received advice from Slaughter and May that the intended tax advantage should be available in consequence of the novations (“the Novations”). Mr Philip Turner, the Group's head of tax and strategic planning and a director of TDS, told the FTT that, without that comfort, LGI would have distributed its reserves by a more “straightforward” dividend route;
vi) On 23 May 2008, the JBB business was sold to LBG; and
vii) On 30 May 2008, the Swap was terminated. TDS paid LBG £648,555 by way of termination payment.
The key to the scheme, as the Upper Tribunal noted (paragraph 9 of its decision), was the reduction in the fair value of TDS's shareholding in LGI as a result of the latter taking on indebtedness of more than £253 million pursuant to the Novations. On the strength of this devaluation, TDS claimed a debit of £253,939,631 under section 91B of FA 1996.
For its part, LGI claimed debits in its 2008 and 2009 accounting periods in respect of the interest it paid on the novated loans.
A helpful diagram indicating the structure of the Group and the transactions into which its companies entered is to be found as an appendix to the FTT decision.
The legislative framework
Section 91B of FA 1996 formed part of Chapter II of Part IV of the Act. As its heading indicated, Chapter II of Part IV, which encompassed sections 80 to 105, was concerned with “loan relationships”. The legislation has since been superseded, but during the period relevant to this case section 80(1) stated that, for the purposes of corporation tax, all profits and gains arising to a company from its loan relationships were to be chargeable to tax as income in accordance with Chapter II of Part IV.
The term “loan relationship” was explained in section 81(1) of FA 1996. This provided for a company to have a “loan relationship” wherever:
“(a) the company stands (whether by reference to a security or otherwise) in the position of a creditor or debtor as respects any money debt; and
(b) that debt is one arising from a transaction for the lending of money”.
Section 84 of FA 1996 dealt with “Debits and credits brought into account”. Section 84(1) stipulated:
“The credits and debits to be brought into account in the case of any company in respect of its loan relationships shall be the sums which, when taken together, fairly represent, for the accounting period in question —
(a) all profits, gains and losses of the company, including those of a capital nature, which (disregarding interest and any charges or expenses) arise to the company from its loan relationships and related transactions; and
(b) all interest under the company's loan relationship and all charges and expenses incurred by the company under or for the purposes of its loan relationships and related transactions.”
Section 84(7) added:
“Schedule 9 to this Act contains further provisions as to the debits and credits to be brought into account for the purposes of this Chapter.”
Paragraph 13 of schedule 9 to FA 1996 was headed “Loan relationships for unallowable purposes”. Given its importance in the present case, I should set it out quite fully. It was in the following terms:
“(1) Where in any accounting period a loan relationship of a company has an unallowable purpose,
(a) the debits, and
(b) the credits in respect of exchange gains,
which, for that period fall, in the case of that company, to be brought into account for the purposes of this Chapter shall not include so much of the debits or credits (as the case may be) as respects that relationship as, on a just and reasonable apportionment, is attributable to the unallowable purpose.
…
(2) For the purposes of this paragraph a loan relationship of a company shall be taken to have an unallowable purpose in an accounting period where the purposes for which, at times during that period, the company —
(a) is a party to the relationship, or
(b) enters into transactions which are related transactions by reference to that relationship,
include a purpose (‘the unallowable purpose’) which is not amongst the business or other commercial purposes of the company.
(3) For the purposes of this paragraph the business and other commercial purposes of a company do not include the purposes of any part of its activities in respect of which it is not within the charge to corporation tax.
(4) For the purposes of this paragraph, where one of the purposes for which a company —
(a) is a party to a loan relationship at any time, or
(b) enters into a transaction which is a related transaction by reference to any loan relationship of the company,
is a tax avoidance purpose, that purpose shall be taken to be a business or other commercial purpose of the company only where it is not the main purpose, or one of the main purposes, for which the company is a party to the relationship at that time or, as the case may be, for which the company enters into that transaction.
(5) The reference in sub-paragraph (4) above to a tax avoidance purpose is a reference to any purpose that consists in securing a tax advantage (whether for the company or any other person).
(6) In this paragraph ‘tax advantage’ has the meaning given by section 840ZA of the [Income and Corporation] Taxes Act 1988.”
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