Vocalspruce Ltd v The Commissioners for HMRC

Section 84(2)(a) of the Finance Act 1996 excludes a gain arising from a loan relationship or related transaction where the amount is required to be transferred to a share premium account. The provision does not distinguish according to why the requirement arose or because the gain first appeared in a profit and loss account.

However, where an intra-group related transaction replaces one company with another as creditor, paragraph 12 of Schedule 9 requires the whole transaction by which replacement occurred to be disregarded. The statutory single-company fiction carries its inevitable consequences. It therefore removes the share issue and the requirement to transfer a premium. The loan-relationship gain remains taxable.

Brixton plc assigned discounted intra-group loan notes to its subsidiary, Vocalspruce Ltd, in payment for newly issued shares. The subscription terms, articles and directors’ resolutions required realised profits on the notes to be capitalised and transferred to Vocalspruce’s share premium account.

HMRC amended Vocalspruce’s corporation-tax return to charge the accrued profit. The First-tier Tribunal and Upper Tribunal held that section 84(2)(a) of the Finance Act 1996 did not exclude the profit, but rejected HMRC’s alternative reliance on paragraph 12 of Schedule 9. Vocalspruce appealed; HMRC relied on a respondent’s notice on the alternative issue.

The central questions were whether the profit fell within section 84(2)(a), and, if so, whether the intra-group related-transaction rules nevertheless required the arrangements to be disregarded.

1. Appeal dismissed. The court unanimously held that HMRC succeeded on its alternative case under paragraph 12 of Schedule 9 to the Finance Act 1996.

2. On Issue I, Lewison LJ, with whom Underhill LJ agreed, held that section 84(2)(a) asks only whether an amount which would otherwise be a loan-relationship or related-transaction gain is required to be transferred to the company’s share premium account. The provision tracks section 130(1) of the Companies Act 1985. It does not distinguish by reference to the source of the requirement, the capacity in which the company made the gain, or the temporary recording of the gain in the profit and loss account. The First-tier Tribunal and Upper Tribunal were wrong on that issue. Gross LJ dissented on Issue I.

3. All members of the court held that paragraph 12 applied because the loan notes were transferred within the group. Paragraph 12(2)(a) requires disregard of the whole transaction, or series of transactions, by which the creditor was replaced. It was impermissible to disregard the assignment while retaining the share issue and its premium terms.

4. Further, paragraph 12(2)(b) deems transferor and transferee to be the same company. Applying the approach to deeming provisions in DCC Holdings Ltd v HMRC [2010] UKSC 58, the inevitable consequence was that, without the acquisition, the shares would not have been issued at a premium and no transfer to a share premium account would have been required. Section 84(2)(a) therefore had nothing on which to operate. The accrued gain remained chargeable.

• Court of Appeal (Civil Division): Dismissed Vocalspruce’s appeal. The majority held that section 84(2)(a) of the Finance Act 1996 applied on its terms, but the court unanimously upheld HMRC’s alternative case under Schedule 9 paragraph 12.
• Upper Tribunal (Tax and Chancery Chamber): Decision released on 19 June 2013. Upheld the First-tier Tribunal’s conclusion for HMRC on Issue I, and rejected HMRC’s alternative case on Issue II.
• First-tier Tribunal: Decision released on 21 December 2011. Dismissed Vocalspruce’s appeal against HMRC’s amendment to its corporation-tax return on Issue I, while rejecting HMRC’s alternative argument under Schedule 9 paragraph 12.