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UT Decision In Greene King PLC

Wednesday 11th June 2014

The UT has recently published its decision in the case of Greene King PLC and Greene King Acquisitions Ltd v HMRC [UKUT 0178], in which it rejected the taxpayer’s appeal against the FTT’s decision in respect of the tax treatment of an assignment of interest on an intra group loan in exchange for an issue of preference shares at a premium.

Greene King PLC [PLC] had lent £300m to a wholly owned subsidiary [GKBR].  PLC subsequently assigned its right to the interest on the loan [£21.3m] to another wholly owned subsidiary [GKA] in exchange for an issue of £1.3m preference shares. GKA subsequently received all the interest on the loan from GKBR.

PLC continued to account for the loan at face value. GKA accounted for interest receivable at its £20.5m net present value by crediting £1.5m to its preference share capital account and £19m to a share premium account. Subsequent interest receipts above £20.5m only were credited to profit and loss.

The taxpayer contended that the borrower [GKBR] would continue to obtain relief for the cost of borrowing, but neither the original lender [PLC] nor the assignee [GKA] would be taxed on the major part of the interest income on the loan.

The UT agreed with the FTT which had found that PLC’s accounting was not GAAP compliant and that PLC should have derecognised £20.5m in respect of the interest no longer receivable, and accrued that amount as profit on the loan stock [to reflect the full amount of the loan receivable at maturity].  It did not agree with the taxpayer that the reduction in the value of the loan could be offset by the increase in the value of PLC’s shareholding in GKA.

The UT also found that whilst the relationship between GKA and GKBR involved a debt [the right to interest], it did not involve a transaction for the lending of money and was therefore not a loan relationship. However, the implication was that the amounts received by GKA would be taxable as income under general principles but this was not explicitly stated by the FTT or the UT.

In summary, whilst GKBR was entitled to a tax deduction for the interest payments to GKA, it may be the case that both GKA and PLC were taxable on income amounts.

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