Prudential Plc v HM Revenue & Customs

A payment under section 151(1)(b) qualifies only if it operates as an inducement to the counterparty’s entry into the currency contract and is distinct from payments made in fulfilment of that contract, including principal payments. Classification depends on substance and true statutory construction, not contractual labels or repetition of statutory language. A principal payment does not become an inducement merely because it is paid in advance. The analysis applies the statute to the transaction and is distinct from any separate anti-avoidance assessment based on tax purpose.

Prudential appealed against the decision of the Chancellor of the High Court concerning two front-end payments made under foreign-exchange hedging transactions. The statutory code was contained in Chapter II of Part IV of the Finance Act 1994, later repealed by the Finance Act 2002. The Special Commissioners dismissed Prudential’s appeal, reported at [2008] STC (SCD) 239, and the Chancellor upheld that conclusion at [2008] EWHC 1839 (Ch) and [2008] STC 2820. The central issue was whether the payments were qualifying payments under section 151(1)(b), rather than prepayments of principal.

The Court of Appeal unanimously dismissed the appeal. Lord Justice Moses gave the leading judgment, with Lord Justice Laws and Lord Justice Mummery agreeing.

1. The statutory distinction under section 151(1)(b) is between a payment which functions as an inducement to the counterparty’s entry into the currency contract and a payment made in fulfilment of the contract, including principal paid on maturity. Section 153(2) does not remove that distinction.
2. The question is one of substance and true statutory construction. Contractual descriptions and the parties’ repetition of statutory language cannot determine the fiscal character of a payment. Moses LJ applied the reasoning illustrated by Street v Mountford 1985 AC 809 and Westminster Bank Ltd v Riches [1947] AC 390. The court was not recharacterising the transactions because of their tax purpose or economic equivalence. It was construing the provision in light of its purpose and applying it to the facts, consistently with Norglen Ltd (in liquidation) v Reed Rains Prudential Ltd [1999] 2 AC 1 and Inland Revenue Commissioners v McGuckian [1997] STC 908.
3. The £65 million and £40 million front-end payments were payments on account or prepayments of the principal exchanges. Their timing and contractual description did not make them genuine inducements required by RBS or GSI to enter the contracts. They therefore fell outside section 151(1)(b).
4. The questions under sections 155(4) and (5), and the separate main-purpose issue under section 168A, did not arise because the qualifying-payment argument failed. Moses LJ also made an obiter observation, following R (Balding) v SSWP [2007] EWCA 1327, about avoiding unnecessary length in appellate judgments.

Appeal dismissed.

• Court of Appeal (Civil Division): Appeal dismissed, [2009] EWCA Civ 622.
• High Court (Chancery Division): The Chancellor dismissed Prudential’s appeal from the Special Commissioners, [2008] EWHC 1839 (Ch); also reported at [2008] STC 2820.
• Special Commissioners: Prudential’s appeal was dismissed, [2008] STC (SCD) 239.