HM Revenue and Customs v DCC Holdings (UK) Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Collins,Lord Kerr,LORD WALKER,Lord Hope,Lord Clarke |
| Judgment Date | 15 December 2010 |
| Neutral Citation | [2010] UKSC 58 |
| Date | 15 December 2010 |
| Court | Supreme Court |
[2010] UKSC 58
Lord Hope, Deputy President
Lord Walker
Lord Collins
Lord Kerr
Lord Clarke
THE SUPREME COURT
Michaelmas Term
On appeal from: 2009 EWCA Civ 1165, 2008 EWHC 2429, 2007 UKSPC 0611
Appellant
John Gardiner QC
Philip Walford
(Instructed by Reynolds Porter Chamberlain LLP)
Respondent
Michael Furness QC
Michael Gibbon
(Instructed by Solicitor to Her Majesty's Revenue and Customs)
LORD WALKER (with whom Lord Hope, Lord Collins, Lord Kerr and Lord Clarke agree)
The legislative background
Both sides agree that the transactions before the Court on this appeal may give rise to taxable interest under three actual or notional loan transactions (the cautious "may" in the statement of facts and issues, paragraph 30, reflects the Revenue's ultimate fall-back position that two of the transactions produce no debit or credit at all). The three loan transactions are as follows:
(1) The actual loan transaction between the United Kingdom government and the holder of United Kingdom Government securities ("gilts");
(2) A loan transaction between DCC Holdings (UK) Ltd ("DCC") as lender and Ulster Bank Ireland Ltd ("the Bank") as borrower deemed to exist under section 730A of the Income and Corporation Taxes Act 1988 (" ICTA 1988"); and
(3) A loan transaction between the Bank as lender and DCC as borrower deemed to exist under section 737A(5) of ICTA 1988 and section 97(2) and
(4) of the Finance Act 1996 (" FA 1996").
Counsel on both sides put this analysis in the forefront of their written cases. The two sides have now been arguing for over six years about DCC's tax return for the relevant period (1 April 2001 to 31 March 2002), and they are now extremely familiar with the arguments. For them the arena is already well-trodden. But for those who are less familiar with the arguments it is unhelpful to be confronted at once with these three abstract relationships, two of which are statutory constructs. It is more helpful to start with the general nature of the problems which Parliament was trying to address, first in sections 730A and 737A of ICTA 1988 and then in Part IV, Chapter II of FA 1996, and the general nature of the solutions which Parliament adopted to deal with those problems.
One source of taxable income is interest payable by a debtor to a creditor. Traditionally that was taxed under Schedule D, Case III under the simple rubric of "interest of money, whether yearly or otherwise." The rule was that even though under the general law most interest accrues from day to day, that was not the right treatment for the purposes of Schedule D, Case III. The tax rule was (as the Special Commissioner observed in this case, echoing Rowlatt J in Leigh v Inland Revenue Commissioners [1928] 1 KB 73, 77 and Lord Hanworth MR in Dewar v Inland Revenue Commissioners [1935] 2 KB 351, 366) that "'receivability' without receipt is nothing." Apart from anti-avoidance provisions the Revenue could not charge income tax on a holder of gilts who, by a well-timed sale just before payment of a half-yearly instalment of interest, in effect turned accrued income into a capital gain ( Wigmore v Thomas Summerson & Sons Ltd [1926] 1 KB 131). Nor could a purchaser of short-dated gilts pregnant with interest escape liability to tax on the whole of the interest payment, even if he had paid an extra sum expressed to be for the accrued interest, as an aggrieved litigant in person discovered in Schaffer v Cattermole [1980] STC 650.
The traditional rule opened up opportunities for tax avoidance. In Wigmore v Thomas Summerson & Sons Ltd [1926] 1 KB 131, 145, Rowlatt J observed,
"The result is that nobody on the super tax level, who has not more money than appreciation of income tax law, will ever buy a security that is full of dividend, because in doing so he is buying super tax; and that a man on the super tax level, if he wants to sell a security, had better sell when it is full of dividend, because then he is selling super tax."
Anti-avoidance provisions were in due course enacted. They were supplemented and elaborated at frequent intervals in response to the development of increasingly sophisticated avoidance schemes, some of which were popularly called "dividend stripping" and "bond washing." When the law of income tax and corporation tax was consolidated in ICTA 1988, Part XVII (headed "Tax Avoidance") comprised 85 sections, and Part XVII, Chapter II (headed "Transfers of Securities") contained 29 sections.
That is the context of the first set of provisions with which this appeal is concerned, sections 730A and 737A of ICTA 1988. Those new sections were inserted into Part XVII, Chapter II by section 80(1) of the Finance Act 1995 and section 122 of the Finance Act 1994 respectively, to apply (in each case) to transactions entered into on or after 1 May 1995. (It is a little surprising that section 737A preceded section 730A in its enactment, but the former provision was initially intended to apply to section 730, a more general provision than section 730A.) It should also be mentioned in passing that section 736A, introducing Schedule 23A, was enacted by section 58 of the Finance Act 1991. I draw attention to the different provenance of these provisions because it is relevant to the resolution of this appeal to see that it depends on the construction, not of a single set of statutory rules addressed to a single problem, but to a patchwork of legislation; and its difficulty lies not only in the language of particular sections, subsections and paragraphs, but in seeing how Parliament must be taken to have intended them to operate together. I respectfully disagree with the comment of Rix LJ [2010] STC 80, para 94 that the statutory provisions were always seeking one goal.
In this context, the special provisions about repos in sections 730A, 730B, 737A, 737B and 737C can be seen as making a relatively modest extension in the existing battery of anti-avoidance provisions already contained in Part XVII, Chapter II of ICTA 1988. They were also intended to make the tax treatment of repos correspond to their economic substance, so as to be more in line with modern accounting theory and practice as set out in FRS 4 and FRS 5. In legal form a repo is a preordained sale and purchase at prices fixed in advance, but in economic substance it is a short-term secured loan, as was explained in the written evidence of the only expert witness, Mr Holgate. These sections were in force in their original form for only about a year before the introduction of the new loan relationships code, for corporation tax purposes, by FA 1996. With hindsight, it might have been better if Parliament had waited a year in order to produce a more integrated legislative scheme for the tax treatment of repos.
Part IV Chapter II of FA 1996 effected a fundamental change in the taxation of loan interest for the purposes of corporation tax (but not for the purposes of income tax). The changes were aimed at bringing the tax treatment of all interest onto an authorised basis of accounting (in many cases, including this case an accruals basis), and went far beyond mere counteraction of tax avoidance. They involved a new head of charge for corporation tax purposes in section 18(3A) of ICTA 1988, as inserted by section 105 of, and para 5 of Schedule 14 to, FA 1996:
"profits and gains which, as profits and gains arising from loan relationships, are to be treated as chargeable under this Case by virtue of Chapter II of Part IV of the Finance Act 1996."
The provisions most relevant to this appeal are summarised below. But first it is necessary to give a brief account of repos and the way in which they were taxed under sections 730A and 737A of ICTA 1988.
Repo transactions
Mr Holgate, a chartered accountant of the highest standing, gave written and oral evidence to the Special Commissioner. He was careful to distinguish between matters of accounting theory and practice on which he could speak as an expert, and matters of statutory interpretation which were questions of law beyond his competence as an expert.
In his written report dated 18 December 2006 Mr Holgate set out the basic definition of a repo in the Stock Lending and Repo Committee's 'Gilt Repo Code of Best Practice':
"A transaction, carried out under an agreement, in which one party sells securities to another, and at the same time and as part of the same transaction, commits to repurchase equivalent securities on a specified future date, or at call, at a specified price."
He then continued (paragraphs 4.3, 4.4 and part of 4.5):
"By using the term 'fixed price repo', I am referring to a sale and repurchase agreement, whereby one party (the 'seller') sells securities to another party (the 'buyer') for an agreed amount of cash and simultaneously agrees to repurchase the same or an identical security at a specified future date for a fixed amount of cash. Therefore, under such an arrangement, the cash flows and the timings of those cash flows are fixed in advance and hence the return under the arrangement for the repo buyer is fixed. Although legally a sale and subsequent repurchase of securities, the seller retains the risks and benefits of market price fluctuations of the securities, rather than passing them to the buyer. Hence, such arrangements are economically similar to a secured loan providing a fixed rate of return, with the security acting as collateral.
FRS 5
The relevant accounting standard under UK GAAP which was in force for the year ended 31 March 2002 is FRS 5 'Reporting the substance of transactions', which was issued in April 1994. The key requirement of FRS 5 is given in paragraph 14 as follows:
A reporting entity's financial statements should report the substance of the transactions into...
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