GDF Suez Teesside Ltd v The Commissioners for HM Revenue and Customs

JurisdictionUK Non-devolved
JudgeMr Justice Newey,Judge Bishopp
Neutral Citation[2017] UKUT 0068 (TCC)
CourtUpper Tribunal (Tax and Chancery Chamber)
Subject MatterTax,17 February 2017
Date17 February 2017
Published date21 February 2017
[2017] UKUT 0068 (TCC)
Appeal number: UT/2015/0163
CORPORATION TAX avoidance scheme transfer of contingent,
unrecognised, claim against third party to subsidiary in exchange for shares —
subsidiary recognising value of asset despite contingency but parent not recognising
shares — whether accounting GAAP-compliant — yes — loan relationship rules —
whether FA 1996 s 84(1) engaged — yes — recognised value of asset to be brought
into account as credit in parent’s corporation tax computation —appeal dismissed
PROCEDURE — opening of enquiry — whether error in identification of
accounting period invalidates enquiry — no, if intention clear
- and -
Sitting in public in London on 24, 25 and 28 November 2016
Mr Jonathan Peacock QC and Mr Richard Boulton QC, instructed by Slaughter
and May, for the Appellant
Mr David Milne QC and Miss Elizabeth Wilson, instructed by the General
Counsel and Solicitor to HM Revenue and Customs, for the Respondents
1. This case concerns the effectiveness of a tax avoidance scheme of which the
appellant, Teesside Power Limited (“TPL”, now renamed “GDF Suez
Teesside Limited”), made use in 2006-2007. HM Revenue and Customs
(“HMRC”) contend that the scheme did not achieve its aim and, on this basis,
issued closure notices assessing TPL to tax on profits of some £200 million.
TPL appealed to the First-tier Tribunal (“the FTT”), but in a decision (“the
Decision”) released on 11 August 2015 the FTT (Judge Rachel Short and Mr
Nigel Collard) ruled in favour of HMRC. TPL now appeals against the
2. TPL’s liability to tax is said to have arisen under the provisions relating to
“loan relationships” to be found in the Finance Act 1996 (“FA 1996”). The
dispute between the parties turns on whether amounts fell to be brought into
account for the purpose of Chapter II of Part IV of FA 1996 on the transfer by
TPL of certain claims it held to a wholly-owned subsidiary. Among other
things, the case raises issues as to the meaning and implications of the words
“fairly represent” in section 84(1) of FA 1996.
Basic facts
3. From 1993, TPL owned and operated a power station at Redcar and
Cleveland. It entered into “off-take” agreements with Enron Capital Trade
Resources Limited (“ECTRL”) and Enrici Power Marketing Limited
(“Enrici”), each of which was part of the Enron group of companies, under
which ECTRL and Enrici contracted to buy the majority of the output of the
power station. Enron Corporation (“EC”) guaranteed ECTRL’s and Enrici’s
4. As is well known, the Enron group collapsed. In 2001, EC filed for relief
under Chapter 11 of the United States Bankruptcy Code and ECTRL went into
administration. Administrators were appointed in respect of Enrici on 12
January 2006 and the company went into creditors’ voluntary liquidation on
21 December of that year.
5. TPL had very substantial claims against the Enron group. In 2005, a US
Bankruptcy Court allowed TPL’s proofs of claim totalling $907,720,278
against EC (“the Enron Claim”) and ECTRL admitted a liability to TPL of
£360,767,273 (plus interest) in a settlement deed (“the ECTRL Claim”). In
November 2006, EC and the administrators of ECTRL issued letters
recognising the extent of TPL’s claims against the companies. In February
2007, Enrici’s administrators accepted that that company owed TPL
£101,071,188 (“the Enrici Claim”). We will refer to the Enron Claim, the
ECTRL Claim and the Enrici Claim together as “the Claims”.
6. By 5 December 2006, TPL had received cash distributions in respect of the
Enron Claim of, in aggregate, some £120 million plus shares in Portland
General Electric (“Portland”) worth about £14 million. These were recognised
as exceptional items in the profit and loss account in TPL’s financial
statements for the periods ended 31 December 2005 and 5 December 2006.
Corporation tax was paid on the amounts received.
7. On 1 December 2006, TPL established a wholly-owned subsidiary, Teesside
Recoveries and Investments Limited (“TRAIL”), which was incorporated and
tax-resident in Jersey. For the purposes of United Kingdom corporation tax, it
was a “controlled foreign company”.
8. On 5 December 2006, TPL assigned to TRAIL:
(a) Its rights in relation to its proofs of claim
against EC which had been recognised by the United States
Bankruptcy Court (i.e. the Enron Claim) in consideration for the issue
to TPL of 101,100,347 ordinary shares in TRAIL; and
(b) Its rights under the settlement deed with
ECTRL (i.e. the ECTRL Claim) in consideration for the issue to TPL
of 93,799,491 ordinary shares in TRAIL.
9. On 2 March 2007, TPL assigned to TRAIL its rights in respect of the Enrici
Claim in consideration for the issue to TPL of 5,154,631 ordinary shares in
10. The fair value of each of the Claims assigned was equal to the fair value of the
shares in TRAIL issued in consideration for it. In a memorandum dated 5
December 2006, Carval Investors LLC (“Carval”) had valued the Enron and
ECTRL Claims at, respectively, $199,698,461 (equating to 22 cents per dollar
or £101,100,347) and £93,799,491 (or 26 pence per pound) (this was an arm’s
length, third party valuation). A paper headed “Review of Enron Estate
Payment Position” that appears to have been prepared on 22 November 2006
and presented to TPL’s board concluded, however:
“Whilst information is available to creditors on the Enron Corp and
ECTRL claims, this information demonstrates that there remain
significant uncertainties regarding the value of unliquidated assets, the
final level of disputed claims and therefore the amount creditors will
receive in distributions from the respective estates. In the case of
Enrici, the only information relates to the Enron Europe Limited estate
and hence, TPL is uncertain about how much it will receive as a
creditor of Enrici.”

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