HM Revenue & Customs v Bank of Ireland Britain Holdings Ltd

In a tripartite repo, Income and Corporation Taxes Act 1988, section 730A(2)(a), deems the price differential to be interest paid to the interim holder: the person to whom the securities were originally transferred. It does not deem the interest paid to a later reseller merely because that reseller receives the repurchase price.

A court cannot insert words assigning the deemed interest to the reseller or to the statutory “relevant person” in order to cure a mismatch between the repo provisions or to achieve a commercially rational tax result. Receipt alone does not establish liability under the loan relationship rules.

Bank of Ireland Britain Holdings Ltd was involved in a tripartite sale and repurchase arrangement for securities. Bank of Ireland first acquired the securities from the original holder. It later transferred them to the taxpayer, which resold them to the original holder.

The arrangement produced actual dividends for Bank of Ireland and the taxpayer, together with a deemed manufactured overseas dividend. The Revenue contended that the resulting deemed interest under section 730A(2)(a) of Income and Corporation Taxes Act 1988 was receivable by the taxpayer as reseller. The Special Commissioners and Henderson J rejected that contention. The Revenue appealed on that construction issue alone.

1. Disposition. The court unanimously dismissed the Revenue’s appeal.
2. Meaning of section 730A(2)(a). The ordinary meaning of section 730A(2)(a) of the Income and Corporation Taxes Act 1988 was that the price differential was deemed to be interest paid on a deemed loan from the interim holder. The interim holder was the person to whom the original owner had transferred the securities under section 730A(1)(a). Accordingly, the deemed interest was paid to Bank of Ireland, not to the taxpayer which later resold the securities and received the repurchase price.
3. Tripartite arrangements. The provision did not address an assignment or a tripartite repo. The differing language of section 730A and section 737A created a mismatch, but that did not permit the court to add words deeming interest to be paid to the reseller or to the “relevant person” under section 737A(6)(a). Such a reading would be an unprincipled legislative gloss. The commercial consequences and the statutory purpose could not displace the clear language used.
4. Loan relationship analysis. As additional support, receipt of interest did not itself determine tax liability. An assignee of a right to receive interest, without an assignment of the loan relationship, would not be taxed under the loan relationship provisions. Section 80 of the Finance Act 1996 charged profits arising from a company’s loan relationships, and section 730A(6) reinforced the conclusion because the only expressly identified deemed loan was from the interim holder.

• Court of Appeal (Civil Division) — dismissed the Revenue’s appeal and upheld the construction adopted below.
• High Court of Justice, Chancery Division (Henderson J) — dismissed the Revenue’s appeal from the Special Commissioners.
• Special Commissioners — determined both disputed tax issues in favour of the taxpayer.