Greene King PLC v HMRC

This appeal concerned the tax consequences of intra-group assignments of an interest "strip" and the interaction between the loan relationships code in Chapter II of Part IV of the Finance Act 1996 and UK accounting standards (FRS 5). The court considered whether the assignment of the right to receive future interest instalments created a loan relationship under FA 1996 s.81, whether amounts recorded by the assignee (GKA) fell within taxable loan relationship credits under s.84(1)(a), and whether the assignor (PLC) was required by FRS 5 to de-recognise part of a £300m loan and to accrete the reduced carrying amount back to principal, producing taxable profit.

The court held that the assignment created a loan relationship between GKA and GKBR within the meaning of s.81(1). The net present value recorded by GKA of the interest stream (and the resulting share premium entry) constituted a profit or gain arising from that loan relationship for the purposes of s.84(1)(a) but was excluded from tax by the statutory carve-out in s.84(2)(a) to the extent transferred to the share premium account. The court also upheld the tribunals' conclusions that, as a matter of UK GAAP (FRS 5), PLC was required to de-recognise the interest strip and that the accretion of the reduced carrying value back to the loan principal was to be treated as realised profit for tax purposes.

Background and procedural history: This appeal was brought by Greene King plc and Greene King Acquisitions Ltd against HMRC, following dismissal of their appeals by the First-tier Tribunal (14 June 2012) and the Upper Tribunal (Mr Justice Mann, [2014] UKUT 178 (TCC)). The Court of Appeal heard the appeal from the Upper Tribunal and gave judgment on 27 July 2016.

Nature of the claim / relief sought: The appellants sought to overturn amendment notices issued by HMRC which increased corporation tax for accounting periods ending 30 April 2003 and 30 April 2004. Central issues were the tax effect of an EY-marketed scheme ("Project Sussex") under which PLC assigned an interest strip to a subsidiary (GKA) in consideration for preference shares, and the correct tax and accounting treatment of those transactions.

Key facts:

• PLC had lent £300m to an intragroup subsidiary (GKBR) and held loan stock redeemable in 2004; interest was originally floating then fixed.
• On 31 January 2003 PLC assigned the right to future interest payments (three instalments totalling c.£21.3m, NPV c.£20.5m) to GKA in consideration for 1.5m £1 preference shares (nominal £1.5m) and a special dividend.
• Accounting treatments: GKA recognised the receivable at NPV and credited the excess to share premium; PLC continued to show the £300m loan but HMRC argued part should be de-recognised under FRS 5.

Issues framed by the court:

1. Whether the assignment created a loan relationship between GKA and GKBR under FA 1996 s.81.
2. Whether amounts recorded by PLC (requiring partial de-recognition and later accretion) gave rise to taxable profit under FA 1996 s.84(1).
3. Whether amounts credited by GKA (including the share premium entry) were taxable as credits under s.84(1)(a) or excluded by s.84(2)(a).
4. Ancillary accounting and legislative points including the application of FRS 5, FA 1996 s.85 and Schedule 9 paragraphs 5 and 14, and Companies Act 1985 provisions on minimum premium.

Court’s reasoning and conclusions: The court concluded (i) the assignment created a creditor-debtor relationship between GKA and GKBR for the future interest instalments and therefore a loan relationship under s.81(1); (ii) the net present value of the interest stream recognised by GKA and the resulting share premium entry were profits or gains arising from that loan relationship under s.84(1)(a); (iii) however, amounts required to be transferred to a company's share premium account are excluded from the reference in s.84(1)(a) by virtue of s.84(2)(a), so the £19m transferred to GKA's share premium account fell outside s.84(1)(a); (iv) as to PLC, the tribunals correctly applied FRS 5: the interest strip was de-recognised and the reduced carrying amount was to accrete back to the loan principal, with the accretion treated as realised profit for tax purposes.

Subsidiary findings and context: The court rejected a purposive gloss on s.81 that would deny loan relationship status where the assignee did not also hold principal rights; it distinguished obiter remarks from other authorities on different facts. The judgment also addresses the interplay between authorised accounting methods under FA 1996 s.85 and tax recognition under s.84, and notes the limited role for overriding accounting treatment where UK GAAP requires a particular treatment.

The appeal was allowed in part. The Court of Appeal held that the assignment of the interest strip created a loan relationship between GKA and GKBR under FA 1996 s.81(1) and that the net present value credited to GKA (and credited to its share premium account) would otherwise be a profit or gain arising from that loan relationship under s.84(1)(a) but was excluded by s.84(2)(a) to the extent transferred to the share premium account. The court also upheld the tribunals’ conclusion that PLC was required by FRS 5 to de-recognise the interest strip and that the accretion of the reduced carrying amount back to principal was taxable as realised profit. Subject to the carve-out in s.84(2)(a), the appellants’ other grounds were dismissed.

Appeal to the Court of Appeal from the Upper Tribunal (Tax and Chancery Chamber) (Mann J) [2014] UKUT 178 (TCC), itself an appeal from the First-tier Tribunal decision of 14 June 2012. Permission to appeal to the Court of Appeal was granted by the UT.