The Union Castle Steamship Company Ltd v HMRC- First-tier Tribunal decision

The Union Castle Steamship Company Ltd v HMRC

This case concerned a deduction claimed for a debit arising from the partial derecognition of financial assets relating to derivative contracts.

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The First-tier Tribunal (FTT) has found for HMRC in a lead case concerning a disclosed tax arrangement where a deduction was claimed for a debit arising from the partial derecognition of financial assets relating to derivative contracts. This is the third decision of the FTT where HMRC has been successful in denying relief for debits claimed under disclosed arrangements involving the derecognition of financial assets; Abbey National Treasury Services v HMRC (ANTS) involved the derecognition of derivative contracts following a bonus issue of shares to a parent company and Stagecoach Group plc v HMRC (Stagecoach) involved the partial derecognition of a loan relationship asset on entering into a forward subscription agreement with a subsidiary.

The Union Castle Steamship Company Ltd (Union Castle) claimed a deduction, under the derivative contracts regime, for a £39million debit in respect of the partial derecognition of financial assets relating to FTSE 250 related derivative contracts which were carried on the balance sheet (the Options). The accounting derecognition was required following a bonus issue of shares by Union Castle to its parent company Caledonia Investments plc (Caledonia) under which 95 percent of the cash from the Options was to be distributed to Caledonia.

The FTT denied relief for the debit on the basis that Union Castle had not incurred a loss because, irrespective of the accounting, it was entitled to receive exactly the same amounts under the Options before and after the issue of the shares. This was sufficient for the arrangement to fail.

However, in case the decision is appealed, the FTT considered the other issues and, in each case, found for the taxpayer, as follows:

  • If there were a loss, this did arise from the derivative contracts;
  • The requirement that a debit should ‘fairly represent’ a loss from a derivative contract has two roles; to identify debits and credits which are appropriate to a particular accounting period (the timing role) and to identify those debits and credits which are attributable to derivative contracts rather than something else (the attribution role). Applying this to the circumstances of Union Castle, the loss, had there been one, would have satisfied this fairly represents requirement;
  • If the derecognition debit were recognised directly in equity (relevant for one of the follower cases which applied UK GAAP rather than IFRS), such a debit is not required to satisfy the requirement that it fairly represents a loss from a derivative contract; and
  • The bonus issue of shares was not a transaction within the scope of the transfer pricing rules, so no adjustment was made under those rules.

Interestingly, the FTT in Union Castle came to their own view on the issues and did not follow the approach taken in the ANTS judgement in relation to whether the loss arose ‘from’ a derivative contract and the application of the transfer pricing rules.

It is understood that no appeal is being made in the ANTS and Stagecoach cases but it is not yet known whether there will be an appeal in the Union Castle and follower cases.

For more detail on this case, please click here to read our technical note.

 

For further information please contact :

Rob Norris

Paul Freeman  

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