UK and International Tax news
Taxpayer Loses FTT Appeal In Loan Relationships Case
Thursday 17th September 2015
The FTT has recently found against the taxpayer in a case involving the transfer of a contingent asset to a subsidiary company where, for the purposes of the loan relationships legislation, GAAP compliant accounting treatment did not fairly represent the profits which could be overridden for tax purposes and replaced with a taxable credit based on the fair value of the asset.
In GDF Suez Teesside (formerly Teesside Power Ltd) v HMRC [TC 04590], the taxpayer was owed large debts following the collapse of the Enron group in 2001 and it received part settlement of these debts from the administrators in 2005 and 2006 which were recognised as exceptional items in the profit and loss accounts and corporation tax was paid on the receipts.
In December 2006, the taxpayer established a wholly owned Jersey subsidiary to which it assigned its rights in relation to the balance of debts owing of approximately £200m in consideration for the issue of ordinary shares. The assignment was notified to HMRC under DOTAS rules as the purpose of the transaction was to take the realisation of profits under the debt claims outside the charge to corporation tax. The assignment transaction was part of a DOTAS registered scheme and the documentation stated that the aim was to transfer the claims to the Jersey subisidiary and obtain a step up in the base cost for the debt claims in that entity to offset against subsequent profits made on the realisation of the claims.
Over the following 18 months the Jersey subsidiary received approximately £243m from the administrators which was lent back to the taxpayer and in 2008 the taxpayer and directors of the Jersey subsidiary applied to wind up the company.
HMRC issued closure notices in 2013 assessing the taxpayer company to tax in respect of profits arising on the value of shares received on the transfer of debt claims, amounting to the £200m.
The taxpayer had not recognised the fair value of the debt claims, as they were contingent, under GAAP and the FTT agreed that the accounts were GAAP compliant after hearing expert witness evidence on FRS 3, 5, 12, and 18 and UITF 31.
The FTT did not agree with HMRC’s argument that if GAAP compliant accounts result in a sum disappearing as part of a tax avoidance scheme it necessarily meant that the accounts are not GAAP compliant or in some other way inferior. However, the FTT held that s.84(1) FA96 provided for an override of the credits and debits produced by an acceptable accounting method if that method has failed to fairly represent profits.
In particular, the UK GAAP compliant accounts of the taxpayer did not give a fair representation of the profits arising from the assignment and the economic substance approach of FRS 5 should not override the requirement of s 84(1) that the profits from the assignment of the debt claims for their non-contingent £200m value should be fairly represented.
The FTT has used s 84(1) as an anti-avoidance rule to stop accounting principles being used as a way of taking profits out of the tax net and this is in line with the proposed FA 2015 changes to the loan relationship code which introduce a TAAR from 2016.
Although the FTT dismissed the taxpayer’s appeal, right to appeal was granted.
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