Greene King Plc & Anor v Revenue And Customs

Under the loan relationships code in Part IV, Chapter II of the Finance Act 1996, assigning the right to receive quantified future interest instalments creates a creditor–debtor relationship between the assignee and borrower. The relationship does not require transfer of the loan principal. The value of the assigned interest stream may be a profit or gain arising from that relationship, but an amount required to be transferred to the assignee’s share premium account is excluded by section 84(2)(a). The original lender must account for the transferred interest strip under FRS 5 by partially derecognising the loan. The discounted principal must accrete to redemption, and the accretion is realised when the loan is repaid.

This was a lead appeal by Greene King plc and Greene King Acquisitions Ltd against corporation tax amendments concerning two intra-group transactions. The transactions assigned future interest rights under an intra-group loan to GKA in return for preference shares. The First-tier Tribunal dismissed the appeals, and the Upper Tribunal dismissed the appeal from that decision in [2014] UKUT 178 (TCC).

The Court of Appeal considered whether the assignment created a loan relationship between GKA and GKBR, whether the resulting credits were taxable, whether the share premium exclusion applied, and whether PLC had to derecognise the interest strip and tax the resulting accretion.

Disposition. The appeal was allowed on Grounds 1 and 2. Subject to that, it was dismissed.

1. Under section 81(1) of the Finance Act 1996, the assignment of the quantified future interest instalments created a creditor–debtor relationship between GKA and GKBR in respect of a money debt. The debt arose from the original transaction for lending money. Section 81 did not require the assignee also to receive the loan principal, nor did it require the same creditor and debtor to hold the principal and interest rights.
2. The approach adopted by Mann J would impose a restriction unsupported by the statutory wording or any identified legislative purpose. The statement in Revenue and Customs Commissioners v Bank of Ireland, [2008] EWCA 58, concerned a different repo transaction and was expressly treated as obiter. It could not be applied outside that factual context.
3. The net present value of the interest strip represented future payments arising from GKA’s loan relationship with GKBR. The £19 million transferred to GKA’s share premium account would otherwise have been a profit or gain within section 84(1)(a), but section 84(2)(a) excluded it. Any excess received over the receivable was properly treated as profit or gain.
4. FRS 5 required PLC to partially derecognise the loan when the interest strip was transferred. The loan had to be shown at its discounted value and accreted to the £300 million principal as redemption approached. The intra-group nature of the transaction and the unchanged overall value of the group’s assets did not justify departing from FRS 5.
5. The accretion was realised profit when cash was received on repayment of the loan. Section 85(3)(c) was irrelevant because the issue was the transfer of the interest strip, not possible non-payment. The requirement that credits and debits fairly represent profits had to be read as part of the statutory whole; it did not permit the court to substitute another accounting method.
6. Paragraph 14 of Schedule 9 did not permit a matching debit. The capital contribution to GKA was not in respect of PLC’s loan relationship with GKBR, and the accounting treatment was required, rather than merely allowed, by FRS 5.

• Court of Appeal (Civil Division): allowed the appeal on Grounds 1 and 2 and dismissed it otherwise.
• Upper Tribunal (Tax and Chancery Chamber): dismissed the appeal from the First-tier Tribunal, in [2014] UKUT 178 (TCC).
• First-tier Tribunal: dismissed the appeals against HMRC’s notices of amendment.