Unallowable purpose – Fidex v HMRC [2016] EWCA Civ 385

Unallowable purpose – Fidex v HMRC [2016] EWCA Civ 385

Wed 18 May 2016

The Court of Appeal has rejected the taxpayer’s appeal in a case which considered the loan relationships’ unallowable purpose rule, commonly referred to as Para 13 (now s441 CTA 2009), in the context of a tax avoidance scheme.

The object of the scheme was to create a loss in the hands of the taxpayer which would then be available for group relief throughout the (BNP Paribas) group of companies of which it formed a part.

By way of background to the appeal, the Upper Tribunal (UT) heard two appeals against the decisions of the First-tier Tribunal on the following points:

that the terms of a particular closure notice did not preclude HMRC from arguing that paragraph 13 of Schedule 9 to the Finance Act 1996 applied so as to deny the benefit of the claimed loan relationship loss (which was appealed by the taxpayer); and
that, upon its proper application, paragraph 13 did not in fact deny the taxpayer the benefit of that loss (appealed by HMRC).

The UT dismissed the taxpayer’s appeal but allowed HMRC’s appeal , holding that the essential conclusion in the closure notice was that the debit corresponding to the claimed loss should not have been brought into account and that the paragraph 13 argument constituted an additional ground on which HMRC could seek to uphold that conclusion. In other words, it did not matter that the initial enquiry and subsequent closure notice initially focused on disallowance of the debit through a different provision (para 19A of Schedule 9 FA 1996) but that HMRC then introduced the additional argument for disallowance via Para 13 only at the FTT .  It went on to hold that the debit in issue arose because of the tax avoidance transaction and this constituted an unallowable purpose. In the view of the UT, the debit could only be attributed to that purpose and the FTT erred in principle in failing so to find.

The taxpayer did not appeal against the fundamental finding of the FTT, upheld by the Upper Tribunal, that a company can (and did in this case) develop a secondary, but still main, purpose for being party to a loan relationship over time (even if the original purpose continues to subsist).

The Court of Appeal has agreed with the Upper Tribunal’s conclusion that:

  • HMRC was entitled to pursue an unallowable purpose challenge not referred to in the closure notice issued to the taxpayer, broadly on the basis that the ‘conclusion’ contained in the closure notice related to the absence of relief for a disputed loan relationship debit rather than (as contended for the taxpayer) that the accounting treatment had been incorrect (the accounting treatment had, on the contrary, been found to be acceptable by the First-tier Tribunal and this finding was not appealed by HMRC). The judge remarked that ‘it was not unfair to Fidex that the issue as to its entitlement to include the sum of €83,849,399 in the change in the basis of adjustments should be examined as widely as might be necessary to determine whether it was indeed entitled to what it had claimed.’
  • The entirety of the debit in dispute (a transitional adjustment arising on the adoption of IFRS at the start of 2005) was attributable to the taxpayer’s tax avoidance purpose on a just and reasonable apportionment because there would have been no debit but for the arrangement (despite an acceptance that it also had ‘good’ purposes such that it would have been party to that relationship irrespective of the unallowable purpose).

There is an interesting argument regarding the focus of the unallowable purpose test. By way of conclusion, Lord Justin Kitchen states at para 74,“I believe that the answer to all of these submissions lies in the words of paragraph 13. The UT was required to assess how much of the debit was, on a just and reasonable apportionment, attributable to the unallowable purpose for which the bonds were held. I am content to assume that Fidex would have held the bonds from the start of 2005 irrespective of the unallowable purpose but that is nothing to the point. The question is whether and to what extent the debit was attributable to the unallowable purpose for which they were held… I agree with the UT that the answer to this question is quite clear. The debit arose from and was entirely attributable to Project Zephyr. But for this tax avoidance scheme there would have been no debit at all.” Thus, the debit was wholly attributable to the unallowable purpose.

The taxpayer’s appeal on both grounds was therefore dismissed.

The full text of the decision can be found here.

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