GDF Suez Teeside Ltd v HMRC

The Court of Appeal dismissed the taxpayer’s appeal. The central legal principles concern the loan relationship rules in Chapter II of Part IV of the Finance Act 1996, in particular the requirement in section 84(1) that the credits and debits "when taken together, fairly represent" the profits, gains and losses arising from loan relationships and related transactions, and the effect of section 85A(1) as amended by the Finance Act 2006. The court held that, read with sections 85A and 85B, section 84(1) can operate as an overriding or "failsafe" rule which may require adjustment of GAAP-compliant accounting treatments to ensure a fair representation of taxable profits where related transactions produce an asymmetry that would otherwise remove value from the charge to corporation tax.

The court accepted the findings of the First-tier Tribunal and the Upper Tribunal that the parent company’s accounts complied with UK GAAP and that there was no alternative GAAP-compliant treatment available to the parent. Nevertheless, applying section 84(1) to the disposal of valuable contingent claims in exchange for shares in a Jersey subsidiary, the court concluded that TPL had realised a profit for tax purposes equal to the market value of the consideration shares and that that amount should be brought into account.

This appeal concerned a tax avoidance arrangement by which Teesside Power Limited (subsequently renamed GDF Suez Teesside Limited) assigned valuable contingent claims against members of the insolvent Enron group to a newly incorporated Jersey subsidiary (TRAIL) in exchange for shares. The claims had an open market value of about £200 million but, on UK GAAP, were carried at nil in the parent’s accounts. TRAIL recorded the claims at market value. The taxpayer’s scheme aimed to prevent immediate corporation tax on the value of the claims by exploiting the interaction of loan relationship rules and accounting treatment, and the scheme had been disclosed under the DOTAS rules.

The procedural history was as follows:

• Enquiries by HMRC led to closure notices; the taxpayer appealed to the First-tier Tribunal (decision 11 August 2015), which found the accounts GAAP-compliant but held that section 84(1) required recognition of profit on the transfers.
• The taxpayer appealed to the Upper Tribunal (Tax and Chancery Chamber) ([2017] UKUT 0068 (TCC)), which upheld the Tribunals’ conclusions on the accounting issues and on section 84(1).
• The case came to the Court of Appeal by permission; HMRC also sought to renew accounting challenges by respondent’s notice.

The issues before the Court of Appeal were:

• whether TPL’s accounting treatment complied with UK GAAP and whether any alternative GAAP-compliant treatment was available;
• whether, if more than one GAAP-compliant treatment existed, section 84(1) required selecting one over another;
• whether, even if the parent’s accounts were GAAP-compliant, the credits and debits brought into account under section 84(1) could be determined otherwise than by reference to the accounts, i.e. whether the "fairly represent" requirement could override GAAP to reflect economic reality and prevent tax avoidance.

The court reviewed the statutory framework (sections 80–85B FA 1996, Schedule 9, and relevant amendments effected by FA 2004 and FA 2006), the DOTAS disclosure, expert accounting evidence before the Tribunals, and authorities including DCC Holdings and Greene King. It concluded that the 2006 amendment to section 85A(1), read with the Explanatory Notes and the anti-avoidance context, reinforced that section 84(1)’s "fairly represent" requirement is a separate, potentially overriding inquiry which must be applied once the GAAP computation has been performed. The court accepted the factual findings that TRAIL’s accounts recognised the claims at market value and that the parent received shares of equivalent value; applying section 84(1) to the loan relationships and related transactions produced a fair and symmetrical tax outcome by bringing into account credits representing the consideration shares. The appeal was therefore dismissed.

The appeal is dismissed. The Court of Appeal held that section 84(1) of the Finance Act 1996, read with sections 85A and 85B and in light of the 2006 amendments, may require an overriding adjustment of amounts recognised under UK GAAP where necessary to "fairly represent" the profits and gains arising from a company’s loan relationships and related transactions; on the facts the transfers of the Claims to TRAIL gave rise to taxable credits equal to the market value of the shares received and those sums should be brought into account for the relevant accounting periods.

Appeal to the Court of Appeal from the Upper Tribunal (Tax and Chancery Chamber) [2017] UKUT 0068 (TCC). The dispute began with closure notices following HMRC enquiries and was first determined by the First-tier Tribunal (decision released 11 August 2015). The FTT decision was appealed to the Upper Tribunal, which delivered its decision on 17 February 2017; permission to appeal to the Court of Appeal was granted.