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FTT Rejects Taxpayers Appeal In Loan Relationships Case
Monday 10th July 2023
The FTT has rejected an appeal by the taxpayer on the deductibility of a payment under the loan relationships rules.
In Swiss Centre Ltd v HMRC [UKFTT 449 TC 2023], SCL claimed a payment of approximately £33.5m, paid to an Irish government agency (NAMA), was deductible under the loan relationship rules. Under an alternative argument, SCL claimed that approximately £24m of the total disputed amount was deductible in computing the chargeable gain on the sale of a property.
The Swiss Centre was sold in 2011 and at the time all involved believed that the beneficial ownership of the Swiss Centre had previously been transferred by SCL to a trust [Capital Trust] such that the Capital Trust sold the property. SCL and HMRC agreed in 2017 that the purported transfer by SCL of the beneficial interest in the Swiss Centre by SCL to the Capital Trust should be regarded as having been of no effect. As a result, SCL agreed that it was liable for corporation tax in respect of the gain which it realised on the disposal. However, the parties did not agree the quantum of SCL’s corporation tax liabilities.
In March 2018, HMRC issued a discovery assessment to SCL for corporation tax of approximately £29.5m on the gain which it realised on the disposal of the Swiss Centre. The assessment was calculated on the basis that the disputed payment was not deductible in calculating the gain or available to be set against it for corporation tax purposes under the loan relationship rules.
SCL appealed to HMRC against the assessment and requested a review. On review by HMRC, the assessment was upheld. SCL notified its appeal against the assessment to the FTT.
SCL’s grounds of the appeal were that SCL was required to enter into a deed with NAMA obliging it to arrange the purchase of certain properties over which NAMA had security for a consideration which was £24m in excess of their market value. That amount should be deductible for SCL in calculating its profits for corporation tax purposes on the basis that:
(a) the payment was deductible under the loan relationships rules as a result of arising from a related transaction to a loan relationship, being financing provided for the development of the Swiss Centre, as a result of being incurred to secure the release of NAMA’s security over the Swiss Centre;
(b) the payment was an expense incurred under or for the purpose of a loan relationship or related transaction. It was treated as incurred directly as a result of any of related transactions” within what was s.307(4)(c) CTA 2009; or
(c) the obligation to acquire the properties at an overvalue was a cost of enhancing the value of the Swiss Centre as it was a payment made to a third party for it to release its security thereby enabling the sale of the Swiss Centre. Reliance was placed in particular on the decision in HMRC v Blackwell [2017] All ER 188 on the basis that the cost will be deductible in the calculation of chargeable gains where it is reflected in the nature or state of the asset.
The remaining amount of the disputed sum was €11m paid in relation to a guarantee given by SCL in respect of the indebtedness of a company [Lavangna Ltd]. On making the payment SCL acquired NAMA’s rights to a loan made to L. The payment was therefore a related transaction. As the value of the rights acquired on the payment was nil, SCL was entitled to a debit for the resulting loss.
SCL said it should be recognised that the amounts were paid in the very particular context of the financial crisis and its aftermath. However, the burden of proof was with SCL to show that it was entitled to a deduction for the payment of the disputed sum.
The core of HMRC’s case was that the disputed sum was paid because it was in the interests of the wider group of companies of which SCL was a member and in the interests of the two principal individual shareholders/directors.
The case involved considerable factual complexity over which company or companies in fact made payments and in what capacity they were made.
On analysis of the payments by the FTT from the evidence provided, and as described in the 242 paragraphs and over 45 pages of its decision, it held that the Lavangna payment was not deductible as a debit paid under the loan relationship rules. Similarly, the payment to NAMA was not deductible under the loan relationships rules nor paid wholly and exclusively for enhancing the value of the Swiss Centre.
If you require further information on the above, please contact Keith Rushen on 0044 (0) 207 486 2378.
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