In GDF Suez Teesside v HMRC [2018] EWCA Civ 2075 (5 October 2018), the Court of Appeal found that a company could be regarded as having made a gain (or profit) on an asset disposal even though that gain was not required to be recognised by UK GAAP.
Teesside owned and operated a power station and its business included selling electricity on a wholesale basis to customers such as Enron Corporation and British Energy. Under ‘off-take’ agreements entered into with two companies of the Enron group, Teesside was committed to sell the majority of the output of its power station to those companies, but following the collapse of the Enron group, both companies were liquidated and Teesside had contingent and unrealised claims (valued at approximately £200m) against them.
In accordance with UK GAAP, it stood to become liable to CT on profits equivalent to the full amount of the sums received as and when the claims were realised. On the advice of E&Y, Teesside therefore transferred the relevant claims to a newly-incorporated and wholly-owned Jersey subsidiary (TRAIL) in consideration for an issue of shares by TRAIL. The scheme was notified to HMRC under DOTAS.
It was accepted that the claims gave rise to loan relationships and the scheme was designed on the basis that the transfer of the claims would not give rise to any taxable credits for Teesside. In addition, TRAIL had acquired an asset at a base value of £200m and would only make a taxable gain if the value of the claims increased. This meant that, even though TRAIL was a controlled foreign company, the claims would only be taxable if they exceeded £200m.
The Court of Appeal referred to National Asylum Support Service [2002] UKHL 38 as authority for the proposition that statutory notes, although they are not endorsed by Parliament, are admissible as an aid to construction. The explanatory notes relating to the 2006 amendment to FA 1996 s 85A(1) confirmed that the amendment aimed to make ‘it absolutely clear’ that the ‘fairly represent’ rule in s 84(1) takes priority over, and may override, the accounting treatment mandated by s 85A(1). The court also rejected the contention that Parliament would have formulated specific guidance on the application of the fair representation test, if it was intended to be an overriding requirement of a substantive nature. It pointed out that basic concepts like profit or gain have traditionally not been the subject of detailed statutory provision and have been left to the courts to develop. The court concluded that an assessment of the kind required by s 84(1) is one which courts and tribunals are well qualified to perform without further specific statutory guidance.
Why it matters: The Court of Appeal found that Parliament could not have ‘rationally intended’ an outcome in which the transfer of the claims took them outside the UK tax net, by virtue of the application of UK GAAP to the transferor and the non-resident status of the transferee. The ‘overriding nature of the fair representation test’ was the solution and ‘the proof of the pudding was in the eating of it’; there was no conceptual difficulty in applying the test to the facts.
Also reported this week:
HMRC v D Higgins Property bought off plan and main residence relief
In GDF Suez Teesside v HMRC [2018] EWCA Civ 2075 (5 October 2018), the Court of Appeal found that a company could be regarded as having made a gain (or profit) on an asset disposal even though that gain was not required to be recognised by UK GAAP.
Teesside owned and operated a power station and its business included selling electricity on a wholesale basis to customers such as Enron Corporation and British Energy. Under ‘off-take’ agreements entered into with two companies of the Enron group, Teesside was committed to sell the majority of the output of its power station to those companies, but following the collapse of the Enron group, both companies were liquidated and Teesside had contingent and unrealised claims (valued at approximately £200m) against them.
In accordance with UK GAAP, it stood to become liable to CT on profits equivalent to the full amount of the sums received as and when the claims were realised. On the advice of E&Y, Teesside therefore transferred the relevant claims to a newly-incorporated and wholly-owned Jersey subsidiary (TRAIL) in consideration for an issue of shares by TRAIL. The scheme was notified to HMRC under DOTAS.
It was accepted that the claims gave rise to loan relationships and the scheme was designed on the basis that the transfer of the claims would not give rise to any taxable credits for Teesside. In addition, TRAIL had acquired an asset at a base value of £200m and would only make a taxable gain if the value of the claims increased. This meant that, even though TRAIL was a controlled foreign company, the claims would only be taxable if they exceeded £200m.
The Court of Appeal referred to National Asylum Support Service [2002] UKHL 38 as authority for the proposition that statutory notes, although they are not endorsed by Parliament, are admissible as an aid to construction. The explanatory notes relating to the 2006 amendment to FA 1996 s 85A(1) confirmed that the amendment aimed to make ‘it absolutely clear’ that the ‘fairly represent’ rule in s 84(1) takes priority over, and may override, the accounting treatment mandated by s 85A(1). The court also rejected the contention that Parliament would have formulated specific guidance on the application of the fair representation test, if it was intended to be an overriding requirement of a substantive nature. It pointed out that basic concepts like profit or gain have traditionally not been the subject of detailed statutory provision and have been left to the courts to develop. The court concluded that an assessment of the kind required by s 84(1) is one which courts and tribunals are well qualified to perform without further specific statutory guidance.
Why it matters: The Court of Appeal found that Parliament could not have ‘rationally intended’ an outcome in which the transfer of the claims took them outside the UK tax net, by virtue of the application of UK GAAP to the transferor and the non-resident status of the transferee. The ‘overriding nature of the fair representation test’ was the solution and ‘the proof of the pudding was in the eating of it’; there was no conceptual difficulty in applying the test to the facts.
Also reported this week:
HMRC v D Higgins Property bought off plan and main residence relief
