In Travel Document Service and Ladbroke Group International v HMRC [2015] UKFTT 582 (19 November 2015), the FTT found that a scheme relying on the loan relationship rules failed.
The appeal related to a tax avoidance scheme, notified under the disclosure of tax avoidance schemes (DOTAS) rules in FA 2004 Part 7. The scheme exploited a perceived loophole in the taxation of loan relationships. It involved bringing a holding of a subsidiary’s shares within the loan relationship rules by entering into a form of derivative contract known as a ‘total return swap’ in relation to them. It then depresses the value of the shares by novating a large loan liability into the subsidiary from another group company. The intended effect of these arrangements was to accrue a large loan relationship debit in the shareholding company, by reference to the reduction in the fair value of the shares in its subsidiary. In consequence of the novation, the subsidiary company also accrued conventional loan relationship debits as a result of its liability to interest on the loans novated to it.
FA 1996 s 91B provided for shares to be treated as rights under a creditor relationship in certain situations, with the result that the debits and credits to be brought into account in respect of them were determined on the basis of fair value accounting.
The FTT found that on the ordinary meaning of the statute, the deemed existence of a ‘creditor relationship in relation to’ a company necessarily implied that FA 2006 Sch 9 para 13 (‘unallowable purpose’ of a loan relationship) was at least capable of applying to it. Furthermore, on a purposive interpretation, an anti-avoidance provision which had been carefully phrased in broad and general terms should apply to ‘deemed’ loan relationships in the same way as it applied to real ones.
The FTT also found that the purpose of the shareholding company when entering into a swap whilst holding shares in its subsidiary had been a tax avoidance purpose which had continued until the swap had been terminated. Paragraph 13 therefore applied to disallow the debits attributable to the disallowable purpose. Finally, the purpose of the subsidiary in entering into the arrangements had been to secure a tax advantage for its parent; and so it also had had an unallowable purpose and the resulting debits should also be disallowed.
Why it matters: In finding that the purpose of the arrangements had been the avoidance of tax, the FTT discounted the submission that a purpose of saving £70m of tax could not be counted as a ‘main’ purpose when set in the context of a company worth some £280m. The various provisions have since been amended and rewritten in CTA 2009.
In Travel Document Service and Ladbroke Group International v HMRC [2015] UKFTT 582 (19 November 2015), the FTT found that a scheme relying on the loan relationship rules failed.
The appeal related to a tax avoidance scheme, notified under the disclosure of tax avoidance schemes (DOTAS) rules in FA 2004 Part 7. The scheme exploited a perceived loophole in the taxation of loan relationships. It involved bringing a holding of a subsidiary’s shares within the loan relationship rules by entering into a form of derivative contract known as a ‘total return swap’ in relation to them. It then depresses the value of the shares by novating a large loan liability into the subsidiary from another group company. The intended effect of these arrangements was to accrue a large loan relationship debit in the shareholding company, by reference to the reduction in the fair value of the shares in its subsidiary. In consequence of the novation, the subsidiary company also accrued conventional loan relationship debits as a result of its liability to interest on the loans novated to it.
FA 1996 s 91B provided for shares to be treated as rights under a creditor relationship in certain situations, with the result that the debits and credits to be brought into account in respect of them were determined on the basis of fair value accounting.
The FTT found that on the ordinary meaning of the statute, the deemed existence of a ‘creditor relationship in relation to’ a company necessarily implied that FA 2006 Sch 9 para 13 (‘unallowable purpose’ of a loan relationship) was at least capable of applying to it. Furthermore, on a purposive interpretation, an anti-avoidance provision which had been carefully phrased in broad and general terms should apply to ‘deemed’ loan relationships in the same way as it applied to real ones.
The FTT also found that the purpose of the shareholding company when entering into a swap whilst holding shares in its subsidiary had been a tax avoidance purpose which had continued until the swap had been terminated. Paragraph 13 therefore applied to disallow the debits attributable to the disallowable purpose. Finally, the purpose of the subsidiary in entering into the arrangements had been to secure a tax advantage for its parent; and so it also had had an unallowable purpose and the resulting debits should also be disallowed.
Why it matters: In finding that the purpose of the arrangements had been the avoidance of tax, the FTT discounted the submission that a purpose of saving £70m of tax could not be counted as a ‘main’ purpose when set in the context of a company worth some £280m. The various provisions have since been amended and rewritten in CTA 2009.
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