The Court of Appeal has partially upheld the taxpayer’s appeal in a lead case in respect of an arrangement intended to allow relief for interest payments on intra-group borrowings without material taxation of the corresponding receipts. The planning relied on an intra-group assignment of the right to receive interest from a loan in exchange for an issue of preference shares, which it was argued resulted in the interest receipts ceasing to be taxable on the transferor without becoming taxable on the transferee. Both the First-tier Tribunal (FTT) and the Upper Tribunal (UT) had rejected this analysis, adopting an approach which potentially resulted in the receipts becoming taxable on both transferee and transferor. In partially allowing the taxpayer’s appeal, the Court of Appeal has taken away this risk of double taxation whilst continuing to deny the intended benefit of the planning, in a judgment with implications for other entirely commercial transactions.
The Court of Appeal agreed with the conclusion of the FTT and the UT that the assignment of the right to receive interest by the original lender resulted in a partial derecognition of the loan asset and subsequent taxable accretion back to par. This was sufficient to ensure that the arrangement failed to obtain its intended benefit.
In rejecting the taxpayer’s argument that the partial derecognition itself gave rise to a deductible debit, the Court of Appeal approved the recent FTT decision in the Stagecoach Group plc case which also denied relief for the debit related to the partial derecognition of a loan relationship asset. In both cases, the underlying accounting was to credit a loan and debit the investment in a subsidiary, with the taxpayer arguing unsuccessfully that the debit was deductible under legislation bringing into account for tax purposes amounts reflected for accounting purposes in the carrying value of fixed capital assets. Whilst this legislation has recently been amended to clarify its scope, the Court of Appeal’s approval of the FTT’s analysis may influence other pending cases involving debits arising from the derecognition of loan relationships and derivative contracts under the original rules.
In an important win for the taxpayer, however, the Court of Appeal agreed with it that the approach taken by the FTT and UT to the position of the company acquiring the interest strip was incorrect.
Firstly, the Court of Appeal accepted the taxpayer’s argument that the transferred right to receive interest itself gave rise to a loan relationship between the transferee and the interest payer. This gives some welcome clarity as to the provisions governing this kind of transaction, which had been in some doubt following comments in the earlier Court of Appeal decision in Revenue and Customs Commissioners v Bank of Ireland  EWCA 58.
Secondly, and more controversially, the Court concluded (against the views of both parties to the case) that the credit to share premium recognised by the transferee in respect of the excess of the value of the asset acquired over the nominal value of shares issued was itself a profit from a loan relationship. On the facts of the case the immediate impact of this finding was limited, as the Court of Appeal accepted that this profit was nonetheless non-taxable by virtue of a now-repealed provision dealing with the treatment of amounts taken to reserves. The implications for other transactions may be more significant, however. For example, acquisitions of debt assets in exchange for shares have not usually been regarded as triggering a tax charge in the acquirer, a position which this decision casts into doubt.
For further details on this case, please see our extended note here.
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