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HMRC Defeats Arrangement to Obtain £36 million Corporation Tax Relief

In Union Castle Steamship Ltd v HMRC [2020] EWCA Civ 547, a lead case, the Court of Appeal reached a fundamental decision on the relationship between taxation and accounting profits.  In upholding the Upper Tribunal’s decision ([UKUT] 316) that a DOTAS registered, marketed tax avoidance scheme was ineffective, the Court of Appeal dismissed Union Castle’s claim that the issue of shares, on which dividends were paid of an amount equal to a significant proportion of receipts from derivatives held by Union Castle gave rise to a “loss” for the purposes of the derivatives code, contained in the Corporation Tax Acts 2009, Part 7. Although the derivatives code generally tracks accounting profits and losses in measuring taxable receipts and deductions, the Court of Appeal held that the legal and commercial reality was that the “loss” which arose for accounting purposes to Union Castle on the share issue was not a loss for the purposes of the derivative code; the accounting “loss” could not be said to “fairly represent” any “loss” as a matter of legal or commercial reality (and was in fact properly viewed as a mere obligation to pay a distribution out of receipts, once obtained).  Neither could this accounting “loss” be said to “arise from” the relevant derivatives which was a further reason why the avoidance scheme failed.  The Court of Appeal importantly decided that the commercial and legal reality of an obligation to pay was a free standing consideration in the application of the derivatives code in measuring taxable profits and relievable losses.  The Court of Appeal thus confirmed the conclusions of the First-tier Tribunal (tax chamber) in two other decisions on variants of this scheme in ANTS v HMRC [2015] UKFTT 341 and Stagecoach plc v HMRC [2016] UKFTT 0120.

Of equal importance was a point that the Court of Appeal did not address (because HMRCs’ victory on the main point meant the point need not be decided), being whether this scheme, involving the issue of bonus shares, fell within the ambit of the “transfer price regime”, in the Taxation (International and Other Provisions) Act 2019.  Thus the significant decision of the Upper Tribunal (that it did), which is of itself a critical victory for HMRC, on a point which had, until the Upper Tribunal decision, been a highly controversial one.

A copy of the full Court of Appeal judgment can be found here.

Julian Ghosh QC represented HMRC in the Court of Appeal (as he had before the First Tier Tribunal and the Upper Tribunal; he had also represented HMRC in ANTS and Stagecoach).