Fidex Ltd v HM Revenue & Customs

The scope of an appeal against a tax closure notice is defined by the conclusions stated in the notice and the amendments required to give effect to them. The notice must be read in the context of the preceding enquiry. The appeal concerns those conclusions, rather than HMRC’s reasoning, so HMRC may advance a new legal ground supporting them, subject to fairness and proper case management.

When applying the unallowable-purpose rule for loan relationships, the tribunal must determine how much of a debit is justly and reasonably attributable to the unallowable purpose. The continued existence of commercial purposes does not require an apportionment to them. A debit caused entirely by a tax avoidance scheme may be attributed wholly to that purpose.

Fidex Ltd participated in Project Zephyr, a tax avoidance scheme intended to generate an accounting debit of about €84 million following a change from UK GAAP to IFRS. Fidex claimed the resulting trading loss for surrender as group relief. HMRC’s closure notice reduced the loss on the ground that the relevant bonds and preference shares should not have been derecognised.

Before the First-tier Tribunal, HMRC advanced an alternative argument under paragraph 13 of Schedule 9 to the Finance Act 1996: the debit was attributable to an unallowable purpose. The First-tier Tribunal held that it had jurisdiction to consider that argument, but later found that no part of the debit should be attributed to the unallowable purpose. The Upper Tribunal upheld the jurisdiction decision and allowed HMRC’s appeal on attribution: [2014] UKUT 454 (TCC).

The issues were whether the closure notice permitted HMRC’s paragraph 13 argument and whether the debit was wholly attributable to Fidex’s unallowable tax avoidance purpose.

1. Appeal dismissed. The First-tier Tribunal had jurisdiction to consider HMRC’s argument under paragraph 13 of Schedule 9 to the Finance Act 1996. The Upper Tribunal also correctly held that the entire debit was attributable to an unallowable purpose.

2. The scope and subject matter of an appeal are defined by the conclusions stated in the closure notice and the amendments required to give effect to them. The relevant matter is the conclusions, rather than the reasoning by which HMRC reached them. A closure notice must be read in its context, including the enquiry which preceded it. Subject to fairness and proper case management, HMRC may advance new arguments supporting its stated conclusions: Tower MCashback LLP v Revenue and Customs Commissioners [2011] UKSC 19 applied.

3. Read in context, the closure notice concluded that the sum of €83,849,399 should not have been included in the change-in-basis adjustments and that the claimed loss should be reduced accordingly. The assertion that derecognition should not have occurred was the reason for that conclusion. HMRC’s later paragraph 13 argument was an additional ground capable of sustaining the same conclusion. It did not enlarge the appeal into a roving enquiry, and no unfair ambush was alleged.

4. Paragraph 13(1) required a just and reasonable assessment of how much of the debit was attributable to the unallowable purpose for which the bonds were held. It was immaterial that Fidex would have continued to hold the bonds for commercial purposes even without the avoidance purpose. The relevant inquiry concerned the cause and attribution of the debit, not merely the purposes for holding the underlying bonds.

5. The debit arose from Project Zephyr and was entirely attributable to the purpose of obtaining the scheme’s tax benefit. Without the scheme there would have been no debit. The existence of other commercial purposes therefore did not justify attributing any part of it to those purposes. On a just and reasonable apportionment, the whole debit was attributable to the unallowable purpose.

Sir Stephen Richards and Arden LJ agreed with Kitchin LJ.

1. Court of Appeal (Civil Division): Dismissed Fidex’s appeal and affirmed the Upper Tribunal’s conclusions on jurisdiction and attribution: [2016] EWCA Civ 385.

2. Upper Tribunal (Tax and Chancery Chamber): Dismissed Fidex’s appeal against the First-tier Tribunal’s jurisdiction decision. It allowed HMRC’s appeal on paragraph 13, holding that the debit was wholly attributable to an unallowable purpose: [2014] UKUT 454 (TCC).

3. First-tier Tribunal, substantive appeal: By a decision dated 2 April 2013, found for Fidex on the accounting issue and held that, on a just and reasonable apportionment, none of the debit was attributable to an unallowable purpose.

4. First-tier Tribunal, strike-out application: By a decision dated 7 November 2011, refused Fidex’s application and held that the closure notice permitted HMRC to rely on paragraph 13.