Commissioners for Her Majesty's Revenue and Customs v DCC Holdings (UK) Limited

Statutory deeming provisions are construed by ordinary principles, consistently with their purpose. A fiction should carry its necessary incidents, but it must not be extended beyond what its context warrants or so as to produce injustice or absurdity unless that result clearly lies within its purpose.

Under the former corporation tax code for loan relationships, the accruals and fair-representation requirements operated as a composite whole. In a net-paying repo, the actual coupon credit and the deemed manufactured-interest debit had to be treated symmetrically. Each was time-apportioned by reference to the period for which the taxpayer held the gilts. The statutory hypothesis did not require the whole deemed payment to accrue during the shorter repo period.

Commissioners for Her Majesty's Revenue and Customs v DCC Holdings (UK) Limited concerned five consecutive, net-paying sale and repurchase transactions involving government securities. DCC received and retained £28.8m in coupon payments during average repo periods of 18½ days. It claimed a non-trading loan-relationship deficit exceeding £28m.

The Special Commissioner, [2007] UKSPC 0611, also reported at [2009] STC 77, held that both the credit and debit were nil. Norris J, [2008] EWHC 2429, held that the credit was £2.9m and the debit £28.8m. By a majority, the Court of Appeal, [2009] EWCA Civ 1165, also reported at [2010] STC 80, held that both were £28.8m.

The central question was how sections 730A and 737A of the Income and Corporation Taxes Act 1988 interacted with sections 84 and 97 of the Finance Act 1996, particularly whether the actual coupon credit and deemed manufactured-interest debit had to be treated symmetrically under the accruals basis.

Held, unanimously, dismissing the appeal and affirming the Court of Appeal's order, although on different grounds. Lord Walker delivered the judgment, with which Lord Hope, Lord Collins, Lord Kerr and Lord Clarke agreed.

1. The deemed income flows under sections 730A, 737A and 737C of the Income and Corporation Taxes Act 1988 were intended to have a cancelling effect. Their purpose was to tax a repo according to its economic substance as a secured loan at interest. The coupon was correspondingly taxable as the bank's income whether received directly, through a representative payment or not at all. A symmetrical solution was therefore essential.

2. A statutory fiction is construed by giving its language its ordinary and natural meaning, consistently so far as possible with the legislation's policy and purpose. If that construction produces injustice or absurdity, the fiction may be limited to the extent necessary, unless the result clearly falls within its purpose. Conversely, the consequences that inevitably accompany the deemed state of affairs must be treated as real unless prohibited. The court applied the approach approved in Marshall v Kerr [1995] 1 AC 148 and the helpful elaboration in Jenks v Dickinson [1997] STC 853.

3. Sections 737A(5) of the Income and Corporation Taxes Act 1988 and 97(2) and (4) of the Finance Act 1996 deemed DCC to make a payment representative of the gilts coupon under a hypothetical loan relationship. They did not require an assumption that the hypothetical relationship lasted only for the repo period. The coupon accrued over six months, while DCC held the gilts for only 18½ days.

4. The words in section 84(1), requiring sums to be determined in accordance with an authorised accounting method and, when taken together, fairly to represent the relevant interest, formed a composite requirement. The mandated accruals basis had to be applied uniformly to the actual and hypothetical loan relationships. If the credit arising under the actual relationship was time-apportioned, the debit representing the coupon under the hypothetical relationship had to be apportioned in the same way. Otherwise the statutory requirement of fair representation would not be satisfied.

5. Both the coupon credit and the deemed manufactured-interest debit were therefore £2.9m. Each represented 18½ days of the six-month coupon period. The Court of Appeal's order was affirmed because the two equal amounts produced the same net result, although its majority had treated both amounts as £28.8m.

1. United Kingdom Supreme Court: [2010] UKSC 58. DCC's appeal was dismissed unanimously. The Court affirmed the Court of Appeal's order on different grounds, holding that the credit and debit were each £2.9m.
2. Court of Appeal: [2009] EWCA Civ 1165, also reported at [2010] STC 80. By a majority comprising Rix and Moses LJJ, the court held that the credit and debit were each £28.8m. Rimer LJ agreed with Norris J's asymmetric computation.
3. High Court: [2008] EWHC 2429. Norris J held that DCC had a credit of £2.9m and a debit of £28.8m.
4. Special Commissioner: [2007] UKSPC 0611, also reported at [2009] STC 77. The Special Commissioner held that both the credit and debit were nil.