AH Field (Holdings) Ltd v Revenue & Customs Commissioners (2012)
Revenue and Customs had been right to disallow claims made by a company for loan relationship debits and fee payments, the loans having been entered into for an "unallowable purpose" within the meaning of the Finance Act 1996 Sch.9 para.13. In ascertaining a company's purposes in the context of Sch.9 para.13, it was legitimate to take into account the purposes of the shareholders as well as those of the directors.
The appellant company (F) appealed against closure notices issued by the respondent commissioners disallowing loan relationship debits and fee payments.
F was an investment company resident in the United Kingdom. Between 2003 and 2007 it took out a series of short-term bank loans. In each case it paid a dividend to its Jersey-based parent (H) who, within days, loaned back the dividend so F could repay the loan. F then issued H with a zero coupon bond, redeemable a year later. When that coupon came to be redeemed, F obtained another bank loan so that it could repay H. It then sought to set off the loan relationship debits and fee payments against its corporation tax liability. The commissioners disallowed its claims on the basis that the loans had an "unallowable purpose" within the meaning of the Finance Act 1996 Sch.9 para.13. F's case was that it had taken out the loans for a commercial purpose, namely to pay dividends to its shareholders, they were not shams, and Sch.9 para.13 did not apply. The issues were (i) whose purposes were relevant for the interpretation of Sch.9 para.13; (ii) whether it was relevant that the loans were made by a shareholder; (iii) whether a loan that was not a sham had, necessarily, no tax purpose; (iv) the significance of the circularity of the movement of funds; (v) the meaning of "purpose" and "consequence" for the purposes of Sch.9 para.13; (vi) the relevance of the definitions of "tax advantage" in the "transactions in securities" legislation.
(1) It was legitimate to consider the views of the shareholders as well as those of the directors in ascertaining F's purposes. The directors were obliged to take account of the views of their advisers and shareholders in carrying out their functions, and the directors' purposes could therefore not be divorced from those of the advisers and shareholders (see paras 114-119 of judgment). (2) The commissioners did not contest the proposition that debentures made by a shareholder were not to be treated any differently from those of a third party lender, Salomon v Salomon & Co Ltd  A.C. 22 considered (paras 120-121). (3) It was not necessarily the case that all non-sham loans had no tax purpose. If that was the case then Sch.9 para.13 would have a very limited impact. Whether a transaction was a sham depended on whether it answered to the documents supporting it. Schedule 9 para.13 was directed at transactions which had some business purpose, but which were so influenced by their tax effect that it was reasonable to assume that the tax effect was one of the main purposes for their having been entered into. It applied to ensure that where one of the main purposes for entering into a transaction was a tax purpose, that trumped any other commercial or business purpose. The American line of cases including Helvering v Gregory was overridden by the specific terms of para.13(4), Helvering considered (paras 122-128). (4) Mere circularity in the movement of funds was not a sufficient ground for ignoring transactions that were otherwise legally effective. The tribunal had to take a two-stage approach, firstly seeing, on a purposive interpretation, what transaction would answer to the statutory provision, and then realistically analysing the transaction to see if it answered that description, Mayes v Revenue and Customs Commissioners  EWCA Civ 407,  S.T.C. 1269 followed. In the instant case the loans were real and the circularity of the funds' movement was not sufficient to confer an unallowable purpose. However, the fact that funds were lent by the bank, immediately paid back from H, and lent internally, was one of the factors to be weighed in considering the overall context and commerciality of the lending transaction (paras 130-132). (5) It was legitimate to consider the consequences of a taxpayer's actions in order to determine his purpose. Just because a tax result was a natural concomitant of a transaction did not mean that it could not be a "main purpose", Trustees of the Sema Group Pension Scheme v Inland Revenue Commissioners  EWHC 94 (Ch),  S.T.C. 276 followed (paras 135-137). (6) The definition of a "tax advantage", derived from the "transactions in securities" legislation, had to be applied purposively and, in the context of Sch.9 para.13, was not to be restricted to its "transactions in securities" meaning (para.142). (7) At least one of F's main purposes in entering into the loans was to reduce its UK corporation tax liability, and that amounted to a tax avoidance purpose as defined by Sch.9 para 13. Whether a tax purpose could be outweighed by a commercial purpose depended on the weight to be given to that commercial purpose: a commercial purpose did not have any greater intrinsic weight than a tax purpose. While F had also had commercial considerations in mind when entering into the loans, there was relatively little reference in the evidence to their expected and actual results. One of their only economic effects was to change F's tax position, and the evidence suggested that that had been an important component of the decision. The loans would not have been entered into had the tax impact been neutral. Thus, the commercial purposes were not sufficiently significant to outweigh the tax purposes of F's entering into the loan transactions (paras 146-7, 152-153, 164-165, 169-170, 174, 176-178).