GDF Suez Teesside Led v The Commissioners for HMRC

Under the corporate loan relationships code, the requirement that credits and debits, taken together, must fairly represent all profits, gains and losses is a separate and potentially overriding condition. It may override the treatment required by generally accepted accounting practice.

The assessment must take a synoptic view of the loan relationship and any related disposal or acquisition. Where a company assigns a valuable loan relationship to a non-resident subsidiary for shares of equivalent value, a capital profit or gain may arise despite the absence of a recognised accounting profit. Fair representation may require a credit equal to the value of the asset at disposal, preventing its accrued value from falling outside the corporation tax charge.

The appellant transferred valuable but unrealised claims arising from the insolvent Enron group to its newly incorporated Jersey subsidiary. The subsidiary issued shares of equivalent value in consideration. The appellant's accounts, consistently with UK generally accepted accounting practice, recognised neither a profit on the transfers nor any value for the shares. The subsidiary recorded the claims at their market value of about £200 million.

HMRC amended the appellant's corporation tax computations to include loan relationship credits equal to that value. The First-tier Tribunal found the accounting treatment compliant with UK GAAP but held that it did not fairly represent the appellant's profits under section 84(1) of the Finance Act 1996. The Upper Tribunal dismissed the taxpayer's appeal: [2017] UKUT 0068 (TCC).

The central issue was whether section 84(1), read with sections 85A and 85B, could override GAAP-compliant accounts and require the value received on the assignments to be brought into account.

1. Appeal dismissed. Section 84(1) of the Finance Act 1996, as applicable in 2006–07, imposed a separate and overriding fair-representation condition. Section 85A(1), as amended in 2006, expressly subjected computation according to UK GAAP to section 84(1). The amendment formed part of anti-avoidance legislation and confirmed that accounting treatment could be overridden.

2. The requirement was not confined to allocating accounting credits and debits between sources or periods. Section 84(1) required a synoptic view of the company's loan relationships together with related transactions. It would have had little content if fair representation always depended on the same accounting criteria as sections 85A and 85B.

3. The absence of a detailed statutory alternative computation did not make the requirement unworkable. Fairness was a suitable evaluative standard for accountants, lawyers and tribunals. Accounting practice remained central but was not conclusive, especially where related transactions were involved.

4. Each assignment disposed of a valuable claim for money's worth in the form of shares of equivalent value. The classification of the transaction as a sale, exchange or assignment for valuable consideration did not matter. Although UK GAAP required no realised profit to be recognised, the taxpayer acquired a different asset and thereafter controlled the claims only indirectly through the subsidiary.

5. Viewed with the related transaction, a capital profit or gain arose to the taxpayer. It could be fairly represented only by a loan relationship credit equal to the claim's value on disposal. A nil credit would have allowed the accrued value to escape corporation tax in the hands of both the taxpayer and its non-resident subsidiary. The resulting symmetrical treatment accorded with the approach in DCC Holdings.

6. The accounting issues raised by HMRC's respondent's notice did not need determination. Henderson LJ added that none of HMRC's arguments came close to showing a material error of law in the Upper Tribunal's treatment of those issues. Asplin LJ and Kitchin LJ agreed.

1. Court of Appeal (Civil Division): dismissed the taxpayer's appeal and left undisturbed the loan relationship credits upheld below: [2018] EWCA Civ 2075.
2. Upper Tribunal (Tax and Chancery Chamber): dismissed the taxpayer's appeal. It upheld the findings that the accounts complied with UK GAAP and that section 84(1) of the Finance Act 1996 nevertheless required credits representing the value of the shares: [2017] UKUT 0068 (TCC); [2017] STC 1622.
3. First-tier Tribunal: dismissed the taxpayer's appeal against HMRC's closure notices. It found no alternative GAAP-compliant accounting treatment but held that fair representation required recognition of about £200 million of profit.