UK and International Tax news
Taxpayer Loses FTT Appeal In Derecognition Case
Wednesday 26th August 2015
The FTT has recently dismissed an appeal by the taxpayer in Abbey National Treasury Services Plc v HMRC [ TC04525] which concerned an avoidance scheme and involved distributing profits from swaps using accounting practice to claim an accounting debit as a tax deductible loss in the payor without a matching taxable receipt in the parent company..
The scheme involved the issue of shares by ANTS to Abbey National Plc. The shares had specific rights that entitled Abbey National Plc to receive dividends of an amount equal to certain cash flows receivable from the swaps held by ANTS.
On issuing the shares, ANTS derecognised £160 million from the accounting value of the relevant swaps and recognised a corresponding £160m dividends debit, which it claimed as a tax deductible loss in its corporation tax return. The dividends were not taxable income in the hands of Abbey National Plc. Whilst HMRC agreed the accounting treatment, it disagreed that the debit fairly represented a deductible loss.
The issues in dispute between the parties were whether the £160 million debit claimed in ANTS’ tax return for the year ended December 2008 was deductible as a debit arising from ANTS’ derivative contracts under Schedule 26 FA 2002 and whether the transfer pricing rules at Schedule 28AA ICTA 1988 applied to the Tracker Shares and if so, the extent to which they reduced the debit claimed by ANTS.
The FTT found that ANTS did not have a debit which could properly be recognised under Schedule 26 and in any event the loss did not arise from a derivative contract.
The FTT also concluded that the Tracker Shares were a provision for Schedule 28AA purposes and that the comparator transaction was that they would not have been issued at all between independent enterprises with the result that any debit arising should be reduced to nil.
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