InGreene King and another v HMRC[2016] EWCA Civ 782 (27 July 2016), the Court of Appeal found that a loan relationship scheme marketed by E&Y partially failed.
Greene King had implemented a scheme with the aim that one company in its group would receive tax relief on interest paid to another group company, without that other company paying corporation tax on the income it received. Greene King had lent £300m to its subsidiary GKBR, which had issued loan stock to Greene King as security for the loan. Greene King then assigned to GKA, another subsidiary, its right to receive the interest on the loan stock (including interest accrued but not then due for payment), in consideration for which GKA issued 1.5 million £1 preference shares. The right to receive repayment of the loan principal remained with Greene King.
The Court of Appeal found that the transaction had created a loan relationship (FA 1986 s 81). The assignment of the interest strip to GKA had created a relationship of creditor and debtor as between GKA and GKBR, in respect of the debt represented by the future instalments of interest. Greene King’s appeal therefore succeeded on that point.
GKA had recorded the asset strip as a receivable from GKBR in its balance sheet at its net present value (£20.5m); it had credited the nominal value of the preference shares issued in return (£1.5m) as a non-capital equity instrument; and it had credited the difference (£19m) to its share premium account. The Court of Appeal held that the £20.5m arose from the loan relationship between GKA and GKBR. For the purposes of s 84(1)(a), the net present value of those future payments, which was recorded in GKA’s balance sheet and which gave rise to the profit transferred to GKA’s share premium account, could be of no different character. The £19m taken by GKA to its share premium account was therefore excluded from s 84(1)(a) by s 84(2)(a).
The Court of Appeal upheld the UT’s ruling on all other points and dismissed the appeal.
Why it matters: The Court of Appeal pointed out that the loan relationship code embraced a wide category of corporate debt, which would not in ordinary legal or trade terms be categorised as a loan. There was no reason why such a relationship would not exist, as between the debtor liable to pay interest and repay the principal and a person to whom the right to interest is transferred but not the right to the loan principal. This is a lead case for a number of other corporate groups which have undertaken similar transactions. Jane Ellison, financial secretary to the Treasury, said: ‘This is a significant victory. Tax avoidance schemes like these attempt to deprive the exchequer of money that's needed to provide the vital public services and infrastructure we all rely on. We will not let such schemes go unchallenged.’
InGreene King and another v HMRC[2016] EWCA Civ 782 (27 July 2016), the Court of Appeal found that a loan relationship scheme marketed by E&Y partially failed.
Greene King had implemented a scheme with the aim that one company in its group would receive tax relief on interest paid to another group company, without that other company paying corporation tax on the income it received. Greene King had lent £300m to its subsidiary GKBR, which had issued loan stock to Greene King as security for the loan. Greene King then assigned to GKA, another subsidiary, its right to receive the interest on the loan stock (including interest accrued but not then due for payment), in consideration for which GKA issued 1.5 million £1 preference shares. The right to receive repayment of the loan principal remained with Greene King.
The Court of Appeal found that the transaction had created a loan relationship (FA 1986 s 81). The assignment of the interest strip to GKA had created a relationship of creditor and debtor as between GKA and GKBR, in respect of the debt represented by the future instalments of interest. Greene King’s appeal therefore succeeded on that point.
GKA had recorded the asset strip as a receivable from GKBR in its balance sheet at its net present value (£20.5m); it had credited the nominal value of the preference shares issued in return (£1.5m) as a non-capital equity instrument; and it had credited the difference (£19m) to its share premium account. The Court of Appeal held that the £20.5m arose from the loan relationship between GKA and GKBR. For the purposes of s 84(1)(a), the net present value of those future payments, which was recorded in GKA’s balance sheet and which gave rise to the profit transferred to GKA’s share premium account, could be of no different character. The £19m taken by GKA to its share premium account was therefore excluded from s 84(1)(a) by s 84(2)(a).
The Court of Appeal upheld the UT’s ruling on all other points and dismissed the appeal.
Why it matters: The Court of Appeal pointed out that the loan relationship code embraced a wide category of corporate debt, which would not in ordinary legal or trade terms be categorised as a loan. There was no reason why such a relationship would not exist, as between the debtor liable to pay interest and repay the principal and a person to whom the right to interest is transferred but not the right to the loan principal. This is a lead case for a number of other corporate groups which have undertaken similar transactions. Jane Ellison, financial secretary to the Treasury, said: ‘This is a significant victory. Tax avoidance schemes like these attempt to deprive the exchequer of money that's needed to provide the vital public services and infrastructure we all rely on. We will not let such schemes go unchallenged.’
